Kathryn M. Stalmack - BioScrip, Inc. Daniel E. Greenleaf - BioScrip, Inc. Stephen M. Deitsch - BioScrip, Inc..

David S. MacDonald - SunTrust Robinson Humphrey, Inc. Brooks O'Neil - Lake Street Capital Partners Kevin Ellich - Craig-Hallum Capital Group LLC Jason Plagman - Jefferies LLC Michael Petusky - Barrington Research Associates Jacob K. Johnson - Stephens, Inc..

Greetings and welcome to the BioScrip First Quarter Fiscal 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Kathryn Stalmack.

Please go ahead..

Thank you. Good morning and thank you for joining us today. BioScrip's first quarter 2018 financial results were released earlier this morning. A copy of the release can be found in the Investor Relations section of our website at www.BioScrip.com.

Within two hours of the call's completion, an audio replay will also be available in the Investor Relations section of BioScrip's website. Dan Greenleaf, President and Chief Executive Officer; and Steve Deitsch, Senior Vice President and Chief Financial Officer and Treasurer will host this morning's call.

Before we get started, I would like to remind everyone that 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 results contemplated 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 the presentation, we will refer to adjusted EBITDA, a non-GAAP financial measure.

A reconciliation of the most comparable GAAP financial measure is contained in our press release issued this morning. And now, I'd like to turn the call over to Dan Greenleaf.

Dan?.

Thanks, Kathryn. Good morning, everyone, and thank you for joining us. This morning, I'll discuss our first quarter 2018 performance and review some of the actions we're taking to drive continued improvement of BioScrip through remainder of this year and into 2019.

I'll then hand it over to Steve Deitsch, our Chief Financial Officer for a more detailed discussion of our financial results and an update on our guidance for 2018. In the first quarter, we continued to execute successfully on our turnaround strategy, delivering 16% year-over-year growth in adjusted EBITDA.

Higher core revenue mix increased gross profit margins and lower operating expenses drove our year-over-year improvement in adjusted EBITDA. Core revenue mix expanded 350 basis points to 75.4% for this quarter, up from 71.9% in the first quarter of 2017.

In turn, our gross profit margin increased 32.7%, a 530 basis point improvement over the prior year on an apples-to-apples basis adjusting for ASC 606, a new accounting standard that Steve will address a bit later in the call. Similarly, operating expenses declined by $3.6 million compared to the prior year quarter.

We achieved this performance despite facing higher than normal inclement weather in the Northeast that caused a significant number of temporary branch closures.

26 occasions where a branch was closed for a whole day and 49 occasions where a branch was closed for a partial day, which negatively impacted our first quarter 2018 adjusted EBITDA by an estimated $1.3 million due to lost sales of approximately $2.5 million, primarily for higher margin antibiotics therapies.

In effect, we lost one billing day during the quarter due to inclement weather.

Additionally, we incurred higher-than-average product acquisition and delivery expenses to serve our patients in the face of temporary industry-wide product shortages including immunoglobulins, antibiotics, IV solutions and supplies, which further reduced this quarter's adjusted EBITDA by an estimated $1 million.

While product shortages can routinely occur, we believe the extraordinary nature of the recent shortages, are now elevating, reducing our need to purchase higher cost alternatives. Outside of these external headwinds, our investments in our field force this quarter increased by approximately $1.5 million compared to the first quarter of 2017.

We believe that disciplined investments in our future are critical to enable us to drive industry-leading revenue growth and accelerate earnings expansion. Among our incremental investments, we held a national meeting in January. We expanded our field force. We implemented sales and operation training programs.

We launched a sales force effectiveness tool and we expanded our managed care team. Adding it all up, we estimate that our first quarter 20 (5:01) adjusted EBITDA of $5.6 million would have been approximately $2.3 million, absent the negative impact of external headwinds.

In essence, we had a solid underlying performance including $10.7 million of operational cash flow, a 6x improvement over the previous year, what is always a seasonally weaker quarter. Looking ahead, we remain firmly on track to achieve our 2018 adjusted EBITDA guidance, which we are reaffirming this morning.

I've already discussed some of the field force effective initiatives we implemented that are designed to increase volumes, improve core mix and raise gross profit margins. We're also making important strategic progress in other areas.

For example, we are expanding and strengthening our hospital and payor relationships, included growing strategic preferred provider agreements, payors increasingly are driving volume to cost effective settings that demonstrate attractive outcomes and many are actively focused on site of service redirection to the home.

With respect to revenue cycle management, we are laser focused on improving efficiency and quality in all processes. As a result we anticipate significant ongoing improvements in cash flow by creating a more efficient model. We are already seeing the benefits of these focused efforts.

