BTSG - NASDAQ

Good day and thank you for standing by. Welcome to BrightSpring Health Services, Incorporated, Fourth Quarter and Full Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. We will be turning the call over to BrightSpring Health Services, Chief Accounting Officer, Jennifer Phipps. Please go ahead.

Good morning and welcome to the BrightSpring Health Services earnings call for the quarter and year ended December 31, 2023. My name is Jen Phipps, and I am the Chief Accounting Officer at BrightSpring. I am joined on today's call by Jon Rousseau, Chief Executive Officer and Jim Mattingly, Chief Financial Officer. After discussing BrightSpring's fourth quarter and full year 2023 results, as well as our 2024 outlook and long-term financial targets, we will open the call for questions. In the Investor Relations section of our website, you will find our earnings press release and slide presentation to accompany today's discussion. Please note that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. Such forward-looking statements are not guarantees of future performance. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today's press release and presentation, as well as in our annual report on Form 10-K that will be filed with the SEC regarding specific risks and uncertainties. Such factors may be updated from time-to-time in our periodic filings with the SEC. And we do not undertake any duty to update any forward-looking statements except as required by law. During the call, we will use non-GAAP financial measures when talking about the company's performance and financial condition. You can find additional information on these non-GAAP measures and reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort in today's earnings press release and presentation, which again are available on our Investor Relations website. Additionally, to more appropriately describe business performance, the results and growth rates mentioned during these prepared remarks and in the investor slides posted to our website excludes the results of our other segment, which is the Equus Workforce Services business that was divested in Q4 2022. This webcast is being recorded and will be available for replay on our Investor Relations website. And with that, I will turn the call over to Jon Rousseau, Chief Executive Officer.

Thanks Jen, and good morning everyone. Thank you for joining us today, and I'd like to begin by thanking all of our dedicated and professional employees across the country who drive our mission of making a difference in people's lives and communities every day. I would also like to welcome and thank our new public company investors. We look forward to continuing our partnership with you. As a reminder, BrightSpring delivers pharmacy and provider health solutions to complex patients in home and community settings. We believe that our complementary and coordinated portfolio of services delivers enhanced clinical outcomes in patient preferred settings and at a reduced total cost of care. And we do this at scale, serving approximately 400,000 people a day across our company. Chronic higher cost and higher need patients referred to as complex constitute 5% of the population, but 50% of the spending in U.S. healthcare. These individuals require a multiple services over time, better coordinated care, and more person-centered care. Our solution for these patients is to not only provide services in lower cost preferred home and community settings, but also to do so with a differentiated care model that consists of three key pillars, including our pharmacy services, provider services, and home-based primary care. In our pharmacy segment, we provide leading infusion and specialty pharmacy and home and community pharmacy. These are our three pharmacy markets. We believe infusion to be a very attractive market given the localized and demanding nature of infusion services required to be successful in this market, continued growth potential from new therapeutics in the future, and market share opportunity. Infusion is also better positioned with customers and has sales synergies when complemented with broader specialty pharmacy capabilities, such as ours. Our oral and injectable specialty pharmacy is one of the two largest independent oncology pharmacies in the U.S. Oncology is defined by limited distribution drug pharmacy networks that are based on quality, such as our 93 net promoter score, biopharma trust and relationships, in partnership with thousands of prescribers across the country. Oncology is the largest category within the specialty pharmacy industry and growing at approximately 15% annually. At Home and Community Pharmacy, which is referred to as closed door pharmacy. We serve more acute customer and patient pharmacy needs in the home and across a myriad of attractive community settings by going directly to people anywhere they reside 24/7. Our network of over 185 pharmacies allows us to be at any door across the U.S. within a few hours with customized local pharmacy services and clinical programs. We believe the dynamics of these three specific pharmacy assets and markets are attractive, where service levels and quality, local and same-day delivery capability, scale, and volume growth are critical success factors. Our pharmacy segment has more than doubled over the past five years and in 2023 generated 6.5 billion of revenue and 371 million of adjusted EBITDA. However, our pharmacy services also do not exist in isolation. They leverage enterprise best practices and infrastructure and benefit from our company's scale and contracting, and they are synergistic with our provider services and home-based primary care. Every one of our provider patients has a significant medication regimen and medication management need, and we provide the majority of the pharmacy services for our provider patients today. Our Continue CareRx program which combines in-home medication management alongside home healthcare, has driven a 73% reduction in hospitalization. The power of this clinical synergy between pharmacy and provider services for patients in the home was documented in a peer-reviewed study published by JAMDA last November. In our provider segment, similar to pharmacy, we are serving large and growing markets consisting of critical services delivered to homes, senior living, and skilled nursing settings to improve healthcare outcomes and costs. With home-based primary care, we are working to optimize care by going to the patient and better coordinating their services. Quality home-based primary care alone reduces hospitalizations by about 50%. And given these outcomes and this growing capability, we have sought new payment models both internal shared savings and payer capabilities and external partnerships with payers to help more optimally manage their members. Our strategy is straightforward. One, drive organic growth in our core service lines, which enjoy strong secular tailwinds and where we have demonstrated above market growth rates. Two, further coordinate our services and care management capabilities to drive integrated care and value-based care. And three, continue to execute accretive acquisitions to fill in geographies and drive market density and share. Most importantly, we will continue to invest in our people, our systems and processes, and our quality as key underpinnings to our strategies and our focus on growth and efficiency. As most recent evidence of this and our continued investment in people, we announced a 100 million equity grant at the time of the IPO to all full-time company employees who've been with us for at least a year, which is over 20,000 of our teammates. We are extremely excited about the opportunities in front of us over the next year and the longer term. We have strategically positioned BrightSpring to be a major player in the areas of greatest need in healthcare and in some of the most exciting growth markets within healthcare services. And I am confident that in each of these markets, BrightSpring will be among the long-term winners. For the year 2023, we are proud of our results in growing revenue by 18% and adjusted EBITDA by 7% to 538 million, which largely reflected organic growth and was the highest point of the range previously communicated in the S-1. Q4 was another strong quarter, as we grew revenue by 22% and adjusted EBITDA by 4%. Notably, adjusted for a one-time Q4 2022 payer rate catch-up, Q4 2023 increased an additional 12% as compared to the reported growth rate of 4%. Q4 2023 growth was consistent with strong Q3 2023 results, including 19% revenue growth and 13% adjusted EBITDA growth year-over-year. We have continued to demonstrate double-digit adjusted EBITDA growth in the recent quarters, and at this time expect double-digit year-over-year growth continuing into Q1 2024. For the full year 2024, we expect adjusted EBITDA to be in the range of $550 million to $564 million, excluding acquisitions. This includes the impact of approximately $6 million of new public company costs, primarily D&O insurance, and excludes certain quality incentive payments received in prior years. And if received again, would result in potential upside. With the debt pay down from IPO proceeds, recent credit rating upgrades, and the successful recent completion of the company's debt refinancing at a seven-year term, our annual cash flow was increased by approximately 100 million from reduced interest expense, resulting in a strong normalized cash flow profile as we focus on driving to and below our three times or less leverage target over time. In summary, BrightSpring is uniquely positioned to serve the large markets and growing needs in healthcare through leading and lower cost services with differentiated scale, capabilities, and historical performance. We provide critical services to people with more significant long-term needs where they are. With that, I'll turn the call over to Jim to further discuss our impressive 2023 results and momentum that is driving us into 2024.

