BrightSpring Health Services, Inc. Q4 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to BrightSpring Health Services, Inc. Fourth Quarter and Full Year 2024 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler, Investor Relations. Please go ahead.

Good morning. Thank you for participating in today's conference call. My name is David Deuchler, and I'm responsible for Investor Relations at BrightSpring. I am joined on today's call by Jon Rousseau, Chief Executive Officer; and Jen Phipps, Chief Financial Officer. Earlier today, BrightSpring released financial results for the quarter and full year ended December 31, 2024. A copy of the press release and presentation is available on the company's investor relations website. 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. Such forward-looking statements are not guarantees of future performance. 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 and presentation as well as in our quarterly report on Form 10-K that will be filed with the SEC, including specific risk factors and uncertainties discussed in our 10-K. Such factors may be updated from time to time in our periodic filings with the SEC, and 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 financial measures and reconciliations to their most directly comparable GAAP financial measures to the extent available without unreasonable effort in today's press release and presentation, which again, are available on our Investor Relations website. This webcast is being recorded and will be available for replay on our Investor Relations website. And with that, I'll turn the call over to Jon Rousseau, Chief Executive Officer.

Good morning. Thank you for joining BrightSpring Fourth Quarter and Full Year 2024 Earnings Call. I'd like to begin this call by expressing my appreciation and gratitude to the BrightSpring team across the country. Our employees and caregivers work very hard with diligence each day to deliver compassionate and attentive care to the people we provide critical services to. I would also like to welcome Jen Phipps as Chief Financial Officer and thank Jim Mattingly for his excellent service over the years as we transition the CFO position. During Jim's tenure, the company has achieved some exceptional results, including the sale and recapitalization to KKR and WBA, 175% revenue and 109% EBITDA growth since that time, implementation of best-in-class financial systems, completing the IPO and executing multiple successful refinancings underpinned by the company's performance. We appreciate all of Jim's leadership and contributions as he moves to other priorities and next steps. After appropriate consideration and evaluation, we are extremely pleased that Jen will assume the role of Chief Financial Officer. With Jen's overall background and eight-year tenure at BrightSpring, she is extremely well-suited for this role. Jen has served as the Chief Accounting Officer of the company since January 2017 and Principal Accounting Officer since the IPO. Jen has also served as the CFO of the home health and hospice business and run numerous other departments within the company, including procurement, real estate, and tax. She has been deeply involved in all financial systems and processes over the years as well as all acquisitions and divestitures and many automation and efficiency initiatives. Jen is well prepared, knows the entirety of the company, and is very deserving of this position. Turning to 2024, it was another year of milestones, continued quality improvements and leadership, further growth, and significant ongoing impact for the customers, patients, and communities that BrightSpring serves. We are proud of how our businesses and people have performed. Throughout 2024, we have also deepened our focus on operational efficiencies across the organization to best support employee effectiveness and high-quality services. In addressing significant needs for individuals across the country, the company has increased its reach to more patients and delivered strong growth across both pharmacy and provider businesses through strategic prioritization, disciplined investments, company scale, and execution. Our results are ultimately a reflection of the reliable, relatively lower cost and coordinated care that drive high customer and patient satisfaction rates. In the fourth quarter, we are pleased to have realized total revenue growth of 29% year-over-year, leading to total company and segment revenues for full year 2024 at the high end of our guidance range and in line with our preliminary results provided in January. Total revenue of $11.3 billion in 2024 represented 28% growth year-over-year, which included Pharmacy Solutions revenue of $8.8 billion and provider services revenue of $2.5 billion, representing 34% and 9% growth year-over-year, respectively. Full year 2024 adjusted EBITDA was $588 million, representing 16% growth year-over-year when excluding a certain $30 million quality incentive payment from 2023. Adjusted EBITDA also came in at the high end of our guidance range and in line with preliminary 2024 results communicated in January. Today, we are increasing total revenue and adjusted EBITDA guidance for 2025 with our adjusted EBITDA guidance for this year increasing by $5 million at each of the low and high ends of the prior range provided in January, which excludes the community living business. We announced in January that we entered into a definitive agreement to divest the community living business to Sevita and expect the transaction to close this year, subject to regulatory approvals and typical closing conditions. Jen will discuss our fourth quarter and full year 2024 financial results along with our 2025 outlook in more detail shortly. Before I discuss business performance, I would like to reinforce our commitment to both quality and continuous improvement and efficiencies across the organization, which go hand-in-hand. For example, in quality, our most recent Net Promoter Scores and specialty pharmacy for Onco360 and CareMed were 98 and 100, respectively, almost a perfect rating for Onco360 and a perfect 10 out of 10 rating for CareMed from all participants, also scores that are the best among specialty pharmacies. After the past year of investments in people and processes in our Infusion business, we are now seeing best-in-class referral to in-home turnaround times for specialty patients. Our home and community pharmacy on-time delivery metrics approached 97%. Approximately 85% of our home health branches now have a predicted CMS star rating of 4 or 5 out of 5. We have 97% timely initiation of care, above the industry average. In hospice, we have a 9.3 hospice care index score out of 10, significantly above the national average. We provide 16% more nursing visits to patients and 27% more patient visits in the last week of life, with 90% of our locations above the national average on visits provided to patients. In primary care, our ACO reported 13% lower healthcare costs for patients in skilled nursing facilities and 31% lower costs for patients in assisted living through our more attentive, local and proactive care and quality. Our special needs plan has already improved its star rating by 0.5 in less than a year under our ownership, with a 6% reduction in hospitalizations in