Option Care Health, Inc. (NASDAQ:OPCH) Q4 2022 Earnings Call Transcript

Option Care Health, Inc. (NASDAQ:OPCH) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Hello, and thank you for standing by. Welcome to Option Care Health Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker for today, Mike Shapiro. Sir, you may begin.

Michael Shapiro: Good morning. Please note that today’s discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today’s press release as well as in our Form 10-K filed with the SEC regarding the specific risks and uncertainties. We do not undertake any duty to update any forward-looking statements, except as required by law. During the call, we will use non-GAAP financial measures when talking about the company’s performance and financial condition.

You can find additional information on these non-GAAP measures 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 Rademacher, Chief Executive Officer.

John Rademacher: Thanks, Mike, and good morning, everyone. As we reported in this morning’s press release, the Option Care Health team delivered another very solid quarter of results in the fourth quarter. Despite ongoing challenges on many fronts that we’ll discuss on this morning’s call, the team was relentlessly focused on delivering extraordinary care to the thousands of patients who rely on us every single day. And reflecting on 2022 as a whole, I am humbled by the dedication of the team and honored by the progress we’ve made over the last year to advance in our mission to help transform health care by providing unsurpassed care and superior clinical outcomes in the home or ambulatory setting. During 2022, we continue to expand our relationships with payers, providers and biopharma to offer the highest quality care at the most appropriate cost.

And over this time period, we provided care to over 265,000 unique patients and their family. As always, Mike will provide a more granular overview of the results. But in Q4, we generated revenue growth of over 10%, with balanced growth coming from both our acute therapies that grew in the mid-single digits and double-digit chronic therapy growth. At the same time, we generated adjusted EBITDA growth of 8.7% and importantly, delivered an adjusted EBITDA margin of 9.2%, up sequentially 80 basis points from the third quarter, despite continued inflationary pressures. And not to steal my thunder, but our balance sheet has never been stronger. As we finished the year with $294 million in cash, and our net leverage ended the year at 2.3 times. Entering 2022, I don’t believe that anyone anticipated the inflationary pressures that the broader economy would endure or as we have communicated previously, the significant impact we felt across many of our inputs.

Throughout the year, we faced emerging cost pressures head on, and we conservatively digested more than $40 million in year-over-year cost pressures in labor, medical supplies, oil-derived products and operating inputs. We focused on offsetting those pressures to the best extent possible through technology enhancements and driving operating efficiencies as we also collaborated with our payer partners to seek reasonable rate increases where appropriate. Our pursuit of operating efficiencies never ends, and the team drove considerable leverage in what we believe is the new cost basis going forward. We also continue to manage through a very difficult labor market. With the acquisition of specialty pharmacy nursing network last April, combined with our Infinity Infusion Nursing network platform, we have established what we believe is the largest clinical infusion nursing network in the country.

And while recruiting key clinical disciplines remains challenging, we are confident we are weathering the storm better than many, and we continue to maintain our reputation as an employer of choice and a dependable partner to our referral sources as we can provide them with adequate clinical staffing capacity, allowing us to serve their patients. During the year, we also opened 22 new ambulatory infusion centers, increasing our total count to nearly 150 sites and added 63 infusion chairs, which increases our total to over 575. With the expanded footprint and capitalizing on patient preference, we continue to see greater percentage of our nursing visits in our infusion suites, now approaching 25%. We will continue our expansion in 2023 with plans to open over 20 additional sites in key markets.

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This will allow for greater operating efficiencies and continued high patient satisfaction scores. In summary, 2022 was a very productive year as we delivered $342.9 million in adjusted EBITDA for the full year, exceeding our original guidance of delivering $310 million to $330 million in adjusted EBITDA. As we look ahead to 2023, I remain confident in our ability to deliver mid to high-single digit top line, leverage bottom line growth and strong cash flow from operations through strong execution and deepening partnerships. We will continue to focus on providing meaningful solutions to our key stakeholders as the marketplace evolves and new models emerge. We will continue to work closely with the payers to offer consistent, high-quality care at an appropriate cost and explore value-based arrangements for their members requiring infusion services across the country.

We will partner with discharge planners and prescribers to provide seamless transition of their patients on to service with us and collaborate broadly as members of their extended care team. We will deepen our relationships with our patients to provide them unsurpassed support as they recover from an acute event or help them manage their chronic conditions so they can live life to the fuller. And we will provide the strongest clinical platform and broadest population access to pharma as they conduct clinical trials in support of novel new therapies or strengthen the data capture and analytics that we will provide for patients that are receiving their medicines. And we will continue to invest in our people as we provide training development and opportunities for advancement to remain an employer of choice and the destination for passionate health care professionals.

Also in this morning’s release, we announced that we have received authorization from our Board of Directors to repurchase $250 million in shares as part of a multifaceted capital allocation strategy. Mike will provide more color on this program, however, I wanted to highlight this as proof positive of how far we have come since the merger in August of 2019 and acknowledge the discipline we have applied to unlock free cash flow, strengthen our balance sheet and vastly improve our leverage profile. And with that, I’ll turn the call over to Mike to review the results further. Mike?

Michael Shapiro: Thanks, John. I’d like to start by providing some commentary on the fourth quarter results and close out with some additional thoughts on our initial 2023 financial guidance, as articulated in this morning’s press release. Revenue as John mentioned was quite strong in the fourth quarter with balanced growth across our acute and chronic therapy portfolios. Note that as previewed on our Q3 call, in late December, we divested certain respiratory therapy assets that were acquired through the BioScrip merger in 2019. Consequently, the fourth quarter included respiratory therapy revenue for effectively the entire quarter. Gross margin of 22.5% reflects our mix of chronic and acute revenue as chronic therapies comprised a bit over 70% of fourth quarter revenue, as well as the impact of inflationary cost pressures in our direct categories.

