Lisa M. Wilson - President, In-Site Communications, Inc. Richard M. Smith - President, Chief Executive Officer & Director Jeffrey M. Kreger - Chief Financial Officer, Treasurer & Senior VP.

William Bishop Bonello - Craig-Hallum Capital Group LLC Michael Petusky - Barrington Research Associates, Inc. Dana Hambly - Stephens, Inc..

Good morning. My name is Kim, and I'll be your conference operator today. At this time, I would like to welcome everyone to BioScrip First Quarter Earnings Results Conference 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. Thank you.

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

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

Rick Smith, President and Chief Executive Officer; and Jeff Kreger, Senior Vice President, Chief Financial Officer and Treasurer, will host this morning's call. Chris Luthin, Chief Operating Officer, will be available during the question-and-answer session. 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 U.S., and 404-537-3406 internationally and entering access code 94119366.

An audio webcast will also be available for 30 days following the call under the Investor Relations section of the BioScrip website at bioscrip.com. Before we get started, I would like to remind everyone that any forward-looking statements made during the call are protected under the Safe Harbor of the Private Securities Litigation and Reform Act.

Such forward-looking statements are based upon current expectations, and there can be no assurance that the results contemplated in these statements will be realized.

Actual results may differ materially from such statements due to a number of factors and risks, some of which are identified in our press releases and our Annual and Quarterly Reports filed with the SEC.

These forward-looking statements are based upon information available to BioScrip today and the company assumes no obligation to update these statements if circumstances change. During this presentation, we will refer to non-GAAP financial measures, such as EBITDA, adjusted EBITDA, pro forma adjusted EBITDA, and adjusted earnings per diluted share.

A reconciliation of such measures to the most comparable GAAP financial measure is contained in our most recent press release, which can be obtained from our website at bioscrip.com. And with that, I would like to turn the call over to Rick Smith..

Thank you, Lisa. Good morning, everyone, and thank you for joining us today. I'm pleased with our results for the first quarter. We continued to make progress with our programs to increase operating work flow efficiency, reduce operating and overhead costs, and focus more completely on acute core and blood chronic related therapies.

Our operating improvements reflected in the quarter and those expected over the remainder of 2016 will continue to strengthen BioScrip's position as a pure-play infusion services provider. We are highly focused on our operations and growing the core infusion business.

We believe the infusion platform we have created over the last three years is ready to accelerate its growth again.

In addition to the market forces directing more care to the home, a recent study by the CVS Health Research Institute reported that home infusion care is a cost- and clinically-effective model that can save patients and payers up to $3,000 per course of treatment compared to a healthcare facility.

For this reason, as well as the convenience and comfort of home treatment, the in-home model is preferred by patients receiving IV therapy. The continued focus on improving patient outcomes by transitioning from a focus on volume to a focus on value is a trend that will continue to benefit BioScrip.

The clinical programs we have created and offer here at BioScrip support more complex patient care at home or at the alternate site. While we spent 2015 primarily reporting on the operational improvements we implemented, we continued to work to strategically position our company in many of our local markets.

To that end, we have executed 78 new hospital transitional care contracts over the past 12 months and we begun to operationalize our pull-through efforts to increase our patient census referrals.

Further, we have another 20 similar contracts in our pipeline, and we expect all of these preferred relationships to contribute to organic growth through rest of this year and into 2017. We are also expanding the clinical management capabilities we offer to our customers in readmission management.

We have completed our first year of working with a 900-bed hospital system on a pilot that bundled a post-acute care improvement program, targeting both lower joint replacement and heart failure readmission management.

Our role was that of a clinical navigator assisting in reducing length of stay in facility-based care while also providing patient transitional support to reduce unnecessary hospital readmissions. The pilot resulted in substantially lower readmissions and costs versus the established targets.

We are now marketing our success and industry-leading experience from this program in all of our markets to our other hospital customers. Thus, we are well positioned to continue to take advantage of the accelerating shift in the site of service for acute and chronic patient administration to deliver organic growth.

As we mentioned on our March call, we expected to see seasonal softness in both January and February of this year. High deductibles push patients into acute and skilled nursing facilities typically at the beginning of the year.

Our March census volumes in core anti-infectives, nutrition and heart failure were very strong and consistent with our expectations. Our April volumes have stepped up on a per-day basis compared to March. We are off to a good start in 2016 and are building momentum consistent with our full-year expectations.

