Option Care Health Inc (OPCH) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the BioScrip Third Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded, today, Thursday, November 6, 2014.

I would now like to turn the conference over to Lisa Wilson, Investor Relations with BioScrip. Please go ahead.

Good morning, and thank you for joining us today. By now, you should have received a copy of our press release issued yesterday after the close of market. If you've not received it, you may access it through the Investor Relations section at our website.

Rick Smith, President and Chief Executive Officer; Tom Pettit, Chief Operating Officer; and Hai Tran, Chief Financial Officer, will host this morning's call. The call may be accessed through our website at bioscrip.com. A replay will be available shortly after the call and will remain available for a period of two weeks. Interested parties can access the replay by dialing 800-633-8284 in the US and 402-977-9140 internationally, and entering access code 21737716. An audio webcast will also be available for 30 days following the call under the Investor Relations section of the BioScrip website at bioscrip.com.

Before we get started, I would like to remind everyone that any forward-looking statements made during the call are protected under the Safe Harbor of the Private Securities Litigation and Reform Act. Such forward-looking statements are based upon current expectations, and there can be no assurance that the results contemplated in these statements will be realized. Actual results may differ materially from such statements due to a number of factors and risks, some of which are identified in our press release and our annual and quarterly reports filed with the SEC. These forward-looking statements are based on information available to BioScrip today, and the Company assumes no obligation to update statements, as circumstances change.

During this presentation, we will refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA including pro forma adjusted EBITDA and adjusted earnings per diluted share. A reconciliation of such measures to the most comparable GAAP financial measure is contained in our press release issued yesterday after the close of market, which again maybe found at our website at bioscrip.com.

And now, I'd like to turn the call over to Rick Smith. Rick?

Thank you, Lisa. Good morning, everyone, and thank you for joining us to discuss our results for the third quarter of 2014. Entering this year, we established three priorities. One, to continue to generate double-digit Infusion revenue growth with the primary focus on core therapies; two, to generate increased operating cash flow sequentially throughout the year to increase cash collection; and three, to generate increased adjusted EBITDA and expand adjusted EBITDA margins.

We've consistently achieved double-digit organic growth through this, double-digit organic growth in core therapies, and we expect this trend to continue. We have also achieved consistent improvement in operating cash flow performance and have generated over $25 million of operating cash flow during these last two quarters. We expect to continue to improve the performance of the first and second priorities in Q4 and into 2015. The less focused area of generating increased adjusted EBITDA has been impacted by many factors involved in the integration of the acquisition. We now have the integration work substantially behind us and we look forward to entering the strongest revenue and adjusted EBITDA part of the year.

We expect to continue to drive year-over-year double-digit organic growth with core revenue continue to grow strong. We also expect Infusion division to generate over $20 million of adjusted EBITDA in Q4. To get to this stage and as we've been discussing with you for some time, we invested heavily in resources to assist in integration, training, system enhancements, call center solutions, cash collections and analysis. We have held on to the infrastructure longer than anticipated to ensure the process improvement initiatives, secured a solid foundation, which we believe they have, as we invested heavily in internal and external resources for reimbursement and cash collection towards the aged account of the legacy and the acquired businesses. The increased cost in bringing on these resources has temporarily offset some of the benefits from the cost structure improvements we had achieved earlier in the year. As a result, we are not yet reflecting the drop through operating leverage below the gross profit line.

The additional reimbursement resources have enabled us to increase cash collection. However, this quarter we recorded $23.1 million charge to establish additional reserves for aged receivables, stemming from the disruption caused by the integration of the HomeChoice and CarePoint acquisitions and the systems upgrades and conversions during 2013. Hai will talk more about this in his remarks.

While this non-cash accounting adjustment impacts third quarter results, this is a necessary action as we saw efforts from our outside collection resources and our internal teams exhaust efforts on collecting our aged receivables. I am pleased to now say that the prior disruptions around accounts receivable and bad debt collection impacted by the acquisition integration are essentially behind us.

Our new COO Tom Pettit is here and will walk you through the operating improvement programs he has been executing during his first 100 days. Tom has taken the structure of the programs that the Alvarez team helped create earlier this year and is expanding the areas of improvement. In Q4, we expect to realize $2 million of additional cost reductions in various areas from these programs. This is an addition to the $4 million in the annual cost reductions we mentioned in our press release. In 2015, we expect to realize an additional $9 million in cost reductions from these programs.

We have accomplished a great deal of work in a short period of time. Infusion revenues for the quarter were $231.5 million, up 33% year-over-year. Organic growth was up over 20% year-over-year and our core revenue also increased double digits year-over-year.

Compared to Q2, there were some ins and outs in Infusion. Sequential revenue performance in our Infusion segment was impacted by $4.4 million decrease of the lower margin Hep C drug Sovaldi and a $3.2 million negative impact from the contractual allowance provision recorded in the quarter as part of the $23.1 million charge. These decreases were offset by strong growth in our core and other targeted Infusion therapies.

