Option Care Health, Inc.

Q2 2021 Earnings Conference Call

8/3/2021

spk03: Ladies and gentlemen, thank you for standing by, and welcome to Option Care Health second quarter 2021 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. To ask the question during the session, you will need to press star then one on your telephone. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today, Mike Shapiro. You may begin.
spk08: Good morning, and thanks for joining us this morning. 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 statements 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 SEC 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. With that, I'll turn the call over to John Rademacher, Chief Executive Officer.
spk11: Thanks, Mike, and good morning, everyone. As you can imagine, we are quite pleased with the overall progress we are making, the expanded number of patients we are serving, and the financial results the team has delivered in the second quarter. And our confidence in this enterprise has never been higher. We continue to translate strong revenue expansion into leveraged earnings growth on our scalable platform. And as we sit here today, we are increasing our growth and earnings expectations for the full year based on the first half momentum. Equally important, we continue to invest in strategic initiatives to build upon our unique national platform. As we entered 2021, we remained in the midst of the pandemic second wave, and we were also managing supply chain dynamics for certain therapies. Consequently, we guided to 6% to 7% revenue growth. Over the past few quarters, we've seen referral patterns return to pre-COVID levels, and in some instances, including several chronic therapies, we've seen referrals considerably above pre-COVID levels. The team has remained on offense, so to speak. and we focused on balanced growth across both our acute and chronic portfolios through collaborations with our payer partners and referral sources. In the second quarter, we saw strong sequential growth over the first quarter in both therapy portfolios as momentum has clearly increased. Recall, the comparative quarter for 2020 is challenging given the disruptive referral patterns with the onset of the pandemic. Regardless, we saw high single-digit acute growth over prior year and high teens' chronic growth, with particular strength in newer therapies for multiple sclerosis and myasthenia gravis. Our top-line results affirm that our unique value proposition is resonating with manufacturers, payers, and referral sources. And for the full year, we now expect to generate double-digit top-line growth based on the momentum generated in the first half. Despite our strong top-line results, we remain in a very dynamic environment. Our supply chain situation is clearly improving, especially with respect to immunoglobulins, which we highlighted as a risk entering into the year. Like most companies, we are facing challenging labor market, and given our strategic investments in clinical expertise, we continue to manage tight labor conditions for skilled clinicians. We have been able thus far to successfully navigate the challenging labor market to maintain our reputation of dependability with referral sources that has been the hallmark of the Ops and Care Health team over the challenging pandemic situation. We continue to monitor the situation closely, and we are proactively addressing the situation through talent development, technology enhancements, labor efficiencies, and deepening partnerships with home health agencies. Aside from the solid growth in the second quarter, we continue to invest in future growth catalysts. Early in Q2, we closed on the BioCare acquisition, and I'm pleased to report that the integration is already complete. This complimentary tuck-in has reinforced our IG go-to-market efforts and strengthened a number of key geographic markets for us. We also recently announced a technology collaboration with AlayaCare, one of our existing trusted technology partners, to co-develop market-leading patient engagement and clinical management software. As we have articulated on many occasions, we have invested tens of millions of dollars into our integrated technology suite to optimize the patient experience and maintain an efficient operating model. AlayaCare has been in the trenches with us for quite a while, and we are excited to introduce additional tools to improve the therapy experience for our patients and their families. Over the past six months, we've invested in an additional infusion suite capacity to and are aggressively moving to open 10 to 15 additional standalone infusion centers by year end. Infusion center capacity is a key growth-enabling initiative to improve the patient experience and optimize our clinical workforce. To my earlier point, infusion center capacity provides additional labor efficiency and partially mitigates the challenging labor market we currently face. I'm also thrilled with the addition of Dr. Seema Khumbhat to the newly created role of chief medical officer. The patient experience is at the forefront of everything we do, and Seema brings a unique perspective to my leadership team as we continue to raise the clinical bar in this industry. Mike will unpack the results in a few minutes, but I'm very encouraged by the top-line growth and our ability to leverage our infrastructure to deliver higher levels of profitability. As we announced in the release this morning, we have significantly increased our guidance for the full year for both revenue and adjusted EBITDA based on the momentum the team established in the first half of the year. The midpoint of the guidance range implies an EBITDA margin north of 8% for the year, and we're only getting started. And our ability to translate earnings to cash flow has been quite strong, delivering over $70 million of cash flow from operations in the quarter. We also achieved our full year leverage target of four times at mid-year. Again, I couldn't be prouder of the team and how they continue to execute our strategy in light of continued market dynamics. Before I turn over to Mike, I want to spend a few minutes on the recent approval of Agihelm for Alzheimer's. As an organization that serves patients with challenging chronic conditions every day, we are encouraged that new therapies are emerging for what is a devastating condition for patients and their families. And clinically, the profile of Adjahelm fits quite well with the alternate site setting, given an older patient population, many with complicating conditions, and a preference for limited travel for therapy. However, the reimbursement pathway for this emerging therapy remains challenging in the home and alternate site settings. as the far majority of the targeted population is covered by Medicare. And, as we have communicated on multiple occasions, Medicare currently does not adequately reimburse for home infusion at levels to support care. We continue to monitor CMS and the payer's approach to coverage determination and separately work with the industry coalition to seek a legislative improvement to reimbursement for home infusion. In the current landscape, we do not see EDGE Helm as a near-term opportunity until the Medicare reimbursement environment changes. Consequently, none of our guidance reflects any benefit from EDGE Helm at this time. So overall, I am very pleased with the second quarter results, the performance by the entire team, and where we are positioned heading into the second half of the year. You'll recall in the first quarter call, I commented that we were quickly pivoting from integration to acceleration, and clearly we've made that turn. With that, I'll turn the call over to Mike to review the results in a bit more detail. Mike?
