Q4 2021 Hanger Inc Earnings Call
President and Chief Executive Officer, and Thomas Kiraly, 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 1095.
These statements are subject to risks and uncertainties that could cause <unk>.
Actual results to materially differ from those we discuss today.
Those risks include among other things.
Matters, we have identified in the forward looking statements portion of our latest earnings release and in our filings with the SEC.
<unk> disclaims any obligation to update forward looking information discussed on this call and now I'll hand, the call over to Dennis.
Thank you Kevin.
Good morning, and thank you all for joining hangers fourth quarter and full year 2021 earnings call.
Joining me on today's call is Tom Karoly hangars, Chief Financial Officer.
This morning, I will provide high level thoughts on our fourth quarter and full year 2021 results, including some of our operational highlights and ongoing strategic initiatives.
I will also discuss the current operating environment and touch on our outlook for 2022 before I pass the call to Tom who will provide details on our financial results for last year and our guidance for this year.
Yesterday after the close we reported fourth quarter revenue of $312 4 million, which increased 12, 6% and adjusted EBITDA of $37 2 million, which increased four 9% over the prior year period.
These results were consistent with our pre announcement on February seven.
Although revenue for the quarter grew nicely on a year over year basis. Our results were negatively impacted by the spike in Covid infections, driven by the omicron variants during December .
For those of you who have followed us for a long time, you know the importance of the last few weeks of the year.
We experienced seasonality in our operations and increased volume in our clinics towards the end of the calendar year, which we believe is due to patients reaching annual deductible as they approach the conclusion of their benefits year.
This generally results in the month of December and fourth quarter being our largest periods of the year for both revenue and adjusted EBITDA.
Not only did omicron adversely affect referrals and patient visits during the latter part of the fourth quarter, but we also experienced a significant increase in particularly by our employees who were infected.
The safety of our employees and patients are our priority and unfortunately, the number of increased infection due to omicron had a negative impact on our ability to deliver on our 2021 earnings guidance.
We saw some continuation into the early part of the new year, but it appears the number of cases related to the underground variants are normalizing.
And we believe that the worst is behind us.
Our business has also been impacted by cost pressures inflation and the labor shortage that has affected the U S economy generally.
Really more in the second half of 2021, which resulted in wage pressure, especially in certain job roles, such as our administrative and technical areas.
With that being said the results from our two business segments had some bright spots.
Patient care revenue increased 14, 4% year over year during the fourth quarter and it grew 13, 4% for the full year.
Same clinic revenue increased five 8% and nine 1% for fourth quarter and full year 2021, respectively compared to the same periods of the prior year.
Turning to our products and services segment's fourth quarter 2021 revenue increased three 2% year over year and four 5% for the full year compared to 2020.
A couple of things to highlight for our products and services segment.
First the team has done a nice job growing its business with the department of defense and the VA.
In addition sales of new products, we added to our distribution business in 2021 contributed $3 $6 million of additional revenue year over year, Despite COVID-19 and a challenging operating environment.
Overall for hanger, while our full year results were clearly affected by Covid, we were still able to grow our revenues by 12% and adjusted EBITDA by 13%.
Now despite the challenges posed by Covid in the last couple of years I'd like to take a moment to put the progress we have made at hanger in perspective.
During the last three years, we have increased our footprint from 780 to 875 clinic locations.
With the recent clinic edition in Alaska, We now serve patients in 47 out of 50 States plus Washington D C.
Currently we believe that one out of every four OMB patients in the United States seek care at a hangar facility, which is an improvement from one out of every five patients a few years ago.
Over the last couple of years, we have added dynamic leaders like peak soy our chief operating officer to our leadership ranks.
Pete and his team have been keenly focused on market based growth strategy that will help drive continued growth and organic share gains in the patient care segment.
Our investments in infrastructure spanning our EHR system, and our ERP system combined with the strength of our revenue cycle and supply chain enhancements have positioned us well to continue to scale. This growing business in the coming years.
As I told our employees the pandemic has set us back on our growth plans only in terms of timing and not in terms of realizing the true potential of our business model and growth plans.
While we have encountered some near term challenges primarily due to external factors like omicron and the inflationary environment I wanted to talk about some of our accomplishments for 2021.
