Option Care Health Inc (OPCH) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BioScrip 2013 Fourth Quarter Year End 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 Thursday, February 27, 2014.

I would now like to turn the conference over to Lisa Wilson, Investor Relations for BioScrip. Please go ahead.

Good morning and thank you for joining us today. By now you should have received a copy of our press release issued yesterday after the close of market. If you have not received it, you may access it through the Investor Relations section at our website. Rick Smith, President and Chief Executive Officer and Hai Tran, Chief Financial Officer, will host this morning's call.

The call may be accessed through our website at bioscrip.com. A replay will be available shortly after the call and will remain available for a period of two weeks. Interested parties can access the replay by dialing 800-633-8284 in US and 402-977-9140 internationally and entering access code 21708103. An audio webcast will also be available for 30 days following the call under the Investor Relations section of the BioScrip website at bioscrip.com.

Before we get started, I would like to remind everyone that any forward-looking statements made during the call are protected under the Safe Harbor of the Private Securities Litigation and Reform Act. Such forward-looking statements are based upon current expectations and there could 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 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 yesterday after the close of market.

And now I would like to turn the call over to Rick Smith. Rick?

Thank you, Lisa. Good morning, everyone and thank you for joining us as we discuss our earnings for the fourth quarter and full year 2013.

We concluded 2013 with solid momentum that reflects the power of our infusion platform and the progress we've made in growing our infusion business. On a year-over-year basis consolidated revenues increased by 34.7% for the fourth quarter and 27.1% for the full year.

Following our recent acquisitions, our team is moving forward as one. We came together in the fourth quarter to do what we do best. We focus on taking great clinical care of our patients and providing referral sources with the highest levels of customer service possible. With a united team, we are now focused on executing our programs as we move into 2014.

As you know, we've been intently focused on building a leadership position in the home infusion industry. From a revenue perspective we believe that BioScrip is now the largest independent provider of infusion services with the third largest platform in the industry overall. Over the past year we have more than doubled our footprint with 42 acquired pharmacies and eight de novo pharmacies we added in 2013 that substantially increased our market presence in key growth areas and positioned us well to capture additional market share. While we still have markets we may expand to at a later day, our current footprint 81 infusion locations are in markets that we estimate utilize higher levels of post acute services.

Overall the infusion business' performance during the quarter was solid with seasonal [adapt] rate exceeding our expectation. Through the contributions of our acquisitions and our ongoing operating efforts, we are pleased to report a healthy year-over-year adjusted EBITDA and revenue growth for the fourth quarter.

Our infusion platform generated $19.5 million in adjusted EBITA. Sequential revenues increased by $37.2 million led by growth of $17 million in core therapy. We believe these results further underscore our momentum. As of year-end 2013, nearly 37% of our revenues from the quarter came from core infusion therapy, up from 35% last quarter and nearly double what it was in 2012. Our strong organic growth levels were driven by a 20% year-over-year growth in our core therapy. We believe that the core therapy growth will continue as the increase of patient census is being driven by strong clinical capability and our local, regional and national relationships.

The performance of our infusion services segment this quarter also includes the full quarter's contribution from CarePoint of which core therapy is our primary component and demonstrates that our efforts are delivering results. During the quarter, we made additional progress on the integration of CarePoint and successfully completed the integration of HomeChoice. As previously indicated, for all of our acquisitions, HomeChoice is now delivering EBITDA margins between 12% and 14%.

As we enter 2014, our infusion growth strategy will continue to accelerate. We provided care for over 114,000 patients in Q4 which is 42,000 more patients than year ago.

We believe that we'll see increased core revenue and adjusted EBITDA contributions from our legacy locations, our de novo locations are all open and servicing patients, our acquisitions are settling in and establishing a foundation from which we believe we can drive strong organic growth. Our critical objective this year is to focus our team on generating positive cash flow from operations. We are making good progress on our reimbursement and cash collection plan. In fact the 2014 field and corporate bonus programs have a high percentage rating on cash collection levels. We are also focused on targeting areas of process improvement and creating operating leverage from a much larger platform.

