Hanger, Inc.
Q4 2019 Earnings Call Transcript

Published: 12 Mar 2020

[Operator:]

Greetings and welcome to Hanger’s fourth quarter 2019 earnings call. 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.

[Seth Frank:]

Good morning and thank you. Welcome to Hanger’s fourth quarter and year-end 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:]

Thank you Seth and good morning everyone. Thank you for joining Hanger’s fourth quarter and full year 2019 earnings call. In my prepared remarks, I will summarize our financial results and provide an update on our business and the industry. Tom will then provide details on the numbers, after which we will take questions. For 2019, Hanger reported net revenues of just under $1.1 billion and adjusted EBITDA of $124.2 million. These results are in line with the 2019 outlook we had provided at the start of the year. Adjusted earnings per share for 2019 were $0.09, a 15.3% increase over 2018. For 2019, we had set a goal to grow at or above market growth rates in patient care, and were successful in this front. Revenue growth was 4.7% for 2019 with patient care segment growth of 5.6%, driven by same clinic growth of 2.1%, a meaningful improvement from 0.9% in 2018. We achieved strong organic growth in prosthetics for the year, totaling 3.2%, and orthotics growth of 0.9%. These results demonstrate the benefits of our multi-year investments in core differentiators, all of which are intended to drive superior patient outcomes and a best-in-class patient experience. Segment profitability in patient care has been masked for the last few years by a decline with products and services segment, specifically therapeutic solutions, and this was the case in 2019, a factor we had anticipated and included in our 2019 outlook. Products and services net revenues were consistent with the prior year, led by a 5.4% growth in O&P distribution offset by the therapeutic solutions business. Our O&P distribution business grew on the heels of strong leadership and expanding catalog, allowing us to enhance our position as a one-stop full-service O&P distributor and providing excellence in service levels to our independent O&P clinic customers. Looking at the fourth quarter highlights, we finished the year on a strong growth footing. As many of you know, given the seasonal nature of our business, the fourth quarter is our most important of the year in terms of financial contribution. Total Q4 net revenue was $300.9 million, reflecting 5.6% year-over-year growth. From a business segment perspective, patient care again performed well, helped by a very healthy underlying same clinic growth rate and the positive impact of O&P clinic acquisitions completed in late 2018 and during 2019.

[Thomas Kiraly:]

Good morning. As Vinit shared, we are pleased with the company’s fourth quarter and full year 2019 performance. For the year, Hanger’s overall results compared favorably to the midpoint of the outlook we provided at this time last year. Net revenue of $1.098 billion reflected a growth of $49.3 million over 2018, and our adjusted EBITDA of $124.2 million reflected a growth of $3.2 million over the prior year. What is perhaps the most important takeaway regarding our 2019 revenue and earnings performance is that the underlying growth of our largest operating segment, patient care, drove those results, and the strength of this division’s performance was partially offset by the results of our smaller products and services segment. Within the patient care segment during the fourth quarter, same clinic revenue growth of 2.9% coupled with the benefit of acquisitions drove a 6.9% increase in net revenue. Net revenue growth was a key contributor to this segment’s adjusted EBITDA increase of $5.2 million or 10.7%. For the full year, patient care achieved a same clinic growth rate of 2.1%, which was an underlying driver of the overall segment net revenue increase of $48.3 million or 5.6%. This led to adjusted EBITDA growth of $13.7 million or 9.1% for the full year. Segment margins increased by 60 basis points over 2018, expanding from 17.6% in the prior year to 18.2%. This segment is by far the largest of our two operating segments. During 2019, patient care revenue of $905.7 million constituted 82% of the company’s net revenue and its adjusted EBITDA of $164.6 million reflected 85% of Hanger’s pre-corporate adjusted EBITDA.

[Operator:]

The first question comes from Larry Solow from CJS Securities. Please go ahead.

[Larry Solow:]

Great, good morning guys. From a high level, if I do the math, it looks like just on the revenue growth, that 1.5 to 3% is your outlook on same store growth in patient care. Question 1, is that about right? Am I in the approximate area? Can you kind of help us parse it out, the midpoint of that is sort of similar to what you did in ’19? Would you be hopeful maybe for a little bit of an increase relative to last year as some of your initiatives continue to hopefully take better shape, and then how does price impact that outlook, ’20 versus ’19?

