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Hanger Inc (NYSE:HNGR)
Q1 2021 Earnings Call
May 6, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Hanger First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Seth Frank, Vice President of Investor Relations. Please go ahead.

Seth R. Frank -- Vice President of Treasury & Investor Relations

Good morning, and thank you. Welcome to Hanger's first quarter 2021 earnings conference call. With us today are Vinit Asar, Hanger's President and Chief Executive Officer; and Thomas Kiraly, Executive Vice President and Chief Financial Officer. Some of the information discussed today will include forward-looking statements in the meaning of the Private Securities Reform Act of 1995. These statements are subject to risks and uncertainties that could cause Hanger's 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 the call. And now, let's hand the call over to Vinit.

Vinit K. Asar -- Chief Executive Officer, President & Director

Thanks, Seth. Good morning, and thank you for joining Hanger's first quarter 2021 earnings call. We're pleased that the year is off to an encouraging start. Our teams nationwide continue to do an excellent job executing on our business plan. Hanger returned to growth in the first quarter of the year for both revenue and earnings for the first time since the onset of COVID-19. We successfully overcame a number of challenges during the quarter, including prolonged severe weather conditions in February as well as the effect of the post-holiday COVID surge. We grew revenue and achieved adjusted EBITDA ahead of our expectations primarily due to favorable disallowances in cost management. Adjusted EBITDA, cash flow also benefited from solid collection trends in both of our business segments. Our ability to execute in the current environment raises our confidence for the long term. That said, COVID remains a wildcard and certainly figures into the thinking behind maintaining our outlook despite the earnings upside this quarter. We view vaccination rates, tackling new variance and continued public health measures as critical to the return of normal business conditions. Reviewing our consolidated first quarter results. Net revenue totaled $237.5 million, growing 1.6% compared to the same period of 2020. Adjusted EBITDA was $13.5 million compared to $5.3 million in the prior year period. Looking at performance by business segment, Patient Care showed encouraging volume trends, particularly in the latter part of the quarter as the post-holiday infection surge faded in most of the country. Hanger patient appointment levels, a key leading business indicator for us, rose to 97% of the same period last year. This reflects an improvement from the 88% appointment level experienced in the fourth quarter of 2020. In addition, we have reopened all patient care clinics that were temporarily closed, returning our operations to normal staffing levels, reflecting the continued improvement in demand for our services. Patient Care segment net revenue grew 2.9%, a solid reversal from prior trends. Underlying same clinic growth on a day-adjusted basis was 1.4%, also a notable positive swing from last year's COVID impacted trends. We are also keeping an eye on patient satisfaction measures as we return to full capacity. For the first quarter, our clinic Net Promoter Score of 86 stayed consistent with what we saw at the end of 2020. We also experienced a return to a normalized mix for our major service categories within prosthetics and orthotics. Excluding the effect of acquisitions, prosthetic revenue growth was 1% in the first quarter, orthotics revenues also continued to improve and swing positive in Q1, growing 1.9%. Orthotics, including custom and other categories, posted a slightly higher category growth rate, while shoes and inserts were down slightly compared to the same quarter last year.

We recently announced the launch of a national cranial care network of clinicians for pediatric patients that is showing encouraging results and was the primary contributing factor to our customer orthotic growth. Overall, for the segment, we are still anticipating additional recovery ahead in order to fully establish a return to normal as the pandemic subsides. Looking at the Products & Services segment, we are also pleased with our results, particularly in light of some of the transitory issues that impacted the business. Net revenues for the segment declined 4.1% in the first quarter compared to the prior year, a sequential improvement over the past few quarters. In contrast, we delivered adjusted EBITDA year-over-year growth in the segment of $1.8 million. This marks the second consecutive adjusted EBITDA growth quarter for Products & Services. Hanger's O&P distribution business declined in revenue by $1 million in the quarter. However, there were two fewer operating days in the first quarter of 2021 and as a result, we estimate revenues would have been flat after normalizing for operating days. That said, underlying these results, is an O&P distribution business that continues to be an outstanding ambassador for the Hanger name, and which provides the most optionality to clinicians across the industry in how they practice O&P. We also continue to post additions to our product offerings and are seen increasingly as the highly reliable, differentiated and value-added partner in the O&P supply chain to the rest of the O&P providers. I am pleased with the continued diversification of our clients and vendor portfolio as it strengthens the future for our distribution business. Finally, Hanger therapeutic solutions business continues to navigate the challenging COVID-affected stiff environment well. Revenue declined by less than $1 million in the quarter. While Skilled Nursing Facilities remain challenged on multiple fronts, the business is well positioned to assist these providers with rehabilitating patients faster through clinically robust protocols and specialized equipment. Entering what we anticipate will be a year of growth, I'll now turn to a few accomplishments and operational items of note from the first quarter. We held our first ever Hanger LIVE event in a virtual format and welcomed the entirety of our 4,900 employees to join us for two days of educational sessions on state-of-the-art clinical care, inspiring patient stories, keynotes and leadership seminars. This event also set the tone we have established around diversity and inclusion. On a related note, we recently published Hanger's second annual ESG report.

