Q2 2020 Hanger Inc Earnings Call
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Greetings and welcome to the Hangers second quarter 2020 earnings call today, all participants will be listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Today, we will have prepared remarks, followed by a question and answer session.
Instructions for questions and answers will be provided after the formal presentation.
It's now my pleasure to introduce your host Seth Frank Vice President of Treasury and Investor Relations. Sir you May proceed.
Good morning. Thank you welcome to hang or second quarter 2020 earnings conference call with US today I've been at all sure Angers, President and Chief Executive Officer, and Thomas Crawley Executive Vice President and Chief Financial Officer.
So many information discussed today will include forward looking statements in the meeting of the private Securities Litigation Reform Act of 1995.
Statements are subject to risks and uncertainties that could cause hangers actual results to materially differ from those we discussed today. Those risks include among others matters. We have identified in the forward looking statements portion of our latest earnings release and in our filings with the FCC hangar discuss.
Claims any obligation to update forward looking information discussed on this call that that's hand the call Overdependent.
Thanks, Seth good morning, everyone and thank you all for joining us.
We hope those of you listening today are staying safe and in good health, especially during these times.
Today, I will review, our second quarter results and give you an update on our efforts to manage the business. During covert 19, Tom will then review the numbers in detail and we will take questions.
If you asked me to describe the second quarter of 2020 in one word I would have to say remarkable at the beginning of April shelter in place orders rising infection rates and uncertainty about the future where peaking.
Managing our business was made all the more challenging by fragmented specific responses to the pandemic varying by state and in some cases by county.
As we discussed during our last call. We had hangar took early and decisive action to expeditiously build and operational and financial plan, which would allow us to successfully navigate this global challenge.
We executed on specific actions that maximize our opportunity to emerge on the other side of all of this on a strong footing to resumed momentum that we saw in the early days of 2020.
Our approach to managing through the pandemic end of your head was and remains grounded in three imperatives.
First ensuring the safety and welfare of our patients that employees.
Second delivering on our purpose of empowering human potential together by ensuring uninterrupted access to essentially it wouldn't be services.
Part of this effort has included proactive communications without referring physicians and patients to ensure they know that the hangar team is accessible and open in person or via video consultation, providing safe high quality own p. care and third ensuring that hangar has adequately.
Quantity to indoor a multi quarter potentially prolong downturn inpatient volumes I.
Im pleased to say that we're in a stronger liquidity position today than at the beginning of the year.
It is difficult to express the profound depreciation and gratitude I have or hangar is approximately 4900 employees.
There are many examples across the organization of people stepping up and going above and beyond in their efforts to support our mission.
The proof is how our patience view us since the onset of cobot 19 hangar clinics patient experience net promoter score has increased from 84.3 to 84.9.
In this environment. It is a phenomenal achievement. It has all the more remarkable that this collective effort occurred on the heels of the difficult actions, we implemented to reduce costs, particularly salaries in the face of a pandemic unknown duration.
As a reminder, salaries for all hangar exempt employees were reduced by an average of 32% in April for a duration of up to six months.
In addition, our senior leadership team and I took a reduction in salaries ranging from approximately 47% to 100% and our board of directors has forgone their cash retainers from the company for the same period.
We also commenced furloughs decreased non exempt employee hours and temporarily suspended adding new head count. In addition, we reduced other operating expenses related to travel professional fees and other items. Finally, we suspended our supply chain and financial systems initiatives and reduced other capital.
Expenditures.
With the completion of the quarter, we can see that the early and decisive operational actions, which we took as a result at the pandemic have been successful.
Having said all of that patient appointment volumes began to gradually improve each month since the approximately 40% reduction we saw in April.
Based on this progression, we announced a restoration of one third of salary reductions in June and a further one third restoration went into effect in July.
We anticipate the remaining 11% base salary reduction to be reinstated no later than the ended the third quarter my salary along with the board cash retainer will remain entirely suspended until employee salaries are fully restored to 100%.
