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Healthcare - Medical - Care Facilities - NASDAQ - US
$ 21.93
-1.17 %
$ 3.73 B
Market Cap
18.43
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2019 - Q4
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Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Option Care Health Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Mike Shapiro, Chief Financial Officer.

Please go ahead..

Mike Shapiro

Thank you. Good morning everybody and thank you for joining us for the Option Care Health fourth quarter earnings call. I'm joined this morning by John Rademacher, Chief Executive Officer.

Before we begin, please note that during the call we will make certain forward-looking statements that reflect our current views related to our future financial performance, future events and industry and market conditions.

These forward looking conditions are subject to risks and uncertainties that could cause actual results to differ materially from our comments. We encourage you to review the information in the reports we file with the Securities and Exchange Commission regarding the specific risks and uncertainties.

You should also review the section entitled forward-looking statements in this morning's press release. 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 in this morning's press release posted on the Investor Relations portion of our website. And with that I'll turn the call over to John..

John Rademacher Chief Executive Officer, President & Director

masks, gloves, gowns, cleaning solutions and sanitizers as well as manage our strategic supply chain to mitigate product or medical supply shortages. At this time, we have not encountered any material disruption to our operations. We will keep you advised if the situation should deteriorate.

With that, I'll turn the call over to Mike to walk through the fourth quarter results and our 2020 guidance.

Mike?.

Mike Shapiro

Thanks, John. As previously mentioned, overall, we're quite pleased with the progress achieved in the fourth quarter, which is evident in the financial results reported this morning. Before I dive into the results, note that Q4 is the first full quarter as a merged enterprise.

And as a result, I'll be comparing results to the combined prior year results of the two stand-alone organizations. Q4 revenue of $720.8 million represented comparable revenue growth in the fourth quarter of 4.6%, up from third quarter growth rates as we saw improved commercial traction, mainly in our portfolio of chronic therapies.

Underlying our revenue acceleration, we also drove our provision for bad debt and contractual adjustments below 3% on a combined basis despite headwinds from legacy BioScrip reserve levels, as discussed on the third quarter call.

Our cash velocity continues to steadily improve as cash collections are ultimately the best measure of our revenue cycle performance. Gross margin of $175.6 million represented 24.4% of revenue. Given P&L geography differences for certain expenses in legacy financials, gross margin comparison to prior year is challenging.

However, we estimate that gross margin dollars grew in excess of 6% on a comparable basis, implying an expansion of gross margin rate over the prior year. Margin expansion was driven by our continued focus on operational excellence and driving spending leverage as well as procurement synergies from our integration efforts.

Spending of $144 million in the fourth quarter included approximately $19 million in integration and transaction-related expenses. Excluding those items, SG&A represented approximately 17.4% of net revenue as we continue to aggressively manage spending levels and drive initial synergies from streamlining functions.

Adjusted EBITDA of $53 million grew 70% over Q4 of 2018 on a reported basis or 24% on a comparable basis. Additionally, EBITDA margin was north of 7% in the quarter.

As we aggressively integrate the organizations and focus on spending discipline, our ultimate measuring stick is EBITDA margin, and we're very encouraged by the leverage we drove in the fourth quarter. Net loss of $0.09 per share reflects the ongoing integration expenses and higher interest expense relative to the prior year.

As announced on February 3, we recently completed a one-for-four reverse stock split. And all per-share metrics, including those in our soon-to-be-filed 10-K, are reflected on a post-reverse-split basis as if the split were in effect for all reported periods as required under U.S. GAAP.

Shifting to cash flow, we generated over $22 million in cash flow from operations in the quarter despite funding ongoing integration efforts. Our cash performance in the quarter is very encouraging as it reaffirms our conviction in the cash generation potential for this enterprise.

We remain relentlessly focused on cash collections and drove an $11 million reduction in net accounts receivable in the quarter, which helped improve our bad debt reserve levels.

In the fourth quarter, we also invested $15 million in capital expenditures to accelerate IT infrastructure and initial facility remediations, which are foundational to our integration efforts in 2020.

Despite our higher level of investment, we still generated free cash flow of $14 million in the fourth quarter as cash balances increased to $67 million at year-end. And with availability on our ABL, we exited the year with more than $200 million in total liquidity.

And before I open the call to Q&A, I want to make a few comments regarding our 2020 full year guidance as outlined in our press release this morning. For the full year, we expect to generate net revenue of $2.83 billion to $2.9 billion, which represents comparable full year growth of approximately 2.5% to 5%.

Net revenue is inclusive of our bad debt and contractual adjustments, which we expect to be below 3% for the year. Also, we expect to generate between $200 million and $215 million in adjusted EBITDA, which reflects our ongoing growth and spending leverage along with the impact of synergies, which will contribute to our growth in 2020.

