Option Care Health Inc (OPCH) 2015 Q4 法說會逐字稿

Good morning. My name is Robbie and I will be your conference operator today. At this time I would like to welcome everyone to the BioScrip fourth quarter earning results conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions). Thank you. 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 yesterday after the close of market. If you have not received it, you may access it through the Investor Relations section of our website at bioscrip.com. Rick Smith, President and Chief Executive Officer and Jeff Kreger, Senior Vice President, Chief Financial Officer and Treasurer will host this morning's call. Also on the call for the Q&A portion is Chris Luthin, Chief Operating Officer.

This 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 or 404-537-3406 internationally and entering access code 55165908. 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. All statements that address operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to cost reductions and projected cash flows are forward-looking statements. Such forward-looking statements are based upon current expectations and they're to be no assurance that the results contemplated in these statements will be realized.

Actual results may differ materially upon such statements due to a number of factors and risks, some of which are identified in our press releases and our annual and quarterly reports filed with the SEC, which you should review in conjunction with this presentation. These forward-looking statements are based upon 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, 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 most recent press release, which can be obtained at our website at bioscrip.com. In addition, as a result of the previously announced sale of the company's noncore PBM business, the company's financial statements 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 Rick Smith. Rick?

Thank you, Lisa. Good morning everyone and thank you for joining us. Our results for the quarter demonstrate the continued execution of our financial improvement plan and the actions we have taken to position BioScrip as a pure play and infusion services provider. We reported $9 million of adjusted EBITDA and $9.2 million of positive operating cash flow in the quarter and I am pleased to share that we expect to be operating cash flow positive in 2016.

While many areas of healthcare are experiencing headwinds, BioScrip is operating in an attractive area of the healthcare industry where the growth dynamics are strong due to the need for affordable healthcare and the migration of complex patient care into the home care setting. While we are not immune to the many challenges facing the industry, we are taking action to position the company for growth and a leading industry position. Our comprehensive clinical offering and our ability to provide service in all 50 states gives us confidence in the continued strength of the Infusion platform that we have created.

As we stated on our January 19 update growth in our core therapies continues to be strong. Connecting our payor contract access with our local marketing efforts has continued to drive high levels of patient census referral. Our transitional care discharge and readmission management programs are working effectively for our hospital customers. We believe we are well positioned to take advantage of the accelerating shift in the site of service for acute and chronic patient administration. Our expected continued core therapy growth coupled with the expected 2016 cost savings from our financial improvement plan positions us well to achieve our objectives in 2016.

As a reminder, our financial improvement plan is focused on reducing costs, improving margin, and aligning the company's operations around a more focused core Infusion business. At the conclusion of our fourth quarter I am pleased to share that the initiatives outlined in our financial improvement plan are largely complete.

To that end we have substantially completed the previously announced targeted work force reduction and remain on track to deliver the expected $19 million in annual cost savings. We have achieved the anticipated additional supply chain program initiative, where we were expected to add $3 million in annual savings in 2016. We have affected the initiatives expected to reduce corporate managed program costs by $5 million during this year and we have implemented cost reduction programs that are expected to reduce Infusion operating costs by $5 million in 2016. These additional operating costs in the field are related to specific targeted areas that include improved nursing utilization and productivity, travel expense, office expense, and other variable cost categories.

The cost savings arising from our financial improvement plan that I just described are embedded in our 2016 financial guidance. Accordingly, we are reiterating our 2016 adjusted EBITDA guidance of between $50 million and $60 million, which takes into account our cost savings plans, all of which remain on track. We are moving forward to focus on drive increased profitability and positive operating cash flow. As previously discussed, we expect that total revenue in 2016 will be lower when compared to 2015 due to our plan on reducing the percentage of noncore chronic revenue as a part of the total revenue of the company. We expect core and chronic revenue growth in 2016 to be consistent with growth levels that we have been experiencing the second half of 2015.

