Q1 2022 Hanger Inc Earnings Call
We had experienced last year.
Tom will provide more color on the impact of this on our adjusted EBITA comparisons in his prepared remarks.
Second as part of our supply chain strategy, we relocated one of our largest central fabrication centers into a purpose built state of the art 49000 square foot Central fabrication Center in Phoenix.
This new facility includes lean manufacturing training and automation areas, consisting of digital carvers, three D printers, and a robotic cell.
This move which experienced a delay during the quarter due to local permitting issues is now fully operational and will be extremely beneficial to our operations on a go forward basis.
Third the impact of Omicron was especially significant in the first half of Q1, driven by elevated levels of sick leave during this period.
The combination of this staffing shortage as well as the temporary disruption caused by the delay of our fabrication center move required an extensive use of higher cost third party fabrication and temporary labor during this time.
We expect the impact of these issues to subside in Q2.
Fourth during the quarter. Despite the effects of omicron, we were able to both deliver on the work in process that had built up at December 31.
As well as replenish our risk balance to level significantly higher than those we carried last year at this time.
This sets the stage for continued positive growth trends in Q2.
Lastly, as some of you know the first quarter is seasonally the lowest contributing quarter for our business and shouldnt be used to extrapolate our performance for the full year.
We expect earnings growth in the second quarter to accelerate which follows our normal seasonality.
Now I'll drill down into the results of our two business segments.
During the first quarter patient care revenue increased 12, 3% year over year, driven by six 9% same clinic revenue growth.
Our prosthetics business in this segment edged up to 52, 1% of our portfolio up from 51, 7% compared to the same quarter in the prior year.
On a same clinic basis. We were also pleased to see prosthetics revenue grew seven 7% in Q1 this year versus 2021.
Products and services revenues of $41 5 million for the quarter remained largely in line with the prior year.
While revenues in the distribution segment were slightly higher than the same period of 2021, we did see a margin degradation in the business driven by freight the normalization of bad debt and other operating costs.
Our therapeutic solutions business showed a slight decline in revenues mirroring the pressures faced by their skilled nursing customers and their reduced census.
Overall, when we look at our results, we feel our first quarter patient care revenue growth of 12, 3%, which constituted 84% of our revenues this quarter establishes a solid foundation for the year as we return to normalcy.
With regards to our progress on tuck in acquisitions, we closed on one transaction during Q1, and our M&A pipeline remains robust as we expect deal activity to continue through the year.
Our capital deployment strategy as diligent and balanced as we look to grow and add to our business in an accretive manner.
We're also looking to reduce our leverage ratio as we keep a close eye on the interest rate environment.
During our last update in early March we discussed a number of strategic initiatives in clinical studies, which highlight the importance and value creation for hanger.
We continue to push forward with these initiatives as we are convinced that this will help drive mind share and incremental business over the long run.
Separately in early April we published a new ESG report, which highlights the initiatives and processes underway as part of our ESG journey.
Given the combination of our values and the purpose based nature of what we do hangars ESG philosophy aligns naturally width and is intended to support our core business strategy.
Can access our ESG report at Hanger Dot com.
With regards to our full year 2022 guidance, given our solid revenue trends and strong patient volumes, we are maintaining our full year outlook.
Before I turn the call over to Tom to discuss our first quarter financial results I want to thank our entire organization for their hard work and dedication that enabled us to generate these results.
Together, we will continue to focus forward and unleash the full potential of hanger building on our efforts over the last several years, while gaining share and providing the highest quality care for patients and customers.
I want to thank everyone on the call for your interest in hanger and with that I'll turn the call over to Tom who will provide more details on our financial results and guidance Tom. Thanks.
Thanks Ben.
And good morning, we're pleased to be off to a solid start from a revenue growth perspective with strong same clinic growth and continuing increases in the company's work in process balances.
During my portion of the call I'll provide you with additional insight into the inherent strength and sustainability of that growth and we will also spend some time reviewing the items in the period that had a bearing on the company's reported earnings.
As Ben it's shared the patient care segment reported 12, 3% total growth and.
Six 9% same clinic growth during the quarter.
These results are even more impressive considering the abnormally low rate of disallowances and the previous year period.
Our total disallowance rate was four 4% in the first quarter of this year.
This compares with a rate of two 9% reported during the same period last year.
As we discussed during last year's first quarter call. We felt that the low disallowances at that time may have reflected a COVID-19 related benefit.
We are likely to return to this more normal trend as they have.
