Option Care Health Inc (OPCH) 2017 Q1 法說會逐字稿

Good morning. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the BioScrip First Quarter Earnings Release. (Operator Instructions) Please note that today's call is being recorded. Thank you. I would now like to turn the call over to Ms. Kathryn Stalmack, You may begin.

Thank you, Sarah. 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've not received it, you may access it through the Investor Relations section of our website.

Dan Greenleaf, President and Chief Executive Officer; and Steve Deitsch, 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 2 weeks.

Interested parties can access the replay by dialing (855) 859-2056 in the U.S. and entering access code 8579499. An audio webcast will also be available for 30 days following the call in the Investor Relations section of BioScrip's website at www.bioscrip.com.

Before we get started, I'd 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 can be 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 this morning, which can be obtained from the Investor Relations section of our website.

And now, I'd like to turn the call over to Dan Greenleaf. Dan?

Yes. Thanks, Kathryn. Good morning, everyone, and thank you for joining us. This morning, I'll be providing an update on our first quarter performance as well as the continued progress we're making on the company's turnaround plan. Steve Deitsch, our new CFO, then will provide additional financial details and discuss our 2017 guidance. Before I further elaborate on the quarter, I wanted to formally introduce Steve Deitsch, newest member of our executive leadership team. Steve recently joined BioScrip as Senior Vice President, Chief Financial Officer and Treasurer. Steve brings a wealth of financial and operational experience to BioScrip, including executive level financial positions with both public and privately held healthcare companies. Following this addition, I believe BioScrip has never been in a better position to effectively execute on the vast opportunities in front of the company, and I look forward to Steve's contribution going forward.

I'm pleased with the company's first quarter performance, which was in line with our plan. The BioScrip leader team continued to execute recently implemented CORE initiatives. As a reminder, CORE is an acronym representing our focus on identifying and executing strategies to accelerate BioScrip's core revenue growth and mix, drive operational efficiencies, improve revenue collections and increase employee effectiveness throughout the organization. The BioScrip team continues to accelerate its 18- to 24-month turnaround plan, and our teammates' efforts are positively impacting the business. Our sales team met our revenue target for the quarter and continued to increase our core revenue mix. In addition, our gross product -- profit margin improved 320 basis points year-over-year with the increase driven primarily by the core revenue mix and supply chain initiatives.

Our organization continues to improve our revenue mix with CORE revenue mix increasing to a record 72% of total revenue, an increase of 12 percentage points compared to the first quarter of 2016 and a sequential increase of 200 basis points from the fourth quarter of 2016. Moreover, our focus on growing our profitable CORE business was the primary driver behind a recent announcement regarding UnitedHealthcare and its expected neutral impact to our 2017 profitability. As previously discussed, the Cures legislation negatively impacted our profitability. However, our improved gross margins, coupled with our focus on operational efficiencies, allowed us to achieve the Home Solutions synergies and other cost savings, resulting in an adjusted EBITDA of $5.2 million for the quarter, which was in line with our plan. Also during the first quarter and ahead of schedule, we successfully completed the Home Solutions integration. I'm highly impressed by the speed, quality and thoroughness of the work completed by the integration team, and we remain on track to realize the full $17 million of cost synergies plus the incremental $23 million to $25 million in operational cost savings. We continue to position the company for long-term success and increased profitability with a laser-like focus on maximizing the value of our shareholders.

Next I'd like to provide an update on the Cures Act. As previously discussed and reflected in our 2017 guidance, Cures is having a negative impact on the business in the short term. However, I'm excited to highlight a positive aspect of the legislation that I'm not sure is widely understood. For the first time, a comprehensive Medicare benefit for a portion of Medicare fee-for-service population become available effective 2021. We are working with key members of the congress and are optimistic that the time line of this future benefit can be accelerated before 2021. In closing, we continue to execute our CORE initiative to drive ongoing transformational change and unlock the value of BioScrip, and I look forward to updating you along the way. I'd like to turn the call over to Steve Deitsch, who will provide a more detailed review of our financial results for the quarter as well as an update on our full year 2017 financial guidance. Steve?