As we've previously discussed, we expect that total revenue in 2016 will be lower when compared to 2015 due to our planned reduction in the percentage of lower margin chronic revenue as a percentage of our total revenue. As we've been discussing, the higher Core Therapy mix results in a higher operating margin.

In addition, the progress we have made to-date on our financial improvement plan is showing positive results. The year-over-year 100-basis-point improvement in the Infusion segment adjusted EBITDA margin reflects the progress from our operating plan.

As an update on our non-Core Therapy transition plan, we mentioned on our last call, we had transitioned $41 million during the second half of 2015. Our plan was a target of another $175 million to be transitioned by the end of Q2. We are slightly behind on this one part of the plan due to coordination with third parties.

However, we believe we continue to achieve our objectives. We believe we can impact as much as $96 million by the end of Q2 with the remaining amounts being transitioned during the second half of the year.

The delay in transitioning this lower margin business is not expected to impact our forecast for this year as we have received price increases on many of these therapies that are delayed in being transitioned. In addition, our supply chain programs are overachieving compared to the original plan.

With that, I'd like to turn the call over to Jeff Kreger for a more detailed review of our financial results for the quarter..

Thank you, Rick, and good morning, everyone. For the first quarter, revenue from continuing operations was $238.5 million, representing a decrease of $5.9 million or 2.4%from the year-ago same quarter.

As we mentioned last quarter, we expected a sequential decline in revenue due to seasonality, as well as our planned announced shift in revenue mix to a greater core revenue business composition and away from lower margin chronic business, just as Rick described in his opening remarks.

This revenue mix shift is a key component of our overall strategic plan. For the quarter, we reported a net loss from continuing operations of $11.9 million or a $0.17 loss per diluted share, as compared to a net loss of $18.9 million or $0.28 loss per diluted share in the year-ago first quarter of 2015.

Gross profit for the quarter was $64.2 million or 26.9% of revenues, representing a 30-basis-point improvement over the year-ago 2015 quarter due to the planned shift in our revenue mix to a higher proportion of core and blood chronic business.

Total consolidated adjusted EBITDA from continuing operations was $7.4 million for the quarter, representing a year-over-year increase of $2.5 million or 50%.

Excluding corporate overhead costs, which totaled $9.6 million in the quarter, the Infusion Services adjusted EBITDA for the first quarter was $17 million, an increase of $2 million or 13% over the year-ago first quarter 2015.

This year-over-year increase in adjusted EBITDA was a direct result of the continued operating improvement initiatives employed by the company, which focused on our core revenue strategy.

The increased adjusted EBITDA was also favorably impacted by the reduced bad debt costs in the quarter, which were directly attributable to the improved cash collections experience shown in our AR agings over the last several quarters.

I am pleased to share with you that we have negotiated a lower annual external audit fee with our independent auditors, KPMG, for our 2016 financial audit. This lower audit fee will result in annual cash savings to the company of over $4.5 million over the next 10 months.

Interest expense in the first quarter of 2016 was $9.4 million, roughly consistent with the $9.2 million of interest expense in the first quarter a year ago. BioScrip has a solid liquidity position.

As of this morning, May 6, 2016, the company had $54.2 million of liquidity, which is comprised of $7.6 million of cash in the bank and $46.6 million of undrawn capacity available on its revolving credit facility.

The company's net days sales outstanding or DSO was 39 days at March 31, 2016, which was seven days lower than the prior year first quarter 2015 DSO of 46 days, and was also comparable to the sequential fourth quarter 2015 DSO of 37 days.

The company generated solid operating cash in the first quarter 2016 and was able to use its operating cash flow to fund all operating costs of the business. We had a net use of cash of $5 million in the first quarter of 2016 once factoring in the $8.9 million semi-annual cash interest paid on the 2021 notes.

The company expects to be operating cash flow positive for the full 2016 fiscal year. In addition to being operating cash flow positive for the full 2016 fiscal year, the company also expects to pay down more than $12 million in bank term debt in 2016 from cash flow generated by our operations.

Please note that $3.1 million of our planned 2016 principal pay-down was already paid in cash this quarter to reduce the term loan balance. Regarding our bank covenants, as of March 31, 2016, the company is in full compliance with all of its bank covenants under the terms of the amended credit facility and under the terms of 2021 notes.

We have the financial flexibility for our current business needs and we have no near-term maturities on our long-term debt. Based on these facts, combined with our 2016 cash flow expectations, we believe we are well positioned to continue executing on our operational and financial strategies. That concludes our prepared remarks.

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

Your first question is from Bill Bonello of Craig-Hallum. Your line is open..