Our core revenue continues to lead the way of positive growth. And our overall organic revenue growth in large part has been driven this year by our continued demonstrated success with national payors. Year-over-year growth this quarter in our national relationships was over 27%. In addition, we expect this strong growth to continue as we renewed several of our national agreements on multi-year terms. We have also signed a new national Infusion transplant agreements effective November 1 where we will be managing thousands of complex patients annually in re-admission and transitional care programs. Part of our increased costs during this year was $700,000 of investment in our transplant clinical team to win and manage this program. This relationship provides entry to over 160 transplant hospitals and is all core revenue focused.

With renewals, we have improved our panel physicians to be designated preferred for implementing and managing chronic infusion patients to take advantage lower cost side of service programs on behalf of our payors. We've also been designated to manage poor nutrition patients on a national level. While there not be guaranteed volume directed to us, we believe the clinical expertise we have established in complex patient management areas will continue to generate strong patient census growth in Q4 and into 2015.

Our patient census levels grew sequentially in Q3 and have continued to grow in October. As we continue to deepen our relationships with hospital systems and payors and actively pursue new post-acute opportunities, we are poised to continue supporting our double-digit organic revenue growth into Q4 and into 2015. We expect our therapy mix to improve each quarter as well.

In Q3, on a pro forma basis, excluding the impact of the contractual adjustment, we sequentially improved our gross margin by 120 basis points over Q2. We expect that our continued revenue growth in the target therapy mix plus expected reductions and productivity improvements in other cost of service areas will provide improved gross margins and adjusted EBITDA margins in Q4 and 2015.

Operating cash flow from continuing operations increased $2.4 million sequentially compared to the second quarter. During the last 180 days, we've generated over $25 million in operating cash flow. Our cash flows have been largely driven by our continued focus on cash collections during the quarter, which also saw an increase in Infusion cash collections grow more than $11 million over Q2. October has continued to show increased collections to start our end of the year push. We have essentially self funded our growth as we have also funded the additional temporary cost infrastructure this year to finish the integration of the acquisition.

Overall, the fundamentals of our business are strong and we have rapidly solidified the foundation of our Company. The cost structure we have today has been burdened by investing in resources necessary to successfully achieve the integration and process improvement objectives. We've begun to reduce the excess cost structure in order to drive operating leverage and targeted performance levels. We believe the programs we've initiated will drive the adjusted EBITDA results beginning in Q4 and continuing into 2015.

We believe we are strongly positioned as we finish out the year and we fully intend to capitalize on leadership position in national footprint we have built in the infusion industry. We have built a clinically-respected provider with the nationally competitive team in place.

I'd like to now turn the call over to Tom Pettit, our Chief Operating Officer, to provide additional details on several of the key operational initiatives we have underway. Tom?

Thanks, Rick. Good morning, everyone. Our team continues to make progress in our key priorities delivering clinical excellence and superior service, driving core therapy mix and gross margin expansion, accelerating cash and reducing bad debt and improving productivity and operating leverage. I'll now highlight progress on cash and productivity.

As Rick mentioned, reimbursement in cash collection efforts continue to be front and center during the third quarter. I'm pleased with the progress the team is making and the momentum that is accelerating. We are now in the Phase III of our cash collection program to motivate our front-line team members. Cash collections improved by $11 million compared to the prior quarter. Overall that program has increased both the dollar amount collected as well as the speed of collections, yielding during the nine-month period ending September 30, $751 million of cash collected on $731 million of revenue.

Our cash per day measure was up over 25% from January 2014 to September 2014 or $800,000 per day to $4 million per day in September. In addition to progress on the back end in reimbursements, we've seen significant and accelerating progress on the front end of the process in intake. As you know, improvements in speed and quality of intake will yield additional benefits and faster cash and reduce bad debt.

To improve our front-end intake, we're focused on improving the quality and speed of the sub-processes of intake including benefits verification, insurance authorization, documentation and patient payment. We have begun improving the patient payment process by collecting more payments on the front end accelerating our cash. Our incentive program for fourth quarter cash will reward our branch team members for success in clean intake and collecting patient payments. So they are very focused on dialing this in.

We've accomplished these improvements by implementing lean processes of visual management, problem solving, standardization and accountability. As an example of enhanced visibility and accountability, each week I personally send all intake and reimbursement employees and leaders a weekly scorecard that ranks their performance. It shows the performance of sites and regions from top performing to bottom performing using Pareto charts.

The bottom performers know who to turn to for best practices and examples, and the top performers know that they need to continuously improve to stay on top. As a result of our enhanced visual management and accountability, our metrics for clean intake and reimbursement are trending strongly. For example, we have achieved a double-digit improvement in productivity in our billing and collections. As measured by bills touched per day per biller and invoices touch per day per collector. We expect to continue improving this productivity, enabling us to support future growth and to generate operating leverage with planned reimbursement staff.

Let's now turn to a discussion of EBITDA expansion through productivity improvement and operating leverage. As the press release highlights, our Infusion services pro forma adjusted EBITDA grew 15% in third quarter of 2014 versus prior year. To build on that, we have several ongoing initiatives cascaded down to each of our branches and are viewed monthly by both me and the Senior Vice President of Field Operations.

