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Edited Transcript of HNGR earnings conference call or presentation 8-Nov-19 1:30pm GMT

Q3 2019 Hanger Inc Earnings Call

AUSTIN Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Hanger Inc earnings conference call or presentation Friday, November 8, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Brian Gil Tanquilut

Jefferies LLC, Research Division - Equity Analyst

* Lawrence Scott Solow

CJS Securities, Inc. - MD

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Presentation

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Operator [1]

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Greetings, and welcome to the Hanger's Third Quarter 2019 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded.

Today, we will have prepared remarks, followed by a Q&A period. Instructions for questions and answers will be provided after the formal presentation.

It is now my pleasure to introduce your host, Seth Frank, Vice President of Treasury and Investor Relations. You may begin your conference.

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

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Good morning. Thank you, and welcome to Hanger's Third Quarter 2019 Earnings Conference Call.

With us today are Vinit Asar, Hanger's President and Chief Executive Officer; 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 earnings release and in our filings with the SEC. Hanger disclaims any obligation to update forward-looking information discussed on this call.

With that complete, let's turn the call over to Vinit.

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

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Thanks, Seth, and good morning, everyone. Thank you for joining us for Hanger's Third Quarter 2019 Conference Call.

During my prepared comments, I will discuss our financial results for the third quarter, our financial outlook and close with an update on our business and the O&P industry.

Hanger's third quarter financial performance was strong. Total net revenue of $279.6 million reflected a solid 6.3% year-over-year increase for the quarter. I'm also pleased with the growth of 4.8% in adjusted EBITDA and 13.6% in adjusted earnings per share during the quarter.

Turning to the segment results. Patient Care performed well, driven by solid organic growth, supplemented by our selective approach to M&A during 2019.

Net revenue grew 7.9%, driven by another quarter -- another strong quarter in prosthetics. The segment generated 2.1% same-clinic day adjusted growth rate, which is a solid performance. It's important to note that prosthetics, excluding acquisitions, grew 4% during the same period. We remain encouraged with the multi-tier strategies we have put in place to drive organic prosthetics growth.

Net revenues in orthotics during the third quarter were consistent with the prior year period on a same-clinic day-adjusted basis, reflecting a slight decline in shoes and inserts with an offsetting modest increase in the rest of the orthotics category. We continue to focus on programs to drive growth in custom orthotics.

As in Q2, patient volume and a stronger mix of custom devices drove margin improvement in this segment. At the clinic level, our patient engagement efforts continue to show results. Our Net Promoter Score through September of 2019 is 84 for Hanger Clinic, continuing the improvement we have seen throughout the year.

On the M&A front, it has been a successful year thus far. On a year-to-date basis, acquisitions have contributed approximately $19 million to net revenue. This is consistent with the approximately $28 million in acquisition revenue built into our financial outlook for the full year 2019.

Looking ahead, we continue to see a strong pipeline of potential O&P clinic acquisitions to supplement our organic growth strategy.

In the Products & Services segment, revenue was consistent with the prior year. The story here remains similar to prior periods. Within the segment, O&P distribution grew a robust 5.7%. As discussed previously, we do expect the growth to moderate closer to the market growth rates in the near future. We continue to benefit from the addition of new SKUs to our catalog for distribution customers.

We are also adding strategic partnerships with manufacturers that provide compelling economic benefits to them, given the natural scale and operational advantages we provide. I will address this in more detail when we discuss our supply chain initiatives.

Therapeutic solutions, which represents approximately 5% of total revenue is largely trending as anticipated. Revenue declined year-over-year, essentially offsetting the increase in distribution revenue. However, we see reason for some cautious optimism, driven by a refreshment of our product portfolio, rebranding initiatives and a systematic alignment of our value proposition with the new PDPM reimbursement system. From a margin perspective in the segment, adjusted EBITDA declined, driven by the impact of therapeutic solutions revenue.

Looking forward, our objectives for Products & Services are to stabilize revenue in therapeutic solutions and drive sustainable margin improvement within distribution services through reengineering our supply chain and investing in technology.

During the last 2 years, the long-term focused investments and strategic initiatives we have implemented in revenue-cycle management, clinical outcomes, patient engagement and referral management programs are driving measurable value. Last quarter, I briefly touched on the opportunity to accelerate the efficiency and sophistication of our supply chain and financial systems. And today,

I will provide more details around this important initiative.