spk08: Thanks, John, and good morning, everyone. Overall, the second quarter can be summed up in strong top-line growth that translated into margin expansion and spending leverage to deliver accelerated earnings growth and cash flow generation. Remember that similar to virtually all healthcare enterprises, the second quarter of 2020 is an atypical comp, as we saw an initial spike in patient referrals, followed by a stagnant period as individuals stayed away from medical facilities. Nonetheless, we generated 16% top-line growth overall, with high single-digit growth in acute and high teens growth in the chronic portfolio. Sequentially, we generated a little over $100 million in revenue over the first quarter as referral volumes continued to rebound off the pandemic lows. Our results continue to reflect some ASP headwind for certain therapies, but clearly the volume's more than offset. Despite the faster-growing chronic portfolio, we drove a gross margin rate expansion in the quarter as we continue to drive network efficiencies and manage our procurement strategies within each portfolio. We don't talk much about bad debt, as it has considerably improved over the past few years, but in the quarter we drove bad debt down to a little over 2%, which represents about a half a percentage point improvement over the prior year. As that improvement dropped straight through, that helped offset the chronic mixed headwind at the margin line. Again, the team fights for every basis point of leverage at the gross margin line, and thus far we have been able to offset the mixed impact. Spending leverage continues to improve as SG&A as a percent of revenue dropped by 130 basis points, driving an EBITDA margin of 8.5%. This is the first quarter that we've delivered a margin north of 8, and as John mentioned, we're just getting started. Cash pays the light bills, not EBITDA, and our ability to translate earnings into cash flow continues to accelerate. In Q2, we generated cash flow from operations of more than $73 million in and increased cash balances by $48 million, despite deploying more than $18 million to acquire BioCure. And we finished the second quarter with a net debt-to-leverage ratio of 4.0 times, which was our full-year commitment. So our cash and working capital profile continues to improve and provides considerable flexibility as we open the aperture on inorganic opportunities. And just a reminder that we maintain a favorable Covey-like debt structure with no maturities until 2026. As we think about the back half, we clearly expect revenue to exceed previously communicated guidance. We anticipate continued sequential improvements, albeit not at the level we saw from Q1 to Q2. With solid acute levels maintained and chronic acceleration, we see full-year revenue growth of 10% to 15% based on the revised guidance issued this morning. And we are increasing profit expectations based on the solid top line and are increasing EBITDA expectations to $275 million to $285 million. Relative to our initial guidance back in March, we've increased our EBITDA midpoint by approximately 11% based on better visibility around revenue trends and our procurement strategies. That will translate into higher cash flow generation and an improved leverage profile before potential capital deployment. We remain active on the M&A front, and our guidance does not incorporate any inorganic contribution in the back half other than the BioCure acquisitions. Before we wrap our prepared remarks and open the call to Q&A, I wanted to clarify a few items regarding the most recent secondary share offering by our primary shareholder in June. At the time of the merger two years ago, an entity formed by Madison Dearborn Partners and Walgreens Boots Alliance held approximately 136 million shares, excluding escrowed shares that have since been canceled, or approximately 80% of the total outstanding shares. Over the past year, through a series of secondary offerings, that entity, which has been and continues to be controlled by Madison Dearborn, has sold approximately 68 million shares and has reduced its investment as of today to approximately 68 million shares, or just under 38% of the total outstanding shares. Until the most recent secondary offering, Madison Dearborn and Walgreens allocated the proceeds from such offerings to based on their pro rata interest in the entity, or approximately on a 5248 basis, respectively. However, with the recent offering of 17.25 million shares, Madison, Dearborn, and Walgreens agreed in principle to allocate all of the offering proceeds to Madison, Dearborn, and other shareholders. Thus, As of today, Walgreens has an indirect financial interest in approximately 21% of the total outstanding shares of Option Care Health, with Madison, Dearborn, and affiliates indirectly holding the remaining 17%. While we wanted to clarify their respective financial positions given the recent dynamics, we don't have any further comments on their investment strategy or any insight on future intentions by either of the shareholders. So in closing, we are very encouraged by the strength of the second quarter results and have raised our expectations considerably in the second half based on the first half momentum. And with that, we'll open the call to Q&A. Operator?
