Q4 2019 Earnings Call

March 5, 2020

[music].

Ladies and gentlemen, thank you for standing by and welcome to the option care Health fourth quarter 2019 earnings Conference call. At this time all participant lines are in listen only mode.

After the speakers presentation, there will be a question and answer session. The question. During the session you need to press Star then one on on your telephone.

Please be advised that today's conference is being recorded if you acquire any further assistance. Please press Star then zero I would now like to hand, the conference over to you today, Mike Shapiro Chief Financial Officer. Please go ahead.

Thank you good morning, everybody and thank you for joining us for the auction care health fourth quarter earnings call.

I'm joined this morning by John Rata maker, Chief Executive Officer.

Before we begin please note that during the call will make certain forward looking statement that reflect our current views related to our future financial performance future events and industry market conditions. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our comments we incur.

Did you to review the information in the reports we file with the Securities and Exchange Commission regarding this specific risks and uncertainties.

You should also review this section entitled forward looking statements in this mornings 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 mornings press release posted on the Investor Relations portion of our website.

And with that I'll turn the call over to John.

Thanks, Mike and good morning, everyone and thank you for joining us to review our fourth quarter results and provide an update on our progress.

This morning, we issued our press release, providing highlights for the fourth quarter as well as our expectations for 2020.

On behalf of the entire option care health team, we're very excited to provide an update on our progress and share some key accomplishments since the merger close.

Tomorrow marks the seventh month anniversary since we bought the two organizations together.

And while there remains considerable integration lift in front of US we've made tremendous progress since August.

The fundamental value creation thesis underlying the combination we articulated almost a year ago is stronger than ever.

So this morning I'd like to spend a few minutes reviewing the fourth quarter financial results at a high level and share some thoughts on the progress we've made as an organization.

I will then turn it over to Mike, who will dive deeper into the fourth quarter financial results as well as articulate our full year guidance for 2020.

Net revenue for the quarter with $720.8 million, representing a reported growth of over 42% versus Q4 of 2018.

Or approximately 4.6% on a comparable basis adjusting for timing of the merger.

Recall that as we discussed on the third quarter call. We quickly initiated the significant reorganization of our commercial team. Shortly after the merger was completed.

This had an impact on our growth in the third quarter, which was 2.3% on a comparable basis.

As we discussed at that time, we expected the third quarter could be the low watermark for growth and while we are encouraged by the higher growth in the fourth quarter. We continue to relentlessly focused on ensuring that we have the right commercial resources on the field.

This focus include the strong balance between our acute and chronic therapy portfolios.

As we know the disruption to our commercial team in the realignment was more heavily weighted on the acute selling resources.

We expect that it will take time for the benefits of the new assignments and new relationships to be fully realized.

But early indications are positive.

Our commercial optimization effort continues and we remain confident in our ability to accelerate topline growth.

Adjusted EBITDA for the fourth quarter with $53 million, representing earnings growth of 70% over the prior year on a reported basis.

Again, despite considerable integration effort in front of US we are encouraged by the earnings leverage we are starting to one leach.

At a high level, our focus on cash continues to bear fruit.

Mike will unpack the flows in a few minutes, but at a high level, we generated over $14 million in free cash flow in the quarter. Despite continued bender remediation efforts.

Increased capital expenditures to shore up the technology infrastructure.

And outflows related to the integration efforts.

I would like to recognize and bank, our patient registration and revenue cycle management teams for the great work to improve our effectiveness and increase the velocity of cash collections.

So it's early and even though the fourth quarter represents our first full quarter as a consolidator organization I'm encouraged by the solid financial results and earning leverage we are starting to unlock.

As mentioned previously we remain confident in the growth potential of this enterprise.

Today as the only independent national provider of home and alternate site infusion therapy.

We are aggressively engaging with payers and health systems to elevate the standards of infusion therapy.

Concurrent to our integration and commercial alignment activities, we have initiated constructive dialogues with several payers and systems around broadening our relationships.

We've recently announced a few of those wins, including entering into a multi year extensions with both United healthcare and Aetna that position option care, how very well in both payers preferred networks.