Supply chain is an area of differentiation for Hanger that has long-term opportunity to benefit our business. Within Hanger, this refers to the physical and technology infrastructure that supports logistics and warehousing of products for both of our business segments. Our plan is to modernize the supply chain by investing in systems and strategies that optimize critical elements, including inventory management, freight, distribution systems and our fabrication network.

The plan includes investment in technology, specifically a cloud-based ERP system, combined with logistics, warehouse and freight-management reengineering that will yield a strong financial return. We have already begun to implement some of these strategies with leading O&P component suppliers. We are entering into formal collaboration programs with manufacturers that are moving forward with the intention of strengthening their relationships with us.

One part of the strategy that will drive efficiencies and reduce our working capital requirements is to manage inventory through consignment programs. This is already being implemented with some of our manufacturing partners. This, as an example, will be mutually beneficial, resulting in sales growth, more efficient order fulfillment, rapid device delivery and more efficient clinician workflow. Specifically, our plan is to invest approximately $22 million to $27 million of additional cash in 2020 and approximately $6 million to $8 million in 2021 in supply chain reengineering and systems initiatives. We expect that these cash investments will generate a sustainable margin improvement for the company of approximately 25 basis points in 2022, growing to approximately 35 basis points in 2024 and beyond. We recognize that deploying capital to these initiatives will not delever the balance sheet as quickly as originally planned. However, our cash deployment priority aimed at deleveraging will be a primacy beginning in 2022.

We will provide clarity on the pacing and financial statement impact of these investments in our annual guidance for 2020 during our Q4 earnings call.

Before Tom provides his views, let me wrap up with a brief perspective on the current state of the O&P industry and Hanger's leadership position. We recently returned from the American Orthotic & Prosthetic Association National Assembly, attended by approximately 2,300 O&P professionals in San Diego. My observations as a result of numerous meetings held and presentations I attended is that Hanger, as an organization, has begun to play the role of championing, not only for patients that need O&P services, but also for clinicians that are truly looking to practice the medicine of O&P.

Our vision is to provide leadership across all facets of the O&P industry and to elevate the profession as well as its reputation and impact on patient care to its highest potential. The significant resources we allocate to peer-reviewed outcome studies, technology assessment and collaborative research programs is intended to constantly raise the bar for O&P practice. The largest challenge for the industry is and will likely always be obtaining appropriate reimbursement. One industry topic is a recent uptick in Medicare audits, focused predominantly on orthotics. I am proud that we, at Hanger, operate what I would characterize as a world-class revenue-cycle management organization and believe we are well equipped to respond as needed to these and other similar ordinary course issues as they arise.

Our clinical outcomes programs continue to develop by providing us valuable insight into the efficacy of various devices from our different manufacturing partners. We have consistently communicated to them that outcomes matter more today than ever before.

On that note, we are pleased to be partnering with those manufacturers that are embracing this approach for the benefit of high quality patient care. At Hanger, we are focused on being defined by the outcomes we generate for our patients and not solely by the devices we fit.

A major issue in O&P continues to be clinician training and recruitment. As a result of our approach, we continue to benefit from attracting the best and brightest new graduates of O&P programs. Ours is a full employment industry. And as a result, extremely important revenue driver is the number of certified O&P clinicians. We have a leadership team completely focused on our national residency program and have seen great results in terms of recruitment, retention and engagement among the next generation of O&P professionals.

We currently have approximately 180 residents. Keeping in mind, only about 250 students graduate from O&P programs annually. We are seeing an increasing number of residents who want to join Hanger, and we believe the multiple career path options we offer on completion of their residency is an important factor in that increase. The net impact of this investment has been an improvement in recruitment rates and the benefit of a more diverse O&P workforce.

Finally, I want to touch on our efforts around patient engagement. The connection between more referrals, higher demand for our services and ever-improving patient satisfaction are all directly tied to our portfolio of programs that raise community awareness of Hanger Clinic as the leader in the O&P field. In August, we held our largest ever EmpowerFest, national patient event in Kansas City, where we had more than 250 attendees, including Hanger Clinic patients, prospective patients, their families and our partners in the health care community. This 3-day event, led by our team of world-renowned clinicians and Hangar leaders was 1 of 4 Hanger Clinic national patient engagement events held this year, designed for people with lower limb loss or limb difference and was an overwhelming success.

I cannot overstate the goodwill and value such events create in the communities that we are proud to serve in. If you get a chance to visit our social media presence on Facebook or Instagram, you will be able to follow our progress on these and other exciting patient-engagement initiatives on a regular basis. We are excited to host more of these going forward, including one this weekend in Dallas, designed for those with upper limb loss or limb difference.