These include initiatives on core mix growth, delivery cost reduction, drug and supply cost management and quality and productivity and intake, pharmacy and nursing. Supplemental to this, in the third quarter we implemented a plan that will be completed by year-end that will yield approximately $4 million in annual cost reductions through streamlining corporate and field operations and reallocating resources to our growth priorities. Rick mentioned the actions we are driving on core mix, I highlighted the productivity that the reimbursement team is achieving in bills and invoices touch per team member per day.

Now I'll talk about productivity initiatives on other cost levers. To improve our delivery costs, we have renegotiated rates with our shipping vendors and are increasing our mix of small parcel delivery versus drivers and carriers. Similarly to improve our nursing costs, we are renegotiating our rates with our nursing agency partners and are increasing our mix of BioScrip nurses versus more expensive third-party nursing agencies. We've also successfully negotiated price increases for nursing services.

For pharmacy, we are rolling out target productivity models to measure each branch pharmacy team against therapy based productivity standards. In each cost area, we have prioritized our opportunities using a simple mine block format, which is three-by-three matrix of EBITDA impact versus time to execute. Each branch has a tailored branch improvement plan that lays out EBITDA impact from specific initiatives, and our Senior Vice President of Field Operations and I conduct progress reviews of them each month with branch General Managers and Regional Vice President.

For 2015 and beyond, we have identified a roadmap of operations and sales initiatives to continue expanding EBITDA. Operationally, this includes opportunities to centralize and automate several processes. Actions are already underway in incremental centralization with our call centers, therapy management, and reimbursement management. Moreover, planning for a broader centralization program has already begun.

Our ultimate objective is to support continued double-digit organic growth and maintain customer intimacy with our national and local relationships, while at the same time substantially reducing costs. At the heart of our strategy is an effort to maintain customer intimacy locally while leveraging economies of scale, standardization and technology. Practically that translates into localized bill for acute and select chronic cases and centralized bill for specialty and other select chronic cases.

We are very encouraged by the results of our Phase I centralization initiatives. A better service model and increased coordination of services has emerged. This supports the acceleration of our chronic infusion injectable business and drives long-term margin growth. There are many more opportunities to improve operating results as we move toward leaner and more automated processes. We have a talented and committed team clinically, operationally and in sales and support. As a former manufacturing and supply chain executive new to healthcare, I see a target-rich environment for which to continue delivering exceptional service to our customers and to drive increased shareholder value.

With that, I will now turn the call to Hai.

Thank you, Tom, and good morning. As a reminder before we review our third quarter financial performance, we have changed the operating and reportable segments of the Company, Infusion Services and PBM Services. As a result of the sale of the Company's Home Health business on March 31, 2014, the Company's financial statements are presented with the Home Health business as discontinued operations on the consolidated statements of income for the three months ended September 30, 2013 and 2014, and are excluded from the results from continuing operations of the business.

In addition to new segment reporting, the financial statements reflect continuing versus discontinued operations classifications for all periods presented. In reviewing our financial performance, we will focus primarily on the continuing operations. We also report adjusted earnings per basic and diluted share, which excludes the same element in calculating adjusted EBITDA and also takes into account the impact of acquisition-related intangible amortization as noted in our press release.

With that for the third quarter of 2014, we reported revenue from continuing operation of $244 million compared to $190.6 million in the prior-year period. An increase of $53.3 million or 28%. The Infusion Services segment revenue increased 32.6% year-over-year primarily driven by double-digit organic revenue growth and the addition of CarePoint Partners.

Revenue in the PBM Services segment was $12.4 million versus $16 million in the prior-year period. Gross profit from continuing operations was $65 million compared to $61.7 million for the same period in 2013, an increase of $3.3 million or 5.4%. Gross profit as a percentage of revenue decreased to 26.6% from 32.3% in the second quarter of 2013. The increase in gross profit was due to growth in revenue in Infusion business, offset by a decrease in gross profit in the PBM Services segment. The decrease in consolidated gross profit margin percentage was driven primarily by the decline in higher-margin PBM Services segment as well as the $3.2 million contractual adjustment Rick mentioned, which we do not expect to reoccur.

SG&A for the third quarter was $58.7 million, a $6.2 million increase over the prior year. SG&A for the third quarter as a percentage of total revenue was 24.1% compared to 27.5% in the prior-year period. The increase in SG&A expenses were primarily due to the inclusion of CarePoint and certain costs associated with supporting the growth in volume for our businesses such as additional investment in our reimbursement resources to improve cash collections as well as other non-recurring expenses such as legal fees associated with legacy litigation matters.

This quarter, the Company took a $23.1 million charge for the bad debt and contractual reserve provisions. This chart represents the amount of bad debt and contractual reserve estimates above its historical experience prior to the disruption in 2013 from the integration of the HomeChoice and CarePoint acquisitions. Although, there is a long collection tail in healthcare, this chart reflects our best estimate of the impact of current aging of our receivables and trends we are seeing with regard of our outsource partners who are focused on collection of the aged receivables that were impacted by the disruption period and the timing of our internal resources, offset by the early impact of process improvements in our revenue side.