spk03: Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Peto Chickering with Detribank. Your line is open.
spk10: Hey, good morning, guys. Thanks for taking my questions. Just a couple ones here. On the top line growth this quarter, obviously, you know, extremely strong. Can you give us just some more color and sort of, you know, chronic versus acute? And then with an aquatic, you mentioned, I think, a multiple sclerosis as a growth area. Just give us some more details as to what will yet perform this quarter, whether sequentially or versus year-over-year.
spk11: Good morning, Peter. It's John. Yeah, so first and foremost, really pleased with the balance that we saw across both the acute and chronic portfolio. You know, I think as we've talked about before, as we expected things to start opening up within the hospital and as patients return to receiving care, We saw, you know, increased flow of referrals, as we had mentioned, and really some strength in the acute area that in some ways had been lagging through that process. So, referrals increased as we had called out. We've done a really good job of converting those referrals to start. And I think that, you know, some of the investments we made to increase our reach and frequency are starting to pay dividends as things open up. You know, on the chronic side, again, good execution by the team. You know, we continue to see strength across the portfolio there. I do believe that, you know, as we called out, we were able to navigate the IG marketplace, you know, pretty adeptly, and so really didn't feel any constraints from the IG side because of supply chain issues. So, All in all, very balanced, all in all, good execution by the team and deepening those relationships with the referral sources to be their partner of choice as they're looking for opportunities to transition patients on to care with us.
spk08: Hey, Peter, it's Mike. The only thing I'd add is, look, as we mentioned, obviously the prior year comp is a little wonky given the results in the second quarter and just the state of the market back then. I think, as John said, on the chronic side, you know, great payer collaboration, more of the same, and the value proposition is resonating. And on the acute side, again, we had an easier comp. And I think, as we've said, you know, we prided ourselves on our dependability and reliability in what remains a very challenging market dynamic. And so, you know, relative to the first quarter and prior year, there's more trips into the batter's box. And I think based on the phenomenal team in the field and their focus, we're getting more hits every time we're walking into the batter's box.
spk10: A follow-up question for you on margins. For SG&A, you know, obviously huge top-line growth here. We got some SG&A leverage sequentially. I guess I'm trying to understand how much leverage we should be modeling on the SG&A line when we have these big revenue beats or where is that conversion ratio? Kind of as you think about the next year or two, can you help us understand as revenues continue to grow at these levels, what is the fixed variable component within SG&A? Just assuming that that's going to be the primary margin driver going forward the next couple of years.
spk08: Yeah, the spending leverage is really part and parcel to our overall strategy where going forward based on the infrastructure that we've established over the last several years, and we've estimated that within our SG&A line, it's roughly 75%, 80% fixed. There's obviously some natural inflation and there's some variable components, but that gives us the confidence that With the top line growth outlook that we have, we are highly confident that spending will grow at a pace meaningfully below the top line. That gives us the confidence, obviously, in margin expansion. We're never going to give up on driving spending leverage. And I think going forward, we have even more confidence that we'll continue to be able to drive that. Again, also in the disclosure this morning, our integration costs, which are included in that line, are really starting to decelerate as well. And as we look going forward... Again, I don't think we have a spending as a percent of revenue leverage. We just have a very high degree of confidence that it will continue to drop, maybe not at the pace that we've realized over the last year because, again, remember in the second quarter of 2020, we were still in the process of harvesting SG&A synergies. But nonetheless, like every other organization, we've learned a lot during the pandemic about how much more efficiently we can operate, and we'll continue to look for those cost-outs.
spk10: And then a quick follow-up. I understand that you guys are not gutting to any impact this year for Alzheimer's, but just curious, sort of two questions. Number one, on the commercial customers, those should be able to sort of fall within home infusion, although they're a much smaller customer base relative to Alzheimer's. But is Alzheimer's a, you know, do those gross margins track generally in line with the chronic business and just any color of what you're seeing on the commercial side of business on managed care or physician pushback? Thanks so much.