In closing, I want to state that we are pleased with our overall results this quarter as we continue to execute on the strategic vision for Hanger and our role in leading the O&P industry.

Now Tom will take you through the numbers in detail. Tom?

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

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Good morning. As Vinit shared, we are pleased with the revenue growth Hanger achieved in the third quarter and the fact that the company's overall contribution on that increased revenue was consistent with what we had expected. Hanger reported $279.6 million in revenue, which reflected a total increase of 6.3% for the quarter. This equated to just under $17 million in revenue growth and was completely driven by our Patient Care segment, which posted a 7.9% increase in its revenue.

Adjusted EBITDA was $32.6 million, which was an increase of 4.8% over the prior year period. These results reflected an adjusted EBITDA margin of 11.7% for the quarter, which was reasonably consistent with the same period last year.

The segment performance trends for the most recent 3 months were consistent with those that we've seen and discussed throughout 2019. Patient Care demonstrated organic and inorganic revenue growth, which has contributed to good earnings increases and margin expansion in that segment.

The Products & Services segment, on the other hand, has experienced overall stable revenues, along with a decrease in earnings and margin due to underlying declines in revenue from therapeutic solutions and increases in the cost structure of the distribution business.

To go a little deeper, first, let's discuss the Patient Care segment. The 7.9% rate of revenue growth was driven by the combination of 2.1% in same-clinic growth, coupled with revenue from acquisitions. This has brought our year-to-date total increase in revenue for the segment up to 5.1% as compared to just 1% for the year-to-date through September last year.

Underlying same-clinic rate of growth has risen to 1.8% for the year-to-date as compared to 1.1% last year at this time. This growth has been the primary factor that's led to an increase of 10.4% in segment-adjusted EBITDA contribution for the quarter and 8.3% for the year-to-date. For the 9 months ended September 30, Patient Care adjusted EBITDA has grown by $8.5 million, and its margin has increased by 50 basis points to 17%.

Within these results, it's important to note that the acquisitions which we completed late last year and early this year are contributing to the earnings growth of this segment. With that in mind, as we've discussed in prior calls, a portion of these earnings have been offset by planned increases in the annual run rate of the cost we are incurring for diligence, legal, integration and other M&A activities, some within the Patient Care segment itself and some in our corporate area.

We include these specific costs as expenses in our calculation of adjusted EBITDA. As a result, as we leave the year, we do not anticipate a meaningful benefit from the annualization of earnings from these acquisitions as we bridge to our 2020 financial outlook.

And looking at our Products & Services segment, its revenue and adjusted EBITDA trends continue to reflect similar dynamics to those that we have had throughout the year. Revenue from distribution grew by $1.9 million or 5.7%, while the decrease in therapeutic solutions revenue offset this and brought the segment's total revenue to $48.7 million, which was virtually identical to the level reported in the third quarter of last year.

Therapeutic solutions revenue continues to trend within the range that we estimated in our original outlook for the year. Due to the declines in therapeutic solutions and increases in support costs within our Distributions business, adjusted EBITDA decreased as compared to the prior year in this segment by $1.6 million during the quarter and $5.4 million for the year-to-date.

Looking forward, as we've discussed previously, while we are pleased with the rate of revenue growth we've been achieving at our Distribution services, we do currently believe this rate will moderate as we acquire O&P clinics, in some cases, they are existing distribution customers, resulting in a subsequent decline in external distribution revenue post closing.

Additionally, we have plans to decrease our emphasis on sales of certain low end, low margin orthotic products through our distribution business in a manner similar to what we previously did in our Patient Care segment. These factors will likely slow the near-term growth of this area of our business.

When reviewing our corporate segment, you'll see that expenses have grown by $900,000 for the quarter and $2.3 million for the year-to-date. These increases relate directly to the $2.5 million in implementation costs we have incurred to date this year in connection with our supply chain and financial systems implementation, which we classify as a corporate expense.

As we've discussed in our financial filings and on prior calls, we expect to spend approximately $4.6 million in aggregate systems implementation expenses during 2019 and estimate that we will spend approximately $5 million per year in each of 2020 and 2021. Given that we have been spending approximately this amount each year for the past several years, we currently view this as an ongoing expense burden.

