Q1 2020 Earnings Call

[music].

Good day, ladies and gentlemen, and welcome to auction care helps first quarter earnings conference call. At this time, all participants will be in listen only mode. Later, well have a question and answer session and in.

Instructions will be given at this time.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host for today, Mike Shapiro Chief Financial Officer, you May begin Sir.

Thank you good morning and.

Thank you for joining us for the auction care health first quarter earnings call Im joined this morning by John Rademacher, Chief Executive Officer.

Before we begin please note that during this 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 in the reports we file with the Securities and Exchange Commission regarding the specific risks and uncertainties.

I should also review the 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.

In addition, you'll also find a few supplemental slide on our Investor Relations website that we're prepared to complement our remarks. This morning.

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 first quarter.

We were very quick out of the gate and aggressively preparing personal protection equipment and critical drugs to ensure continuity of care and the wellbeing of our clinical team on the front lines.

As we have stressed on previous call, we have invested considerable effort in improving our bender relationship.

And getting current with that.

And those efforts enabled us to whether the procurement storm better than most.

Are procurement team has worked around the clock and across the globe to ensure our clinicians our state and prepared.

Beyond our clinical teams, we have affectively migrated to a virtual enterprise across all functions and geography.

Over the past past five years, we have invested more than $100 million in technology and infrastructure and that foundation enabled us to quickly migrate our support and administrative function to a virtual environment.

Well not without a few bones, we have been very successful in maintaining a business as usual environment.

With our National network up compounding pharmacies and flexible model, we've been able to respond quickly geography is more impacted.

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With ridden in capabilities inconsistent clinical protocols, a rapid response model has ensured that patients guaranteed in their home are receiving consistent and reliable therapy from the option care how pain.

Are collaboration with health systems in pairs have only strengthened as they see us now more than ever as a reliable partner.

Mm.

Our entire model is centered on the belief that infusions therapy and advanced care is more suitable and often performed more safely in the home or alternate site and our expertise in this area is proving more relevant now more than ever.

Since the merger last August we've made tremendous progress on cleaning up the capital structure and streamlining are working capital.

We entered the year with dollar liquidity and in the first quarter. We continued the momentum adding to our cash balances and generating salad cash flow in what is historically, the most challenging porter from a cash flow perspective.

Ensuring adequate liquidity and cash availability has been and will continue to be a critical priority and as we sit here today, we are in a solid position as Mike will articulate and a bit.

The pandemic has had and we expect will continue to have a meaningful impact on a referral trends.

As we've shared in the past, we have two fundamental therapy vertical acute and chronic.

Acute referrals that are primarily generated from hospital discharges represents approximately 40% of our revenue base on an annual basis, and we'd seen quite a bit of this ruskin from the pandemic.

After an initial push by or hospital customers in March to empty the bad in preparation for cope with 19 patients. We've seen acute referrals decline. It's hospitalizations have obviously been quite limited.

Acute trends have been far from consistent across the country and even within metropolitan area.

To provide additional contacts we estimate that a very small percentage of our acute referrals are from elective surgery.

Nonetheless, as patients have stopped going to the hospital to receive even general medical procedures.

Acute referrals have trend in down from a few one levels after the initial sir.

Or commercial team remains in constant contact with our health system partners to ensure we are prepared to respond when hospital admissions rebounds.

Arconic referrals are faring better.

As we continue to see consistent volumes per patience with chronic condition.

Also as connotations tend to be on service for significantly longer period. The revenue base is more stable as the majority of our revenue is comprised debris occurring patient treatment.

Looking forward, we expect chronic referrals to begin to soften as position office visits have been constrain due to shelter in place guidance, which in turn back new patients diagnosed.

Similar to most enterprises box and care. How is also experienced disruption on our labor model throughout our network.

A team of more than 5000 professionals, including approximately 2900 clinicians or in many cases working remotely with children at home potentially six members of their family and Daily Challenge is known to all.

To this point to the team is solved and reason to the challenge.

We have aggressively moved to enable remote capabilities, where possible encourage team members to work from home.

However, this is not possible in many instances.

Including our care transition specialist within our pharmacy operations, warehousing, and logistics and nursing and respiratory therapist, who are providing care in a patient's home or one of our over 125 alternative treatments.

Given our consistent clinical protocol.

We have been able to ship resources, where necessary to ensure seamless continuity of care in as efficient a banner as possible.

But there has clearly been an impact on our costs to serve our patients given the circumstances.

As the old saying goes necessity is the mother of invention.

Like many other organizations, we have quickly modified our operating model and accelerated deployment of new technology and tool.

One silver lining how to the current situation relates to the further enhancements to our industry leading technology sweet.

We have quickly developed and deployed new virtual patient engagement tools that enable our clinical teams to perform virtual discharges airport or patients remotely in a compliance manner.

This has been while received by or patience and customers, who are managing their sys with restricted access to non non hospital personnel.

In the New York Metropolitan Area. For example, we estimate that approximately 50% of our patient onboarding experiences from hospitals.

