Option Care Health Inc (OPCH) 2016 Q3 法說會逐字稿

Good morning. My name is Heidi and I will be your conference Operator today. At this time I would like to welcome everyone to the BioScrip third quarter earnings results call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions). Kathryn Stalmack, you may begin your conference.

Good morning, and thank you for joining us today. My name is Kathryn Stalmack, Senior Vice President and General Counsel of BioScrip. By now you should have received a copy of our press release issued yesterday. If you have not received it you may access it through the Investor Relations section of our website.

Dan Greenleaf, President and Chief Executive Officer, and Jeff Kreger, Senior Vice President, Chief Financial Officer, and Treasurer, 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 855-859-2056 in the US, and entering access code 1061955. An audio web cast will also be available for 60 days following the call in the Investor Relations section of the BioScrip website at www.bioscrip.com.

Before we get started here today I would like to remind everyone that many of our comments may contain forward-looking statements within the meaning of the Private Securities, Litigation Reform Act. Such forward-looking statements are based upon current expectations and there is no assurance that the results contemplated in these statements will be realized. Please refer to our press release and our reports filed with the SEC where you will find factors that could cause actual results to differ materially from these forward looking statements. 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 adjusted EBITDA, a non-GAAP financial measure. A reconciliation to the most comparable GAAP financial measure is contained in our press release issued yesterday afternoon which can be obtained from the Investor Relation section of our website, www.bioscrip.com. And now, I am happy to turn the call over to Dan Greenleaf. Dan?

Yes. Good morning, everyone. Thank you for joining us on the call today. I want to get a couple things out of the way before we get started today. One of those items is clearly the organization took its eye off the ball in the third quarter and those that are involved are no longer part of the organize in any shape or form.

I also want to remind people, and I'll remind people later on, throughout my presentation, that I have inherited challenging business situations before and this is not the first time. I have faced down situations like we are currently experiencing at places like Forum, Apria and Home Solutions, where we had organizations that had very good bones and were in a very good space and we are just in a place that they needed to be led. And so I just want to point that out because as we think of any of those organizations, they've all come out the other side in a very healthy and in a fruitful position.

And the last thing I also want to point out to those of you who are part of this call today, I have a significant personal stake in this organization and for those of you who are investors on the call, our interests are aligned and the success of the stock and the success of the Company and my success are intertwined.

Again, as I stated, the organization did take its eye off the ball and the folks that did this are no longer part of the organization and I am confident about the future of this organization and frankly I have a history of taking difficult situations and turning them around and making them into something superior to what they were previously.

With that, I will drop into the bulk of my presentation. As you know I joined BioScrip a few weeks ago as the President and Chief Executive Officer in conjunction with BioScrip's acquisition of my former company Home Solutions.

Under my leadership as Chairman and CEO at Home Solutions, my team and I developed and led transformational change resulting in Home Solutions becoming one of the top performing infusion service providers in the country. Home Solutions produced industry leading core revenue mix of over 85% in double-digit growth in core revenue, both of which in turn produced strong EBITDA profits.

Prior to Home Solutions from 2008 to 2012 I led similar transformational change at Coram which included the achievement of a 12.5% compounded annual rates in sales, adjusted EBITDA improvements from 4.7% to 13.3% and reductions in the cost of service as a percent of sales in excess of 10 percentage points.

Folks, make no mistake about it. The next 18 to 24 months will be a highly transformational period for BioScrip, perhaps the most transformational in the history of the Company. I see many similarities between the current state of BioScrip and both Home Solutions and Coram, upon my arrival. I believe there is tremendous opportunity ahead of us.

Very much like my focus when I began the turn around' s at Coram and Home Solutions I have made it abundantly clear to the organization and my leadership team that the top five priorities that we must deliberately execute upon over the next 18 to 20 months are the following; Number one, drive profitable growth. Number two, optimize operational efficiencies. Number three, ensure predictable and consistent customer service experiences. Number four, enhance employee effectiveness. And number five, exceed cash collection targets. Allow me to expand upon each of these key priorities which are what I believe to be the key components to transforming BioScrip to a world class health care organization.

Key priority number one, driving profitable growth. We need to maximize our time, talents and treasures around the things that drive the greatest value for our patients, referral partners, organization and shareholders. this will conclude improving our core revenue mix with an ultimate target of 85%, driving greater than market core growth and achieving profit in excess of goals. In addition we will seek to become the destination of choice through various sources of strategic partnerships throughout the continuum of care.

Additionally, we will make the best use of our procurement negotiations and constantly look for better ways to ensure we are getting the right value. We will optimize payor contracting for healthy win/win contracts. And lastly, we will manage our formularies in the best interests of our Company and our patients.

Key priority number two, optimize operational efficiencies. This includes establishing a single repeatable model. The keys of which a durable and competitive cost structure, reducing variation, driving out waste through metric score cards and accountability, and implementing best practices across the organization regardless of their genesis. We are also going to instill a culture of constructive discontent and continuously look for ways we can improve everything we do.

Key priority number three. A predictable and consistent customer experience in a manner that proactively addresses our referral partner needs, profoundly improves the quality of life for the patients we serve and strategically positions us as a market leader. This involves the measurement of patient referral (inaudible) satisfaction to ensure we are providing a predictable and consistent experience and a high level employee engagement.

This will also include the measurement of things like insurance verification and authorization so that those scores and those statistics are consistent with world class health care organizations.

The number four key priority enhancing employee effectiveness. We want to ensure that we are getting the right people in the right seats. This priority requires and embraces candid communication, encourages professional development, fosters collaboration and recognizes and rewards high performers. But the key to this is we need to ensure we are getting the right people in the right seats regardless of the function in the organization.

