Q2 2021 Hanger Inc Earnings Call
Good morning, and welcome to the Hanger second quarter 2021 earnings call.
All participants will be in listen only mode.
If you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Asked a question you May press Star then 1 on your Touchtone phone sales.
Draw. Your question. Please press Star then 2.
Please note this event is being recorded.
I would now like to turn the conference over to Seth Frank Vice President Investor Relations. Please go ahead.
Good morning. Thank you welcome to Hangers second quarter 2021 earnings conference call with US today are gonna Doster Hanger, as President and Chief Executive Officer, Thomas Crowley, Executive Vice President and Chief Financial Officer.
Some of the information discussed today will include forward looking statements in the meaning of the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause hangers actual results to materially differ from those we discuss 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 SEC hanger disclaims any obligation to update forward looking information discussed on this call.
Now, let's hand, the call over to Vince.
Looking at our 2 business segments inpatient care, we saw significant year over year growth and a return of the historical seasonal pattern of sequential improvement that we had compared to the first quarter.
4 Q2 patient care segment net revenue grew 29%, while the same clinic growth was 18, 2%.
When we look at trends within the segment as a reminder, hour orthotics business that experienced a significantly greater downturn then prosthetics during the early part of the pandemic.
As a result, we are seeing a more pronounced year over year growth and orthotics prosthetics when comparing to 2020.
Orthotics revenues rebounded, 44% customer thetic devices, such as ankle foot orthosis spinal cranial and other categories posted strong growth as surgeries in elective procedures picked back up in addition, our newly established National cranial care network is helping.
Drive growth and customer thoughts.
Off the shelf devices, as well as shoes, and inserts experienced recovery, but at a rate less than customer thoughts.
This is generally positive for our segment margins.
Excluding the impact of acquisitions prosthetic revenue growth was 4.3%.
Microprocessor based prosthetic volumes in general grew relatively modestly these.
These devices tend to be utilized by otherwise healthy and younger individuals who continued coming in to see us even during the height of the pandemic.
This contrasts 2 prosthetic Catholic categories, typically utilized by lower mobility older patients many with chronic illnesses.
The growth in this older less mobile population aligns with what we saw on our practice last year. As these patients were profoundly impacted by care access limitations at the height of the pandemic.
A key metric for hanger as a leading health care provider is patient satisfaction and as you know we view our net promoter score is a key indicator I am pleased to share with you that despite the challenges of the ramp and patient volume that are occurring hanger clinic NPS remains solid at 86.
From an operational perspective, we're facing as are many companies what we anticipate our temporary challenges due to the economic recovery and macroeconomic environment.
Specifically hourly or Nonexempt labor remains at high demand.
Certain the price staff positions, such as distribution center workers fabrication technicians in front office administrators are most impacted.
Widely reported inflationary signals and capacity constraints have also created some near term challenges.
These factors are naturally, creating additional demands on clinic staff and her associates on the distribution and fabrication areas even through this I am encouraged and heartened by the execution and commitment to our patients on our organizational values by our associates. The current environment asks for extra effort.
Pitching in and maintaining a professional attitude after a long and difficult 18 months.
We are fortunate to have built on environment with a DNA that embodies or corporate values on a durable service oriented culture.
Turning to the products and services segment. We also saw a return to growth as independent owned P providers, so patient volumes improves.
Segment revenue growth was 17, 2% year over year.
Hangers on P distribution business grew by 25, 4% and is that approximately 89% of prepandemic levels.
We remain focused on the transition to our new state of the art distribution facility in Alpharetta, Georgia.
Tom will take you through the margins in patient care as well as products and services.
While our reported adjusted EBITDA declined due to normalize levels of personnel expenses in 2021, we continue to do a solid job managing G&A expense growth given current revenue levels.
Operationally, we continue to build on hangers key differentiators and are increasingly focused on maximize our assets to accelerate and sustained growth.
During the second quarter, we held our national meeting for clinic leadership, there was a lot of excitement and energy as this was the first time, our regional leaders gathered in person in a year and a half.
The focus was on our vision for hanger over the next several years.
We have begun to look at increasing disciplined and consistency across our network to drive alignment and tighter integration within the broader healthcare system.