Thank you, Dan, and good morning, everyone. It's an honor to join the BioScrip team as Chief Financial Officer. And I look forward to working together with all of you. My prepared remarks will include additional information on the company's Q1 performance and 2017 guidance.

Revenue from continuing operations for the first quarter of 2017 was $217.8 million compared to $238.5 million in the first quarter of 2016, a decrease of $20.7 million or 8.7%. This revenue decrease resulted from the company's previously announced shift in strategy to focus on growing its core revenue mix, coupled with the impact of the Cures Act, partially offset by the accretive impact of the Home Solutions acquisition. Our revenue mix is currently 72% core and 28% noncore, with core mix increasing 12 percentage points above our 60% core mix from a year ago. Core product mix also increased 200 basis points from the fourth quarter of 2016. Gross profit margin for the first quarter of 2017 was 30.1%, a 320 basis point improvement compared to the first quarter of 2016. This year-over-year improvement reflects the positive impacts from increased core product mix, supply chain initiatives, Home Solutions synergies and other cost reductions. Adjusted EBITDA for the first quarter of 2017 was $5.2 million compared to $7.4 million in the first quarter of 2016. The decrease was primarily driven by the negative impact of the Cures Act, offset partially by improved gross profit margins, Home Solutions synergies and other cost reductions. The company's cash balance increased $6.4 million during the first quarter of 2017 to $15.9 million. The increase in cash during the first quarter of 2017 was primarily driven by $19 million of net new borrowings pursuant to the sixth senior credit facility amendment and a $5.1 million private equity placement. Partially offsetting the net capital raised during the first quarter of 2017 was negative free cash flow of $12.3 million from continuing operations, which included $8.9 million of semiannual bond interest payments and $3.6 million of senior credit facility interest payments. Excluding interest payments made during the first quarter of 2017, the company generated positive free cash flow from continuing operations of $200,000. As a reminder, the first quarter of each calendar year is typically the company's softest in terms of free cash flow generation due to revenue cycle seasonality. The company expects free cash flow and liquidity to continue to improve during the coming quarters, as the company continues executing its turnaround plan.

Scheduled principal payments pursuant to the company's senior credit facility for the balance of the year totaled $17.4 million. As reflected in our press release of this morning, the company continues to evaluate the impact of our previous UnitedHealthcare announcement on its 2017 revenues. And we will provide updated revenue guidance at the appropriate time. The company is reiterating its prior guidance of adjusted EBITDA in the range of $45 million to $55 million for full year 2017. The full year 2017 EBITDA guidance fully incorporates the estimated impact of the Cures Act legislation and the company's estimates regarding its contract with UnitedHealthcare. That concludes our prepared remarks.

Operator, we will now open up the call for questions.

(Operator Instructions) And your first question comes from the line of Brooks O'Neil from Lake Street Capital.

Welcome, Steve. I can tell you with certainty I am breathing a big-time sigh of relief this morning.

Thank you, Brooks. It's a pleasure to be here and look forward to working with the team.

Great. So I have a few questions. First, you talked, Steve, about the liquidity situation. I'm just hoping you might be able to give us some insight into the impact of the United rolloff from a liquidity cash flow perspective?

So our contract with UnitedHealthcare continues through most of this year. And so our team is going through the process of evaluating the transition of that contract. In the near term, we're not experiencing any negative impacts from it.

Okay. That's good. Second question. Obviously, you're making great progress on the core mix and I see that as a central pillar of the transformation occurring at the company. Did -- how high do you think that can go given what you see in the marketplace today and the plans for the company?

I have no doubt we can get to 85%, Brooks. And keep in mind, every single percentage point is -- improves our EBITDA somewhere between $0.5 million and $1 million. So there is a large push within the organization to get this done. Brooks, I like to think of it as 1 percentage point every month is probably very optimistic. I think it's probably going to be more like 1 percentage point or 2 every quarter. And so that's how we're kind of thinking about this. But again, Brooks, I think what our experience has been is that, [85-15] is the right number. It gets the company to a very healthy place, very sustainable place, but also allows us to also be a good steward to our customers. And there is a need out there for us to do some business that's less than favorable, and we think the 85-15 is the right balance of that.

