Option Care Health Inc (OPCH) 2014 Q4 法說會逐字稿

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 would 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 have 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 two weeks. Interested parties can access the replay by dialing 800-633-8284 in the US, 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 everything 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 the 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. Now I would like to turn the call over Rick Smith. Rick.

Thank you Lisa. Good morning everyone. I'm in New York, and the weather kept Tom in Eden Prairie, but we will work through essentially the different aspects of 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 regional and national 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 nonrecurring 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 at 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 looked at our plan for 2015, I'm confident in the platform we are building. We enter 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 reviewed the strategic fit of some of our non-core businesses. Turning to our process improvement we moved the needle most in Missouri, both in cash collections and productivity. We have significantly increased our cash flow from continuing operations, from a use of $25 million in the first quarter of 2014 to $1.7 million in cash generated from continuing 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 collections. 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 in 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 nonrecurring cost items, and the balance was due to the delay of 2,000 nutrition patients that were awarded to us 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 and 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 and 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 would 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 a new CFO is well underway. We have identified several internal candidates, I will 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 continuing improvement in operating cash flow. For a financial discussion I will review the fourth quarter and 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 revenues $14.2 million, up 5% compared to the prior year period. Full year revenue was $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 nonrecurring 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 business. 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 in resources to support reimbursement, and cash collection. Legal fees associated with certain litigation matter, and accounting and professional fees.

In the fourth quarter, we changed auditors, which resulted in approximately $8 million in accounting fees for the year. $5.8 million of which was incremental in our Q4 to the normalized auditor 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 debts 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 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 to normalize bad debt to historic levels going forward.

For full year 2014, we had an adjusted EBITDA loss of $23 million, and a fourth quarter 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 the $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 of 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 turn the call over to Tom Pettit, our Chief Operating Officer to provide additional detail on costs and cash initiatives in 2014 and our plans for 2015. Tom.

Thanks Rick. Let me begin by highlighting some of the key operating improvements in 2014, to give you better insights I am providing more detail than usual on our cash collection metrics. We are collecting more of every dollar billed 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 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 are 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 and 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 in 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 couriers 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 payor 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 reimbursement resources, employee health benefits, employee merit increases, and bonus plans. 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 road map we are executing will bring us another step closer. I would now like to turn the call back over to Rick. Rick.

Thank you Tom. Operator, we will take questions.

Thank you. (Operator Instructions). Our first question is coming from Brooks O'Neill with Dougherty & Company. Please go ahead.

Good morning. I have a couple of questions. 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 am 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.

We saw some as I mentioned, saw some muted census levels and seasonality in some of our markets 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 additional seasonal kick. We have 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 it was 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.

Okay. And then was there a disproportionate mix of the lower margin infusion therapies in Q4 as well?

No. The chronic. business still continued to come through. And then the delay on the nutritional patients in December impacted our expectations for the quarter as well.

Okay. And then I saw that you put out an 8-K relative to some restructuring of at least part of the debt. Talk about what is going on there, and where you feel you stand relative to the debt and the lenders right now?

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 are in good shape with the banks. I think just to continue the opportunity to stay focused on executing the plan and building the business.

And just what exactly is the implication of the reduction of the covenant to trip from 25% to 5%? What is that?

That is nothing. Is just again that is when the covenants essentially go into place when more than 5% is borrowed on the line beginning in Q2.

Okay. And then lastly, I think I heard you say, Rick, 8% adjusted EBITDA margin is kind of the goal at this point?

Well --I'm sorry. Go ahead Brooks.

So I was just trying to be sure I understand exactly how to 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 end of the year, the $15 million plus the incremental $9 million notwithstanding the investment our objective is essentially to approach that 8% lower range this year, and continue to build from there.

Okay. And then I guess just one other question. I t looked to me like the corporate expense was high obviously you called out 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?

We don't expect it to recur. We saw in Q4 a final true-up of the employee benefits, our health costs essentially with true-ups in some worker's comp, and we trued up those reserves as well in Q4. So we don't expect as we said 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 old things as well that we expect to come down in 2015.

Okay. Thank you very much.

Okay.

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

Good morning guys. Rick, a couple of questions. Is there anything else in terms of portfolio culling? 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. That is one thing that I would point out. I think that as we saw the AR from a number of the merged sites cause us additional write-offs and provisions in 2014, there are essentially five merged sites from the [trip points] acquisition at 2013 Q3 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 cleanup, some turnover, and some disruption. We saw those actually perform at about a $5 million loss in 2014. One of those we closed that we mentioned, because just the viability was not there.