First we went live with our state of the Art 150000 square foot distribution center in Alpharetta, Georgia, which will enhance the in stock availability of componentry and reduced delivery times in the eastern half of the country.
The expansion of our distribution capabilities in Georgia has also allowed for the consolidation of the number of distribution centers from five to two by midyear 2022, which is in line with the long term supply chain strategy, we had previously outlined.
I also want to commend our supply chain and fabrication teams, who demonstrated incredible resolve during the fourth quarter, making sure we had adequate inventory and substantially on time deliveries. Despite the worldwide supply chain interruptions.
Second we successfully implemented the financial module of our ERP with the move to an Oracle cloud based system.
It was a seamless transition with no disruptions, which is a testament to our finance and it teams and all of those involved in the implementation.
Third in November we fortified our balance sheet by refinancing our revolver, resulting in a greater capacity a lower interest rate and an extended maturity gives.
Given the inflationary and rising interest rate environment, It was timely and a great move by Tom and the finance team.
Lastly, our acquisition pipeline remains robust we.
We acquired eight independent E&P businesses during the fourth quarter and as a result continue to welcome high level clinical and management talent into hanger.
Our M&A pipeline remains active and we will continue to deploy capital to grow and add to our business supplementing our organic growth efforts.
In addition to these 2021 accomplishments we have been pushing a few strategic initiatives that will further support our growth plans.
Beginning with our pediatric strategy, Dr. Jim Campbell Peach soy and their teams have started to implement the highly effective network approach for our pediatric <unk> patients and their families.
This is the first step in ensuring we drive growth in this area, while enhancing the care provided to these children.
This initial focus on our cranial patients which began earlier in 2021 as clearly demonstrated strong results that we are building on as part of an overall pediatric strategy.
Another strategic initiative I want to highlight is our partnership with Zimmer Biomet.
This small pilot program using Zimmer Biomet my mobility platform links with a personal device to provide targeted education exercise guidance and insights into daily activities for our prosthetic patients.
There is a lot we can learn by collecting data in this manner to improve outcomes for our patients.
Speaking of data every healthcare company is now our data repository of sorts.
As such our clinical outcomes programs and data strategy are increasingly informing our business model and care pathways.
As an example handle recently published the safe Amped manuscript in the journal of Assistive technology.
The insights from this analysis provides guidance on the appropriateness for providing microprocessor needs to patients with diabetes.
Mitigating the cost associated with injuries, Paul that are more likely to occur when patients are fit with a non microprocessor needs.
In a separate study our research confirmed that individuals who received the prosthesis earlier post amputation had significantly lower total health care costs compared to those with Nomura thesis within 12 months of amputation.
Additionally, early receipt of a prosthesis following amputation resulted in reduced health care utilization, noting specifically the odds of VR department visits are reduced by 32%.
It is these types of findings that we are using to communicate with payers and referral sources to further validate the need for outcomes driven care and appropriate reimbursement.
As a result of our efforts in recent years, we believe hanger is now in the unique position of having the largest clinical outcomes database for prosthetic patients in the world.
Our intent at hanger is to use data to drive actions, which leads to better clinical outcomes more efficient care delivery and lower health care costs.
We continue to be encouraged by the progress we are making.
Before I provide some high level thoughts on our 2020 to outlook I want to applaud our team for weathering another year of the Covid storm. It has been a challenge and the team have sacrificed and risen to the occasion.
While 2021 wasn't exactly what we expected nor wanted to be we were able to continue to make investments in areas that will help lay the foundation for years to come.
I believe 2022 will be a year for hanger to begin to show its true potential.
With our pre announcement on February seven.
We introduced 2022 revenue guidance, which represents 6% to 9% year over year growth, while our adjusted EBITA guidance represents 7% to 11% growth over 2021.
We expect same clinic growth in our patient care segment to be approximately 5%.
Given the current operating environment, coupled with cost pressures inflation and labor issues. We believe this could be a prudent outlook for the year.
Tom will provide more details on our 2022 guidance shortly.
In closing before I turn the call over to Tom to discuss our financial results I want to thank our entire organization for their effort dedication and sacrifices to generate these financial results.
In early February of this year hangar was named to Forbes list of best Midsize employers. This is a great accomplishment for our company and illustrates the commitment and dedication of the entire organization.
