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

Thank you. Good morning everybody and thank you for joining us for the Option Care Health fourth quarter earnings call. I'm joined this morning by John Rademacher, Chief Executive Officer. Before we begin, please note that during the call we will make certain forward-looking statements that reflect our current views related to our future financial performance, future events and industry and market conditions. These forward looking conditions are subject to risks and uncertainties that could cause actual results to differ materially from our comments. We encourage you to review the information in the reports we file with the Securities and Exchange Commission regarding the specific risks and uncertainties. You should also review the section entitled forward-looking statements in this morning's press release. During the call, we will use non-GAAP financial measures when talking about the company's performance and financial condition. You can find additional information on these non-GAAP measures in this morning's press release posted on the Investor Relations portion of our website. And with that I'll turn the call over to John.

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 closed. 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 have made tremendous progress since August 5. 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 was $720.8 million, representing a reported growth above 40% 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 a 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 to be the low watermark for growth. And while we are encouraged by the higher growth in the fourth quarter, we continue to relentlessly focus on ensuring that we have the right commercial…

Thanks, John. As previously mentioned, overall, we're quite pleased with the progress achieved in the fourth quarter, which is evident in the financial results reported this morning. Before I dive into the results, note that Q4 is the first full quarter as a merged enterprise. And as a result, I'll be comparing results to the combined prior year results of the two stand-alone organizations. Q4 revenue of $720.8 million represented comparable revenue growth in the fourth quarter of 4.6%, up from third quarter growth rates as we saw improved commercial traction, mainly in our portfolio of chronic therapies. Underlying our revenue acceleration, we also drove our provision for bad debt and contractual adjustments below 3% on a combined basis despite headwinds from legacy BioScrip reserve levels, as discussed on the third quarter call. Our cash velocity continues to steadily improve as cash collections are ultimately the best measure of our revenue cycle performance. Gross margin of $175.6 million represented 24.4% of revenue. Given P&L geography differences for certain expenses in legacy financials, gross margin comparison to prior year is challenging. However, we estimate that gross margin dollars grew in excess of 6% on a comparable basis, implying an expansion of gross margin rate over the prior year. Margin expansion was driven by our continued focus on operational excellence and driving spending leverage as well as procurement synergies from our integration efforts. Spending of $144 million in the fourth quarter included approximately $19 million in integration and transaction-related expenses. Excluding those items, SG&A represented approximately 17.4% of net revenue as we continue to aggressively manage spending levels and drive initial synergies from streamlining functions. Adjusted EBITDA of $53 million grew 70% over Q4 of 2018 on a reported basis or 24% on a comparable basis. Additionally, EBITDA margin was north of…

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

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

Thank you, Brooks. Good morning.

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

Yes, sure Brooks. It's relatively simple. Obviously, when you look at where we are from a gross debt perspective, again, in my prepared remarks, we expect to generate free cash. We're not in a position to give specifics on the level of free cash flow. But based on our EBITDA margin, we think that, that translates under the definition of the credit agreement into 5.5 times.

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

Yes, thanks Brooks. It’s John. So on our coronavirus 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 to 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 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 is just this: look, we’re monitoring this on a national basis but really looking at it on a market-by-market basis. And as you hear in the news, it’s affecting localities different in the way that the disease is spreading and/or the number of patients within that. And so we have kind of a national response and managing it as part of a command center-type environment but also looking at things at a very localized basis and responding to the local needs.

And Brooks, the only thing I’d add is, as we’ve invested considerable effort and resources over the last six months to remediate and build on our relationships with our suppliers, the benefit is, for the most part, our procurement relationships are domestic. However, we are proactively working with our supply chain partners to understand where they may have APIs that’s sourced overseas. And given the health of our overall working capital, we do have the flexibility, as John mentioned, to make some strategic investments, both in med supplies as well as some of the therapies, again, with the veil of absolutely ensuring continuity of care for our patients. Brooks O’Neil: Absolutely. That’s great. Let me just ask one more, and then I’ll turn it over. Can you just sort of handicap a little bit where you see the biggest uncertainties or – and/or biggest opportunities in the synergy capture now that you’re seven months into the integration effort?