This is becoming an imperative and a risk based health care environment, and we believe hanger is appropriately positioned as the leading partner for OSP services on a national scale.
Hanger commitment to putting the patient first backed by our substantial investments in clinical research and focus on excellence continues to support and advance our reputation among medical professionals and payers nationally.
We have a solid clinical systems platform patient connectivity and an integrated revenue cycle process, all of which enabled per compliance and documentation requirements, while ensuring low friction access to vital OSP services.
Focusing on centres of excellence and establishing regional specialty hubs present longer term opportunities to enhance productivity, while optimising patient outcomes.
With regards to acquisitions I am pleased with our initial progress since the pandemic related pause we took in 2020 after the landmark acquisition of second Cyrus.
We've acquired 6 independent OSP providers in 2021 through the end of June, bringing our total nationwide clinic accounts to 835.
These new clinic locations spanned the southwest part of the country, California, the southeast and the mid Atlantic areas. We welcome these associates and patience to hanger looking.
Looking ahead to the remainder of 2021, we continue to be optimistic and our ability to add to our network through selective acquisitions that will strengthen hangers growth strategy.
It is important to note that several team members that have come to us via acquisitions have taken on significant management positions across hanger and regional and national Rolls.
It is an indication of the strength of the teams were bringing in the hanger combined with the myriad of career opportunities available to them as they join us.
In conclusion, we achieved solid results this quarter and are in a good position for the year to date.
As Tom will discuss our outlook for the remainder of the Euro is predicated on a continued improvement of the business environment.
Despite these immediate term challenges when you combine the strength of our experienced senior leadership team our financial condition.
And the benefits of our portfolio, gaining better understanding and recognition broadly we continue to be optimistic about hangers growth prospects as the pandemic ends.
Thank you for your interest in US I will now turn the call over so we can get more details on the financials Tom Thanks.
Thanks than it has been discussed we're pleased with hangers financial performance during the second quarter and are encouraged to see that business volumes have returned to levels close to those achieved prior to the pandemic net.
Net revenue for the quarter was 288 million and due to the effects of COVID-19 in the second quarter of last year, our results reflected $47.4 million in revenue growth.
The company is adjusted EBITDA during the quarter was $31 million.
In reviewing our adjusted EBITDA because.
As you May recall in response to the pandemic last year, we undertook a number of temporary cost reduction measures, which resulted in approximately $35 million and operating cost savings during that period as.
As a result, the company's adjusted EBITDA during the recently completed quarter of $31 million does reflect the decrease from the $36.5 million, we reported last year at this time.
When reviewing our performance by business segment patient care reported $236.8 million in revenue, which reflected a $49 million increase over the same period last year, primarily due to the adverse effects, which the pandemic had on our prior year patient volumes.
Our same clinic revenue growth was 18.2% during the quarter.
Patient care produced $44.8 million, an adjusted EBITDA, which reflected a margin of 18.9%.
Due primarily to the temporary cost reduction measures we implemented in the second quarter of 2020. This segments adjusted EBITDA reflected only slight improvement when compared to the 44.2 million, we reported for that period prior period.
Same clinic net revenue for the segment during the quarter was approximately 96% of the Prepandemic are pre COVID-19 level, we reported in the second quarter of 2019.
As a result, we're currently not utilizing our clinic capacities at the same level as we were prior to the pandemic and our markets are reflecting this operating environment.
Patient care is adjusted EBITDA margin is running approximately 160 basis points lower than the second quarter of 2019, and this difference primarily relates to the fact that we have not yet fully recovered to pre COVID-19 patient volume levels.
Our products and services segment is reflecting similar business trends.
Revenue of $44 million for the second quarter reflected a $6.5 million increase over those reported last year at this time, primarily due to the adverse effects of the initial months of the pandemic.
Within this segment distribution services grew by 25, 4% over the second quarter of 2020 and revenues were at 89% of the level of reported in the second quarter of 2019.
This is primarily due to the continuing effects of COVID-19 on the business environment, but it's also a reflection of the exit from unprofitable podiatry distribution arrangements as we discussed throughout last year as well as the effects of lost revenue due to our acquisition of independent OMB providers.
