U.S. markets close in 1 minute

Edited Transcript of HNGR earnings conference call or presentation 12-Mar-20 12:30pm GMT

Q4 2019 Hanger Inc Earnings Call

AUSTIN Mar 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Hanger Inc earnings conference call or presentation Thursday, March 12, 2020 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Seth R. Frank

Hanger, Inc. - VP of Treasury & IR

* Thomas E. Kiraly

Hanger, Inc. - CFO & Executive VP

* Vinit K. Asar

Hanger, Inc. - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Brian Gil Tanquilut

Jefferies LLC, Research Division - Senior Equity/Stock Analyst

* Lawrence Scott Solow

CJS Securities, Inc. - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to Hanger's Fourth Quarter 2019 Earnings Call. As a reminder, this conference is being recorded. (Operator Instructions) It is now my pleasure to introduce your host, Seth Frank, Vice President of Treasury and Investor Relations.

--------------------------------------------------------------------------------

Seth R. Frank, Hanger, Inc. - VP of Treasury & IR [2]

--------------------------------------------------------------------------------

Good morning, and thank you. Welcome to Hanger's Fourth Quarter and Year-End 2019 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 Litigation 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 release and in our filings with the SEC. Hanger disclaims any obligation to update forward-looking statements discussed on this call.

And with that, let's hand the call over to Vinit.

--------------------------------------------------------------------------------

Vinit K. Asar, Hanger, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Seth, and good morning, everyone. Thank you for joining Hanger's Fourth Quarter and Full Year 2019 Earnings Call. In my prepared remarks, I will summarize our financial results and provide an update on our business and the industry. Tom will then provide details on the numbers, after which we will take questions.

For 2019, Hanger reported net revenues of just under $1.1 billion and adjusted EBITDA of $124.2 million. These results are in line with the 2019 outlook we had provided at the start of the year. Adjusted earnings per share for 2019 were $0.90, a 15.3% increase over 2018.

For 2019, we had set a goal to grow at or above market growth rates in Patient Care, and we're successful in this front. Revenue growth was 4.7% for 2019 with Patient Care segment growth of 5.6%, driven by same clinic growth of 2.1%, a meaningful improvement from 0.9% in 2018.

We achieved strong organic growth in prosthetics for the year, totaling 3.2% and orthotics growth of 0.9%. These results demonstrate the benefits of our multiyear investments in Hanger's core differentiators, all of which are intended to drive superior patient outcomes and a best-in-class patient experience.

Segment profitability in Patient Care has been masked for the last few years by a decline within Product & Services segment, specifically therapeutic solutions, and this was the case in 2019, a factor we had anticipated and included in our 2019 outlook. Product & Services net revenues were consistent with the prior year, led by a 5.4% growth in O&P distribution offset by the therapeutic solutions business.

Our O&P distribution business grew on the heels of strong leadership and expanding catalog, allowing us to enhance our position as a one-stop, full-service O&P distributor and providing excellence in service levels to our independent O&P clinic customers.

Looking at the fourth quarter highlights. We finished the year on a strong growth footing. As many of you know, given the seasonal nature of our business, the fourth quarter is our most important of the year in terms of financial contribution. Total Q4 net revenue was $300.9 million, reflecting 5.6% year-over-year growth. From a business segment perspective, Patient Care again performed well, helped by a very healthy underlying same clinic growth rate and the positive impact of O&P clinic acquisitions completed in late 2018 and during 2019.

During the quarter, Patient Care net revenues grew 6.9% with a notable same clinic revenue growth of 2.9%. Prosthetics, excluding acquisitions, grew 4.4% during the quarter, a peak level during 2019. We remain encouraged with the multi-tier strategies we have put in place to drive organic prosthetics growth.

Total orthotics revenue grew by 1.3% during the quarter on a same clinic basis. We are seeing success in custom orthotics with slower growth in shoes and inserts, partially offsetting the strength in custom categories. As a reminder, we provide a full-service approach in our clinics and continue to work closely with our clinicians and referral sources to drive programs that create a platform for growth in custom orthotics.

At the clinic level, our focus on service excellence continues to show results. Our Net Promoter Score through December of 2019 is 84 for Hanger Clinic, a 200 basis point improvement from the end of 2018.