The information which is available on our website, serves to provide investors a better understanding of how we view sustainability and the key priorities we've established in the business in areas identified by SASB, or the Sustainability Accounting Standards Board, relevant for healthcare services organizations. We are aligning our ESG priorities to our corporate values. Initial areas of focus include clinical outcomes, quality of care, data privacy and security, access to care and sustainable human capital. We are excited about adding ESG as an additional mosaic for investors and all stakeholders to further assess our impact. Another key initiative is expanding Hanger's relationships with our partners in healthcare to continue to grow the evidence space of how best-in-class O&P care can positively affect patient outcomes and healthcare costs. During the first quarter, we announced the establishment of the Hanger Institute for Clinical Research and Education. The primary focus of the institute is to bring together all the available resources and experts across our healthcare environment to focus on leading-edge clinical research, evidence-based care and professional education in O&P. We are particularly excited about the Institute as a platform to facilitate collaborations with medical and academic institutions, as well as those industry partners that share the same passion for patient outcomes as us. We are in the process of signing formal partnerships that together will enable and strengthen the institute's ability to seek grants and carry out a transformational research agenda with surgeons, physicians and therapists. These endeavors, plus our community outreach programs such as patient education clinics and other engagement activities are all part of a core strategy to continue to advance the practice of O&P and its value as a core component of rehabilitative medicine. These initiatives are providing Hanger an additional benefit, an increasing and more visible M&A pipeline of quality-independent providers looking to partner with us. We offer a clear value proposition to clinic operators that increasingly look at the landscape and consider the benefits of joining the industry leader. I am optimistic that, as the year continues, we will be well-positioned to accelerate the rate of acquisitions meaningfully. So in summary, we are off to a good start. Unfortunately, the pandemic is still with us so we want to be judicious about when we declare all clear. We are confident however that as vaccination prevalence continues to rise and disease trends wane, we are well-positioned to resume the trajectory of growth we began in the 2019 timeframe. I continue to be encouraged with the positive impact of the strategic investments we have made to-date in the areas of patient engagement and clinical outcomes as well as our focus on revenue cycle management and supply chain. Thank you for your continued interest as we reestablish our growth trajectory this year. And now, Tom will give you the details on the financials. Tom?

Thomas E. Kiraly -- Chief Financial Officer & Executive Vice President

Thanks, Vinit, and good morning. As Vinit shared, we are pleased that Hanger reported solid first quarter results, despite the lingering effects of COVID and the difficult February storms. Net revenue for the quarter was $237.5 million, which reflected $3.7 million or 1.6% growth over the first quarter of 2020. Adjusted EBITDA was $13.5 million, which reflected $8.3 million in growth over the first quarter of last year. To provide you with a reference point to a pre-COVID period, when comparing Hanger's first quarter results to those of the first quarter of 2019, total net revenue grew by $1.1 million and adjusted EBITDA grew by $1.7 million or 14.1% as compared to that period. There was some pressure on the results of the -- that first quarter two years ago. Better performance in 2021, nevertheless, indicates that we are beginning to see an overall tracking in the current year with pre-COVID results. In the Patient Care segment, revenue of $195.7 million reflected growth of $5.5 million or 2.9% compared to the first quarter of 2020. Same clinic revenue grew at a rate of 1.4%. This segment benefited from a favorable decrease in disallowed revenue in patient non-payment rates, which declined to 2.9% on a combined basis as compared to 4.9% in the first quarter of last year. This provided approximately $4 million in net revenue improvement through better realization of claims. This performance was primarily the result of the favorable rates of collection that the company has been achieving during the past 15 months. Adjusted EBITDA in the Patient Care segment grew to $24.9 million or by $7.6 million over the prior year period. In addition to the benefit provided by lower disallowances, results were aided by good expense management. In particular, due to COVID, our annual Hanger LIVE education and national meeting was converted to a virtual setting, which saved the company approximately $2 million. In addition, the segment benefited from lower personnel and travel expenses. And looking forward to the coming year for the Patient Care segment, it's important to note that while we're pleased with the favorable disallowance trends reported in the first quarter, it's likely that this is temporary as revenues grow and COVID-19 settles that favorable factors that have led to this improvement could subside as well. Disallowance trends may return to levels approaching their pre-COVID amounts. Additionally, it's also important to note that we currently plan on returning to an in-person format for Hanger LIVE event in the first quarter of 2022. So the $2 million in expense savings we realized in the first quarter of this year will likely not reoccur in the first quarter of next year. Now and turning to our results for the Products & Services segment, this portion of our business reported $41.8 million in revenue, which reflected a $1.8 million decline from the prior year quarter. Of this amount, our distribution services decreased by approximately $1 million.