This period over period swing in disallowance resulted in approximately $3 5 million and lower net revenue and earnings in the first quarter of 2022 as compared with the first quarter of 2021.
In analyzing this further as of the end of March total disallowed revenue was four 3% on a trailing 12 months basis.
Which is in line with what we reported in the first quarter.
However, it's also important to point out that underlying same clinic disallowances were three 7% in the quarter and have generally been running about 35 basis points lower than total disallowances. During the past 12 months as acquisitions join us with an inherently higher rate of disallowed revenue prior to their.
Integration.
Based on this we believe it's reasonable to expect that disallowed revenue could decrease to approximately 4% as acquisitions are integrated into the company and they gravitate to our underlying core rate.
Additionally, in looking at the patient care segment, six 9% same clinic rate of growth. If you adjust for the swing in disallowances. The underlying same clinic growth rate during the first quarter was seven 9%.
We estimate that approximately two 7% related to rate and five 2% related to volume growth.
In addition to a strong rate of growth in the period. The patient care segment has also experienced further significant increases in patient demand as evidenced by a 16% increase in same clinic work in process inventory as compared with March 31 2021.
These results are made all the more remarkable by the fact that hanger encountered significant adversity from the omicron variant during the first months of the quarter and experienced higher employee sick time.
Despite this our clinics were able to deliver for our patients in the quarter and entered the second quarter with an increased level of web.
Before I turn to earnings I should note that the net revenue on our products and services segment was essentially consistent with the level reported during the first quarter of 2021.
We did experienced modest $700000 in growth in our distribution services net revenue there was offset by a $1 million decline in therapeutic solutions revenues.
Overall hangar grew revenues by $23 8 million or 10% during the quarter.
Now, let's turn to the company's earnings for the quarter.
In total the company produced $8 9 million and adjusted EBIDTA in the first quarter, which reflected a $4 6 million to our decline from the same period in 2021.
Patient care accounted for $1 $9 million of this decrease.
Products and services constitute a $2 million and the remaining 700000 related to increases in corporate expenses.
Got.
In reviewing these results it's important to note that due to the seasonality of our business that are unique nature of the events that affected operations in the first quarter and an inherently fixed cost structure.
<unk> first quarter earnings have always been highly volatile and are not a useful indication of the company's performance trends for the full year.
In particular this has been the case during the last three years.
In reviewing patient care results there are three key items to take into consideration.
<unk> three 5 million of the earnings variance relates directly to the swing from a favorable two 9% disallowance rate in the first quarter of 2021 to a more normal rate of four 4% in the first quarter of 2022.
Secondly, as Vin, it's shared given the effects of COVID-19 on our personnel and the delay in the opening of our Phoenix, Arizona fabrication facility in January.
We found it necessary to increase our reliance on higher cost third party fabrication providers.
Due to these costs, our total fabrication network expenses increased on a percent of revenue basis, and drove $1 2 million and higher operating costs with 900000 affecting adjusted EBITA.
This was a primary driver of the increase experienced in material cost during the quarter.
The use of third party fabrication returned to more normal levels by March after Covid subsided and our new facility was opened.
We chose to meet the needs of our patients during the quarter. Despite these adversities and bear these additional costs in the process.
Finally, an additional cost item that affected our materials cost and the patient care segment during the quarter related to $630000 and increased freight costs, primarily relating to increased fuel and container costs.
While we do not necessarily view this particular item to be temporary.
We currently believe that favorable reimbursement rate trends as compared to our original forecast will enable us to more than offset it.
In total these three items affected comparative patient care adjusted EBITDA results by $5 million of which only the 630000 freight was not transitory in nature.
And another important point is that absent the transitory items and the acquisition effects on the comparative periods patient care's underlying margin in Q1 2022 was the same as its margin in Q1 2021.
In other words after taking these and other smaller brain since into consideration during the quarter.
Inflation in material costs and salaries was generally consistent with the patient care segments underlying increase in reimbursement rate.
During 2021 and for the year to date hanger has been able to manage underlying inflation.
In the case of material costs. This has been due primarily to our purchasing scale <unk>.
Ability to emphasize preferential skus and the investment we've made in advancing our supply chain operations.
In the case of labor cost, what we've encountered some constraints in the areas of office administration technician and distribution center roles. These are are relatively smaller and lower compensated portion of our employee base.
In contrast to other health care firms you may be more familiar with.
Tanger does not employ nurses and as accordingly, not had to endure the significant cost increase you've heard about in the hospital and related sectors.