Turning to the Products & Services segment. Revenues declined by $316,000 or just under 1% in the fourth quarter. Within the segment, O&P distribution growth moderated during Q4 to 1.7%, in line with industry growth rates and closer to the more normalized rates we had anticipated for some time. Underlying fundamentals within our core business of distribution of componentry to independent providers remains positive. Looking ahead, as part of our ongoing analysis of our business, we have made a strategic decision beginning in 2020 to exit the distribution of certain off-the-shelf orthotics goods into third-party channels, such as podiatry that are noncore and unprofitable. Tom will discuss the impact of this in 2020, essentially a small negative effect on O&P distribution revenue for the year, but EBITDA neutral as we shed noncore low-margin offerings.

Within therapeutic solutions, we saw a moderation in revenue declines, and we exited 2019 with therapeutic solutions revenue declining by $911,000 for the quarter. Looking forward, we believe therapeutic solutions declines will narrow meaningfully in 2020. The reason for this is that we are beginning to see installations at new client locations exceeding cancellations at some existing client locations. This is a positive sign. After seeing several years of stress in the SNF industry, we have pivoted our offerings to align with new skill nursing facility PDPM Payment Model. Our investments now allow SNF providers to provide high-quality rehabilitation care and improve compliance by creating efficiencies through the use of technology and evidence-based treatment pathways. These changes, along with more flexible pricing packages in our offerings, align well with new PDPM model and has contributed to the recent success on the new sales front, which has helped close the attrition gap. As a result, we see therapeutic solutions as a more mild headwind on segment and consolidated results for Hanger in 2020.

On the M&A front, 2019 was a successful year. We recognized approximately $28.9 million of net revenue as a result of small and midsized O&P businesses acquired at the end of 2018 and during 2019. This was consistent with the acquisition revenue we had built into our financial outlook for the full year 2019. The purpose of our M&A strategy is to identify independent O&P clinic businesses in local markets that add high-quality clinicians to our team and expand Hanger's geographic footprint.

Our business development team and integration processes have been strengthened during 2019. And as a result, we enter 2020 in the best position we have been to continue to add and integrate attractive O&P businesses at prudent valuations. We strongly believe prudent, appropriate acquisitions provide amongst the highest returns on invested capital we can achieve for shareholders. With multiple successful integrations completed to date and Hanger's strong clinical reputation rising, our pipeline of opportunities continues to strengthen.

I want to briefly touch on our supply chain initiative, which we discussed in detail last quarter. We are on track with this important initiative, which is both operational and technology components. We are underway preparing for the automation that will occur within our distribution facility environment. At the corporate level, we have begun our journey to a cloud-based financial system, which we expect to complete in 2021. We are optimistic about the cost savings and enhanced efficiency this initiative will bring Hanger in just 2 years. The 2 key areas for savings include lower freight costs, a significant contributor to our indirect cost of materials as well as increased automation.

We have also begun to implement consignment-based inventory in our distribution centers, and the program has been well received by our manufacturing partners. This lowers inventory, working capital and freight costs and helps ensure proper stocking of high-demand componentry.

Looking ahead to 2020, we have a considerable foundation in place to build upon. We recently held our national education meeting, Hanger Live, in Nashville, and it was attended by approximately 1,400 people from across the country, mainly our clinicians as well as vendors, partners and patients. This is one of the largest domestic O&P industry events held in the United States. This annual event is focused primarily on educational and clinical training sessions supplemented with business strategy meetings and inspirational talks by our patients regarding their limb loss and limb difference journeys. We were very pleased with the success of the event this year.

2019 demonstrated that our strategy of differentiation is driving growth. If you consider the unique assets Hanger has within this industry, they are notable. Our clinical leadership team, likely viewed as the best in the world and the infrastructure we have invested in during the last few years. In the communities we serve, we also have invaluable relationships, our partnerships with hospitals, physicians and allied health professionals across the country as well as manufacturing partners and payer relationships. Our growth going forward will be the product of the synergy of these various external relationships combined with our internal assets. The reality is that historically, O&P has been outside looking into the mainstream of medical science and health care practice. Ours is a small and somewhat niche industry with a history and reputation that is just as much about art as it is science.