Lastly. Key priority number five, exceeding collection cash targets. As you know, liquidity and generation of operating cash flows are key to the health of this organization. This priority as a result is somewhat self-explanatory as it involves aggressively pursuing the collection of our accounts receivable which leads to reduction in bad debt costs and a corresponding enhancement to the overall health of the Company.

I also want to update you on the integration in our synergies. As we announced in our press release we are reconfirming our plan to achieve between $14 million to $17 million integration synergies over the next 12 to 18 months.

Additionally, we are in the process of finalizing the evaluation and incremental amount of synergies over and above the $14 million to $17 million. These savings will be accretive to our profitability and create additional shareholder value.

Folks, our mission is clear. We have a great deal of work to do here at BioScrip and as I stated this will be an 18 to 24 month turn around. I do see a tremendous amount of opportunity and untapped profit potential in the organization. In my few weeks here I have already seen many, many good people were working very hard and charging ahead with a real sense of urgency to assess our operational processes, correct weakness and implement best practice and process improvement.

I am confident we will achieve significant success as we move through the journey ahead. Ultimately we will get the organizations we deserve. I look forward to updating you on our progress. I would like to turn it now over to Jeff Kreger, our Senior VP, Chief Financial Officer and Treasurer who will provide a more detailed review of our financial results for the quarter as well as an update on our full year 2016 financial guidance.

Thank you, Dan. Good morning, everyone. For the third quarter revenue from continuing operations was $224.5 million representing a decrease of $22.7 million, or 9.2% from the year ago same quarter. As we mentioned last quarter we expected a decline in revenue due to our planned shift in revenue mix to a greater percentage of core revenue business and less low margin chronic business. This revenue mix shift is a key component in our overall strategic plan.

Our revenue mix is currently 65% core, 35% other chronic representing a 500 basis point improvement on a year-over-year and sequential quarter basis. For the quarter we reported a net loss from continuing operations of $11.1 million, or a $0.12 loss per diluted share as compared to a net loss of $24.5 million, or $0.39 loss per diluted share in the year ago third quarter 2015.

Gross profit for the quarter was $62.6 million, or 27.9% of revenues representing a 150 basis point improvement over the year ago 2015 quarter due to the planned shift in our revenue mix to a higher portion of core business.

Total consolidated adjusted EBITDA from continuing operations from the third quarter 2016 was, while disappointing, $3.5 million representing a year-over-year decrease in adjusted EBITDA of $2.5 million. This year-over-year decrease in adjusted EBITDA resulted from lower than expected core revenue combined with the higher than expected year-over-year operating expenses principally in the area of labor.

Interest expense for the third quarter of 2016 was $9.3 million, down $175,000 from the $9.5 million in the year ago third quarter due to smaller average interim borrowings outstanding on the line of credit, the revolver, during the quarter on a comparative year-over-year basis. Our line of credit as of September 30, 2016 has an outstanding balance, or had an outstanding balance of $39 million, and as of today the line of credit balance is $44.0 million. Higher by $5 million due to working capital fluctuations over the last 30 days.

As you likely noted in our press release of last night, we are updating our guidance for the full year 2016. In light of the Company's third quarter results, in light of the ongoing integration work the Company is under taking associated with the Home Solutions acquisition and the Company's new leadership which has lead to a comprehensive assessment of all operating processes, the Company is lowering the prior financial guidance as to the full year 2016 and the fourth quarter 2016 that it previously provided on August 8, 2016.

The updated full year 2016 guidance has revenues in the range of $928 million to $934 million and adjusted EBITDA in the range of $27 million to $29 million. In addition to the updated 2016 full year guidance, we are also providing preliminary guidance for the full year 2017.

The full year 2017 guidance is preliminary in nature and is subject to change given the new management team's comprehensive assessment of all operating processes which is currently underway. Following the completion of this comprehensive assessment by management, the Company will further update the preliminary 2017 guidance next year. The preliminary full year 2017 guidance is revenues in the range of $940 million to $980 million, and adjusted EBITDA in the range of $50 million to $60 million.

The bridge from our 2016 guidance to preliminary 2017 guidance is as follows. The 2016 implied Q4 mid-point adjusted EBITDA guidance converts to an annualized run rate of approximately $27 million of adjusted EBITDA. This $27 million projected annual run rate adjusted EBITDA effectively includes $4 million of synergies achieved and $4 million of Home Solutions contributions on an annualized basis.

In 2017 we then project also achieving an incremental $13 million of synergies plus we project an additional and incremental $8 million to $10 million of cost savings over and above synergies. Plus, $4 million to $6 million of projected adjusted EBITDA stemming from core revenue growth principally during the second half of 2017.

Turning to liquidity and leverage.

As of September 30, 2016, the Company had $34.2 million of liquidity which consists of $2.8 million of cash in bank and $31.4 million of undrawn capacity available on its revolving credit facility. Year to date to the third quarter of 2016 the Company has paid $9.4 million in principal payments on our bank term debt. We expect to pay an additional $3.1 million in principal payments during the fourth quarter of 2016. As such our total deleveraging principal payments on bank term debt are expected to be over $12.5 million in 2016.

As of September 30, 2016 the Company is in full compliance with it's bank covenants under the terms of the amended credit agreement. However, we anticipate we will not comply with the more restrictive debt leverage covenant that will apply in the amended credit agreement beginning in 2017. As such, we are proactively working with our lenders and evaluating options for maintaining compliance. This may include further amending our amended credit facility.

Regarding our capital structure, and I want to be very clear about this. We do not have any active plans to raise additional equity capital through common share issuance. Furthermore, there are no active discussions of this type with our Board.