Hey. Thanks. Just a few questions this morning. On adjusted EBITDA for the quarter, you were actually a little bit better than what we had been looking for.

Can you just give us some sense in your own plan? Was the Q1 result pretty much in line with what you had planned to get to your guidance better, a little bit worse? Just so we know how it's playing out relative to your expectations. And then a couple other questions..

Sure, Bill. Good morning. Thanks for the question. Yeah. In fact, Q1 came in about what we expected. We actually ended with awfully strong March. We were pleased to see the patient volume pick up, which has continued into April, as Rick mentioned in his opening remarks. We did have a little corporate overhang.

You may have noted that in Schedule 4 of our press release. We think that based on what we understand, our Q2 and beyond corporate spend will go down a little bit, I think it was $9.6 million in the quarter and we expect that to be closer to maybe $8 million, $9 million or so, as we walk out which will benefit of course total EBITDA as well..

Okay. Good.

And some things that were maybe not just seasonality impactful, but maybe some nonrecurring expenses in that Q2 corporate overhead?.

Well, like all businesses here in the U.S., (14:59) employer payroll taxes reset at the beginning of each calendar year, so we had that burden as other organizations did as well. But sequentially from Q4, that was over $1 million of additional expense within the quarter that of course we – was burdened on the P&L and paid for in cash.

That will be much reduced in Q2 and the other quarters as we march through the year. We think our bad debt costs, we got it in the past to around 3.3% to 3.5% of revenue. We think that's probably a good estimate as we look at Q2 and beyond the remainder of the year.

We were a little lower at 3.2% of revenue in the first quarter, and that was, again, due to collections experiences and our ability to adjust down our reserves to the appropriate level based on the improved AR agings, but walking forward, I think it's probably 3.3% to 3.5% in terms of bad debt exposure..

Okay.

And I thought maybe you had had some consulting expenses or something too in the (16:02)?.

Yeah. I'm sorry. We did. Within that corporate number, the $9.6 million, we had about $500,000 of non-recurring onetime consulting costs associated with some internal audit (16:15) last year as we kind of fixed some of our SOX control matters that we talked about, as well as some compliance and privacy matters that were strengthening the organization..

Okay. Perfect.

And then just in terms of progress on the financial improvement plan, is it kind of safe to characterize the situation as the components are all in place or almost all in place, but we shouldn't necessarily assume that the actual impact on Q1 EBITDA was much more than, say, $1 million or so?.

Yeah. We haven't quantified that for the markets, but certainly the components are all in place. We've talked before about the different procurement initiatives we've put in place regarding rebates and better pricing. We've talked about, of course, the personnel reduction, the workforce, and then we stabilized that.

We've talked about the plan design change around our employee health benefits. And that all went into effect January 1. We should begin to see some greater benefits from a few of those initiatives during Q2 through Q4. It's not exactly linear in 2016.

There is a slight gradual uptick, and so we're expecting a little more strength as we go into the second half of the year..

Great. Thank you very much. I'll follow up later..

Thank you..

Thanks..

Thank you, Bill..

Your next question is from Mike Petusky of Barrington Research. Your line is open..

Hi. Good morning.

I guess, I didn't catch it if you mentioned it, but what's the chronic-Core Therapy mix for the quarter?.

Just on the core, we talked about before, about 32% for the quarter, Mike. In terms of core and blood chronic, we're about 56%..

Okay.

And so, with the transition of some of the lower margin business being maybe pushed out a little bit, I mean, where do you think you can get to by the end of the year in terms of that mix?.

Well, I think, north of 60%. I think if we're successful on the timing of the $96 million that we talked about that we are in process on, then that will have a meaningful impact relative to that percentage. And then, I think, the other, the rest of that is in line.

It's just coordinating third parties and activities that we still are looking to get by the end of the year..

Okay. So, I guess, I know it's a difficult question, but your confidence level in terms of moving this $96 million out by the end of Q2, I mean, is it kind of fairly high or, I mean, obviously, you're picking a number that's pretty specific..

Yeah. It's very high. It's based on specific limited categories. So, we believe that the concentration and the similarities will enable us to be efficient with it..

Okay.

And so should we continue to expect then some meaningful gross margin improvement kind of on a sequential quarterly basis throughout the remainder of the year? Is that a fair expectation?.

It is. I think consistent with our plan, I think a little bit if Q3 and Q4 has that incremental drag, then it might be impacted a little bit but overall directionally consistent with our plan..

