Option Care Health Inc (OPCH) 2015 Q3 法說會逐字稿

Good morning. My name is Zoe and I will be your conference operator today. At this time, I would like to welcome everyone to the BioScrip third-quarter 2015 financial results conference call. (Operator Instructions).

Lisa Wilson, Investor Relations for BioScrip, you may begin your conference.

Good morning and thank you for joining us today.

By now, you should have received a copy of our press release issued this morning. If you have not received it, you may access it through the investor relations section of our website.

First, BioScrip Director Carter Pate will make some opening remarks, followed by Rick Smith, President and Chief Executive Officer, and Jeff Kreger, Chief Financial Officer. Also on the call for the Q&A portion is Chris Luthin, Chief Operating Officer, and Scott Davido, Chief Implementation Officer.

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 855-859-2056 in the US and 404-537-3406 internationally and entering access code 64965564. 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 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 upon information to BioScrip today and the Company assumes no obligation to update statements as circumstances (multiple speakers).

During this presentation, we will refer to non-GAAP financial measures such as adjusted EBITDA. A reconciliation of such measures to the most comparable GAAP financial measure is contained in our most recent press release issued this morning, which can be obtained from our website at bioscrip.com. In addition, as a result of the previously announced sale of the Company's non-core PBM business, the Company's financial results concerning PBM are presented as discontinued operations on the consolidated financial statements for all periods presented.

And now, I would like to turn the call over to Carter Pate. Carter?

Good morning, everyone, and thank you so much for joining us.

Now before turning this over to Rick to discuss the quarter, I wanted to just make some brief remarks upfront. Now when I addressed you last quarter, it was discussed of how we had strengthened our Board and the management team and to introduce the Board's financial improvement implementation committee, which was responsible for overseeing BioScrip's financial improvement plan that we announced on the last call.

Our objective is to quickly and effectively drive meaningful change in order to improve the Company's financial and operational performance and enhance value for all our shareholders. Now as you can see this morning, we are making real progress on our objectives since initiating the financial improvement plan on August 10, just a little over seven weeks ago. Already, BioScrip is a leaner Company with a simplified business structure, focused on core infusion services.

Now this management team has a real sense of urgency here. We are succeeding and the results delivered this quarter are reflective of those tremendous efforts during the last seven weeks. We showed real progress on growth revenue for continuing operations.

You'll see a leaner DSO, a leaner selling and general administrative expenses. You will see we have reduced bad debt expense and you're going to see EBITDA improvement and strong liquidity this morning, as Rick walks you through this.

Now looking ahead, BioScrip will become an even more efficient company as we execute on the additional components of our strategic priorities and we are confident that this team will meet our goals.

Lastly, I want to thank this management team and my fellow directors for the countless hours they gave us this past seven weeks to make this quarter possible. Now, Rick, I will turn it over to you at this point.

Thank you, Carter, and good morning, everyone.

As Carter said, we are positioning BioScrip as a pure-play infusion services provider. We operate in an attractive market where the dynamics are strong, due to the need for affordable healthcare and the migration of facility-based services into the home care setting. With our comprehensive clinical offering and licensure to provide service in all 50 states, we believe we are well positioned for growth.

Our financial improvement plan is focused on growing our core revenue, reducing costs, improving margins, and reorganizing our structure around a more focused core infusion business. During the quarter, we substantially completed the announced targeted workforce reduction and remain on track to deliver the expected $19 million in annual cost savings. We made progress towards additional supply chain programs that are expected to add $3 million in annual savings in 2016.

We completed the sale of the non-core PBM business for $25 million in gross cash proceeds. We initiated programs to take place January 1, 2016, that are expected to reduce corporate costs by $5 million annually. We initiated cost-reduction programs totaling $5 million in projected annual cost savings to take effect in January 2016 from other targeted areas, including nursing, travel, office expense, and through technology-enhanced applications.

And finally, we continued our transition of chronic non-core infusion therapies to various alliance pharmacy providers, which, when fully realized, is anticipated to improve adjusted EBITDA by approximately $4 million annually.

Once our actions are complete, we expect to drive increased profitability through a more streamlined organization. We also believe that continued growth in core revenue will have a positive impact on both our gross margin and EBITDA margin profile.

In addition, BioScrip will continue growing through a clinically focused and customer orientated post-acute care model. Our core infusion business demonstrated strong performance this quarter, reflecting the potential for this business, and we saw continued organic growth year over year in the high single digits. This reinforces our belief in the strategic platform that we have built and the benefits of focusing on the infusion services sector.

This quarter's total revenue was flat with the second quarter. However, core and chronic blood therapies, where we focus our efforts on our clinical programs, increased sequentially by $6.4 million through strong patient census increase. Our hepatitis C revenue decreased $8.4 million.