On February 1, we reached an agreement to sell home health to LHC Group, a national provider of post-acute home health services. The sale is on target to close on March 31. We appreciate the employees of our home health division and the contribution they have brought to BioScrip. We believe that this transaction will allow them to continue to flourish under the LHC Group ownership. We intend to use the proceeds of the sale to pay down debt. In addition, we conducted a successful debt refinancing in conjunction with the home health announcement, which when taken together, greatly enhance our financial flexibility and allows us to focus on our priorities for 2014.

With respect to our PBM services segment, revenues were down this quarter due to issues we discussed previously. Now we are now committed to managing through the headwinds that continue to affect this segment. As we move forward, we will take additional appropriate steps to stabilize revenue, support growth and evaluate its longer-term ability to contribute.

Before I turn the call over to Hai for more details on our financial results, I'd say that I am excited about the progress we've made this year and eager to continue building on our momentum in 2014, we now have the market presence and resources to truly be a leader in infusion with the clinical programs and infrastructure to deliver best-in-class solution for our payers, patients and referral sources. Going forward, we intend to continue implementing and growing our transitional care management model while maintaining an appropriate cost discipline. We believe all of our efforts this past year will position us to create meaningful shareholder value.

With that I'll turn it over to Hai to give our results.

Thank you, Rick and good morning. As a reminder, before we review our fourth-quarter financial performance we have changed the operating reportable segments of the Company to infusion services, home health services and PBM services. In addition to new segment reporting the financial statements reflect continued versus discontinued operations classifications for all periods presented. In reviewing our financial performance we will focus primarily on the continuing operations.

We also reported adjusted earnings per diluted share which excludes the same elements in calculating adjusted EBITDA and also take into account the impact of acquisition related intangible amortization as noted in our press release.

With that for the fourth quarter of 2013, we reported revenues from continuing operations of $243.5 million compared to $180.7 million in the prior-year period, an increase of $62.8 million or 34.7%.

The infusion services segment revenue increased 56.3%, primarily driven by the addition of HomeChoice and CarePoint as well as double-digit organic growth which excludes these acquisitions. The strong growth in infusion revenue was offset by a 1.5% revenue decline in the home health services segment and a 49.6% decrease in revenue from the prior year in the PBM services segment.

Gross profit for continuing operations was $74.9 million compared to $60.4 million for the same period in 2012, an increase of $14.5 million or 24%. Gross profit as a percentage of revenue increased to 30.8% from 33.4% in the fourth quarter of 2012. The increase in gross profit was due to growth in revenue in infusion services segment offset by declines in our non-core segments.

Infusion gross profit margin percentage increased by 60 basis points from the fourth quarter of 2012 to the fourth quarter of 2013. However, consolidated gross profit margin percentage decreased, primarily due to the lower gross profit margins in our non-core segments as well as growth of lower margin infusion services revenue as a percent of total revenue versus the higher margin non-core segment revenues.

SG&A for the fourth quarter was $65.9 million, a $16.8 million increase over the prior year. SG&A for the fourth quarter as a percentage of total revenue was 27% which is 10 basis points lower than the prior-year period. The increase in SG&A expense was primarily due to the inclusion of HomeChoice and CarePoint and certain costs associated with supporting the growth and volume from our business.

Total operating expense for the fourth quarter of 2013 was $79.7 million. Operating expenses for Q4 of 2013 included $3.1 million of acquisition and integration expense and $4.3 million of restructuring and other expense. Operating expenses for the fourth quarter of 2013 also include a change in fair value of contingent consideration of $5.4 million related to our infusion acquisition. It also included a $5.6 million increase in the bad debt provision related to the aging of the receivables.

Interest expense in the fourth quarter of 2012 increased to $8 million, compared to $6.4 million in the prior year. The Company reported a loss from continuing operations net of income taxes of $15.4 million for the quarter compared to a net loss of $1.4 million in the prior year. Net income from discontinued operations, net of income taxes was $3.2 million in fourth quarter of 2013 compared to income of $8.6 million in the fourth quarter of 2012.

Consolidated net loss for the quarter was $18.6 million or $0.28 per basic and diluted share compared to consolidated net income of $7.2 million or $0.12 per basic and diluted share for the same period in 2012.

BioScrip reported adjusted EBITDA from continuing operations of $13 million, compared to $12.1 million in the prior year. Adjusted EBITDA from the infusion services segment increased by $8.5 million or 76.7% as compared to the prior year. This was offset by continued weakness in the non-core segment which delivered approximately $800,000 less than adjusted EBITDA than we anticipated when we provided our outlook in November.

