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Option Care Health, Inc. (NASDAQ:OPCH) Q3 2023 Earnings Call Transcript

Option Care Health, Inc. (NASDAQ:OPCH) Q3 2023 Earnings Call Transcript October 25, 2023

Option Care Health, Inc. beats earnings expectations. Reported EPS is $0.31, expectations were $0.29.

Operator: Good day, and thank you for standing by. Welcome to the Option Care Health Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Shapiro. Please go ahead.

Mike 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.

A home health aide helping an elderly person with their daily activities. Editorial photo for a financial news article. 8k. --ar 16:9

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. With that, I'll turn the call over to John Rademacher, our Chief Executive Officer.

John Rademacher: Thanks, Mike, and good morning, everyone. Overall, the third quarter was a strong performance, and our team of over 7,500 dedicated members at Option Care Health, continue to set the pace in home and alternate site infusion market, and I'm personally quite pleased with our ability to remain focused on our key objectives and expand the census of patients that we serve. Patient care is at the center of everything that we do. And our purpose is to provide extraordinary care that changes lives for the better, and the team continues to fulfill that on a daily basis. Given that there is a loved one on the receiving end of every dose that we dispense and infusion we oversee, I believe our team is relentless in driving for the highest quality and best patient experience.

In the third quarter, our patient satisfaction score exceeded 92%, and we achieved a Net Promoter Score of over 75. So while we continue to deliver solid results for our shareholders, we also continue to deliver unsurpassed service to our referral partners and care for our patients. In the quarter, our team continued to collaborate with our key stakeholders across the spectrum of bio-pharma, payers, health systems and physicians to support our patients and to deliver care in their homes or one of our convenient infusion centers. This resulted in balanced performance across the broad portfolio including acute therapies for patients transitioning from a hospital setting to patients receiving care for an ongoing chronic condition. There's a lot to have impact in the financial performance but overall, the results were strong and in line with our expectations.

We generated approximately $110 million in adjusted EBITDA and revenue of $1,093 million, resulting in another quarter of double-digit adjusted earnings growth and an adjusted EBITDA margin of 10%. The capital structure has never been stronger and we continue to generate solid cash flows and improve the leverage profile of the enterprise. In my opinion, the focus of our revenue cycle management team has been outstanding, and our ability to drive the velocity of cash collections has never been better. On our second quarter call, you will recall that we committed to repurchasing $100 million in stock in the near term. Roughly equal to the $106 million gross breakup fee before taxes and fees related to the Amedisys transaction. I'm pleased to share that we completed that repurchase effort in the third quarter.

Year-to-date, we have repurchased $175 million in stock while continuing to drive our leverage profile well below 2 time. I want to shift gears before handing the call over to Mike, to share a few thoughts on our M&A strategy, given some of the developments from earlier this year. As we have consistently articulated, we view this deployment of capital in support of M&A as a cornerstone of our strategy to create value for our shareholders. The base business continues to perform very well and has a strong foundation with favorable capital structure. Given this, we continue to be well positioned to evaluate opportunities for strategic capital deployment intended to deepen our market presence or increase our capabilities to serve patients in the home or alternate site setting.

As mentioned on the second quarter call, we have thoughtfully considered feedback from our shareholders as we continue to seek to identify value-creating opportunities and focus our M&A efforts. From my vantage point, we see an array of opportunities to strengthen our offering and given our strong foundation, we will continue to be disciplined and thoughtful in evaluating potential targets. Our primary focus continues to be on executing on our core home infusion business, and maximizing the value of our platform as we evaluate capital deployment strategy. While we are not in a position to lay out details or specifics, as I mentioned, we would anticipate near-term M&A efforts to focus on assets closer to our core business and would anticipate deploying capital opportunistically from our cash balances and leverage capacity.

As Mike and I have consistently conveyed, we are comfortable operating at a net leverage profile up to the 3 to 4 times range. Having said that, we will be quite disciplined in evaluating both economically and strategically the attractiveness of each opportunity. This is a facet of our strategy that we take very seriously and I'm confident that given our market position and capital structure, we are well positioned to continue our M&A efforts to increase value for our shareholders by delivering value to our key stakeholders. And I will finish where I started, which is to reiterate the strong performance of our business and express the confidence I have in our team to continue providing unparalleled patient care in the home and alternate site setting.

With that, Mike will provide additional color on the results. Mike?

Mike Shapiro: Thanks, John. Overall, the results from the third quarter were quite strong and continue our track record of double-digit adjusted EBITDA growth with solid cash flow generation, and we expect to deliver another strong year for our shareholders. Revenue of $1,093 million was up 7% over the prior year, and as John mentioned, was balanced across the portfolio. We've seen growth in our acute therapy portfolio stabilized to lower single digits as we've anniversaried the competitive gains from a year ago, but volumes continue to be solid as we partner with health systems to transition patients from the acute care study. Chronic revenue continues to be strong across the portfolio and recall that we exited two chronic therapies earlier this year that collectively represented a headwind of roughly 100 basis points on a consolidated basis in the quarter.

Gross margins continue to be strong with Q3 gross margin of 23.3%, as gross profit dollar growth outpaced the top line. Our ability to offset the mix shift towards chronic and expand margins was driven by our relentless focus on operational efficiency as well as some procurement tailwinds. As I mentioned on the second quarter call, our procurement environment is quite dynamic, and we see puts and takes every year. We believe our procurement team is the best in our industry and is constantly collaborating with bio-pharma as the majority of our procurement efforts are direct with manufacturers. Earlier this year, we were able to drive favorable margin dynamics for a number of codes that resulted in an approximate $8 million to $10 million benefit to the gross margin line in Q2.

In the third quarter, that benefit was approximately $12 million to $14 million, which benefited margins considerably. Again, this is not an exact figure as there are many volume payer and therapy dynamics at play. We see a similar benefit in the fourth quarter, and that's incorporated into the revised guidance that we shared this morning. And while we are not in a position to provide any preliminary thoughts on 2024 this morning, we expect with a high degree of conviction that the favorable procurement dynamics that I'm referring to will subside in early 2024. Adjusted EBITDA of $110 million represented 10% of revenue and grew 28% over the prior year. Even excluding the approximate $12 million to $14 million procurement benefit, we still delivered mid-teens adjusted EBITDA growth in the quarter.

As John mentioned, we completed the $100 million share repurchase effort in the quarter. You'll recall, we announced our first ever authorization in the first quarter this year for $250 million and have deployed $175 million to date. We exited the quarter with $386 million of cash on the balance sheet even after the share repurchase efforts and settling all fees and taxes related to the Amedisys transaction, and we finished the quarter at a net leverage profile of 1.7 time. So very pleased with the progress and financial profile exiting the third quarter. Finally, as you saw in our press release, we've updated our guidance this morning. And for the full year, we now expect to generate revenue of $4.23 billion to $4.28 billion, adjusted EBITDA of $420 million to $425 million and cash flow from operations of at least $350 million.

So shaping up to be another very productive year for the Option Care Health team. And with that, we're happy to take your questions. Operator?

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To continue reading the Q&A session, please click here.

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