Turning to DSO's and cash flows. The Company's net days sales outstanding, or DSO, was 42 days at September 30, 2016, consistent with the year ago third quarter 2015 net DSO also of 42 days.

Through the nine months of September 2016, ended September 30th, the Company's cash flows from operations represent a net use of cash from operations totaling $32.5 million. Significantly lower than the $70.7 million that used cash during the same period last year although still negative and we certainly are managing toward positive cash flows for 2017. The $32.5 million use of cash from operations during the first nine months of 2016 includes the use of cash for over $8.3 million in cash spending during the period associated with integration and acquisition matters.

We believe we have the financial flexibility for our current business needs and we have no near term maturities on our long-term debt. Given this, we believe we are appropriately positioned to continue executing on our operational and financial strategies.

That concludes our prepared remarks. Heidi, we will now open up the call for questions.

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

Good morning, guys. Just a handful of questions here. First just to get a bit more comfortable on the liquidity, Jeff, I just want to make sure I understand your commentary on the revolver. Are you saying that the liquidity has fallen since the end of the quarter and now it would stand at about $29 million? Is that how I should interpret that comment?

Bill, that is exactly correct. We have normal working capital swings as our payroll cycles in, as AP is paid and there was a $5 million swing over the last 40 days between year end and today's call.

And of the $8.3 million, just trying to see what the quarter looked like on an adjusted basis. Of the $8.3 million of cash that was used for acquisition and restructuring, how much of that was actually in Q3 versus previous quarters?

A little less than half of that was actually cash expense during the third quarter.

Okay. And what is your thought in terms of cash earned for Q4 in the first half of next year?

Q4 will be finishing off several of the severances which is obviously a cash exposure for the Company, but, will significantly help our 2017 results both P&L and cash flow wise. I tell you as we look out for 2017 cash from operations will -- cash flow from operations, we project a break even Q1 and then positive Q2 through Q4 for a full year 2017 cash flow from operations of positive.

We then project free cash flow after CapEx which typically, you know, with Home Solutions acquisition would be $10 million, maybe $11 million. So free cash flow after CapEX would likely be negative, single digits, but negative in Q1 and then positive in Q2 through Q4 resulting in some positivity, single digit, free cash flow positivity at the end of the year.

Okay. And was that before or after additional -- do you have additional principal payments you have to make over the course of the year?

When I say free cash flow, I am intending that before debt service, or debt services, 3.13 per quarter, which means it's 12.5 in the year, and so that is before debt service. With debt service we should be right about break even for the full year. 2017. Bottom line cash flow.

That's very helpful. And I'm sorry. Can you repeat what did you say for Q4? I didn't quite get what you said that you thought the cash burn would be in Q4?

So Q4 cash burn, we will definitely be negative. Again, burdened with the, you asked me on the $8.3 million of integration and transaction related cash flow, how much of that was in Q3. Well, on our P&L there is more and that will come through in cash in Q4, therefore, Q4 cash flow from operations will be negative and will turn to positive the second quarter of 2017.

Okay. So you don't anticipate you will have to raise equity but, are you saying you have enough liquidity with the current line of credit to get you through to that second quarter when you start to get to break even, or is there something you are going to have to do to shore things up?

Yes. Bill, liquidity is very tight and we're taking it very seriously. We manage our cash daily. However, we do believe we have the capacity on our current revolver to allow the Company to operate on its operational and its strategies into the future. A large portion of that is going to be the head count reduction. Many of which we've already enacted. That we've talked about, Dan touched on it and we will spend more time during the Q&A sessions as well as other operating strategies that we're employing right now. We've already put in place. That cost savings is a large piece of ensuring that we have adequate liquidity.

Sure. Thanks. And if you will indulge me, one additional big picture question for Dan and I will hop back in the queue. One of the questions we are getting over and over is, help us to get comfortable that the issues here truly are operational and not structural, that this isn't just a bad business.

And I don't mean the infusion business, but this particular set of assets. Can you sort of speak to that, Dan? The commonality between this set of assets and what you had at Home Solutions and what you had at Coram, and what it is you see that makes you believe you can achieve similar levels of margin and why it is not a structural problem?

Yes, I don't think it is a structural problem, Bill, because the organization is under achieved and under performed. It is hard for me to say the organization has structural issues when it's never ever hit its stride. Frankly, Bill, this looks a lot like Coram. If you were to look at Coram when I originally joined it was doing about $500 million in revenue and about $5 million of EBITDA.

I think many people after Apria bought that business and thought -- if you read the stock analyst report they thought it was a bad idea. And so I look at that, and I look at this and I look at the bones of both of these companies and I look at an organization that hasn't had I think the level of focus on core revenue that I believe it needs to. We all know that profitable growth leads to higher gross product margins. Ad again, we've got some regions, Bill, like the central region that has -- it does about 85% core.

It has 44% gross product margins and it has a contribution margin of 16%. When I look at that, Bill, it says to me, there isn't something wrong with this business. But what it says to me is there is a lot of opportunity in this business. We have identified substantive additional cost-savings already that consist of things like labor and nursing and overtime and supply chain and delivery costs and mileage costs and asset management, and those are all things that we're getting after right now that invariably is going to help with our cost structure.

And then secondly, on the sales side this organizations is under achieved sales wise. And I look at the percent of core and where it is and where it could be and I don't think there is something inherently wrong with this business. I think there is something inherently wrong with how we focused our sales resources.

I look at the payor area. I think those are areas that at the last organization we did get price increases and we weren't just about getting access. We were making sure that when we looked at contracts we did everything in our power to make sure those things, that those contracts worked for us.