Based on our guidance, this implies that we will drive adjusted EBITDA margins north of 7% in 2020 for the full year. And while not in a position to provide granular synergy guidance, we exited December approximately 25% to 30% complete on our integration efforts and expect to be around 90% complete by the end of 2020.

And we remain highly confident in delivering at least $60 million in net synergies upon completion. We also expect to generate cash flow from operations of at least $50 million in 2020. Translating earnings growth into cash and improving our leverage profile are critical priorities.

And based on our guidance, that translates into a net debt to adjusted EBITDA leverage ratio of approximately 5.5 times by the end of 2020 as defined by our credit agreement.

In addition, as we've mentioned previously, we expect to generate positive free cash flow in 2020 even after our continued capital investments in facilities, technology and quality initiatives. So overall, we expect to deliver strong earnings growth in 2020, translating into solid cash flow and an improved capital structure.

And with that, I'll turn the call over to the operator. And we’ll open it up for Q&A.

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brooks O'Neil with Lake Steet Capital. Your line is now open..

Brooks O'Neil

Good morning guys. And I'm happy to see your fully functioning, publicly traded company and doing great. Congratulations..

Mike Shapiro

Thank you, Brooks. Good morning..

Brooks O'Neil

So one of the questions I had was, if you, Mike, could give us just a little more color on how you get to that 5.5 times net debt to EBITDA by the end of 2020. I mean I'm decent at math, but I'd love any color you can provide on what the equation looks like..

Mike Shapiro

Yes, sure Brooks. It's relatively simple. Obviously, when you look at where we are from a gross debt perspective, again, in my prepared remarks, we expect to generate free cash. We're not in a position to give specifics on the level of free cash flow.

But based on our EBITDA margin, we think that, that translates under the definition of the credit agreement into 5.5 times..

Brooks O'Neil

Okay, that’s good.

As you think about the whole situation with coronavirus, and I appreciate John's comments, are there any areas where you anticipate significant drug shortages at this time? Or you have significant exposure to, say, the key active ingredients being manufactured in China today?.

John Rademacher Chief Executive Officer, President & Director

look, we’re monitoring this on a national basis but really looking at it on a market-by-market basis. And as you hear in the news, it’s affecting localities different in the way that the disease is spreading and/or the number of patients within that.

And so we have kind of a national response and managing it as part of a command center-type environment but also looking at things at a very localized basis and responding to the local needs..

Mike Shapiro

And Brooks, the only thing I’d add is, as we’ve invested considerable effort and resources over the last six months to remediate and build on our relationships with our suppliers, the benefit is, for the most part, our procurement relationships are domestic.

However, we are proactively working with our supply chain partners to understand where they may have APIs that’s sourced overseas.

And given the health of our overall working capital, we do have the flexibility, as John mentioned, to make some strategic investments, both in med supplies as well as some of the therapies, again, with the veil of absolutely ensuring continuity of care for our patients..

Brooks O’Neil

Absolutely. That’s great. Let me just ask one more, and then I’ll turn it over.

Can you just sort of handicap a little bit where you see the biggest uncertainties or – and/or biggest opportunities in the synergy capture now that you’re seven months into the integration effort?.

John Rademacher Chief Executive Officer, President & Director

Yes, Brooks. From my perspective, we are still in the early innings. A lot of the work that we did to realign our commercial team, again, we’re feeling positive about the momentum there. But as I said in my comments, there is – it does take time to restat relationships and really to start to build that momentum behind it.

And so I think we’re trying to be very disciplined and thoughtful in the way that we’re approaching that and building that ahead. The quicker we can accelerate that top line, I think, is both a risk and opportunity as we’re looking at it. And I think that’s an area in which we are focused.

The other thing is we took a little bit of a fire break in our activities around integration efforts as we came to the end of the year, given all of the activities for year-end close as well as preparation for benefit verification and reauthorization.

And so we took a little bit of a pause to make certain that our teams could be very focused around all of the aspects there. We will start to ramp that back up as we move to the back half of Q1 and accelerate through the year. And so there’s a little bit of slowness in realization, I’d say, in the first half accelerating into the back half.

Mike, anything else you’d add?.

Mike Shapiro

No..

Brooks O’Neil

That’s perfect. Thank you very much and keep up all the hard work..

John Rademacher Chief Executive Officer, President & Director

Thanks, Brooks..

Mike Shapiro

Thanks, Brooks..

Operator

Thank you. Our next question comes from the line of David MacDonald with SunTrust. Your line is now open..

David MacDonald

Hi, good morning, guys. A couple of quick questions.

First, just can you talk a little bit about the payers? And in these conversations, just receptivity around narrowing of networks, talk a little bit about any opportunity and the receptivity of these payers to increasingly move some of the more expensive infused products out of the institutional setting into the ambulatory infusion suites.