A word of caution is in order we're still in the early stages of a situation, which will likely be with us for some time.
We are working under an assumption that volumes will remain suppressed due to covert 19 for the remainder of 2020 and potentially into the first half of 2021.
I will now turn to the second quarter results.
Please keep in mind that adjusted EBITDA adjusted net income in adjusted EPS exclude a $20.5 million cares payment hangar received from the federal government and the second quarter of 2020.
Revenue results were similarly, not impacted by this grant.
Net revenue in Q2 totaled $233.4 million, a decrease of 17% compared to the same period in 2019.
Total adjusted EBITDA in the quarter decreased by $860000.
In our patient care segment, we experienced appointment volume declines the primary metric, we use for managing and planning staffing levels of 33% during the quarter.
As mentioned appointment volume declined in April by approximately 40% and improved somewhat throughout the remainder of the period, finishing down 24% in June appointment volumes have remained at approximately that level as we entered the third quarter.
From a net revenue perspective net same clinic revenue on a day adjusted basis declined 18.7%.
While net revenue declined it did so at a rate significantly less than appointment volume. There are two primary reasons for this first because of the widespread shelter in place orders that occurred in March we saw some prosthetic device deliveries that shifted from Q1 to Q2.
Tom discussed this during the last earnings call, specifically as it related to quarter end work in process inventory.
Secondly, the demand for hangers prosthetic services proved to be more resilient relative to robotics in the current environment.
We certainly believed this would be the case and to date. It has become increasingly evident that prosthetic care is indeed, a necessity and is challenging for people to put off for a prolonged period.
[noise] brought the prosthetic mix of our patient care revenue to 61, 3% up from 54, 8% during the prior year quarter.
View all of this data is encouraging regarding the essential and resilient nature of the majority of revenue generated within our clinics during unprecedented times.
Higher prosthetic mix improved collections and most significantly the temporary personnel cost reductions resulted in patient care adjusted EBITDA being significantly buffered relative to the drop in segment net revenues and the quarter.
To be clear adjusted EBITDA for the company and segments should be viewed in tandem with our liquidity improvement in the quarter driven by a deliberate intention to build cash as a defensive measure against potential future Coke at 19 impacts on our business.
The fact that volumes began to gradually returned during Q2 allowed us to move quickly to partially restore salaries.
Begin to bring back furloughed employees and increase hours for Nonexempt employees.
Looking at the products and services segment <unk> distribution declined significantly.
Was a decrease in therapeutic solutions revenue was more muted.
Total segment net revenue declined 24, 7% driven primarily by a 29, 6% decline in <unk> distribution.
As in Q1, a portion of the reduction and distribution revenues was anticipated due to our decision in 2020 to exit the distribution of off the shelf orthotics into channels that were unprofitable.
Excluding this effect, we estimate distribution revenue declined approximately 23% as independent providers scaled back there buying in response to lower patient volumes due to cover it.
A critical element in our success of providing uninterrupted continuing access to one P. Care has been the result of the many operational adjustments, we made it hanger to ensure patient and employee safety.
Since it's January inception, the hanger corporate 19 task force is effectively managed all aspects of responding to the pandemic, including case surveillance and monitoring employee communications supply chain risk assessment mandatory employee training and business continuity planning.
We implemented consistent infection mitigation procedures across the entire organization at every clinic and facility.
We're also focused on keeping employee morale as high as possible encouraging paid time off and the use of benefits to support our employees and their families. During these difficult days.
Finally.
While we're very focused on the operational measures taken to navigate the pandemic, we continue to strengthen our strategic Differentiators recently hangar as part of our research group that includes the Veteran's administration in Minnesota, The University of Washington, and the University of Illinois, Chicago was awarded of $2 million Research grants.
A defense to study for related health outcomes in lower limb prosthetic users, including the largest clinical trial of microprocessor needs to date.
Through landmark research studies, such as this hangar in partnership with leading healthcare and academic institutions continues to develop and implement industry, leading evidenced space clinical programs.