Adjusted EBITDA also included a $5.4 million favorable adjustment to the fair value contingent consideration relating to our infusion acquisition. Adjusted EBITDA also included a $5.6 million increase in the bad debt provision. Adjusted EBITDA was further impacted by the timing of cost reductions throughout the fourth quarter and $300,000 in recruiting expenses related to the expansion of the Board.

On schedule five of the press release, you can also see the Company reported adjusted loss per share from continuing operations of $0.02 per basic and diluted share in Q4 of 2013 compared to adjusted earnings per share from continuing operations of $0.04 per basic and diluted share in Q4 of 2012.

Turning to cash flows and liquidity, for the 12 months ended December 31, 2013 the Company used $38.5 million in net cash from continuing operating activities, compared to cash provided of $49.9 million in the 12 months of 2012, a decrease of $88.4 million. The increase in cash used in operating activities is primarily due to the loss from continuing operations net income taxes of $53.6 million, an increase in net accounts receivables of $58.2 million as a result of the acquisitions and organic growth and a steady cash generation in 2012 due to reflection of accounts receivables retained after the pharmacy services asset sales net of accounts payable related to those businesses.

As of December 31, 2013, the Company's cash balance was $1 million and it had $435.6 million of outstanding debt. Subsequent to year-end, BioScrip completed a bond offering issuing $200 million and 8.875% Senior Notes due 2021. The net proceeds of $194.5 million were used to pay down amounts outstanding under the Company's revolving credit facility and a portion of its term loan B. On February 1, 2014, the Company entered into a stock purchase agreement to sell its home health business for $60 million in cash. The transaction, subject to customary closing conditions, is expected to close on March 31, 2014. Net proceeds from the sale are expected to be used to pay down outstanding debt.

As indicated in our earnings release, financial performance in 2014 is expected to be driven by the following. Infusion services segment revenue is expected to grow by over 20% driven by the full-year impact of the acquisition and double digit organic revenue growth for 2014. This outlook takes into account the revenue dissynergies that typically rise in the first year after acquiring an infusion business as we absorb out-of-network volume on to our in-network reimbursement platform. These revenue dissynergies are offset over time as the acquired entity have access to our national contract and can therefore drive organic volume growth. Bear in mind that the growth in infusion services segment revenue is expected to be offset by declines in the PBM services segment and the sale of the home health services business.

Gross profit margin percentage for the infusion services segment is forecasted to improve by 200 basis points by the end of 2014. However, consolidated gross profit margin percentage is expected to decline due to the sale of the home health services business, the decline in the PBM services segment gross profit margin and the mix of business as the lower gross profit margin infusion services segment is on pace to grow faster than the higher margin PBM services segment.

Infusion services segment adjusted EBITDA margin percentage is targeted at approximately 10% for the fourth quarter of this year. Please note that there is seasonality in the infusion services segment whereby the fourth quarter typically generates the highest adjusted EBITDA of the year and the first quarter typically generates the lowest adjusted EBITDA of the year. Lastly, corporate overhead is projected to be less than $8 million per quarter.

With regards to our cost-savings initiatives to drive $10 million in annualized savings, we have executed on those reductions throughout the fourth quarter and are substantially complete. Approximately 40% of those reductions relate to CarePoint synergies. The remaining amount relates mostly to improved efficiencies in the infusion services segment and reductions in corporate overhead.

The change in fair value of the contingent consideration is primarily attributable to the HomeChoice earn-out. As highlighted, this asset is meeting and exceeding our expectations in terms of revenue, adjusted EBITDA and adjusted EBITDA margin. However, performance has been robust. It is not at the levels we believe will result in an earn-out payment in the first year which also reduces the probability of obtaining an earn-out in the second year. These earn-out targets were set assuming very strong growth that meaningfully exceeded our valuation [case].

As previously mentioned, the increase in our bad debt provision is the result of the aging of our receivables. As discussed in our last earnings call, we believe this aging could be the result of the disruption from the acquisitions as well as inadequate resources to keep pace with our growth. We have addressed these challenges by bringing to bear additional temporary resources through system managing and processing of receivables backlog, implementing an aligned incentive compensation program which includes meaningful cash collections component, driving process standardization throughout our locations and executing a detailed metric-based workflow from intake through to collection.