My point in all of this, Bill, is these are things in our control. There are some things like boogie man out there or the hand, the Adam Smith, the invisible hand, that is not what is going on here. These are things that are related to management and these are related to operations and these are related to sales, these are related to sense of urgency, these are related to focus and these are related to the quality of people that we have in our organization and from my perspective, Bill, those are things that are not endemic.

They are things that can be resolved and fixed. And I have done it three times before.

Excellent. Thank you so much.

Thank you, Bill.

Your next question comes from the line of Brian Tanquilut, from Jeffreys. Please go ahead.

Thanks for all of that color, Dan. I just want to follow up on Bill's question, basically what we're hearing from investors. How would you answer the question when investors ask you how do we feel comfortable or how do we get confidence? This is not the BioScrip of old that we knew, and there will be more consistency and predictability and visibility in the numbers, and your ability to hit the numbers you've set out. And if you don't mind giving to us in details into exactly what the extra cost cuts you are putting out there and what specific initiatives you are putting out to drive organic growth specifically in core?

So Brian do you want to ask that, you asked like three different questions?

What makes it different this time from the old BioScrip? Let's start there.

Look at the changes in the organization already. Just start there. Look at the changes that have been made across the board with the operations and with sales and with the top executive. And that in and of itself I think should speak volumes to you about what's been done.

Also the other thing is the quality of people we are adding to this executive team. I think the best opportunities here between these organizations is that we are able to blend the best talent from both organizations, and we are doing that. Some of those people have worked with me, as you know for example Alex Shott worked for me at Coram. He was the Chief Financial Officer at Home Solutions, and is now responsible for strategic initiatives. I would share that with you and I would also share with you -- and I was talking to Katherine Stalmack on the way home last night and we were chatting about what was different from her perspective and her perspective was just that.

You came in first week and there was no question about the -- about how you were going to hold people accountable. And we have similar conversations with our area Vice President's of Operations, with our Regional Sales Directors, we're producing daily metrics now. This is something that the organization hadn't historically done. We're producing metrics on insurance verification authorization which the organization has not historically done.

We are being much more transparent with our employees about what the expectations are and how they are doing. That is going to carry -- not only, Brian, will that carry into our organization and its behavior changes, but it is also going carry into how we deal with the street and I think it is important that we are transparent. I think it is important that we are clear about what we are trying to achieve. I think it is important that the numbers we show you are numbers that accurately portray how the business is doing. And so you've got my commitment on that.

I think again, if you ask the people in the organization about the tempo we are running now and the amount of data they are getting how and the level of metrics and measurements they are obtaining right now. And again, some of these additional cost-savings like I have shared with you. Additionally, they are going to be in buckets of labor. They will be in buckets of improving our nursing efficiency. They will be in buckets of over time and on call costs and buckets in the error of supply chain. Because we think there's even more opportunity there than was originally identified.

They will be in areas of delivery costs. Simply put, we are going to be using UPS and Fed Ex more aggressively. Courier is $55, a driver is $55 and Fed Ex or UPS is $15. Our goal is to get that number to where Home Solutions is which is between 65% and 70% of all deliveries will be done through Fed Ex or UPS. Things like mileage reimbursement. We have to make sure we have mileage reimbursement that is consistent with what the reimbursement really is.

And that we are reimbursing people for maintenance, for gas and for insurance, but it is consistent with the actual dollars is versus over reimbursing. And then things like just asset management. Better pump management. We took our pump management at Home Solutions from somewhere from the 60% range to over 90%. The management of pumps is a percent of utilization here at BioScrip is in the 70s. And we certainly think there is a significant opportunity to improve that. Fed Ex utilization at Home Solutions when I joined was around 21% and we drove it to 65%. At BioScrip that is somewhere in the 40% range.

Keep in mind also, Brian, in the 8515 I have done this with a couple of organizations and the last at Home Solutions and we were in the mid to low 70s in terms of the percent of revenue that came from what I would describe as core therapies or profitable therapies. We have driven that to over 85%. Again, there is no reason to think we won't be able to do something very similar to that at BioScrip.

Again, the nice thing is, we have a couple of regions as it stands right now, Brian, that look exactly like what we want to look at BioScrip. Which is 85% core, gross product margins in the 40s and contribution margins at the branches in the mid-teens. And if we do that, we have the opportunity to be a 10% EBITDA organization. Again, we have those analogs out there in a couple of our regions already.

I appreciate all of that color, Dan. The follow-up for me, you talk about quarter growth and all the initiatives you're putting out. Do you face the risk of putting in too much in the form of cost cuts that you start eating into the bone and impacting the ability to grow core?

I think we have to be conscientious about that, Brian. There is no question about that. I think we -- on the other hand we have built staffing models. We have a pretty good idea about what the productivity should be at different locations. And even things, like if you think about this, Brian, part of this is unlocking the value of the organization. If you think about asset management for example. We work with a company called MSC. What asset management -- I think it's a really telling example, it allows one to do it allows one to pull pumps.

No longer do we have branch managers going out and saying I looked on my shelf and I have no more pumps and I have no awareness around what the overall organization has in terms of its availability. So number one, we are going to-- That's one example of where we are getting efficiencies. And then you go to the warehouse level and no longer do we have drivers picking up pumps. No longer do we have people in the warehouse cleaning pumps. And, frankly, what that does is allows our people in those branches to do other things. And to do more things.