Yes, Brooks. From my perspective, we are still in the early innings. A lot of the work that we did to realign our commercial team, again, we’re feeling positive about the momentum there. But as I said in my comments, there is – it does take time to restat relationships and really to start to build that momentum behind it. And so I think we’re trying to be very disciplined and thoughtful in the way that we’re approaching that and building that ahead. The quicker we can accelerate that top line, I think, is both a risk and opportunity as we’re looking at it. And I think that’s an area in which we are focused. The other thing is we took a little bit of a fire break in our activities around integration efforts as we came to the end of the year, given all of the activities for year-end close as well as preparation for benefit verification and reauthorization. And so we took a little bit of a pause to make certain that our teams could be very focused around all of the aspects there. We will start to ramp that back up as we move to the back half of Q1 and accelerate through the year. And so there’s a little bit of slowness in realization, I’d say, in the first half accelerating into the back half. Mike, anything else you’d add?

No. Brooks O’Neil: That’s perfect. Thank you very much and keep up all the hard work.

Thanks, Brooks.

Thanks, Brooks.

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

Hi, good morning, guys. A couple of quick questions. First, just can you talk a little bit about the payers? And in these conversations, just receptivity around narrowing of networks, talk a little bit about any opportunity and the receptivity of these payers to increasingly move some of the more expensive infused products out of the institutional setting into the ambulatory infusion suites. Just kind of a quick download on the conversations with payers.

Yes. Thanks, Dave. Those conversations are happening in earnest. I think as we have talked about before, site-of-care initiatives are front and center for many of the payers, especially with the high-priced chronic drugs and being able to provide care in these alternate settings. We are working through the programs as we had identified. And the thing I will identify with both the Aetna and the United contracts, just because we highlighted those, they are in a process of putting together a preferred network, and we are very honored to be part of that preferred network that they’re putting together with that. But setting appropriate expectations, that’s a fishing license in which we have to go out and hustle every day to make certain that we’re getting those referrals and we’re bringing those patients on to service under the care of Option Care Health. And so we’re working with them as they’re narrowing their networks and helping to initiate their site-of-care initiative. And we do it in a way in which, again, we have to be out hustling every moment to make certain that we’re capturing those referrals and that we’re bringing those patients successfully on to service.

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

Yes. Thanks, Dave. We feel really good where we exited the year from – both from a supplier relationship perspective. I’d 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 IOUs 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 to put a couple of goalposts out there: when you look at the two stand-alone organizations at the end of 2018, there was $425 million in accounts receivable. We just reported this morning ending AR balance of $324 million. We literally took $100 million out of the AR balance. And at the same time, when you look at the payables balances year-end, year-end, we’ve reduced it more than $30 million. And so where we’re entering 2020, we’re in a very, very productive spot from a working capital perspective. And so look, we clearly benefited from a cash flow generation with monetizing a lot of the AR. And we’ll never spike the football and say we’re done on AR reduction. But I think going forward, we’ve got a very efficient working capital position and gives us flexibility to respond to market factors, such as some of the current supply chain dynamic.

Okay. And then just last question for me. I think the number you had said is that you expect the integration to be roughly 90% complete exiting 2020. So as we think about kind of exiting 2020, with a lot of the integration lift behind you, is there any reason to not think that we should see your organic growth rate accelerate to kind of at least in line with the industry and maybe a bit better as most of the integration lifting is done?

Yes, Dave. I think as – our view has been, and again, through our work that was done immediately post close to get the commercial team in place and moving forward, our expectations are that we will continue to see that acceleration as we move through the year. Remember, there is a lot of work that was done. I think we had said on the third quarter call, about 45% of the team got new assignments with either new territories or new customer base. And so expectations are that will start to build as we move through the year, and we’re thinking about how we would exit.

Okay. Thanks very much, guys.

Thanks, Dave.

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

Hi, good morning. I actually wanted to follow up on that issue on growth, which is coming off obviously a nice sequential improvement here in Q4. Can you just kind of help us understand, Mike, maybe what would push you towards the higher or lower end of that 2.5% to 5%? And how do you think about the pacing? I think you mentioned you might – we maybe should expect it to accelerate throughout the year? And as a component of that, is there additional territory reallocation, personnel changes, et cetera, that you’re expecting that might affect the pacing of the growth profile throughout the year?