This is related primarily to there being two fewer business days in the quarter. Within the distribution business, new revenue growth from customer additions and product expansion was essentially offset by the planned reduction in revenue from certain low margin podiatry distributors, which we exited in 2020, as well as lost revenue due to Hanger's acquisitions of independent O&P providers. Despite the modest decrease in first quarter revenue for this segment, earnings within Products & Services grew by $1.8 million to $6.9 million due to lower travel and bad debt expenses. Corporate expenses were up modestly, primarily due to increases in technology expenses and the restoration of incentive compensation. Now, I'll provide some comments on the company's cash flows and liquidity for the quarter. Hanger completed the first quarter with $165.1 million in total liquidity, which reflected an increase of $33.3 million from the first quarter of 2020. This increase was primarily the result of a $22.6 million decrease in net working capital, excluding cash, debt and taxes receivable when comparing March 31 of this year to the same day last year. A primary contributing factor to this working capital improvement has come from a significant reduction in accounts receivable. Despite having a $3.7 million increase in revenues in the first quarter of this year as compared to the first quarter of last, accounts receivable declined by $10.7 million. This has resulted in a favorable decrease in the company's DSO from 50 days in March of last year to 45 this year. As the company's revenues continue to recover from the effects of the pandemic, we do believe that we will see an overall reversal and increased consumption of cash for the further reestablishment of working capital. When reviewing the company's cash flows for the quarter, as expected, due to the seasonality in our industry, Hanger reported a net use of $42.4 million in operating cash flow during the first quarter. Within this amount, the payment of annual incentives in 401(k) match amounted to an outflow of $42.9 million. Hanger also expended $19.4 million in cash for acquisitions completed in the quarter. As we discussed in our March investor call and year-end earnings release, the expected revenue and earnings contribution from these acquisitions was incorporated in our original guidance for the year. From a leverage perspective, at the end of the first quarter, Hanger had $442.1 million in net indebtedness and a leverage ratio of 3.9 times trailing 12 months earnings and 3.3 times based on our guidance for the current year. Now, I will turn my commentary toward our overall outlook for 2021. While Hanger performed well in the first quarter, I think we all recognized that a substantial amount of uncertainty and speculation continues regarding the course of COVID-19 and its lingering effects on our daily lives. While we performed well in Q1, our performance during the remainder of 2021 is dependent on a continuing resolution of COVID-19 and a return to normal business conditions by the second half of the year. As such, we're closely monitoring infection, vaccination and general business activity to gauge the positioning of our forecast for the full year. With these considerations in mind, our current outlook for 2021 continues to remain, that Hanger will produce net revenues in the range of $1.145 billion to $1.175 billion and adjusted EBITDA of $130 million to $135 million.

Our outlook includes the benefit of approximately $27 million in net revenues from the annualized effect of acquisitions completed in 2020 or closed in the first quarter of this year. From a quarterly timing perspective, we believe the second quarter will provide a difficult year-over-year earnings comparison. The current quarter will likely be affected by the lingering transitional effects of COVID and due to the fact that we had a temporary benefit of $35 million in cost reductions, which aided our results in the second quarter of last year. In closing, we are pleased with the company's start to the year. However, as has been the case in prior years due primarily to seasonality, the first quarter contributed approximately 10% of our currently estimated 2021 EBITDA. So the greater majority of the year remains ahead of us. We are, nevertheless, fortunate to have an exceptional leadership team and employee base, who have demonstrated their ability to execute and we believe they have put us in a good position with their excellent work in the first quarter of this year. With that, I'll turn the call back over to the operator to open it up for any questions you may have.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from Larry Solow of CJS Security. Please go ahead.