Thank you, Jon. For the fourth quarter of 2023, we realized $2.4 billion in revenue, which represented 22.1% growth. Our adjusted EBITDA for the quarter was $143 million, representing 3.8% growth and an adjusted EBITDA margin of 6%. Of note, adjusted for a one-time Q4 2022 payer rate catch-up, Q4 2023 increased an additional 12.7% as compared to the reported growth rate of 3.8%. Cash flow from operations in Q4 2023 was $162 million. For the full year of 2023, revenue grew 18.5% to $8.8 billion, and adjusted EBITDA grew 7% to $538 million. Adjusted EBITDA margin for the full year of 6.1% reflected mixed shift, and in particular, the strong and continued growth of our leading specialty pharmacy business and its margin characteristic of the specialty industry. We remain focused on margin stability and expansion over the next several years as we continue to operationalize enterprise efficiencies on an ongoing basis, and each business grows its margin with continued scaling and targeted operational initiatives. During 2023, our cash flow from operations was $211 million. Turning to segment performance, for the fourth quarter of 2023, year-over-year pharmacy revenue increased 406 million, or 29.5%, to 1.8 billion. And pharmacies segment EBITDA decreased 4 million, or 3.9%, to 93 million. As previously mentioned at the company level, more relevant comparability for Q4 2023 year-over-year growth rate was impacted by Q4, 2022, payer rate adjustments and catch-up by approximately 17%. Provider revenue increased 25 million, or 4.4%, to 589 million. And provider segment EBITDA increased 9 million, or 12%, to 86 million, as compared to the fourth quarter of the prior year. For the full year 2023, pharmacy revenue increased 1.3 billion, or 23.9%, to 6.5 billion. And Pharmacy Segment EBITDA increased 27 million or 7.7% to 371 million compared to the prior year. Provider revenue increased 122 million or 5.6% to 2.3 billion and provider segment EBITDA increased 18 million or 6.2% to 307 million as compared to the prior year. In terms of business metrics, [scripts expense] [ph] were 9.6 million for the fourth quarter an increase of 8.3% year-over-year. Revenue per script was $186, an increase of 20%, driven by mixed and outsized growth in infusion and specialty pharmacy. And home health care average daily census was 42,000, an increase of 8.4%. For the full year, [scripts expense] [ph] were 37 million, an increase of 9.5% year-over-year, with infusion and specialty pharmacy prescription growth of over 20% and home and community prescription growth of over 8%. Revenue per script was $174, an increase of 13% year-over-year, driven by mix and outsized growth in infusion and specialty pharmacies. And home health care average daily census was 40,000, an increase of 8%. Turning to 2024 guidance, we are currently projecting revenue between 9.35 billion and 9.50 billion, with pharmacy revenue between $6.95 billion and $7.05 billion and provider revenue between $2.40 and $2.45 billion. Adjusted EBITDA is expected to be between $550 million and $564 million, representing an adjusted EBITDA margin of approximately 6%. Following our IPO, we paid off all of the company's second lien debt and repaid a portion of the first lien debt. We secured updated ratings for Moody's and S&P improving from B2B to B1B-plus ratings and refinanced the remaining $2.566 billion of debt in a new tranche that expires in 2031. The combined equity and debt transactions have reduced annual interest expense by over $100 million. Following our IPO and the debt refinancing, our leverage currently sits at 4.3x with a long-term target of below 3x and a strong focus on cash flow generation and deleveraging. With an improved capital structure and significantly lower interest expense, and our ongoing focus on cash flow generation. And with CapEx at 0.8% of revenue, a reduction in day sales outstanding by 3.7 days to 33.7 days, and days of inventory on hand relatively flat and at excellent levels in 2023, we remain confident in our ability to delever, while we continue to execute on our growth strategy including funding attractive and tuck-in acquisitions. I will now turn it back over to Jon for some final thoughts.