The mix shift from Q2 to Q3 resulted in a 30 basis-point improved gross margin. The improved revenue mix and the effect of the cost reduction initiated in the quarter contributed to sequential improvement in consolidated adjusted EBITDA to $6.2 million.

We remain focused on increased cash collection, showing improvements of lower DSO resulting from stronger front-end processes and higher levels of cash collection. We're also reiterating our 2016 adjusted EBITDA guidance of between $50 million and $60 million, which takes into account our cost savings, which remain on track.

I would now like to turn the call over to Jeff Kreger, who will provide a more detailed review of our financial results. Jeff?

Thank you, Rick, and good morning, everyone.

For the third quarter, revenue from continuing operations was $247.2 million, representing a year-over-year increase in revenue of $15.8 million or 6.8%. The revenue increase was driven by year-over-year revenue growth in core therapies, chronic blood therapies, and other therapies.

For the third quarter, we reported a net loss from continuing operations of $24.2 million or a $0.38 loss per diluted share, as compared to the prior-year same period net loss from continuing operations of $39.2 million or a $0.57 loss per diluted share.

Gross profit for the quarter was $63.1 million, an increase of 3.9% over the $60.8 million gross profit reported in the third quarter of last year, driven by the year-over-year increase in revenues.

As a percentage of revenue, gross profit margin in the quarter was 25.5%, compared to 26.3% in the year-ago period. As Rick mentioned earlier, on a sequential-quarter basis gross profit margin improved 30 basis points to 25.5% in Q3 from the 25.2% we experienced in Q2, this due to sequential improvements in patient census in the areas of core and chronic therapies -- chronic blood, excuse me.

For the quarter, total consolidated adjusted EBITDA from continuing operations, including corporate expenses, was $6.2 million. Excluding those corporate overhead costs, the infusion services adjusted EBITDA for Q3 was $12.4 million. Adjusted EBITDA has increased both year over year and sequentially, due primarily to revenue growth combined with reduced operating expenses, including a reduction in bad debt expenses.

During the quarter, the Company recorded a $13.9 million pretax goodwill impairment charge related to the completion of its goodwill valuation, which we initiated during the second quarter of 2015. The Company also incurred $4 million of pretax restructuring and other expenses, primarily associated with its ongoing financial improvement plan.

Interest expense in the third quarter of 2015 was $9.5 million, down slightly from the $9.6 million in the year-ago third quarter of 2014. Income tax benefit from continuing operations in the third quarter of 2015 was $4.7 million of benefit, as compared to income tax expense of $1.9 million in the prior-year period.

As of September 30, 2015, the Company had approximately $69 million of liquidity, which is comprised of $29.4 million of cash on hand and $39.6 million of undrawn capacity available on our revolving credit facility. The Company has improved net days sales outstanding by six days since year-end, from 51 days at the end of 2014 to now 45 days at the end of 9/30/2015.

Additionally, the Company has reduced its cash burn rate throughout 2015 and we expect to be operating cash flow positive in 2016. As of the end of the third quarter, September 30, 2015, the Company is in full compliance with its bank covenants under the terms of the amended credit facility.

With that, we will open the call up for questions.

(Operator Instructions). Bill Bonello, Craig-Hallum Capital.

This is actually Per on for Bill. Congratulations on the early progress here.

A couple, actually, housekeeping questions. Curious when you refer in the press release to having transitioned some of the non-core infusion, and I know that was discussed last quarter, I'm just curious if the $247 million reported this quarter already reflects a little of that transition. So, in other words, was the, call it, 7% growth in the quarter actually better than that because some of that patient population had already been offloaded?

We have transitioned a small percentage, but as I mentioned, our chronic business, our hep C, was down $8.4 million sequentially, so that reflects some level of that transition and it was backfilled by our targeted therapies in the core and the chronic blood patient census growth.

Okay, so it really -- it would be fair to say that organic growth was better than the 6.8% reported? I think that --

Yes, in the targeted areas, I would -- yes. Definitely.

Okay, okay, fantastic. I'm just thinking in terms of framing it in the context of the business that you are endeavoring to go forward with and where you have spoken about 2016 already.

Okay, and then just one other really simple question for me. The bad debt moved better here this quarter. Just wondering if you still see bad debt migrating toward that 3.2%? I think that was where you had stated before. Is that a fair rate to consider for Q4 and into 2016?

Yes, hi, Per, good morning. As I stated back in Q2, we are going to take the remainder of this 2015 fiscal year to work through our Accounts Receivable and our bad debt issues.

We think we have gotten a lot better. In fact, October was our best collection month in several years for the Company and that is not even reflected, of course, in our Q3 numbers, so that is going to benefit the fourth quarter.