It's also important to note that the $22 million to $27 million in capital, which Vinit outlined, that we intend to use for the supply chain and financial systems project during 2020 is incremental to this baseline spend. Those expenditures will affect our cash flow in 2020 and will then be depreciated or otherwise recognized as expense in future years over the useful lives of the related technology and distribution facility assets. We believe the savings from the supply chain and financial systems initiative should commence in 2022 and provide the company a company-wide increase of approximately 25 basis points in margin in that year. And then increase to a level of roughly 35 basis points by 2024 and thereafter.

Before turning to cash flows. There is one more important consideration regarding our operating results. While we're pleased that revenue and earnings growth in the third quarter tracked well with our expectations, given the highly variable rates of growth we exhibit from quarter-to-quarter and the fixed cost nature of our business, please bear in mind that our individual quarterly results can be quite volatile as they were in Q1 and Q2. This remains an ongoing dynamic in our business.

Now let's turn to the company's cash flows and indebtedness. For the 3 months ended September 30, Hanger produced $23.5 million in cash flows from operations, which reflected an increase of $3.2 million or 15.8% as compared with the third quarter of 2018. While we continue to carry a comparative year-to-date decrease in cash flows due to the timing of collections items that affected the first quarter, we're pleased that the second and third quarters have shown favorable growth over the same quarters in the prior year. Our capital expenditures moderated in the quarter as we expanded $590,000 less than we did in the third quarter of 2018 for PP&E and therapeutic equipment. These factors increased our free cash flow generation by $3.8 million to $16.4 million for the period. As a result of this free cash flow, the company's overall liquidity increased by $11.8 million over our June 30 level to a level of $144.8 million at the end of September.

As we finish out the current year, due primarily to the favorable timing of payables last year and the unfavorable timing of our payrolls this year, we anticipate lower comparative operating cash flows in the fourth quarter. For the full year of 2019, we continue to estimate that we will spend approximately $35 million on capital expenditures.

Now I'll spend a moment on our indebtedness. Hanger had $455.8 million in net debt at the end of the third quarter, which equated to a leverage ratio of 3.7x. As Vinit shared, due to our decision to pursue the operational and savings benefits of the supply chain and financial systems implementation as well as a continued pace of O&P clinic acquisitions. We do not believe we will see a near-term reduction in leverage. Nevertheless, we remain focused on this factor and believe our 2020 investments will ultimately contribute to more favorable shareholder returns than with a more immediate reduction in indebtedness.

I'll close the call with a brief comment on our financial outlook. As we indicated in the press release, given that we have been tracking in the middle of the range we set for this year, we have again reaffirmed our outlook for 2019. Nevertheless, the fourth quarter is by far our largest seasonal quarter from both a revenue and earnings perspective. So our performance during these final 3 months will be particularly important to our achievement of the expectations we set for the year.

With respect to 2020, our plan is to return to you at the time of our year-end earnings release and share our initial outlook with you at that time.

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

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Questions and Answers

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Operator [1]

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[Operators Instructions) The first question comes from Brian Tanquilut of Jefferies.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [2]

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Congrats on a good quarter. But I guess my first question from an industry perspective, I've seen a couple of instances where O&P device manufacturers have gotten into the clinics business. How are you thinking about that? And then what do you think is your strategy? And is this something that we could see them try to do on a bigger scale?

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

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Yes. Thanks, Brian. Look, I think it doesn't change our strategy, the fact that a manufacturer has decided to acquire an O&P clinic or O&P clinics. Our strategy, we're pretty -- we're very focused on the things that we've been doing. We feel very confident that our focus on clinical outcomes, on patient engagement, our investments in revenue-cycle management make us stronger than we've ever been before. So it doesn't really change our strategy and our focus on organic growth, supplemented with the tuck-in acquisitions. I can't comment on their strategy, certainly is curious. But we feel also comfortable that our clinicians have the advantage of being objective about what devices they pick and they choose for our -- for their patients, so they can provide the best outcomes as opposed to a clinician that may be influenced by a device manufacturer. So we're feeling good about our strategy at this point.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. And then, I guess, shifting gears to the last part of Tom's comments. So from the Board level, how are you guys thinking about leverage? Obviously, it is a key investor focus, but sacrificing near-term leverage for long-term EBITDA growth. Like how do you guys view balancing those 2 different goals?