That's one example, and Fed Ex is another example. When you are planning ahead which is what Fed Ex and UPS and Lead Time allows you to do, it frees up the capacity in the branch to do more cube business. Again, these are -- the things we are talking about are also ways that we unlock productivity in the branches, Brian. And I just want to point that out. We're not just saying, okay, we're going to go out and make these labor changes, without providing the branch tools to be more productive, and I think we have got to do both.

Last question from me. Do you mind giving us some color into how Home Solutions on a stand alone basis performed during the quarter, just kind of like as a validation.

Again, you can't get all of the information because of the fact that we started blending the businesses on September 9th, but suffice to say from a core growth standpoint in June we were above 18%, core growth year-over-year same store. And throughout the third quarter up to the time, we were riding in the mid-teens. The last time I remember was 14.5% core growth. Those trend continued. And again, I think that also provides a foundation for our growth expectations here, core growth expectations here at BioScrip.

All right. Appreciate that. Thanks, Dan.

Your next question comes from the line of Mike Petusky from Barrington Research. Please go ahead.

Good morning. So, Dan, I guess you guys have been hit on a lot in terms of cost reduction, but this issue of core and chronic mix has been a long-time issue for BioScrip. How specifically--because this 35%, 36, 37% core piece has been there for what seems like a really like time. How do you specifically move that needle? Does it come from corporate? Is it out in the field? Is it in a contract? Up front? How does that happen?

There are five things you have to do. Number one you have to have the right incentive for the sales organization. And you know, the moment we kind of put new incentives in place at Home Solutions in July of 2014 we saw double-digit growth in core almost immediately. You also have to have the right set at the branch level. They have to understand that they play a role in that as well.

So, aligned incentives between the branch and the sales organization is particularly important. You also have to make sure you do training. Training is also a very, very important part of this. And we have to train our people to have those conversations with our referral partners and explain to them, yes, we want to be a good partner, but the partnership has to work for both of us. I'll take a (inaudible) and I'll take a hydration but I need a couple of [TPN's] too.

How that -- you train your team and train your team around products too, but also train your team on how to communicate that. And then metrics. We have to publish metrics and hold people accountable to those metrics. And so, Mike, so that's also another very important piece of this is that -- and then thirdly, we have to communicate on these things. Communicate, communicate, communicate. And again I know it doesn't sound like a silver bullet, but it is not.

It is blocking and tackling it is aligning incentives and it is providing the right training. It is making sure we have the right metrics in place and that we are holding people accountable to these things. And in some instances we may have to have a conversation with the referral partner saying, listen, we can't take this business anymore. We can't be a dumping ground. If we can't find a relationship that works here, then we are going to go a different direction.

And we've had those conversations at Home Solutions as well. And so that's also got to be part of it too. At some point in time if we can't find something that works for both the referral partner, or for Home Solutions for the payor, then we have to really think about what we're doing.

You know, you guys have been off loading some lower margin or even unprofitable business for the past few quarters. Is it fair to say in your early weeks that maybe there is some more of that business out there that needs to go? Is it possible that you go smaller, but much more profitable if we are looking at this 12, 18, 24 months down the road?

Yes. If you look at Home Solutions, we are growing top line 18% to 20%, but actually we have fewer patients. We dropped our patient load by 15% because we ended up having patients that better suited our skill set that we were better able to service more effectively and also made sense for the organization. So that is very possible.

So in terms of, you've used the term, holding people accountable, if the investors kind of want to hold you guys accountable, what would success be in terms of the core chronic mix? Let's give you the full length of the 24-month turn around, what would success be? Would that be 50/50? What would that mix look like (inaudible)?

I'd like to think once we enacted this it takes -- it is about a percent a month, at best. Again, this is what I'm saying this is an 18 to 24-month turn around. These things just don't happen overnight. You know, as you put on more profitable patients, you also are exiting less profitable patients. You just can't -- you have to keep those patients on service in some shape or form. (inaudible)

So it is a percent a month and if I think about that, do I think we can be in the 80s in 24 months? Absolutely.

And, Mike, just to clarify our core mix right now, 65% core, 35% other chronic.

Yes. I'm sorry, I'm sorry about that. I had that backwards. You can move that needle another 15% possibly over 24 months.

Yes. I think that would be over a couple years I think that would be. It may be faster, but I think if I was really looking at it in terms of just getting the right momentum in the organization and once you turn the corner it can turn pretty quickly, but it is a process and I don't want to -- just like it is a process to get additional earnings. It is not like you flip on a switch.

I think about back when I was at Coram and as we started to improve our earnings I reminded people at the Board that we set a target of 8%, or 9% earnings in 2009 and 10% earnings in 2010 and 11% earnings in 2011. So there was a process there.

And then I had a Board member say to me, well 2016 means you will be at 16%. I don't think we will get to that point, but I also want to point out this drive toward improved earnings is a process as well. And I also want to point out too that it is not just limited to core growth. I think there is significant opportunities in revenue cycle as well. As we look at our bad debt at 3.3% to 3.5%. Coram was at 1.8% to 1.5%. If we get down to Coram rates, that could be an additional $20 million.

I look at things like our patient pay yield which runs at about 60% and if we were to get the kind of, what I would say best in class standards at 85, and that's another $4 million. I want to also point out that there is also, as I see it, opportunities of revenue cycle management and I also don't want to underestimate too that the importance of initial authorization and insurance verification in the timeliness we get back to our referral partners. And that's something the Company has never measured up until when we arrived. The good news is BioScrip is where Home Solutions was when I joined. You know, it was roughly in the 50 to 60-minute range and we got back to under 25 minutes and there is no reason to think we can't have that kind of success at BioScrip as well.

So I just want to point out some other things too that I think could be very promising and could accelerate things in 2017 and beyond, too.