the last year, a 99% capture rate for health risk assessments, and 99% of our patients receiving annual wellness visits within 90 days of enrollment. In Personal Care, we have a likelihood to recommend of 4.54 out of 5. In rehab, we have overall stakeholder satisfaction of over 97%. And among case managers, discharge planners, physicians, claims managers, etc., we have a patient satisfaction score of over 95%. In community living, our external audits outperformed the national average, and we hold more third-party accreditations than anyone in the industry while deploying innovative and leading technologies to drive client risk stratification and care plans. These are just select mentions and highlights among many other strong and leading service and quality measures in the company. Across the organization, we continue to invest in and deploy new and/or enhanced technologies EMRs, ERPs, applications and analytics and reporting, many of which now incorporate new automation and AI use cases for the benefit of our people and to drive outcomes for the individuals we serve. We also continue to invest heavily in compliance with literally thousands of on-site internal compliance visits and audits conducted across our operations last year. On the efficiency front, since the start of last year, the company has over 100 procurement, workflow augmentation, and automation programs completed or ongoing, driving process improvements, cost efficiencies, best practices, and streamlining across all business lines. We are dedicated more than ever to lean into process and technology innovation and leadership in healthcare services to provide all of our stakeholders with the best possible experiences over the years. Now taking a closer look at fourth quarter results, Pharmacy Solutions revenue of $2.4 billion represented 34% growth compared with the fourth quarter of last year. Growth for the business was primarily driven by total script volume of $11 million in the fourth quarter, which represented 14% growth compared to the prior year's quarter. The Infusion and Specialty business has continued to deliver above expectations, growing revenue 42% year-over-year in the quarter, driven by specialty script growth of 35%. Our results in specialty and infusion this quarter and throughout the year have been a function of cross-functional operational execution and continued LDD brand launches and generic drug utilization. Our total LDD portfolio now stands at 125, which includes 12 LDDs launched in 2024 in either an exclusive or ultra-narrow pharmacy network. We continue to see the potential for an additional 16 to 18 limited distribution drug launches over the next 12 to 18 months while also facilitating the adoption of new generic products. We are honored to be selected by our pharma manufacturing and biotech partners as a limited distribution drug specialty pharmacy for each of these therapies and are committed to helping improve the lives of patients who are battling cancer, rare orphan, neuro, and a number of other diseases through market-leading service levels and satisfaction scores. Within Infusion in 2023 and through 2024, we initiated and completed operational initiatives and investments to deploy standardizations and process improvements, and we believe that results in the infusion subsegment will begin to benefit from these investments in 2025. In Home and Community Pharmacy, revenue grew 17% year-over-year in the fourth quarter, driven by script growth and new customer wins. We continue to be pleased with our execution across a variety of home and community pharmacy settings, including behavioral, hospice, assisted living, skilled nursing, hospitals, and rehab settings, as well as other locations where patients need at-home pharmacy support. We believe we have additional market share and growth potential opportunities in all of these markets, and we will also be entering the PACE pharmacy market this year. We remain focused on driving more operational and technology-driven efficiencies in the business, and the continued expansion of our pharmacy services is important to ensuring that as many people as possible receive the highest quality and most comprehensive medication management and care. Turning to Provider services. Segment revenue grew 11% year-over-year, and segment adjusted EBITDA margin expanded by 70 basis points year-over-year to 15.2% in the fourth quarter, primarily driven by strong service and quality-based volume growth and broad-based operational efficiency and execution. In Home and Healthcare, revenue grew at a rate of 17% year-over-year in the fourth quarter, with average daily census growth of 9% to 46,000. We saw continued growth in the home health and hospice businesses, both in the fourth quarter and for the full year 2024. Personal Care has been a consistent performer this year with steady billable hours and very consistent operational execution. Our primary care business has seen expansion in growth, where we leverage proximity and access to patients, including through core pharmacy and provider services, and we believe home-based primary care represents a significant opportunity in the coming years with ACO and payer strategies continuing to develop. Community and Rehab Care also performed well again in the quarter with strong revenue growth of 8% year-over-year and consistent growth in rehab persons and hours served. In the rehab business, billable hours grew in the mid-teens year-over-year for the fourth quarter and full year. We continue to add numerous de novos through new home and community neuro rehab programs and new rehab and motion programs in assisted living facilities. We anticipate attractive growth from rehab in motion over the next five years, as we continue to add locations. The community living business has shown solid growth through 2024 through operational continuity, a service focus, and continued investments in technology and employees. As I mentioned earlier, the divestiture of community living remains on track, anticipated to close in the second half of 2025, subject to customary regulatory approvals and closing conditions. We expect that the transaction will create a streamlined organization of BrightSpring and augment both provider services and company revenue and adjusted EBITDA growth rates. Our strategic focus in Provider will narrow to the remaining Home Healthcare, rehab and personal care businesses, each of which continues to perform in line with our high expectations. Consistent with the announced divestiture of Community Living, our capital allocation priorities remain on both debt paydown and continued tuck-in acquisitions at disciplined valuations, consistent with our prior strategy. To summarize, 2024 was an excellent year for BrightSpring, and I'm pleased with our execution so far in 2025, as we always continue to look for any way to serve more people and improve their outcomes with mission-driven and meaningful services. We are focused on delivering on our 2025 financial outlook through quality, volume growth, process optimization, cost efficiencies, accretive acquisitions, and effective portfolio and asset management and deployment. With that, I'll turn the call over to Jen to discuss our 2024 fourth quarter and full year financial results and 2025 guidance in more detail.