As a result of these factors to date patient care has not experienced a notable change in its margin due to inflation and turning to the products and services segment in a manner similar to patient care comparative results for this segment also reflects some items that were beneficial to the first quarter 2021 results as well as items.
Specific to Q1 2022.
However, it has been in shared we have experienced a decrease in the underlying margin of this portion of our business.
Fortunately, we anticipated much of this in our plan for the year.
In summarizing the company's total earnings performance during the quarter in recent years hangars first quarter adjusted EBITDA as a percentage of the total year is range from 5% to 10% of full year results.
Given our strong same clinic rate growth rates being achieved and the inherent nature of the items that cause volatility to earnings. We believe 2022 will follow the same pattern.
Now I'll spend a few minutes on the company's cash flows.
Due to seasonality and the payment of annual incentive compensation hangar normally consumes operating cash flow in the first quarter.
This year due to lower incentive payments lower accounts payable consumption and decreases in cash outflows for inventory, we consumed $34 1 million less operating cash flow during the first quarter of 2022 as compared with the first quarter of 2021.
Capital expenditures in purchases of therapeutic equipment were also favorable to trend as we expended just $4 5 million in the current year as contrast to $6 9 million in the prior year.
On a trailing 12 months basis, our capital expenditures of around $22 4 million.
As of March 31, 2022, we had $167 $2 million in total liquidity, which is up by $2 1 million as compared to March 31 2021.
We are currently sitting with a leverage ratio of three seven times, the midpoint of our 2022 guidance.
In closing I'll provide a few comments regarding our outlook for 2022.
As we progress through the second quarter, we are highly encouraged by the strong rates of same clinic revenue growth and increases in work in process reflected on our results.
We currently believe those trends are more than sufficient to offset the structural cost items that were not specific to the quarter.
Such as freight costs as well as the trends in our products and services segment.
Given these factors we are maintaining our original outlook at this time.
As we originally announced on February seven we estimate the 2022 net revenue will be in a range between $1. One 9 billion to $1, two 2 billion and adjusted EBITDA will be in a range between $127 million to $132 million.
Overall patient care revenue growth will be aided by approximately $35 million and the annualized revenue effect of acquisitions completed in 2021.
With that I'll turn the call back over to the operator to open it up for any questions that you may have.
Thank you if you would like to ask a question at this point. Please press the star followed by number one on your telephone keypad. If you would like to withdraw your question. Please press the star followed by number two one.
One propane to ask a question. Please ensure your phone is on mute it locally.
On the first question comes from the line of Brian <unk>.
From Jefferies. Please <unk> your line is now open.
Hey, good morning, guys. Thanks for.
Questions here, So I guess, Tom My first question as I think about the nonrecurring, but feels like tranches issues during the quarter and maybe just give us a little more color like how does that work out or how does that play out would be use the third party fabs.
Because normally when we see.
When we see quarantines of employees, the top line where that hits.
Capacity. So just maybe if you can explain how that all played out and what youre seeing currently in terms of the usual utilization of third parties.
Yes, Brian So normally hanger does use third parties for certain of its fabrication in the first quarter. We found that we just had to use significantly more because of the disruption in our own operations.
It really didn't affect revenues I think you can see revenues were very robust because we were able to deliver for patients but.
But it did affect our expenses because we had to rely on these third party Fabs. In addition to carrying the overheads associated with the employees that we were unable to use.
Yeah, No I appreciate that and then.
You maintained guidance, obviously and I guess the.
Yes, I get the topline driven.
Confidence there, but maybe just anything you can share with us that would give us confidence.
The numbers that you are maintaining today.
I know that.
Obviously, theres a high contribution margin to revenue so.
Yes.
Share with us anything that any color that you can share that would give us that.
Scott.
Right.
Sure Yeah, the first one.
First quarter revenues clearly came in strong.
Really pleased with it we've talked about some of the initiatives and programs. We've put in place over the last couple of years and we see them bearing fruit right. Now so we feel very good about the top line and as Tom mentioned.
In the in his prepared remarks that the whip ending the first quarter also was pretty strong so for the remainder of the year, we're feeling pretty good about the topline growth and then when you combine that with these couple of transitory items, it's really two transitory items that affected Q1, it's the swing and the disallowance.
Right, which was abnormally low last year and then it's these higher third party fab spend in Q1 of this year when you adjust for all of that we're feeling very good about where we are.
Got it and then just to clarify you don't have acquisitions in the guidance right.