We're also excited about a recently launched new website, which among other things enables us to communicate this information to help our patients are care teams and communities we serve.
Coupled with our leadership and social media. This website will strengthen a marketing efforts differentiating hanger clinic in a more efficient manner.
This has been especially valuable during the pandemic as digitally connecting with our audiences has never been more important.
Another important strategic differentiator at Hanger is a revenue cycled function, we built during the last few years.
Tom would provide more details about the continuing strength demonstrated by our RCM team during this past quarter.
With regards to M&A, we completed and successfully integrated Ah leading regional one P practice during the quarter.
This was a notable achievement for us as we continue to utilize R capital to partner with outstanding Independent one P clinics to build a key geography's and clinical specialties.
While transactions are temporarily paused, we continue our diligence and build relationships with independent Owen P clinics around the country.
Our value proposition as a partner for the best Independence is nothing if not clear and unlike any other partnership available in the <unk> industry.
And closing my prepared remarks, I would reiterate the characterization of our second quarter results as remarkable in light of the onset of corporate 19.
It's important to note that are cute too adjusted EBITDA, primarily reflects the early and decisive cost savings actions, we took to help us whether the storm and strengthen our liquidity.
Our purpose in our values. During this time have served as well and I will close with what we share in all our internal meetings by saying be safe declined and be strong.
I sincerely appreciate your time and interested hanger now Tom will discuss the numbers in more detail Tom.
Good morning, due to the early planning and implementation of cost reduction and liquidity enhanced from measures on late March.
As a result show hangar was able to successfully generate cash flow and build it's available capital during the second quarter.
And reviewing our results for the quarter. It is critical that they not be viewed in isolation, but rather as an integral part of our focus on establishing the financial resources necessary to endure the adversity a prolonged pandemic.
Primarily due to the adverse effects of Covid 19 on our business volumes hangar produced 233 $4 million in revenue during the second quarter, which reflected a 47 7 million or 17% decrease as compared with the same period last year.
However, due to cost reduction measures. The company was able to offset a meaningful portion of this revenue decrease and achieved adjusted EBITDA of 36 5 million.
This reflected a moderate decrease of $860000 or two 3% as compared with the second quarter of 2019.
These results do not include the favorable benefit of $25 million in provider Grands, we received in connection with the cares Act.
The decrease in revenue was primarily driven by a 35 3 million decline in our patient care segment, which experienced in 18, 7% reduction in the same clinic revenue.
Has been it's shared although patient appointment volumes were down by an average of 33% during the quarter due to a higher relative priced prosthetic devices declining at a lesser right. The degree of the effect that patient appointment declines had on revenue was moderated by an increase in our prosthetic mix.
We believe this favorable mixed shift was due in part to the somewhat more acute nature of the injuries conditions and impediments to mobility that lead to the need for hangers prosthetic services.
This may have contributed to a greater proportion prosthetic patients choosing to seek a central care and our clinics. Despite the pandemic.
Net revenue in this segment also benefited from favorable collection trends.
Due to an exceptional performance by our revenue cycle management team disallowances in patient nonpayment fell to three 3% of gross charges and the quarter, which compared favorably to the five 4% we reported in the second quarter of last year.
I will touch further on the favorable contribution to cash flow, resulting from these collections trends later in my prepared remarks.
Our products and services segment was also significantly affected by the pandemic.
Revenues in this business segment declined by 12 $4 million or 24, 7% in the second quarters compared with the same period in 2019.
Distribution services constituted the greatest portion of this decline as a decreased by 11 $1 million 29, 6% to 26 $5 million.
When reviewing the company's earnings for the quarter, it's important to view them in the context of the benefit we received from the temporary cost reduction measures we've implemented in March.
During the quarter. In addition to $21 million decrease the materials cost, we realized approximately $27 million in savings from exempt employee salary reductions.
Employee furloughs reduced employee hours benefits and associated payroll taxes.