Thank you, Jon. In the fourth quarter of 2024, the total company revenue was $3.1 billion, representing 29% growth from the prior year period. Pharmacy Solutions segment revenue in the quarter was $2.4 billion, achieving 34% year-over-year growth. Within the Pharmacy segment, Infusion and Specialty revenue was $1.8 billion, representing growth of 42% from the prior year, and home and community pharmacy revenue was $601 million, representing growth of 17% year-over-year. In the Provider Services segment, we reported revenue of $656 million in the fourth quarter, which represented 11% growth compared to the prior year period. Within the Provider Services segment, Home Healthcare reported $280 million in revenue, growing 17% versus last year, and Community and Rehab Care revenue was $376 million, representing growth of 8% year-over-year. For the full year of 2024, total company revenue was $11.3 billion, representing 28% growth from 2023. Pharmacy Solutions segment revenue was $8.8 billion, representing 34% growth from the prior year, and Provider Services segment revenue was $2.5 billion, also representing very strong 9% growth from the prior year. Moving down the P&L. In Q4, company gross profit was $422 million, representing growth of 14% compared with the fourth quarter of last year. For full year 2024, company gross profit was $1.588 billion, representing growth of 13% compared to 2023 when excluding a $30 million quality incentive payment. Adjusted EBITDA for the total company was $167 million in the fourth quarter, growing 17% compared to the fourth quarter of 2023. For full year 2024, adjusted EBITDA for the company was $588 million, representing 16% growth compared to 2023 when excluding a certain $30 million QIP in 2023. Adjusted EPS for the total company was $0.22 for the fourth quarter. Turning back to segment performance. In the fourth quarter, Pharmacy Solutions gross profit was $205 million, growing 20% compared to the fourth quarter of last year. Adjusted EBITDA for Pharmacy Solutions was $113 million for the fourth quarter, growing 22% compared to last year, representing an adjusted EBITDA margin of 4.7%, which was in line with our expectations. Provider Services gross profit was $217 million, growing 10% versus the fourth quarter of last year. Adjusted EBITDA for Provider Services was $99 million for the fourth quarter, growing 16% versus last year, representing an adjusted EBITDA margin of 15.2%, up 70 basis points versus last year. On a total company basis, cash flow from operations was $116 million in the fourth quarter, excluding IPO fees paid in Q4 and $90 million of cash flow from operations in the quarter, including these fees. We expect to deliver over $300 million of annual run rate operating cash flows in 2025 as we remain focused on improving our leverage ratio towards our pro forma goal of 3.0 to 3.5x and our long-term target of 2 to 2.5x. As of December 31, our net debt outstanding is approximately $2.7 billion with a leverage ratio of 4.16x, which was in line with our internal projections. As a reminder, net interest expense includes interest income related to cash flow hedges due to our three received variable pay fixed interest rate swap agreements that we have in place set to mature on September 30, 2025. Prior to any proceeds from the pending Community Living divestiture, quarterly interest expense is expected to be approximately $43 million per quarter, including approximately $1.2 million in interest expense related to the TEU instrument. Turning to our guidance for 2025, we are increasing our expectations for revenue and adjusted EBITDA that was provided in January, which excludes the Community Living business. Total revenue is expected to be in the range of $11.6 billion to $12.1 billion, including Pharmacy Solutions revenue of $10.15 billion to $10.6 billion and provider services revenue of $1.45 billion to $1.5 billion. This revenue range reflects 15.2% to 20.1% growth over full year 2024, excluding Community Living in both years. Total adjusted EBITDA is expected to be in the range of $545 million to $560 million for full year 2025. This would reflect 18.4% to 21.7% growth over full year 2024, excluding Community Living in both years. With that, I will now turn it back to Jon.

