Option Care Health, Inc. (OPCH) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2014 Financial Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Monday, March 2, 2015. I now like to turn the conference over to Lisa Wilson, Investor Relations for BioScrip. Please go ahead, ma’am.

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 at our website. Rick Smith, President and Chief Executive Officer; and Tom Pettit, Chief Operating Officer will host this morning’s call. The call may be accessed through our website at bioscrip.com. We would also like to point out that supplemental slides are available on the company’s website for download. 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 800-633-8284 in the U.S. and 402-977-9140 internationally, and entering access code 21762174. 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 this 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 release, and our annual and quarterly reports filed with the SEC. 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 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 press release issued this morning, which can be obtained from our website at bioscrip.com. And now, I would like to turn the call over to Rick Smith. Rick?

Thank you, Lisa. Good morning, everyone. I am in New York and the weather kept Tom in Eden Prairie, but essentially, we’ll work through essentially the different aspects for this call. Thank you for joining us today to discuss our fourth quarter and year-end 2014. During the year, we continued to take steps to position BioScrip as an infusion services leader. We drove double digit organic growth; renewed managed care agreements with national and regional payers; secured core therapy carve-outs; improved reimbursement performance; accelerated positive cash flow; and finally implemented cost productivity initiatives to strengthen EBITDA. At the same time, we faced and addressed several challenges resulting in non-recurring expenses that impacted our EBITDA performance during the year. We took proactive steps to position BioScrip for the future. This all goes back to the priorities we committed to in the beginning of 2014. These are to generate double digit revenue growth in Infusion Services; to generate increased operating cash flow; and to increase adjusted EBITDA and expand margins. As we look at our plan for 2015, I’m confident in the platform we are building. We entered 2015 as a leaner and more streamlined infusion services organization. We are a clinically respected provider with strong hospital and customer relationships, and a significant pipeline of opportunities. We believe our core infusion business continues to have double-digit growth potential growing core therapies which includes anti-infectives, autoimmune, cardiac care, transplant, and nutrition support remains our focus as we head into 2015. This means that we seek to reduce our exposure to lower margin therapies. We also review the strategic fit of some of our non-core businesses. Turning to our process improvement, we have moved the needle most in this area, both in cash collections and productivity. We have significantly increased our cash flow from continued operations from use of $25 million in the first quarter of 2014 to $1.7 million in cash generated from continued operations in the fourth quarter, an improvement of approximately $27 million over the three quarters. We have closed four underperforming locations and restructured to remove layers of infrastructure and put resources closer to customers. We have also aligned our management and sales teams to improve focus and accountability. Finally, at the end of 2014, we implemented the $15 million in cost savings initiatives that we discussed on our third quarter call. We have also identified an incremental $9 million in cost savings that we expect to realize in 2015 from productivity and other operating initiatives. This will bring the total expected annual gross savings to $24 million by the end of 2015. We also expect to invest up to $14 million in the business to support our double-digit organic growth and continued improvement in cash collection. This translates into a net savings of approximately $10 million. However, included in the $14 million is approximately $5 million that would be payable under an annual bonus plan. With these cost savings, we expect to target that 8% EBITDA margin in 2015 as we continue to move and execute our strategic plan. The bridge for these savings is shown on Slide 10 and our supplemental presentation found on our website, and Tom will talk about these activities in more detail shortly. In reviewing Q4 EBITDA expectations of $20 million, the infusion division reported adjusted pro forma EBITDA of $13.2 million. The difference was $3.2 million of non-recurring cost items and the balance was due to the delay of 2,000 nutrition patients that were awarded to us in some of - in the new contract renewals in Q4. However, they did not start in December as expected, but have started in January and will continue through Q1 in terms of that patient census coming on service with us. We also saw some muted seasonal impact in anti-infectives in some of