spk11: Yeah, look, I think it's too soon to tell on some of that stuff. You know, as, you know, I said in my prepared remark, I mean, we're trying to be very thoughtful in the way that we look at this. There are still a lot of questions around coverage determination and which payers are going to, you know, to allow this from authorization standpoint. So, you know, at this point in time, without knowing kind of what payers are in and how they're actually going to provide coverage discrimination, really don't have an answer to that question, which is why we were conservative in our approach of It's not really in our guidance, and in the near term, we don't expect a significant amount of value. But I will say, as I said in my opening comments, look, we do think that we have a really great platform in order to support these types of products, and it's a matter of making certain that we're working both in Washington as well as with our payer community to let them understand the value that we can bring to this patient population.
spk10: Great. Thanks a lot, guys. Excellent quarter. Thank you.
spk03: Thank you. Our next question comes from the line of Matt LaRue with William Blair. Your line is open.
spk04: Hi, good morning, and congratulations on the quarter. I just wanted to follow up on a comment you made. I think you mentioned there were several chronic therapies that were trending well above pre-COVID, so could you maybe give us a sense for where in particular you're seeing strength, and is that from payer site of care redirection efforts? Is that new therapies you're involved in? Just any more, Carlo, that would be interesting.
spk11: Yeah, good morning, Matt. It's John. So, you know, specifically to your question, so a couple areas. In chronic inflammatory disease, we've seen that move, you know, ahead of where we were from a historical basis. A lot of that is in payer collaboration, in working around site of care initiatives, and helping support patient choice as they're making decisions around where to receive care, sometimes out of hospital outpatient departments and physician practices on the service with us. So we continue to work closely across the payer community to identify those opportunities and find ways to deepen our partnership in supporting their goals of providing high-quality care at an appropriate cost. That's, you know, been part of our overall strategy, and it's, you know, the execution was strong in the second quarter.
spk04: Okay, that sounds sustainable to me. The second one, again, interesting comments that John and Mike, you both made today. I think it was, we're just getting started in terms of the EBITDA margin, building off levels from today, and I think just a couple years ago, the idea was getting to this sort of 8%, 9% level over some time. So, I think this is as bullish as I've heard you on the long-term margin picture. So I guess maybe if you could expand on the we're just getting started comments and what in particular you've been encouraged by there.
spk08: Sure, Matt. It's Mike. Look, when we put these organizations together, we were making a lot of expectations around the margin expansion. Those were comments made in the locker room, so to speak. And now that we've been out on the paint for a number of quarters, and have been able to truly demonstrate how scalable this platform is, it just gives us the higher level of confidence. In the middle of the integration, we got a couple of curveballs with the pandemic, and I think we just continue to learn around how much bricks and mortar we need, how virtually we can operate this business, and I think it continues to add to the number of areas where we think we can leverage technology and infrastructure. you know, we announced the collaboration with Alaya Care, which has been just a phenomenal technology partner of ours, and we see additional areas where we can, A, improve the patient experience at the same time that we can, you know, provide that value to payers and patients, and at the same time, do it in a more efficient manner. And so, Look, the candid reality is as we go forward, we continue to believe that the chronic portfolio will grow faster than the acute. Again, we've received some benefits and been able to offset that mixed shift with bad debt and procurement strategies. But regardless of what we view as the reality of portfolio mixed headwinds, we are highly confident that we will be able to grow the spending components of this business, and the capital efficiency of this business considerably below the top line. And so I don't think we'll see the EBITDA expansion of the big steps that we've seen over the last two years, as we're almost at the two-year anniversary of the merger. But nonetheless, I think we have a high degree of confidence we'll continue to chip away at a higher and higher EBITDA margin. And I wouldn't put an upward limit on what that could be.
spk04: Okay, that's great.
spk08: Thanks.
spk04: Thanks, Matt.
spk03: Thank you. Our next question comes from a line of David McDonald with Truist. Your line is open.
spk07: Thank you. Good morning. Guys, just a couple of questions. First, on home health, we've seen some interesting announcements out of some of the bigger home health guys about, you know, treating a more acute patient. And when you look at the services that they're bringing, you know, home infusion is really a hole across the board. So can you just talk about the opportunity to work more collaboratively with the major home health players? You mentioned a little bit during the prepared remarks around staffing, et cetera. But if you could just spend a minute on that, that would be helpful.
spk11: Hey, Dave. Good morning. So, look, we continue to look for those opportunities to deepen the relationships. I think, as you'll recall, we had announced earlier or late last year and then again earlier this year around some of the work we are doing with the medicines on the monoclonal antibodies. We do think there is opportunities for us to, you know, be a partner in that process, you know, both in looking at opportunities to leverage clinical, you know, resources as we did with the Amedisys team, as well as, you know, support their patient population. So, you know, we're pleased at the position that we're in. We think there are opportunities for, you know, some additional deepening of partnerships and creation of new ones there. And, you know, we're well positioned in order to participate in that activity as we move forward.