We have historically had very productive relationships with both United in that arena and look forward to investing further in those relationships in 2020 and beyond.

We have now established uniform contracts for each payer across the country that simplifies our relationship and open access to all markets further unique members on a consistent basis.

We remain the only alternate site infusion provider that is in network for all major national payers across the country.

We also announced that Highmark Blue Cross Blue Shield selected option care health as a preferred partner to support their hemophilia population.

We are honored to collaborate with high Mark and bring our clinical expertise to help ensure their patients received the very best care in a patient centric and cost effective manner.

This relationship continues to validate our belief that our investments in quality and clinical differentiation concrete a competitive advantage.

As we've articulated many times the merits of our merger, we're multifaceted with the obvious benefit of driving meaningful cost synergies and expanding our EBITDA margin.

But equally important we're encouraged by these early wins on a commercial Brian as it reaffirms that national scale and clinical expertise are critically important and a key opportunity for us to differentiate and again elevate the standards of care.

I'd like to provide an update from my perspective on the integration efforts today.

Every single day, we had the privilege of serving thousands of patients who rely on auction care health for lifesaving, Unlike sustaining therapy and it's a role we considered sacred.

As we planned and executed the early stages of our integration efforts. The underlying tenant has always been to maintain the outstanding level of care our patients absolutely deserve.

We're spending a considerable amount of time, making certain we get the softer aspects of the integration right.

As the same goes culture will eat strategy for breakfast. So we had been working across the organization to define and communicate our purpose mission and values clearly in effectively.

I am pleased to report that we are making great progress in operating as one team with one goal and the engagement levels of our team members across the organization our high.

To date, we have made considerable progress on realizing procurement and supply chain savings, which is apparent in our Q4 results.

We've consistently message that the procurement effort would be quicker to realization and we've made significant investments in our supplier relationships to get caught up with them and to establish new relationships going forward.

Beyond procurement, we are on track with our spending reduction initiatives and field optimization efforts, which as we previously communicated will take 12 to 24 months to fully realize.

But overall, our confidence in generating at least $60 million in cost synergy remains very high and we continued to overturn new rocks everyday looking for additional opportunities.

So overall I am quite pleased with the integration progress to date. Despite considerable our effort that lies ahead.

Finally, I would be remiss, if I did not address the situation in the world is facing with the spread of Kuroda by rest co bid 19.

Needless to say this is a very dynamic situation and we are monitoring it closely through public sources and our infectious disease Advisory Council.

Our first priority is to ensure that our employees and our patients are safe and informed about the best ways to reduce the spread of this disease.

We are working closely with all of our vendors to secure adequate supply of personal protection devices math gloves down 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 advise that 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.

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 has emerged enterprise and as a result, I will be comparing results to the combined prior year results of the two standalone 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 therapy.

Underlying our revenue acceleration, we also drove our provision for bad debt in 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 PML 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 as DNA 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, 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 as EBITDA margin and we're very encouraged by the leverage we drove in the fourth quarter.

Net loss of nine cents per share reflects the ongoing integration expenses and higher interest expense relative to the prior year.

As announced on February Threerd, we recently completed a one for for reverse stock split and all per share metrics, including 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 us 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 our cash performance in the quarter is very encouraging as it reaffirms our conviction in the cash generation potential for this enterprise.

We remain rent 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 and capital expenditures to accelerate 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 in May 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 in $215 million and adjusted EBITDA, which reflects our ongoing growth in 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, our 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 back over to the operator, and we'll open it up for QNX.

Thank you as a reminder to ask the question you need to press Star then one of your telephone.

To withdraw your question please press the pound Keith.

Please stand by while we composite culinary roster.

Our first question comes from the line of Brooks O'neil with Lake Street Capital. Your line is now open.

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

Thanks, good very good morning.

So.

One of the questions I had was if you might get was 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.

Since then Matt, but I would love any color you could provide and looking equation looks like.

Yes sure broke it.

Relatively simple you know 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 on the level of free cash flow, but.

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

Okay. That's good.

As you think about.

The whole situation with Kuroda virus and I. Appreciate John's comments are there any areas, where you anticipate significant drug shortages.