Hanger is striving to bring the O&P profession to the broader health care table as a trusted partner that promotes access to increased mobility, better health status and lower cost care over the long term. We are driving a narrative, not just about prosthetics or orthotics, but about access, access to care and access to a quality of life. This is value, and our clinical and payer partners are beginning to better understand it. And as you can imagine, our patients appreciate it.

Let me now wrap up with some observations in the O&P industry. Like other health care service industries, the O&P industry demands the utmost rigor and documentation for services prior to the submission of claims to payers. Hanger is well positioned for this, with the revenue cycle investments we have made over the last few years. There is also an increased need for demonstrating clear patient outcomes to our referral sources and our payers. Hanger is in an excellent position and outcomes. Because today, we have the largest outcomes database of lower extremity prosthetic patients and are beginning to build a similar database of outcomes for our upper extremity prosthetic patients as well as our custom orthotics patients.

The primary beneficiary of our focus on outcomes are our patients who benefit from the appropriate care they receive from our clinicians. Our mantra at Hanger is that we will be defined by the outcomes we generate and not by the devices we fit, and it in itself is a strong differentiator. At the end of the day, we have a highly differentiated value proposition and an enviable leadership position in the industry, both clinically and strategically.

Before I turn the call over to Tom, let me comment about the COVID-19 situation and how we are dealing with it. As a reminder, all our patient care clinics are within the United States. At Hanger, we've established a COVID-19 task force that is monitoring the situation through the CDC and WHO information channels as it relates to our approach to patient care as well as other operational elements of the business. As of this time, we have not seen a slowdown in patient flow within our clinics. However, the busiest time in our clinics in Q1 is generally these last few weeks in March, and we will be monitoring the situation closely.

In closing, I want to state that we are pleased with our overall performance in 2019 and well positioned for long-term success based on the investments we have made and the momentum we are building.

Thank you for your attention and interest in Hanger. And now Tom will take you through the numbers in detail. Tom?

--------------------------------------------------------------------------------

Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [4]

--------------------------------------------------------------------------------

Good morning. As Vinit shared, we are pleased with the company's fourth quarter and full year 2019 performance. For the year, Hanger's overall results compared favorably to the midpoint of the outlook we provided at this time last year, net revenue of $1.098 billion reflected a growth of $49.3 million over 2018, and our adjusted EBITDA of $124.2 million reflected a growth of $3.2 million over the prior year. What is perhaps the most important takeaway regarding our 2019 revenue and earnings performance is that the underlying growth of our largest operating segment, Patient Care, drove those results. And the strength of this division's performance was partially offset by the results of our smaller Products & Services segment.

Within the Patient Care segment, during the fourth quarter, same clinic revenue growth of 2.9% coupled with the benefit of acquisitions drove a 6.9% increase in net revenue. Net revenue growth was a key contributor to this segment's adjusted EBITDA increase of $5.2 million or 10.7%. For the full year, Patient Care achieved a same clinic growth rate of 2.1%, which was an underlying driver of the overall segment net revenue increase of $48.3 million or 5.6%. This led to adjusted EBITDA growth of $13.7 million or 9.1% for the full year.

Segment margins increased by 60 basis points over 2018, expanding from 17.6% in the prior year to 18.2%. This segment is by far the largest of our 2 operating segments. During 2019, Patient Care revenue of $905.7 million constituted 82% of the company's net revenue. And it's an adjusted EBITDA of $164.6 million, reflected 85% of Hanger's precorporate adjusted EBITDA.

Prosthetics growth of 3.2% for the full year was generally consistent with the rate of growth we reported in each of the prior 2 years and reflects a premium to what we believe to be the market rate of growth. As a result, the increase in our overall same clinic growth rate during 2019 came from an improvement in the growth trend in our orthotics during the course of the year. Due in part to our focus on custom devices, orthotics growth increased to 0.9% in 2019 as compared with a decline of 1.3% in 2018. We believe these favorable financial results have validated the investments we made during the past several years in building an industry-leading clinical focus on patient outcomes and satisfaction. When coupled with our differentiating capabilities, we believe that Hanger is now beginning to reflect the benefits of its ability to leverage its Patient Care infrastructure.