Some examples include reduced denied claim queues from over $20 million to under $3 million (6:37). This has been an ongoing problem at this organization for years and it's finally been addressed.

Improved PBM unbilled claims from four days to two days, and lowered unbilled claims, pending authorizations by over 80% and accelerated and improved the accuracy of our initial claim submission. Moreover, our revenue cycle management team together with our field force team is more focused than ever on enhancing the patient's experience.

For example, patient overall satisfaction ratings for nursing exceeded 85% top box score and our overall Net Promoter Score is greater than 70%, which favorably compares to highly regarded companies such as USAA, Costco and Nordstrom, reflecting the speed and the quality of our team's ability to onboard patients as well as continue to provide them excellent service.

We continue to execute upon meaningful supply chain savings opportunities, including favorable contracting for drugs, supplies, and indirect spend and formulary management enhancements, all of which continue to accelerate as the year progresses.

In terms of operating expenses we expect ongoing improvements through labor management, technology investments, staffing productivity and our continued execution of our single repeatable model, all of which benefit BioScrip employee engagement and enhance the customer experience.

Continued successful execution of our strategic plan over the long-term is positioning BioScrip to expand our core sales growth to our target of 85%, achieve gross profit and EBITDA margins approaching 40% and 10% respectively, and therefore have the potential to begin to pay down debt and delever the balance sheet.

Our optimism is supported by favorable industry dynamics in the home infusion and space.

As I've noted in the past, the home infusion industry is growing at 5% to 7% per year, driven by an accelerating shift in healthcare away from higher-cost institutional settings such as hospitals to lower-cost home settings, which is preferred by the patient and delivers effective outcomes combined with lower risk of infection.

The trend is undeniable. In addition we look forward to the favorable Cures Fix catalyst, which will add a minimum of $9 million to our EBITDA starting in 2019, while Cures has turned into a positive for us; I'd like to point out the BioScrip stands out from other home health peers that have significantly heavier exposure to CMS reimbursement.

And as a result we have relatively low pen stroke risk. We have a diversified commercial and government payor base with more than 1,000 relationships and no single payor including Medicare accounts for greater than 10% of our revenue.

We have officially expanded our core initiative in what we are calling Vision 2020, which will transform BioScrip into the industry leader and drive significant earnings growth for years to come.

In addition to what I have previously shared with you regarding our core initiatives, the four pillars of Vision 2020 include a leading sales growth driven by field force effectiveness, the continued unlocking of supply chain opportunities, enhanced revenue cycle management and strengthened relationship with our payors.

Along with Vision 2020 I also want to underscore significant enhancements to our management team since I arrived at BioScrip.

I believe we have a team today that is better positioned than any other homecare company to capitalize upon the compelling macroeconomic changes that are occurring in our healthcare system today and our team is the single most important advantage we have as an organization.

We expect to make good progress this year, growing our core business and expanding our profitability while making continued strategic growth investments. Looking ahead to 2019 we stand by our expectation for a minimum of $75 million of adjusted EBITDA.

In conclusion, we still have more work to do but we remain as enthusiastic as ever about BioScrip's unique position as the only independent national home infusion pure-play and our ability to deliver long-term sustainable growth and value creation to our stakeholders. I'd like to now turn the call over to Steve Deitsch.

Steve?.

Thank you, Dan and good morning, everyone. My prepared remarks will include additional information on the company's first quarter performance and 2018 guidance. Net revenue for the first quarter of 2018 was $168.6 million compared to $217.8 million in the first quarter of 2017, a decrease of $49.2 million or 22.6%.

This revenue decrease resulted primarily from our shift in strategy to focus on growing BioScrip's core revenue mix including contract changes with UnitedHealthcare effective September 30, 2017.

The impact of the implementation of ASC 606 which during the first quarter of 2018 resulted in the recognition of amounts previously reported in bad debt expense, being reported as a reduction of revenue and lower patient volumes in certain product lines, including the impact of inclement winter weather.

Our revenue mix in the first quarter was 75.4% core and 24.6% non-core with core mix increasing 350 basis points above our 71.9% core revenue mix in the prior year quarter.

Gross profit for the first quarter of 2018 decreased $9.8 million or 15.1% compared to the prior year period, due to a lower first quarter 2018 revenue base including lower sales of antibiotic therapies that carry higher than average gross profit margins, the implementation of ASC 606 in the first quarter of 2018 and higher product acquisition and delivery costs related to temporary product shortages, offset partially by the impact of higher core product mix due to our core strategy, including the UnitedHealthcare contract transitions and supply chain improvements.