At this time or.

Significant exposure to say the key active ingredients being manufactured in China today.

Yes, Thanks Brooks it's gone.

So on our kroner by risks response really focusing on three key areas first and foremost, making certain that our employees and our patients are safe and well informed around how to reduce the exposure to the disease and that is underway.

We've been working aggressively with our supply chain as I said in my prepared comments, we're not seeing any disruption at this point in time and don't feel that there's broad exposure.

Two product shortage on that we are seeing on some of the medical supplies.

There are some runs on sanitizers and things of that nature, but we feel that we're well positioned.

In order to do that and we were very proactive in working on this.

At the moment that this started to break to make certain that we understood where we were on our supply and doing anything we can to make certain we had safety stock on the shelves where appropriate the only other thing I would say it just is look we are monitoring this on national basis, but really looking at it on a market by Mark.

But basis and as you here in the news.

No it's affecting localities difference.

In the way that.

The disease is spreading and or the number of patients within that and so we have at kind of.

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 in projecting I'd add is as weve 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 our domestic however, we are proactively working with our supply chain partners to understand where they may have a pie that 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 invent supplies as well.

Well as some some of the therapies again with the with avail of absolutely ensuring continuity of care for our patients.

Absolutely that's great. Let me just this little more and then I'll turn it over.

Can you just sort of a handicap, a little bit where you see the biggest uncertainties or indoor biggest opportunities in the synergy capture now that you're several months into the integration effort.

Yes Brooks.

From my perspective, we are still in the early innings. So 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 reach that relationship and and really too 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 topline.

I think is both.

A risk and opportunity is we're looking at it and I think thats 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 ended 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 aspect is there we will start to ramp that back.

As we moved to the back half of Q1 and accelerate through the year and so there's a little bit of up slowness in realization I'd say in the first half accelerating into the back half of Mike anything else you that not stance.

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

Great. Thanks Brooks.

Thank you. Our next question comes from the line of Damien Mcdonald with Suntrust. Your line is now open.

Good morning, guys.

A quick questions. Paul just can you talk a little bit about the payers.

And then these conversations just.

Receptivity around narrowing of networks.

Talk a little bit about any opportunity and the receptivity of these payers to increasing will move some of the more expensive infused products out of the institutional setting.

Into the ambulatory infusion switch is just kind of a quick download on the conversations with payers.

Yes, Thanks, Dave.

Those conversations are happening in earnest I think as we've talked about before a site of care initiatives are front and center for many of the payers.

Especially with the high priced chronic.

Drugs, and and being able to provide care in these alternate settings.

We are working through the programs as well 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 are putting together with that.

But setting appropriate expectations that so that's a fishing license in which we have to go out in hostile everyday to make certain that we are getting those referrals and there were bringing those those patients on the service under the care of of option care health and so we were working with them as they are narrowing their networks and helping to.

Two.

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.

Okay.

Mike just a quick question on 2020 or is there anything you would call out in terms of in terms of working capital we should be thinking about for 2020 and when you look at some of the legacy Bios challenges.

Some of the vendor true ups you guys have seen.

Since the since the merger are those largely are you kind of largely where you need to be in terms of in terms of that.

Same thing on the working capital side.

Yes, Thanks, Dave.

We feel really good where we exited the year from both from a supplier relationship perspective, I would say in the fourth quarter.

We really got caught up and really have been able to move into more constructive relationships with folks not talking about io use in outstanding balances, but really around collaborative supply chain management, and we feel really good about where we exited the year from a working capital perspective, just to put a couple of our goal post out there.

When you look at the two standalone organizations at the end of 2018, there was $425 million in accounts receivable. We just reported this morning.

Ending a our balance of 324 million, we literally took a $100 million out of the IR 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 in 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 aydar.

And we'll never Spike the spike the football and say we're done on a our 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 our some of the current supply chain dynamic.

And then just just last question for me.

The number you had said is that you expect integration to be roughly 90% complete exiting 2020.

As we think about kind of exiting 2020.

With a lot of the integration with behind do 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.

Yes, yes, Dave.