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

Thank you Rick and good morning everyone. For the fourth quarter revenue from continuing operations was $243.8 million, down 1.4% on a sequential quarter basis as a result of achievement towards our planned shift in revenue mix to greater core revenues from lower margin chronic. Gross profit for the quarter was $65.9 million, roughly unchanged from the $65.2 million in the third quarter of 2015. As a percentage of revenue, gross profit margin in the quarter was 27% as compared to 26.4% on a sequential quarter basis.

Total consolidated adjusted EBITDA from continuing operations was $9 million in the fourth quarter, representing an increase of $2.8 million sequentially over the third quarter of 2015. Excluding corporate overhead costs, the Infusion services adjusted EBITDA for Q4 was $17.8 million, an increase of $3.1 million over the third quarter of 2015. This increase in adjusted EBITDA was a direct result of the operating improvements realized from the financial improvement plan, including improvements realized in our accounts receivable agings and related bad debt costs.

Interest expense in the fourth quarter of 2015 was $9.6 million, roughly consistent with $9.5 million in the third quarter of 2015. Income taxes from continuing operations for the fourth quarter of 2015 were a benefit of $1 million, as compared to income tax expense of $4.6 million recorded in the third quarter of 2015.

For the fourth quarter, we reported a net loss from continuing operations of $19.1 million or a $0.28 loss per diluted share as compared sequentially to a net loss of $26.3 million or a $0.38 loss per share in the third quarter of 2015. Our fourth quarter net loss included on a pretax basis $9.4 million of restructuring costs, which were principally associated with executing our financial improvement plan. These restructuring costs consisted of severance and retention benefit costs, as well as other FIP-related consulting and professional fees. In 2016, we anticipate that our restructuring costs associated with our financial improvement plan will be significantly reduced from the 2015 level and on a quarterly basis, these costs will trend down to zero by the beginning of the third quarter of 2016.

Turning to liquidity -- as of December 31st, 2015, the company had $70.2 million of total liquidity comprised of $15.6 million cash in bank and $54.6 million of undrawn capacity available on our revolving credit facility. As of this morning, March 3, 2016, our liquidity continued to remain solid with $52.3 million of liquidity as of today comprised of $5.7 million of cash in bank and $46.6 million of undrawn capacity available on our revolving credit facility.

Please note the temporary dip in liquidity between year-end December 31, 2015, and today, March 3, principally resulted from two matters. First, the February $6.4 million payment of our third and final installment in our Department of Justice Novartis XJ settlement. And secondly, the February $8.9 million interest payment on our 2021 notes which occurs semi-annually in the months of February and August.

Net long term debt at December 31, 2015 was $418.4 million, which was $1.1 million lower sequentially than the third quarter of 2015 and was also $4.7 million lower than the year over year fourth quarter of 2014. We expect to further reduce our net long term debt by over $12 million in 2016 through principal payments on our term loans as funded by positive operating cash flow.

Regarding cash flows, and DSO -- we improved our net days sales outstanding by ten days year over year, dropping from 51 net days at the end of the prior year 2014 down to 41 net days at the end of the current year, 2015. This net DSO improvement was the result of much improved cash collections generated by improved billing and collection processes, improved patient intake processes, and the collection of one large older accounts receivable balance in the fourth quarter. The improved DSO was key to the company producing $9.2 million of positive operating cash flow in the fourth quarter of 2015. And as Rick discussed in his remarks, we are projecting positive operating cash flows for the full year 2016, as well.

With that, we'll open up the call for questions.

(Operator Instructions). Our first question comes from the line of Bill Bonello, from Craig-Hallum. Your line is open.

Hey good morning guys. Congratulations on the nice progress that you're making here. A couple of questions. First, just curious. Given sort of the normal seasonality in the business, maybe the timing of the low margin chronic business transition and the fact that I would assume some of the financial improvement benefits are going to be a little bit more backend-loaded, is it fair to assume that EBITDA could be down sequentially in Q1, albeit up year over year?