Gross profit margin for the first quarter of 2018 was 32.7%, a 530 basis point improvement compared to the prior year quarter, stated on an apples-to-apples basis adjusted for the impact of ASC 606 adoption. Operating expenses were $49.4 million for the first quarter of 2018, a $10.6 million or 17.6% reduction compared to the first quarter of 2017.

Our more efficient BioScrip workforce along with the reduction in bad debt expense due to the implementation of ASC 606, were the primary drivers of this improvement. First quarter 2018 operating expenses declined $3.6 million compared to the prior year quarter on an apples-to-apples basis, adjusted for the impact of ASC 606.

G&A expenses during the first quarter of 2018 increased primarily due to the investments in our field force that Dan spoke about earlier and additional legal and accounting fees during the quarter. Adjusted EBITDA for the first quarter of 2018 was $5.6 million compared to $4.8 million in the first quarter of 2017, a 16% improvement.

The increase was driven by the improvement in operating expenses, which was offset partially by lower gross profit which was primarily the result of the lower revenue base. As a reminder, the first quarter of each year typically represents the least profitable quarter of our year primarily due to the seasonality of our revenue and labor costs.

Restructuring, acquisition, integration and other expenses net totaled $1.9 million for the first quarter of 2018 a $1.3 million or 42% reduction, driven by decreased acquisition and integration activity during the quarter.

Costs in the current quarter were primarily composed of employee-related costs including severance, as well as redundant site closure expenses.

Net loss from continuing operations net of income taxes was $13 million for the first quarter of 2018 compared to a net loss from continuing operations net of income taxes of $19.4 million in the first quarter of 2017, reflecting a $4.4 million decrease of non-cash expenses, including gain on dispositions, depreciation and amortization, change in fair value of equity-linked liabilities, stock-based compensation and a $0.8 million increase in adjusted EBITDA, a $1.3 million decrease in restructuring acquisition, integration and other expense, and a $0.6 million decrease in net income tax, offset partially by a $700,000 increase in interest expense.

Cash used in operating activities for the first quarter of 2018 was $5.2 million including $10.7 million of operational cash flow and $15.9 million of interest payments, which included by annual bond interest paid of $8.8 million. The $10.7 million of operational cash flow compared to $1.8 million in the prior year, a 6x or $8.9 million improvement.

Total liquidity at March 31, 2018 was $40.4 million including $30.4 million of cash and $10 million of additional borrowing capacity under our senior credit facility, compared to $16 million of total liquidity at March 31, 2017.

Regarding our outlook for 2018, we are reaffirming our previous adjusted EBITDA guidance for 2018 between $54 million and $58 million and updating our 2018 revenue guidance to between $688 million and $698 million, which only reflects an adjustment for the implementation of ASC 606.

ASC 606 became effective January 1st, 2018 in amounts which would have been reported as bad debt expense are now reflected as reductions to revenue. The implementation of ASC 606 does not impact operating income or adjusted EBITDA. That concludes our prepared remarks. Operator, we will now open up the call for questions..

At this time, we will be conducting a question-and-answer session. Our first question come comes from David MacDonald of SunTrust Robinson Humphrey. Please proceed with your question..

Good morning, guys. A couple of questions..

Hey, good morning, Dave..

Dan, can you just talk a little bit about the product shortages, did you see that linger – are we back at normalized levels or is there still a little bit of a drag. And if – and just give us some sense of the timing of that. I would assume that there's a little bit of leakage in terms of impact into the second quarter.

But just wanted to get some clarity on that so we have a better sense of the pacing of the quarters?.

Yeah. So just – so just for everybody's for the purposes of the broader group here. This was initiated or began with the hurricanes that went through Puerto Rico predominantly. And most of our manufacturers have facilities in Puerto Rico.

And if the Puerto Rico facilities come back online and begin to produce product again, as we see they have, we expect this to go down.

We also had kind of an anomaly today with one of our immunoglobulin products that, by way of a – by way of – it really was a paperwork mistake by the company that resulted in that product being unavailable to us for about three months or four months. And so you've seen this movie.

I mean we switch all the patients over to one product and then we have to switch them back and we had already switched the patients over to another product. And on the Puerto Rico's, if you will, supply issues, I mean what it caused us to do was, we spent a lot of money in delivery this quarter because we were moving stuff around branches.

We also did, as you could imagine today, we did some buyouts just to make sure that we had enough inventory. But I see it largely behind us in terms of order of magnitude, Dave. I still think there'll be some one-offs going forward but I think by and large I think it's mostly behind us..