Lawrence Scott Solow -- CJS Securities, Inc. -- Analyst

Great. Thanks and good morning guys. Just -- I realize Q1 is seasonally -- normally very unimportant in respect to the rest of the year and obviously, with COVID and a lot of factors going on and you haven't changed your guidance, so it sounds like I'm just trying to get any -- what you can glean from trends that you're seeing at your O&P clinics and in respect to COVID trends and as COVID certainly is waning, anything you can glean out of this to sort of reinforce or maybe a little more uncertainty in your outlook as you come out over the next few quarters, because it clearly is a big macro driver being probably sort of somewhat out of your control. So any color or thoughts to that?

Vinit K. Asar -- Chief Executive Officer, President & Director

Sure, good morning lawrence. Yeah. The way -- the metrics that we look at -- probably one of the major metrics we look at are our patient appointment volumes and we clearly see that that trend is getting better and has gotten better, if you think back of the last three sequential quarters. So in the fourth quarter of 2020, where we were at about 88% of our patient appointment volumes from the prior year; in the first quarter of '21, we were closer to 97%. And so, we clearly see that trend and we see the trend playing out in both orthotics and prosthetics. The other piece we also monitor is our patient pipeline, how many patients are waiting, a work in process, jobs that are waiting and we see that number also steadily increasing over the last three or four months. So that gives us comfort that the trend is heading in the right direction but until it's all clear, we want to be cautious.

Lawrence Scott Solow -- CJS Securities, Inc. -- Analyst

Yeah, absolutely. Understood. Okay, and I have a question for Tom, just on the unusually low disallowance rate. It sounds like you benefited from COVID a little bit on that, maybe just discuss what is sort of driving that. And then, I guess in the same vein, your collections have been magnificent and two to five days -- the reduced DSOs of five days is really impressive. So I guess, and perhaps there's some relation to the two just in terms of your strong metrics there.

Thomas E. Kiraly -- Chief Financial Officer & Executive Vice President

Well, Larry, what I would look at is, there's probably three factors. I mean, first of all, we have to go ahead, again, and really recognize our revenue cycle group and the leadership there for the tremendous job they've done over the last 15 months. And for that matter, our field personnel who we're very dependent on from a documentation standpoint. But a secondary factor, I would say, is -- with the situation with COVID, there's just a lot of anomalous activity, in particular at the payer side of the equation, where the payers have had favorable claims trends, their personnel are probably less pressured from a denial standpoint and more willing to work with us on the resolution of outstanding balances and I think that's been very fortunate. We hope they keep that posture as COVID subsides, but we suspect due to their own demands, that that will become more difficult post-COVID. The third factor that I would go ahead and highlight is in fact federal funds, both CARES Act, some of the different loan arrangements, as well as the personal stimulus funds, that's helped businesses we do commerce with to pay timely and to have the cash to do that. That's helped patients -- our patients to pay their portion of the bills more readily. So that's been a fortunate element in our business and in our collections and obviously, we would suspect the government will keep that pace up.

Lawrence Scott Solow -- CJS Securities, Inc. -- Analyst

Fair enough. Okay, great. And then, just as a last question maybe for Vinit, you mentioned Hanger LIVE and how the virtual form -- forum actually saved you $2 million this year, can you maybe just discuss Hanger LIVE a little bit, the importance of it and the importance of bringing it back? Obviously, you had to bring it live, but maybe just a little bit of color on that would be great.

Vinit K. Asar -- Chief Executive Officer, President & Director

Sure, Larry. For 2021, the -- I'm sorry, for -- yeah, 2021, the virtual format worked well because of the situation we were in. We needed to do that and we were happy that we were able to pull it off very successfully. But really under normal circumstances when COVID is behind us, there is a huge value to our -- to all our clinicians and employees, because as you know, our geography will spread all across the country with 800-plus clinicians at clinics and their staff. So to bring them together in-person to interact with each other, to think through different care practices and clinical guidelines is really important in-person. The other advantage of doing it live is, they also get to interact with our manufacturing partners and see -- get to see the new devices that are coming out in the marketplace in person. So when you put out -- put all that together, it's a very powerful forum for our clinicians to be able to interact with live. And to be honest with you, there is nothing like this sort of forum anywhere in the world, so we also are able to attract clinics and business owners that are thinking of selling to Hanger or joining us by sometimes inviting them to this event so they get to experience this as well. So it's also one of our differentiators that we have that we're proud of and I think it's been very successful in prior years.