For 2014, we expect this focus on cash to result in achieving our goals of DSOs into 60 by the end of the year and cash flow breakeven by the second quarter and positive by the second half of the year.

With that, I'll turn the call back to Rick.

Thank you, Hai. Operator, we'll open up it to the question.

(Operator Instructions) Brooks O'Neil, Dougherty & Company.

Good morning, guys. I have a number of questions. So first, I infer from both the press release and comments that you feel very good about InfuScience and you basically completed the integration of HomeChoice. Could you just talk about where you're at with CarePoint and what you think are some of the key steps you need to take to fully integrate that acquisition?

Yes, we're finishing up some of combination of the physical assets and movement. There is still some contracts that due to the asset structure need to come over and be secured and then essentially just some of the business process. So for the first half of this year, we'll be getting all of their locations on the -- in terms of the BioScrip processes that we use essentially for all the organization and the warehouse, formulary rollout and just adding some of those. So some additional blocking and tackling activities that need to occur relative to that asset joining us late last year.

Great. And then if I understand it correctly, so now you've got two of the three acquired businesses performing at that 12% to 14% level there is a pretty good chance that CarePoint will get there, say, as we move through 2014, are there things you could do to what I might call the base business, for lack of a better term, to attempt to move your legacy infusion business towards that 12% plus margin level?

Yes, I think that a lot of the organic growth, I think as you know, we -- a lot of our larger markets' legacy locations, New York, New Jersey, Columbus are essentially starting from the scratch relative to core business. And we saw in -- even though they did not meet our 2013 expectations, we saw progressive growth sequentially in each quarter relative to building the core patient mix. And our expectation for 2014 is that not only relative to operating leverage, cost reductions and efficiency to improve the EBITDA contribution of the legacy locations but also the work done in 2013 is helping us access to more of the referral sources that can drive organic core revenues growth and higher margin contribution to the Company.

So we think that we had a lot of growth, we had a lot of effort in terms of opening up access. Our Burbank facility which we expect to grow in profitability launched the four satellite locations in California. So even though they were stressed in carrying a lot more cost, we expect that we now have four satellites that they opened in 2013 that we would expect probably contributions in 2014 and allow them to take the stress off and improve their profitability as well.

Great. When you say core, Rick, I assume you're talking about significantly strengthening your acute therapy mix, the anti-infectives and the nutritional therapies?

That is correct.

Cool. I just have one more question and then I'll hop back into the queue, have you seen or are you hearing about any proposals related to Medicare that you consider either positive or negative for the 2014, 2015 outlook at this point?

The industry continues to pursue a path towards full coverage of the home infusion benefit working with different organizations and educating Congress as well as CMS in terms of the opportunities of structures. And so it may not appear in 2014, but that activity will continue. We believe that the competitive bidding round two and the re-compete, which is essentially the re-compete relative to round one, are all in -- essentially done. We essentially have over 88 CBAs in round two to where we have shrunk position on the [enteral] nutrition opportunities to grow that patient census and incorporate into our nutrition program.

From a re-compete perspective, those are only the original small number of CBAs and we have not seen any impact relative to the pump part of that competitive bid because we've aligned with the partners. So I think materially relative to those areas in Medicare, we don't expect major changes this year.

Okay. Great. Thank you very much.

Dana Hambly, Stephens.

Hi. Good morning. Thank you. Hai, just a couple of cash flow items. What would you expect for CapEx in 2014?

Yes. So CapEx will be materially less than what it was in 2013. I think there are key drivers that drove CapEx spend in 2013 that just aren't there for us in 2014. The key drivers are the fact that we had two large acquisitions in 2013, we invested in the de novos, we also made some meaningful investments on the IT infrastructure and the application development to differentiate ourselves in the marketplace, and then we also had the replacement of some of the infusion pumps due to a recall. So we had to replace those pumps because of the manufacturing recall.

And so when you look at 2014, I think our CapEx is going to be more -- my guess is kind of the $13 million to $14 million range, that's what our current expectation.

Okay. That's helpful. And just on the cash interest, I think you were making $5 million payments on the term previously. Are you still required to do that at this point?