Okay.

And so just on the idea – on the immunoglobulin patients, those are kind of settled in, you've got them back on whatever therapy is most appropriate and then in terms of the forward buys you kind of have all the product you need and you're back to kind of normalized levels there?.

Yeah. I would say yes the both of those, Dave..

Okay. Okay. Secondly, Dan, can you talk a little bit about, look everyone on earth is talking about value-based care and you guys mentioned it a little bit in your prepared comments. But....

Yes..

...are you actually seeing contracts or talking about contracts where there's an opportunity to participate depending on a set of outcomes and value-based metrics where if you guys perform there's a potential opportunity care in (21:33) some of the savings?.

Yes, we are..

Okay..

And we're doing that at the payor level, we're doing it at the integrated delivery network level. We also see significant opportunities potentially do it with physician groups. So, yeah, and again I think by virtue of what we do, Dave, and I know you can appreciate this [Technical Difficulty] (22:00) value-based care..

Sure..

And our business it by – in its essence is value-based care because it's more – it's as effective, it's safer, it costs a hell of a lot less for the patients and the healthcare system and the patients provide. There's not a metric that I can think of that we don't win on.

And again if you look at any of the metrics that that we measure, we think we are value-based care already. We also believe we're already the transformative company in this industry, Dave. I think there's a whole bunch more that's going to come out of this, out of this company and this team here in the mid-term.

And I prefer to talk to some of this stuff not in a broader group because it has strategic implications..

Yeah. Okay.

Steve, just a couple of questions, I assume just given that the EBITDA guidance hasn't changed, the expectations around cash flow and free cash flow are unchanged, is that accurate?.

Yeah, that's correct, Dave. We – as Dan mentioned, we did do some inventory buy-ups and you can see that on our balance sheet. So we are carrying a higher level of inventory today than we typically would.

And so we will likely have some additional inventory payments in the second quarter higher than maybe a typical quarter but that will even out as we go through the balance of the year..

And is it fair to say, Steve, some of the progress you've made on revenue cycle management should wash some of that out as we think about it on an annual basis?.

That's correct, we're making a lot of progress there as Dan outlined, our new team and our existing team mates that have been working hard for several quarters are making a lot of progress. I mean the denied claims reduction....

It's – I mean....

Yeah..

Dave, it's just remarkable because we've been – I mean this company been pounding on that for six years, seven years. We pounded on it here the day we got here and it's – when you've got – you end up with the right people in the right seats like Danny and his team and Harriet and her team, things happen quickly.

And I even look at like what's happened on the held revenue, I mean, we – the held revenue at our simple verification location has gone from – this is, these aren't big numbers but they've gone from somewhere in the $3 million range to $300,000.

But all these things just add up in terms of, as you can imagine in terms of cash flow, in terms of working capital. We've also done some things, Dave, in terms of just orientation and we had a – we were unbalanced related to our collectors versus our billers. We had more, we were over-weighted in collectors.

And so one of the things we've done is we've shifted the orientation of the organization more to billers. And that – I mean it makes obvious sense, why you do that because you bill to get paid. But again in some instances, it just wasn't intuitive here.

And – so I really – I got to tell you and as we – as this – as our revenue cycle management team continues to make this progress, I – where I've shared three or four things, we've got 10 other things that again for somewhat for strategic purposes, I don't want to share but suffice to say this is gone, what I see is this is gone from a very much a weakness prior to kind of this team coming onboard to what I would describe as really one of the strengths of the organization and it's only going to get stronger going forward..

Okay. Guys last question, just with regards to the patients that were impacted by the Cures Act, I know various different competitors did different things in terms of potentially moving away from those patients or not. I know you guys stuck by them.

Is there a chance that you're seeing disproportionate growth amongst some of those folks and that that $9 million potentially has an upward bias by the time some of the payment rules change?.

Yeah. Dave, what I would share with you is that our census hasn't dropped..

Okay. Okay. Thanks very much, guys..

Thanks, Dave..

All right. Thanks, Dave..

Our next question comes from Brooks O'Neil of Lake Street Capital Markets. Please proceed with your question..

Good morning. So, I was just hoping to follow-up a little bit on some of the things David was asking about specifically. I know you're not providing quarterly guidance but can you give us sort of an impression of what you expect to sort of quarterly progression to be.

Are we looking at a hockey stick type earnings here, where the bulk of the $54 million to $58 million is in Q4, or are we looking at more of a steady sort of linear progression from here to whatever number makes sense for Q4?.

So, Brooks, the only thing I can share with you, look at last year. Look, last year is an excellent analog for how this business ebbs and flows..