Thank you. And thank you for all of your time today to go through BrightSpring's platform, including our focus on building out the most relevant healthcare services and care management capabilities demanded and required, both today and in the future in the United States. This ends our prepared remarks. Operator, please open the line for questions. And operator, I'm actually just going to make one additional comment while you go ahead and give you a few seconds to queue up any of the questions. Just one more quick clarification on the on the prior comment about 2024 to be crystal clear. And again, the expectation for adjusted EBITDA is to be in the range of 550 million to 564 million excluding acquisitions. For the purposes of comparability to 2023, we note that this includes the impact of about 6 million of new public company costs, which is primarily D&O, and includes partial credit for certain quality incentive payments received in prior years. That is entirely consistent with what we had included in our 2024 forecast before. And we note that if received in full again, it could potentially result in additional potential upsides. Just wanted to make that quick clarification so it was crystal clear. With that operator, we're happy to take questions. Thank you.

Thank you. [Operator Instructions] Our first question today will be coming from Jamie Perse of Goldman Sachs.

Hey, thank you. Good morning, and I'll just say a quick congrats on the IPO. I wanted to start with the value of the platform that you've talked a lot about, the sales synergies that you see across the business. And as you've talked to folks over the last few months, what do you think's most misunderstood about the complementary nature of the businesses and how you actually execute on generating some of those sales synergies? And what data can you share about where you are in that process and the number of patients getting multiple services or leads generated internally?

Yes. Hey, Jamie, appreciate the question. Good morning. Look, I think first off, what's critical to understand is that this 5% of the population that makes up 50% of the spend in healthcare and needs better solutions where they are in the home, they all have the need for multiple services. Everybody needs their medications managed. Everybody needs a doctor. Most people need provider services in their home. They don't need just one service. Most providers only offer one service. So we have the ability to offer a comprehensive set of care capabilities that drive not only better outcomes, it gives us access to many, many, many more volume and care opportunities in the organization. It really dramatically increases our addressable market sizes and really has helped to fuel additional incremental growth for the organization, all while we drive quality outcomes and better coordinated care. That is a very unique capability set that we feel is imperative to drive value-based care-type outcomes in the future. I would say, as you look at our company today, we derived a substantial amount of EBITDA from these internal care integrations. It's primarily from the majority of our provider patients. Every single one of them has an important medication management need and regimen. And for the majority of our provider patients we serve, we're also providing medication management, the pharmacy services in a more coordinated way. I mean, that's upwards of about 35,000 additional referrals a year, and upwards of about double-digit amount of our EBITDA in the 10% to 15% range. And so it is a significant adder to what we do today in addition to providing better outcomes for our people. As we look forward, there is a much bigger opportunity. There are upwards of over 400,000 to 500,000 additional referrals a year that we could potentially be taking if we were to serve all of the services and needs that our patients have today. That is our goal over the next five to 10 years to continue to drive more integrated care. It would more than double the company if all we were doing was fully serving all of our patients' needs because we have those care capabilities today. So it's a huge opportunity going forward. It's meaningful today. I wouldn't though want to lose sight of the fact that we have core service lines that are demonstrating best of breed growth in each one of its markets through its external referrals, obviously first and foremost. So we view the internal integrated care opportunity as a significant adder to leading businesses in their own right, in their markets. And then going forward, if we have this care capability, the ultimate opportunity, is not to drive more internal care integration for more volume, but it's to leverage those skills in home-based primary care to drive, to serve our patients in value-based care models where we are starting to more derive the economic benefits for the great outcomes that we produce every day. That's a potentially nine figure EBITDA opportunity as we look out four, five, and six years and beyond and something we're really leaning into. Is that helpful?