In 2019, as anticipated, growth in our Patient Care revenue and earnings were moderated by the results of the Products & Services segment. For the year, due to an expansion in the size of the product offering and the addition of key accounts, revenue from distribution increased by $7.4 million or 5.4%. This growth was almost fully offset by a $6.4 million decline in revenue from therapeutic solutions, which was right in the middle of the $5 million to $7 million range we forecasted at the start of 2019. The effects of this decline in therapeutic solutions revenue when coupled with increases in our support costs within distribution services led to a decrease of $7.3 million in adjusted EBITDA in the Product & Services segment during 2019.

As we enter 2020, there are several important trends that emerge within the Product & Services segment during the fourth quarter that we believe will have a bearing on the coming year's results. First, as we anticipated in our third quarter conference call, revenue increases from distribution moderated to a market rate of growth of 1.7% during the fourth quarter. Accordingly, our plan for 2020 envisions a more normalized rate of underlying distribution growth. However, as Vinit shared, we have recently chosen to exit from the selling of some low-margin off-the-shelf orthotics products to podiatrists. We anticipate that this will cause distribution revenue to decrease by approximately $5 million in 2020, but due to their low margin, we do not believe this will have an adverse effect on earnings. Secondly, during the fourth quarter, the rate of decline in revenue from therapeutic solutions slowed to $0.9 million, which was significantly less than the decline in prior quarters. We are hopeful that this is indicative of the onset of a gradual slowing of the revenue declines in this portion of our business.

During 2020, we currently anticipate that the revenue decrease from these services for the full year will be approximately $2 million, which should lead to a more modest decline in segment earnings than what we experienced in 2019 and prior years. In other words, we're cautiously optimistic that we will see the onset of a stabilization in therapeutic solutions during the course of the year and a more modest decline in Product & Services adjusted EBITDA during 2020 than what we experienced in 2019.

Our corporate expenses increased by $3.2 million during 2019 and $2.5 million of this increase related to the costs associated with the implementation of the supply chain and financial systems project. In 2020, we estimate that we will recognize $5 million in technology-related expenses in connection with this project.

Now I'll provide you a bit more background on the company's cash flows for the fourth quarter and for 2020. For the last 3 months of 2019, Hanger produced $38.9 million in operating cash flow, which was in line with the $41.4 million and operating cash flow produced in the fourth quarter of 2018. The slight decrease in operating cash flow relates in part to a $1.7 million deferral of implementation costs incurred in connection with the supply chain and financial systems project during the fourth quarter. These seasonally strong operating cash flows contributed to a $24.5 million increase in our cash and investment balances and a growth in Hanger's overall liquidity to $169.2 million.

As we look forward to 2020, as discussed in prior calls, the supply chain and financial systems project will utilize a portion of our available capital during the coming year through both the cloud systems implementation as well as the reconfiguration of certain of our distribution and fabrication centers. We believe these initiatives will position Hanger to expand its service capabilities and its supply chain efficiencies commencing in 2022.

During 2020, in accordance with the recent accounting rules regarding cloud computing implementations, we currently anticipate that we will defer approximately $7 million to $10 million in implementation expenditures related to the project, and that those expenditures will be recognized as expense in future years over the useful life of the underlying systems. Additionally, we anticipate incurring $13 million to $15 million in capital expenditures associated with our build out of distribution and fabrication facilities and the acquisition of related equipment, which will bring our 2020 capital expenditures up to approximately $45 million.

On a net-debt basis, Hanger's overall leverage profile remained consistent with the prior year-end at 3.5x. As we look forward to 2020, our plans are to continue to balance our management of the company's leverage profile with our desire to deploy capital for our systems implementation projects and towards market acquisitions that have provided us with attractive returns. While we believe these investments will drive an expansion of long-term shareholder value, we nevertheless remain sensitive to the need to manage our debt profile.

Now I'll spend the final portion of my comments discussing our outlook for 2020. During 2020, Hanger currently anticipates net revenue in the range of $1.125 billion to $1.155 billion and adjusted EBITDA in the range of $129 million to $134 million.