No, that's the principal repayment. I mean, part of the -- that was the mandatory kind of principal amortization of $5 million a quarter. Part of the benefit, from a cash flow perspective on the refinancing, is that we get credit because we took the proceeds from the bond to pay down the first lien debt, is that we get credit toward that for eight quarters, right, and then pro rata thereafter. So for the next eight quarters, we're relieved of the mandatory payments.

Okay. Okay, that's helpful. And just cash taxes, I'm assuming de minimis this year as well?

Yes.

Okay. And just back to your comments on the revenue and the dissynergies, I'm just trying to understand, when you talk about CarePoint, can you give me a sense of just how much of that is out of network? And I think at the time of acquisition, you said it was about $160 million. Is that -- that's the acquired revenue and so the base is actually smaller than $160 million as you think of switching from out-of-network to in-network?

Yes. I mean, it does change. I mean, there's really two levers of dissynergies. I've highlighted the most prominent, which is around out-of-network volume, right. So the added network, simply put, is oftentimes payers reimburse that kind of two to three times the in-network rates and out-of-network volumes. So that's the impact we immediately take when we take those same patients and on-board them on to our in-network platform.

And the second is that in certain markets, in certain -- we may have national contracts and they may have local contracts. And the pricing of the local contracts might just be more favorable, right. So when we load them on to our national platform, we'll take a hit there as well. So yes, I mean, it varies from acquisition to acquisition, but what we've seen, as I mentioned in my prepared remarks, is that we'll take a hit kind of in the near term and over time we offset that through volume growth due to assets or national agreements.

Okay. But when you talk about organic growth, as those acquisitions fold in, you still expect to get double-digit organic growth on those acquisitions?

That's correct. And obviously, that takes a little more time because the first year, a lot of the focus -- although we're always focused on growth, but a lot of the focus is getting the integration right, right, more operationally-focused. But once we're through the integration period, we fully expect them to grow at kind of double-digit rates and we've seen that with our other acquisitions.

Okay. Last one for me. Rick, on the -- one of your largest competitors is acquired by CVS and the other owned by Walgreens. As you think about the competitive landscape, are there -- besides the drug purchasing power, are there other things that put you at a disadvantage from those competitors? Is there anything that they have that you want and conversely, can you talk about some of the advantages that you think you have?

I think -- well, first of all, I think the reason that we transformed this Company to the industry and the focus that we have is because of the contract structures. So we, with the -- being on the national panels and having direct managed care relationships, we have an ability to present our clinical programs. And so we believe that in this industry, the strength of clinical programs and service levels enable a competitive advantage.

We think that, hopefully, given our independence, that we can move faster relative to customizing solutions for our customers. And I think also the independence that we have, not being affiliated with a larger retail or potential competitor to payers enables us an opportunity to have an audience of solution creation that we believe could potentially send more patient census and create more opportunities for us as well. I think size relative to purchasing power, our supply chain and purchasing capabilities are pretty strong. And I think that in a short period of time, all the assets that have become part of our Company have come with very strong clinical reputations and capabilities in all the markets in which they service. And we think that reputation enable -- is what enables us to essentially tuck them under our agreements and managed care contracts and drive strong levels of organic growth.

Okay. Thank you.

(Operator Instructions) Matt Weight, Feltl & Company.

Good morning. Rick or Hai here, I'm wondering if you can address in a little bit more detail, the negative operating cash flow, again, this quarter. And kind of more specifically what needs to be done to turn that around?

Yes. I think as we mentioned in the last call that the acquisitions were fairly disruptive, right. [Oftentimes] but the first quarter post-acquisition is where we have the biggest cash drag, right, because there's just -- and hence, the aging of the AR and the working capital drag on the business in the fourth quarter. As I mentioned in my prepared remarks, I fully expect that to turn around. We've got a lot of focus on cash collections right now. We've got some additional resources that we bought -- that we bought to bear, greater standardization, greater process improvement and a lot of incentives. So what that should result in is the ability for us to drive our DSOs down, the ability for us to try to get to effectively cash flow break even in the second quarter and then cash flow positive in the second half of the year.

Okay, that's sounds good. And then Hai, just going back to the revenue dissynergies, CarePoint Partners, is the reason why expectation for revenue is closer to $120 million for 2014?

For CarePoint?

Yes.