Yes, that's super helpful. I wanted to ask one separate question just on the longer-term margin targets, the 6% to 7% that you're talking about for EBITDA margins. Given the growth and margin rates of your businesses, you've got some natural mixed pressure and we've ended up kind of on the lower end of that range. Can you talk about the offsets to that mixed pressure, whether it's a margin at the business unit level, corporate leverage or otherwise, and what would need to happen to kind of make progress and move more consistently into the higher end of that range?

Yes. We've seen margin stability in every single one of our business lines, right? So to the extent you've seen any EBITDA margin change in our company, it's purely due to business mix as we have a very high performing oncology, specialty pharmacy business that continues to ramp at rates, double and triple the rates of the industry. That's a good thing. So the EBITDA dollars for the organization and the growth we're driving from that is nothing but a good thing. That said, if you were to step back and look at the aggregate margins, we think we're going to continue to focus on efficiency initiatives and operational initiatives as, in particular, our infusion in home health and hospice businesses continue to scale. We think there's opportunity there with scale and further best practices with our leadership teams. And then at the corporate level, one of the obvious benefits of our company is, if the procurement and purchasing synergies that we were able to drive across the company and leverage our infrastructure. Just as we sit here today, there's another $12 million of OpEx annualized that we think is going to start to come online in terms of savings in the April, May timeframe. We've got an initiative on the coding side and one of our businesses in the company that we think could be a $10 million opportunity. And so we are always looking at those opportunities in the organization. So, whether it's terrific continued EBITDA dollar growth, and specialty, whether it's opportunities, 1% to 2% margins as we scale certain businesses, or whether it's continuing to leverage the unique sides we have to drive efficiency across the organization, you add all those three things up, and that spits out the range that we would expect to be in over the next three years from an aggregate perspective at the enterprise.

And our next question will be coming from Brian Tanquilut of Jefferies.

Congrats on the IPO and the quarter. Jon, maybe just to follow up to the answer that you gave Jamie to his second question. So if we're thinking about the growth rate for the company over the next three to five years, where would you set that? And how should we be thinking about the key drivers there? And maybe also how that compares to historical growth rates, right? Is that just conservatism or just curious like how you're thinking about growth in general?

Yes, thanks Brian. Hope you're doing well. Look, we envision growth rates into the future being consistent with our historical growth rates. I mean you look back over the long-term, our six-year CAGR is 14% as a company. Our three-year CAGR is about 12% as a company. For a company of our size within healthcare services, I think there's been one other company, maybe a clinical trial support company of our size that has produced those sort of growth rates at over 500 million a year over the last 15 years. So we're in some pretty rarefied territory when it comes to growth rate. I think our historical growth rate in the S&P would put us in the top 10% to 15%, another benchmark. Our expectations over the next five years are for the same. I think there is a little bit of normalization in growth rate with scale and potentially conservatism baked in, as you said. But nothing has changed about our expectations for growth in the company. We have never been more excited about the growth levers we have in the organization. When you look at our combined platform and our ability to drive both growth in our core service lines and then incremental growth, through internal care integrations and value-based care in the future and our ability to uniquely drive accretive acquisitions comparatively, we've never been more excited about our growth. January and February were a record, two more record months in terms of volume on the pharmacy side of our business. I mean, just incredible volume results in January in particular in our pharmacy business. And so nothing has really changed about our outlook. We previously communicated mid to upper single digit growth rates organically. We think for a company of our size, that's very good. We supplement that with a very accretive acquisitions, but our goal as a company is to drive double-digit growth. And we've got a lot of unique levers to be able to do that. And that's going to continue to be our focus.

Now that's awesome. Maybe Jim, just a quick question on the guidance. Curious, what is embedded in there in terms of acquisitions? And then just the DIR stuff, just to clarify. If you can quantify how much is in there, and what is the potential upside from those payments. Thanks.