Thank you, Jim, and thank you for your time today to go through BrightSpring's fourth quarter results and 2025 outlook. We will now open it up for questions. Operator?

Thank you. And our first question comes from A.J. Rice of UBS. Your line is open.

Hi, everybody. Congratulations, Jim. Best wishes in the new role. When you think about your limited distribution drug business and pipeline, it seems like you guys are seeing more exclusivity and fewer and fewer competitors are getting the contracts you're receiving. I know some of that is obviously the strength of your franchise and what you've done, but I also wonder if there are any changes in the competitive landscape. Obviously, the pipeline of new LDDs continues to look robust, but it seems like you might be capturing more of those or getting more narrow contracts. Can you just comment on that?

Yeah, good morning, AJ. Thank you. No, nothing material has shifted in the market, and we've had about a 10 to 15-year history with our team of really focusing on operational process and service levels for our partners. Here in the most recent quarter, we pulse the market on Net Promoter Scores, and we actually had a 198 Net Promoter Score for CareMed, which is really the non-oncology and then Onco360 in satisfaction ratings, which we were obviously incredibly pleased with. So, the team has just done a nice job of servicing our partners over the years. There is a general trend toward more niche micro therapies in the market. Perhaps there's something there in terms of partners being more comfortable with fewer pharmacies serving those niche targeted populations. But we have seen a trend towards the narrowing of networks, and we've been pleased that we've been able to continue to be a strong and chosen partner through that process.

Okay. Then a couple of times, you mentioned in the prepared remarks about the investments you've made over the last 18 to 24 months in the Infusion business, and you feel like it's positioned to grow from here. I wonder if we could get you to talk a little bit more about the opportunity now, what the growth trajectory might look like for that business as well as where you're at with respect to margin and what level of upside there might be on margin at this point?

Yes. No, good question. And just tying off the LDD point there as well. In 2025, we've now launched two LDDs so far this year in the first two months, so good to see that momentum happening in the first part of the year too. Importantly, a handful of our more recent launches have been in the rare orphan category as we continue to focus on oncology, as well as other relevant indications where we can apply our operating model similarly. On Infusion, certainly, the last two years, as has been mentioned multiple times, there has been a real focus on the business operationally, trying to implement more commonality and standardization across the 30-plus Infusion pharmacies across the country, really trying to apply best practices and balance what gets more centralized and what stays local. That's a critical decision in Infusion, and we've been very thoughtful about that. We generally have a totally new team there at Infusion over the last six to seven months. That team has been locked-in in its entirety for a good six months or so now. We are seeing really good progress, whether it's on the operational front, whether it's on the AR and bad debt front—things are really trending in the right direction. From here, we need to just focus on starting to drive more referrals again as we've been more focused operationally over the last 18 months. A key metric in that industry is turnaround time; how fast can you get a referral and then get the patient through the process and be ready to schedule them in the home on the specialty side, not acute, on the specialty side. We're seeing turnaround times of 10 to 11 days in the last three or four months as a result of all of our efforts, which would be generally best-in-class in that industry. We're excited about where that can go. Infusion, we believe, is a market with a ton of opportunity. Looking ahead, we're hopeful that this business could grow about 20% this year on a growth rate basis. And that's what we're pushing for. Our internal goal is to stay in that range or even above.

Okay. All right. Thanks a lot.

Thank you. And our next question comes from Whit Mayo of Leerink. Your line is open.

Hey, thanks, guys. I think in the past, you've talked about a lot of internal operating cost-saving and efficiency opportunities, maybe 60 different projects or programs that you've had kind of in flight. I think you recently rebid your wholesaler. Just maybe any sense on the cumulative savings from a lot of these initiatives and the opportunity on the margin side for this year?

Yes, good morning, Whit. I would say it's really an amalgamation across a lot of different areas of our company. Fundamentally, we have had a lean and PMO focus in the organization for a very long time, driving process and cost opportunities. We put that in place going back about eight years ago, and it really cuts across procurement well beyond anything by drug spend, I mean medical supplies, delivery, just go down the list. We are very focused in that area. We look at processes across the organization from an RPA, from an automation perspective. You think about something like onboarding along our new employees—that's something that we're leaning into and trying to automate a lot of touch points in that process. You look at something like scheduling instead of a human being trying to figure out schedules across 100 nurses and 100 patients in the city and what's the most efficient route doing that in an automated way. We have a process going on there right now as well. It cuts across almost everything in our company. I would say just the attention and the focus to that, while it's been going on for eight years, has really deepened in the last eight years. We're leaning into AI applications now as well. We'll see about that as many people will—many AI today is just sort of glorified scribing. A lot of AI today is just sort of glorified scribing. You have the obvious chat stuff. But in new EMRs, we are looking at within some of the provider side. The idea is that the EMR can be the doctor, and there are recommendations coming out of that, and there's chart pre-populating going on that drives a ton of efficiency. We have a BPO, business process optimization team that works across everywhere in our organization. I would say the cumulative result of literally—it's now been over 100 projects as we look back over the last 15 months—has been a helpful driver to our EBITDA last year, but not necessarily EBITDA; a lot of the proceeds from those efficiencies were driving right back into the business, whether it's IT, compliance, quality, sales and marketing, hiring great people, etc. Some of the benefit of that does drop to EBITDA, but a lot goes back into reinvesting for future growth and winning in the future as well. We're certainly getting into the eight figures; there has been a benefit of that to EBITDA last year, and many of these things happened later in the year. We expect to see continued contribution from that program in 2025. We've always tried to, and will continue to try to, make this a hallmark of the organization.