I think is our view has been and again through our work 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 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 that will start to build as we move through the year and we're thinking about how we would ask.

Good.

Okay. Thanks very much.

I think that.

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

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

Can you kind of help us understand Mike, maybe we'll have pushing towards the higher or lower end of that two and half to 5% and how do you think about pacing I think you mentioned you might finish it expected 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.

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 as part of the overall synergy.

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 we know that there is.

An opportunity for disruption again, we're doing everything we can to minimize that there but that is contemplated in the way that we're approaching it knowing that that worked really well start.

To to ramp up as we go through the year as we move past the fire bright yes, a couple things I'd just add Matt first and foremost there is some seasonality in this business as you know Washington this industry for numerous years.

We typically do see lower growth in the first quarter as deductibles reset as people change insurance plans and.

Care is.

Adjusted.

What I would say from a from a.

The range perspective, a couple of things as John mentioned, the fourth quarter were very encouraged that was more driven.

On the portfolio of chronic therapies, which as you know can be a more dynamic portfolio of therapy is relative to the acute and I would say that we continue to refine the resources.

To to ensure we've got the right coverage and reach into the health systems and referral sources. The other thing I'd just add real quick if you know that in our revenue that also encompasses the the pharmaceutical costs and given given the magnitude of our chronic portfolio those are mostly branded and subject.

To SP variability throughout the year in rather than try to explain.

Why were above or below given certain asap shifts and try to reconcile after the fact, we tried to put out a range that would accommodate.

Variability in ASP for certain therapies, along the way.

Okay understood Thats all helpful.

A follow up from the pair dynamics.

United on on the lab site for network has talked about making benefit design changes in my incentivize both patients and doctors to participate in the network. Just curious if that's something that you discussed with respect to alternate fusion and then to in a the conversations with with payers or our systems that you are having isn't up to me.

Due to sharing some of the cost savings after the site redirection initiatives.

So it's too 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 with the payers is they are looking at benefit design change to provide appropriate alignments and incentives for patients to choose the right sites of care to receive.

Should 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 and provide a.

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 340 be programs that provide savings back.

To the organizations those entities.

For patients that are served that qualify.

For the 340 be a savings initiatives 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.

I have been day management programs as part of that so we're looking at 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.

Okay. Okay.

Thanks Ben.

Thank you as a reminder to ask the question do you need to press Star then one or your telephone.

Our next question comes from the line of Mike Zaremski with Barrington Research. Your line is now open.

Hey, good morning, guys.

Did you say that that you guys generated $14 million of free cash flow in the fourth quarter.

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

Okay. Okay. So when I look at cash flow from ops of 22, nine and then I look at Capex of 15 and change typically that's how I would think of free cash flow what am I, what am I missing.

Yeah Youll see in the in the cash flow statement attached to the press release. This morning, there was a deferred financing adjustment of approximately $6 million front through financing, but effectively offset split within the back half activities.

Okay, Okay, Gotcha, Gotcha, and I may have I may have missed this earlier did you guys give any kind of range or guide or guide on Capex for 2020.

No but.

Look going forward off of the $50 million of of cash flow from ops. We previously said that we think that in the first year 2020 that capex would be around 40 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 80.

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 feel very good about the investments to date and I think.

Relative to what we've socialize previously I think capex for the year it'll be somewhere in the $35 million to $40 million range. Okay.

And then you guys give any guidance I made again may have missed it but on around sort of restructuring integration charges expected for 20.

Yes, we would expect the onetime cost 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 in.

Theres still considerable work, but I think a reasonable assumption for 2020 is about $30 million. Okay last one.

Guys said that the.

To this point no material disruption due to current a virus does your guide include any kind of sort of.

Cushion in there for some potential impact Q1, or more going forward or essentially no no.

No no aspect of guidance includes any disruption there.

No there we haven't constraining specifically as John mentioned, we've been we've been trying to stay ahead.

Ahead of the curve, we feel very good right now about where we are from a supply chain and.

Our business continuity perspective, so we havent.

Dialed in any any shock specifically for Corona, okay, great. Thank you.

Thanks, Mike.

Okay.