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

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Obviously, it's a delicate balance. We're very committed to bringing leverage down. The challenge we have is that these opportunities on the supply chain and with some of the acquisitions, our immediate-term items that we really feel will bring the shareholders a value. So to set those aside strictly to bring the leverage down a bit earlier is something that we've elected to go ahead and trade for the higher return. It is nevertheless an area that we're all very conscious of and talk about frequently and is a big part of our financial plans.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [6]

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Got it. And then I guess, Tom, tying that into the supply chain discussion, right? If you don't mind just walking us through how and where the benefits will come from. And then where exactly is the money going to be spent? And what sort of improvements -- what are the KPIs you guys are going to look from 2021 going forward?

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Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [7]

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Well, as we outlined in the 10-Q, there's 2 real components to the spend. One is the capital expenditures that we're under -- that we're putting into place for the actual facilities. We're going through an upgrade of our key distribution facility in Alpharetta to really modernize that facility and to bring in warehouse management technology and other systems that will really enable us to serve our customers better. And that's both our internal clinicians as well as really our external customers.

Secondly, there is an ERP component or a financial systems component that ties into this as well. Those capital items, obviously, will be a burden to cash flow this coming year, but we'll have, what we think, a very moderate effect on the company's earnings going forward. Meanwhile, the savings are going to come in areas such as freight, being much more efficient in terms of the number of packages that we send instead of multiple boxes. We'll be able to box things in a more organized fashion with fewer shipments. We'll be smarter about how those boxes are packed. We'll be able to really support our manufacture partners with the consignment of their inventory and how we coordinate their distribution through our distribution services or in fashions that will be supportive of their mission. So those returns will come -- the ones that we outlined, that Vinit outlined and I outlined, are primarily the freight and what we'll call the operational costs and efficiencies of the [DCs], we think there's some upside to this as we look at our distribution business and look at our relationships with manufacturers.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [8]

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All right. And then, Tom, I guess my last question, as I think about this allowances during the quarter. I noticed that there's still an elevated amount of disallowances. And your same-store probably would have been at least 100 basis points higher if not where that above average level of disallowances. Is there anything you can call out on that? And then how are you thinking about driving some improvement there over the next 12 months?

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Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [9]

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Yes. That slight pressure is on the patient nonpayment side. We are seeing a more -- an increased portion of the payments that relate to private payment or pace the patient portion of planned payment. We think that relates a little bit to mix. The higher prosthetic mix is carrying a bit of that. We're also seeing a little bit of credit, credit decrease in -- not dissimilar to what other providers of care are seeing with individual payments. Overall, we continue to feel that the patient on payment, which was about 1.3% in the quarter, will settle down around 1% on the longer term. And that what we're seeing is sort of a short-term effect on that side. Meanwhile the disallowed themselves are actually down a bit, about 200 basis points from the prior year, which we see as a positive event.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [10]

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Yes. I appreciate it. I guess if I may just throw in one last for Vinit. As I think about growth, prosthetic grew 4% this quarter. Is there any reason why the other sides of the O&P clinics business will not -- should not grow at that pace, at least, the custom side, whether it's orthotics? And then what's the sustainability, do you think of that prosthetics growth rate?

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Vinit K. Asar, Hanger, Inc. - CEO, President & Director [11]

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Yes. In terms of growth, I'll answer the latter part of your question first, the sustainability of the prosthetic side. We're pretty pleased with what we're seeing on the prosthetic side. And we believe it's a direct result of the effort our clinics and our marketing teams have made over the last few years on all the prosthetics programs have gone in. So last year, in 2018, we had a 3.3% prosthetic growth. So we expect that level to sustain given what we've been seeing, and we're pleased with that. On the orthotics side, just as a reminder, there are elements to the orthotics business that include the off-the-shelf orthotics, shoes and inserts and customer orthotics. The heavy focus we've put in over the last year or so has been the custom orthotic side. And so we're pleased with what we're seeing on the customer orthotics side with the education programs and the training we've been implementing across our clinics. With regards to off-the-shelf and shoes and inserts, it is something that we'll continue to offer our referral sources and patients. But as we've mentioned before, it's low or no margins. So we're not really focused on those areas at this time.

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Operator [12]

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The next question comes from Larry Solow of CJS Securities.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [13]

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Just a few follow-ups to Brian's question. Just on the revenue growth. So you are getting a little bit of benefit from pricing, right, at least on the prosthetic side. Is that maybe responsible for some of the bump-up? And then part 2 of that, I would hope that maybe not only sustainable, but maybe over time, we could see even a little bit of a bump-up on the volume side in the prosthetics, and maybe even solely on orthotic so we can sort of get back to like a 3% volume growth. Is that a fair target, at least, without putting a time line on it?