Yes. Brian, thanks a lot. Good to hear from you. So the guidance is consistent with the way we've been talking about it, and consistent with our expectations. We have about half credit for the quality incentive in '24 with some conservatism in several businesses, including pharmacy, for the balance of the year. And we're confident in our ability to achieve that 550 to 564 range for adjusted EBITDA for the year.

And Brian, that number assumes no acquisitions.

Okay, got it. That's what I was going to ask. Awesome, thank you guys and congrats again.

The next question will be coming from AJ Rice of UBS.

Just to maybe drill down, because I think there are some questions about what's in and what's not in those specialty quality incentive payments. So you booked $30 million in '23. It sounds like you got $16 million in your '24 outlook. Is there anything magical about 16 that you know you got that versus the 30? Why the 16? And then is that number something that could conceivably grow? I mean, is the upside potential to 30 or is there some reason to think, given the growth in the business, that there could be even more than that if you hit everything you're hoping for? Just give us a little more specific flavor on what's in, what's out, and how you ended up with that number of 16 for this year.

Yes. Thanks, AJ. I'll just say again that the number included in our 2024 forecast or arrange today is 100% consistent with everything that we had communicated to people during the roadshow in months back. So, nothing has changed around that. Look, there is some tiering structure, to some of these incentives where you can have some variability. As we look out into the year, we did want to apply some conservatism, and we wanted to land on an assumption that would give us confidence in our guide in all potential scenarios, and to achieve our guide under any scenario. That's really what was embedded in our thinking, but the numbers that you quoted are correct, and we're optimistic that if history occurs again, given our very, very unique quality capabilities in this company that there could be some upside there.

Okay. And just maybe drill down a little further on the acquisitions. So there's no acquisitions baked in for your outlook for '24. Give us a little flavor for what the pipeline is. Obviously, that you have a wide array of businesses in their particular areas that you're focused on for acquisitions. And as you're thinking about how those acquisitions get valued and what prices you're able to obtain on that, has there been any change in thinking on that?

Yes. I know that's another area of complete consistency. Our acquisitions pipeline has been as large as ever, as attractive as ever. Most of our deals are proprietary, given our relationships. Many folks want to sell through our company. They look at us as a winner in the future of health care and a long-term home. So we have tremendous access. Our pipeline has 100 potential deals in it at any point in time. We're very measured and deliberate about the deals we do. Historically, our average pro forma multiple on acquisitions is 4x EBITDA. And so there's a lot of potential value creation there, obviously, in addition to using acquisitions as a strategy to continue to drive market density in targeted geographies. But this will be an entirely consistent year from our perspective. We have several deals that we would expect to close in the March, April timeframe. Two in particular are going to be bread and butter, just small tuck in deals and geographies, actually it's sub-3x, EBITDA. Again, a capability I think that few other companies have, and we will continue to use an advantage and to use very judiciously. A lot of these acquisitions are also deleveraging, just given our ability to drive operational execution after we buy them, and to leverage our scale and synergies at our company to drive these sort of multiples. That's really just another benefit of our one company platform and scale is our ability to drive these multiples, not only through our operational prowess, but through our cost energies that we're able to drive in when we integrate them within 30 days. So we would expect a typical level of M&A. We've guided, I think, to 7 to 12 range of acquired EBITDA. Again, it's something that we have the ability to dial up or down a little bit, but we are very deliberate about any transaction we do. We have an almost 100% track record of growing acquisitions that we've acquired. And so that's going to be a consistent view, nothing changed going forward for the organization.

And our next question will be coming from Joanna Gajuk of Bank of America.

So I guess maybe just a quick follow-up on the discussion around the QIP, the quality payments, to the point of the likelihood you actually get the same amount, and when will you do?

Yes. Joanna, that plays out later in the year. We should have more visibility through Q2 and Q3 on that. And I would just reiterate that we do have confidence in our guide in all potential scenarios and to achieve it under any scenario. So again, just given our quality results, our ability to get some of these incentives in the past is extremely unique versus other companies. But this is all done through third party, quality measures that roll in as the year goes on. But we would expect to have some visibility going forward. And hopefully if history repeats itself, that would be incrementally good news for the organization.

Thanks for that. And my question is around, I guess, some other comments you were making around the organic growth and you outlined in the slides and you talk about long-term growing high single digits. Can you, and I know in the slide you also talked about 9% organic growth CAGRs, the last couple of years. Can you give us the organic revenue growth for Q4 and the full year? And, or maybe the other way to ask a question would be, the metrics that you gave at say home health care [indiscernible] grew 8%, how much was organic of that 8%. And also as it relates to your guidance for '24, what number do you assume and also specifically how many de novos are assumed for 2023, or '24, sorry.