[Thomas Kiraly:]

Hey Larry, this is Tom. First of all, you are correct. If you look at the lower end of the guidance, it’s right around what we would consider to be the market rate of growth in 2002, and the upper range of the guidance would go ahead and presume some expansion of Hanger’s underlying market share pace of growth. Now, the reason you’re not seeing that in the midpoint of the guidance is that there is a slight pricing decrease that we will be having in 2020 that relates to CMS. CMS’ reimbursement is going to be about 0.9% in 2020 as compared to 2.3% in 2019, and that affected us as a decrease from 1.4% pricing in 2019 to about an average melded rate of 0.7% pricing in 2020. Now, we’re offsetting that pricing decrease because we believe that we’ll have a good stabilization on the patient non-payment part of the company’s overall growth, and those factors lead us to believe that it’s reasonable than 2.1%, 2.2% could be a good baseline for medium range growth, but we’re hopeful obviously that we can pick the pace up and try to achieve the higher end.

[Larry Solow:]

Just parsing that out maybe a little bit between prosthetics and orthotics, obviously prosthetics continue to grow in that 3% to 4% range, very solid quarter in Q4, and orthotics appear to have stabilized. I know you’re exiting a small piece of the business, but ex that--you know, excluding that, do you expect similar 3% or 4% in prosthetics and maybe a little bit of growth in orthotics in 2020?

[Thomas Kiraly:]

We do. When you look at it, the baseline is similar to the 2019 baseline, where we’re up in about the 3% range for prosthetics and we’re around the 1% range or so for orthotics. Our agenda is to try to increase the rate of orthotics growth, and if we do that, it would give us some upward potential on the rate of growth.

[Larry Solow:]

Got it. Just last question on the coronavirus, I fully get that you guys--first of all, hopefully it would be not something that recurs every year, and I fully get that the O&P certainly has limited discretion, but is there some possibility that some stuff is pushed out? I don’t know how some parts of the country are. I do live 15 minutes from the containment zone, if you will, up here in Westchester County, but there’s no one on the roads, stores are empty, restaurants are empty. People are just staying in when they can, it seems like, and hopefully that will subside eventually. But in the short term, could that push some stuff out a little bit into future quarters?

[Vinit Asar:]

Hi Larry. You know, I think there’s a possibility it could. It’s going to depend on what parts of the country, what happens - you know, patients decide to stay home and not step out of their homes. If they do cancel appointments, we could see some of that. From a care perspective, patients could push off their replacement devices maybe by a few weeks, waiting for things to settle. So far for the first month or two months or so this year, we haven’t seen that slowdown, but as I mentioned in my comments, the busiest time for us is here in the next few weeks, so we’re watching that closely.

[Larry Solow:]

Right, okay. Fair enough. Great, thanks guys. Appreciate it.

[Vinit Asar:]

Thanks Larry.

[Operator:]

The next question comes from Brian Tanquilut from Jefferies. Please go ahead.

[Brian Tanquilut:]

Hey, good morning guys. Congrats on a good 2019. I guess Vinit, my first question, as we exit 2019, going into 2020, I think one of the last few times you and I had spoken, we talked about how this company’s focus was stabilize the business, prepare for growth, and now should we be thinking about the fact that you’re done with those and we should be in the growth phase right now for the business? How do you think about the M&A opportunities out there? I know you’ve got some deals baked in your guidance, but walk us through how you’re viewing growth and the opportunity for acceleration?

[Vinit Asar:]

Yes, thanks Brian. You’re right - I think over the last few years, our focus and attention was more on the stabilization and preparation for growth, stabilizing the infrastructure and preparing the actual infrastructure to allow for the growth, so we believe we’ve done a lot of that. In Tom’s and my comments on this call and the previous call, we’ve talked about the investments that we’ve made, and we’re pleased with how we’ve set the company up. At this time, our growth plans are on the patient care side to make sure that all these investments we’ve made and the focus on outcomes and on patient satisfaction have set us up to get good, healthy organic growth, same clinic growth that allows us to expand market share organically, and supplementing that with key tuck-in O&P acquisitions that we believe will be incremental to us and good for shareholders. Our focus on the acquisitions is on high quality clinically driven assets, and we’re pleased with the interest we’re getting to join Hanger as well. On the M&A side, leading into the second part of your question, we’re really pleased with the pipeline that we have. It appears that we are attracting those businesses that are focusing on outcomes and on patient satisfaction, really high quality businesses, so we’re pleased with the pipeline and we’re pleased with the folks that have joined us, and we expect that caliber of businesses to be joining us.