No, that's helpful. And maybe just wondering how you're feeling about Home Health and Hospice, really on the development side. There's maybe some distraction with some of your peers tied up with acquisitions or whatnot? I'm just wondering how you're thinking about the potential development opportunity over the next year or so. Thanks.

Yes. Home Health and Hospice is a market that we're certainly committed to and have been for the last four or five years, as we've really sought to build that out. I mean, you go back five years ago, we had nothing. In 2024, Home Health and Hospice revenue was $600 million. That's a business we'd like to double in the next five years, potentially more. It's an area of focus. I think we see hopefully a more conducive reimbursement environment on the Home Health side going forward. I think we're hearing things from D.C. where a lot of people acknowledge that there needs to be more support there. Ultimately, the ROI data for Home Health in terms of the outcomes that can drive for people, in terms of keeping them out of hospitals and lowering mortality rates, has never been more positive. Interestingly, and it still has to be worked through, we're talking to several more of the innovative payers leaning in on enhanced rates, but there's a quality component to that, and that's fair, and that's the way it should be. We're leaning into those conversations, and we're pleased that we're at the table on those because of our quality. We got started in Home Health through some acquisitions. It's been more of an organic push over the last couple of years. We inherited a lot of branches early on, which didn't have the world's best star ratings. It's been really pleasing to me that if you look back about three or four years ago because of that history, we probably had about 15%-20% of our branches with 4 stars or better out of 5. We're now up to about 85%. That's just tremendous performance on the quality side. We're trying to have a lot of interesting conversations with MA that can result in enhanced rates for the outcomes we're delivering, but you have to prove that quality out, so that's exciting. On the Hospice side, the benefit is just so obvious and the data is so clear, obviously, an incredible experience for the family with patient satisfaction rates above 9%. There's a lot of data showing that Hospice is ultimately a cost reducer for the system, and we have a nice platform there still today, about two-thirds of our business mix between Home Health and Hospice is on the latter. For us, it’s about providing as much access to as many people as possible through our clinical aides out in the field every day, driving referrals for that terrific service.

Thanks.

Thank you. And our next question comes from Brian Tanquilut of Jefferies. Your line is open.

Hey, good morning, guys. And congrats on the quarter and the year, and congrats on the promotion. Maybe, Jon, as I think about your prepared remarks, clearly, growth has been really good and seems to be tracking well. So as we think about maybe the sustainability of these growth rates or just the elevated gross levels and with community out of the picture now, how should we be thinking about your view on blended growth going forward?

Yes. Good morning, Brian. We have going on an eight—to be nine-year track record at this point of demonstrating double-digit top and bottom line growth in the organization. Nothing about that will certainly change going forward. If the community living divestiture occurs and everything there at present is just working through the process in a very expected and normal way at this point in time that enhances our growth rate from an adjusted EBITDA standpoint of about 5% or 6%. As we see it going forward in 2025, there are a couple of percent growth when you pro forma that for 2024, but as we look forward, probably more of a 5%, 6%, 7% uptick in our growth rate going forward. As we look out at least to next year, we feel very good about this year. In the guidance we've put out there, which we obviously raised today. There would be nothing that would change our view of a similar growth rate this year for next year. But some of the things in D.C. need to play out. There are just certain things that we do not have visibility into yet. It's really just principally IRA and how that plays out. That’s not going to have any massive impact one way or another on our performance in 2026. There are a couple of points up and down based on how that ultimately plays out. We continue to feel like the pharmacy industry will be well protected through that process, but it needs to play out over the balance of the year. What we can control in a fairly steady state exogenous environment, we don't see a lot changing. Our focus in the organization has been to drive quality through very strong operational infrastructure, drive efficiency and lean processes and leverage all that with great people to reach as many people as you can and continue to drive volume above market growth rates. That's been the playbook for the last five or six years in particular, and we will continue to drive that playbook in the future. As always, there are external factors that need to play out but in terms of what we can control, we're very confident in continuing to drive the level of growth that we see in the business this year.

That makes a lot of sense. Then maybe, Jon, just a follow-up on A.J.'s question earlier on Infusion. As we think about your Quorum exiting markets, and then maybe thinking about the mix of business that you have in terms of being heavy on the acute versus chronic. Just trying to think about the dynamics that we are seeing or we could be expecting in that Infusion business for the period. Thanks.