No. I mean, like you said, once we get to 2014 what you've got is you've got basically the sales synergies, right, offsetting the dissynergies. So we ought to be back close to that $160 million or maybe slightly better than $160 million contribution from that asset from a revenue perspective.

Okay. So you're going to capture closer to what the run rate was in the press release when you acquired them?

Correct.

Okay. And then I'm just curious with the refinancing, what was the decision to go with -- to the mark with the high-yield bond, given the strength in the bank loan market where now you're going to be paying a higher interest rate?

Yes, I mean, I think for us, it's two things. One, when we looked at the combination of the sale of the home health business alongside the refinancing, I think we were trying to address two concerns, right, and make sure that the Company have plenty of flexibility going into 2014, right. The first was, there were -- I think there were challenges around liquidity, and we want to make sure that we address that and provide sufficient liquidity to the Company and sufficient runway for the Company to address its cash challenges, right. And the second is plenty of operating room under its covenants, right. And if you look at kind of first lien debt, although they're less expensive, they come with some covenants. And so to the extent that we can create that operating flexibility, I think it gives, once again, the Company the ability and the flexibility to recover from the challenges that we experienced in 2013.

Okay. And what's the capital structure going to look like post the close of the home health business?

Yes. So as I mentioned, we have about $436 million outstanding debt at the end of the year. Effectively, you're going to have net proceeds, about $55 million is our estimate right now, on the $60 million purchase price and that will just go towards paying down -- further paying down outstanding debt.

Okay. Last question, just quickly. Can you give an update, you -- in the past three months, you hired an interim COO. Can you talk about what Richard is doing? And then what's an update on getting a full time permanent COO within the Company? Thanks.

Yes, so Richard and his team, as I mentioned, they are helping us with the integration, exciting integration efforts and the process rollout with the CarePoint acquisition. And also, some of the other process improvements and looking at areas for driving higher levels of operating leverage for the Company. And we also have ongoing search for a permanent COO to essentially look to fill that position by mid-year or sooner.

Thank you.

Kyle Smith, Jefferies.

Yes. Hi, good morning, gentlemen. First question is just a process one. Your EBITDA calculation, why is that you calculated it not taking credit for the $5.6 million bad debt's charge, but taking credit for the change in the fair value of contingent consideration? If I adjust those two items out, I get about [13.2] of EBITDA. And I was just curious why you approached it this way?

They're independent items, right. So we booked them as independent items. I mean, I think analysts can view -- if that's the way to -- one way to look at it, if you're just trying to look at the underlying business.

Okay. And then in terms of getting back to breakeven cash flows, you said in the second quarter, in terms of collections, how much progress has there been made? Can you give us a sense of where daily cash collections right now are in comparison to revenues net of bad debts?

Yes. I mean, I think what -- the daily cash collections has continued to trend up very positively. Like -- as we've indicated, since we tracked it upon kind of the closing of CarePoint and it's moved up very significantly, essentially, double that. But obviously, it's volatile from week to week, but it trended up very positively. And we are clearly seeing progress and impacts from the additional resources that we've brought in where we played some of our older AR with them to go out and help us on the collections front. We're clearly seeing improvements on the process side, right, because we're on those calls almost both -- they are on the calls every week with the bottom 20.

What's encouraging for us, Kyle, is that when we look across the system, it's not as if the entire system is broken, right. So for example, when we look at our 80 infusion locations and we stratify them into quartiles, they're clearly locations to DSOs that are sub-40 days, right. And when you look at the characteristic of the floatations, you can say, hey, it's the right resources, it's good process, it's disciplined management day-in and day-out. And then when you look at kind of the bottom quartile that -- whereby we're having some challenges, the characteristics there are oftentimes, we were understaffed, right, and so we have to address the resource issue.

There are also oftentimes location that were impacted by the integration of the acquisition, right. They were in overlapping markets, for example, whereby we were merging locations together. And so there's distraction and some challenges that we had to work through. So we know that and we can -- and we've proven in our system that we can drive DSOs down, and that's what we're focusing on, right. How do we get the bottom quartile at least back up to the median or if not, towards the top half of our performers. And the same thing on the bad debt side, right. I mean, we've got locations where -- and it's the same story.