Great. A last quick one for Jeff. The cost savings I think you pointed out $8 million to $10 million, in terms of the activity that will lead to that, how much of that will be done by year end?

So most will not be done by year-end. However, 25% of it has already been done. We have already cut 52 heads from our labor. We have it planned to do another 40 before the end of the year. That is roughly 4.5% of our labor force, our workforce. And then the other initiative, whether it is the nursing comps or the over time changes and the delivery costs, those are the processes we are going through now. Those will be changed as we are exiting the fourth quarter into the early part of the year, and the pull through will come behind that.

Thanks, guys, I appreciate it.

You're welcome, Mike.

Your next question comes from the line of David MacDonald from SunTrust.

Just a couple left. Just wanted to touch on the last point you talked about. The head count, that is in the cost savings bucket as opposed to some of that was assumed and that wasn't synergies tied to putting the two companies together?

No. We have a separate 50-head on synergies. Entirely separate from those numbers I gave you. We are on track to over achieve versus the $14 million to $17 million, hence the additional cost savings, but the 50 heads in synergies are completely separate from this. And those are 100% zero miss on those heads.

And just so I am clear, you said at year-end 2016 roughly 25% of that eight to ten will be kind of done and accounted for? And then, can you just talk about the remaining piece? I mean, renegotiating contracts, increased efficiencies, how we should think about the pacing of that as we move throughout the year?

The pacing has been extremely urgent, Dave. We've already had nearly all of our large supply chain partners in here. We've been negotiating with them. They've been very open. They like Dan, and they have had prior relationships with Dan, with Alex Schott whom Dan brought up earlier who is now a member of our management team. These guys have prior relationships. And they have been very accommodating thus far.

Several disagreements are not yet finalized but we're getting better pricing, we're getting different rebate structures. So all of that stuff is going to begin to come through. Some may even come through in the fourth quarter, but to be Frank, I don't have that in my fourth quarter numbers yet on purpose. I will have it in the next year numbers. Nursing costs, overtime, we've looked at all of this stuff. We had our Vice President of Operations in here about four weeks ago and I think it was Dan's second week on the job and we looked everyone eyeball to eyeball and went through the numbers and showed them the performance that was expected and began to developed tools at that point to measure the scorecard, the initiative, have rolled those out now.

And they are beginning to manage their staff and operating processes in that manner, but we know that's not going to happen overnight. We know that will be taking part of 2017 before the real savings in terms of more efficient processes, lower costs in terms of -- again, in terms of processes and switching to Fed Ex utilization as opposed to couriers. As Dan pointed out. All those things, they're going to take some time so we have them in our 2017 numbers.

Just two other --

Just wanted to note, too, Dave, we had within five days of me being here, and once I got a sense of some level of how the organization perform, and my sense is some folks had taken their eye off the ball, we had the (inaudible) in and we spelled this out within five days. And so again, these were things that were not identified prior to my being here and we have already executed on a significant portion of them and we will continue to do that throughout the year. And again, these are all things that I have done in other places with team members that are here with me and there is no reason to think that we won't be able to do similar types of -- we will not be able to see similar types of achievements.

Second question, Jeff, you mentioned being break even post debt service, but it was unclear to me if that included CapEx or didn't. Do you expect cash flow to be roughly -- cash flow from operations to be roughly even with debt service or free cash flow?

So, Dave the way our projections model out, cash flow from operations will be positive second quarter, third quarter and fourth quarter of next year. That's obviously before CapEx and before debt service. After, including both CapEx and debt service which, as a reminder, all on a full year basis CapEx is probably $10 million to $11 million, annually our debt service as required is $12.5 million. After incorporating both of those, I wouldn't call that free cash flow (inaudible) in the middle there, but bottom line cash flows will also be positive but lower single digits quarters two, three and four next year. Q1 will be negative, and Q4 will be negative.

(inaudible) You expect to generate cash flow after CapEx and debt service in quarters two through four?

Yes, that's correct.

Okay. And then guys, just one final question, Dan, can you just provide a little more color on the metric scorecard? When was this implemented? Is this a real time scorecard? Where if I am for example a salesperson I go home at the end of the day and I can look and see how I stack up against other folks in sales? Just a little more detail on that.

So what it does and what it does is basically gives us the sense of exactly where we are as a Company relative to what we have projected within nine or ten hours of the close of the day. And so we get information on therapy, we get information on admin, we get information on census, we get information on conversion rates, we get information on cash. So all of those things are factored into this one-page scorecard that -- we're going to be pushing out to our senior leadership in the organization. And we have already done it for the last several days of September, and come November 10th we will be pushing that out every day. You have to give a certain amount of days in there so you can -- you've got a large enough cohorts to the predict built is such, but that is something that we are doing.

And then the other thing I wanted to point out, we are ranking them. We are stack ranking sales people. They will know exactly where they stand relative to their peers and relative to their expectations and again I think that is something that historically hasn't been done. We are also going to be stack ranking AVP's in terms of their performance metrics and what we expect them to achieve on an earnings basis and what we expect them to achieve in terms of nursing costs, overtime, supply chain, delivery costs, mileage costs. So it is not just the sales stack rankings.

The stack rankings will also include operations too. I also want to point out, again, I can't say this enough, the measurement of insurance authorization and verification. I mean that is a huge component of what is going to help drive our success going forward as well.

And then when I look at 2017, say I am in sales, I assume a portion of my comp will be tied to growth, how much of that growth is core, if I'm in revenue cycle management, what cash flows look like. Can you give me a sense of how much this metric scorecard will tie into variable compensation across the organization?

It will tie completely into it. You can't separate the two.

Okay.