Lawrence Scott Solow -- CJS Securities, Inc. -- Analyst

Great. Appreciate the call. Thanks.

Vinit K. Asar -- Chief Executive Officer, President & Director

Thanks Lawrence.

Operator

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

Jack Slevin -- Jefferies -- Analyst

Hi, good morning. It's Jack Slevin on for Brian. Guys, congrats on a strong quarter. I wanted to start, given your geographic footprint, if you could provide any color on weather impacts in the quarter? Any quantification there would be really great.

Vinit K. Asar -- Chief Executive Officer, President & Director

Sure. Certainly, weather was a pretty significant factor in general this year, because of, I think, you all are aware of the significant weather pattern down in the southern part of the country, especially in Texas. So it occurred in the early part of February and it did affect us in the sense that we had to literally close all of our clinics in Texas, pretty much for the full week. It also affected our distribution center down in Dallas. In the same manner, we had to keep it shut for a whole week. But really hats off to our employees within the distribution centers, our clinics and our sales reps within SPS, that they were able to rally after the weather pattern did pass. And so, when it affected us pretty significantly in February, we don't believe there was a material impact for the quarter.

Jack Slevin -- Jefferies -- Analyst

Got it. Okay, that's great color. And then, I wanted to turn to pent-up demand, I think it's been an ongoing conversation across healthcare as far as trying to get a gauge on what pent-up demand looks like across varying services. For you all, how are you thinking about pent-up demand right now and what's left to be recovered? Specifically, kind of gauging against that, appointments still being down 3% year-over-year figure that you put out.

Vinit K. Asar -- Chief Executive Officer, President & Director

Sure. Yeah, great question. As you know, a large portion of our patients are diabetics and it's been proven that this is the highest-risk population when it comes to COVID-19. And so, when we look at our patient traffic over the last year or so, we've seen a couple of things. #1, in -- last year in 2020, we certainly saw that the higher mobility devices were less affected in terms of the patients coming into CS, which is the K3 population. But the population of patients that were more in the lower mobility devices, K1 and K2, which is primarily likely the diabetic patients, that foot traffic slowed down considerably last year in 2020. So we know that is yet to come back in full form in 2021. And then, when you look at our orthotics business and I think, I mentioned in my prepared remarks that shoes and inserts were still down, and the reason that's important is because within that category, you have the diabetic shoes and inserts, which is a large part of that particular category and that's still down. So both on the orthotics and prosthetics side, we still anticipate some of that pent-up demand coming through. Now I don't believe it's going to come through instantly or within one month or within one quarter, it'll probably bleed back in during the course of the year and early part of next year as COVID subsides.

Jack Slevin -- Jefferies -- Analyst

Okay, got it. That's helpful. And then, last one for me. I think, wanted to take a step back remembering to your prior Hanger LIVE event in 2020. Using that kind of as a baseline, can you talk about how you feel about the growth trajectory and the growth power of the underlying business ex-COVID? Do you think it's strengthened at all? Any color you can give on your outlook relative to where we were early 2020 would be great.

Vinit K. Asar -- Chief Executive Officer, President & Director

Sure. Yeah. When we closed out 2019, we were feeling very good about the demand for our services, we were feeling very good about the investments we had made in the past. We could clearly see the impact on our patient engagement score, we could see the impact on the work we are doing in clinical outcomes and in essence, we basically took a step back in -- during the COVID year of 2020. And so, we kind of lost that year. And now, as we reemerge, we continue to see that optimism. We feel very good about where we're going to head with organic growth based on those investments. And then also in the inorganic growth, I will tell you that the M&A pipeline looks pretty solid. So in terms of growth expectations, we feel like we're on the right track. And as Tom pointed out in his prepared remarks, we're just right now being cautious before we declare that all clear until COVID is completely gone. We will continue to be a little bit cautious in terms of how or whether we look at the -- our outlook, but at the current time, we feel pretty optimistic that the trend is our friend.

Jack Slevin -- Jefferies -- Analyst

Awesome. Thats all for me. Thanks and congrats.

Vinit K. Asar -- Chief Executive Officer, President & Director

Thanks.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Seth R. Frank -- Vice President of Treasury & Investor Relations

Vinit K. Asar -- Chief Executive Officer, President & Director

Thomas E. Kiraly -- Chief Financial Officer & Executive Vice President

Lawrence Scott Solow -- CJS Securities, Inc. -- Analyst

Jack Slevin -- Jefferies -- Analyst

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