Thank you. This concludes today's question and answer session I would now like to turn the call back to John right in my closing remarks.

Yes. Thanks, Sarah Thank you again for joining us this morning as I hope you've heard in our voices in our commentary we're very pleased with the progress we're making it more importantly about the potential of this business as we look forward.

There is a significant amount of work of had ahead of us to fully integrate the businesses. However, we have a dedicated team detailed plans and a disciplined approach the 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.

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

[music].

Ladies and gentlemen, thank you for standing by welcome to the option care Health fourth quarter 2019 earnings Conference call. At this time all participant lines are in listen only mode.

After the speakers presentation, there will be a question and answer session. The question. During the session you would need to press Star then.

On your telephone.

Please be advised that today's conference is being recorded if you acquire any further assistance. Please press Star then zero.

I would now like they had the coffee so what's your today, Mike Shapiro Chief Financial Officer. Please go ahead.

Thank you good morning, everybody and thank you for joining us for the Optumcare health fourth quarter earnings call.

I'm joined this morning by John Rata maker, Chief Executive Officer.

Before we begin please note that during the call 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 statements are subject to risks and uncertainties that could cause actual results could differ materially from our comments.

We encourage you to review the information into reports, we filed with the Securities Exchange Commission regarding the specific risks and uncertainty.

You should also review this section entitled forward looking statements in this mornings press release.

During the call, we'll 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 mornings press release posted on the Investor Relations portion of our website.

With that I'll turn the call over to John.

Thanks, Mike and good morning, everyone and thank you for joining not to review our fourth quarter results and provide an update on our progress.

This morning, we issued a press release, providing highlights for the fourth quarter as well as our expectations for 2020.

On behalf of the entire Oxy care health team, we're very excited to provide an update on our progress and share some key accomplishments since the merger close.

Tomorrow marks the seventh month anniversary since we bought the two organizations together.

And while there remains considerable integration lift in front of box, we've made tremendous progress since August.

The fundamental value creation of pizza underlying the combination we articulated almost a year ago is stronger than ever.

So this morning I'd like to spend a few minutes reviewing the fourth quarter financial results at a high level and share some thoughts on the progress we've made as an organization.

I will then turn it over to Mike who will dive deeper into the fourth quarter financial result.

Well as articulate our full year guidance for 2020.

Net revenue for the quarter with $720.8 million, representing a reported growth of over 42% versus Q4 up 2018.

Or approximately 4.6% on a comparable basis adjusting for timing of the merger.

Recall that as we discussed on the third quarter call. We quickly initiated the significant reorganization of our commercial team. Shortly after the merger was completed.

This had an impact on our growth in the third quarter, which was 2.3% on a comparable basis.

This focus include the strong balance between or acute and chronic therapy portfolios.

As we know the disruption to our commercial team in the realignment was more heavily weighted on the acute selling resources.

We expect that it will take time for the benefits of the new assignments and new relationships to be fully realized.

But early indications are positive.

Our commercial optimization effort continues and we remain confident in our ability to accelerate topline growth.

Adjusted EBITDA for the fourth quarter with $53 million, representing earnings growth of 70% over the prior year on a reported basis.

Again, despite considerable integration effort in front of US we are encouraged by the earnings leverage we are starting to one leach.

At a high level, our focus on cash continues to bear fruit.

Well on pack flows going a few minutes, but at a high level, we generated over $14 million in free cash flow in the quarter. Despite continued bender remediation effort.

Increased capital expenditures to shore up the technology infrastructure.

And outflows related to the integration efforts.

I would like to recognize and bank, our patient registration and revenue cycle management teams for the great work to improve our effectiveness and increase the velocity of cash collections.

So it's early and even though the fourth quarter represents our first full quarter as a consolidator organization.

Encouraged by the solid financial results and earning leverage we are starting to unlock.

As mentioned previously we remain confident in the growth potential of this enterprise.

Today as the only independent national provider of home and alternate site infusion therapy.

We are aggressively engaging with payers and health systems to elevate the standards of infusion therapy.

Concurrent to our integration and commercial alignment activities, we have initiated constructive dialogues with several payers and systems around broadening our relationships.