We also saved an approximate $8 million from reductions in travel professional fees advertising bad debt and other operating expenses.
The achievement of these reductions took exceptional companywide coordination and personal sacrifice by all hanger employees.
And doing these savings it's important to note that they were by design temporary.
It was originally conceived are multi quarter plan for addressing the Cobra 19 pandemic foresaw the second quarter as being the one where we could take the extensive measures necessary to build the financial resources to withstand an extended pandemic.
Towards the end of the quarter. We commenced the restoration of are exempt employee wage reductions and have begun to bring back the majority of our furloughed employees.
These restoration actions were in part in recognition of the stabilization a patient volumes, but more importantly, the relate to the need for hanger to support the livelihood, if it's invaluable employees.
We believe these actions were position us to preserve are talented employee base in order to resume the company's growth and the post covert 19 error.
Between the months of June and July we restored two thirds of the wage reductions and it reduced approximately 60% of our employee furloughs.
Because of these actions. We currently believe the third quarter will be burdened by an increase of roughly $15 million and labor costs.
Given that we will likely be restoring the last one third of exempt wages by October one <unk>.
We additionally, foresee but the fourth quarter will likely reflect a return of labor costs to close to normal levels.
What we will continue to remain focused on managing our expenses. During this demanding time, we think it's important that these sequential increases in our cost structure be taken into account when estimating the company's earnings for future quarters.
From a cash flow perspective. In addition to the cash flow facilitated through cost reductions. The company also increase what's available liquidity through substantial collections of accounts receivable.
The deferral, a certain obligations and from the cares act provider grants.
During the first six months of this year. In addition to other favorable working capital effects hangars generated 44 $9 million in cash through the net decrease in accounts receivable.
Has received five $1 million from inventory reductions and has benefited from approximately nine 5 million and changes in payable terms.
These actions when coupled with a cares act provider grants enabled the company to complete the quarter with 202 $7 million liquidity.
This available capital was comprised of 129 $9 million in cash in investments, coupled with 72 $8 million of borrowing capacity under a revolving credit facility.
After considering this level of retain cash net indebtedness was 422 $5 million.
At the end of the quarter and reflected net leverage ratio of three six times trailing 12 months adjusted EBITDA.
In a manner similar to my prior comments regarding the temporary nature of our cost reductions.
Especially important to recognize that benefits from these working capital actions cannot be replicated in coming quarters as well.
Hi June 30th or accounts receivable had declined to 115 $6 million and reflected a DSL a 45 days.
This constituted the decrease of 32 $7 million or 22, 1% in net accounts receivable and two days and DSO from the same time last year.
Is revenues return, we will find it necessary to consume cash.
Since we rebuild those receivable balances.
The same will be true for our inventory balances.
Are we expect to benefit to a certain extend from some of the supply chain efficiencies that had been put into place during the past year, we will nevertheless find it necessary to rebuild our stock levels.
Additionally, we will be paying and $18 4 million seller node.
In the early October period that relates to a deferred portion of the purchase price for the acquisition we closed in early April.
As a result of these factors in the natural payment timing of our other deferred payables an employee liabilities. We currently anticipate that we will consume a meaningful portion of the company's retained capital in order to fund our operations on our other obligations over at least the next three quarters.
Now I'll provide you with some brief comments regarding the next six to nine months.
While we did experienced some gradual sequential increases in patient appointments in April may and June.
I think we're all aware of the pressures, which the recent summer surge in Cove at 19 cases was placed on the country.
Given this is currently difficult to estimate the company's near term revenue trends.
And as a result, we're currently managing our business with a primary objective that we need to retain sufficient liquidity to operate a current business volumes for at least the next three quarters.
A business volumes resume more quickly than we would be in a position to respond and to capitalize on those favorable trends.
Due to this continuing uncertainty we have chosen did not provide guidance at this time.