our markets. Our challenges in mitigating responses impacted our 2014 quarterly results in the short term. These efforts were necessary to provide BioScrip with a stronger foundation for growth and will help ensure the long term success of the business. Some financial highlights that underscore the strength of the business include increasing consolidated revenue by 28% year-over-year to $984 million driven by organic growth in infusion therapies; delivering 32% year-over-year growth in the infusion business in full-year 2014 compared to 2013; and 13% growth in Q4 compared to the prior quarter; increasing gross profit by 7% compared to 2013; and completing the integration of HomeChoice and CarePoint acquisitions. Before I review the financial results, I’d like to address some recent organizational events. As you know, Hai Tran, BioScrip’s Chief Financial Officer will be leaving the company at the end of March to pursue other interests, we are working with an executive recruiting firm and the search process for our new CFO is well underway. We have identified several external candidates and we’ll keep you apprised with developments. As a result of this change, we will not be providing guidance at this time. We have provided estimated cost saving metrics and we are still targeting double-digit infusion growth along with expected continued improvement in operating cash flow. For a financial discussion, I will review the fourth quarter and our full-year 2014 financial results in more detail. Q4 consolidated revenue was $253.7 million, up 12.5% compared to the fourth quarter of 2013. Infusion Services revenue during the fourth quarter 2014 was $239 million, up 13% compared with the prior quarter. For the full year, Infusion Services segment revenue was $922.7 million, up 32.4% year-over-year. For the PBM Services segment, fourth quarter 2014 revenue was $14.2 million, up 5% compared to the prior year period. Full year revenue is $61.4 million in 2014, a decrease of $11.2 million compared to 2013. While we believe our PBM business has now stabilized and are pleased with its performance, we continue to view Infusion Services as our primary growth engine. During Q4, gross profit was $65.6 million, down year-over-year resulting from an overall decline in margins in the PBM business, the impact of therapy mix on the Infusion Services segment as well as other non-recurring factors. For the full year 2014, gross profit was $261.1 million compared with $243.6 million in 2013, a 7.2% year-over-year increase. In 2015, we expect to deliver gross margin improvements from improved therapy mix, delivery cost per unit savings, and nursing productivity programs and scheduling. In 2015, we are also evaluating the strategic fit of some of our lower margin and non-core businesses. SG&A in 2014 was $240 million, an increase of $30.2 million compared to the prior year. The increase in SG&A expenses was primarily due to the inclusion of CarePoint Partners, additional investment of resources to support reimbursement, and cash collections, legal fees associated with certain litigation matters and accounting professional fees. In the fourth quarter, we changed auditors, which resulted in approximately $8 million on accounting fees for the year, $5.8 million of which was incremental in our Q4 to our normalized audit fee. We would expect auditor fees for 2015 to be reduced by those activities associated with a full-year audit that will not recur. In addition, we recorded an incremental $31.7 million increase in allowance for bad debt in the fourth quarter, bringing the total bad debt expense in 2014 to $79.6 million. We believe this charge appropriately reserves older accounts receivables. At the end of Q3, we had reserved a 100% of our over 720 days aging. As of December 31, we have 100% of our over 360-day agings. We typically collect 20%, or up to 20% of our over 360. And as a result, we expect to turn part of this reserve into income in 2015, through cash collections. As Tom will discuss, you will see that, we have taken a number of important steps that we expect normalized bad debt to historical levels going forward. For full-year 2014, we had an adjusted EBITDA loss of $23 million, in the fourth quarter of 2014, adjusted EBITDA loss of $30.6 million. Pro forma consolidated adjusted EBITDA was $39.3 million for full-year 2014. Pro forma adjusted EBITDA for the Infusion Services segment was $62.9 million. Full-year pro forma consolidated adjusted EBITDA primarily includes the impact of $56 million in infusion services, pro forma adjustments, and $5.8 million of incremental audit fees that were incurred in the fourth quarter of 2014. Of that $31.5 million in Q4 pro forma infusion services adjustment, $32.3 million reflects bad debt and the rest relates to site closures incremental impact of reduction in force and contractual obligations offset by a benefit on contingent consideration reserves that were established in connection with the 2013 acquisitions. With that, I would like to the turn the call over to Tom Pettit, our Chief Operating Officer to provide additional detail on our cost and cash initiatives in 2014, and our plan for 2015. Tom?