We recently announced a few of those wins, including entering into a multiyear extensions with both United healthcare and at that position Optumcare held up very well in both payers preferred networks.

We have historically had very productive relationships with both the United in that not and look forward to investing further in those relationships in 2020 and beyond.

We have now establish uniform contracts for each payer across the country that simplifies our relationship and open access to all markets further unique members on a consistent basis.

We remain the only alternate site infusion provider that is in network for all major national payers across the country.

We also announced that Highmark Blue Cross Blue Shield selected option care health as a preferred partner to support their hemophilia population.

We are honored to collaborate with high Mark and bring our clinical expertise to help ensure their patients received the very best care in a patient centric and cost effective manner.

This relationship continues to validate our belief that our investments in quality and clinical differentiation concrete a competitive advantage.

As we've articulated many times the merit of our merger, we're multifaceted with the obvious benefit of driving meaningful cost synergies and expanding our EBITDA margin.

But equally important we're encouraged by these early wins on a commercial Brian is it reaffirms that national scale and clinical expertise are critically important and a key opportunity for us to differentiate and again elevate the standards of care.

I'd like to provide an update from my perspective on the integration efforts to date.

Every single day, we had the privilege of serving thousands of patients who rely on auction care health for lifesaving, Unlike sustaining therapy and it's a role we considered sacred.

As we planned and executed the early stages of our integration efforts. The underlying Tennant has always been to maintain the outstanding level of care our patients absolutely deserve.

We're spending a considerable amount of time, making certain we get the softer aspects of the integration right.

As the same goes culture will eat strategy for breakfast. So we've been working across the organization to define and communicate our purpose mission and values clearly in effectively.

I am pleased to report that we are making great progress in operating as one team with one goal and the engagement levels of our team members across the organization our high.

To date, we have made considerable progress on realizing procurement and supply chain savings, which is apparent in our Q4 results.

Beyond procurement, we are on track with our spending reduction initiative and field optimization efforts, which as we previously communicated will take 12 to 24 months to fully realize.

But overall, our confidence in generating at least $60 million in cost synergy remains very high and we continue to overturn new rocks everyday looking for additional opportunities.

So overall I am quite pleased with the integration progress to date. Despite considerable effort that lies ahead.

Finally, I would be remiss, if I did not address the situation in the world is spacing, but the spread of Corona by rest co bit 19.

Needless to say this is a very dynamic situation and we are monitoring it closely through public sources and our infectious disease Advisory Council.

Our first priority is to ensure that our employees and our patients are safe and informed about the best ways to reduce spread of this disease.

We are working closely with all of our vendors to secure adequate supply a personal protection devices math glove gown cleaning solutions and Sanitizers.

As well as managed 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 advise 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.

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 result note that Q4 is the first full quarter has emerged enterprise and as a result, I will be comparing results to the combined prior year results of the two standalone organizations.

Q4 revenue of $720.8 million represented comparable revenue growth in the fourth quarter of 4.6%.

From third quarter growth rate as we saw improved commercial traction mainly in our portfolio of chronic therapy.

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 PML geography differences for certain expenses and legacy financials gross margin comparison to prior year as 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 integration and transaction related expenses.

Excluding those items as DNA 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, 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 as EBITDA margin and we're very encouraged by the leverage we drove into fourth quarter.

Net loss of nine cents per share reflects the ongoing integration expenses and higher interest expense relative to the prior year.

As announced on February 3rd we recently completed a one for for reverse stock split and all per share metrics, including including those in our soon to be filed 10-K are reflected on a post reverse split basis as it the split were in effect for all reported period as required under us GAAP.

We remain rent 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 and capital expenditures to accelerate 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 Abbeel, we exited the year with more than $200 million in total liquidity.

Before I open the call to Q M&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.

Based on our guidance this implies a wheel drive adjusted EBITDA margins north of 7% in 2020 for the full year.

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.

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 back over to the operator, and we'll open it up for Q Onec.

Thank you as a reminder to ask a question you need to press Star then one of your telephone.

So with all your question please press the pound Keith.

Please standby, while we composite culinary roster.