We are 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 have got a new area Vice President over the markets that came from a competitor that knows the markets well. We also just installed within the last 90 days two new general managers also from competitors. So we have got I think an upgrade in leadership, an upgrade in management, and this business builds back very quickly when you focus on it. We believe that will be a strong turnaround 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 work into close by facilities. There are other facilities in the merge market that lost $5 million that essentially are still open, and we expect to have a rebound year in 2015.

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

It is really just restoring, well, first we changed the leadership over. We also have invested in an 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 has 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 are 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 have stabilized the markets, we have stabilized the leadership and employee base, and are now starting to essentially build 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 starts to grab? And can you talk about what you can do without frankly, creating some issues with the referral source? Obviously you prefer the higher margin patients, but in a lot of cases have to take the lower margins, lower margin patients to make sure your referral sources happy? Can you just kind of walk us through that a little bit?

We have been servicing these patients at the local level 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 have grown the core significantly. Our offset was the fact that HEP C and the new drugs came out in 2014 early on, and that was a build that continued. So we also saw some exchanged lives that were not as profitable, in terms of some of the payor 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 focus 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, at an average that is 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 are 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 is 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 is a legitimate jumping off point here?

I think our view is that the essentially the $39.3 million for the year, plus essentially $40 million, plus the $15 million in cost cuts is I think the jumping off point. The $9 million we have a high confidence in this 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 cuts.

So the $39 million is total Company adjusted EBITDA?

Right.

And then $10 million from the cost cutting?

Essentially $15 million.

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 annual impact of say, $8 million to $10 million, is the $15 million a truly --?

15 --

Is $15 million is a truly fully realizable number in 2015?

$15 million is.

In --

$15 million is a hard number we laid out in terms of the sources of that. $15 million is the full year number. The incremental $9 million will be realized throughout the year through the initiatives that Tom outlined.

So you feel like.

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

Okay. But just again just to recap, $39 million and $15 million, that $54 million is pretty firm, you have another $9 million that is a little bit squishier, but some portion of that will be realized in 2015, and then a little bit of growth factored in there? It 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. With the cost savings initiatives and some of them in corporate overhead, how should we think about the right size for corporate overhead, and when do you think you might get there?

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

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

We have got a list that we are targeting. I think there are some efficiencies through automation we implemented that we believe can enable us to drive more efficiencies and cost reduction, we have also been renegotiating a number of indirect contract supply agreements that we believe there will 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 have discussed?

As we stated, we said we are focusing on the lower end of the 8% to 10% range, we believe that throughout longer term initiatives that we have 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 the longer term.

Okay. Longer term is that 2016, or is that three to five years?

I think it is in the 2016 area.

Okay.

Yes.

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

We have seen some branches that have been closed for half days or had to shut early servicing patients, and then start the next day or have delayed starts. And so I think just like not necessarily where you would expect it. Our Boston area branches have maintained 100% uptime, notwithstanding the snow. It has been more in the lower south mid-Atlantic areas, where the area are not necessarily prepared to deal with some of that extreme weather. But they have been, we have been opening up 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 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 conservativism, or just wanting to make sure that you had it all captured? Because it sounds like with 20% historically being recovered, it sounds like a pretty conservative assumption for the 365 days?

Part of our frustration this year as we have been chasing our aging buckets each quarter, we have been improving our cash collections relative to, on the front end our under-180 days in terms of Accounts Receivable has continued to show progress. Our over-180 is really where we have been chasing. We have 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. 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.

Okay.

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

Hi guys. How are you doing?

Good morning, David.

I want to make sure I fully understand how to think about 2015. We have the $39.2 million, which is basically your pro forma number from 2014, and then Rick you kept saying $15 million to add to that. When I look at slide 10 I think you are 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 is contingent on hitting certain hurdles, but is some of that normal costs associated with incremental margins. And as you walk through this, I know this is kind of a long question, can you talk about what kind of margins we should think about in incremental growth? And did you include those when we think about those in 2015, should we think on top of the numbers I just identified, you should be getting some pickup from those underperforming sites you discussed? Give a little more detail on what is included would be helpful? Then I have a follow-up.

The $39 million plus the $15 million, that is hard.

Right.

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 have outlined there, in terms of controllable expenses, supply chain, nursing and delivery. Those all are beginning of the year drawn numbers additive to our pro forma run rate. The $9 million are through the initiatives that Tom had outlines, also on slide 10 on that page, so that is the incremental $24 million. Some of that $9 million essentially will come in over time, but our teams are working on it, and we have got multiple areas driving reductions in additional nursing and delivery costs and the incremental supply chain initiatives that we expect to essentially get there. And so in the $14 million as I said there is about $5 million dependent payable on achievement of a bonus plan, which is a essentially self-funding structure, but we laid it out there. There other incremental, there is 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. Those are essentially hard. The sales and reimbursement resources will be driving from incremental growth. When you asked about what should you expect in terms of margin on the growth, we are targeting essentially our core therapies, and so that would be typically a higher margin therapy in the 12% to 14% EBITDA contribution rate.