spk07: Okay. Secondly, you talked about 10 to 15 new infusion centers by year end. Can you give us a sense either percentage of revenue, a percentage of nursing hours, or, you know, whatever is you think the best metric that are currently running through these centers and then, you know, how much you think you can potentially push that just given the pretty significant leverage around labor within those centers.
spk11: Yeah, Dave, you know, we continue to monitor and track, and I think as we have talked about before, you know, we look at the percentage of nursing visits that we conduct in those facilities as opposed to in the home. We have been running in the high teens, you know, and we've been really focusing on that. Through the second quarter, we were at 20% of our nursing visits were being done in one of our infusion suites. Our expectations as we move forward is we can be pushing that both by the expansion that we talked about of opening more centers and having more convenient facilities available for the patient population, as well as the growth. that we're seeing, you know, in the patient census, especially on the chronic side. You know, I think that we're looking to push north of that. You know, whether we can get to 23% to 25%, I think those are realistic, and that's kind of the goals that we're pushing the organization on that. You know, there is a level of patient satisfaction and convenience that we're factoring into not only the efficiencies that we can gain out of that, just the retention and satisfaction of the patient population given these facilities and the features and benefits that we build in there. So, you know, we have talked historically around, look, we have a lot of work to do on integration and a lot of work to do to rationalize some of the redundant infrastructure that we had there. So as we move past that integration effort and now really start focusing around these growth levers, we expect that this will be a bigger part of our go-to-market strategy and a bigger part of our point of care service model as we're looking at the opportunity ahead. And, you know, we're building that into our CapEx plans as we move forward. So it's not a deviation from kind of what you've seen historically as we're pretty efficient in being able to stand these up in a capital light way.
spk07: Okay. And then just last question for me, if I look at, you know, net debt to the midpoint of 21 EBITDA guidance is actually south of four times. When you think about kind of the long-term outlook here, you know, what range would you like to run the business in in terms of leverage? And then on a go-forward basis, is it fair to assume further deleveraging will be more growing the denominator as opposing to shrinking the numerator?
spk08: Thanks, Dave. I was waiting for the leverage question, so I owe you one. But we're thrilled with the capital efficiency and the cash flow generation of the business. I mean, we mentioned we wanted to be at or below four times net levered by the end of the year. We're there at mid-year, and that's in a quarter where we deployed $18.5 million for M&A. And so that's another area where we get really excited because with cash interest dropping and with CapEx relatively static, we see the incremental earnings to incremental cash flow quite significant. I think we expect to operate this business below four times. How far below, that will be dictated partially by what are the strategic opportunities that lie ahead of us. And I would tell you that You know, the M&A activity is robust. I think it's more likely than not that we will, you know, have some additional news to share before the end of the year. And I think that's an exciting aspect and a serious responsibility that we take in terms of how do we best deploy capital to create value for the shareholders. And I think, you know, given where we are at mid-year and given the fact that we're We will continue to drift south, but just based on the earnings and cash flow trajectory, access to capital will be substantial. So, you know, more to come on that front. Okay. Thanks. Congratulations. Thanks, Dave.
spk07: Thanks, Dave.
spk03: Thank you. Our next question comes from the line of Jamie Pierce with Goldman Sachs. Your line is open.
spk01: Hey, good morning, John and Mike. I wanted to just touch on the long-term growth algorithm and level set how you guys are all thinking about that. Just given the step-up in growth this quarter, the growth investments you talked about, the new infusion suite, is it time to kind of level set us on where you think this business can grow long-term?
spk08: Yeah, Jamie, look, obviously we're not in a position to provide longer-term guidance, but the way we've characterized it is we see this industry in a mid-to-high single-digit top line. I think we've tried to establish a reputation of laying out guidance that we have an extremely high degree of confidence that we will deliver. We also believe over the last couple of years we've demonstrated we think we can grow faster than the market just based on the unique aspect of this model. And we've said that we see that as a base case before inorganic capital deployment of somewhere in the low to mid teens. Look, this year we're thrilled with the momentum and the business that we've built. Again, one note of caution just around, you know, relative to the comp of 2020, it gets a little atypical, I guess, is the term I'd like to use. And so, look, as we go forward, I think we have a very high degree of confidence in that base case. And, you know, as we get closer to 2022, you know, we'll revisit that. But for now, I still think that, you know, longer term is still a logical zip code to focus on.
spk01: Okay, fair enough. I wanted to come back to the Medicare reimbursement and the issues there. I know that's a barrier to increased confidence on the Agihelm side. I'm wondering if that were to improve what that would mean to the base business, so for getting Alzheimer's for the moment, how could that change the number of therapies that are addressed in these alternate sites and your outlook for the business?