Yes, that is a good point and something we've talked about before. It's a good characterization of our business. I would say that we probably are a little bit more tilted toward acute versus chronic and Specialty and the Infusion space versus what you might see in the broader landscape of some providers out there. Certainly, if anybody were to exit any markets on the acute side, that's helpful. The acute margin is one that is one that we are fine with. We believe if you have a broader set of services to payers, that is more well-received and welcome, and it will ultimately help us nurture and cultivate better and deeper relationships with payers over time. Acute is a market that we are committed to. There is volume there. There is nothing about acute therapies that is changing anytime soon. We like the idea of just growing more market share. I think what that ultimately says about the chronic and specialty side is that we've got, hopefully, real opportunity there versus where some other people are today. There's a trending positive observation with turnaround times on specialty, which is really the linchpin for that business; how quickly can you manage people through the process? That’s what referral sources care about. We will really deepen our focus on the specialty growth side this year. We would be very disappointed if specialty isn't growing well into the 20% range and above going forward.

Thank you. And our next question comes from David Larsen of BTIG. Your line is open.

Hey, congratulations on another very good quarter. Jon, can you maybe talk a little bit about your ACO arrangements? One of the things I've always liked about your business is that you're in what people call the post-acute space, its lower cost in the acute care environment. A lot of investors are maybe a little bit wary of anything that says ACO or value-based care, given how some of the stocks in the sector have performed. Can you talk about your approach, your volumes, and your pricing looked great on the provider side? Thanks very much.

Yeah. Thank you, David. Two quick points on that. For us, building out the home-based primary care was really an augmentation and complementary to our pharmacy and provider services and just allowing us to ultimately better manage outcomes for patients, really secondarily, there is an economic stream there, if you can get more appropriately compensated for the great outcomes you're providing. Otherwise, the incredible quality work you're doing is enduring to everybody else in the system. Those were really the two driving forces of the logic. I would say anything around ACO is purely upside. There is zero downside there. Amongst our patients that we serve across assisted living, skilled nursing facilities and some people in their own homes with our home-based primary care, the subset of those that would be Medicare straight Medicare patients, we have a partnership with another organization to get an ACO capability last year; it was the first year of that. Nine months after last year, on October 1st of this year, we will receive ultimately what our performance was from Medicare, but we have line of sight into our outcomes and what's happening on the cost side, albeit with a little bit of a delay with about a quarterly delay. We are pleased with what we're seeing in terms of our ability to drive outcomes and cost reduction versus the benchmark. We would expect the shared savings to be realized this year. We are just being conservative until we get through the first actualization of what those results were. We have about 15,000 to 16,000 patients today, a subset of those were in the ACO. Our focus in home-based primary care is how do we continue to drive that incredibly valuable service to as many patients as we can and get them in the ACO, so that we can drive more shared savings. We've said before, our five to seven-year goal is how we are serving at least 100,000 or more people. That's what we're working towards.

Okay. Great. And then just one more, quick one on Specialty pricing. It looks like your Specialty revenue growth is very good. Is there anything in your mind that could slow that down? Obviously, a tailwind for the overall organization is the pricing increase, right?

Yeah. We've seen overall stability in the market for Specialty. Ultimately, your revenue per script and your margin in that business is a function of about 150 different drugs, some brands, some generics at different parts of their life cycle. Given the diversity of that portfolio and the complementary nature of brands and generics, we've ultimately seen all of that come out of the bottom of the bucket in just a very steady way year-over-year. We do everything we can to not only provide great outcomes to manufacturers but also focus on being the best partner we can for the PBMs and the payers and their members as well. We’re as focused on our payer and PBM partners and nurturing great relationships with them as anybody, and those have been really stable over time. We're very thankful for that, and our team has a long history of working with stakeholders across the value chain.

Great. I'll hop back and see you next quarter.

Thank you. And our next question comes from Joanna Gajuk of Bank of America Securities. Your line is open.

Hey, good morning, and thanks so much. I guess my question will be around the IRA. Just a follow-up on the answer you gave earlier to the question about the long-term outlook for growth after 2025. What do you mean by there's a downside risk there? What would need to happen for this to be a headwind in the IRA? There’s obviously the price reductions, but then there's some Part D with design under the IRA. In the past, you spoke about it as being a tailwind to the company as realizations increase. I'm just trying to understand the different dynamics and what would need to happen that you're referring to in terms of being IRA and the impact there.