In summary from a financial perspective through the hard work of our employees, we were able to accomplish what we set out to do in the second quarter, which was to build the financial resources necessarily to be able to withstand the prolonged adverse effects of the covid 19 pandemic.
And to do so with our own internal sources of capital.
Well, we certainly believe we have demonstrated that we can act decisively and effectively an adverse circumstances.
It is likely that the Covid 19 pandemic will continue to provide us with a difficult road to travel.
I think it's fair to say that we've proven that we are prepared for that journey.
With that I'll turn the call back over to the operator to open it up for any questions you may have.
We will now begin the question and answer session to ask a question you May press star than one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys.
You said anytime your question has been addressed and you would like to withdraw it.
Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
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As a reminder, if you do have a question. Please press star than one on your Touchtone phone.
Today's first question comes from Larry solo with C. J S Securities. Please proceed.
[noise] Hi, good morning, guys. Thanks for taking my question.
Took honestly.
It's very.
Quarter that certainly lots of challenges home and because you know commendable on the on the job you did on your on your cost cutting in actually told you kept EBITDA almost flat. Despite the significant volume declines could you could you maybe just discuss you discuss trends at all and obviously the mix was.
Much greater than we expected.
I'm trying to figure out what sort of a much better performance on the bottom line.
Maybe discuss what you learn from from this experience.
And more importantly.
What's this bodes for 2021 and beyond I know you know and the last call. You. You know you thought you lost about a year in terms of just grow with him.
The income statement.
Maybe you can kind of discuss that as well thanks.
Great. Thanks, Larry.
You know in terms of what we've learned through all of this first of all you know I can't help but emphasize.
How much.
Packed the collective efforts of our employees had on the business I mean, we basically laid out what we needed to do for the quarter and our focus wasn't a couple of things as I mentioned, the focus was an employee and patient safety and on building liquidity.
With all the the efforts we put in the sacrifices from our employees that collective effort came shining through and I think it's a result is a reflection of our purpose or of our values et cetera. So it's clear the company can rally rally when when the need is there.
The other pieces.
Tom mentioned on the prosthetic mix you know for the prosthetic mixed jumped almost 61%.
You know for the quarter kind of tells US a couple of things about.
The nature of our prosthetic services, especially if you compare them to off the shelf orthotics in particular, there's no question our patients Sarcos Sthenic users clearly need this service despite the the shutdowns into the shelter in place et cetera was clear that number one they needed to come in and number two we were able to figure out ways.
Provide the service whether it was in our office, where there was in the parking lot. If we have to make a visit.
To their front yard to service them. It was clear that need was was essential so a number of operational learnings across the businesses are therapeutic solutions business also did a lot of nice a remote work in webinars et cetera, as did our patient care patient care business.
And then with regards to 2021, you know our view hasn't changed I think if we look at 2021 really view it as if.
As if we skipped 2020, so what we were expecting to do in 2020, we expect to do in 2021, the only caveat being the continuing length of the duration of this pandemic if the effects filter into the first part of 2021, it could affect the operations for that period, but in general we believe.
Oldest strategies the investments, we put in place of primed and ready for growth.
Conclusion of the effects of the spend demick and.
Great and then just a follow up on that.
You guys are much bigger than your peers. So I'm just curious of you know through this challenging times and some of these more mom and pop type I wanted facilities or are they able to maintain operations and.
And the or are there cases, where do you guys maybe for starters potentially take any market share and then you know secondarily, maybe there becomes more acquisition opportunities because we lockout.
Sure Yeah, we have a lot of respect for the independent providers is even the smaller in mid size regional players and and what we've seen is in pockets of the country a lot of them were not able to stay open or at full strength.
And in those cases, a lot of their referral sources did actually end up sending hanger those patients. So there is a likelihood that we picked up some market share at least on a temporary basis wildly smaller independent don't pay players had scaled down their operations of their offerings.
Now a lot of them also were able to take advantage of the P. P. P loans, which is you know we did not take advantage of qualify for it for that matter. So they did also strengthen their balance sheet to an extent so temporarily we likely picked up market share. The key here is the next three six months as operations big into old.