Interest expense in the third quarter of 2014 increased to $9.6 million compared to $7.2 million in the prior year. The company reported loss from continuing operations net of income taxes of $37.6 million for the quarter compared to a net loss of $23.8 million in the prior year. Net loss from discontinued operations, net of income taxes was $1.1 million in the third quarter of 2014 compared to net loss of $10.3 million in the third quarter of 2013. Consolidated net loss for the quarter was $38.7 million or $0.57 per basic and diluted share compared to consolidated net loss of $34.1 million or $0.53 per basic and diluted share for the same period in 2013.

BioScrip reported adjusted EBITDA from continuing operations of negative $12.6 million and adjusted EBITDA from the Infusion Services segment was negative $6.3 million. Pro forma for the $23.1 million charge increased the bad debt and contractual reserves. Adjusted EBITDA for the consolidated business and Infusion Services segment was $10.5 million and $16.8 million respectively. The $16.8 million pro forma adjusted EBITDA for the Infusion Services segment is a 14.8% increase over the prior-year period.

Adjusted EBITDA was impacted by $900,000 in investment in operations leadership and reimbursement resources, which included the addition of our new COO. These costs include only the recruiting fees for our COO and not the salary, over time temporary labor and third party professional fees. Corporate overhead also included $700,000 in non-recurring legal fees relating to legacy litigation matters.

Turning to cash flows, for the three-months ended September 30, 2014, the Company reached the breakeven milestone in net cash from continuing operating activities, compared to $6.1 million of net cash used from operating activities during the three months ended September 30, 2013, a $6.1 million improvement year-over-year. Sequentially, net cash from continuing operating activities improved by $2.4 million from second quarter of 2014 despite an $8.9 million bond interest payment in the third quarter. The improved sequential performance reflects continued focus and efforts on improved intake processes, more rapid documentation and billing and increased resources on collections.

Our historical experience prior to the disruption in 2013 suggests that we should ultimately collect between 97.3% and 97.5% of unbilled revenue. Implying that our normalized bad debt rate should be between 2.5% and 2.7% which we are using in our budget for 2015. The data suggests that we sell off that phase during 2013, but we continue to make progress on cash collection. As for the last few months, we are seeing a return to better than the pre-disruption period trend. As of September 30, 2014, the Company's cash balance was zero, and we had $4.5 million drawn on the $75 million revolving credit facility.

Turning to the outlook, as indicated in our release, we believe by 2014 revenue is trending towards the high end of our range of $940 million to $980 million, driven by double-digit organic revenue growth. And as Rick mentioned, we expect adjusted EBITDA for the Infusion segment to be over $20 million in the fourth quarter, which is over 19% sequential growth from the $16.8 million of pro forma adjusted EBITDA in the third quarter.

This outlook assumes continued stability in our PBM Services segment from an adjusted EBITDA perspective. Seasonality in the Infusion Services segment whereby the fourth quarter typically generates the highest adjusted EBITDA of the year and the first quarter typically generates the lower adjusted EBITDA of the year. And that our initiatives to collect older receivables will continue as we expect to collect a portion of the amount that we have added to our bad debt provision.

With that, I'll turn the call back to Rick.

Thank you, Hai. As we approach the end of 2014, it's fair to say that BioScrip has come a long way since where the year began. Our Infusion business continues to see double-digit organic growth. Our integration efforts are substantially complete. And as you just heard, we've begun to drive the next wave of EBITDA improvements. We'll continue to focus on streamlining operations, maximizing productivity and enhancing the customer service experience in line with our strategic objectives.

With that, operator, we'll open it up to questions.

Thank you very much. (Operator Instructions) Brooks O'Neil, Dougherty & Company.

As you might expect I have a few questions. So, I guess, I'll start off by asking you, it looks like the -- even using every adjustment I can think of to make for the Infusion segment's adjusted EBITDA or adjusted EBITDA margin percentage, we're still nowhere near the 12% to 14% adjusted EBITDA margins you commented were possible from acquired businesses last year, and that [about 13%] to 14% adjusted EBITDA margin we've seen from some industry peers. Obviously, you talked a lot about steps you're taking to improve those margins, but can you give us a perspective on sort of the level of adjusted EBITDA margin you think is achievable over the next few quarters?

We believe that the steps we're taking, I think, with Q4 we stated that I believe we can reach towards the 10% that we set out for the beginning of the year. But essentially it could be impacted by the Synagis and then some of the other chronic that will have a lower gross margin percentage. Believe that the steps we've taken with the cost reductions and eliminating some of the infrastructure that we've held on to go after aged receivables will essentially wind down into 2015. So we would expect to get the north into that 10% to 12% range into 2015 on the Infusion side.

We are seeing the drop-through rate on the acquisitions that we said that we were targeting. We do have a large chronic business that for the overall Infusion division essentially will take some time to work through. But I think on an overall basis, we'll continue to drive our core mix as a higher percentage of revenue. And at the same time taking out the cost that I'd mention as well as Tom had mentioned based on the initiatives that we set out for ourselves.

Can you give us a sense, Rick, what the mix is right now? I forget exactly what the target mix is you think is achievable over time, but what do you think it is right now?