I've been conducted virtually.

And this is the capability, we will continue to elaborate well after the pandemic.

One final area I want to touch on is the integration effort.

As discussed on the call in Mark we made considerable progress in late 2019 on integrating the two organizations.

Given the situation we continue to focus on key areas of the integration into continued to target being 90% or more complete by the end of year.

Undoubtedly we expect minor disruption due to travel restrictions and social disturbing standards.

However, we remain very competent in the ability to deliver at least $60 million in net synergies thing.

I continue to be very encouraged by the cultural integration.

The recent events have truly galvanizing tire organization or around our purpose and has the United as as one team with one goal.

As you can appreciate the current pandemic situation is quite dynamic and we continue to monitor and manager operations on a daily basis.

To borrow a sports analogy as an organization we are not playing deepened.

We remain on offense as we continue to believe that we are part of the solution to this pandemic and are playing a vital role in ensuring patients continue to receive clinical infusion therapy in a state setting.

We have consistently advocated for care in the home or alternate site and the current situation has clearly reaffirmed the merits a patient care in alternate static.

Having said that at this point, we're not in a position to completely <unk> or articulate the impact of the pandemic on our operations and financial results.

As I said at the onset we are very encouraged by the first quarter result, and believe that underscores the value creation antrel be enterprise.

With that I will turn to call over to my to review the financial results in a bit more detail Mike.

Thanks, John.

Circle back and spend a few minutes on the first quarter financial results and pivot into current efforts here in the second quarter in response to the pandemic situation.

As John mentioned previously were quite pleased with the financial results in the first quarter and are encouraged by the earnings leverage we're beginning to online.

Just a reminder that the reported growth in this morning date K. is as reported and prior periods of <unk> are comprised of only legacy option care financial results.

I'll try to provide comparable growth where possible based on our estimated combined prior year results.

In the quarter, we generated $705 million a net revenue based on comparable infusion revenue growth of approximately 6.5%.

Well not in a position to provide granular therapy level results are accused therapies are relatively flat in the first quarter and the revenue growth was driven by continued momentum in our chronic portfolio.

Gross profit of $158 million represented 22.4% of net revenue.

And while comparisons to prior year or challenging given geography differences in the P.N. over the legacy organizations, we still expanded gross margin by 180 basis points over reported legacy off some care result, despite higher growth in lower margin chronic therapies.

Cost of service leverage is improving as we integrate the organizations and we're encouraged by the expansion and gross profit.

Spending represented 18.3 per cent of revenue and will continue to be a key area of focus as we continue to integrate the two organizations.

And adjusted even $40.2 million represented 5.7 per cent of net revenue and approximately 51% growth over the combined results at both organizations in the first quarter of 2019.

Again, very pleased with the leverage released and encouraged by the top line performance in the corridor.

Shifted into cash flow, we generated $18 million in the quarter in cash flow from operations, even as we ramped up our response to the covert 19 situation.

After $5 million and capital investments and required first clean amortization payments.

Cash flow in the quarter with $10 million, increasing our cash balances to more than $77 million at March 31st.

Our collection productivity continued to improve and as we harmonize our technology and processes, we expect to see additional productivity around collection.

At the end of the quarter, we had $140 million available on a revolver after adjusting for approximately $10 million issued letters of credit on 150 million dollar A.B.L. facility.

Today, we have not drawn anything on the facility despite our full ability to do so.

The assets underline the revolver remain quite healthy and far exceed the 150 million dollar notional facility amount.

So from a total liquidity perspective, we ended the first quarter at approximately $217 million in total available liquidity.

I'd like to make a few additional comments on the impact of the pandemic and specifically around our four key priority to John outlined up front with respect to ensuring financial stability an adequate liquidity.

Ensuring consistent cash flow is our life right and we are diligently managing and monitoring daily liquidity.

As we have articulated previously more than 80 per cent of our revenues generated from commercial pairs and we've seen very little disruption in our collection activity.

And at the same time, we have tightened our belt like every other organization and have accelerated certain spending reductions to maximize our flexibility inability to <unk> more resources to our supply chain in P.P.E. procurement efforts.

Given the precedent in circumstances and to break from our normal practice I do want to share a bit of additional insight around our current liquidity situation.

As we sit here today I can share that our cash generation has continued to be strong and our cash balances at the end of April exceeded $90 million and the revolver remains untapped.

Store liquidity position continues to improve and rest assured we take nothing for granted.

As it relates to our capital structure recall that we completely receptor leverage profile last August in conjunction with the merger.

All legacy instruments were retired and we implemented a very simple and patient capital structure.

First lean term loan do 2026, and a smaller balance of second lien notes do 2027.

Both of which are covey light and include no triggering covenant.

R.A.B.L. revolver doesn't mature for four more years and has one fix charge coverage requirement for which we are very much in compliance.

So overall, we believe the capital structure is quite supportive to our current efforts to whether the pandemic and our liquidity position remains strong intact.