We foresee that revenue and adjusted EBITDA increases will be driven by the Patient Care segment. As I discussed earlier, due primarily to the discontinuance of low-margin off-the-shelf orthotics to podiatrists, we believe that Product & Services revenues will decrease modestly. And that when coupled with the therapeutic solutions trends, the adjusted EBITDA for this segment will do the same. Corporate expenses are anticipated to increase, and this is due primarily to the implementation expenses associated with the supply chain and financial systems project, other technology-related expenses and increases in incentive compensation. This outlook includes $27 million of revenue growth related to the full year effect of acquisitions completed in 2019 and acquisitions for which we had a definitive purchase agreement signed as of March 5 this year.

Additionally, this outlook does not reflect any potential adverse consequences of the COVID-19 virus on our operations. And looking at the quarterly spread of our adjusted EBITDA, as you may recall from the swings in results last year, our business is highly seasonal and subject to inherent quarterly volatility. The fixed nature of our cost structure causes our earnings to be inherently sensitive to natural changes in our revenue growth from one quarter to the next. Last year, due to several timing factors, we experienced a weak first quarter and a strong second quarter as some prosthetics deliveries slipped from the first quarter into the second. This year, while the first quarter will be our seasonally lowest quarter, it should benefit from a relatively easy comparison to 2019. The second quarter, on the other hand, will have a difficult comparison to the prior year quarter. Due to our natural seasonality in 2020, as was the case in 2019, more than 60% of our adjusted EBITDA will likely come in the second half of the year. So the last 6 months of 2020 will be the most critical to our achievement of annual results.

From a cash flow perspective, please also bear in mind that while the fourth quarters are seasonally strongest, due to operating seasonality and the payment of annual incentive compensation, the first quarter is our weakest cash flow quarter. When coupled with the increased capital expenditures of our supply chain project, we currently estimate that we will finish the first quarter of 2020 with total liquidity of approximately $125 million.

In closing, we're pleased with our 2019 financial performance and believe that Hanger is well positioned to capitalize on that underlying momentum in 2020.

With that, I'll turn the call back over to the operator to open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Larry Solow from CJS Securities.

--------------------------------------------------------------------------------

Lawrence Scott Solow, CJS Securities, Inc. - MD [2]

--------------------------------------------------------------------------------

From a high level, if I do the math, it looks like just on the revenue growth of about 1.5% to 3% is your outlook on same-store growth. So sorry about that -- same-store growth in Patient Care. Is that -- I guess is that -- question one, is that about right? Am I in the approximate area? And you kind of help us parse that out, the midpoint of that is sort of similar to what you did in '19, would you be hopeful maybe for a little bit of an increase relative to last year as some of your initiatives continue to hopefully take a better shape? And then how does price impact that outlook for '19 -- '20 versus '19?

--------------------------------------------------------------------------------

Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [3]

--------------------------------------------------------------------------------

Larry, this is Tom. First of all, you are correct. If you look at the lower end of the guidance, it's right around what we would consider to be the market rate of growth in 2020. And the upper range of the guidance would go ahead and presume some expansion of Hanger's underlying market share pace of growth. Now the reason you're not seeing that in the midpoint of the guidance is that there is a slight pricing decrease that we will be having in 2020 that relates to CMS. CMS' reimbursement is going to be about 0.9% in 2020 as compared to 2.3% in 2019, and that affected us in a -- as a decrease from 1.4% pricing in 2019 to about an average melted rate of 0.7% pricing in 2020. Now we're offsetting that pricing decrease because we believe that we'll have a good stabilization on the patient nonpayment part of the company's overall growth. And those factors lead us to believe that it's reasonable that 2.1%, 2.2% could be a good baseline for medium-range growth. But we're hopeful obviously that we can pick the pace up and try to achieve the higher end.

--------------------------------------------------------------------------------

Lawrence Scott Solow, CJS Securities, Inc. - MD [4]

--------------------------------------------------------------------------------

And how about just parsing that out maybe a little bit between prosthetics and orthotics? Obviously, prosthetics continue to sort of grow in that 3% to 4% range, very solid quarter in Q4. And orthotics appear to have stabilized, ex the -- I know you're exiting a small piece of the business, but ex that little -- excluding that. Do you expect sort of similar 3% to 4% in prosthetics and maybe a little bit of growth in orthotics in 2020?