Our first question comes from the line of Brooks O'neil with Lake Street Capital. Your line is now open.

Good morning, guys in them I'm happy to see your.

Fully functioning publicly traded company in doing great congratulations.

Thank you very good morning.

So one of the questions I had was if you might get was 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.

And then Matt, but I would love any color you could provide and what the equation looks like.

Yes, sure but.

It's relatively simple you know 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 on the level of free cash flow, but.

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

Okay. That's good.

As you think about.

The whole situation with Kuroda virus and I appreciate John's comments.

Are there any areas, where you anticipate significant drug shortages.

At this time or significant exposure to say the key active ingredients being manufactured in China today.

Yes. Thanks.

John So on our kroner virus response really focusing on three key areas first and foremost, making certain that our employees and our patients are safe and well informed around how to reduce the exposure to the disease and that is underway.

We've been working aggressively with our supply chain as I said in my prepared comments, we're not seeing any disruption at this point in time and don't feel that there's broad exposure.

New product shortage on that we are seeing on some of the medical supplies.

There are some runs on sanitizers and things of that nature, but we feel that we're well positioned.

Order to do that and we were very proactive in working on this.

National basis, but really looking at it on a market by market basis, and as you here in the news.

It's affecting localities different in the way that.

The disease, the spreading and or the number of patients within that and so we have kind of.

National response, and managing it as part of command Center type environment, but also looking at things at a very localized basis and responding to the local needs in projecting I'd add is.

Weve 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.

Well as some some of that therapies again with the with avail of absolutely ensuring continuity of care for our patients.

Absolutely that's great. Let me just as a little more and then I'll turn it over.

Can you just sort of a handicap, a little bit where you see the biggest uncertainties or indoor biggest opportunities in the synergy capture now that your seven months into the integration effort.

Yes Brooks.

From my perspective, we are still in the early innings.

So 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.

I think as both.

A risk and opportunity is we're looking at it and I think thats 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 ended the year given all of the activity 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.

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 that not stance.

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

Thanks.

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

Good morning, guys.

Okay quick questions first just can you talk a little bit about the payers.

And then these conversations just.

Receptivity around narrowing of networks.

I will talk a little bit about any opportunity on the receptivity of these payers to increasing a little move some of the more expensive infuse products out of the institutional setting.

And to the ambulatory infusion suites, just just kind of a quick download on the conversations with payers.

Yes, Thanks, Dave.

Those conversations are happening in earnest I think as we've talked about before site of care initiatives are front and center for many of the payers.

Especially with the high priced chronic.

And and being able to provide care in these alternate settings.

We are working through the programs as as we had identified and.

The thing I will identify with both.

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. There they are putting together with that.

But setting appropriate expectations, that's a better fishing license in which we have to go out in the hospital everyday to make certain that were getting those referrals and we're bringing those those patients on the service.

Under the care of auction care health and so we're working with them as they are nearing 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 referral and that we're bringing those patients successfully on to service.

Okay.

Mike just a quick question on 2020 or is there anything.

You would call out in terms of 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.

You know since the since the merger are those largely a you kind of largely where you need to be in terms in terms of that.

Just anything on the working capital side.

Yes, Thanks, Dave.

We feel really good where we exited the year from both from a supplier relationship perspective, I would say in the fourth quarter.

We really got caught up and really have been able to move into more constructive relationships with folks not talking about.

Use and outstanding balances, but really around collaborative supply chain management.

And we feel really good about where we exited the year from a working capital perspective, just just put a couple of our goal post out there. When you look at the two standalone organizations at the end of 2018, there was $425 million and accounts receivable. We just reported this morning.

Ending a our balance of 324 million, we literally took a $100 million out of the IR balance and at the same time when you look at the payables balances.

Year end year end, we've reduced at 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 aer.

Some of the current supply chain dynamic.

And then just just last question for me.

I think the number you had said is that you expect integration to be roughly 90% complete exiting 2020, so as we think about kind of exiting 2020.

With a lot of the integration with behind you is there any reason.

To not think what we should see your organic growth rate accelerate to kind of at least in line with the industry and maybe a bit better as you know most of the integration lifting is done.