Yeah. Good morning, Joanna. There are two pieces there. For IRA, one aspect is lowering out-of-pocket for patients. Certainly, anything that makes drugs more affordable is helpful for patients. It's helpful for the utilization of Specialty medications for them, and increasing patients on therapy is beneficial, so that's helpful. The second point for us is focused on our home and community pharmacy. There are eight drugs there on the IRA for 2025. We just have to see that play out. CMS issued guidance last October, endorsing using a true-up on the MFP to WAC. As your reimbursement moves to MFP on those eight drugs, getting a true-up on that to WAC will ensure those Specialty drugs do not negatively impact margins. The discussion this year revolves around what's going to be the mechanism to ensure those Specialty drugs have an appropriate and current margin. There is a ton of support around the logic for that, and needing to do that in D.C. It was literally written into IRA. This is not intended to harm any pharmacies. Pharmacies are the last mile to the home, and they must be held harmless to continue to be that last mile. We're optimistic about how this will play out, but it needs to play out this year. With a lot going on in D.C. in the last two months, I think we just have to see how this plays out further into the year. What I've said before is that this is a swing factor on the downside of a couple percent of EBITDA, which we fully expect to grow through, given growth in the other parts of our company. That's the benefit of our complementary diversified organization with a lot of different growth drivers, and we would be very confident that something like that we would just absorb. That said, we are very focused and think what is fair is for there to be a proper resolution for the long-term care pharmacy industry around these drugs and having a fix for that. That’s what the industry is focused on, and we see a lot of support for it, but those mechanisms need to play out through the balance of the year.

Thank you very much.

And our next question comes from Erin Wright of Morgan Stanley. Your line is open.

Great. Thanks. So following the community divestiture, which made sense to us, are there other areas that you'd be looking to refine in terms of the business mix? How do you think about that in contrast with efforts to better integrate the offering from a provider and pharmacy standpoint? I'll just ask my second question upfront as well, which is just on the government business. You mentioned kind of part, but I wanted to ask about Medicaid. Just how you're thinking about the exposure there. Obviously, it comes down with the divestiture. Can you talk about some potential risk factors as well as how you're just thinking about the outlook for that group given the unknowns in terms of that backdrop right now? Thanks.

Yes. The streamlining of our organization post-community living divestiture, assuming that closes, gives us a very tight set of pharmacy and provider services and a platform that we think is unique and advantaged in many ways in healthcare services. We view that as a terrific platform for the future. Regarding Medicaid, Trump and the Trump administration have stated they do not plan on touching Medicaid or Medicare. That's what they've said thus far. The House Republicans are certainly talking about other things. Notwithstanding that, the populations we serve would not be in the conversations or some of that Medicaid discussion in the house. The people we're serving are seniors and individuals with disabilities, which is very different from what's being discussed in terms of work requirements for the population of otherwise healthy people on Medicaid. Our populations are very different and not relevant in the context of those conversations.

Thank you.

Thank you. And our next question comes from Jamie Perse of Goldman Sachs. Your line is open.

Hi, thank you. Good morning and congrats to Jen. I guess I wanted to start with helping us think through OpEx investments needed to sustain growth in both businesses in 2025? How much does that level of investment scale up or down based on top-line growth? Just trying to think through incremental margins below gross profit?

Yes, we've certainly got some—Hey, Jamie. We've certainly got some leverage in our business without a doubt. I mean, I spoke to a lot of the efficiency projects that are part of our program, and we expect to get a little bit of a tailwind from those this year. In every year, we expect as we continue to grow the top line in the future, we will realize more margin opportunities. We have seen our OpEx per script on the pharmacy side generally trend down in key areas. If you look back historically, the primary impact to any margin has just been our mix with outsized growth in Specialty. I have said before that home and community pharmacy and Infusion pharmacy have OpEx per script opportunities, and we fully expect to see OpEx per script in those two businesses go down this year as we scale volume. On the provider side, we've continued to leverage fixed costs there. I think as you look at the company this year and next year, outside of any mix impacts, we expect to get some improvement incrementally on leveraging our cost base and some margin uptick.

Okay. Just thinking about your new pro forma leverage targets for the year, which suggest quicker deleveraging than we had contemplated before the divestiture. Can you just update us on how you plan to allocate that between pure debt paydown versus M&A? Any color you can provide on the M&A pipeline or environment?

Yes. I think the current thinking is either with or without the funds from a community living disclosure, our base case would be about $100 million for M&A spend, and if a community living divestiture happens, it's about 0.3 times deleveraging on a net basis. We put out guidance of a longer-term 2 to 2.5 at this point because if we do execute through this year and start getting under 3.5 times, our goal would then shift to 2.5 times from a longer-term perspective.

Thank you. And our next question comes from Pito Chickering of Deutsche Bank. Your line is open.

Hi, good morning, guys. Can you sort of get back to that rare and orphan opportunity that you're talking about with A.J.? Historically, a big part of the strength of specialty has been deep ties with oncologists, which has made you the partner of choice with new drugs and then obviously, as they go generic. Transitioning where orphan seems to pivot away from oncology. Can you talk about why you can be successful in the new area after being so successful in oncology?