Although 2021 didn't quite play out as we expected I am appreciative and truly amazed by the things we accomplished during the second year of this pandemic. We've continued to strengthen the foundation for hanger through hard work and focus coupled with investments that strategically position us to gain share and provide the highest quality.
The care for our patients and customers.
Now is the time to focus forward and I truly believe that we can begin to unleash the full potential for hanger in 2022.
I want to thank everyone on the call for your continued interest in Tanger and with that I'll turn the call over to Tom who will provide more details on our financial results and guidance Tom.
Thanks, Pat and good morning, as Insurable fourth quarter results fell short of expectations I think it's important to recognize the significant growth in revenue and earnings which were achieved despite the continuing adverse effects of COVID-19.
Our fourth quarter net revenue of $312 4 million reflected growth of 12, 6% over the prior year period.
Adjusted EBITDA of $37 2 million reflected an increase of four 9% for the quarter.
When looking at the full year reported net revenue was 112 billion, which reflected growth of $119 3 million or 11, 9%.
Adjusted EBITDA was $118 9 million, which reflected an increase of $13 $8 million 13, 1% over 2020.
And looking more closely at our performance by business segment. The results for our patient care segment operating even more favorable underlying comparison to the prior year period.
Fourth quarter patient care revenue grew by $33 6 million or 14, 4% as compared to the fourth quarter of 2020.
And adjusted EBITDA grew by $5 5 million or 12, 1%.
Same clinic revenue increased by five 8% over Q4 2020 on a day adjusted basis.
It was 95% at the level reported during the fourth quarter of 2019.
As we've discussed results for the quarter were primarily affected by the emergence of the omicron variance and secondarily due to increases in labor costs.
We believe the disruption caused by an employee absences due to crop protection and a related corn team contributed to the loss of approximately 6 million to $8 million in revenue in the fourth quarter.
This also resulted in the buildup of undelivered work in process devices of the year then.
Given the patient care segments high flow through for each incremental revenue dollar you can see how significant the impact was on fourth quarter results.
For the full year same clinic revenue growth over 2020, and our patient care segment was nine 1% and.
And same clinic net revenue was 97% of 2019.
Volume growth constituted eight 5% of our nine 1% same clinic growth rate for the year.
The relatively strong growth rates in patient care revenue and earnings over the fourth quarter of 2020 were partially dampened by a relatively stable performance in our products and services segment and.
And an increase in corporate expenses.
The products and services segment reflected revenue growth of one 4 million or three 2% and a modest decline in adjusted EBITDA of 700 rebalancing.
The overall margin in products and services declined from 17% in the fourth quarter of 2020 to 14, 9% in the fourth quarter of 2021.
This margin decline was primarily due to growth in lower margin distribution services revenue and an increase in personnel and travel costs within this segment.
During the fourth quarter of 2021, corporate expenses increased by $3 million over the prior year fourth quarter.
This was primarily due to the recommencement of our corporate financial and supply chain systems implementation projects.
Increases in other technology spend in.
And increased personnel expense.
Now I'll spend a few minutes discussing the effects of inflation on our 2021 results and our 2022 outlook.
As discussed in prior calls throughout 2021, we have been able to manage our material costs in a manner that for the most part is mitigated increases in our unit component costs.
We also have not experienced any noticeable disruption due to stock outs.
As we enter 2022, we currently do anticipate that we will begin to experience some increases in underlying material costs.
To mitigate these increases we have put in place certain new clinician formulary and purchasing preference programs, which should enable us to moderate the effects of inflation.
From a labor cost perspective as is common in today's business environment employee turnover and rising labor costs are also increasingly affecting us. This.
This is occurring particularly in our clinical administrative and technical roles as well as in our distribution center positions.
We currently estimate that wage inflation has increased our average salary growth by 100 to 150 basis points over our past right.
In 2022, we believe we can effectively manage these inflationary trends by offsetting them with what we estimate will be in average price growth of approximately 3%.
This is reflective of a five 1% Medicare rate increase for 2022.
Which affects approximately 50% of our patient care reimbursement coupled with increases from commercial payers.
Through these pricing increases along with the benefit of approximately 2% volume growth.
We should be able to maintain our overall adjusted EBITDA margin in 2022.
Now I'll provide some comments on the companys cash flow from operations.