Who had previously purchased componentry through our Sps business.
Our therapeutic solutions business, which operates through the monthly equipment and related therapy protocols. It provides to skilled nursing facilities was less directly affected by COVID-19 in the second quarter of 2020 and reflected relatively stable revenue of $10.8 million on the current year quarter.
Now I'll spend some time walking you through the company's cash flow from operations.
And analyzing hairs cash flows it's important to recall that during 2020, we undertook a number of initiatives to build liquidity in light of the risks we face due to the pandemic.
These included the temporary operating cost reductions I mentioned earlier as well as a number of actions of reduced our net working capital to lower than normal levels on the prior year.
As we left 2020, when excluding cash taxes receivable and the current portion of debt hangars net working capital had been temporarily reduced by 59.7 million.
During 2021 is business volume to return, we will naturally be deploying a portion of our cash flow and the restoration of more normal working capital levels.
With that said for the year to date are operating cash flow trends have been similar to those for the first 6 months of 2019, the best comparable pre Covid period.
During 2021, we've consumed approximately $35 million on networking capital through June 30th primarily due to the payment of annual incentives on the first quarter due to reductions on our payables levels and due to an increase in inventory balances.
This is in line with the same period of 2019, if you adjust for our building inventories and return a payables to more normal levels.
Are operating cash flow from the second quarter was $33.1 million, which reflects an increase of 3.8 million for 13% as compared to the second quarter of 2019.
A key favorable factor in our financial performance working capital and cash flows continues to relate to the decreases and disallowed revenue and day sales outstanding which the company has achieved in 2021.
During the quarter disallowed revenue in patient non payment, we're 3.4% of gross charges, which was well below the pre COVID-19 level of 5.4% reported in the second quarter of 2019.
Day sales outstanding decrease to 40 days, which reflects an improvement of 5 days as compared to June of 2020, and 7 days when comparing to June of 2019.
These trends are encouraging and again reflect the exceptional documentation and building work of our field personnel.
And the collection activity spearheaded by our revenue cycle management team.
During the quarter, we expended $16 million in cash for the acquisition of OMB clinics from $7.3 million for capital expenditures.
We currently estimate that we will utilize approximately $30 million to $35 million per capital expenditures during 2021.
As of June 30th we had $171.1 million in total liquidity, which reflected in an increase of $6 million from the first quarter of this year.
From a leverage perspective hanger had $438 million on net indebtedness as of June 30th.
This reflected a leverage level of just under 4 times on a trailing 12 months adjusted EBITDA basis, when taking acquisitions into account.
Our underlying net leverage is closer to a mid 3 times level, if we adjust for the effects of COVID-19 on the second half earnings for 2020.
Now I will turn my commentary towards our overall outlook for 2021.
While we are pleased with hangers performance during the first 6 months of 2021, it's important to recognize that our original outlook for the second half assumed a clear and to COVID-19 affects from the business environment by the end of June.
As such we're not in a position to view are favorable first 6 months performance.
Is indicative of a change in our anticipated full year outlook.
Based on this we are reaffirming our original guidance for 2021, which force sees that hanger will produce net revenues in the range of 114.5 billion to 1.175 billion and adjusted EBITDA of 130 million to 135 million.
This includes the benefit of approximately $36 million in net revenue from the annualized effect of acquisitions completed in 2020 or closed on the first half of this year.
This outlook also assumes that continued sequential improvement in the third and fourth quarters of the orthotics and prosthetics business environment related to the continued cessation of the effects of COVID-19 on patient volumes.
From a quarterly timing perspective, we believe that due to the continuing effects of the COVID-19 virus on business conditions, and the $16 million in temporary cost reduction items that benefited us in the third quarter of last year.
That the majority of our revenue and earnings growth will occur in the fourth quarter.
With that I'll turn the call back over to the operator to open it up for any questions that you may have.
They will now begin the question and answer session.
Good question, you May price star on 1 on your touchdowns on.
If you are using a speaker phone please pick up your handset before pressing a key.
So much on your question. Please press Star then too.
Our first question today comes from Brian tank, along with Jeffries.