I mean, yes. I also want to let you know that my Chief Operating Officer, Dave Evans has created the first ever balanced scorecard with the help of Ron Howard for Operations. And that's rolled out last week, and again that's going to look -- they are going to get and it is one page, and the operations team is going to know exactly how they are performing in a variety of different categories and it's going to be green, yellow, red, and by in large a proportion amount of their variable comp percentage is going to be tied to that.

Jeff, a quick question on working capital management. I know you talked to revenue cycle a little bit, but can you talk about are there any other areas other than maybe a little bit better collections in bad debt, anything you guys can do, for example, payables, etcetera? Just anything that we should be thinking about in terms of working capital management?

Well, certainly. As I mentioned in my opening remarks we are taking our liquidity very seriously. Inventory has already been managed down quite a bit. If you look at the balance sheet and I know you all have, we feel we managed that to a fairly low kind of almost as needed and on hand inventory.

If we can manage that lower we certainly will and we are looking at ideas do that. In addition, our AP vendors, we are at terms and in fact we are enjoying some discounts currently for prompt pay on a number of our larger vendors who provide us substantial discounts for 15, 20 day payment terms. If we need to change that we will. At this point I have not yet pulled that lever. We don't feel like we are in that danger zone. But if we need to pull back to just normal terms and not early pay terms, we will certainly do that.

Okay, thanks very much.

I will let you know also, Dave, one of the things is we implemented a perpetual inventory system at Home Solutions and it includes like an event that looks at work flow in the warehouses and those types of things. That had a substantive amount of savings. We estimate that we're able to reduce our inventory anywhere from 15% to 20% and the inventory terms moved from 17 to 24. That's a big project that I want to point out. That's something we can take on this year, in 2017, at some point in time. We need to get some of this lower hanging fruit, if you will, out of the way and then we will attack that too.

Okay, thanks very much, guys.

Your next question comes from the line of David Brecht, from Pioneer Investments. Please go ahead.

Hi, guys. Just a question on the full year EBITDA revised guidance. It sounds like it is more not a gross margin issue, but more an operating expense issue. Is that correct? I mean it seems like your -- (inaudible) a lot of the lower margin non core business and is that correct where we are right now, then?

Yes, David. That's exactly right. In the intermediate terms so I will say the next three to six months it is absolutely a cost structure issue. You can see it in our other operating costs and that is predominantly branch labor, that's within that particular line in our P&L. Typically we run 16.5% to 17% and we are up to 19% of costs. As we exited the other chronic business our labor costs did not come down.

Our Chief Operating Officer isn't here any longer. That's a big reason why. We have addressed a lot of that already and we will be addressing the last bit of it before this quarter ends. And once we've stabilized and have that single repeatable model we will then move towards that sales growth. Which, as Dan mentioned, will take several months to get the sales force up and moving. But when they do that will really be beneficial to our bottom line.

That's helpful, Jeff. So do you guys still assume -- I mean there was a time when you guys thought the gross margins would settle out in the low 30% area, 30%, 31%, something like that. Does that sound achievable at this point?

Yes it does. That's exactly what we're aiming for.

Just as far as working capital goes, obviously there is noise with Home Solutions closing late in the quarter, is there any kind of source of cash that occurs, kind of a freeing up of working capital given the close late in the quarter, or was that already reflected by the end of the quarter?

For the most part it is reflected. We have a little bit of accounts receivable that we acquired that has still not been collected as of the day of this call. There will be a few million dollars to come in for that, but it has predominantly already washed through. Their AP has already been paid off, that we acquired, we are now in a normal cycle of AP. We did acquire AR with the transaction. Because of that the base transaction, the lion share of that had been collected. What remains is slightly positive, but not significant.

Thanks, Jeff. Thanks, guys.

Your next question comes from the line of Bill Bonello from Craig-Hallum. Please go ahead.

Thanks for taking a follow-up question. Just a couple quick things. One just again a clarification on the liquidity situation, Jeff. Sorry to parse your words, but I think when you were talking about making us all comfortable that you weren't planning on any kind of additional raise you specifically said through common share issuance. Can we expand that? Is there no intention to do any kind of equity raise at all? Were you meaning to specify common shares?

That's fair of you to ask, Bill, but let me be crystal clear on this. And I spoke to a few of the Board members about this again this morning to triple confirm, Dan and I understood this. There is no intention by this Board, by our Board, by this Company to raise equity capital of any type, preferred, common or otherwise, none. That is not a current topic of discussion.

Perfect. That's helpful. And then just for either of you on the revenue side, are you seeing any shifts in business again back to sort of this just being execution, are you seeing any sorts of concerted efforts by any of the payers to sort of proactively shift patients to other providers for any reason? In particular we would think of United Health Care because of the Optum (inaudible) situation, but is anything like that going on?

We haven't seen anything like that yet. We haven't seen anything like that yet. I'll leave it at that.

Okay, That's all. Thanks for taking those questions.

(Operator Instructions). Your next question comes from the line of Jeff (inaudible) from UBS. Please go ahead.

Thank you for taking my question, gentlemen. I guess overall big picture question regarding the EBITDA for 2017, the guidance. Obviously everybody on the call would like the Company to succeed and do well, and there is certainly a lot of concern raised about whatever comparisons might be between the old BioScrip and the new BioScrip and certainly confidence comes into play. How confident are you gentlemen, both you, Jeff, and Dan, regarding the $50 million to $60 million EBITDA for next year?

Jeff, this is Jeff Kreger. I'll answer first. I am very confident. We have these plans in place. All of them are being executed upon to some degree. Several of them are behind us, as I mentioned in terms of some of the labor, which is the first step. You have the most difficult piece of the equation frankly, and I listed it in order, what the pieces are to walk you, the bridge, the most difficult piece will be the sales, and that's why we back end loaded it. But we're running very hard towards it.

