Hanger, Inc.
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Greetings, and welcome to Hanger's Fourth Quarter 2020 Earnings Call. All participants will be in listen-only mode. . As a reminder, this conference is being recorded. Today, we will have prepared remarks, followed by a Q&A period. Instructions for questions-and-answers will be provided after the formal presentation. It is now my pleasure to introduce your host, Seth Frank, Vice President of Treasury and Investor Relations. Please go ahead.

[Seth Frank:]

Good morning and thank you. Welcome to Hanger's fourth quarter 2020 earnings conference call. With us today are Vinit Asar, Hanger's, President and Chief Executive Officer; Thomas Kiraly, Executive Vice President and Chief Financial Officer.

[Vinit Asar:]

Thanks, Seth and good morning. Thank you all for joining Hanger's Fourth Quarter and Full Year 2020 Earnings Call. I hope you and yours are staying safe and healthy. We were pleased with our results in Q4. The resilience and determination of the communities we serve, as well as the tenacity of our Hanger nationwide organization to meet the continuing needs of our patients and customers were significant factors in our success, despite the national surge in COVID-19 cases in the fourth quarter. That said, COVID-19 continues to challenge our industry. We believe that a cohort of patients, particularly those most vulnerable to the virus such as the elderly and those with chronic health issues may be delaying certain aspects of their orthotic and prosthetic care in deference to social distancing and other life priorities. So while we are pleased with our achievements, we remain cautious in the near-term until key public health considerations become clearer. Looking at our overall fourth quarter results. Net revenue totaled $277.3 million, a decrease of 7.8% compared to the same period of 2019. Adjusted EBITDA was $35.5 million. These results are notable, particularly in light of the fact that we made the critical decision to bring back the organization to pre-pandemic staffing levels essentially intact. In October, we fully normalized base salaries, eliminated furloughs and returned hourly employees to full-time schedules. We took these actions because we remain convinced of the temporary nature of the pandemic-related business downturn. From a cash perspective the results are quite remarkable. Across the entire company we continue to make excellent progress on cash collections and managing our working capital needs. Looking at our business segments. In patient care appointment volumes for Q4 were at 88% of the same period last year. This is an improvement compared to the 84% in the third quarter. So there is a recovery in place that did not go backwards despite the resurgence of infections during the quarter.

[Thomas Kiraly:]

Thanks Vinit and good morning. 2020 was certainly a remarkable year we will all not soon forget. While, we all faced our own challenges when reviewing Hanger's performance, I'd like to spend a few minutes discussing how the company's financial results reflect well and its inherent ability to successfully overcome adversity. From an operational and financial perspective, Hanger's results can be summarized in three specific ways

[Operator:]

We will now begin the question-and-answer session. The first question comes from Brian Tanquilut of Jefferies. Please go ahead.

[Brian Tanquilut:]

Hey, good morning, guys and congrats on a good year, given all the circumstances. But Tom I guess, as we think about guidance, I appreciate you taking the initiative of putting out guidance despite uncertainty. But as I think about the seasonality comments or the progression comments that you made, a couple of questions. Number one, you're expecting some inflection in volumes beginning – or after February. And I know generally you have pretty good visibility into your orders. So is that a good way to think about that? And then I guess, if you were just to ask you for percentages in terms of the breakdown between quarters of EBITDA, how should that look? Any color you can give on that. Thank you.

[Thomas Kiraly:]

Yes, Brian. So, first of all from the visibility standpoint, I would argue that we do have some visibility but not as much as obviously anyone would like to have. We – March is always traditionally the strongest month in the first quarter. We do have some good work in process levels but it really is a bit of a bet on our part as to how this quarter pans out. And the hope that with all the vaccinations and positive effects occurring with COVID that we start to see at least some return to more of a normal environment. But again it remains to be seen. From a standpoint of quarterization, really what you're looking at is a very modest sort of performance in Q1 from a percentage standpoint. I would – and then somewhat of a step-up in Q2, you start to look at what it means for the year. You could have 55%, 60% of the company's EBITDA in the second half of the year when you look within the numbers.