Yes. Thanks Joanna. I'll start first and turn it over to Jen. We'll go in reverse order. So for 2024, that's an organic number. And we're going to assume and we're executing on a pretty consistent level of de novos in the organization, it will probably be in the high teens ultimately across our service lines. Those are very high return on capital endeavors that help us further penetrate markets and states and build market density. Jen, I'll turn it over to you for any historical and 2023 organic revenue growth numbers.

Yes, good morning, Joanna. You asked first about Q4, and that the revenue growth rate is 22.1% for the quarter. That represents almost entirely organic growth. We had very few acquisitions, as you know, in 2023 as we were approaching our IPO process. And of note, there was very little revenue contribution associated with those particular acquisitions. In Q4, as we noted, we had 3.8% organic growth from an EBITDA perspective. And as we discussed that that was actually impacted by the one-time payer rate adjustment in the year-over-year related to a Q4 2022 payer rate adjustment that we booked. So that growth outside of that would have been 12.7% higher. And it continues, the momentum that we had in Q3 where we had posted 13% organic EBITDA growth in that particular period. As you look at the year, our growth associated with the full year is actually largely organic for the same reasons that we mentioned.

Okay. That's helpful. My last question. When it comes to guidance, any comment on operating cash flow for the year? You talk about some savings of the interest expense, but I guess there's also the settlement payment. So how should we think about the '24 operating cash flow? Thank you.

Sure, Joanne. When you think about operating cash flow, in 2023 we generated $211 million of total cash flow. That number will certainly increase going into 2024. We believe it will approach around $300 million in 2024 with the inclusion of the TEU as a partial drag on that number. And also normalizing for working capital. As we discussed previously, working capital was net favorable during 2023 in returns to a normalized level in 2024. So we're expecting between 275 and 300-ish around on operating cash flow.

Our next question will be coming from Whit Mayo of Leerink Partners.

Jon, maybe just an update on timing of the acquisition of the I-SNPs, maybe just some more color on that, the size, which markets, the overlap you have with your current platform, and maybe just elaborate on any additional strategic thoughts that you'd like to share on that.

Yes, sure. We went under definitive on that win in December. It's a small deal. We expect about 2.5 million of annualized EBITDA before we grow it further. It's at a modest multiple of about 7x. For anything, obviously, in that sort of a space, that's actually an incredibly low multiple, and that's how we operate. We take baby steps to get into these things with almost zero risk. So that again is a reflection of our value-based care strategy where, as I said, we are looking to have internal payer models, which are ACO capabilities. 2023 was the first year that we had an ACO capability to derive shared savings on our own patients, our patients under our home-based primary care clinicians. And then the other angle on internal payer sources is more managed care models because ACOs are Medicare shared savings models. So from the managed care model, you have I-SNPs and D-SNPs where you are taking risk. This is a baby step into that in Kentucky and Tennessee. We would look to expand that organically in about 20 more states over the next five to six years. That's an annual process that you have to work through to get those approvals in new states. And again, the rationale is that if we are the primary care for a growing number of patients and we have access to 300,000, 400,000 people every year through our pharmacy and patient base that can go under our primary care. We know these patients already. How can we manage them ourselves with Medicare and then managed care models? And so the I-SNP is, if RNPs are going into skilled nursing facilities and senior living communities every day, if they're going into people's homes on home health every day, those people are all eligible for I-SNP and D-SNP plans. So if they can join our plan side-by-side with an ACO, if they're straight Medicare, we have it covered from being able to offer our patients our internal plans. Now with those care management capabilities that we have, we are also looking to partner with payers to do the same thing and to more optimally manage their members for them, obviously, in a different payment construct. We're talking to several right now. Our goal is certainly over the next year or two to start to execute with multiple payers externally to drive these very unique outcomes and reduce hospitalizations for them as well. People are very excited to do that, in those conversations have been going on, for a decent period of time now.

That's helpful. Maybe just an update on just on labor. I know pharmacy isn't really an area of concern, but maybe just on the provider side, I think maybe a little bit more inflation on low-skilled labor, just what you have in your plan. How that's trending versus prior years, just anything that gives us a sense of how confident you are that you have your arms around it, maybe 100 million of stock grants is the answer, but just any thoughts would be helpful.