Thanks, Rick. Let me begin by highlighting some of the key operating improvements we delivered in 2014. To give you better insights, I’m providing more detail than usual on our cash collection metrics. We are collecting more of every dollar build and are doing it faster. When we started 2014, 26% of pending claims awaited billing for more than 14 days. By December 2014, our process improvements had cut that down to a 11%. We believe these and other improvements in speed and quality of intake will allow us to reduce bad debt and generate higher operating cash flow to fund the business. We’re making progress on our cash collections. Our cash collected per day was up 43% from the beginning of 2014 to the end of 2014, or $1.2 million per day to $4 million per day in the fourth quarter. Our quarterly average cash collected grew from $70 million in the first quarter to $83 million in the fourth quarter. In the fourth quarter, we implemented various initiatives resulting in realized cost savings of $2.9 million during the quarter and $15 million on an annualized basis. Of those, our reduction in force and facility closures contributed $2.1 million in savings in the fourth quarter, or $8.4 million annualized. We closed four unprofitable branches as part of the restructuring, enabling us to focus company resources on markets with higher returns. In 2015, our planned cost reduction initiatives are expected to deliver a total of $24 million in gross savings. One-third of the overall savings will come from the reduction in force and site closures that I just discussed. We expect approximately 20% will come from our supply chain programs. Those will primarily be driven by improvement in product pricing. Another 20% will be driven by savings in controllable expenses. We implemented various cost controls focused on travel expenses, professional services, office supplies, and telecommunications expenses, among others. The balance of the $24 million will come from productivity and delivery, nursing and pharmacy areas. Nursing productivity opportunities include preferred agency pricing, increased staffing utilization, and improved scheduling. We plan to reduce delivery costs through utilization of the most cost effective modes of delivery, including shifting from carriers to employee drivers and small parcel delivery. And we plan to achieve increased pharmacy staffing productivity driven by working ahead on recurring patient orders, optimizing supplies utilization, and improving utilization versus benchmark standards. Importantly, the reorganization we completed in 2014 of our sales and marketing organization will strengthen our top line organic growth capabilities. Our sales organization is now focused on all call points to capture more opportunities. They are driving profitability through an increased focus on our core therapies, which include anti-infectives, autoimmune, cardiac care, transplant and nutrition support. Additionally, we remain focused on commercial payer pull-through. With an integrated and operationally aligned sales team, we will continue to pursue a strong pipeline of new hospital, physician, and payer relationships in 2015. We also reorganized our operations, reimbursement, and clinical support teams removing layers and putting resources closer to customers, and we will continue to regionalize and centralize operations as appropriate. This simplification is already speeding decision-making and improving collaboration and focus. As Rick mentioned, we expect to invest $14 million into the business to support our double-digit organic growth, which translates into net savings of approximately $10 million. These investments are expected in the areas of sales and imbursement resources, employee health benefits, employee merit increases, and bonus plan. Over the last several years, BioScrip’s goal has been to build an infusion services leader that is known for operational excellence. We digested several acquisitions on disparate platforms. In 2014, we achieved a major milestone to become an integrated company with a common playbook and systems. However, there is still more work to do. In 2015, we will continue to standardize our processes and create a lean culture with stronger execution capabilities. Our goal is to be the post-acute care leader, and we believe the roadmap we are executing will bring us another step closure. I would now like to turn the call back over to Rick. Rick?

Thank you, Tom. I think, operator, we’ll take questions.

Thank you. [Operator Instructions] Our first question is coming from Brooks O’Neil with Dougherty & Company. Please go ahead. Brooks O’Neil: Good morning. I have a couple of questions. So first Rick, I guess, if I heard you correctly, you said somewhere in the range of $13 million of adjusted EBITDA from Infusion segment. If I’m looking at the year that is meaningfully lower than the results recorded in any of the first three quarters, despite the fact that typically the fourth quarter is seasonally stronger than earlier in the year, so could you help us to understand, obviously you commented about the nutrition patients that didn’t come in, but if I’m doing the math properly, it looks like the business fell off considerably relative to the first three quarters -- just need to understand that?

Yes, we saw some, as I mentioned, we saw some muted census levels and seasonality in some of our markets with - on the anti-infective side just the way that the seasons, November was very strong, December seemed essentially the way it laid out, it was just essentially some of the markets were light relative to that that additional seasonal kick. We’ve seen it essentially come back in the first part of this year. And we actually saw our strongest quarter on anti-infectives in Q3. And so, I think just the way that the seasonality was kicking in, we didn’t see it in all markets in Q4 like we had in previous years. Brooks O’Neil: Okay. And then was there disproportionate mix of the lower margin infusion therapies in Q4 as well or…?

No, well, those - the chronic business has still continued to come through. I think that the - and then the delay on the nutritional patients in December impacted the - our expectations for the quarter as well. Brooks O’Neil: Okay. And then I saw that you put out an 8-K relative to some restructuring of, at least, part of the debt. Could you just talk a little bit about what exactly is going on there, and where do you feel you stand relative to the debt and the lenders right now?