[Brian Tanquilut:]

Got it. And then Vinit, obviously you're sitting on a lot of cash right now, significantly above what you normally would keep on the balance sheet. And how are you thinking about capital deployment of the M&A environment? And also like just any changes to how you're doing M&A versus the historical Hanger approach? It looks like you had a pretty good acquisition in the Midwest that's more concentrated. If you don't mind just walking us through that. Thank you.

[Vinit Asar:]

Sure. Thanks, Brian. Look, our M&A program is pretty robust in the sense that as I mentioned throughout 2020, the pipeline is pretty solid. We get a lot of inbound inquiries. We've got a lot of conversations going on. And we're being very selective and who we're working with because we want to bring on the quality practice. And just to give you a sense of the landscape, the vast majority of the O&P businesses in the US are very small-sized businesses. So we're being very selective in terms of who we speak with, who we're bringing on board. The conversations have been very robust and there is a focus on M&A. As I mentioned in my prepared remarks, we brought in nine businesses last year. And we feel pretty good about 2021, as well, given the nature of the conversations we're having. So we expect that trajectory to continue in 2021 at this point.

[Brian Tanquilut:]

Got it. And then last question for me. Obviously, COVID delayed some of your initiatives whether it's the supply chain systems rollout or the ERP, is it safe to assume that all that goes full steam this year and we should expect the benefits that you've outlined in the past once we get into 2022?

[Thomas Kiraly:]

Yes. We are recommencing as we described both the supply chain and the financial systems projects. Fortunately, we did continue some critical ones last year and in fact have already been receiving the benefits from that into the tune of approximately $4 million in 2020. So those are going to continue in 2021 and obviously, already demonstrate almost the lion's share of what we would expect out of the program. And from a capital standpoint, I think we've outlined it pretty extensively in the 10-K. But we've seen a nice moderation in terms of the amount of capital we put out where it won't be as dramatic as it was originally thought it might be.

[Brian Tanquilut:]

Awesome. Thanks, guys.

[Thomas Kiraly:]

Thanks, Brian.

[Operator:]

The next question is from Larry Solow of CJS Securities. Please go ahead.

[Larry Solow:]

Great. Thanks, guys. And I echo Brian's comments congrats on a tough environment a very good year. Just a few follow-ups on the -- Tom you mentioned, some pent-up demand that you're -- assume you're building in some of that into your guidance. I think prosthetic declined 8% for the year. It doesn't seem like -- I don't think you're losing share. So how do you sort of -- I guess it's a balancing act between -- hopefully some of that comes back in, but you continue to have this sort of COVID at least the tail of it where some of these patients are not coming in. How do you balance that as you look out over the next few quarters?

[Vinit Asar:]

Sure. I can give you some color Larry on how we're thinking of the next few quarters, especially when it -- when we think about the pent-up demand. We certainly believe there's probably three buckets in terms of how to think of this pent-up demand. I'd say the one bucket is what I alluded to in my prepared remarks on. There's a cohort of patients that are like the lower mobility patients that have these other comorbidities and they're electing to stay in and are reticent to come in for care. So our guess is that they will over time as they get vaccinated as the environment around them allows them to come in for care. They will come in for care that they haven't been coming in terms of getting their adjustments or their replacement devices. So I'd say that's one group of patients. Then there's another group of patients, who I believe have these underlying conditions such as foot ulcers that they may not have taken care of their ulcerations through this period of the pandemic and that deteriorate -- when that deteriorates it could end up in amputations. So that in-home care that hasn't been given to these patients, these patients probably haven't moved around a lot either. So that also contributes to some pent-up demand. And last, but not the least, there is this whole concept of the seesaw of the elective surgeries that they were on again and then off again and on again. So as these three buckets start clearing up, we should see some pent-up demand being released. Larry, we don't see that happening overnight. It will happen over time, but that's how we're thinking about especially the second half of the year.

[Larry Solow:]

Okay. And you guys mentioned, I know in terms of -- on the acquisition front, I think in terms of guidance I think it was $27 million included sort of in the 2021 revenue guidance. You completed I think you spent like $30 million on acquisitions in 2019 and $50 or so million last year $25 million I think already this year. How do you view sort of the ramp in profit contributions? I know sometimes acquisitions first take in about 12 months that before you sort of get to the full fruition of the profitability. With COVID sort of impacting a lot in 2020, is there sort of a tailwind that's been -- we may see over the next couple of years where you get benefit even some acquisitions you did in 2019 and in '20 as we look out over the next few quarters?