We think our bad debt expense rate's probably going to continue to move downward from the 3.8% we have reported this quarter. I don't know that I said 3.2%. I think we're talking more 3.3%, 3.4%, and so probably in that mid-3% range is where we are going to be approaching in Q4, and as we get into 2016, we think the models ought to reflect about the same 3.4%-ish.

Okay, that sounds good. Thank you.

Brooks O'Neil, Dougherty & Company.

I have a couple questions. So, one thing I would love for you to talk a little bit about is your efforts to strengthen the infusion margin, I think primarily by driving improved mix. Obviously, we see some improvement this quarter, but can you talk about where you think you are and what you think the opportunities are going forward?

I will take a first pass. First of all, it has continued to drive the patient census. In each quarter this year, we have sequentially grown our core therapies and our chronic blood therapies, which is the IVIG, subcu, and factor. We believe that our sales programs and also we have a nice contract pipeline that we believe will contribute to sequential growth into 2016 and future years.

And so, we feel good about the focus of our teams and where we are strategically positioned with our hospital partners and a number of our communities, as well as with our payers.

And then, also, one of the initiatives that I talked about is we have taken an aggressive look at additional field operating costs in the nursing side, so that is up in our gross margin, so we are -- we saw some sequential improvement from Q2 to Q3 in that area through some management and productivity, and that's a strong initiative for us going into 2016.

So those are areas that we believe our continued focus and where we are positioned with the initiatives in place that we will continue to see some good progress.

That's great. Can you just tell us roughly what the mix is between acute and chronic therapies this quarter?

Yes, sir. Our targeted profile is we're about 36% in terms of the core. We have got -- I think where we are targeted on the -- our plan that we presented in August was about a 75% total revenue mix, including core and chronic blood. We're about 65% at Q3.

So, with the expected transition over the next 10 months of the non-core items that we listed, we believe that through census growth and those other steps that we can march towards that directive in 2016.

That's great. I think you have said in the past that your efforts to transition some of those non-core therapies might result in a couple hundred million of revenue reduction. A, did I hear that correctly? And B, is that still in the range that you're thinking might be possible over the next few quarters?

Well, I think we -- we laid out our plan in August over 12 months, and not all of that transition is in our control, and so our cost reductions are firmly in our control and we are on track and driving that, and so the other piece is just coordinating and communicating transitioning.

So I think in terms of the total range, we maintain our guidance towards the pro forma revenue mix that we laid out in our plan.

Okay, good. And then, the last thing, I was just hoping Jeff might talk a little bit more about liquidity, about your ability to manage your debt over the next few quarters, and what the outlook might be, and thanks for taking the questions.

Sure, Brooks, and good morning. We believe we have ample liquidity to continue to execute on our financial improvement plan throughout 2016 and the future period. As I mentioned, we have the $69 million of liquidity at the end of the third quarter. That's a figure that is not all that different from today, where we stand on early November.

Our cash burn rate has continued to come down in 2015 and, in fact, we are projecting operating cash flow positive in 2016. We, of course, have some debt amortization payments that kick in in 2016 as well. We will be able to fund those, so we feel like we have got strong liquidity and we are well positioned marching into next year.

Great, thank you very much.

David McDonald, SunTrust.

A couple questions. Rick, can you just run through the numbers again? I missed them. How much hep C was down sequentially and how much the core therapies and chronic blood was up sequentially?

Yes, $8.4 million decrease sequentially in hep C Q2 to Q3, and then $6.2 million of core and chronic sequentially up from Q2.

And then, can you guys just remind me when you transition all of this lower-margin chronic business off, what do you anticipate the mix of core versus chronic will be at that point, once this is completely done?

We had stated in our plan that on a pro forma basis that picture that we had, core would be about 43% of total revenue and then core and chronic blood on an expectation basis would be about 75% of our revenue.

Okay. Just a couple of cash flow questions. If I look at the working capital, it looks like there was a pretty sizable payable outflow sequentially, which doesn't make a lot of sense to me why you guys would be paying your bills what looks to be faster. Can you just give me a little detail about am I thinking about that correct, and will that payable working capital drag reverse in the fourth quarter?

Dave, Jeff Kreger. Actually, we had about $11 million of AP that at 6/30, because of the way our revolver financial ratios requirements worked, we actually held $11 million of AP and paid it in early July.

As of 9/30, and in fact, as of today, early November, we are 100% current with all of our vendors. In fact, many of our vendors we pay, prompt pay, to enjoy a discount in terms of our cost with them, so we are 100% at terms on AP currently. That was an $11 million swing within the quarter, so if you move that back to Q2 where it should be, you get a little better look at how the cash flows are really playing out.