spk11: Yeah, Jamie, look, as we've talked about before, the current way that Medicare reimburses, especially in the home, it's just inadequate for the care that's provided. We're working on multiple approaches to that, both with the industry and independently. through the process of, you know, getting a better reimbursement scheme that reflects not only the care plan and oversight as well as the nursing interventions that we provide, not just the drug and the drug reimbursement, you know, per their process. Look, you know, I think on the near term, you know, our focus is getting the calendar day fixed around getting a per diem for when a patient is truly under our care and we're managing them through that process, and that's been the focus. You know, I think more broadly we'll continue to look for expansion. opportunities to expand access to the Medicare population. But, you know, this is going to take time and it's pretty complex given all of the different priorities in Washington these days.
spk01: Okay. Thank you. Congrats on the quarter. Thanks, Jamie.
spk03: Thank you. Our next question comes from the line of Lisa Gill with J.P. Morgan. Your line is open.
spk00: Thanks. It's actually Mike Minchak on for Lisa this morning. Just a couple questions. So first, with respect to gross margins, you know, clearly a very strong quarter there with nice year-over-year growth. I was just wondering if you could comment at all on sort of the trends you saw within both segments of the business. You know, was the growth there sort of more mix-driven or, you know, given the pickup of growth in the acute therapies, or are you seeing favorable margin trends within both categories? And if so, maybe, you know, what are the key drivers there?
spk08: Hey, Mike. It's Shapiro. I'll start. So, look, I think, you know, a couple of key dynamics within gross margin. First and foremost, we continue to aggressively drive down bad debt. You know, any amount of bad debt is unacceptable, and we've driven it down a couple of full percentage points over the last year. And so, as we've seen bad debt drift down towards 2%, that's an immediate gross margin benefit. Aside from that, within each of the therapy categories, we have been aggressively working on our procurement strategies, and we've got a procurement team that's second to none, and we also continue to work with the manufacturers and suppliers. Again, we benefit from having direct relationships with most of our suppliers, and as we collaborate with them on market expansion and and promoting the therapies, that can result in better margins within each of those categories. So I would say, you know, A, we still saw some ASP headwind. We still saw some mixed headwind from chronic growing a little faster than acute. Again, acute did benefit from an easy comp in terms of the year-over-year, but I think the way I would characterize it is probably your latter assertion that we saw good margin traction within each of the individual portfolios.
spk03: Thank you. Our next question comes from the line of Kevin Fishbeck with Bank of America. Your line is open.
spk02: Good morning, actually. This is Joanna Gadzik filling in for Kevin today. Thanks for taking the questions. I want to follow up on a couple of these things you were discussing right before on the infusion suite that you expect to add, I guess, 10 to 15, sounds like in the second half of this year. So for the kind of reference point, you know, can you talk about how many of these suites did you add, you know, this year over the last 12 months, or, you know, maybe before the pandemic, kind of get a sense of, you know, acceleration seems in those suites being added. And I guess to that end, you mentioned that, you know, it's a very cost efficient way of growing. So can you give us the ballpark, I guess, of CAPEX expectations for the year?
spk08: Sure. It's Mike. So today we have a little north of 120 infusion suites, almost 400 chairs coast to coast. And again, a lot of these are standalone. A lot of these are incorporated into our care management centers and pharmacies. And this, as John mentioned, today roughly 20% of our nursing events occur in one of our suites. Again, we view this as both a clinical labor efficiency strategy as well as a growth support platform as These suites are quite amenable to many of the chronic conditions and patient cohorts that we support. As we think about, we've added some in the first half. We have an aggressive expansion plan. in the back half, these are relatively efficient investments. And I would say that as we've characterized our CapExes in the $25 to $30 million range, that has been and will continue to be absorbed and funded through what we view as a very efficient capital investment amount on an annual basis. And we don't see that $25 to $30 really growing. We can accommodate quite a few suite expansions in addition to our other technology and infrastructure projects within that estimate.
spk02: Okay. What I was getting at is, you know, have you added recently these suites? Because clearly you're growing faster than the market, so we are trying to assess, you know, what is driving that. I mean, it sounds like it's sustainable, but just, you know, any colors there, whether it's You know, adding this week, the last, you know, couple of quarters, maybe, you know, it's another reason to think those markets for gains are sustainable.
spk11: Yeah, it's John. I guess I would respond to that in two ways. Certainly, you know, the infusion suites and adding the additional, you know, chairs that we did certainly give broader access, and we'll capitalize on that. But the growth, you know, a lot of that was driven by, again, the deepening partnerships that we have with the payer community, the deepening partnerships we have with the referral sources. and the focus of our commercial team to make certain that from a reach and frequency that they are getting out into the market and that they're capitalizing on the platform that we have. So, you know, I think it's just one component of what is a comprehensive go-to-market strategy. And our expectations are, you know, that given the investments we've made into the team, given the training that we have provided them, that we're going to be well positioned to continue to, capture, you know, our fair share of demand in the marketplace and look for those opportunities to continue down the growth momentum.