Just kind of a quick download on the conversations with payers..

John Rademacher Chief Executive Officer, President & Director

Yes. Thanks, Dave. Those conversations are happening in earnest. I think as we have talked about before, site-of-care initiatives are front and center for many of the payers, especially with the high-priced chronic drugs and being able to provide care in these alternate settings. We are working through the programs as we had identified.

And the thing I will identify with both the Aetna and the United contracts, just because we highlighted those, they are in a process of putting together a preferred network, and we are very honored to be part of that preferred network that they’re putting together with that.

But setting appropriate expectations, that’s a fishing license in which we have to go out and hustle every day to make certain that we’re getting those referrals and we’re bringing those patients on to service under the care of Option Care Health.

And so we’re working with them as they’re narrowing their networks and helping to initiate their site-of-care initiative. And we do it in a way in which, again, we have to be out hustling every moment to make certain that we’re capturing those referrals and that we’re bringing those patients successfully on to service..

David MacDonald

Okay. Mike, just a quick question on 2020.

Is there anything you would call out in terms of working capital we should be thinking about for 2020? And when you look at some of the legacy BIOS challenges and some of the vendor true-ups you guys have seen since the merger, are those largely – are you kind of largely where you need to be in terms of that? Just anything on the working capital side..

Mike Shapiro

when you look at the two stand-alone organizations at the end of 2018, there was $425 million in accounts receivable. We just reported this morning ending AR balance of $324 million. We literally took $100 million out of the AR balance.

And at the same time, when you look at the payables balances year-end, year-end, we’ve reduced it more than $30 million. And so where we’re entering 2020, we’re in a very, very productive spot from a working capital perspective. And so look, we clearly benefited from a cash flow generation with monetizing a lot of the AR.

And we’ll never spike the football and say we’re done on AR reduction. But I think going forward, we’ve got a very efficient working capital position and gives us flexibility to respond to market factors, such as some of the current supply chain dynamic..

David MacDonald

Okay. And then just last question for me. I think the number you had said is that you expect the integration to be roughly 90% complete exiting 2020.

So as we think about kind of exiting 2020, with a lot of the integration lift behind you, is there any reason to not think that we should see your organic growth rate accelerate to kind of at least in line with the industry and maybe a bit better as most of the integration lifting is done?.

John Rademacher Chief Executive Officer, President & Director

Yes, Dave. I think as – our view has been, and again, through our work that was done immediately post close to get the commercial team in place and moving forward, our expectations are that we will continue to see that acceleration as we move through the year. Remember, there is a lot of work that was done.

I think we had said on the third quarter call, about 45% of the team got new assignments with either new territories or new customer base. And so expectations are that will start to build as we move through the year, and we’re thinking about how we would exit..

David MacDonald

Okay. Thanks very much, guys..

John Rademacher Chief Executive Officer, President & Director

Thanks, Dave..

Operator

Thank you. Our next question comes from the line of Matt Larew with William Blair. Your line is now open..

Matt Larew

Hi, good morning. I actually wanted to follow up on that issue on growth, which is coming off obviously a nice sequential improvement here in Q4.

Can you just kind of help us understand, Mike, maybe what would push you towards the higher or lower end of that 2.5% to 5%? And how do you think about the pacing? I think you mentioned you might – we maybe should expect it to accelerate throughout the year? And as a component of that, is there additional territory reallocation, personnel changes, et cetera, that you’re expecting that might affect the pacing of the growth profile throughout the year?.

John Rademacher Chief Executive Officer, President & Director

So Matt, let me start, it’s John, on kind of answering that, and then I’ll turn it to Mike for some of the other details. So as we’ve talked about, we do have network consolidation that is part of the overall synergies.

And we expect that – again, we’re doing everything we can as we look at those opportunities to optimize the network, to minimize the amount of impact that, that may have within the market. But that is contemplated in the growth numbers that we provided is, we know that there is an opportunity for disruption.

Again, we’re doing everything we can to minimize it there. But that is contemplated in the way that we’re approaching it, knowing that, that work really will start to ramp up as we go through the year as we move past the firebreak..

Mike Shapiro

Yes. A couple of things I’d just add, Matt. First and foremost, there is some seasonality in this business, as you know, watching this industry for numerous years. We typically do see lower growth in the first quarter, deductibles or [indiscernible] as people change insurance plans, and care is adjusted.

What I would say from the range perspective, a couple of things. As John mentioned, the fourth quarter, we’re very encouraged. That was more driven on the portfolio of chronic therapies, which, as you know, can be a more dynamic portfolio of therapies relative to the acute.

And I would say that we continue to refine the resources to ensure we’ve got the right coverage and reach into the health systems and referral sources. The other thing I would just add real quick is, you know that in our revenue, that also encompasses the pharmaceutical costs.