Yes. No, sure. I mean, being several years past COVID, I mean, things really settled down, going on two years ago in the labor market, at least for us. And even during COVID, our retention improved, our hiring numbers went up every single year for the last seven years. Our hiring numbers have gone up, and our retention has improved. And so we've had a unique ability to do that. Our model assumes sort of that 3% to 4% labor growth increase, which is pretty customary. That's the world we're in today. And we just continue to manage it really well. You're exactly right on the pharmacy side. Just given the ability to scale that model from a labor perspective, we've got about a million dollars of revenue per FTE on the pharmacy side. So, $100 million for the pharmacy, you only need 100 people, it's a great labor model. And then on the provider side, people want to work at a company that focuses on quality. We've continued to invest in our teams repeatedly through comp and benefits and training, career ladder programs. We have partnerships with nursing schools. We started an international sourcing program for nurses two years ago. Those people have, it takes forever. Those people have started to come here now. They will this year. So we just really attack it from multiple angles. We view HR as an area of competitive differentiation, and our numbers have proved that out. So, we also benefit from our settings. On the pharmacy side versus retail, I think people really prefer to work in our sort of closed-door pharmacies. And then on the provider side, a lot of people really want to be out and about. They don't want to be in an institution and they love our settings. And so labor has been a massive focus for the company. We have a great, great, great culture. And I love where we're at. That is not an area of concern whatsoever for us as we look at the year and the next couple of years.

And our next question will be coming from Stephen Baxter of Wells Fargo.

So your revenue growth in the pharmacy business has been really impressive in recent years. I guess first, can you help us understand the assumptions you're making in the revenue growth guidance for the pharmacy business for 2024? I guess how should we think about how you're approaching further LDD launches and generic conversions and the guidance? And what could be potential drivers of upside as the year plays out. And then just to kind of put a pin in the discussion around the quality incentive payments, just confirming that your expectation is still that 2024 is the last year for these payments, regardless of whatever the ultimate amount turns out to be. Thank you.

Yes. Hey, Stephen, thank you. On your latter question, the answer is yes. And then on your prior questions, yes, look, we've been able to grow a pharmacy around a 20% CAGR over the last three and six years. It's actually accelerated to 22% in three years versus a six-year CAGR of 20%. Obviously with our scale, those are very, very big numbers and big numbers comparatively. I would point out that the provider business also has grown its revenue CAGR at 10% historically. It's a 10% six-year CAGR and an 11% three-year CAGR. And it's a broad based growth in the organization from what we consider to be best of breed businesses in the company. As we look at 2024, again, I would just reiterate that as the businesses continue to scale, I think there could be some conservatism based into our number in terms of revenue growth for this year. And I would just add that nothing has changed in our outlook from in terms of going forward versus where we've been historically. We're as focused as ever on driving best practices in our business and driving, unique multiple growth levers that that we have access to. And we're coming off January and February where we just where we saw the most referrals and volume, we have ever had.

And our next question will be coming from Ann Hynes of Mizuho Securities.

You're talking about guidance. What are the key assumptions that would get you to the low end, and what are the key assumptions that would get you to the high end? And then, secondly, just on leverage, I know your target leverage is below 3x over the long-term. Can you get more just on an intermediate goal for maybe 2024 and 2025, and what your definition of long-term is when you think you can get below 3x? Thanks.

Yes. Thank you for the question. I mean, look, on the range for this year, the range is really around the midpoint of what we had communicated before. I think if we just stay on plan and on track, we feel very good about that number. If we continue to improve like we would expect, hopefully we can beat it. We talked about some potential quality incentives as is upside in the number as well. As we think about leverage going forward, 3x is our long-term goal. I mean, our long-term goal is below 2x, right? What's long term? As you look out long-term five years or so, but we want to continue to drive to drive leverage as low as we can for -- into the future. I mean, if you look at our cash flow profile now, you're probably looking at a couple years, 2.5, three years to get to that 3x number. That's how we think about it.

Our next question will be coming from Jack Wallace of Guggenheim.

I just wanted to double-click into the value-based care strategy and marry that with the capital deployment. It sounds like to me de novos are going to be the -- versus M&A, are going to be helping to unlock that capability, thinking about the primary care element there. But the second part of that is how much EBITDAs are you getting from value-based care and it's just today? And if you could kind of help us wrap our models around how much -- you kind of de novos are going to be pointed at primary care to unlock additional diabetes care even on the next couple of years. Thank you.