In the fourth quarter of 2021 hanger produced $35 6 million in operating cash flow, which compares favorably to the $33 million generated in the fourth quarter of 2020.
Operating cash flow was aided in 2021 by a decrease in disallowances in patient nonpayment, which declined from four 5% of adjusted gross revenue in 2022, 4% in 2021.
During the year free cash flow also benefited from lower than planned capital expenditures.
In 2021 capital expenditures were $24 9 million, which was roughly $5 million less than the $30 million range. We had originally planned for during the year.
As of December 31, 2021, we had $61 7 million in cash and cash equivalents.
When coupled with our newly Upsized revolving credit facility. This provided us with available liquidity of $191 million.
This level of liquidity was achieved despite using $80 1 million in cash for acquisition.
And our increased investment in working capital during the year.
As a reminder, we took some strong working capital reduction actions in 2020 in light of the pandemic and we reverse those during 2021, which is now brought it back to more normal levels.
In connection with our management of cash flows and increasingly vulgar capacity.
<unk> that Moody's noted our improved liquidity position and the February analysis and release on the company.
With this new level of cash and liquidity, we are in an excellent position to both continue our acquisition strategy during 2022 as.
As well as support our desire to gradually reduce leverage.
With net debt of $461 5 million as of December 31, 2021, <unk> net leverage ratio was three nine times trailing 12 month adjusted EBITDA and is three six times the midpoint of our 2022 guidance.
Shifting to our 2022 outlook, we believe the revenues hanger produced in 2021 will serve as the new base for future growth.
As we announced on February seven we currently estimate that our same clinic growth rate will be approximately 5% during 2022.
This is comprised of the price growth of approximately 3% that I spoke of earlier.
Coupled with 2% volume growth.
We believe that the volume growth of 2% will be supported by generally more favorable referral and patient conditions.
More stable operations due to future variants, having a less disruptive effect.
And the benefit of current sales and marketing initiatives.
Overall patient care revenue growth will be aided by approximately $35 million and the annualized revenue effect of acquisitions completed in 2021.
These and other operating trends have led us to estimate that our 2022 net revenue will be in the range between $1. One 9 billion to 122 billion and adjusted EBITDA will be in the range between $127 million to $132 million.
The midpoint of our guidance reflects total revenue growth of approximately 8%.
And adjusted EBITDA growth of roughly 9%.
With that I'll turn the call back over to the operator to open it up for any questions that you may have.
As a reminder, if you'd like to ask a question today. Please press star followed by one on the telephone keypad now.
To ask a question. Please ensure your headsets fully kicked in in a muted likely style bond on your telephone keypad.
Our first question today comes from Brian <unk> from Jefferies. Brian . Please go ahead. Your line is open.
Brian from Jefferies. Your line is open please ask your question.
Can you hear me okay.
Yes can you guys hear me okay.
Okay perfect. Thanks, Yes. Thank you good morning, I appreciate you taking the question.
No.
Thanks for all the color on the growth plans.
Plans and the growth initiatives, but why do you see if you can give us more color on so the things that youre doing in terms of I think you're talking about the buyers.
Zimmer Biomet and a few of the other things you're working on so just maybe if you could share with us how youre thinking this.
It will all play out in terms of driving growth acceleration number one and how it seems like youre gaining market share.
Is that where this will come from I'm, just trying to get a gauge of how or if you've got a sense of how this will all shake out.
Sure. Thanks, Brian So our strategy over the years has been fairly consistent in terms of focusing on the organic growth side and the inorganic growth side.
This year, what we're sharing with you all is a little more color on especially on the organic growth side. So.
I'll touch on three of the initiatives, we've got going one of them is we've got this market based approach we've looked at all the msas across the country and the OMB dollar spend in all the Msas.
And we've put in place strong leadership and some of the key markets. The key msas and given them the resources to go out and do their own local growth strategies and capture share.
In those specific markets. So this market based strategy that <unk> implemented is picking up steam at the current time.
I'll touch on the pediatric strategy.
Touched on during my prepared remarks, we believe there is opportunity here and focusing on the pediatric segment to OSP.
During 2021, we announced.
A national network of our cranial pediatric cranial specialists and we really saw terrific results in 2021, so we're going to build on that pediatric approach in 2022, focusing on the pediatric side of <unk> as well.