And given the magnitude of our chronic portfolio, those are mostly branded and subject to ASP variability throughout the year. And rather than try to explain why we’re above or below given certain ASP shifts and try to reconcile after the fact, we try to put out a range that would accommodate variability in ASP for certain therapies along the way..

Matt Larew

Okay. Understood. That’s helpful. And then just a follow-up on some of the payer dynamics. United, on the lab side, their preferred network, has talked about making benefit design changes that might incentivize both patients and doctors to participate in the network.

Just curious if that’s something that you’ve discussed with respect to alternate site infusion.

And then in any of the conversations with payers or systems that you’re having, is there an opportunity to share in some of the cost savings through the site redirection initiatives?.

John Rademacher Chief Executive Officer, President & Director

So to – I guess to directly answer your question, look, we’re in those conversations today, and that is the next frontier for a lot of the conversations with the payers is they are looking at benefit design change to provide appropriate alignments and incentives for patients to choose the right site of care to receive their therapy in that process.

Nothing I could go into detail on that, but those conversations are part of the broader discussions around how to deepen the partnership and provide a high-quality, appropriate cost solution for the members.

On the work with health systems and the conversations that we have there is, look, we have a significant number of different relationships across the country as we’re thinking around how to better partner with them.

Certainly, we have 340B programs that provide savings back to the organizations, those entities for patients that are served that qualify for the 340B savings initiative.

We have also quality management programs that we work with them on that provide performance guarantee as well as helping them look at things like admission, readmission avoidance and [indiscernible] management programs as part of that.

So we’re looking across those – the spectrum to really figure out how is the best way to provide a meaningful strategic partnership with both health systems as well as with the payer community..

Matt Larew

Okay, thanks for that..

John Rademacher Chief Executive Officer, President & Director

Thanks for that..

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Mike Petusky with Barrington Research. Your line is now open..

Mike Petusky

Hey, good morning, guys.

Mike, did you say that you guys generated $14 million of free cash flow in the fourth quarter?.

Mike Shapiro

Yes. Basically, we just define that as the change in cash flow, so $14.3 million..

Mike Petusky

Okay. Okay. So when I look at cash flow from ops of $22.9 million, and then I look at CapEx of $15 million and change, typically, that’s how I would think of free cash flow.

What am I missing?.

Mike Shapiro

Yes. You’ll see in the cash flow statement attached to the press release this morning, there was a deferred financing adjustment of approximately $6 million flowing through financing. But it effectively offsets within the op activity..

Mike Petusky

Okay. Okay. Got you, got you. And I may have missed this earlier.

Did you guys give any kind of range or guide on CapEx for 2020?.

Mike Shapiro

No. Look, going forward, off of the $50 million of cash flow from ops, we’ve previously said that we think that in the first year, 2020, that CapEx would be around $40 million to $45 million. I would expect it to come in below that in the fourth quarter given the strength of some of the cash flow.

We accelerated some of the IT infrastructure investments. So we pulled forward some of the investments, and those are really a conduit to some of the integration activities in 2020. So feel very good about the investments to date.

And I think relative to what we’ve socialized previously, I think CapEx for the year will be somewhere in the $35 million to $40 million range..

Mike Petusky

Okay. Super helpful.

And then did you guys give any guidance? I may – again, I may have missed it, but on around sort of restructuring integration charges expected for 2020?.

Mike Shapiro

Yes. We would expect the onetime costs to be approximately $30 million this year. That’s consistent with – we’ve talked previously around the cost to achieve the synergies of being roughly around one time. We’ve made good progress, and there’s still considerable work, but I think a reasonable assumption for 2020 is about $30 million..

Mike Petusky

Okay. Last one. You guys said that the – to this point, no material disruption due to coronavirus.

Does your guide include any kind of sort of cushion in there for some potential impact either in Q1 or going forward or essentially no aspect of guidance includes any disruption there?.

Mike Shapiro

No. We haven’t contemplated anything specifically. As John mentioned, we’ve been trying to stay ahead of the curve. We feel very good right now about where we are from a supply chain and a business continuity perspective. So we haven’t dialed in any shocks specifically for corona..

Mike Petusky

Okay, great. Thank you..

Mike Shapiro

Thanks, Mike..

Operator

Thank you. This concludes today’s question-and-answer session. I would now like to turn the call back to John Rademacher for closing remarks..

John Rademacher Chief Executive Officer, President & Director

Yes. Thanks, Sarah. Thank you again for joining us this morning. As I hope you’ve heard in our voices and our commentary, we are very pleased with the progress we are making and, more importantly, about the potential of this business as we look forward. There is a significant amount of work ahead of us to fully integrate the businesses.

However, we have a dedicated team, detailed plans and a disciplined approach that provides us with confidence. We look forward to providing further updates on our progress in the second quarter. Take care, and thank you very much..

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..

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