Yes, we actually just continued the maximum leverage covenants that we had in place in 2014 through the first quarter of 2016, just given the noise in 2014. And so, we’re in good shape with the - we’re in good shape with the banks. I think just to continue the opportunity to stay focused on executing the plan and building the business. Brooks O’Neil: And just what exactly is the implication of the - I think the reduction of that covenant to trip from 25% to 5%, what is that?

That is nothing. Again, that’s - when the covenants essentially go into place when - if more than 5% is borrowed on the line, beginning in Q2. Brooks O’Neil: Okay. And then lastly, I think, I heard you say Rick, 8% adjusted EBITDA margin is kind of the goal at this point, could you just, I’m sorry…

I’m sorry, go ahead, Brooks. Brooks O’Neil: Well, I was just trying to be sure I understood exactly how to sort of think about that?

Well, we said all along that our first milestone is getting the 8% to 10% for the infusion division recognizing that our competitors are in that 8% to 12%, depending on mix at a national level. And so, we believe that 2014, we had extensive amount of higher chronic mix cost structure investments essentially getting our AR and reimbursement areas in shape and fully staffed. We expect with the cost cuts we took out at the end of the year, the $15 million plus the incremental $9 million, notwithstanding the investments, our objective is essentially to approach the - that 8% lower range this year and continue to build from there. Brooks O’Neil: Okay. And then I guess just one another question, I was, it looked to me like the corporate expense was high obviously you call, at least, one item, which was higher audit fees, but were there -- I’m trying to sort of frame higher than expected G&A expenses relative to the cost savings you are calling out?

Yes, just - we don’t expect it to recur. We saw in Q4 a final true up of the employee benefits health costs essentially with true ups and some workers comp that we trued up those reserves as well in Q4. So, we don’t expect, as we said on the - for 2015, our audit fees, we believe will bounce at more normalized levels given the level of first-year audit extensive work that our auditor performed for this year end. And then, we believe that there is also some additional cost savings. We had elevated levels of legal expenses in 2014, just cleaning up some other things as well that we expect to come down in 2015. Brooks O’Neil: Okay. Thank you very much.

Our next question comes from David MacDonald with SunTrust. Please go ahead.

Hey, good morning, guys.

Hi, Dave.

Rick a couple of questions, is there anything else in terms of portfolio calling, I mean, can you give us a sense of, is there another batch of facilities that are kind of around breakeven-ish that could, there could be further cleanup and further closures, or is this pretty much it?

No, this is it. I think that one thing that I would point out, I think that is we - as we saw the AR from a number of the merged sites cause us additional write-offs in provisions in 2014 are - there are essentially five merged sites from the CarePoint’s acquisition that essentially Q4 2013 run rate was about $7.9 million in 2013 Q4 annualized run rate. They were all challenged very much in 2014, as a result of the cleanups and turnover and some disruption. And so we saw those actually perform at about a $5 million loss in 2014. One of those we closed that we mentioned and because just the - the viability was not there, we’re expecting a strong turnaround potentially essentially close to $11 million in EBITDA reversal relative to those markets. And so that also is a drag. We believe these markets are definitely viable. We’ve got a new area Vice President over these markets someone that essentially came from a competitor that knows these markets well. We also just installed within the last 90 days two new general managers also from a competitor. So we’ve got, I think an upgrade in leadership and upgrade in management, and this business builds back very quickly when you focus on it. So we believe that, that will be a strong turnaround and contributor to not only revenue growth, but also margin and EBITDA contribution in 2015.

Okay. So Rick, just so I’m clear, did you say the four underperforming facilities lost $5 million in 2014?

They did, yes.

Okay. And you have, I assume other locations in these markets that you can soak up that - can you just walk me again through how that…

I’m sorry the closed facilities - the closed facilities lost about $1 million. Those again absorbed into close by facilities. There’s other facilities in the merged markets that lost $5 million that essentially are still open and we expect to have a rebound year in 2015.

Okay. And can you just walk us through the steps that are being taken with other facilities that lost the $5 million that are going to lead to that profitability swing?