Hey, good morning guidance Jacks, Lebanon for Brian Congrats on a really strong quarter.
I guess the first 1 you appreciate the commentary on on why you are maintaining a guidance I think.
Delta varying is on everyone's mind right now.
Just wanted to see kind of any color you can get on what you saw.
Exiting <unk> and perhaps an early <unk> in terms of.
Patients willingness to to get into centers for.
Or the flow of volumes and as a result of.
The Delta variant being out there are you seeing any patient hesitancy and then secondly can you give us any color on what vaccination rates are like in your staff as well as in in your broader patient base.
Sure Jack Thanks, So first off let me address the the.
Closing out second quarter patient volumes et cetera.
Thank you may know that in our business, it's kind of early to try and project how third quarters looking this early in the quarter because a lot of our traffic comes in the latter part of the quarter. So it's a little bit early to to.
The project that having said that we haven't seen any significant or material degradation and the traffic.
Since that point, but again just as a reminder, most of our traffic comes in in the latter part of the quarter.
With regards to our patients.
And our employees in terms of Covid vaccination rates, we haven't disclosed that information. So we are encouraging are strongly encouraging our employees to make sure that they do get vaccinated on within our clinics, we have some pretty stringent protocols in terms of what happens when a patient does come in.
In terms of mask wearing with or without the.
The vaccination. So that's that's kind of where we are with with the vaccination rates.
Okay got it I appreciate that and then I guess.
Looking forward.
It looks really strong numbers on the top line I think and encouraging to see some of the M&A coming through.
As we look forward, perhaps out the 2022 or beyond how should we be thinking about the the.
The buckets that you all can.
Put your focus into accelerate growth, whether it be topline initiatives more M&A or organic growth acceleration or.
Or.
Kind of savings opportunities and appreciate some of the commentary on supply chain initiatives any update there would be great in terms of what you're doing on the cost side to.
Drive earnings longer term.
Sure Let me touch on the are focused on growth post pandemic and I think that's how we should look at it post pandemic.
Growth our focus.
Is really on both organic and inorganic growth.
R. As we've said throughout the last year or so is our focus is on same clinic revenue growth within patient care organic growth within the products and services segment and will supplemented with selective acquisitions within within 1 P and our pipeline right now on the <unk>.
<unk> Sighed is very strong we don't expect that to slowdown anytime soon.
So.
Post pandemic.
Focus on organic growth, we've got some terrific initiatives. We've got some terrific leadership, we put in place over the last year, as we've announced and very encouraged with.
Some of the areas of focus on on.
On the growth initiatives with regards to focusing on hospital systems, focusing on centres of excellence.
And equally importantly, a recruiting efforts, bringing in residence and the increased investments, we've made and bringing in the right conditions. So that's how we look at our growth opportunities organic supplemented by selective acquisitions.
And then Tom if you want to touch on the on the supply chain and cost side of things.
I think as we talked about and per.
Calls we've been forging ahead on the supply chain from despite COVID-19.
And that is involved completing our investment in the new distribution facility in Alpharetta, GA, which came online.
Really is that last year clothes and has been serving the company here on the first half.
And given its automation and the nature of that facility. That's 1 of the key contributors to the supply chain savings, which we've talked about in past calls so that has been going well in the secondary of supply chain investment we have been investing in our fabric.
Fabrication central fabrication facilities, there has been it touched on I think we're seeing less of the benefit at that at this point simply because of some of the labor on staffing that we're trying to attain to really put those facilities to full use.
From a standpoint of growth I will just add to advantage said, it's too early for us to be.
Sharing what we think on a market share basis, but what we've seen in terms of our organic growth.
During last year, and this year as compared to the industry as well as the augmentation we've done through M&A.
We think that's driven our market share up a little bit and so we're pleased with that and think as we leave 2021 and get into 2022, we're going to be even better position from an overall size and and network capacity standpoint.
Great and I appreciate that and then Tom quick 1 just for modeling purposes for you to close it out from me.
On the deals that were announced in the quarter any color you can give on timing just so we can model out Q on queue to contributions from M&A next year.
When you look at it there's those came in real late in the quarter, they're not really that large from a standpoint of revenue contribution this year and certainly earnings contribution because of the integration expense.