Yes, I would say nothing about our focus on oncology changes whatsoever. It just happens that everything that's required for you to be very successful in servicing your payer members and biotech and pharma partners in all of the patients from an oncology perspective directly applies to rare and orphan too. For us, that's purely sitting back and saying, what other therapies can we pursue that leverage our critical success factors that we have in place today. We specifically look for those therapy opportunities in the pipeline where we can apply all of our similar best practices to those areas and just continue to expand within the therapeutic space. That takes nothing away from oncology, and it's really what is most closely peripheral and adjacent to oncology, that is also opportunities, and our team has clearly demonstrated the ability to continue to execute on as many relevant therapies as possible to drive that growth with the bandwidth that we have.

Thank you. And our next question comes from Stephen Baxter of Wells Fargo. Your line is open.

Hey, thank you for the question. Just wanted to follow up a little bit on earnings side of things, the segment level? It sounds like you might expect a little bit more improvement in provider margins as you move through 2025. But can you speak a little bit about the pace of margin change in the Pharmacy business? I know you obviously had a pretty big step down; it's all a function of mix. Just wondering if we should be thinking about something similar in terms of the pacing of Pharmacy margins in 2025 or whether you expect that to moderate potentially maybe as the growth so little? Thank you.

Yes, I would say outside of mix and continued growth on the specialty side, it does have a lower margin. We would expect within each of the three Pharmacy businesses, stability to upticking margins. I would say on Infusion and Home and Community, so margin historically has been influenced by our mix, and also by investments that we've made on the Infusion side and even Home and Community Pharmacy. As I mentioned earlier, we fully expect our OpEx per script in those two businesses to improve this year as we continue to grow volume at double-digit rates. Those would be the two dynamics: ultimately, what is the mix of all of our services between those three businesses and all of our drugs, and our ability to drive down OpEx per script in Home, Community, and Infusion this year, which ultimately, we think, will lead to a positive EBITDA per script and margin story.

Got it. And just the improvement in the guidance for 2025 at this stage. Is that based on trends that you're seeing year-to-date or additional limited distribution drugs you have gotten that you didn't have at the time in early January? Just wondering how that influenced that at this point in the year.

Yes, I would say it's less to do with any one specific factor and just continued momentum and breadth of progress across the entirety of the organization. So far, we've been heads down from an execution standpoint in Q1, like always. We just continue to work through what we see as a very productive first quarter across most of our service and business lines, and that was reflected with the update we provided.

Thank you. Our next question comes from Matthew Gillmor of KeyBanc. Your line is open.

Hey, thanks for the question. Just had a quick follow-up on the guidance discussion. Any comments you can provide in terms of seasonality of EBITDA and how that may pace throughout the year? Should we just look at prior years for that, or is there anything new to consider as we look at 2025?

Yes. Thank you for the question. I think prior years would be a good reflection of how it typically plays out. Q1 obviously has the reset of payroll taxes versus last year, and you should keep in mind that last year included a leap year day as we're thinking about the guidance for this year. Additionally, Q4 tends to be one of our strongest quarters for a variety of different reasons. Yes, we think seasonality—Q1 and Q4 tend to be the outlier quarter just a little bit when you look historically, and we expect that to continue in 2025.

That’s great. Thank you.

Thank you. And our next question comes from Larry Solow of CJS Securities. Your line is open.

Great. Thanks. Good morning, everybody, and echo congrats to Jim. I guess just a couple of follow-up questions. Just on staffing across your properties' availability and wage inflation? How does that feel as you look at the $25 million?

Yes, hi, Larry, that's something we've just been continuing to manage for years in a very productive way. We're focused on recruiting, onboarding, training, and retention. We continue to see all of our retention stability and numbers improve over time across all of our businesses. They're very, very solid, and we're very focused on managing that, trying to make our provider service lines a destination within the industry where people want to work. We've always invested in compensation and wages. We rolled out 401(k) everywhere in the last few years. That's just been steady for us. Obviously, you could always use more nurses and therapists, but we've managed to keep up with the volume growth we've driven in double digits through all our people-focused efforts.

Got you. And you mentioned the M&A outlook and the expected targeted spend for this year. How about just—could you give us an update on de novos, the efforts in '24 and going forward?

Yes, de novo has been a hallmark for the organization. We'll do about 10 to 15 new locations this year across home and health hospice and rehab principally. We'll do a few new hospice pharmacies this year as well. Those have nice ROI to them over a 2 to 4-year period of time. They're principally in those four areas, and we'll continue to do about 10 to 15 of those a year. Those are helpful adders to your financial performance as you go out years into the future.

I can squeeze one more. Just the acquisition of Haven hospice in '24. How is that progressing? I know I think it was going to ramp up over the next couple of years. Maybe any thoughts on that, any color? Thanks.

Yes. The team has done a really nice job integrating that in Q4 and so far this year. That's been a good example of our track record on M&A, almost never having an acquisition go down from where we acquired it, and that acquisition is ahead of plan.

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Jon Rousseau for closing remarks.

Thank you, everybody, for your time today. We really appreciate it, as always. We look forward to talking to you in another quarter. Have a good day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.