spk02: And to follow up on something you said also on this topic of getting market share, can you talk about, you know, your relationships with your payers? You know, is there a clear, you know, drive for these payers to shrink their networks? And I guess, you know, It is beneficiary of that dynamic.
spk11: Yeah, look, you know, they'll give you their strategy. From our perspective, look, if we are offering high-quality care at an appropriate cost in a setting in which patients want to receive the care, we think we're really well positioned on that. The national network that we have gives them the confidence that patients or their members, regardless of their location, will be well served and, you know, and have superior clinical outcomes. based on the capability set that we have. And so, look, we think we're on the right side of narrowing of networks because we should be a preferred partner for them there. And, you know, our focus is around patient satisfaction and high-quality outcomes. And if we do that, we expect that we'll be on the right side of any of those conversations.
spk02: Yes, definitely. Because I guess there is not really a unified approach. quality scoring system for home infusion, but I guess, you know, it's really more about the payer relationships, and I guess, would you deliver to them, and I guess, how this relationship progresses. So, I understand, and thank you for answering that question. Thanks.
spk11: You're welcome.
spk03: Thank you. Our next question comes from the line of Mike Petusky with Barrington Research. Your line is open.
spk06: Hey, good morning, guys. A couple questions. Mike, I guess on the bad debt expense improvement, was that driven by maybe some of the old bioscript stuff being cleared out or gone through or things that you guys have done? And then I guess I think I had always thought that maybe 2% was about as good as it could get there. And I'm just curious if you think there's meaningful room there below 2%. Thank you.
spk08: Yeah, look, I'll arrange a call with our revenue cycle team who will assure you that 2% is way too high. All kidding aside, Mike, look, this is what we've focused on for the last five years. You know, revenue doesn't pay the light bill, converting it to cash and getting cash in the bank. And so through our technology, we have dramatically improved our collectability, both on the option care side as well as you know, what I would call the legacy bioscript side. And so I would say it's more around, you know, when we're providing the services, you know, we're making sure that we're presenting clean claims and following up with payers. The amazing thing is if you present an accurate, timely claim to a payer, they pay you very timely. And so that's as complex as it gets, and we've just become relentlessly focused on doing so. And if you look... since the merger, you know, our accounts receivable came down dramatically on a combined basis. And, you know, there's some modest growth, but nowhere as close as revenue. And so our DSO continues to improve. And I would say, you know, 2% might have been the theoretical low. I will tell you that we've got a team that is just getting started on that front. And I would expect that we'll dip below 2%. How far? What really matters is just getting that cash in the bank.
spk06: Okay, terrific. And then, John, I guess you guys, along with a lot of other healthcare companies, have expressed that they've learned things about their businesses during COVID in 2020 and into early 2021. I'm just curious, are there things that you can sort of call out that, you know, if this Delta variant or another variant becomes a thing for at least a period of time that you guys learned last year or earlier this year that you feel will position you, you know, well as you deal with any challenges related to a variant heating up? Thanks.
spk11: Yeah, so, you know, a couple things that we've talked about previously. You know, some of the investment in the technology stack allows us to be efficient in, you know, in discharges on a virtual basis, on virtual teaches, on the ability for us to utilize that tool to improve patient engagement and support. So we're going to continue to, you know, leverage that where appropriate. Our team has become very adept at, you know, being able to capture the demand in the marketplace, even though, you know, for a while we weren't allowed into the facilities or we had restricted access. And so... we're going to continue to execute around those paths i think from mike had called out look from an operating standpoint we have um you know figured out how to be very effective uh with remote workforce and uh and leveraging the technology to collaborate in ways um that uh that honestly we just weren't doing uh in advance of the pandemic and we're going to continue those as we move forward um because we expect uh that we'll continue to get the efficiency and the effectiveness of those collaboration tools as we look ahead.
spk06: Can I just ask, according to an article I think I read this morning, it looks like the Delta variant is sort of ripping through a couple of key states or bigger states. Have you guys noticed any meaningful dip in patient referrals or anything else in the states that appear to be hit the hardest with this variant?
spk11: Yeah, look, we certainly feel impact as hospitals reset. If they move towards reducing or eliminating elective surgeries or they move towards being more responsive to the pandemic in their marketplace, we feel the impacts of that. We also feel the impacts when patients aren't going to specialists. for diagnosis or for care. And so, you know, we kind of monitor it on a market-by-market basis. But, yeah, I mean, we feel the impacts of those. But, you know, right now it's been a pretty short duration for the variant, and we're trying to, you know, monitor and manage that very closely.