Okay. Then I just have a question on the negotiation of a lower audit fee.

How much of that $4.5 million actually will hit the 2016 numbers?.

Well, Mike, it's a good question.

And I tried to emphasize earlier (20:29) that the cash savings and the reason I called out the cash component is last year we expensed of the $6.1 million of audit fees for 2015, all of which were expensed in 2015, $2 million of it was up in continuing operations EBITDA and the remaining $4 million was part of our restructuring costs.

As I've guided, our restructuring costs are going to come in between $3 billion and $5 billion for the year, all of which will be in the first six months. And so next quarter, the second quarter, will be the last quarter that we have those restructuring expenses as they relate to our earlier FIP plans and restructuring that matters (21:10).

So it's true cash savings, but the impact on EBITDA is going to be somewhat reduced given that a lot of that expense was recorded down in restructuring in the past..

Plus in our guidance for the year, we had expected that given the remediation of material weaknesses at the end of 2015 that we would have a meaningful reduction. But I think that our actual final proposal came in a little bit lower than that expectation as well..

Okay. I guess just more of a bigger picture question, Rick.

When you look out over the next few quarters and even beyond this year but into next year, what are the one or two or three biggest concerns that you have in kind of achieving, I guess, both the guidance in 2016 and what you would like to accomplish beyond that? Is it competitive concerns? Is it pricing? What do you see as the things that you're most focused on or even concerned about looking forward?.

Well, I think, as I mentioned in my prepared remarks, a year ago we invested in additional regional positions for strategic initiatives in selling, and as we've been looking forward, we've been seeing that, as I mentioned, there are significant amount of market forces and programs pushing more care to the home.

Our industry and our company have been experts at building that hospital room in that patient's home. And so we don't see a slowdown in that. We also see that the site of service initiatives by lot of payers, minimally save 50% over existing utilization and we're preferred on the panels of all three national plans in addition to other regional plans.

The relationships that we mentioned relative to the hospital contracts we've signed over the last 12 months, we've talked before about not only have payers looked at a preferred panel, but a lot of large hospital systems have done the same, and we've been successful in positioning ourselves to take advantage of that relationship and that the continuity and bridge back into the community.

We also have introduced some patient care technology that we believe will enhance efficiency and collaboration with our referral sources, our payers and support of the patients in terms of eliminating manual processes that can also save us cost. So we're looking ahead and continuing to see where the direction of care is going.

We also are looking at technology solutions that will enable us to be more efficient, but at the same time enhance collaboration and sharing of information securely with everyone around that patient to enable a good outcome. So I think with that, Mike, we are positioned well. We've got the payer access.

From a reimbursement perspective, we believe there is some good movement on The Medicare Site of Care Act, Infusion Act (sic) [The Medicare Home Infusion Site of Care Act] (24:19) that may pass sometime over the next 12 months.

We hope there's an association, an organization, and I think that will bring some additional referral flow to the industry as well as some stabilization on pricing on the patient obligation piece, especially under Medicare Part D.

We also with a large percentage of our business in a managed care payer perspective, they truly understand the value of home infusion, the ability to reduce readmissions, the ability to avoid ER visits as well as to enable opportunities to bring patients home faster and avoid longer stays in facility-based care.

So I think all of what we're seeing and the work we've done over the last three years, I think bode well for the direction of where the industry is going, the census growth, the demographics and then also our confidence (25:18)..

So the last question, just on the Medicare legislation potentially. That's been out there for years.

I guess what are you seeing or what the industry is seeing that makes, I guess, a level of increased confidence that you may see finally some action on that legislation?.

Yes.

There are bills introduced in both the House and the Senate last year in 2015, and we've got some strong sponsorship in both chambers, especially on the staff we've got some strong legislative expertise within the NHA Association (26:03), and so we believe it is priority to get this moving, and I think it would also be consistent with a lot of what has happened in terms of the bundled initiatives and the value-type models that a lot of the hospitals and other programs that are being pushed out into the marketplace..

Thank you very much for everything. Thanks. Appreciate it..

Thank you..

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

Hey, thanks. Good morning. Jeff, you mentioned the $500,000 in consulting fees in the corporate overhead. That wasn't in the restructuring cost.

That was part of the $9.6 million in corporate overhead?.

Yes. That's right. And while they were one-time in nature, we want to make sure that restructuring category truly goes to really if there's large restructuring initiatives. These are normal course of business costs, not ones that necessarily repeat.