Perfect.

Secondly, obviously there's a lot of pending consolidations in the industry, do you see or have you seen anything that's likely to impact BioScrip and BioScrip's opportunities in the marketplace?.

Not at this time, Brooks. I mean, I – what I – what – so those consolidations are occurring, but frankly what I'm more excited about, Brooks is, I'm excited about where the trends are going in healthcare.

I'm excited about the conversations that we're having with payors about redirection programs and the materialness of those – of those conversations, which are so far advanced from at any point in time that I've been part of this industry.

I'm excited about the trends that are undeniable about patients moving to the home and that care is being redirected to the home. And that outside of the operating room, outside of the ER room and outside of the ICU, the home will be the general ward.

And so as much as there are – there are external factors that are occurring, Brooks, in the marketplace, I think, I fundamentally – I don't think, I fundamentally believe that we have a much more ability to impact the outcome of this company much more than any external factors that are occurring.

And we've got – we just have a ton of wind at our back and it's – my mind is – are we prepared to take our future. And I feel like I talked about Vision 2020, I feel like we're better prepared than ever.

And then I look at the broader organization and I look at every – if we look at last quarter, first quarter of 2017, you compare it to first quarter of 2018, I don't care what you look at, we're better off. We're better off margins. We're better off core. We're better off liquidity wise. We're better off in terms of operational cash flow.

We're way, way, way better off in terms of a management team. And moreover, I'm not facing Cures, I'm not facing a refinancing, I'm not incurring the challenges of exiting a UnitedHealthcare contract. I'm not undergoing significant management changes and I'm not integrating a company.

So, when I look out, Brooks, and I look out to the future, and I – this is really a future-looking question you're asking me. I don't think we've ever been in a better position as a company in the 10 years or 12 years or whatever period of time this thing's been public..

Great. Thank you very much. That's all I had..

Thanks, Brooks..

Our next question comes from Kevin Ellich with Craig-Hallum. Please proceed with your question..

Good morning, guys. Thanks for taking this question..

Hi, Kevin..

Hi, Kevin..

I think (30:31) so we saw some nice improvement on the quarter revenue mix, Dan. Just wondering your thoughts in terms of still on track to get to that 85% mix.

Have you guys – can you remind us, how long do you think that'll take? Are we going to see it in the next four to six quarters?.

I think, how I look at it is, if we're really humming along here, I think you could look at 1%, somewhere 1% every couple of months I think would be – I think would be accurate. I think that – and in some instances, for example, at other places I've worked, we've seen 1% every month.

But just for the purposes of gauging the speed at which this happens, I would say probably 1% every couple of months in terms of... (31:23).

Okay. That's helpful. And then clearly you've made some nice investments in the management team and the sales force, et cetera. You know, could you provide some color in terms of I guess, key takeaways and how are you measuring.

I mean, you've clearly shown up in the results, but just a little bit more color on other investments that you might need to make or we kind of at that point where you've done enough?.

No, I think, again, if I look at my Vision 2020 or our Vision 2020, and I think about the four pillars, one is field force effectiveness. Another one is revenue cycle in bad debt. Another one is procurement and another one is strengthening the relationship with the payors.

You know, we're going to continue to make investments in those areas that we believe will get us to that above $75 million in 2019, Kevin. So and that includes things like IT, technology is very important. I think, part of it also is – as we reframe this business as what types of people do we invest in, that's really important.

And again, as we look to continue to transform this industry and transform this company, we're going to continue to make strategic investments in certain people. And again, I hope you understand I've got competitors sitting on the phone, and I don't really want to tip my hand to them. But suffice to say that we'll continue to make those.

I don't think, if you're looking at it from a CapEx standpoint or an OpEx standpoint, I don't think it's anything extraordinary, Kevin. So I don't – I don't think there's anything that really is going to be a got you or jump out at you.

You know we've made a lot of investments since we've been here and disciplined investments, I would say, and strategic investments and I think you'll continue to see that practice..

Understood, that's helpful.

And then, Steve, you talked a little bit about pacing for the year and whatnot but are there any other costs that we should be thinking about as we update our models over the next few quarters? And then on top of that could you get – could you tell us what the adjusted DSO was and maybe I missed that in your prepared remarks for the impact from the weather and whatnot?.

Yes. So, hi, Kevin, thanks for your question. And I would tell you that there's really nothing incremental or out of the ordinary coming with respect to our operating expenses as we move into the second half of the year.

I think Dan did a nice job of re-articulating what we've – we said on last quarter's call that we expect our EBITDA to progress this year in the same manner that it did in 2017. And if you look at the way last year progressed, we're sort of right on track with where we expected to be and with getting to the $54 million to $58 million..