Yes. So it’s really just restoring, well, first we changed the leadership over. We also have invested in additional sales team that had turned over during the year, and essentially just regaining outreach to referral sources to rebuild the revenue momentum, the cash is essentially cleaned up. We moved the reimbursement to another reimbursement site and essentially have a new AVP over the area that has extensive knowledge and experience and a successful track record in running this particular area.

So, Rick, there is no issues with contracting or anything in those markets, it sounds like there just was not enough volume to leverage it properly, is that correct?

It was turnover of employees that essentially caused disruption during 2014 that we were chasing. But essentially we’ve stabilized the markets, we’ve stabilized the leadership and the employee base and are now starting to essentially build to a fresh start for 2015.

Okay. And then Rick, can we just get a little more detail on, it sounds like the focus on moving towards higher margin therapies has been in place for a while here. Can you talk about what gives you confidence that 2015 is the year that that starts to grab? And can you talk about what you can do without frankly, creating submissions with the referral source, I mean, obviously you prefer the high margin patients, but in a lot of cases have to take the lower margins to lower margin patients to make sure your referral source is happy. So can you just kind of walk us through that a little bit?

Yeah, I think we’ve been servicing these patients at the local levels on the chronic side. And we have the ability to centralize the management of them, and I think increase the service levels, as well as the accuracy in terms of managing this business. I think that our focus has always been to grow the core, we’ve grown the core significantly. Our offset was the fact that Hep C and the new drugs came out in 2014 early on that was a build that continued. So we also saw some exchange lives that were not as profitable in terms of some of that payer mix. And so we have gone back and gotten some price increases with some of this business. We also have identified opportunities to align with other providers to go to market together where their cost structure enables them to service those lower margin chronic therapies as part of their core competency and then ours essentially focused on the complex acute patients.

Okay. Just a couple of quick questions on cash flow, do you expect cash flow to continue to improve sequentially each quarter throughout 2015 and will there be an aging table in the 10-K?

There will be an aging table in the 10-K. We do expect our cash flow to improve sequentially in 2015. We expect to take as much as 5 to 10 additional days sales outstanding out of our DSO through cash collections. And on average that’s about $2.5 million in cash per day that we would expect to continue to improve in terms of our cash performance.

5 to 10 days off of where you exited 2014, Rick?

Yes.

Okay. And then, just last question. I know you’re not providing 2015 guidance but if you look at the delayed nutrition patients that it sounds like are now up and running, and I assume the anti-infective seasonality kind of works itself through, can you give us any sense of - I mean, it’s a little bit difficult to tell what the run-rate of the business was coming out of the fourth quarter, can you give us any sense in terms of the run-rate in January even or kind of what’s a legitimate jumping off point here?

Yes, I’d say, our view is that essentially the $39.3 million for the year plus essentially so $40 million plus the $15 million in cost cuts is I think the jumping off point. The $9 million we have a high confidence and in terms of getting after it, but I think those two items are the jumping off point total company-wise. The $62.7 million in the pro forma for the year, we believe is the jumping off point for the infusion division as well, added to that the cost cut.

So the $39 million is total company adjusted EBITDA.

Right.

And then $10 million from cost cutting, and then you…

Yes, essentially the $15 million.

And well, you guys, I mean, when I think about P&L impact, can you give us a sense, was any of that captured in the fourth quarter? Is it truly a full incremental $15 million that kind of - or does that - those cost cuts get phased in where the $15 million really turns out being an annual impact of say $8 million to $10 million? Is $15 million a truly - $15 million is a truly fully realizable number in…?

Yes, $15 million is hard number we laid out in terms of the sources of that, but $15 million is the full year number. The $9 million essentially - incremental $9 million will be realized throughout the year through the initiative that Tom had outlined.

So you feel like…

You jump to Page 10 of the supplemental it kind of lays out the gross savings of $24 million, $15 million that were implemented by the end of the year, $9 million incremental and then the offset by the investments is the $10 million then.

Okay, but just again, just to recap, $39 million and $15 million, that $54 million is pretty firm, you’ve got another $9 million that’s a little bit squishier, but some portion of that will be realized in 2015 and then little bit of growth factored in there, is that all relatively fair, Rick?

Yes.

Okay. Thanks very much.

All right. Thank you.

Our next question comes from Brian Tanquilut with Jefferies & Company. Please go ahead.

So this is Jason in for Brian.

Hi, Jason.

One with the cost savings initiatives and some in corporate overhead, what’s the - how should we think about the right size for corporate overhead and when do you think you might get there?