That's correct, we have only the 2021 acquisitions.
Effect on revenue this year, it's not comparable to the prior year, which is around $35 million. So anything we closed in 2022 would be something that we would eventually have to adjust guidance for.
All right got it thank you.
Thanks, Brian .
Thank you. Our next question comes from the line of Larry Solow from CJS Securities. Please <unk>. Your line is now open.
Great Good morning, guys.
Up on just Brian has outlined I think on the acquisitions.
Maybe you could just about the pipeline of opportunities.
During the third over the last couple of years, maybe maybe there are more companies who could use a lot.
Bigger hand for help and then and then how do you weigh sort of.
Your longer term goals, maybe to bring down your leverage a little bit on it seems like you're generating it looks like the last 12 months of about $50 million of free cash flow.
A bumper.
I don't see that number really growing that much above that how do you sort of take that $50 million in free cash flow, maybe idea of trying to reduce your leverage a little bit mixing that with the opportunities on the acquisition front.
Thanks.
Sure Larry I'll take the first part of the question and then Tom can pick up on the second part in terms of the acquisition pipeline as we.
Mentioned, we closed on one deal in the first quarter, we're feeling great about the pipeline, especially because we're able to have conversations now with.
A lot of.
OSP independent providers.
I do want to partner with us and we're able to actually pick out and partner with those that are stronger than others. So.
Today I don't think there is a dearth of opportunities out there, we're just being very selective in who we partner with we have a very strict criteria, we want to make sure that.
Outside of the obvious financials in the geography, we also make sure the cultural fit is there the compliance issues. So when we take all of this into account we are able to be selective and we have a solid pipeline.
Okay.
When you look at it Larry the underlying $50 million of trailing 12 months.
Free cash flow, we should point out that much of that period was during a COVID-19 affected period of operations and as our earnings increase.
With capital expenditures running favorable to our forecast down in the $20 million to $25 million range. We do think theres some opportunity to see some increased free cash flow in the company, which some of which we could potentially use to address that underlying leverage question.
Okay. Okay. Okay, and then just another question just sort of a higher level longer term question you guys have a lot of multiple initiatives.
Certainly differentiating yourself from.
Probably all of the other providers out there.
And I think the last updated you on our report you certainly it looks like you've taken some market share at least through the acquisition.
Side of the story do you feel like you're taking share I know, it's sort of hard way to look at that there probably are many.
<unk>.
Data on.
Aggregate data on the industry, but do you feel like is there a way to kind of look and see if you are actually growing faster than the industry and actually taking share from competitors because it does seem like qualitatively youre doing.
A lot of things that are much better more value add for patients and doctors alike.
Yes, Larry.
Both fronts on the organic front and the inorganic front, we believe we're taking share on the inorganic front, it's pretty obvious as these.
Businesses join us, but on the organic side when you look at our same clinic numbers.
Especially this quarter than in the prior year its clear that we are growing faster than the market. If you look at the market growth up 2% to 3% depending on pre COVID-19 or during COVID-19 irrespective.
On a same clinic basis, we know we're growing faster than market in and picking up market share and you're right. It goes back to <unk>.
All the different investments and differentiator as we put in place over the last few years, whether it's clinical outcomes, whether it's a revenue cycle management, whether it is our supply chain. Our leadership. So we feel very good about picking up market share on both fronts organic and inorganic.
Okay.
Great appreciate that color thanks, guys.
Thanks, Larry.
Thank you with another question from the line of Brian <unk> from Jefferies. Please Brian Your line is now open.
Hey, guys. Thanks for letting me ask Tom.
I guess, Tom you mentioned, how Q1 is normally a your weakest EBITDA quarter.
But any thoughts you can share with us and how we should be thinking about the cadence.
For earnings for this year given yeah. So the challenges that you're seeing but also the.
Our strong top line and pipeline expectations.
Yes, I mean, when you when you look at the overall cadence Brian in past years, I think a conservative is a pretty indicative.
Way to think about the current year typically the first quarter as we said 5% to 10%.
When you go to the fourth quarter were typically 30% to 35.
36%.
So it's a big swing from Q1 to Q4 with the intervening quarters being probably a bit more ratable in terms of the way that you look at them on a percent of percent of earnings basis. So I think I think our historical trends really serve as a good foundation for thinking about the current year.
I got it thank you.
Thanks, Brian .
Thank you. We currently have no further questions. So this concludes today's conference call. Thank you. So much for joining you may now disconnect your lines.
Okay.