Great. And I know there was quite a bit, I mean, not as a percentage, but just quite a bit of core business with United. Do you see that as having a negative impact on the business or the company in any way terminating that part of the relationship?

I don't, Brooks. I mean, if I look at the overall contract as a percent, United core to noncore was significantly less than our company average. And so I think the impact of that is going to be -- is going to be significantly less than you might see based on our 72% number.

Great. Just 2 more quickies. In the past, you've mentioned the potential for partnerships and potentially new relationships with health plans. Do you still see that as an opportunity for BioScrip in 2017?

Yes. And we're making -- I haven't published any numbers on that, Brooks. But we've literally doubled the number of hospital arrangements we've had previously, just in the last 6 months. So we feel there's tremendous momentum there. There is tremendous interest. I think we've got a great product for our hospital referral partners. And then on the payer side, there's been -- there's, obviously, a tremendous amount of interest in working with a company like ours. I mean, it's by virtue of what we do, Brooks, we're value-based purchasing organization. And clearly, people understand that there is significant value in making sure that the patient is going to the home at the right time. And the payers understand that, the health care systems understand that, and so I would expect that these relationships will continue to become more formalized in the future.

Great. Last question from me. My sense is when Cures was put into effect at the beginning of the year, you still had some Medicare patients who were getting those therapies. Can you just give us a sense for where you're at in sort of mitigating the negative impact of the Cures Act? And maybe any sense for whether that should be incrementally positive for you moving forward into Q2?

Yes. I think like anything, Brooks, when we took the action plan and part of the action plan was labor. And that labor had to be bled off in the first quarter because we just -- people had jobs they had to do associated with these patients, and we wanted to make sure that there was going to be an orderly transition. We'll get the full impact of that in the second quarter. Other things we did subsequent to that announcement was, we even stepped up our supply chain initiatives. And we've seen very favorable impact on the first quarter, but I would expect that those will get the full value of what we did in the first quarter. But I fully expect those things to continue to accelerate. And then, obviously, the other piece that isn't completely baked into this is, is just our improvement in our profit margins. Our gross profit margins and as we continue to grow CORE, we can fully expect that those will continue to improve. And again, the fourth quarter was 410 basis point improvement year-over-year and first quarter was 330 basis points improvement. And that is driven by CORE, certainly, supply chain., but again, Brooks, we'll continue to see those things accelerate into the second quarter.

Great. You guys are off to a terrific start. And I'm excited for the year.

And your next question comes from the line of Brian Tanquilut with Jefferies.

Just a follow up. To follow up on Brooks' questions on United first. So how should we think about the pace of rolloff of United. And then, Dan, if you don't mind just walking us through your views on the mechanics of mitigating the United hit, whether it's supply chain and -- because we're getting a lot of questions from folks wondering how it would not be -- why or whether or not it would delever your purchasing power? And what you can do to flex the cost structure to address the United rolloff?

Let's start with one question at a time. So -- Yes, if we could just do that, Brian. The first question was regarding -- we're still working with United on what the transition looks like. I mean, they have been a -- frankly, they've been a very good partner, and I think it's been a very -- I just think it's -- for the ending of an arrangement, I think the discussions with them have been ongoingly positive, if you will. And so I think that this will be a very orderly transition. I believe that both parties are going to work very closely together and make sure that we're doing right for the patient, and certainly, right for both companies. And I think that's the spirit of everything that we've undertaken with them. And again, this is something, as you know, we've done before at Coram and again, had a similar experience where it was an orderly transition. The patient was put first. Both companies were able to do this in a manner that didn't hurt either company, and that's the spirit that, I think, both companies continue to go at this way.

Okay. And then Dan, on price -- on the purchasing scale. I mean, what's your view on whether or not the United loss will eventually cause the deleveraging of your purchasing power?