Okay. And then last question for me. You've talked about the initial negative impact of going from out-of-network to in-network, and in some cases, from going from local contracts to national contracts, and then you get the benefit in volumes over time. What's the rough timing on that? Do you see one quarter or two quarters of decline and then it takes a year to get back to where you were or is it a longer-term process? I'm just trying to understand from a modeling perspective, how to think about that.

It's a couple of quarters. I think with the asset structure, there are some local contracts that have not yet come over yet, and so there's just a timing delay. So I would take it into the first quarter of this year as well relative to some of those delays. But there is also, again, the provider licenses, the new contracts coming over, some delays, and just the normal licensures that you have. So that is behind us for the most part now as well, given all the provider numbers. So I think that, again, in the overlapping markets, where we already had a presence, we've quadrupled the size of what our presence was prior to the acquisition. And so we believe that we can drive some strong organic growth. And so I think that from Q2 through the rest of the year, we'll see a ramp-up relative to that level of asset and eliminations that are -- mitigation of the dissynergies.

Okay. Great. Thank you very much. Congratulations on the refi and best of luck executing in 2014.

Thank you.

Mike Petusky, Noble Financial.

Good morning. I confess, I may have missed this, but did you guys give the core chronic mix in Q4 and then kind of a general outlook for 2014 in terms of how you think you can move the needle, if you can, in 2014 on that?

We said that core, as a percentage of revenue in the quarter, was 37%. And Mike, our longer-term -- over a two-year period, is to move core to essentially 50%. But we see that -- and we believe that we could move the needle in 2014, but, minimally, another 3% towards 40% of our revenue and keep sequentially moving it from there. And so I think that's how we're looking at it today relative to 2014.

Okay, great. And then in terms of kind of the next 12 to 24 months out, in terms of your -- obviously, of strong organic growth, but in terms of your potential external growth and then kind of weighing against de novos, I mean, how are you guys thinking about expansion over the next, say, two years?

The next six months is just internally focused to maximize the opportunities. There are 50 markets that we're on a original map that essentially were in terms of our national footprint. The primary ones are Phoenix and perhaps the Pacific Northwest and some -- and up and down, I think, the -- in Colorado, Denver area where there are some managed care lines we have under contract that have some high concentration. But I think, as I said in my prepared remarks, we have our map, and our locations today are in some of the highest-populated areas of the country and are those areas that have a high utilization of post-acute services. And so as more care moves to the home, we believe strong opportunities for our organic growth can come from our existing platform and the markets that we're in today.

Okay. So what I think I hear you saying is head down for at least the next six months and then after that you'll see, basically.

Yes.

Okay. All right. Very good. Thanks, guys.

Thank you.

Walter Branson, Regiment Capital.

Thanks. So just going back again to the dissynergies. Did I hear you say that CarePoint's local contracts will provide better payments than your national contracts, is that right?

In some markets that might be the case because -- and that's not unusual, right, because you're on a national panel and that's where you want to be because that's where we think that volume is going to head towards. Oftentimes, the trade-off is some unit pricing discount for access to more volume.

Got it. And then since you're -- I guess, you're looking at the dissynergies sort of being offset by organic growth for 2014, but sort of giving up price to get volume, does that suggest that the EBITDA for CarePoint would be lower than it has been historically?

No. Because remember, what we -- it's clearly not historically because what's offsetting the margin compression on the dissynergies is that we bring our synergies to bear, right. We've got the cost of goods sold synergies, we've got operating expense leverage, the consolidation of overlapping locations, that's all going to drive the synergies there.

Okay. Thanks. And then you didn't, in your outlook, make any remark specifically about PBM. What are your expectations for PBM for 2014?

Well, clearly, given the fourth-quarter performance, it's not going to -- I think that there will be some marginal improvement on that because we still have some costs ramping up, but I wouldn't put any big numbers relative to the PBM business.

So sort of fourth quarter run rate or maybe slightly better?

Yes.

Okay. Thank you.

(Operator Instructions) [Andy Bloom, DSC].

Hi, guys. Thanks. Just on SG&A, I was a little surprised that the run rate was going to continue at $8 million a quarter. I was expecting that to start to come down and starts coming down rather dramatically over the year. Can you please just comment on that? Thank you.