Yes, we think that there is additional cost savings that can be taken out of corporate. I think that with a lot of what we’ve gone through in terms of streamlining our activities, we believe that as part of our goals for 2015 is to take few more million dollars at a minimum out of corporate.

And do you have targeted areas that you’re focused on there or just a little more granularity on where those savings might come from?

We’ve got a list that we’re targeting. I think there is some efficiencies through automation we’ve implemented, that we believe can enable us to drive more efficiencies in cost reductions. We’ve also been renegotiating a number of indirect contracts in supply agreements that we believe we’ll have savings for us this year as well.

Okay. That’s helpful. And last quarter you talked about 10% to 12% margins in the infusion business as kind of the target. Is that still the case and is that achievable in 2015 given the mix that you discussed?

As we stated, we said, we’re looking to approach it in the lower end of 8% to 10% range. We believe that through the longer term, the initiatives that we’ve outlined in terms of the core mix and also getting our cost structure lower that we believe that we can essentially reach those 10% to 12% in longer term.

Okay. And is longer term, is that 2016 or is it three to five year?

No, I think it’s in the 2016 area.

Okay.

Yes.

And as far as - have you seen any impact from the weather in Q1 that’s - or how should we think about kind of the seasonality from Q1 and then once you kind of hit a higher run rate through the rest of the year?

We’ve seen some branches that have been closed for half days or had to shut early servicing patients and start the next day or have delayed starts. And so I think just like, it’s not necessarily where you’d expected our Boston area branches have maintained a 100% up time notwithstanding the snow. It’s been more in the lower South, Mid-Atlantic areas where the areas are not necessarily prepared to deal with some of that extreme weather. But they’ve been - we’ve been opening it up for every day, and just adjusting and working through the different areas.

Okay. And last one for me - so what triggered the change in the AR for your reserve to decide that 365 days is the right number versus previously 720?

I think we just - it was just the year-end essentially analysis of the reserve and essentially where we look to establish coverage for the aged receivables.

Okay. And so that was just a matter of conservatism or just wanting to make sure that you had it all captured or - because it sounds like 20% historically being recovered, that sounds like a pretty conservative assumption for the 365 days?

I think we - part of our frustration this year is - as we’ve been chasing our aging buckets each quarter, we’ve been - we had been improving our cash collections relative to on the front-end are under 180 days in terms of accounts receivable has continued to show progress. Our over 180 is really where we’ve been chasing. We’ve talked before in terms of staffing and using outside agencies and I think we had been frustrated just due to the aging buckets continue to grow and roll essentially each quarter due to some staffing issues and other items. And so I think as we looked at the year-end, we thought it was appropriate based on the age of the older buckets to establish this larger reserve.

Okay. Thanks.

Our next question comes from David Heller with Cloud Gate Capital. Please go ahead.

Hey, guys. How you’re doing?

Good morning, David.

I just want to make sure I fully understand how to think about 2015. So we have this $39.2 million, which is basically your pro forma number from 2014. Then, Rick, you kept saying, $15 million to add to that, but when I look at Slide 10, I think you’re only supposed to add $10 million. On top of that, I want to understand on the projected incremental growth numbers, is some of that - some of it sounds like it’s contingent on hitting certain hurdles but is some of that just sort of normal costs associated with incremental margins and as you walk through this, I know this is kind of a long question, but can you talk about this - what kind of margins we should think about in incremental growth and did you include those - when we think about 2015, should we think on top of the numbers I just identified, you should be getting some pickup from those underperforming sites you discussed, just if you could give a little more detail on what’s included on what, I think it would be helpful?

Yes. So I think…

…and then I have a follow-up?

Okay. So the $15 million is hard, so the $39 million plus the $15 million, that’s hard, okay.

Okay.