Yes. There are a few things to think about. Number one, a lot of our arrangements, frankly, are already -- are frankly, market share base, so have nothing to do with volume. And so I want to point that out. The other thing is that there is lots of pricing opportunities in the marketplace related to kind of formulary control that are also not volume-based and are actually a lot more favorable than just going at a -- staying in a volume-based arrangement that from a manufacturing standpoint is a win, but may not be necessarily a win for us. And we think, frankly, behind there is a ton of opportunity on that front of just choosing other products for our formulary. And again, we've already done this with Abott and Nestle and are seeing tremendous success there. We certainly believe there is lots of opportunity in the IVIG space as well, and we've only scratched the surface of that opportunity. And then we also have very good partnerships with (inaudible), and we have very good partnerships with Amerisource and very good partnerships with MSD. And these are long-standing partnerships, and we certainly believe that they will continue to be very appropriate partners for now and in the future. And again, part of their bet, Brian, is leaving the volume base aside is they're betting on a team that's going to win. They're betting on a team that can drive formulary. They are betting on a team that keeps its commitments, and I think unequivocally they know this is the team to bet on.

Okay. I appreciate those comments. And then, Dan, as I think about the mix, right, you're trying to push the core mix higher, obviously, and margin. So have you seen any pushback from referral sources as you try to shift away from the unprofitable noncore drugs?

I mean, you always get -- you'll get some pushback, I think, initially, Brian, because this is a change in how we do business. But, again, we did this at Coram, we did this at Home Solutions, and a big part of it is just really educating -- educating the referral sources. And once we've done that, and they understand, "Listen, we want to be a good citizen to your patients, we want to be a good health care steward. But we also have to do something that works for us too." That -- most people understand that. And so -- and again, that's why we picked [85-15]. That's the number that we have empirical validation around that, that's the right balance. We think when we're below that, we're not optimizing the business. When we go above that, we believe that we start seeing push -- pushback from referral sources. So that's why, again, I think we have a lot of empirical validation around this 85-15 and why that's the right number.

Appreciate that. Couple of quick ones left from me for Steve. Would you be able to quantify what you thought the Cures' impact was for the quarter?

It was consistent with the previous guidance and discussion that Dan had, had. We expected a full year impact of approximately $24 million. And that was an annual number. And we expected that and it was built into our guidance and into our plan for the year, and what we saw develop was very consistent with that along with the mitigating efforts that the team has put in place.

(inaudible)

It's about $15 million.

Okay. And then last one from me. DSOs were up during the quarter. How should we think about the progression of DSOs over the rest of the year?

Well, Brian, when you think about this business, it's a seasonal business in that the first quarter, from a revenue perspective, is seasonally the lowest of the year due to some dynamics in the health care markets that we serve because of the elective nature of some of the delivery of products and therapies. And so that combined with in the first quarter, we see a higher patient mix of pay as compared to payer. And as -- unfortunately, the patients typically pay a little bit slower than what our payer partners do. So it's a heavier mix of that in the first quarter. And then another phenomenon that we typically see is with insurance carriers. A lot of our patients that we serve change insurance carriers effective the first part of the year. And so what that creates is a little bit of disruption within the collection cycle because insurance companies are switching, and we have to work closely with 2 insurance companies as part of the collection cycle. But what I would tell you is that was expected and it's consistent with what we've seen in the past. So we did see a raise or a rise in DSO during the first quarter compared to the fourth quarter. But that's what this business has typically seen in the past. And we saw it last year as well. So no surprises there. We planned for it that way as well.

And your next question comes from the line of Per Ostlund with Craig-Hallum Capital.

Few of my questions have been asked already. So I'm going to -- I wanted to ask about liquidity. I know in some past releases, you had provided a figure of liquidity cash on hand and availability and on revolving facility. Just kind of wanted to see if that number was handy for you now as it stands today or at the end of the quarter? And I guess, related to that, wanted to talk about your thoughts around cash flow for the year. Steve, you alluded in your commentary that Q1 is typically a little bit on the softer side on cash flow. So I'm just kind of curious as to your thoughts overall for the year and if we're -- if we've kind of seen the worst of the liquidity crunch.