Yes, sure. So I think that -- and that's why in my prepared remarks, I talked about the $10 million reduction. I think there was some -- I think folks had thought that all $10 million was the amount of corporate overhead, that's not really the case. As I mentioned, about $4 million of it is associated with the synergies in CarePoint and of the remaining $6 million, a big chunk of that is actually going to come out of the infusion services segment, which is going to help with the margin expansion. And a little bit will come out of corporate overhead as well. So we're looking to make our operations more efficient. But remember, on a relative basis, although I know people focus on the dollars, on a relative basis, what we're saying is we've got an infusion segment that delivered about [$62 million] in EBITDA in 2013, growing meaningfully off of that and our corporate overhead, essentially, is staying relatively flat, right. But in fact, the guidance is just down from last year, so we are definitely getting operating leverage as we continue to grow the business.

But your long-term goals are at least, if I remember, for the entire Company to be at least after corporate SG&A, at 10% margin. At least, that's what I remember. I mean, you got a long way to go and I'm not sure that that's all going to be driven by organic growth and revenue, but also, a significant look in reduction of your SG&A, which, frankly, seems to be way too high.

You're buying competitor -- you bought a couple of companies that had significantly higher EBITDA margins after, theoretically, their SG&A. It seems like there's an awful lot of work that needs to be done on scrubbing that SG&A number. I just would've thought there'd be more movement in 2014 on that number, or at least I thought there was going to be.

Yes. I mean, I think it's a fair point. I would highlight the following which is that when we made acquisitions, our acquisitions not necessarily had meaningfully higher EBITDA margins, right. They're reaching the 12% to 14% because of the synergies that we're bringing to bear, right. So for example, CarePoint, I think was in the single-digit margins, right. And so, through our efforts in terms of the supply -- renegotiating the supply costs and the drug costs, our efforts around leveraging our corporate overhead infrastructure and through our efforts around consolidating overlapping locations, that's what's driving those margins up for InfuScience, for HomeChoice, for CarePoint. Point in fact, for example, InfuScience -- I mean, sorry, HomeChoice's EBITDA margins were kind of in the mid to low-single digits, right. So we are generating that value by leveraging our corporate overhead. With that said, I mean, your point about our targets over the next -- and I think we gave ourselves three to five years to get there. I think that -- as a reminder, we've mentioned people that the way we believe we're going to get there, because our closest comp to that is the numbers that people see from quorum, is twofold, right. The first is that we have to get our mix up, right. And mix is a big driver of margin for us, and that's why we're so focused, Rick is focused, on the trends around core mix, right.

Core mix in the fourth quarter of 2012 is about 22%, and the fourth quarter of 2013 we're at about 37%. And I think as you heard Rick just answer, we're targeting -- approaching 40% by the end of 2014. And then the second is the scale, right. Coram is meaningfully larger than us, right. And that's the operating leverage you keep talking about.

We continue to grow and, in fact, something like our corporate overhead effectively flat. And if we can do that, then we're going to drive some very meaningful operating leverage.

And I think -- just to add to that, I think that as we are -- we agree to your point in terms of just looking at corporate and continue to attack it, that highest point, we divested the older company, the old division, we held balances in corporate infrastructure in anticipation of buying entities, and we've been able to layer in those acquisitions. But at the same time, our total pure corporate headcount has been coming down. We continue to take it down. The variable cost related to headcount continues to come down. There's a big chunk, I'll say, of IT infrastructure and development that have been in that corporate number where we expect to drive even more efficiencies and operating leverage in to the fields.

In addition to the fact that a lot of the models that are moving into the home, essentially a big component of what we do today is telehealth in our transitional care management program and collaboration with other providers.

So there is some development work in there that's not anticipated to be capitalize in that [31], which is up from 2013, but it's all corporate investment that will lead to positioning the Company strategically for higher level of patient census, collaboration with providers in our markets and with our payers, and reporting outcomes to our collaborators. So I think -- so we agreed that corporate needs to continue to come down, we need to leverage our investments to support the field and continue to drive higher levels of operating efficiencies throughout the entire platform to drive that bottom line after corporate EBITDA contribution.

As there are no further questions at this time, I'll now turn the call back to you Mr. Smith.

Okay, great. Well, thank you, everyone, for your time today and joining us on our call. I want to thank, as I always do, our BioScrip employees, for the great work in taking care of our patients and bringing the foundation of our growth for this year and next year, and all years to come. Have a great day. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.