So Matt, let me start, it’s John, on kind of answering that, and then I’ll turn it to Mike for some of the other details. So as we’ve talked about, we do have network consolidation that is part of the overall synergies. And we expect that – again, we’re doing everything we can as we look at those opportunities to optimize the network, to minimize the amount of impact that, that may have within the market. But that is contemplated in the growth numbers that we provided is, we know that there is an opportunity for disruption. Again, we’re doing everything we can to minimize it there. But that is contemplated in the way that we’re approaching it, knowing that, that work really will start to ramp up as we go through the year as we move past the firebreak.

Yes. A couple of things I’d just add, Matt. First and foremost, there is some seasonality in this business, as you know, watching this industry for numerous years. We typically do see lower growth in the first quarter, deductibles or [indiscernible] as people change insurance plans, and care is adjusted. What I would say from the range perspective, a couple of things. As John mentioned, the fourth quarter, we’re very encouraged. That was more driven on the portfolio of chronic therapies, which, as you know, can be a more dynamic portfolio of therapies relative to the acute. And I would say that we continue to refine the resources to ensure we’ve got the right coverage and reach into the health systems and referral sources. The other thing I would just add real quick is, you know that in our revenue, that also encompasses the pharmaceutical costs. And given the magnitude of our chronic portfolio, those are mostly branded and subject to ASP variability throughout the year. And rather than try to explain why we’re above or below given certain ASP shifts and try to reconcile after the fact, we try to put out a range that would accommodate variability in ASP for certain therapies along the way.

Okay. Understood. That’s helpful. And then just a follow-up on some of the payer dynamics. United, on the lab side, their preferred network, has talked about making benefit design changes that might incentivize both patients and doctors to participate in the network. Just curious if that’s something that you’ve discussed with respect to alternate site infusion. And then in any of the conversations with payers or systems that you’re having, is there an opportunity to share in some of the cost savings through the site redirection initiatives?

So to – I guess to directly answer your question, look, we’re in those conversations today, and that is the next frontier for a lot of the conversations with the payers is they are looking at benefit design change to provide appropriate alignments and incentives for patients to choose the right site of care to receive their therapy in that process. Nothing I could go into detail on that, but those conversations are part of the broader discussions around how to deepen the partnership and provide a high-quality, appropriate cost solution for the members. On the work with health systems and the conversations that we have there is, look, we have a significant number of different relationships across the country as we’re thinking around how to better partner with them. Certainly, we have 340B programs that provide savings back to the organizations, those entities for patients that are served that qualify for the 340B savings initiative. We have also quality management programs that we work with them on that provide performance guarantee as well as helping them look at things like admission, readmission avoidance and [indiscernible] management programs as part of that. So we’re looking across those – the spectrum to really figure out how is the best way to provide a meaningful strategic partnership with both health systems as well as with the payer community.

Okay, thanks for that.

Thanks for that.

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

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

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

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

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

Okay. Okay. Got you, got you. And I may have missed this earlier. Did you guys give any kind of range or guide on CapEx for 2020?

No. Look, going forward, off of the $50 million of cash flow from ops, we’ve previously said that we think that in the first year, 2020, that CapEx would be around $40 million to $45 million. I would expect it to come in below that in the fourth quarter given the strength of some of the cash flow. We accelerated some of the IT infrastructure investments. So we pulled forward some of the investments, and those are really a conduit to some of the integration activities in 2020. So feel very good about the investments to date. And I think relative to what we’ve socialized previously, I think CapEx for the year will be somewhere in the $35 million to $40 million range.

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

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

Okay. Last one. You guys said that the – to this point, no material disruption due to coronavirus. Does your guide include any kind of sort of cushion in there for some potential impact either in Q1 or going forward or essentially no aspect of guidance includes any disruption there?

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

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 Rademacher for closing remarks.

Yes. Thanks, Sarah. Thank you again for joining us this morning. As I hope you’ve heard in our voices and our commentary, we are very pleased with the progress we are making and, more importantly, about the potential of this business as we look forward. There is a significant amount of work ahead of us to fully integrate the businesses. However, we have a dedicated team, detailed plans and a disciplined approach that provides us with confidence. We look forward to providing further updates on our progress in the second quarter. Take care, and thank you very much.

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