Hanger, Inc.
Q2 2019 Earnings Call Transcript

Published: 11 Aug 2019

[Operator:]

Greetings, and welcome to the Hanger's Second Quarter 2019 Earnings Call. And as a reminder, this conference is being recorded. Today we will have prepared remarks followed by a Q&A period. Instruction 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. Thank you. You may begin.

[Seth Frank:]

Good morning. Thank you. Welcome to Hanger's Second Quarter 2019 Earnings Conference Call. With us today are Vinit Asar, Hanger's President and Chief Executive Officer; and Thomas Kiraly, Executive Vice President and Chief Financial Officer.

[Vinit Asar:]

Thanks, Seth, and good morning, everyone. Thank you for joining us today. Hanger reported strong financial results for the second quarter. During Q2, net revenues of $281.1 million reflected growth of 5.3% from the prior year. Revenue growth on a same clinic basis was 3%. Adjusted EBITDA totaled $37.4 million, growing 11.1% year-over-year. The Patient Care segment led the way with solid margin increases. Our Products & Services segment also performed well, led by the distribution business, which exceeded our expectations. Putting the second quarter in perspective, during the Q1 call in May, we discussed that the timing of some prosthetic deliveries pushed out into the second quarter. At that time, we noted April was a good month, and we remained optimistic about getting back on track during Q2. Ultimately, the quarter came in solid, driven by strong demand for O&P services across the board. As you will see, Hanger is executing well across our various operating metrics, and our year-to-date numbers align with our 2019 expectations here at the halfway mark. As a result, we are reaffirming both our net revenue and adjusted EBITDA outlook for 2019. I am encouraged with the momentum in the business. During my recent travels to visit clinics, I can see the excitement and energy across the Hanger network as our clinicians and support teams see the indelible impact we are having on patients' lives, and how our efforts are translating into tangible results. I believe that the execution of our multipoint strategies and the investments we are making are driving these results. We continue to focus on differentiating Hanger in the O&P industry, emphasizing our outstanding patient care experience, strong business partnerships and an unrelenting focus on superior outcomes for the communities that we serve. The returns for shareholders from these efforts are being driven by keen focus in profitable, organic growth, supplemented with targeted, in-market O&P acquisitions at attractive valuations.

[Thomas Kiraly:]

Thank you, Vinit. Good morning. During the second quarter, Hanger reported $281.1 million in revenue and $37.4 million in adjusted EBITDA. This reflected a $14.1 million or 5.3% increase in revenue and a $3.7 million or 11.1% increase in adjusted EBITDA as compared with the second quarter of last year. Our revenue and earnings growth for the quarter were driven by the Patient Care segment, which provided $13 million of our $14.1 million in revenue growth. This segment's adjusted EBITDA grew by $6.1 million or 14.9%, and reflected a positive flow-through of approximately 47%. As anticipated, our second quarter results benefited from a shift in prosthetic deliveries from the first quarter into the second as compared with the first half of last year. This was a key factor that contributed to the 4.3% in prosthetic growth that we reported for the period and was a primary driver in our overall 3% same clinic growth rate. On a year-to-date basis, prosthetics have grown by 2%, and orthotics have increased by 1.2%. This has resulted in an average overall same clinic growth rate of 1.6% for the first half of the year. As Vinit shared, we are pleased that we've begun to show positive increases in the orthotics portion of our business to complement the somewhat stronger relative growth we've achieved over the past 2 years in prosthetics. Over the last 9 quarters, the average organic growth rate of prosthetics has been 3.1% while orthotics revenue has been relatively stable.

[Operator:]

The first question comes from Brian Tanquilut with Jefferies. Please go ahead.

[Brian Tanquilut:]

Congratulations on a good quarter. So I guess my first question, Vinit, for you is, as I think about the 3% same store you put up this quarter, 5% top line growth, translated to 11% EBITDA. I know in the past you've talked about kind of like the algorithm for the translation of organic growth or same-store growth to EBITDA, I mean is this a good way to think about the earnings power of the company, where if you're putting up 3% same store, you can get to double-digit EBITDA growth?

[Vinit Asar:]

Yes. That's basically how we look at it. We think about organic growth, 3% to 5%, should get us in this range of EBITDA growth.

[Brian Tanquilut:]

And then, I guess, taking a step back from that point, in the past you've talked about all the initiatives you've laid out, whether it's technology, marketing and using your scale and all these things, where are we in the process of rolling those out and also seeing the benefits? I mean, are we about to see the inflection or the acceleration in organic growth do you think?

[Vinit Asar:]

I think we're beginning to see the effect of those investments. Certainly, if you take the first half of the year this year in 2019, organic growth rate is about 1.6% compared to last year. The full year organic same clinic growth rate was 0.9%. So we're beginning to see it. I think there's still work to be done, but we're feeling good about the results we're seeing so far.

[Brian Tanquilut:]

And then I guess my last question is on the M&A front, nothing big this quarter, but how are you feeling about the deals that you've done year-to-date? I know there are some deals earlier in the year, in terms of the integration of those deals and the strategic value that they've added to the business and what does the pipeline look like for you guys?

[Vinit Asar:]

Yes. We're pleased with the folks that we've brought into Hanger this year and late last year. Really, the first year of these businesses that come into Hanger, we focus on integration, so putting them on our EHR system and the like. So we're pleased with how that's working out in terms of the pipeline. We're also very happy with the discussions we are having with folks that are interested in joining Hanger. So the pipeline still remains strong, and we'll, obviously, keep you updated as we close more deals.