Been up for the smaller players, how they're able to build up there pipeline and how much of that market share we're able to retain I think that's the bigger question and we're obviously monitoring that and.
In all over that.
[noise] God, Okay, great. Thanks, I appreciate the Colorado.
Thanks, Larry.
The next question it comes from Brian Tanaquil out with Jeffries. Please proceed.
Good morning, guys send a good job in this past quarter I got my first question for you is I think about the volume recovery right. So you've done a good job like about 40% down to just down 24 percentage then.
How are you thinking about you know the remaining opportunity or remaining a runway for the bounce back right is that something that has to be more macro driven or is there anything more proactive that you guys could do whether it's.
Bush sales effort Bush or just bringing people back more an opening more hours to to recapture that especially at me see yeah broadly speaking to me and we look at hospitals in other areas of health care that I've seen recovery.
80, 210% of pretty Covid levels in terms of medical activities. So it's one of your thoughts on the pay so recovery that you say.
Sure and honestly.
It's a bit of both so first of all we will be dependent a little bit on the macro environment Ya know if they reopening of different states do slowed down then that's going to affect the volume, but from a proactive perspective I think the team is I'm just a wonderful job.
[noise] wonderful job on <unk>.
Making sure that we're proactively reaching out to a referral sources letting them know that our operations are open a are available. We're also proactively reaching out to patients to let them know.
We also have information on our website and letting our patients know the safety protocols, we have in place at each of our clinics I'm pretty detailed and I'm pretty detailed fashion. So it's a bit of both.
Do expect you know, it's the volume's to be suppressed for sure for the rest of the year, but as Tom pointed out you know, it's it's gonna be difficult for us to put us taken the ground and say, it's gonna be X percent for the remainder of the year coming into the third quarter. You know the patient volumes appear to be appointment volumes appear to have stabilized at about 24%.
Hello last year, and we haven't seen an uptick neither have we seen a regression and the last few weeks.
Got it and then I guess, so sorry, Tom is I think about your comment.
The progression of earnings without getting Guy, it's obviously right. So.
Is it safe to say ramped up real expensive, presumably for most of this order we're going to gain back that yeah 35 million expenses, you guys pulled back on the wage side.
And if the volume staying in kind of like in this down 24% of range, let's just stay for most of the quarter that sequential English and see EBITDA go down with a hub of recovery. Thank you for it and basically back to the free Cove at 2020 outlook. Once you get the 21 is that the right way to frame that.
Yeah, I think you articulated it fairly well I think that the caution point is it's very difficult to get a grasp on how the fourth quarter will play we're gonna be restoring the final third of the wages at the end of the quarter.
At the end of the third quarter.
And so that's kind of put additional cost into our operations and the fourth quarter.
So a little bit of what happens on the fourth quarter is gonna be dependent on whether we stay at around that 20% to 24% volume decline or not.
Got it and then yeah go ahead.
And then I guess very my last question and ACP.
I need to sniff industry struggling right now with covered and.
It can be something that's probably more of last thing.
How are you thinking about that business is the end market struggles and probably struggles further.
Yeah, we're watching as closely as you know and we made some significant enhancements to the offerings to this sniffs.
That's going to be dependent now how the sniffs get through this environment. They certainly have received government funds and we're seeing a little bit of of the impact of that.
The offerings that ACP, the therapeutic solutions business has put out there.
Actually allows for more remote support group therapy et cetera. So.
We're watching closely not sure we can predict what's gonna happen within the sniffs, but I'm really pleased with the team in terms of the different offerings they've come out with some of the things are planning on here for the next couple of quarters, which kind of should help the sniffs navigate the environment better than than the prior years.
Alright got it thanks guys.
Thanks, Brian.
And there are no further questions and accuser this and the question to answer session and Anthony Conference Conference is now concluded. So thank you for attending today's presentation and you may know disconnect.
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