And with the exception obviously of the shortages..

Right, sure..

In the northeasters..

Yep..

Yeah. So we're comfortable and we've got, Dan articulated again a number of drivers that will continue to enhance our profitability revenue cycle being a significant component of that from a cost perspective as well as a DSO perspective, and then also supply chain. Supply chain is going to continue to drive our gross profit margin.

And so will our core product mix, so those – those are going to be big drivers as we move into the second part of the year..

I think the other thing, Kevin, I'd say about this is that, one of the reasons why I like how well-positioned we are, is because we get the advantages of scale. So in other words, we get the advantages that UnitedHealthcare or Walgreens or CVS has in terms of purchasing power.

And as well as, I think strength of our ability to hire the absolute best talent which we've done as a company. And we also are not disadvantaged by being too small. And then where you just – you're not going to have sophistication on the payor side. You're not going to have the sophistication on the revenue cycle management side.

You're not going to have the sophistication at different levels within our organization and which really puts us in a really unique position where it doesn't take 17 signatures to get a roll of toilet paper. And on the other hand, it doesn't – we don't have all of the – and I've worked at Schering-Plough for a decade, so I know what that was like.

And then on the other hand, we're not so fragile that we can't make – or less attractive that we can't make the right investments that we know that are needed to scale this industry and to scale this company..

Sure. Well,.

And Kevin just to....

Yep, go ahead..

Kevin, just to answer your second question on DSO. We're at 45.8 days at the end of the first quarter compared to 44.2 days last year. And that's really at an intentional. We're really focused on collecting old receivables instead of writing them off.

I think previous, some previous practices were to focus more on a DSO level and we're – and our teams are more focused on not necessarily writing off old receivables, we're really focused on collecting them.

And one of the things that we didn't mention earlier is, we've seen – we expect that we've got (37:43) $5 million of targeted DSOs that are over 360 days old that we're still, we expect to collect and the team, they're making a lot of progress on it. And so, I think, that's....

That's another really amazing thing, Kevin, because in the past, this company would have written all that off and we were just looking most recently at like $5 million that historically would have been written off. And we've already collected $2 million of it..

Wow, (38:11).

And this is just one example of where things are just way better here in terms of – and again, as we talk about the strength of our business is our revenue cycle management team..

That is the impressive. I think most companies would write-off receivables when they're turning 360 (38:25) days old, so that's really impressive. And Dan again, it's great that you guys don't have to worry about getting 16 (38:32) signatures to get the toilet papers, so. Anyways, thanks guys... (38:38).

I couldn't resist. I couldn't resist, Kevin.

Do you have to do that?.

Hopefully not..

Okay, good..

Thanks, Kevin..

Our next question comes from Brian Tanquilut of Jefferies. Please proceed with your question..

Hey, guys. It's Jason Plagman on for Brian. So just wanted to dive a little deeper on a couple topics that you mentioned as part of Vision 2020.

So your first one on the supply chain savings, what level of savings do you think that initiative could drive over the next couple of years separate from the improvement in the core mix, but just pure, better purchasing savings?.

I think eight figures would be a reasonable target..

And as far as – is that spread over a few years or how quickly can you achieve that number?.

I think we're well on our way..

Okay. Fair enough.

And then on the – expanding your relationships with the payors, any additional color you can provide on progress on that front and when we – should we expect to see any benefit from that in the second half this year, is that more of a 2019 lift?.

No, I think that we have one instance where we have one payor that a third of our revenue now comes from redirection. So we're seeing it already..

Yeah..

And I just think there is, and I – as we've staffed up our managed care team, there isn't – I don't think there's a payor we're talking to, Jason, that isn't saying what we're doing is not a really, really good idea.

And so I don't think these things are – obviously most of these are big companies that don't move really fast but there is – I think there's clear energy behind this. And we've already demonstrated pretty substantial (40:55) results that that are really helping us in these discussions..

And, Jason, this is Steve. I would just add to that that Dan outlined that as one of our investment areas and we've really built out a, what we think is an industry leading payor relations team and that team is in the field every day meeting with payors during the first quarter they had 47 visits with payors that we have not met with in the past.

And so these people are getting out and building these relationships and talking about the benefits of BioScrip and redirection and it's making a difference..

Yeah. And just you know, Jason, when I joined there was not a payor team here. I mean there was a couple people that did this, but there was not what I would describe as a payor team that's really ready to help with the transformation and I think we're extremely well-positioned to do that now..

Great, that's helpful.