Separate from my comments regarding current cash balances.

We did disclosing this morning's pressrelease than in April we received as part of the Corona virus aid relief and economic Security Act approximately $11.7 million in provider grant intended to offset negative impacts from the pandemic.

Similar to other organizations that received such grants, we continue to investigate and at this point or not in a position to assert what amount we will ultimately retain.

We will keep all of you apprised of our progress on assessing the program.

Commend the health and human services administration for rapid and impactful response.

Finally, as John mentioned, given the uncertainty around the duration and impact of the pandemic, where revoking or previously communicated full year 2020 guidance at this time with that will open up the call for Q. and a operator.

Mm.

Oh, Yeah, Oh, ladies and gentlemen, if you have a question at this time please.

Followed by the number one key on your touch tone telephone.

It's a question has been and all of US are moved here from the kill <unk>. Once again to ask the question. They start start and then why now.

And our first question comes from <unk> from William Blake.

Yeah line is okay.

Hi, good morning, Thanks for taking all questions first <unk>, maybe you can help us out.

With some of the volume pay seen here, both on the acute and chronic.

You have to give us that quarterly numbers, but just curious you know kind of what you saw throughout marsh and what you've seen.

In April if you have crap seen a trough, yeah, I'm not sort of patient uncle standpoint.

And just have an update they're a little more kind of weekly.

Hey, Mad at John Rademacher. So you know as you would expect that I think as you know you've seen in other reports of the hospital. A result, we started to see the decline envy acute area really starting in the second half of March.

As as patients no longer we're going to receive care in that setting I'm. Certainly you know we looked at the difference between you know elective surgeries and scheduled server surgeries as a as kind of two different things and scheduled service.

Surgeries were were prevented at that time as they were in locked out until we started to see that trend.

Really started to fall off a fork cute in the back house of March and that continue into two April. So you know, we're trying to assess whether the bottom of the <unk> will be on that from the chronic side, we actually continue to see strength and aquatic result.

Through March and you know may have tempered a little bit, but not to the same extent as big as the the product. So you know on some of the therapies to put into perspective, we're seeing you know anywhere between 15 and 20% reduction in the referral base.

You know off of that peak that we saw so I I think that's that's probably the about the best you know estimate that we have at this point in time, Hey, Hey, Mad at my you only thing I would add is again as you know when you look at the duration of treatment for our two vertical they're they're very.

Different the the correlation between real time referrals and and the impact on revenue is is much more impactful and immediate on the acute side again, given the duration of treatment on the chronic you know you don't see as as quick as and impactful of it a a hit on on revenue again.

Because of the duration of therapy and the majority of our of our revenue on the chronic side are recurrent treatments for our for our established longer term chronic there page.

Yes, <unk> you know and then you got a question that.

Anytime April I'd sort of your work with making health systems.

Channel <unk>, killing your comments, you're yeah, the company's efforts to help hostels care capacity.

Just trying to get a sense for if you're seeing you think this might be sort of flag underground moment or.

So this underline shift from hospitals are hospital, they file patient foreigners into the home and if you're seeing patient preference <unk> as well, whether it's you need to compromise patients or patients who might have cracked they're taking piano for a long time, if you've noticed sort of those preference changes pool.

For refers referrals and for patients themselves.

Yeah, Great Great 20, Matt Yeah, we I mean, we are seeing that and I think that that is part of the reason why we're seeing the sprang maintained in the chronic area for many of those procedures certainly the immunocompromised patients wants to be served in the home and we are well prepared in order to.

Do that we expect also through some of the conversations and partnerships that as hospitals begin to open backed up and scheduled service surgeries begin to take place that we will see a similar amount of rebound you know it at the appropriate time as a India shoot.

Pay as they'll want to transition patients safely and effectively but out of the four walls at the hospital and then to the home as quickly and safely as as possible.

Mm.

<unk> Oh the final one you mentioned virtual Onboarding I'm asking me that something that is increased cost near term as you plus stuff the tool, but is that something that could for long term I might be <unk> for half a price can raise that and that's taking the sort of spiritual team.

I was in a number fishing awful city.

Awfully close what they've been replaced Apollo Health Physics, and just curious what obviously, there's little slower thrilled channel, but have you had referrals from <unk> and is the perhaps increase power off the national Brandon footprint and more sort of a tele house setting that'd be off me thinking.

Yeah, Matt So so a couple things one is.

First with the change is really articulated and put in place by C.M.S. in the embracing tele how we think that they positive movement you know in general and so you know we are you know riding a that wave associated with it and you know we believe that the virtual this <unk>.

Large and our ability to leverage and utilize that technology will be something that will carry beyond the pandemic and something that will be part of our normal parse the bits that as we move ahead and it it drives efficiency and effective use of our our professionals and are skilled resources and it all.

So provides strong support for the patients in a very compliant way. So we're encouraged by that and we expect that that will continue to move forward. The broader question around you know tell a health and you know the.