Thanks for that, Per. That's a very good question. And we -- the way our plan was developed for the year, we did plan the first quarter to be the lowest in terms of liquidity given the seasonality of revenue is also the collection cycle. So both of those impacts typically, as I mentioned, drive the first quarter of the calendar year to be the lowest in terms of a liquidity perspective. And when we look out to the second quarter through the fourth quarter, we expect our liquidity to improve sequentially as we move forward, given increases in our expected revenue as well as the turnaround plan that Dan and the team have been executing here. We expect our EBITDA to continue to progress upward during the year as our guidance indicates. And that will be a driver of additional cash flow. And as we look at our required obligations, our interest payments as well as our principal requirements, we're very comfortable with our liquidity profile for the rest of the year and execution of the ongoing operational cost savings and just revenue growth, enabling us to meet our obligations.

Okay. That's very helpful and very encouraging as well. And I think that's a good segue to, I guess, the other question that I wanted to ask right now too. It sounds like everything is on track as far as Home Solutions synergies and cost-savings activities. Wanted to get a sense of sort of how much of that -- I assume most of it, but how much of that is sort of still yet to be realized and put in place?

We don't typically provide guidance at that level of detail. But what I can tell you is the -- we yielded most of the Home Solutions synergies. We still have opportunities there. But as Dan indicated, the integration is done and ahead of schedule, which the team did a great job of pulling that complex integration and completing that and yielding the synergies per plan. There are some opportunities over and above the -- where we're at today, and that's reflected in our guidance. And then also the cost-savings plan in addition to the Home Solutions synergies that Dan had referenced to previously, $23 million to $25 million of total operating cost initiatives. And those are on track. We haven't yielded all of those yet, though we've got clear operating plans and, as Dan indicated in his prepared comments, the team is laser-focused on making sure that we yield those commitments that we've communicated.

(Operator Instructions) Your next question comes from the line of Mike Petusky with Barrington Research.

So when I look at the EBITDA -- just the EBITDA guidance in the first -- obviously, first quarter expected to -- you guys signaled it would be kind of a down comp due to Cures. But as you kind of look out throughout the year, to me it looks like Q2. The Q2 comp is fairly tough as well. I mean, would you expect another down comp versus the '16 result and then positive from there? Is that kind of how this plays out in your view?

Thanks for the question, Mike, and this is Steve Deitsch. Looking forward to working with you. We do expect our EBITDA to continue to sequentially improve during the year. And looking at last year's comp, we did $10.4 million of EBITDA in the second quarter. We're not going to provide quarterly guidance as we move forward, but what we can tell you is that we expect sequential improvements in our EBITDA as we ramp through the balance of the year. And just looking at our guidance of $45 million to $55 million, you can kind of work through your respective model and make some estimates there. But we're really not prepared to or -- nor do we want to provide quarterly guidance on line items.

Okay. In terms of -- and you guys have touched on this a little bit, but in terms of your free cash flow improvement that you see, I didn't -- if you said it, I didn't catch it. Do you see a positive free cash flow quarter in this year?

Again, in terms of specific quarterly guidance, we don't provide that, but what we can tell you is we are anticipating free cash flow to be a positive as we exit the year, and that's consistent with our EBITDA guidance. And that's the primary driver of our anticipated improvement in liquidity. And EBITDA is, obviously, driven by our 2 main initiatives, core revenue growth as well as operational cost savings. And we're very comfortable with that for the rest of the year.

Okay. Is there -- I'm jumping around here a little bit. But is there any reason that you shouldn't see sequential improvement in gross margin throughout the year? I mean, I would assume that's part of the internal expectation.

Yes. I think that's fair. And I don't -- we don't like to talk about individual line items or quarterly guidance. But thinking through the ramp in revenue and our expectations for continued improvements in our cost structure, I think that's a fair consideration to think that as our core product mix continues to improve and we yield savings into the second, third and fourth quarters that you should see some sequential improvement in gross profit margins.

Okay. And then just a last question in terms of patient census and just mix of the first 35 days here of the quarter. Can you give any commentary around how the quarter has started off?

Again -- this is Steve, again. And we don't like to provide updates mid-quarter on revenue or anything like that. What I would tell you is that, we're comfortable with the full year and I don't like to provide mid-quarter updates on how anything is progressing. And so that's sort of the operating paradigm that Dan and I like to work through, and it just gets to be too onerous to provide more than a yearly guidance, and so that we can -- and operate the business versus focus on mid-quarter updates.