Bill, yes. Good morning. I think it's fair what you're saying. I mean certainly there is seasonality as you pointed out in our business, and Q4 is always the strongest and Q1's typically the lightest and it builds during the year. So as we bridge over from Q4 2015 to Q1 of 2016, deductibles reset for all of our patients; that impacts some of their decision making in terms of whether to stay in a facility or be provided home based Infusion therapy. In addition seasonality of weather often affects discharges from our hospitals and other referral sources, so -- but we would definitely state that on a year over year quarter basis, Q1 of 2015 to Q1 of 2016 will see a step up in our EBITDA but sequentially Q4 to Q1 we'll see some seasonality.

Okay. And then can you just maybe give a little bit more color on the sort of what's remaining in terms of transitioning the chronic business out, what's being transitioned, sort of what plans are in place, how confident you are in that and sort of how that impacts profit going forward?

Yes. Hi, Bill this is Rick. Good morning. By the end of the year, we had moved out about $30 million of lower margin hep C business, so I think you can see that sequentially between June and the end of the year. While revenue did come down, our gross margin expanded as our core growth continued to improve the second half of the year. We have approximately $175 million of other business to move out, and we gave ourselves through the end of June to effect the transition to alliance partners. And so we have infrastructure that's in place in terms of communication, and there's a network of about 50 pharmacies -- specialty pharmacies that do not do home infusion that we anticipate will be able to effectively achieve our goals.

Excellent. That is very helpful. I will just hop back in the queue for anything else. Thank you.

Thank you.

(Operator Instructions). Your next line comes from the line of Dana Hambly from Stevens. Your line is open.

Hey, good morning thanks. Just -- Rick on that last note, the $170 million, what of that is contemplated in the revenue guidance for the year?

A little bit less than that just because of timing and not 100% of that can move based on our timetable. So I would say that maybe about $120 million of that is --

Yes that sounds about right. I mean the budget contemplated as you said, Rick, moving that out by midyear so the figure you provided is correct.

So then second half revenue should be significantly down from first half, although there is negligible profitability so no real impact to EBITDA. Correct?

That's correct, Dana.

Okay. All right. And then Jeff, just thinking about some of the cash flow items, it's -- could you talk about cash interest and cash taxes for the year? Cash interest I think last year was $34 million, $35 million, a little bit higher this year?

Yes. Cash interest we project will come in around the same, around $35 million. That additional $2 million that showed in our projections for 2016 is the noncash amortization for financing costs and whatnot. Cash taxes will be low. I mean we're not a federal payer, obviously, our position on the losses more recently and we have got NOL carryforwards to utilize on a federal basis. So we're really a state and local payer, if you will. We project those taxes to be in the neighborhood of, say, between 5% and 6% and typically I guess our cash taxes are very, very low, under $1 million.

Pretty negligible.

Yes. Fairly negligible.

Okay. How should we think about working capital for the year, would you expect that to be positive to cash flow if you're collecting more or just kind of grow that with revenue growth?

No. We would expect that to be positive. You might have noticed our inventory increased a little bit as we kind of protected ourselves for seasonality entering into Q1, we built up on inventories. We probably -- we intend to work that back down. We intend to continue to have some improvement in our AR, likely not as dramatic as we just experienced over the last 12 months, but a day or two is to be expected. We are current on our AP so not expecting that to change a lot but overall working capital year over year we should see some slight improvement.

Okay. Very good and just on CapEx, kind of similar with last year?

CapEx we would say may be down just a shade, probably guiding between $8 million and $10 million on the CapEx on an annual basis.

And then last one, Rick, since the last call Optum came out announced an acquisition of an infusion platform. Can you just talk about what they acquired, how that's different from you and whether or not you would expect that to have any impact on your relationship with United going forward?

Yes. I think they acquired AxelaCare which is primarily has started as a chronic IV/IG infusion provider. I think their footprint is not as large as ours, nor are some of their branches have the scale. Good quality company. Their CEO is a good leader, as well. We have two years left on our United contract, and we've had a long-term relationship. They're like any other customer, you have to work hard to always prove your value. And I think that based on the work that we're doing with them on behalf of the United members, we believe that we'll be a part of the panel and continue to add value and we can work side by side with AxelaCare and OptumRx like we have been on a number of United initiatives.