And then last one from me, any concern about or impact that you're seeing from the tight clinician labor market in – and nurse wage inflation or wage inflation in general?.

Well, it's so interesting. That's a great question, Jason, and I fully understand it because we're seeing the tight labor market across the board. I mean we're here in Denver and unemployment is I think below 2% now.

So it's real and I don't know if you've seen any of the Wall Street Journal articles talking about companies going into the teenager ranks now, I mean GE's even doing this. So we understand that's a macro issue.

The interesting thing is about our nursing population is that 70%, 80% of them have what's called a certificate that it gives them a special qualification to serve patients. I guess the best way to describe the kind of serve patients at home. Now they don't have to have this but 70% to 80% elect to have this.

So this is a really kind of unique subset of nurses that love to deliver care in the home, they love kind of the autonomy that comes with that, they love the flexibility that comes with that. And we're starting to do some really cool stuff with them too that I think they really feel like they can be an active participant in this transformation.

So it's, yeah, we'll have – there'll be some markets that we're challenged in. But again I think we've got my view of it is, first of all, we have an amazing nursing team. And again you look at this top box score of over 85%, which is just unbelievable.

And secondly, we've got a nursing team that really loves this industry, loves what they get to do and this is a very unique, a very unique role in the overall nursing community.

And when you – and when you find the right person here and again if you just look at, they elected to get this certificate, there's a tremendous loyalty to the patients and there's tremendous loyalty to this industry..

That's helpful.

And so it sounds like it's not of concern that your operating expense could be pushed up by inflation in the near-term?.

I don't really see it. One of the neat things we've been able to do this year, Jason, is for the first time since 2009 we paid bonuses to the organization and we also were able to distribute equity amongst a number of our team members that historically had not gotten that before.

So there's other things we're doing that I would share with you that BioScrip historically hasn't done that had been very, very meaningful also to team members here and I think we got – as a result of what we went through last year in terms of turning this company around, I think we've got a level of engagement amongst our team that's, I think just continues to grow and improve..

Great. Thanks, guys..

Thank you..

Our next question comes from Mike Petusky of Barrington Research. Please proceed with your question..

Hey, good morning guys. Thanks..

Hi, Mike..

Thanks for taking the questions. Steve, I may have missed this earlier. I had been under the impression that some level of bad debt expense would stay post ASC 606.

Is that not right or can you help a little bit as far as how to model that going forward?.

Sure.

So we completed our analysis in the first quarter and based upon the ASC 606 standard, effectively all of our bad debt expense with the exception of where you have payors that default from a credit perspective, which is de minimis and frankly, totally immaterial, all of it is reflected as a – what's called an implicit price concession per the accounting standard, and all of that gets reflected as a reduction to revenue.

If we were to have a significant payor that would default and do financial purposes that would be a bad debt expense, but most of our bad debt expense originates because of considered implicit price concessions due to authorizations or verification issues that we're working to lower, as Dan has talked about.

And also, on the patient side, since we do – and maybe this is getting a little too technical, Mike, but since we don't do credit checks on patients, the accounting standard requires that that is also considered an implicit price concession despite the fact that most patients when they don't pay, they don't pay because they don't have the financial wherewithal.

So that results in all of the – effectively, all of the amounts that were previously reported as bad expense getting reflected as a contra revenue amount..

Okay, so it sounds – it sounds like if you're modeling this, you're modeling that as a zero going forward, right, generally?.

That's correct..

Okay. All right. And then you compared kind of the cadence of how this year is likely to unfold to last year? And I guess I want to slightly press you guys on that. You know last year's second quarter you virtually doubled EBITDA from the first quarter of last year.

And obviously you guys called out that some of this product shortage issue is still kind of hanging over a bit at least. I guess, my question is, would you expect this year's second quarter to be north of the $10 million you guys reported a year-ago second quarter. Thanks..

Mike, you're a sneaky guy, right there..

I'm not trying to be sneaky..

Go ahead, Steve..

Go ahead..

Here's what I would tell you. We're not going to give specific quarter-to-quarter guidance. But what I would tell you is, if you think about our first quarter and some of the things that we outlined, several of those things we don't expect to repeat as we go into the second quarter.

We're not having another national meeting, although as impressive and as exciting as that was for everybody, we're not going to do that every quarter. So that's going to drive OpEx savings compared to the first quarter.

We're not going to – knock on wood, we're not going to continue to see any of these products shortages that drive higher acquisition costs and higher delivery costs. So that's going to be a catalyst for us. And we expect revenue to be higher, as we move forward, because our seasonally weak first quarter.