So that and then the incremental investments essentially the $9 million, those are programs, so the $15 million is hard, those are locked in savings, hard costs, body FTEs left the organization as did their benefits and other incremental costs. And then we have other costs that we’ve outlined there in terms of controllable expenses or supply chain nursing and delivery. So those all are beginning of the year strong numbers additive to our pro forma run rate. The $9 million are through the initiatives that Tom had outlined also on Slide 10 of that page, so that’s the incremental $24 million. Some of that $9 million essentially will come in over time, but our teams are working on it, and we’ve got multiple areas driving reductions in additional nursing and delivery costs and then incremental supply chain initiatives that we expect to essentially get there. And so, in the 2014, as I said, there is about $5 million dependent payable on achievement of a bonus plan, which is essentially a self-funding structure, but essentially we laid it out there. The other incremental there’s about $2 million of employee health benefit step-up that we took into account essentially that is in the run rate, and then the merit increase will come essentially later in the year. So those are essentially hard. The sales and reimbursement resources will be driving from incremental growth. When you ask about the - what should you expect in terms of margin on the growth, we are targeting essentially our core therapies. And so that, that would be typically a higher margin therapy in the 12% to 14% EBITDA contribution rate.

Okay, that’s helpful. And then did you include anywhere in those numbers you had mentioned there were the underperforming sites that cost you $4 million. Is any improvement on that baked into any of the numbers we just discussed, or that improvement be incremental?

The improvement would be incremental.

Got it. And then two quick ones - sorry, two more quick ones. A follow-up to the last question, you talked about the accounts receivable and just being frustrated with the older collections. Did the new auditors, how did they treat auditors? How conservative did they want you to be? Did they consider this just kind of even though we thought last quarter was the kitchen sink, are they saying this is it? Can you talk a little bit about the give and take with the new auditors?

The new auditors did extensive amount of testing, it was clearly our books. And so we believe in evaluating our - the agings at the end of the year and the balance sheet that this was the appropriate reserve given the age and essentially wanting to finally get everything over 360, finally essentially fully reserved and essentially get those behind us once and for all.

And last one big picture-wise, what do you think about all the M&A activity that we keep reading about in the space recently?

I think we started this platform, we ran very hard, we built by acquisitions. We bought some nice companies. All the companies we bought were high-quality companies. We ran into some high-level disruption in these markets that in terms of the merged markets that really caused us some issues. Our focus - the first-half of this year is to focus on our cash flow, execute on our deliverables, but I think that we believe that we can take advantage of this activity sometime down the road as well.

Great. Thanks, guys.

All right. Thank you.

Our next question comes from Mike Petusky with Barrington Research. Please go ahead.

Good morning. Hey, Rick, I just want to kind of draw a couple of things out there, and because lot of numbers are being kind thrown around, but I feel like the breakdown is fairly simple if I’m understand it right. I mean, basically 8% EBITDA segment margins on about $1 of infusion revenue, $80 million, about - round numbers, about $5 million on $50 million of PBM revenue, another $5 million, $85 million, and then $25 million to $30 million of corporate overhead, I mean, is that kind of, I know you are not giving guidance, but isn’t that roughly the math?

Well, we are not giving guidance. I think that, as we stated we’re - we’ve been able to generate double-digit organic growth on our revenue. We stated that we maintain higher levels or elevated levels of expenses to finish the integration last year. We said that our minimum threshold was to get into the 8% to 10%, as the first milestone. We believe that the cost we took out in - as of the beginning of this year and the incremental programs that Tom outlined, notwithstanding the investments will essentially get us to that lower range based on what we can expect of ourselves.

Right. So in terms of, let me just jump over. I know it’s non-core, but the PBM business, I mean, the revenues were up a little bit, the margins kind of held. I mean, is there anything in that business that as you look out changes - that changes either the margin profile or the revenue profile of that business going forward?

We - as we stated before the expectations was that it would be stable, and I think our expectations for 2015 would be the same. We still view it as non-core. And I think that our overall objective is to generate levels of cash flow from any source, clearly our operations, but other non-core areas to delever the business. So we’re happy to see that it stabilized. We’re happy to see that some of the noise around it is going away. We’ll lap the downdraft from 2013 to2014, in 2015, and look to take advantage of any situation to essentially continue to delever the balance sheet.

Okay. And then a couple more quick ones. I think if you gave it, I didn’t catch it. Did you guys give a chronic core mix for the quarter?

We’re about 37% before Hep C on the core. And so and the balance - we’ve got blood products and then that take up the fair amount of the percentage of revenue. But that essentially is how it’s breaking out.

Okay. So then you guys have said longer term that you think you can get to 40% or better. I mean, what kind of improvement are you hoping for in 2015, I mean, a couple of hundred basis points? What are you hoping for?

Yes, we believe that we can get over the 40% range. I think that we’ve been chasing it hard, I think if we can essentially look to adjust some of the chronic mix in 2015, then I think we would be able to pop over the 40% range at - by - during 2015.