Great. Thanks very much.

Okay.

Thanks, Dana.

Our next question comes from the line of Kyle Smith from Jefferies. Your line is open.

Hey, good morning, everyone. The first question, Rick, you said that I think you're essentially complete on some of the initiatives that have been outlined in the past several calls. Could you speak a little bit to timing in terms of the impact from those, how much is fully reflected in the fourth quarter numbers and how much should we expect incrementally in first quarter/second quarter 2016?

Yes. I'll go to Jeff with the numbers.

Yes we've said we're substantially complete the biggest of course being our reduction in work force and while nearly all of those had occurred by the end of the year, not all of them but nearly all of them had occurred, that will be pro rata as we march through the year. Some of our other initiatives -- for example we adjusted our benefit plans design. Those kicked off January 1 as well and that's pro rata. Whereas others, for example, initiatives around some of our nursing productivity, our supply chain savings, those tend to be more mid to back half of the year as opposed to right here in Q1 so I would keep all that in mind as you prepare your models.

Yes. And I think that as we move some of the chronic out there will be a reduction in additional headcount to get to the targeted number more as well. And I think last year we had mentioned we would expect it given the plan that it would take through at least mid year to get 100% of the run rate into this year, as well.

Okay. Is that something you could put some numbers around?

We kind of stuck with the guidance, Kyle, the $50 million to $60 million for the full year and we've not really been providing quarterly amounts as we look out.

Okay. That's fair. And then looking at your working capital, obviously, there was an increase in inventory. The cash receivable declined you've described already. You gave some mention to the inventory increase. Is that something we should expect to reverse? And then also on your accounts payable that's moved around quite a bit from quarter to quarter. How should we be thinking about that number going forward, as well?

Sure. Accounts payable is beginning to stabilize very nicely. We are at terms with our vendors. Inventory, as I pointed to a little bit, but just I'll remind everyone: we expect to see that come down. We built up seasonally. We were concerned about some of the seasonality in the winter, being access to the inventory, having it available for our patients for immediate distribution so I would expect Q1 and going forward that to be a lower balance, inventory on hand.

Okay. Great. And then in terms of the overall plan for turning the business around and positioning it for growth going forward, I think 2015 was a year where there were a lot of sort of immediate triage kind of items to deal with. You've mentioned some things that are perhaps longer term adjustments. How is the management team and the board thinking about the position of the business as we sit today? Stuff that's super high priority, has to happen as soon as possible, versus longer build type projects and where you want to kind of aim this thing going forward?

I think that our priority is our execution of the financial improvement plan. I think that's -- as we have stated all along that is job one. We expect that given our position with -- our managed care panel presence as well as our hospital relationships, that we believe that our strong organic growth in the targeted therapies will continue. We have a level of a revenue stream pipeline that is getting increased concentration. I think that 2015 and 2014 we were pointed inward to ensure that we got this company back to cash flow positive, eliminate the cash burn and resolve the integration issues from the acquisition. And now the objective is to take advantage of our market position and get this company running a little bit stronger in terms of organic growth production.

Okay. And then I notice that there hasn't been any mention of the strategic options side of the equation. How are you thinking about M&A, sale opportunities et cetera. Is there anything that you can share with us on that front?

Our January 19th update, we provided -- clearly, Jefferies (inaudible) is engaged to assist us in terms of evaluating strategic options. We've stated all along that it's a parallel path but our number one priority is to execute on our financial improvement plan. We believe that executing a strong business, getting the cash flow generation stronger will build shareholder value and in the event that something on the strategic long-term process develops, then essentially we'll also update our shareholders on any of those updates as well.

That's helpful. Obviously, I'm on the other side of the wall for that one. And then last question is sort of a more of a big picture thing. There's been a lot of discussion over the past six, seven months about the pharmaceutical industry, drug pricing, availability, patient access, et cetera. As you've observed that, given that Infusion involves some of these high cost drugs, are there any major takeaways or shifts in wind that you've identified that are relevant to your business that we should be thinking about?