Spending grew 8.5%, but dropped as a percent of revenue to 14.4%, as we continue to drive spending leverage to offset inflationary cost pressures. Adjusted EBITDA of $94.3 million represented 9.2% of revenue, and while 20 basis points below prior year, as we’ve discussed, we’ve absorbed roughly $12 million to $15 million in quarterly cost pressure on a year-over-year basis. Additionally, we’re encouraged by the 80 basis point sequential improvement in adjusted EBITDA margin over the third quarter. I want to take a minute to provide a bit more color on the respiratory therapy asset sale that we completed in late December. Other income on our reported income statement includes a pre-tax gains on the net asset sale of $10.3 million, which we have also backed out of our adjusted EBITDA reconciliation included in the press release.

So the gain which we reported in other income did not benefit our adjusted EBITDA calculation and was excluded from operating results altogether. As John mentioned, we finished the year with $294 million of cash on the balance sheet and our net debt of approximately $800 million represented a multiple of 2.3 times. So our capital structure has never been in better shape and positions us well to continue investing for the future and deploying capital for our shareholders. To that end, we also announced this morning that our Board of Directors has authorized the repurchase of up to $250 million of common stock. Given our cash flow generation and capital structure, we continue to believe that deploying capital through our M&A strategy will create value for our shareholders going forward.

However, as we evolve and continue to generate strong cash flow, we believe that share repurchases can provide additional optionality to complement our disciplined M&A strategy as we deploy capital for our shareholders. We are not in a position at this time to provide a specific time horizon or repurchase guidance and would anticipate modest repurchases at first. Again, we expect M&A to continue to be the primary area of focus for capital deployment. Shifting to 2023 preliminary expectations, we expect to generate revenue for the full year of $4.15 billion to $4.375 billion. Our revenue composition is quite dynamic and this year will be no different. Our revenue guidance suggests top line growth of approximately 5% to 11%, and that includes approximately 2 points of year-over-year headwind, due to two specific therapies for ALS and high-risk pregnancy in which we anticipate rapid decline, along with the revenue loss from the respiratory therapy asset sale.

Despite those headwinds, our top line expectations affirm the strength of our diversified revenue base in our national platform. Adjusted EBITDA guidance of $370 million to $390 million implies growth of approximately 8% to 14%, and includes an estimated $15 million to $20 million of year-over-year inflationary pressure, as we’ll annualize the cost pressures that emerged in 2022 and that we do not anticipate subsiding anytime soon. Our cash flow from operations guidance of at least $240 million reflects our expectation of being a federal income taxpayer for all of 2023, and our cash flow guidance reflects the year-over-year increase in federal income tax payments, which we estimated approximately $30 million. Despite the change in taxpayer status, we still anticipate strong cash flow generation for the year.

So overall, we’re quite encouraged by the momentum from the fourth quarter and expect 2023 to be another productive year for the Option Care Health team. And with that, we’re happy to take your questions. Operator?

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Q&A Session

Operator: Thank you. Our first question comes from the line of David MacDonald with Truist. Your line is open.

David MacDonald: Hey, guys. Just a couple of quick questions. Mike, I apologize, my line cut out there for a minute. But just on the inflationary pressures, can you repeat what you guys are assuming for 2023? And then once we get past 1Q and have kind of annualized some of that $10 million to $12 million, can you give us a sense of, on a percentage basis, how we should think about? What you guys are seeing on labor and just kind of overall cost trend?

Michael Shapiro: You bet, Dave. Good morning. Yeah. So what we laid out is, as we mentioned, the inflationary pressures really started to emerge in Q2. So our guidance assumes that there’s a buy up of around $12 million of year-over-year inflationary mostly in the first half of the year, affecting Q1 since those inflationary pressures really didn’t emerge until going into Q2. So we fully expect that $12 million to $15 million buy up on inflationary pressures, primarily in the earlier part of the year. From an inflationary pressure, look, I mean, I think our presumption is that clinical labor, as we’ve been very clear, is going to continue to be tied, I think, John in his prepared remarks was spot on in that, we believe we’re performing better than most. But our guidance also reflects that we’re going to continue to be competitive for clinical labor throughout 2023 and beyond.

David MacDonald: And then I guess a couple of other quick questions. In terms of the year-over-year cash flow, did you say the impact of moving in terms of the taxes is about $30 million. And then is there anything else from just a working capital standpoint that we should be thinking about in terms of ’23 relative to ’22?

Michael Shapiro: Not really related to working capital. Again, we did lay out in our press release, we do expect interest expense. We do have $300 million of floating exposure. So our guidance assumes probably in the neighborhood of $10 million of higher cash interest as well. So between cash interest and the federal tax payments, that we estimate to be a total impact of around $40 million year-over-year.

David MacDonald: And then guys, just — you talked about on the cost side, clearly being positioned better than most. That would suggest that with regards to potential M&A pipeline, is it fair to think about you guys probably have more incomings. And then secondly, just any generic comments in terms of adjacencies and anything that you guys are seeing that would complement the business that looks interesting.

John Rademacher: Yeah, Dave. It’s John. Good morning. Look, I think as we’re looking forward, again, we feel really well positioned to your comment, yes, the pipeline of M&A activity continues to fill through that process. And we’ve always talked about the disciplined approach that we’ll take to M&A, looking for those types of opportunities where we believe it’s going to bring some competitive advantage and/or augment our existing infrastructure. So we’ll continue down that path and feels like Rochester Home Infusion and others will continue to pursue. As we’ve talked about before, just broadly, I mean, we really are excited about the work that’s being done in our nursing network and the integration that’s happening as we’ve moved the specialty pharmacy nursing network and infinity infusion together, moving them on to the same platform.