Well, at the beginning of the year, we said we are looking to target to get close to 40% core therapy as total Infusion revenue by the end of the year. That was essentially and not anticipating the impact of Sovaldi coming out because we don't have to sell it, but it's a long-term patient. So when you take a look at that including our Hep C, we're just under 36%. And when you -- continue to sequentially increase our total revenue from each quarter this year and year-over-year very strong.

When you exclude Sovaldi and Synagis, we're closer to 38% of essentially a core as a mix of that revenue and essentially including other chronic therapies. But in terms of the areas that are sold and we manage. So I think that, we continue to make progress. As I mentioned in my prepared remarks, we have renewed some of our national agreements with opportunities to drive core and nutrition. The transplant program that I mentioned is primarily core Infusion. And opportunities in complex patients and complex medical management programs that we believe will continue to take us longer-term, as you know, our target is 50% of Infusion revenue over time.

So I think that the steps we're taking aggregating with or essentially aligning with aggregators of lives enable us an opportunity to continue to push towards our overall objectives.

That's good. And that's very helpful, Rick. I appreciate that. So, secondly, obviously the AR write down on many levels seems appropriate, but I'm hoping that maybe Hai can give us a sense for sort of the mix or the aging of receivables that remain in AR today, I mean, what percentage are, say, over 90 days or have you cleaned out 100% of the uncollectible receivables that you've been carrying at this point?

Yes, I mean, as I mentioned what we've done is substantially de-risk the balance sheet there, right. So, and as I said in my prepared remarks, well, there is a long tail in healthcare collection. So when we -- and give you a little more color and detail around what we did in our analysis, right. We went back into 2012 and we look month-by-month at all the revenues we built by each month in 2012. And the reason we chose 2012 is that was what we call the pre-disruption period, that's prior to the acquisition of HomeChoice and the acquisition of CarePoint, right. So that will be a clean year for us, right.

What we did is, on that month-by-month basis, we then tracked each subsequent month the amount of cash that was collected that was specifically related to that month's billed revenue. And so we created what we call a waterfall chart, right. We looked at cash collected versus amounts billed on a month-by-month basis. And what that showed is that's how we got to the ultimate cash collection, there is about 97.3% to 97.5%. But what really stands out is there is really a long tail in healthcare collections because one of the things that people say is, hey, look at this stuff over a year old, this is really uncollectable. Not really, because we are still collecting today. We're still collecting cash relating to amount billed in 2012, right.

And so what we look at is, clearly there are things that like it was over 720 days, it's a 100% reserve right, because that's not -- at some point it just isn't practical, right. And if it's over 360 days and 720 days, we've got around 70% of that reserve, right. Because there is 30% of it that we believe we can still collect down, right or have a probability of collecting them. And then that percentage kind of decline with each aging bucket. But the important thing to note here though is when we look then at the same trend that same waterfall chart for 2013, clearly, you can see the impact of disruption. You can see how our collections rate was depressed in 2013.

But the good news for us and what we look at it, if you look at over the last few months and you see the same trend. So for example, I look at amount of revenue that was billed in June. And we say how much of that amount that we billed in June was collected in the first 30 days, the first 60 days, the first 90 days, first 120 days. What we see is that that selection rate is actually better than what we saw in 2012. And so because it's better it implies two things; one, the DSOs will come down over time if we fix the processes, right, because the processes have effectively been addressed, the issues have been addressed. And so we'll be able to accelerate our cash. But secondly, it implies cleaner claims and cleaner claims will ultimately translate to lower bad debt.

That's good. So I'm just wondering when I did the math took off the non-recurring, let's call it unusual AR charge in the quarter. I think you only wrote off or had bad debt expense of 1.21% this quarter. A, am I doing that math right? B, why was it so low this quarter, excluding the charge?

That's -- I think, Brooks, you have to do -- you have to take the $23.1 million and you have to bifurcate in two buckets. $3.2 million of that is contractual, that is essentially like a contra-revenue. It goes against revenue, right. And so it depresses our gross profit margin for the quarter. And as I stated, we don't expect that to recur, right. And then obviously you have -- the balance $19.9 million is the bad debt. That's what you should go against, all right. And once again, we will never see a bad debt charge anywhere close to this level again for the Company. This is a -- this helped us substantially de-risk the balance sheet and clean it up.

That's good. So just the last question I'd like to ask, I'm guessing you think you will be profitable on a cash flow basis at least hopefully even from an operating earnings perspective, the next few quarters, is that a fair assumption?

Yes, I mean, I think, if you look at what we firmly believe is when we look at 2015, right. We believe -- although we're clearly still in the throes of our budget process there, right. I think it's safe to say that, we expect consolidated adjusted EBITDA to be north of [$60 million] in 2015.

Thank you. David McDonald, SunTrust.

Hand full of questions. Rick, first can you talk about some of the contracting that you guys have done, a, this national transplant contract, who is that with and how many centers again did you say that it ties into? Secondly, just some of the deals you've re-upped with your national accounts, has there been any pricing increase? Is there any escalators or is there more importantly some type of mix opportunity within those on a go-forward basis? And then I got couple more.