Yes, yes, Dave.

I think is our view had been and again through our work 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 that acceleration as we move.

Through the year remember there is a lot of work that we've 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 that will start to build as we move through the year and we're thinking about how we would act.

Good.

Okay. Thanks very much.

Hi, Thanks.

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

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

Can you kind of help us understand Mike, maybe we'll have pushing towards the higher or lower end.

Back to enhance the 5% and how do you think about pacing I think you mentioned you might finish it expected 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.

So Matt let me start it's John on on.

To 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 as part of the overall synergy.

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 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 worked really well start.

To to ramp up as we go through the year as we move past the fire bright yes, a couple things I'd just that Matt first and foremost there is some seasonality in that business as you know Washington this industry for numerous years.

We typically do see lower growth in the first quarter deductibles reset to people change insurance plans and.

Care is.

Adjusted.

What I would say from a from a.

The range perspective, a couple of things as John mentioned, the fourth quarter were very encouraged that was more driven on the portfolio of chronic therapy, which as you know can be a more dynamic portfolio of therapy is relative to the acute and I would say that we continue to refine the resources.

To SP variability throughout the year in rather than try to explain.

Why were above or below given certain may have key shifts and try to reconcile after the fact, we tried to put out a range that would accommodate.

Variability in ASP for certain therapies, along the way.

Okay understood that's helpful.

A follow up I think the pair dynamics.

United on on the lab site for 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 discussed with respect to alternate fusion and then.

Conversations with with payers or or systems, you are having.

And up to me too to sharing some of the cost savings after the site redirection initiatives.

So.

Two 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 with the payers is they are looking at benefit design change to provide appropriate alignments and incentives for patients to choose the right sites of care to receive.

Should 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 and provide a.

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 340 be programs that provide savings back to the organizations those entities.

For patients that are serve that qualify for the 340 be savings initiatives. 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.

Yes bed day management programs as part of that so we're looking at 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.

Okay. Okay.

Thanks, Matt.

Thank you as a reminder to ask a question you need to press Star then one or your telephone.

Our next question comes from the line of Mike Zaremski with Barrington Research. Your line is now open.

Hey, good good morning, guys.

Did you say that you guys generated 14 million of free cash flow in the fourth quarter.

Yes.

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

Okay. Okay. So when I look at cash flow from obsolete 22, nine and then I look at Capex of 15 unchanged typically that's how I would think of free cash flow what am I, what am I missing.

Okay, Okay, Gotcha, Gotcha, and I may have I may have missed this earlier did you guys give any kind of range or guide or guide on Capex for 2020.

No goes.

Look going forward off of the $50 million of cash flow from ops. We previously said that we think that in the first year 2020 that capex would be around 40 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 80.

Relative to what we've socialize previously I think capex for the year will be somewhere in the $35 million to $40 million range. Okay.

Super Helpful. And then you guys give any guidance I mean again may have missed it put on round at sort of restructuring integration charges expected for 20.

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 are still considerable work, but I think.

A reasonable assumption for 2020 is about $30 million, Okay last one.

You guys said that the.

At this point no material disruption due to Corona virus does your guide include any kind of sort of.

Cushion in there for some potential impact Q1 or or going forward or essentially no no.

No no aspect of guidance includes any disruption there.

No we haven't contriving, specifically as John mentioned, we've been we've been trying to stay ahead.

Ahead of the curve, we feel very good right now about where we are from a supply chain and.

Our business continuity perspective, so we havent.

Dial than any any shock specifically for corona, okay, great. Thank you.

Thanks, Mike.

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

Yes. Thanks, Sarah Thank you again for joining us this morning as I hope you've heard in our voices that our commentary we're very pleased with the progress, we're making and more importantly about the potential of this business as we look forward.

There is a significant amount of work of had ahead of us to fully integrate the businesses. However, we have a dedicated team detailed plans and a disciplined approach that provides us with competence.

We look forward to providing further updates on our progress in the second quarter take care and thank you very much.

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

Q4 2019 Earnings Call

Request a DemoDemo

BIOS

Earnings