spk03: Okay. Thanks, guys. Thanks, Mike.
spk11: Thanks.
spk03: Thank you. Our next question comes from the line of Richard Close with Canaccord. Your line is open.
spk09: Great, thanks. Congratulations on a great quarter. A lot of questions been asked here. But, you know, first of all, Mike, I would ask, you made some comments with respect to your conservatism. in the past, obviously, because the merger first and foremost, and then COVID last year. Just to be clear, your sort of conservative stance hasn't necessarily changed despite your updated guidance, correct? I think that's fair. Okay. And then maybe just to dive in on the technology side a little bit, You talked about, you know, technology with respect to the bad debt, and then on this new collaboration for engagement. I'm just curious, on the tens of millions of dollars you spent previously, do you think you've realized all the benefits from that technology, you know, as of now? And then looking forward on this collaboration, you know, where do you see the benefits coming from the technology and maybe how quickly?
spk11: Yeah, so first and foremost, you know, we are still in a process. We will fully deploy the technology here in August across all of our platforms. So there is still some opportunity that we see from interoperability and kind of tightening, you know, some of the process and efficiencies that we can receive out of that. We're really excited about the opportunity to have that patient interface and and drive a better patient experience and engagement through the collaboration with AlayaCare and the co-development there. So, look, we still see some additional opportunities to drive efficiencies and effectiveness and, in many instances, a better engagement and outcome for the patient population.
spk08: Yeah, I think from a return perspective, which I think we absolutely have, you know, as we've talked about throughout the merger and integration process, We started years ago with very scalable platforms using market-leading platforms, and we've retooled and replaced a lot of clean rooms and pharmacy infrastructure. I think pre-merger, the EBITDA margins were in the mid-single-digit range, and we're now – we just printed an eight. I would say that from the cash and from the earnings ROI – I think we have absolutely generated the returns or greater than we expected. And I think those platforms continue to be highly scalable going forward.
spk09: Okay, that's very helpful. And then, John, I just wanted to touch on the labor market. You did mention that quite a bit in your prepared remarks. Is that the biggest headwind for you guys as you look forward, just managing labor? The labor component, just any thoughts there is helpful.
spk11: Yeah, I mean, look, it certainly is a headwind. You don't pick up many newspapers that don't, you know, highlight some of the constraints. It is market-by-market driven. Certainly some of the clinical resources, nursing, you know, being one of those areas that we're watching closely. We like our model in the sense of we have full-time, part-time per diem, and then the strength of some of our agency relationships that allows us to flex. through that process. But, yeah, I mean, that is an area that we are keeping our eye on. I think, you know, the other thing that we're keeping our eye on, as we had just talked about, was, you know, the Delta variant and how that's going to have impact in the second half of the year. Okay.
spk09: Great. Thanks. Congratulations. Thanks, Rick.
spk03: Thank you. Our next question comes from the line of Frank Tackenden with Lake Street Capital Markets. Your line is open.
spk05: hey thanks for taking my questions and congrats on the quarter a lot's been covered I'll keep it to one relatively simple one Mike can you just remind us on interest expense thoughts as well as any potential or likelihood of a refinance and I think there's a rate lock expiration coming up so just maybe give us a overall thought process around interest expense as we think about the back half of this year and into 2022
spk08: Sure, Frank. So, look, when we started this journey, we were burning about $110 million in cash interest. We're right now in the second quarter at an annual rate in the low 60s. That still includes, as you always keep me honest, it includes a rate swap that swaps out our rate to 2% fixed. That expires near the end of the third quarter. And at that time, going into the fourth quarter, we should take another meaningful step down to, you know, somewhere, depending on where LIBOR and rates are, somewhere in the low to mid-50s, which, you know, represents a 50% cut in our cash interest from a couple years ago. So very good decline. Again, goes back to our comment around converting incremental earnings to cash flow. Regarding a refinancing, look, as I mentioned in my prepared remarks, we've got a great cap structure that's Covey light. We have no maturities for five years, and it's all at L plus 375. We'll continue to look opportunistically at our cap structure, and if there's opportunities to further improve it, you can bet we will absolutely capitalize on those opportunities.
spk05: Perfect. Thanks, and congrats again on the quarter. Thanks, Frank.
spk03: Thank you. I'm sure no further questions in the queue. I would now like to turn the call back over to John for closing remarks.
spk11: Great. Thank you. In closing, look, I'm very pleased with the performance of the team and the strength of our first half results. Our focus remains on providing extraordinary care to the patients that we serve and capitalizing on the momentum we are gaining, even in this dynamic environment. Thank you for joining us this morning, and please stay safe.
spk03: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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