Yes. Thank you. So as we refer to “de novos”, I mean, that's really opening, new pharmacies, infusion suites, new home health, hospice, branches, rehab, outpatient clinics. De novos for home-based primary care in the sense that yes. Our first strategy with home-based primary care and value-based care is to grow it out organically and just hiring up our doctors and NNPs. That's really what our focus is. The patients are there. In the thousands and hundreds of thousands we're managing, we'll be managing about 20,000 patients at least by the end of the year. But we hope that number scales dramatically, orders of magnitude larger in the next three to four years. So it's really ramping up. Our clinician count to be able to do that across, call it our 20 target states over the next five years or so. There are some very small tuck-in opportunities where you acquire a clinician here or there in a market or a practice of 10 clinicians. But the way that we practice home-based primary care is different. We go to the home, which we feel like gives you the best care outcome and biggest impact on cost reduction. There's not a lot of comps that do that. There's really just several regional ones, and then it gets much smaller from there. So we are looking to build out a model on a national scale that really hasn't been done before, but it is an organic strategy. Again, we are leveraging the service lines in the patients that we have in pharmacy and provider. That's the whole point. That's what's unique about us is we have access to these patients today. And then with these capabilities, your step change could occur and your acceleration could occur, if you're able to do this for external payer partners as well in addition to your own internal patients that you're serving in primary care. So our ability to provide these sort of high quality and very impactful outcomes for payers as well, that is where you could see some step change and some acceleration. Over the next few years and why we have both an internal and an external payer strategy. For 2024, our expectations are to be in the mid-single digits of EBITDA. Again, this is an initiative that really we started building out 12 to 18 months ago. True to our form, we've never lost money on this. We don't go make flyers and bets. We don't go lose $40 million a year building something out. That is not what we do. We were able to leverage our platform to slowly start building this out in a very common-sense way. But we hope to accelerate it into the future in our five-to-seven-year plan is that this becomes 20%, 25%, 30% of our EBITDA from the company. But it's going to be a build out over time and one that's mostly focused on organic.

And then as a follow up to that, is there any material, backend infrastructure investments you need to make in order to -- you take on that additional risk and whether that's market dependent or kind of more, national company platform wide? Thank you.

Yes. No, as we've been building this out over the past 12 to 18 months, our focus has been on the operational and infrastructure and data side. That's actually why we haven't probably grown as fast in the last 12 to 18 months. We didn't want to take 20,000, 30,000, 40,000 patients before we had all of the infrastructure and capabilities in place. And so '23 was the first year where we were in an ACO. And so the data and the analytics and the real time patient monitoring and cost controls and triage and stratification of your patient base, our ability to do that internally and to have that daily level of visibility to manage external contracts as well, that is in place today.

Our next question will be coming from Pito Chickering of Deutsche Bank.

Can I follow up on Stephen's question? Just on the pharmacy, you drew 30% of the fourth quarter and guidance is about 7.4% at the midpoint. Is there a wave of a limited distribution of drugs between '22 and '23 that are slowing? Just trying to bridge the four key results of '23 guidance. I get the law of large numbers, but is there anything structurally different in '24 than it was in 23?

No, there's not. We're up to 116 limited distribution drugs. Again, we're winning those [indiscernible], based on our quality results with manufacturers and our other data and hub and value add programs that we're able to offer them. We expect to win another 12 to 16 of those drugs, depending on what comes out of the pipeline this year. But nothing has changed in terms of our outlook. We've got a really strong position just given our quality and our relationship with the trade and nothing's changed in terms of our outlook and our enthusiasm on this market going forward.

All right, great. And the second question is on margins. I guess they're a guide to compress a little bit. Can you just give us the detail on the interplay between the gross margin pressures from pharmacies or that mixed impact versus any gross margin impacts, head or tailwinds actually on the provider side, and how you offset that with SG&A leverage? Thanks so much.

Yes. I mean, look, I mean, as I said before, our growth and specialty, it's good growth. It's EBITDA dollar growth. Our services are really high-value add, our margins tend to be in line with the industry. On the specialty pharmacy side, these are the margins of the industry, where we feel like we're a best-in-class player, certainly from a growth perspective, in that business, continues to hopefully scale. You will see some level of margin impact on the company as that business just continues to scale. That's math. Now we feel like that will be offset by growth in the other businesses as well and what we're able to do by leveraging the platform in our scale. And so, as mentioned really before, it's a combination of, I would say really five factors, and I'll wrap it up maybe with this. Number one, you've got that outsized growth in specialty. Number two, though, we expect to see very strong growth across all of our service lines that are higher margin. Number three, we're able to leverage our platform scale and drive efficiency programs, I mentioned before. We feel like we've got $25 million at least sitting out there that we're going to execute on over the next 12 months. Number four, our ability to do accretive acquisitions. When you look at that multiple and do the math on the margin that we're we are buying at 4x that's upside favorable pressure on our margin. And then number four, as we're able to continue to scale value-based care into the future, that's going to be significantly higher margin too. And you sort of pull all those together, and that's what makes us really confident and being able to both grow the revenue of the company and over the next three years, have a very stable EBITDA margin as well, just given the favorable combination of all those factors.

Thank you. At this time, we'll be turning the call back to Jon Rousseau for closing remarks. Please go ahead.