Yes, I think, well, with the national customer, division of the national customer and essentially it's a national program where we will be the exclusive provider. And essentially as a program that services over 160 transplant hospitals across the country, center of excellence hospitals. And so it's 100% focused on core therapies and assisting in the complex medical management of these transplant patients.

In addition, on your second question relative to the national agreements, we are seeing stability in pricing. And we are also seeing the opportunities, as I mentioned being designated as national nutrition provider enables us an opportunity to drive core mix in all the targeted areas.

We also are strengthening our positions at -- within the plan and at the hospital discharge level in order to essentially get the discharges and patients out of hospitals and also bring to the market the transitional care and post-acute management programs and early discharge and avoidance programs we've talked about before. I think that what we've seen, as I mentioned in our -- in my remarks with that growth in our national customers year-over-year and that's been building each quarter this year. It's really being driven in the core therapies for the most part and essentially the positioning that we thought when we established these relationships and then added the footprint quickly over the last two years has enabled us to provide that national footprint in which to grow core therapy.

Couple of questions on the balance sheet and cash flow. First of all, do you expect to be free cash flow breakeven by the fourth quarter? Secondly, Hai, can you tell me what your target DSOs are for 2015? And also can you guys give us a sense of what percentage of collections are being done on the front end now and where that was, say, a couple of quarters ago?

Yes, I have to get back to you on that last part, Dave, but in terms of the first two parts of your questions, I think, the free cash flow, clearly, we're targeting to get free cash flow in the fourth quarter. I think the only risk and I've said this before is -- and it's what I call a good problem to have, is that we have really hype of growth in the fourth quarter, it will cause a working capital drag for us, right, just timing.

And so that will be the headwind we face, right. But in terms of continue to improve our cash performance, continuing to, in terms of faster cash and more cash, as I mentioned in my prepared remarks we're still going to go after the aged receivables here. And we expect to collect a portion of that. And as Tom indicated in his prepared remarks, we are collecting more than 100% of our live revenue, right. So we are making -- gaining some ground here, absolutely. The only risk is around that working capital drag from growth.

Okay. And then just target DSOs for 2015?

The target DSOs, I don't have a specific number yet, but I will tell you that I think beginning of the year, we said we wanted to get into the 60s, right. And we're in the 60s. I think, yes, we're keen to have a lower number than I would have thought. I mean, I think anywhere from the high 50s to low 60s is probably a decent target, which would represent continued improvement in our cash from this year to next year.

Okay. And then just one last question, Hai, did you say that for 2015 you expect adjusted EBITDA of at least $60 million, so there is no way you do south of $60 million, is that fair?

And that's kind of our expectation, right now. Like I said that when we look at the preliminary numbers in our budget, we don't view it as being lower than $60 million in adjusted EBITDA.

And then just one other question, I know you guys have talked about north of $20 million in the fourth quarter, can you give us a sense of, a number of at least, what the -- you think the consolidated, I mean, I know the corporate is running a little bit south of $8 million, but I mean, is $15 million or higher, fair number for the fourth quarter?

Yes. I mean, there is still some moving pieces in the corporate, but the reason we're quoting the Infusion -- of the PBM, we expected to be stable. But the reason we're including Infusion because that's what we are focused on right now, because that's where all the leverage is. Alright. So for us, our focus is, we think we're going get north of $20 million. Tom signed up for that, Rick signed up for that, I have signed up for that and that's what we are clearly focused on.

Brian Tanquilut, Jefferies.

Hai, just a question on that comment you made on the $60 million. As I think about bridging that, I mean, even if you're looking at double-digit organic growth, I mean, there's still a little bit of a hole in there. So I'm guessing that's related to the infrastructure on the billing and collection side, is that something that you guys can share and try to quantify for us like what the opportunity is, in terms of reducing the expense related collections?

Yes. If you go back to Rick's prepared remarks, he said, look we announced a $4 million -- we already announced an initiative to streamline the operation and take $4 million out, right. That's well on (technical difficulty) staying on top of that you have got the $9 million that -- through Tom's initiative. So, that's already $13 million and just pure cost reduction, above and beyond our run rate. So that in and now itself should bridge you to the number there, Brian.

Okay. And then on the national agreements, we've been asked in the past, obviously, you're giving in better pricing for the national payors, do you think you can help us just qualitatively understand what the delta is between the growth rate that you're getting from the national agreements versus your traditional contract?

Yes, I think, as I said before, on the core infusion, the pricing is pretty consistent between regionals and nationals. I think, the value of what our industry provide in terms of reducing a bed day being 10% to 20% of the cost of a bed day in a hospital, I think is demonstrated. I think that there are different variances and structures and price of drug and per diems and the nursing rates. And I think that we have essentially -- we believe that the pricing in those agreements are consistent with what we see in other types of contracts.

Rick, what about the growth rates in terms of like how much faster is the national book growing compared to the regionals in the out of network stuff?

Well, we've essentially no out of network, because that -- I mean, every business we've probably been to our contract rate. I think that we've got -- the nationals are growing faster than pretty much any other book of business that we have. But it's really that sponsorship and presence where we're able to enable our one-stop shop pull through of those other relationships.