--------------------------------------------------------------------------------

Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [5]

--------------------------------------------------------------------------------

We do. When you look at it, the baseline is similar to the 2019 baseline, where we're up in about the 3% range for prosthetics and that we're around the 1% range or so for orthotics. Our agenda is to try to increase the rate of orthotics growth. And if we do, that would give us some upward potential on the rate of growth.

--------------------------------------------------------------------------------

Lawrence Scott Solow, CJS Securities, Inc. - MD [6]

--------------------------------------------------------------------------------

Okay. And then just last question on -- just on the coronavirus. I fully get that you guys -- first of all, hopefully, it would be not some that reoccurs every year. And I fully get that the O&Ps certainly have limited discretion. But is there some possibility that some stuff is pushed out? I don't know how some parts of the country are. And I do live 15 minutes from the containment zone, if you will, up here in Westchester County. But there's no one on the roads, stores are empty, restaurants are empty, people just are staying in when they can, it seems like, and hopefully, that will subside eventually. But in the short term, could that push some stuff out a little bit into future quarters?

--------------------------------------------------------------------------------

Vinit K. Asar, Hanger, Inc. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Larry, yes, I think there's a possibility it could, it's going to depend on what parts of the country, what happens, patients decide to stay home and not step out of their homes. If they do cancel appointments, we could see some of that. From a Care perspective, patients could push off their replacement devices, maybe by a few weeks, waiting for things to settle. So far for the first month or 2 months or so this year, we haven't seen that slowdown. But as I mentioned in my comments, the busiest time for us is here in the next few weeks, so we're watching that closely.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

The next question comes from Brian Tanquilut from Jefferies.

--------------------------------------------------------------------------------

Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [9]

--------------------------------------------------------------------------------

Congrats on a good 2019. I guess, Vinit, my first question. So as we exit 2019, go into 2020, the -- I think one of the last few times you and I had spoken, we talked about how this company's focus was stabilize the business, prepare for growth. And now -- should we be thinking about the fact that you're done with those, and we should be in the growth phase right now for the business? And how do you think about the M&A opportunities out there? I know you've got some deals baked in your guidance. But -- would you mind walking us through how you're viewing growth and the opportunity for acceleration?

--------------------------------------------------------------------------------

Vinit K. Asar, Hanger, Inc. - CEO, President & Director [10]

--------------------------------------------------------------------------------

Yes. Thanks, Brian. You're right. I think over the last few years, our focus and attention was more on the stabilization and for preparation for growth. Stabilizing the infrastructure and preparing the actual infrastructure to allow for the growth. So we believe we've done a lot of that, and then Tom and my comments on this call. In the previous call, we've talked about the investments that we've made, and we're pleased with how we've set the company up. And at this time, our growth plans are on the Patient Care side to make sure that all these investments we've made and the focus on outcomes and on patient satisfaction have set us up to get good healthy organic growth, same clinic growth that allows us to expand market share organically. And supplementing that with key tuck-in O&P acquisitions that we believe will be incremental to us and good for shareholders. And our focus on the acquisitions is on high-quality, clinically-driven assets. And we're pleased with the interest we're getting to join Hanger as well. So on the M&A side, leading into the second part of your question, we're really pleased with the pipeline that we have. It appears that we are attracting those businesses that are focusing on outcomes and on patient satisfaction, really high quality businesses. So that's -- we're pleased with the pipeline, and we're pleased with the folks that have joined us. And we expect that caliber of businesses to be joining us.

--------------------------------------------------------------------------------

Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [11]

--------------------------------------------------------------------------------

I guess to follow-up on that, Vinit. So if that's the case, I mean, in a way, there should be some expectation of above-market growth? I mean we're seeing that, obviously, in the prosthetic side of your business. I guess 2 questions on that point. So do you think that the prosthetics business growing faster than the rest of the company is a good thing from a margin perspective? And then as I think about your ability to grow above market, there have been rumblings from some manufacturers recently about how the prosthetics market globally is slowing down. So I just wanted to hear your thoughts on that. And what you're seeing here in the U.S. In your market? Is the market going to continue to grow for O&P going forward?