So.
It's probably premature from me to start giving you 2022 cents on what those will do.
But we'll certainly as we close out the year be giving more guidance in terms of how to think about the M&A plus the organic for that year.
Got it awesome. Thanks, guys on congrats again.
Thanks Jack.
Our next question comes from Larry solo with a C. J S Securities.
Hi, Good morning guidance, just just a quick follow up on the on the unchanged guidance and the cadence it sort of feels like.
The first half I know you guys don't fall to the quarters, but it does feel like I guess from your initial guidance in terms of per.
Percentage of the day EBITDA that perhaps for a little bit ahead of the curve in the first half, but with Covid is.
Greatly diminished.
Some resurgence and whatnot, so maybe not completely.
Spot, we'd like to be.
So perhaps the year itself is a little bit more not quite as backing loaded as you thought.
Is that a fair way to characterize it and then in terms of the tables.
Sounds like Q4, you're going to get most of the growth.
But should should the normal cadence that's in Q3 and Q4 be relatively normal on versus.
At 3 Covid.
Yeah, Larry first of all I think I think that's correct I think we'd be in a much.
Stronger position, if we'd seen a full.
Reduction of cover its effect on the business environment through the site by the close of the second half and certainly the outperformance on the first half would've really help the company from a standpoint of its its.
That's future expectations when.
When you look at the cadence.
I think if you look historically the third quarter has always been relatively similar to the second quarter, maybe even a little bit lower around 25% or call. It right of the year.
And I don't think.
Reasonably speaking that we'd be much different this year and probably more of a sideways slide from Q2 Q3 as we've seen in past years. So clearly the fourth quarter will be significant in contrast to pastures from from a from a revenue perspective, and then certainly from an EBITDA perspective.
Okay.
No way too early to got on 22, but it doesn't seem like you're.
Your your confidence in 22.
Being a normal year and being a good growth here has changed at all are weighing in the last few months certified SF.
That's absolutely fair to say.
We feel pretty bullish about the business as we look at next year and I would like to believe these these distracting searches.
Probably continue there'll be other variants, but less and less we would like to believe effect on the daily lives of people. So we're viewing 2022 is pretty much being a full normal year at this point.
Okay and lots of companies, especially on other industries in service industries.
Spacing difficulties with retaining labor labor.
Wages.
I'd also some on the supply side as well of course, so and I'm. Just curious you guys are facing any of those challenges. It does seem like from your margins you've been able to offset most of us.
Yeah look with regards to labor.
The areas that were a little bit under pressure or the Nonexempt labor.
As I've mentioned in my prepared remarks were feeling it in our fabrication facilities, we're feeling it in the front office administrators.
On both those areas and we put on some incentive plans to bring in recruit heavily in those areas. So we're hoping that also what will help us is some of the eliminations of the supplemental unemployment benefits that are out there. We're hoping that will help us here on the second half bring in some of that.
Labor that we've been having a tough time, bringing in on the Nonexempt side.
Gotcha, and then just just lastly for Tom.
You mentioned the pay remarkable.
Improvement in the disallowance rated for Ya.
3.4% from 573, Covid and Dsos down to 40 from Thank you said 45 last year was 47, you can look back on the on the 2 year. So.
The dynamic are suppose some COVID-19 benefit but.
You see some of this as being sustainable you look out.
Yeah, each quarter that goes by we're filling more and more comfortable.
Comfortable that we've got enough of a trend that we should see some improvement that would be more permanent in nature.
I do feel because of the benefits of Covid and some of the special initiatives that we put into place there were achieving peak level of success. So I wouldn't necessarily be saying that you should look at the current periods as being indicative of the future, but I'd like to say that at this point internally, we're much more opt.
Mystic that were in the in the mid force from a standpoint of where patient non payment on disallowance would be as opposed to the low fives, where we were in pre COVID-19 periods.
Got it great. Thanks, Tom appreciate it discussed on the call.
If you have any further questions. Please press star from 1 to join our queue.
Cause I'm showing no further questions. This will conclude our question and answer session as well like today's conference call. Thank you for attending today's presentation. You May know desk came on.