Okay, got it. And then last question from me, Hai, in terms of your leverage ratios and your covenants if you don't mind us reminding what their restrictions are in your debt. I know it's pretty loose credit facility but I just wanted to get glimpse that one.

Yes, sure. So we have let's call it a springing covenant and what that means is, if our revolver is, at any quarter end date if our revolver is grown by less than 25% of our $75 million line or $18.75 million. In this less than $18.75 million drawn on that line, the covenants won't come into play. If there is north of $18.75 million drawn on the line then the covenants come into the play. Now the covenants, it is a leverage covenant, but it's senior leverage. So it's on the senior debt, so which means it excludes the $200 million of bonds in that calculation, right. And for the current test even though it doesn't apply to us because we don't have $18.75 drawn on the line, our current test is at 7.25 times senior leverage. That's our threshold under the covenants. And we are significantly below that, we're under 5 times, because there are add-backs for things like non-cash charges, right. So for example, the $23.1 million charge that we took here was a non-cash charge. So that would not go against us in terms of calculation for covenant purposes.

Kyle Smith, Jefferies.

I did want to just make sure I was clear, it sounded like there were three buckets of cost savings that you talked about. There's the $4 million it was previously announced, well on its way should be complete on a run rate basis by the end of fourth quarter. So maybe we get a little bit benefit in the fourth quarter from it, but then it will be fully flowing through starting early next year. Rick, I think you mentioned that there was an additional $2 million from other areas of cost reduction during your prepared remarks. This should also be reflected in the fourth quarter. Is that reflected as then it will be implemented by the end of the quarter or that we should see an annualized full $2 million benefit in the fourth quarter?

I think, this we would expect it contribute to our EBITDA target that is expected in Q4. These are from a number of initiatives that Tom outlined in his prepared remarks in terms of different initiatives.

It's what help I guess to the north of $20 million in adjusted EBITDA in our infusion segment.

So it's $4 million plus $2 million plus the $9 million of infrastructure, it's coming out. So, all in $15 million of costs that are coming out from various pockets.

Yes, correct.

And the $9 million of infrastructure coming out. I image that that's going to be a lot of people sort of additional things that you brought in a little bit of a rush to deal with the disruptions that you were experiencing. Should we anticipate any significant severance or other costs to take out that $9 million of annual infrastructure cost?

It is just that if you go back to what Tom talked about, right, some of the major initiatives that are going to drive some meaningful cost savings for us or things like our nursing initiatives, right. So when you look at the nursing initiatives it isn't necessarily about people, it's about to enhance productivity and lower reliance on agency costs, right. So that would not result in any sort of restructuring costs, for example, right or shipping, right, initiatives. Those (inaudible), clearly there will be some streamlining, right. And to the extent there are then we'll incur some restructuring charges there.

The other noteworthy point here is that we do have a reasonable amount of turnover, so that it can be, just not replacing those positions and avoiding some restructuring charges in certain areas due to our term.

And then one other, we've had, as I said, we've burdened the infrastructure this year with holding assets and consulting and some outside resources that are in our current cost structure that would -- now that a lot of the work is complete on the integration and the process improvement, the training, there's still some lean activity is going on in the market, in the company and that will wind down by the end of the year as well. And so that a lot of those processes will essentially go away. So a lot of the delayed holding on to those infrastructure as I mentioned to finish the integration, do the training, knowledge transfer, process improvement, systems enhancements, all that is rapidly coming to a close by the end of the year.

Okay, great that's helpful. Sorry, I had perhaps misunderstood, I thought that $9 million number was purely stuff like consultants are hiring extra bodies to process bills and I didn't realize it included the initiatives that the Tom is working on. So it's helpful for that clarification.

And then taking all this together in the guidance you've given for your infusion segment margins for the fourth quarter, it looks like you're probably going to settle out for the year, and all in corporate basis $45 million, $46 million, maybe $47 million of EBITDA depending on where all of the pieces fall, which is substantially below the guidance that you have been giving to the market in the first part of the year. What -- was it that failed, is it primarily things that failed to materialize or was it primarily timing on the things that you're working on or that you just didn't get that juice or you have longer disruption? I'm trying to understand where it is that the mark was messed, because that is a fairly substantial revision in outlook for the year.

Well, I think the additional bodies necessary to collect the AR to prepare the integration to work through all of the accounts and the bills and accelerate the cash collections, we essentially put in over investment in internal resources as well as external resources. And then, as a result of some of the process improvements and training with ensuring that the processes would stick and the front end process would stick. That is primarily where were we saw, essentially the difference in cost structure.

And then last question from me is, my understanding is that the majority of the disruption that you've experienced in AR, and the majority, if not the totality of what's behind the charge-off is from the situation where you had to get new pharmacy licenses provider numbers experience some delays around that. But you talking about process improvements across the board whether it is -- is the right way to look at this that the disruption was mostly around your acquisitions last year and the things that followed naturally from those you then to moved react to that. And because of the process improvements that you put in place, perhaps, you still have to charge-off most of the ARs uncollectible, but you'll have an ongoing benefit from the enhancements to your people processes and then systems, is that the right way to look at that?