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

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Well, listen, Larry, on the pricing part, yes, obviously, we did have a good Medicare increase this year, it was around 2.3%. When you weighted into our average rate including the commercial side, we figure that we're probably about 1.3% to 1.4% rate. The key thing that I would point out was something that Brian alluded to, which is because of the higher patient nonpayment, our net growth is 2.1% on the same-clinic basis. But if you were to normalize for that increase in patient nonpayment, the underlying growth was actually 3%. And so we're sitting on average, included prosthetics and orthotics in Q3, at about 1.6%, which is showing some volume growth. Now sustainable, we certainly are hopeful for that and believe that, that -- our differentiation is going to contribute to that. But we're pleased with this intermediate step that we seem to be seeing so good volume on that side.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [15]

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Okay. And then on the acquisition front, just one thing, can you repeat -- did you say -- I missed that. I had to step away for a second, on the contribution as we bridge from '19 to '20 from the acquisitions you did earlier in this year. Was that what you're referring to, when you say, don't expect a step-up?

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

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Yes. I really -- I don't think we will see a step-up primarily because the growth, when you look at the earnings growth on the patient care side in addition to the organic contribution to EBITDA, the acquisitions are contributing to EBITDA. And really what's happening for the company on a consolidated basis is, that's being offset to a certain extent by the Product & Services segment and its decline.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [17]

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Okay. And as you complete further acquisitions, though, do you think that you're more well positioned to get benefit from those -- from the profit from those deliver, I mean, pretty soon after they're completed?

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Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [18]

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Yes. We would like to believe so. We -- really, when you look at these acquisitions, we're very conscious of making sure that we pay fair multiples and that the company receives the benefit of their earnings.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [19]

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Right. Okay. Turning to just on the supply chain investments. So you called out the $22 million to $27 million, I think $13 million to $15 million for the supply chain, another $12 million to the ERP. Will there be any -- just -- is this the brunt of the expense? Is that pretty much all the expense? So essentially, the 25 bps or up to 35 bps, which is, what, $2 million to $4 million or $2.5 million to $4 million would be like a 10% to 15% kind of targeted ROIC. Is that about right?

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Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [20]

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Yes. A little bit -- maybe a little higher. I think when we do the math, we're up around 15% to 20% pretax ROI on the program. There is an additional 6% to 8% that we outlined in the Q that occurs in 2021. And but no, this is a pretty comprehensive statement as to how much we believe we'll spend in total for those programs.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [21]

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And then just switching gears, just on the ACP or therapeutics business. I realize it's the 5% of revenue. So pretty small, obviously, but a good amount of cash flow or CapEx spent on that business to refresh the product line. Is that a number that can be brought down a little bit over time? And then part 2 of that question, one on the the operating side of it. It sounds like perhaps you see some light at the end of the tunnel where maybe the business could stabilize?

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Thomas E. Kiraly, Hanger, Inc. - CFO & Executive VP [22]

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Yes. So from a capital expenditure standpoint, we definitely do believe that, that can be moderated as you go into 2020. That's a part of our plan on the CapEx side. They are through a lot of the refresh programs. They still will have a reasonable degree of new investment every year, but there is an expectation that we'll see a little bit of a decrease in that area.

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Vinit K. Asar, Hanger, Inc. - CEO, President & Director [23]

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Yes. And I can take the second part of the question in terms of the operational side, Larry. What we're seeing is -- it's the business, the results of the business are a reflection also of what's going on within the SNF industry over and above the enhancements that the team at therapeutic solutions is working on and we do see a stabilization, a sort of stabilization in therapeutics in the skilled nursing facilities. As you know, PDPM went live on October 1. Things appear to have stabilized, leading up to it and after that. We are seeing a lot of our customers, when about 1 or 2 years ago, they were having a hard time paying their bills to us or some of them going bankrupt. We're seeing less and less of that. So that's what gives us optimism going forward.

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Operator [24]

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[Operators Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Vinit Asar for any closing remarks.

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Vinit K. Asar, Hanger, Inc. - CEO, President & Director [25]

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Great. Thank you all for your questions. We are pleased with where we are with the business. And really excited about where we're going. I hope you can see that while we have plenty of work ahead, we are in an enviable and strong position given our leadership position in the O&P industry. We look forward to seeing you at conferences and in your offices in the coming weeks. And look forward to speaking again to review our year-end results and provide our 2020 financial outlook early in the new year. Thanks very much.

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Operator [26]

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