You know, weather was worse than expected as we talked about, far worse and with our concentration in the Northeast, we're – percentage-wise....

Disproportionately..

...disproportionately. Thank you, Dan, disproportionately affected probably the – many other companies. So we believe that while we won't say the second quarter is going to be x, we believe the second quarter will continue to go upward as will the third quarter, as will the fourth quarter. Okay..

So what. Hey, thank you. So last, I guess last, question..

You want to try that one again, Mike..

So, yes, so thank you. So last question....

Let me ask it other another way..

Last question, different subject. Dan, you've called out a bunch of different things that you guys are excited about, investing in the....

Yeah..

...sales team, revenue cycle management, provider relationship, strengthening the relationship with payors, et cetera, I guess, what are the two or three things that you feel like as you look out over the next couple two, three years, hey, if we really execute on – in this area, in this area, in this area, this thing can really go, I mean, what are the two or three areas...

(50:18).

No, it is four. And they're almost all equivalent in terms of their value creation..

Okay. (50:24).

Its sales force – its sales force effectiveness....

Yeah..

...its revenue cycle and bad debt, because we see opportunities to, as we move stuff to the front, we're going to drive efficiencies there.

We see opportunities to certainly drop our bad debt, payor relationships is a big one and it's a very important one as you – and as we've talked about, we've made a very concerted, disciplined and strategic effort to make sure we're well-positioned on that front. And then the fourth is procurement.

And we're – I just can't – at some point, Mike, I can probably share with you some shape or form around our Vision 2020, I think it'll be important for investors to really understand just how granular this is, how specific this is, how much time we spent with the help of Ares working on this that we feel like we know what the hell we're doing and then moreover there's another 12 or so initiatives that are not priority initiatives but we think could be incrementally valuable as well.

And, but those are the big four and those are the four we're going to be talking about internally or externally and at some point, Mike, we can probably roll out like just how specific this really is..

All right. Very good, guys. Thank you very much..

Thanks a lot, Mike..

Thanks..

Our next question comes from Dana Hambly of Stephens. Please proceed with your question..

Hey, thanks. This is Jacob Johnson on for Dana. Dan, just one big picture question. You've had some surprises since you joined BioScrip.

Are you still today encountering things that need to be fixed or do you think you're just now at the point of enhancing the platform that you have built?.

Yeah. I think we're, what I see is we're really at a point where we're enhancing the platform. One of the terms I think I took it out or I may have – but I think we're kind of at a, I don't like using blocking and tackling stage, because I think that seems really rudimentary.

But I think there's a real component of that that we just need to go out now and execute, like we talked about. I'm not dealing with the Cures legislation this year. I'm not dealing with the refinancing this year. I'm not dealing with the exit of – partial exit of UnitedHealthcare contract.

I'm not dealing with significant management changes and I'm not dealing with an integration. So, Jacob, when I look out, I mean I really feel like at this stage it's about execution around the things that are going to drive the greatest value for our stakeholders. And I don't see anything getting in the way.

I mean admittedly there's things that occur in the marketplace like product shortages but those are temporal in nature and I don't think they're going to last.

But, Jacob, I think we're at a point and again I look around the table here in this room and I just – l look around our top 50 people, we had a leadership team meeting in here with General Sattler about leadership development and leadership. And we've really got this just rock solid, air tight leadership team now.

That is everybody's oars in the water, they've been equitized, they've been bonus, and again if I look at Harriet and Danny, who are our two most recent upgrades, I mean they're absolutely best-in-class. And they're the kind of people like you're already seeing with Danny in some of the revenue cycle management that are going to accelerate things.

And the question is, for me, is like how do we continue to accelerate things across the board here and move things forward. And that's my – because I feel like we talked about a period of unequal time because of the changes that are occurring and we think we have such an amazing and unique opportunity here and how do we grasp that and drive that.

And so I think even I would share with you that some of our thinking has changed. We're like – we were in a place where we had to survive. I consider last year was kind of – as again as I lay out all the things we had to do, I think any one of those could have been a death sentence for the previous management team. I'll just be very candid with you.

And now we've kind of moved through those things and we're really forward looking right now and we've got – with the talent that's on this leadership team now, we have a lot of firepower to throw down on what we're trying to do..

Great. Thanks for all the color. Appreciate it..

Thank you, Jacob..

Thanks, Jacob..

Ladies and gentlemen, we've reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Dan Greenleaf for closing remarks..

Okay. Well, thank you all for joining the call today. We are pleased with the solid momentum and the execution of our plans. We look forward to updating you again on our continued progress in August when we announce our second quarter 2018 financial results..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..