No, we have. I mean there's been drug shortages on key ingredients of our patient-specific needs that we've been dealing with as an industry for the last several years. We've got a very strong supply chain team that has -- is always done advance connected to our clinical services organization that is ensuring that we have necessary ingredients and drugs on the shelf. But so we never have had to turn away a patient for lack of access to necessary medicine.

Great. Well, thank you very much, gentlemen, and congratulations on the progress you've made in executing on the financial improvement plan and having what looks like a very sequentially nice fourth quarter.

Thank you, Kyle.

Thank you, Kyle.

Your next question comes from the line of Kirk Balzer from Ardsley. Your line is open.

Hi, thanks for taking my question. On the Infusion service adjusted EBITDA, the $17.8 million and the improvement of the $3.1 million, you said it came from aging of accounts and bad debt. How much of that was from that and how much was that from improvement of the operations and how we can look at that as an annualized basis?

Sure. It came from a combination of the operating improvements to the FIP and continued improvements around our billing collections and processes which of course lead to a lower bad debt cost overall. Bad debt costs in the quarter were 3.4% down sequentially from Q3, Kirk. Probably roughly $1 million was improvement in the bad debt costs within the quarter if you were to compare, and then walking forward, we think our bad debt expense is going to probably be in the neighborhood of between, say, 3.3% and 3.5% of revenues. It would be a good proxy for 2016 bad debt.

Okay. I'm trying to get at what is basically the run rate and the growth prospects of that base business on the Infusion services because right now you're analyzing at $71 million about and how do I get back that into the $50 million to $60 million of the overall EBITDA that you've done? So basically what is the corporate overhead and what else is in there that's a one-time function, if you will, between those two?

Yes. So -- I mean in our schedules, we actually have restated our P&Ls to we think be more user-friendly not only to our stakeholders, yourself and others but also to management in managing the business. You'll notice that we now have a line that specifically says G&A expense on our P&L. That represents corporate. So and our tables in the very back of the release kind of walk you back to what we'll call Infusion segment level EBITDA, which we believe is comparable to maybe other Infusion providers out there and some private. But information available in the market on them from a comparability standpoint. So hopefully that helps. That was the point actually in restating the P&L. Separate corporate from field operations expenses.

Okay. Thank you.

Sure.

(Operator Instructions). Our next question comes from the line of Michael Petusky from Barrington Research. Your line is open.

Hi good morning. A number of my questions have been asked and answered. But in terms of, I guess, the first quarter, I'm assuming it sounds like you're saying a little bit of a step back because of adjusted EBITDA. Are you saying also a little bit of a step back in terms of gross margins, kind of from Q4? Is that fair to say?

No. I think our gross profit is probably going to be right there around 26.8% to around 27% in terms of gross profit percentage.

Okay. And then I guess if you're able to transition this business out on the timetable you're suggesting, where -- ballpark, where could that gross margin be by Q4?

We're targeting gross profit as we get towards the end of the year in the mid to higher 30 percentile -- I'm sorry -- high 20s, low 30s, I apologize. So we're looking at maybe 30% to 32% gross profit margins as we exit 2016.

Thanks. And I guess then that just leads me to my next question. The -- and I think I got on your case a little bit last time on this issue. The transition of business to me seems like it's going slowly and it continues to seem like it's going slowly, I guess. What's your conviction level that this timetable you've set out for transitioning that business occurs? I mean how confident are you?

Well, we're running hard towards it. As I said, we have expanded the network of potential alliance partners and we are aggressively identifying it. As you know, it's not all in our control. So there is a timing -- we're running hard to the June 30 date as we laid out for ourselves.

Okay. So I mean is it your expectation that if you do come up a little bit short, it will be a little bit short, not $150 million short?

Yes.

All right. Great. Thanks, guys. Really seriously, good progress. Thanks.

Thanks, Michael.

Thanks.

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

Great. Well, thank you everyone for your -- joining our call this morning. We look forward to updating you on our progress as we continue to execute on our financial improvement plan.

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