And then just to touch on in terms of our approach on the commercial side. We also believe that given our footprint and our infrastructure and the clinical talent. We have we're really well positioned to support the workers comp providers. So we've put in.
Put in.
Team, that's going to be focused on providing support to workers' comp providers and patients have come in through that angle as well. So that gives you a sense for how we're focusing on organic growth. We believe thats helped us gain market share in 'twenty, one and that will continue to help us gain organic market share in 2022 and beyond and then of course we.
<unk> that with our acquisition strategy that we've shared with you.
Yeah I appreciate that color you got it I guess.
To that last point, so as I think about capital deployment right I mean as the business stabilizes then you've returned to a growth trajectory.
Are you thinking about capital deployment priorities right now between acquisitions.
That pay down and whatever else.
It is out there.
Yes, Brian so.
As you know when you look at the return on investment.
The M&A strategy.
It really is superior to the company's other alternatives and in addition to that and probably more importantly, the M&A has been very strategic in terms of our ability to really concentrate.
Key markets and build economies of scale in those markets you really improve patient access.
To lower our overall cost structure.
So M&A is continues to be an attractive use of capital now with that said.
A very very important parallel objective is our ability to reduce debt and we're very sensitive to.
The amount of leverage the company's carrying.
<unk> had a commitment and continue to have a commitment to bring it down.
We've primarily been focusing on doing that through EBITDA growth.
But I wouldn't I wouldn't set aside the possibility that with the company's free cash flow, we take more proactive measures to address that as well.
Got it and then Tom last question for me as I think about just the comment that I've made on growth the market share gains that you guys are seeing.
Trying to reconcile that with the guidance that you gave you a 2% volume 3% right. So.
Is that just conservatism I mean, because I'm guessing the market is growing in that 2% range as well right and then.
Maybe the follow up to that just the pricing.
Youre getting a 5% rate increase from the government so.
And you did kind of like 1% commercial is there opportunity to bump up commercial rate growth given the inflationary environment that we're in.
Yes, so on the market share side.
Difficult to judge the market growth rate, but we've traditionally felt that given the broad base of the market. It grows at the rate of population.
And as we know population is growing pretty modestly half a percent to 8%. So when you look at that additional growth. That's clearly market share expansion is clearly the company taking ground.
And when you look at 1% growth call it $10 million in round terms.
It's about a quarter point of market share if you call the market about $40 million per 1%, so that's a pretty meaningful organic commitment.
And certainly if theres a natural recovery in the market that helps us achieve the 2%, but I would characterize 2% as being a very realistic estimate at this point, we could outperform it but we could underperform it as well.
And then from a standpoint of the second question on the commercial carriers.
They obviously are the more difficult.
Side of our reimbursement equation, we're having constructive discussions with them we have baked in a certain amount of the commercial achieved commercial rate growth into our guidance for 3%.
But we've got more work to do and we're very heavily committed to being very assertive with the payors on the importance of.
Them, recognizing the value of our care to their members.
Awesome. Thank you.
Thanks, Brian .
A quick reminder, that Scott I wanted to ask a question.
The next question comes from Larry Solow with CJS Securities. Larry. Please go ahead. Your line is open.
Great Good morning, gentlemen.
Perhaps a couple of follow ups to Brian maybe on some of your initiatives, maybe maybe theyre more blocking and tackling but not swinging for the fences, but more on the just on the investment side.
You guys touched on and I know with the <unk>.
You switched over to the Oracle cloud based system and you said you are also re implemented I'm, telling your supply chain investment if I look back if I remember just before I guess in late 19 or early 'twenty. You were you were going to spend.
I think somewhere between 30 and 35 million in.
In 2020 in 2021 on <unk>.
Supply chain.
Investments it sounds like those are.
Our are being accomplished I'm, just trying to sort of tie it altogether Tom.
Timelines in stock.
ERP systems up and running how does this help you guys put up a financial.
Financial point of view and just everything.
Everything put together, you're still going to spend what you were planning on spending.
Do we start to see some of those.
Actual tangible benefit we can look forward to draw the line in a couple of years.
Yes, Larry So in fact, we have been spending underneath all of this despite COVID-19 . We've remained committed to that strategy and have been realizing the benefits from it we spent in total probably around $13 million all of those various initiatives during 2021.