[Operator:]

The next question comes from Larry Solow with CJS. Please go ahead.

[LarrySolow:]

Obviously, you had a big improvement in the quarter. Some of it looks like on the prosthetic side was some carryover from Q1 into Q2. But could you just maybe discuss without going into specifics, do you think sort of prosthetic growth in the 3% to 4% range, which you've sort of done over the last, I think, 2 years, is that a sustainable number? And then also on the Orthotics side, obviously a nice improvement from the slow declines to a slow improvement, do you see that picking up even more as we go forward?

[Vinit Asar:]

Yes. I think the observation is exactly right, Larry. In terms of the last couple of years, our prosthetic growth has been averaging about 3%. And we think that's achievable on a go-forward basis. And just a reminder, it could get lumpy. You could get a high number one quarter, you could get a low number the next quarter, and that's why we try and look at it for the longer term. And going back to the previous question that was asked as well, we think all the initiatives we've put in focusing on prosthetics are beginning to show on the prosthetic side. And as I said in my prepared remarks, we've begun to focus on the custom orthotics piece, which is showing this nice uptick in custom orthotics. So I think it remains to be seen when we see a further uptick, but today we're feeling very good about the results of the investments we've put in on the prosthetic side and on the custom orthotics side.

[Larry Solow:]

And on the -- obviously, as Brian pointed out, the reflection and the power of the operating model with the 15% EBITDA growth on 3% same-store sales growth, did the acquisitions have any contribution to the bottom line? I know that for the full year you sort of had said that they're basically close to breakeven. But in the quarter, did that help at all on the year-over-year operating margin or segment margin, EBITDA margin?

[Thomas Kiraly:]

Larry, this is Tom. Yes. The acquisitions certainly are contributing, but not very meaningfully. It's a very low amount of earnings flow-through coming from them at this point, primarily because of the integration activities that Vinit described.

[Larry Solow:]

Okay. And then going forward, obviously, we do -- as we look out into next year, I would assume that these acquisitions, should they start performing sort of in line with historical and corporate performance?

[Thomas Kiraly:]

Yes. We believe so.

[Larry Solow:]

Okay. How much is the -- how about an update on the industry? Obviously, it's been going through some -- the last few years, pretty turbulent times with increased regulatory and paper trail requirements for reimbursement. How do your competitors shake out? I don't know if you have any real read-through on them, but just from a global level, how is the industry doing relative to, say, a couple of years ago?

[Vinit Asar:]

Yes. I think what's -- what we are seeing is there is kind of a settling of that overall industry growth rate of that 1.5% to 2%. I mean it might have been higher many years ago, but I think it's settling at 1.5% to 2% is what we're seeing. In terms of the regulatory reimbursement environment, every once in a while you're going hear things such as there's a competitive bidding piece out there for the lower off-the-shelf type devices, and some parts of the industry that focus heavily on orthotics or off-the-shelf type of orthotics, they're going to have a little bit of a tougher time going forward. I think this view that we're taking is we're focusing on our custom side of the portfolio right now. Custom prosthetics and custom orthotics I think, we believe, is the right thing to do, but we don't want to lose sight that we do want to be a full service provider to our referral sources. So from Hanger's perspective, we will be figuring out how we actually deliver those low-end orthotics and shoes and inserts as well. But for now, we're pleased with the focus we put on the custom side with clinical outcomes and the patient engagement pieces.

[Larry Solow:]

Okay. Then just switching gears real fast, on the Products & Services segment, EBITDA declined, I believe, $2 million, although sales were actually -- revenue actually grew slightly. I assume that decline is primarily related to the therapeutic services. But could you maybe just give us a little bit more color on that and what's the outlook? Do you expect declines will continue?

[Thomas Kiraly:]

This is Tom. There's really three factors that are contributing to the decline. First of all, we're very pleased with the growth we're showing in distribution. Some of that growth, though, is coming with higher volume accounts where there may be certain margin differences in those accounts. Secondly, this year we have invested and have a larger support for this distribution business given its growth. That's affected the margins of that segment or that business. And that's a part of that difference in year-over-year contribution from the segment. And then thirdly, as you stated, therapeutic solutions revenue is down, and that certainly is a part of why you see this year-over-year decrease of $2 million in the segment. Now as -- for the second part of the question, do we foresee that continuing decline, certainly, our belief is that going forward that segment, at some point, will stabilize. And when it does, the growth that we're seeing and the economics that we're seeing on the larger segment, the Patient Care segment, will shine through even a bit more. I think we could all see what earnings would have done this quarter had we not had the decline in that segment, and we're hopeful that we can demonstrate that in future years.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Vinit Asar:]

Great. Thank you all for your questions. Look, to sum it up, we're pleased with the second quarter results and where we sit on a year-to-date basis relative to our plan. And we're seeing encouraging signs of momentum in the Patient Care segment, as you could see. We're confident our strategy is the right one, and we're making the appropriate investments to further build a sustainable competitive advantage for Hanger as really the national leader in orthotics and prosthetics. We're also determined to continue to focus on executing our strategy of clinical, operational and financial differentiation to drive organic growth. And we believe our markets remain highly attractive, and our position is the strongest it's ever been. I'm confident that by staying true to our values and our mission as a company and maintaining the course, we will create a sustainable long-term value for patients and shareholders. And we appreciate your participation today and look forward to seeing many of you at conferences and meetings around the country during the next 1.5 months, so thanks very much.

[Operator:]

And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.