Okay, Dan any further comment?

Again I just have a history of delivering so I don't really follow the same types of rules most people do in these situations.

I guess the concern I have is that obviously in the past BioScrip we have been given guidance's as to EBITDA and other numerics and unfortunately when there were changes made they were made to the lower side as opposed to the upper side. So I'm just hoping the $50 million to $60 million, obviously is only guidance, and Dan, you have only been there for a number of weeks, but I'm kind of hoping as I think everybody else is that this is a pretty realistic figure going forward.

Yes. I mean, we're on record saying it is. And we're going to do everything in our power and I understand, Jeff, your concerns based on -- again I believe you can't talk yourself out of what you have edged yourself into, Jeff, and you won't -- we are not interested in talking ourselves out of things.

We are interested in behaving ourselves into performing.

Thank you very much, and thank you for taking my question.

Thank you, Jeff.

Your next question comes from the line of Doug Peter, from (inaudible) Management. Please go ahead.

Thanks for taking my questions. I need help on the bridge in terms of the guidance you gave. Looking at the last few quarters you were on a run rate to do almost $40 million of EBITDA, pre Home Solutions. And then Home Solutions came with $6 million of EBITDA, plus the $14 million to $17 million of synergies. That gets me to north of $60 million. I am trying to understand what happened between the second quarter and the third quarter that caused that math to change?

Sure, Doug. Well, two main things. I will boil it down to that. Substantial erosion of our core revenue in terms of BioScrip legacy business and the second is our labor costs. Our labor costs did not lead this Company as they were correlated with two items.

The first is the planned exit of other chronic business, labor costs had to come down for that. We knew it. It didn't occur. The second is the core dip that we did not expect that was a bit surprising as the quarter played out.

Labor costs also didn't translate down for that. So the variable nature of whether we are talking about pharm techs at the branches, pharmacists, nurses, intake personnel, revenue cycle to some degree. They are billing -- there is less billing volume. Those labor costs did not go out. And that's included in that operating cost line of our P&L. You can see it rose 200 to 250 basis points over what we have been trending over the last couple quarters. That's due entirely to-- go ahead.

Doug I think it is simple. I think the Company took its eye off the ball. I think it is that simple. I know there are details behind it, but I think the Company for whatever reason lost focus and as a result didn't deliver on its commitment.

I am just trying to understand how that feeds through to one quarter of dropping the ball to a year loss of future performance. I am just trying to -- did you lose a contract? Did you lose --

No, no contracts. No contracts. If you even think about it, and again if you just look at sales, for example. You look at how that process works, and you really -- it starts with a phone call to the branch, and then it goes to some level of conversion and then it goes to admits and census.

If you are losing out on admit, Doug, you are not rebuilding your census and then you have a leaky bucket, if you will, that you are not filling up fast enough. That's what'd happened. The admit did not keep at the right level of performance to ensure that the census continued to carry forward from one quarter to the next.

And then in terms of the time line to getting the 10% EBITDA margin it looks like you're at the 5.7% to midpoint for 2017 guidance. Can you bridge us to that 10% number?

We'll reevaluate it. I am not prepared to bridge that right now. I can just share with you that it was a 20 mile march. We did it at Coram and we will reevaluate at the end of every year in terms of what we need to do to get closer to that mark.

And then on the credit amendment issue, I guess you were eluding to that, you are providing very strong confidence and no need to provide additional equity, has there been a deal reached or proposal already made on this amendment?

No, there is not. We have had active discussions, but there is no drafted, documents that I have been shown.

And have you specifically highlighted what metric you are not going to meet in the first quarter?

Yes, I have. And I have shared that with the bankers and they are very aware.

Okay. And in terms of the OpEx issue, as David Brecht asked and you discussed, can you give us a perspective of -- and maybe I missed the materiality of that over the next 12 months. How much of the OpEx improvement can you achieve in that time frame?

Well, I am not sure, are you talking about the additional cost-savings?

Cost-savings. Yes.

Again. I will give you some examples of what we have been able to do over time. At Coram we reduced our cost of service as a percent of net revenue. Greater than 10 percentage points over the five years I was there. At Home Solutions we reduced, over the two and a half years I was there we reduced greater than five percentage points of our cost of service over those two and a half, three years. I just want to be careful. It is a process. It is something that takes place over time. That being said, there is some things that we believe we have solved when I immediately came on board and we have already acted on them.

Right. My last question, just, the stock is obviously down almost 50% today so shareholders are basically saying they don't have the patience to wait. How does the Board and management think about timing to do something from a strategic perspective to create more value for shareholders?

Well, Doug, frankly our value creation plan is around achievement of our operational initiatives. That's what we are focused on as a management team, that's what the Board is focused on and strategics that you are referring to are not something that over the next 12 months we believe are anything we are currently entertaining.

Thank you.

Your next question comes from the line of Mike Holland from UBS. Please go ahead.

Thanks for taking the call. My question has been answered.

Thanks, Mike.

And there are no further questions in the queue.

I just want to thank everybody for joining the call today. I appreciate the engagement. I'm excited about the future of the organization and many things that we've undertaken. I also fully appreciate the fact that the organization took its eye off the ball in the third quarter and you have a commitment from me and Jeff and Kathryn and others part of the senior management team that that won't happen again.

I am not saying we are going to be perfect and there aren't going to be things -- but it's not going to be a function of the senior management team taking their eye off the ball. And we look forward to updating you on our continued progress.

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