We also in the quarter had a concerted effort to work down our days inventory health facilities and that was successful, and now we are ordering more real time as opposed to stocking inventory. That has been a change in our inventory management throughout the Company.

So, guys, if I am doing the math, if I take a look at the operating cash flow and I reverse that working capital anomaly, it looks like operating cash flow is about a $10 million drag in the quarter. Can you give us any sense of what you expect the fourth quarter to look like and when in 2016 you expect to flip to cash flow positive?

Yes, we think the fourth quarter is going to be similar to the third. We still do have some drag on some of our restructuring costs, particularly around severances on these $19 million or so of RIFs that we are working through and were substantially through at the end of third quarter.

We are projecting fourth-quarter operating cash flows to be not so dissimilar from what we have experienced in Q3. Q1 of 2016, at some point in those first three months, we expect to go cash flow positive. We have also got the principal amortization that becomes due end of March 2016, so we are teed up to fund that, but we will be operating cash flow positive throughout 2016. And in fact, bottom-line net cash flow after debt and amortization payments and CapEx, we anticipate that being breakeven for the year of 2016.

Jeff, can you just quickly walk me through how you get from 4Q $10 million negative cash flow to positive in 1Q? I assume some of this is the cost savings and the EBITDA is going to be higher, but what are some of the other nonrecurring drags that go away as you move into 2016?

You touched on the majority of it right there. In fact, the RIFs -- as Carter said in his opening comments, we didn't start our financial improvement plan until August 10, and as we went through our RIFs during the third quarter, we have got some more to implement in the fourth quarter, those severances begin to work out, combined with the EBITDA improvements that we will enjoy from that as well.

The combination of those two is effectively going to -- and the changes we have got coming through in the early part of next year associated with some changes to different plans around the Company's contracts that we put in place that won't begin to kick off savings until the beginning of next year, all those in concert effectively will reduce that cash burn that we have had during 2015.

And then, guys, just last question, can you give us some sense of ballpark where you expect adjusted EBITDA to be in the fourth quarter? And then if you could just crosswalk us from that run rate exiting 2015 to the $50 million to $60 million in 2016, that would be helpful.

I suppose, Dave, I would say it like this. We have said $50 million to $60 million of EBITDA for 2016. We are not forecasting how 2015 will play out. There is a little bit of uncertainty as we work through the rest of our financial improvement plan. Rick?

Yes, I think our expectations are we would continue to see some sequential revenue growth that we have talked about some, and then the cost savings, additional cost savings, from the plan will have an impact, and so I think we have got some additional restructuring costs because there is some additional steps to accomplish in Q4 as well.

But I think, directionally, we feel the steps we are taking in every aspect of our financial improvement plan with revenue holding relative to sequential growth that [attain] us nicely to finish the year and in good shape and going into 2016 to achieve our targeted adjusted EBITDA.

Okay, thanks, guys.

(Operator Instructions). Mike Petusky, Barrington Research.

I guess, obviously some good progress on a number of these metrics. The one issue, though, that to me seems like it is lagging is that transition of the lower-margin business, and to me it seems like it is lagging in a meaningful way, unless I am misunderstanding what you guys initially had hoped to accomplish a few months ago on that.

Can you just speak to what's going on there? Are there multiple groups you are trying to offload this to? Is there one group that you are primarily trying to offload this to and that's hung up? And then, can you speak to what a reasonable gross margin -- overall gross margin level, post business transitioning, could be? Is it 200 basis points of improvement from the 25.5% or thereabouts?

I think, first of all, as we've said, we expected to execute this plan over a 12-month period when we announced it on August 10, and so all aspects of it, and when you bring in essentially different coordinated third parties that you're essentially working with, it is complicated relative to a patient base.

So I think we believe that all the steps we are taking has us on timetable to be done within the initial 12-month period that we laid out for ourselves and maybe a little bit earlier as it relates to the transition of the non-core therapy. So I think that's number one. We believe that within our plan we are essentially moving forward as essentially we contemplated.

At the same time, as it relates to the overall gross margin, I think we talked at the -- on August 10 relative to the pro forma look after transitioning that we would be closer to, I think, the 29% to 30% gross margin at the -- given the different mix.

Okay. So you are essentially saying versus plan you're not lagging on that piece of it that I identified?

No.

Okay. All right, thanks.

There are no further questions at this time. I will turn the call back over to the presenters.

Great. Thank you, everyone, for joining today, and all the BioScrip team on the call, thank you for your great efforts in helping us to continue to move forward and improve the strength of our organization. This quarter represented a solid step forward in our financial improvement plan in our transition to a pure-play infusion services provider. We look forward to updating you on our continued progress. Thank you.

This concludes today's conference call. You may now disconnect.