Okay. And then just last question, I mean historically, kind of, I guess making this past fourth quarter kind of a kitchen sink type exception. I mean, historically kind of you start slow in Q1, and then build sequentially, both in terms of revs and profitability. I mean, is that what you are looking for in 2015?

It builds the same way. We - as I said, it was something in terms of a muted where Q3 and some of our markets actually was the strongest seasonality, and I think just the way that schedules of surgeries and other activities were occurring. And so we’ve got some initiatives with hospitals and payers this year that we talked about before that we believe should enable us to continue to grow our revenue line very strong this year.

Okay. All right. Thank you.

Thank you.

Our next question comes from Dana Hambly with Stephens. Please go ahead.

Hey, thanks, good morning. Rick, I think you said the 37% core was before Hep C?

Yes.

Okay. That Hep C was about 2% in the third quarter, I think that sound about right for the fourth quarter?

It does.

Okay. And then…

It’s a little lower….

Maybe a little lower?

Yes.

Okay. All right. That’s helpful. On the aged receivable, so above 360 days is a 100%, did you take up the reserve as well on the plus 180 and the plus 270, or did that change?

Yes, we did that as well. So we’re up to 80% on the 271 to 365. So we have - we spread it to our older buckets, but so that also was increasing.

And that was part of the $31 million?

That was part of the $31 million, yes.

Okay.

So we essentially looked at the all the over 180 reserve bucket just to - again to look to get this behind us.

Got it. All right, and then I guess, that would probably to ask the question directly. I mean, is this it, on the big bad debt adjustments, do you think?

So we expect it to be so. Yes, so as I said, we put a lot of focus and Tom covered it as well in terms of our front-end, our cash. We stated that we’ve historically seen the ability to collect ARs as all this 700 days and so we would expect to get some strong cash collections, relatively strong cash collections on the aged AR in 2015, and that’s our focus is to get this back.

Okay. All right, and on the new builds going out, I think we have been looking at bad debt on the new builds around 2.5% that still sound about right?

Yeah, we’re still on that range. We’re seeing a 100% on our 60-day lag and I think we can do better than that, and it’s part of our objectives in our MDOs for 2015.

Okay. All right, and on the nutrition patients could you just - I guess, I hadn’t heard that before, I guess, I wasn’t paying attention but could you just talk about - I know they pushed into January. Did you quantify what the drag was on the fourth quarter and just how big that program is?

Well, it’s very big. I mean, we expected a more orderly transition but the competitor that was transitioning them did not follow direction. So we had to scramble all of our resources, field and in take to support these patients, and get them lined up for their medicine. So it was 2,000 patients so nutritional support, it was pretty - I would say it was a fair amount of revenue for the Q4, and something that we expect to build on in 2015 beginning with January.

Okay. But you feel that’s - was that pretty much in place starting in January or are you still working through?

Oh, yes, now we - no, we did all the work. I mean, part of our disruption also was we incurred the cost of reaching to those 2,000 patients to line them up for service and so essentially beginning - some came on in late December but the bulk started coming on beginning January 2, through all of January and has continued through February.

Okay. All right.

Yes.

On the - you still had about $3 million in integration costs on the quarter, but are we done with that at this point?

Yes.

All right, so that - all right, we’ll see no more of that.

We’re looking for - yes, we’re looking for clean P&L in 2015.

Okay. Excellent. And then last one, on just - just generally speaking, are you seeing any commercial pricing pressures or are you involved in any new types of payment models that you’re experimenting with, just anything on the pricing side?

Yes, we have not seen any pressure. I mean, clearly the only pressure that continues in the industry is on the blood products, IVIG primarily. But that - what we’ve seen is the new contracts that we signed, essentially the site of service initiatives, communication has gone out to physicians and hospitals to move patients out of the outpatient center into the home on those chronic therapies and so we expect to be a beneficiary of that given our preferred status in 2015. I think on the core therapies we’ve actually continued to see stabilization there. I think there is a lot of talk out there regarding bundled payments, regarding other types of structures but I think we’re a good year or two away from seeing any level of that coming into our industry.

All right. Thanks very much.

All right, thank you.

Mr. Smith. I’ll now turn the call back to you.

Okay. Great. Thank you everyone for your time today. I appreciate it, and have a great day. Thank you.