[Thomas Kiraly:]

Yes. Larry, this is Tom. There is that ramp you're describing where it is somewhat depressed irrespective of COVID in the first year after an acquisition and then it gradually improves from there as that acquisition is fully integrated. I think it's important to point out that, we've been doing around this level of acquisitions each year for the last several years. And so some of that ramp up already was occurring for the cohort that was the 2019 cohort and 2020, and certainly there's a little bit of that ramp in 2021 from the 2020 cohort. And then, that portion of the $27 million that has occurred in Q1 would be pretty modest in contribution this year. I wouldn't characterize it as an excessive amount of overall pickup, then in earnings just that it kind of layers into the company's earnings naturally as we go. And then I do want to go back to my response to an earlier analyst question regarding quarterization, I had sort of cited 60% in the second half. And that's typically normal. I would actually argue that in 2021, it's going to be closer to 70% in the second half when you look at the effects of the first half just to make sure we have that clarification. I don't know. Does that answer your question, Larry on the M&A?

[Larry Solow:]

Yeah. No, absolutely it does. Absolutely and obviously you're really expect to hit a back-end loaded year. Just another couple of quickies, I saw in the MD&A you mentioned that there are a couple or several larger-sized independent O&P providers, who were having some financial struggles during 2020 which is not a surprise. And I think it caused you to maybe interrupt or even stop distributing some products to them. Sort of a two-pronged question there, Is there any real significant impact on the distribution products and services as you go forward? And is there -- and how do you think is there any benefit with the shakeout of some of your competitors as you look out in terms of operations and in terms of maybe potential acquisitions?

[Thomas Kiraly:]

Yeah. First of all, in terms of that reference in the MD&A that gets to some of the customers of the distribution business in 2019, where we'd had some bad debts and some difficulty with them. And there were just a few customers that were having some difficulty during that year that we chose to part ways with during that year. But I wouldn't characterize it as large providers overall, in the industry or that it's indicative of an overall trend. And then, I'll turn it to Vinit to just add more color to that.

[Vinit Asar:]

Yeah, Larry, we've been obviously having conversations with most of the independent providers from a distribution perspective and also from a potential M&A perspective. And we feel that, the conversations have been very productive in the sense that, we're being -- we can get to see how strong these providers are. I think a lot of assistance they got from the government whether it's the PPE loans, or the Medicare payments that they received did help these providers. When we engage in conversations with these providers, it's more about looking for the stronger providers to come on board to propel us into further growth as opposed to be looking for the weaker providers to come on board. So that's the conversations we're having. We're just again pleased with the businesses we brought on board last year. Every single one of them was solid, with solid management teams. And that's the focus we have in our M&A program. It's pretty selective.

[Larry Solow:]

Okay. And then just -- I appreciate that color and then just last question maybe for Tom. Obviously 2020 was a fabulous year for operating and free cash flow especially as we look back what we thought it was going to be during April and May. You mentioned -- I understand the benefits of 2020 and obviously there's going to be some drop in 2021. You mentioned sort of operating cash flow would be relatively -- I don't know what the word was, but it sounded like, it's going to drop significantly. I know you don't guide to this number, but can you give us an idea of what it might be?

[Thomas Kiraly:]

Certainly, so if you take the $156 million of operating cash flow last year $24 million of that came from the CARES Act funds and then there was another $60 million that came from our reduction in working capital. So we won't have that $84 million in 2021, to assist the company in its operating cash flow. So if you were to go to a normal year being in call it the $70 million to $80 million operating cash flow area, the company will have a greater majority of that $60 million that it will likely have to reinvest in working capital, as the company's revenues and overall business profile returns to normal. So you could go ahead and look at that number as a very important number in your calculation.

[Larry Solow:]

Got it. Great. I appreciate all the colors. Thanks guys.

[Operator:]

This concludes our question-and-answer session and today's conference. Thank you for attending the presentation. You may now disconnect.