For example, as we strengthen our compliance infrastructure, as we improve our internal audit functionality, as I referred to, they are one-time in nature, but we classify them as a normal operating cost within our corporate budget. However, they will not repeat in Q2 and beyond. So I would expect a lower corporate spend rate, if you will..

Okay. And so you mentioned $8.9 million of corporate overheads in Q2. Is that pretty consistent for the rest of the year? Has it stepped down a little bit, moved up a little bit? Just remind me of the seasonality in that..

Yes. Again, I'm looking back to last year real quick here, we were running....

(27:50)..

We ran $8.8 million in the fourth quarter and just $8.5 million in the third quarter. I mentioned $8.9 million, we're going to run in kind of that higher $8.9 million, $8.8 million type category....

Okay..

...Q2 and as we march towards the end of the year, we continue to look for other cost-savings initiatives. But I think I target that general range..

Okay. Okay.

And then, Rick, the offloading of that revenue, that's neutral to EBITDA, or slightly positive, slightly negative?.

We would say it's neutral. I think as I mentioned, we've gotten some price increases recently on a number of those therapies just I think due to some of the delay. And at the same time, we've overachieved in other areas that will make that neutral..

Okay.

And the cash drag from the discontinued ops, when should that tail off?.

Yes. Thanks for bringing up that, Dana. I wish I had mentioned that in my opening remarks. So the cash drag from discontinued ops, we expect to effectively go away Q2 and beyond. In the first quarter, the money we expensed there was the third and final payment on our previously announced DOJ and Exjade settlement matter.

That was a three-year-old matter that we just....

Okay..

We had a settlement payment, but I'm looking at the cash flow now, it's $5.9 million from disco, the cash payment was $6.4 million.

I think you'll see on the P&L that we actually had a little bit of cash generated from the favorable settlement of small workers' comp plans that are rolling through there, but really that should be moving to zero for the remainder of the year..

Okay. That's helpful. And then last for me, Rick, appreciate all the color on the transitional care programs, Hospital at Home. You did talk about this pilot with the hospital. I think you used the term clinical navigator.

Is that different from your core business? Is that an extension? Could you just describe in a little more detail your role as a clinical navigator?.

Yes, a little bit, given my competitors are probably listening to me, Dana....

Okay..

...but I think it is a new role. It's actually a natural role that and the expertise of our industry and our company through a liaison to where we are expert at identifying patients that can go home.

And so with the bundled post-acute model, the opportunities to plug in our clinical expertise, our knowledge of what happens in the home and the coordination of care and the different providers in the home, it actually enables us to play a different role but one that just extends off of our current capabilities in clinical programs..

Great. Thanks very much..

You bet..

And your final question comes from the line of Bill Bonello with Craig-Hallum. Your line is open..

Hey. Yes, just one follow-up question. I was hoping you might expand a bit on these 78 transitional care relationships. Maybe you could tell us a little bit more about how the referral pattern with those hospitals may differ from the traditional referral pattern in terms of who is driving the decision, what percentage of the cases you might get.

And then if there's any way you want to take a stab at sort of what the impact of those relationships could be on a revenue front that would be great..

I think that as we've talked before, Bill, the marketplace has, as a result of ACA and readmission penalties, there's a lot of patients that leave their home community, they go outside the community to a center of excellence hospital for treatment.

And I think as a result of that bridge back into the community when there's many providers involved, hospitals lose visibility to that patient and end up with the patient back in or readmitted.

And so as we've talked about, the trend has been to limit the number of providers around the desk, the discharge desk in a lot locations and I think it's really to focus on that continuity of care, the bridge back home and a better reporting of outcomes of what happened.

So we believe that by being on a preferred position with these types of agreements, the opportunity is to bring those patients home, have a consistent level of care and service levels to those facilities, and the ability to report back outcomes.

And so we believe that in many situations we have had multiple levels of referral activity compared to prior levels of activity and prior to these types of relationships. So it's really about that level of additional clinical care, consistency, reporting, and the avoidable readmission episodes..

Okay. So when you have these relationships, do you find that you're getting a greater percentage of the discharges than you would in – that either you had been previously or maybe you do in other situations..

Correct..

Okay. That's helpful. All right. Thanks a lot..

Thank you..

And there are no further questions at this time. I'll turn the call back over to Richard Smith..

Thank you. Okay, great. Thank you so much, everyone, for joining us today. We appreciate your support of our company and thank you to all the BioScrip employees for all your great work. Thank you..

Ladies and gentlemen, this completes today's conference call. You may now disconnect..