And your next question comes from the line of Dana Hambly with Stephens.

Just a question on the restructuring and acquisition expenses, $3.2 million in the quarter. With the Home Solutions now largely done, will that $3.2 million -- does that trail off to 0 in future quarters and just -- I assume that's all cash and if it doesn't drift off, kind of what's the expectation this year?

Yes. That's -- the first quarter number is likely the highest for the year as we look forward, given the completion of the Home Solutions acquisition and synergies -- or not synergies, but integration. And most of that is severance expense. So when you think about that with the integration being largely completed at the end of the first quarter, we expect that and have planned for that to trail off as the year continues.

Okay. All right. And then on -- with respect to the Cures Act and the mitigation and maybe this is part of the $15 million. But I'm just curious, if you are able to go to your hospital partners and see if they can share some of the burden or subsidize you in the meantime until we get to 2021 or earlier. Any discussions there?

We've had discussions. And I think there has been modest interest, if you will. So I think those are -- those kind of discussions are unfolding. Candidly, the discussions on the Hill have been so dynamic. And we've kind of spent a lot of our time, energy and effort really trying to move the legislation forward, which, again, we remain very optimistic about. And so we have ongoing discussions with hospital partners, but the most of our focus, frankly, has been moving this benefit forward.

Okay, okay. And then last from me. Dan, you had mentioned last quarter about you had moved your clinical liaison team under sales from operations. And I guess, I don't really appreciate what that does or the reason for making that move and how has that helped the core mix, if at all? Or what are the benefits of doing that?

Yes. No, it's a great question, Dana. And just you know, we did this at Coram as well. And so this is -- we saw, frankly, from experience the value in doing this. And so what it did, Dana, is we added basically 150 people to our sales organization. So we took our sales organization from roughly 150 people to almost 300. So you just think about sheer numbers. The second thing is this is the group that largely helps with the transition of patients out of the hospital. And they are very instrumental in terms of the relationships with the referral partners, particularly the case managers and social workers, Dana. So that's particularly important. The third piece of it is that they're now structured under a sales environment. So in other words, they're being held accountable to referrals, they're being held accountable to helping drive the top line, they're being held accountable to making sure that we're getting the right amount of core. And you can just imagine having that many more feet on the street who are as focused as our sales team is on driving referrals, what the potential impact of this is going to be.

And you do have a follow-up question from the line up Brian Tanquilut with Jefferies.

Just one follow-up. Dan, you've been here, gosh, what, 6 months, 7 months, and probably lot more than that now, but just wanted to hear your thoughts...

It's dog years, Brian. So it's like 7 years.

Exactly. But in terms of your conversions with the other managed share companies beyond United, I mean, how is that progressing? And then, do you think that there is an opportunity there to get better pricing because I know it's one of the weak spots that BioScrip had prior to you coming in?

I think we've had great dialogue with the other payers. And I certainly think there is a high degree of receptivity to price changes, particularly price improvements, Brian. I think they understand that there's been years where this company has not had price increases. And I think there is also, as I mentioned, this tremendous understanding around the fact that by getting patients into the home at the right time, the savings are so much more substantive than anything they can do on the drug side. And so we're saying, give us relief on the drug side and we'll work collectively in driving patients to the home sooner, where they know that's where the real dollars are. And we have had payers actually, Brian, come to us and show us the savings. I mean, there is one example where they looked at 64 patients and it was roughly $5 million of savings. None of it's drug-related, Brian. Just by moving the patient into the appropriate site of care at the right time.

And you have no further questions at this time. I would now like to turn it over to Dan Greenleaf for any closing remarks.

Yes, just want to thank everybody for joining us today, and we remain very pleased with the momentum in our execution of our plans. And again, we look forward to updating you on our continued progress. Certainly, appreciate all the support and I know there is a number of you we have phone calls with over the balance of the day and we, certainly, look forward to speaking with. So thank you, everybody.

And this does conclude today's conference call. We thank you for your participation, and ask that you please disconnect your line.