That is. I mean, there is -- through the system enhancements and conversions, we essentially consolidated five instances of CPR+ into one upgraded. There was paper on the legacy side and accounts that were moved around and essentially due to under staffing to essentially manage the integrations plus handle the growth of the ongoing business essentially some timely filing deadlines were missed as result of that disruption and essentially just made those dollars uncollectible.

So I think, it's behind us, the front-end, as Tom mentioned by having all of our branch locations on one system we have visibility, we've essentially enhanced our daily recording and visibility to the business to our branch managers reimbursement centers, our teams everyone has essentially dashboard view in terms of visual management of what's going on with the business at the local level and has drill down capability as well. So essentially a lot of the work in putting the system environment, the control of the training has improved as well.

Okay. And I apologize, I think that was the last one, if you allow me, just one more. Now that you've completed these integrations and you've got a lot of initiatives that seem to be delivering very well on the top line. How should we be thinking about the seasonality in the business, I know there are some parts that historically been very significant, but you mentioned, some things are moving around Q4 to Q1, et cetera, how should we be looking at seasonality overall?

Yes, I mean, seasonality still is exactly the same as we have indicated and the fourth quarter remained stronger than oftentimes and it will represent over a third of our -- a [25-25, 25-25] straight line split. Fourth quarter often times will represent over a third and maybe even up to about kind of 35-36% of both revenue and EBITDA.

Dana Hambly, Stephens Inc.

I did want to follow-up on Kyle's question on just on the visibility, I think you have answered quite a bit on what the challenges have been with the EBITDA visibility. I do want to get a sense of -- you've been very good with estimating revenue and the cash collections have been pretty much on target. So I'm trying to get a sense of the challenges on EBITDA guidance. Has there been anything in the gross margins in the particular therapies that have been surprising? And I guess, more importantly, Tom, if you could talk about, since you joined what gives you so much confidence in the visibility for hitting EBITDA targets going forward.

Confidence in hitting the targets going forward is really about the momentum that we've gotten in terms of executing the initiatives and being able to do the reviews and kind of see some of the progress building monthly. And we sequenced that out multiple months ahead to see when those hit and then we review those each month in terms of the progress. And have a rule of thumb that we like to have 1.5 to 2.0 times the number of initiatives in the funnel that we need to come out, because we know that everything doesn't always hit to the top of the expectation. So we have initiatives that are greater in that. So that's a program that we've built for 2015 that we're executing against.

Just coming from a different industry, different background, in your view is this some pretty low hanging fruit?

As I mentioned, I call it a target rich environment, excited about the opportunities and productivity and speed and quality. And we've got a great team that I think is well organized to get after.

And Rick on the earlier question, has there been any surprise in the margins of the different therapies that you guys have been delivering or has it there been a surprise in the mix of therapies that may be made visibility so difficult?

No, I think, the thing that we discovered early on this year and that was one of the initiatives we identified was on the nursing, and productivity and the shipping. And I think that as we brought the different companies together and started to mapping up the processes in essentially early part of the year with the Alvarez team. We noticed that there was a different mix of full-time nurses, per diem nurses and then a heavy utilization of agency nurses. And so the cost structure and the management was not pulled into the normal branch operations and normal visibility.

And so we think that there is a -- I think, we believe there's at least $1 million a quarter of opportunity in nursing through essentially pricing, through costs, through management and Tom mentioned the RFP that we've initiated. And so those -- that's just an opportunity in tighter management and also scheduling logistics that we are implementing some tighter rules around, we saw some initial start of cost reductions and margin improvements in Q3 from this one initiative.

We also have seen through the shipping initiatives that we identified in terms of driving per shipment per patient down that can essentially drive some significant savings as well. So that's all going to be in the gross margins. So some of these initiatives is just pulling 61 Infusion pharmacies together with -- that had different practices, we're all in the same system, we have visibility to all of it. And essentially now we believe that with the programs and the processes and review that Tom has put in place we're making some good progress very quickly on it.

Okay. That's good information. And then on the national accounts, I think you may have answered, and I apologize there's a lot of background noise on the -- one, could you just, there is 27% growth, can you just give us a sense of the size of that book of business? And then, again if I missed it, I apologize, did you say the margins there were fairly comparable to the regional payors?

On the core therapies, they are fairly comparable across the whole industry.

Okay. And as to size of that book of business?

Well, it's a fair amount of the national accounts on a quarterly basis represent a fair amount of our revenue, our quarterly revenue.

Okay. Alright. Last one, Hai, just you update us on the material weaknesses and I think you remediated one of them, just where we are on the other one?

Yes. So we did remediate one in the first quarter. The one that's left is we expect it to be remediated by the end of this year. We already -- we've gone through all the steps and we've previewed both with Ernst & Young who will be leaving us. This will be the last quarter for their review as well as KPMG, who is coming on board will be conducting the full year audit. And so we've previewed our, all the steps, all the models necessary to remediate the second material weakness by the end of this year.

Okay. As you said that was previewed with KPMG?

Yes.

And there are no further questions. I'll turn the call back over to our speakers today.

All right, great. All right. Well, thank you, everyone, for your time today. And thank you very much to the BioScrip employees for your great work and patient care. Thank you.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.