[Brian Tanquilut:]

To follow up on that, Vinit, if that’s the case, in a way there should be some expectation of above market growth. We were seeing that obviously on the prosthetics side of your business. Two questions on that point. Do you think that the prosthetics business growing faster than the rest of the company is a good thing from a margin perspective, and then as I think about your ability to grow above market, there have been rumblings from some manufacturers recently about how the prosthetics market globally is slowing down, so just wanted to hear your thoughts of that and what you’re seeing here in the U.S. in your markets. Is the market going to continue to grow for O&P going forward?

[Vinit Asar:]

We haven’t seen any slowdown of the prosthetics market here in the U.S. I can’t speak for outside of the U.S., obviously, but in the U.S. we haven’t seen that. We had our strongest quarter with 4.4% growth in Q4 in 2019, but even if you think and if you look at the numbers over the last couple of years, we’ve consistently grown prosthetics at about 3.3% in 2018 and a similar number in 2019, so while we haven’t seen that slowdown in prosthetics growth, obviously we’ll monitor it. But right now, we’re really pleased with at least our performance, and we believe we’re probably picking up some market share on the prosthetic side, so I would consider that above market growth on the prosthetic side.

[Brian Tanquilut:]

Yes, so it sounds like that’s more company specific to that manufacturer. My question for Tom, over the last five years, you’ve gone through a lot of accounting issues or accounting--heavy lifting to address the accounting issues of the past. Where do you stand now in terms of your audit, your controls, and anything else that you want to call out on the accounting and finance infrastructure front?

[Thomas Kiraly:]

Brian, good question. As of December 31, 2019, we had a fully effective control environment. We had no outstanding weaknesses in controls that we’re reporting, so really we see that as something very indicative of the past and certainly not the Hanger of the present or the future.

[Brian Tanquilut:]

Tom, do you think that the accounting infrastructure and the cost associated with that, you should be at that level, the right level at this point, right?

[Thomas Kiraly:]

Yes, I believe the cost structure is pretty stable and will be stable going forward. We are continuing to obviously make systems enhancements which our operations benefit from, and the accounting team will benefit from. We’re hoping that we can drive some further efficiencies in the years to come.

[Brian Tanquilut:]

Got it. My last question, Vinit, just a follow-up on Larry’s question on covid-19. If I take a step back on a more fundamental basis, what percentage of your revenues are recurring, number one; and then the second part of that, as I think about the key drivers of your referral flows outside of the recurring--the renewals or the updates on people’s devices, what’s the main driver of that? What should we look at? Is it prevalence of diabetes, cardiovascular disease, amputations? How do you think about the elective nature of the underlying growth drivers for the industry?

[Vinit Asar:]

Great question. In terms of recurring revenues, when you think of our patient care segment, our prosthetics business, about 70% of our revenues are of a recurring nature in the prosthetics side, and the balance are new patients coming in, and they’re generally coming in primarily as a result of either vascular disease or trauma - those are the two big areas that they’re coming in as a result of. In terms of the elective nature and tying it back to your question around covid-19, look, I think the patients that are coming back to us on a recurring basis for their replacement devices or adjustments, those patients could possibly delay things if they have to, so if you’re in a containment zone, etc. and if you’re not stepping out of your home, they could delay by a week, two weeks, or something like that. Those patients that are just new patients getting their amputations, my guess is they would be keen to come in and get their first prosthetic device, so that’s how we’re thinking about it. But as you and I both know, this is such a fluid situation. Our job right now is to monitor it and do the best we can to provide the best healthcare and be as available as possible to those patients that need the care.

[Brian Tanquilut:]

I appreciate that. All right, thank you.

[Vinit Asar:]

Thanks Brian.

[Operator:]

Again, if you have a question, please press star then one. There are no more questions in the queue. This concludes our question and answer session. I’d like to turn the conference back over to Vinit Asar for any closing remarks.

[Vinit Asar:]

Great, thank you Jason. In closing, I’d just like to re-emphasize that we’re pleased with our 2019 performance and we believe we’re well positioned for 2020, so we look forward to speaking with you all again in May for our first quarter earnings call. Thanks very much.

[Operator:]

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