And about just about five 5% to $6 million were spent through the P&L.
Primarily the ERP spend which which we don't capitalize which we do expenses were installing that.
And we have probably about $5 million of Capex that we incurred primarily with our fabrication facility. So we have been committed to that investment and it is an ongoing operating investment I would say in addition to an investment where as a company were transformative and we're going to continue to grow and advance our systems advanced our processes now from a return.
<unk> standpoint, we are realizing the benefit of this investment one of the things that has enabled us to do is to really cut our freight expense.
And enjoying some good freight savings and some better efficiencies in terms of the way that we distribute product to our clinics into our third party provider customers.
So when you look at that it's been a beneficial effect it does gets shadowed or over.
<unk> overcome a bit by this overall COVID-19 effect and some of the inflation that we're seeing in freight rates and things such as that but.
So far we've been very pleased with how the underlying investment has paid off.
Okay great.
No.
Volume growth for 'twenty two.
And perhaps sort of the some of.
The revenue.
That would sort of pushed out into Q1, maybe that's a rounding error for the full year, but.
I'm, assuming you're including that sort of in Q1 and I guess.
Part B of that question is.
This.
Impact the normal cadence at all because I know normally were.
Q1 was barely profitable does that.
I suppose it still will be the least profitable quarter of the year or perhaps.
Supplement that a little bit.
Deposits pushout, or but then obviously with some world coal, but early on in the quarter. So just trying to shape that all out maybe give us a little more color on that.
Yes, Larry so absolutely when you look at the $6 million to $8 million, we did incorporate that into our guidance. It is one of the factors that's assisting us with a 2% volume growth for the overall revenue estimate now the challenges. We were also affected in January by Omicron saw micron did affect adversely the first quarter.
That $6 million to $8 million should positively offset that assist us in that so it's very hard to look at Q1, and say that it's going to be anything other than sort of balance on balance a normal quarter and to your point a normal quarter for Q1 for us because of seasonality typically is that we get maybe 5% to 10% of the years, earning.
In the first quarter. So it's a very low earnings quarter due to that extreme seasonality and it's really not determinant as we've seen in past years of how the company is going to do on a full year.
Great and how about just.
Touching again on the acquisition so I'm looking at <unk>, it's about $40 million in Q4 $80 million for the year. So that's a real star.
My follow up.
<unk>.
<unk>.
But normally spend.
So I guess my question there it sounds like the pipeline is still got a lot of opportunities but.
I suppose you can't keep spending.
Putting more capital into acquisitions and also want to reduce your debt load.
A challenging task.
Yes, we're clearly balancing the two Larry we do have a pretty solid pipeline as I indicated in the prepared remarks. There are some really good regional players still out there that we believe would make good fits to join the.
The Hanger clinic network. So we believe the acquisition pipeline is strong. We believe we will continue we're balancing of course this issue around leverage that Tom pointed out.
And we will keep making prudent acquisitions a lot of times, we like these acquisitions because they are a good fit geographically or culturally and sometimes we do walk away from them. So we're very selective in the acquisitions that we bring in but right now the pipeline is pretty solid.
Great.
One last question just on the on the old ERP system, our business or that I guess the therapeutic piece.
It looks like.
Haven't heard too much about it.
Our business has held up through Covid.
And I guess it looks like Capex in that business has dropped significantly over the last few years is that a.
A sustainably lower level.
Yes that therapeutic solutions business.
It's highly dependent as you know on the skilled nursing facility environment that hasnt that environment Hasnt stabilized, but the business appears to have stabilized.
During 2021, we've expanded the portfolio of product offerings and that's been recognized by our customers. So of course, it's a small piece of our overall business but.
But we're monitoring what goes on in the skilled nursing facility environment in this coming year and then Larry is the <unk>.
Second part of your question relative to the Capex. The reason that the Capex came down there as we had done our equipment refresh several years ago and change out all of that equipment and we're done with that refresh now. So you are looking at a more normal level of equipment investment for that business.
Got it great appreciate the color thanks, guys.
Thanks, Larry.
As we have no further questions. This concludes today's Q&A session and thus concludes today's coke. The team. Thank you very much for your attendance you may now disconnect your lines.
Yes.