--------------------------------------------------------------------------------

Vinit K. Asar, Hanger, Inc. - CEO, President & Director [12]

--------------------------------------------------------------------------------

Yes. We don't expect -- we haven't seen any slowdown of the prosthetics market here in the U.S., I can't speak for outside the U.S., obviously. But in the U.S., we haven't seen that. We had our strongest quarter with 4.4% growth in Q4 in 2019. But even if you think, and if you look at the numbers over the last couple of years, we've consistently grown prosthetics at about 3.3% in 2018 and similar number in 2019. So while we haven't seen that slowdown in prosthetics growth. Obviously, we'll monitor it. But right now we're really pleased with at least our performance, and we believe we're probably picking up some market share in the prosthetic side. So I would consider that above-market growth on the prosthetic side.

--------------------------------------------------------------------------------

Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [13]

--------------------------------------------------------------------------------

So yes, it sounds like that's more company-specific to that manufacturer. I guess my question for Tom, over the last 5 years, you've gone through a lot of accounting issues or accounting heavy lifting to address the accounting issues in the past. Where do you stand now in terms of like your audit, your controls? And anything else that you want to call out on the accounting and finance infrastructure front?

--------------------------------------------------------------------------------

Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [14]

--------------------------------------------------------------------------------

Yes. I mean Brian, good question. As of December 31, 2019, we had a fully effective control environment. We had no outstanding weaknesses and controls that we're reporting. And so really, we see that as something very indicative of the past and not -- certainly not the Hanger of the present or the future.

--------------------------------------------------------------------------------

Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [15]

--------------------------------------------------------------------------------

So Tom, do you think that the accounting infrastructure and then the cost associated with that, we should be at that level -- at the right level at this point, right?

--------------------------------------------------------------------------------

Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [16]

--------------------------------------------------------------------------------

Yes. I mean I believe the cost structure is pretty stable and will be stable going forward. We are continuing to obviously make systems enhancements, which our operations benefit from and the accounting team will benefit from. So we're hoping that we can drive some further efficiencies in the years to come.

--------------------------------------------------------------------------------

Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [17]

--------------------------------------------------------------------------------

Got it. And then I guess my last question, Vinit, yes, just a follow up on Larry's question on COVID. If I take a step back on a more fundamental basis, right? Like what percentage of your revenues are recurring, number one? And then, I guess, the second part of that, as I think about the key drivers of your referral flows outside of the recurring -- the renewals or the -- what do you call these updates and people's devices. What's the main driver of that? I mean is it -- literally we would be looking as it -- probably it's a diabetes, cardiovascular disease, as an amputation? Like how do you think about the elective nature of the underlying growth drivers for the industry?

--------------------------------------------------------------------------------

Vinit K. Asar, Hanger, Inc. - CEO, President & Director [18]

--------------------------------------------------------------------------------

Yes. Great question. So in terms of recurring revenues, when you think of our patient care segment, our prosthetics business, about 70% of our revenues are of a recurring nature in the prosthetic side. And the balance are new patients coming in, and they're generally coming in primarily as a result of either vascular disease or trauma. Those are the 2 big areas that they're coming in as a result of. In terms of the elective nature and tying it back to your question around COVID-19. Look I think the patients that are coming back to us on a recurring basis for the replacement devices or adjustments, those patients could possibly delay things if they have to. So if you're in a containment zone, et cetera, and if you're not stepping out of your home, they could delay by a week, 2 weeks or something like that. Those patients that are just new patients, getting their amputations, my guess is they would be keen to come in and get their first prosthetic device. So that's how we're thinking about it. But as you and I both know, this is such a fluid situation. Our job right now is to monitor it and do the best we can to provide the best health care and be as available as possible to those patients that need the care.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

(Operator Instructions) There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Vinit Asar for any closing remarks.

--------------------------------------------------------------------------------

Vinit K. Asar, Hanger, Inc. - CEO, President & Director [20]

--------------------------------------------------------------------------------

Great. Thank you, Jason. Look in closing, I'd just like to emphasize that we're pleased with our 2019 performance. And we believe we're well positioned for 2020. So we look forward to speaking you -- speaking with you all again in May for our first quarter earnings call. Thanks very much.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.