That is helpful. Did you include in those numbers you mentioned there were the underperforming sites that cost you $4 million.

Yes.

Is any improvement on that baked into any of the numbers we just discussed or what that improvement be incremental?

That improvement would be incremental.

Got it. Two more quick ones. A follow-up to the last question, you talked about the Accounts Receivable and just being frustrated with the older collection. Did the new auditors, how conservative did they want you to be? Did they consider this kind of even though we thought last quarter was the kitchen sink, are they saying this is it? Talk about the give and take with the new auditors?

The new auditors did an extensive amount of testing, it was clearly our books, so we believed in evaluating 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 essentially fully reserved, and get this behind us once and for all.

Big picture-wise, what do you think all the M&A activity we have been reading about in the space recently?

We started this platform and ran very hard, we built by acquisitions, we bought some nice companies. All of 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 some time down the road as well.

Great. Thanks, guys.

Thank you.

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

Good morning.

Good morning.

Rick, I want to kind of throw a couple things out there, because a lot of numbers are being kind of thrown around. But I feel like the breakdown is fairly simple if I'm understanding it right, basically 8% EBITDA segment margins on about $1 billion of infusion revenue, $80 million, about $5 million on $50 million of PBM revenue, another $5 million. $85 million. And then $25 million to $30 million of corporate overhead. Is that kind of, I know you are not giving guidance, but isn't that roughly the math?

We are not giving guidance. I think that as we stated, we have been able to generate double-digit organic growth on our revenue. We stated that we have maintained 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 a first milestone. We believe that the costs we took out as of the beginning of this year, and the incremental programs that Tom outlined, notwithstanding the investments will essentially get to us to that lower range, based on what we can expect of ourselves.

Right. So in terms of, let me jump over. I know it is 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, that changes either the margin profile or the revenue profile of that business going forward?

As we have stated before that the expectation was that it would be stable, and I think that 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. We are happy to see that it stabilized. We are happy to see that some of the noise around it is going away, will lap the downdraft from 2013 to 2014 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. If you gave it I didn't catch it. Did you guys give a chronic core mix for the quarter?

We are about 37% before HEP C on the core, and the balance we have got blood products, that take up a fair amount of the percentage of revenue. But that essentially is how it is breaking out.

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

We believe that we can get over the 40% range. I think that we have been chasing it hard. I think if we can essentially look to adjust some of the chronic mix in 2015, then I think we will be able to pop over the 40% range 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. Historically kind of you start slow in Q1, and then build sequentially both in terms of revs and profitability. Is that what you are looking for in 2015?

It builds the same way. As I said, it was something, in terms of a muted Q3 and some of our markets was actually the strongest seasonality, and I think just the way that schedules of surgeries and other activities were occurring, and so we have got some initiatives with hospitals and payors this year that we have 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.

Thanks. Good morning.

Hi.

Rick, I think you said the 37% core was before HEP C?

Yes.

Okay and HEP C was about 2% in the third quarter. Does that sound about right for the fourth quarter?

It does.

Okay.

Actually a little lower.

Maybe a little lower.

Yes.

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

Yes, we did that as well. So we are up to 80% on the 271 to 365. We spread it to our older buckets. So that also has increased.

And that was part of the $31 million?

That was part of the $31 million , yes. We essentially looked at all of the over-180 reserve buckets just to look to get this behind us.

Got it. And I guess that would probably to is 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, as I said, we have put a lot of focus, and Tom covered it as well, in terms of our front end, our cash. We stated that we have historically seen the ability to collect AR as old as 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 is our focus is to get this back.

Okay. All right. And on the new bills going out, I think we had been look at bad debt on the new bills around 2.5%. Does that still sound about right?

We are still in that range. We are seeing 100% on our 60 day lag. And I think we can do better than that. And that is part of our objectives and 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 can you just talk about, I know they pushed into January, did you quantify what the drag was on the fourth quarter? Or just how big that program is?

Well, it is very big. I mean we expected a more orderly transition, but the competitor that was transitioning them did not follow directions, so we had to scramble all of our resource, fields and intake to support these patients, and get them lined up for their medicine. It was 2,000 patients, so nutritional support. It was pretty significant, 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 was that pretty much in place starting in January? Or were you still working for it?

No, we did all of the work. Part of our disruption also was we in secured the cost of reaching out 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 then has continued through February.

Okay. All right.

Yes.

You still had about $3 million in integration costs in the quarter. Are we done with that at this point?

Yes.

So we will see no more of that?

Looking for a clean P&L in 2015.

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

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 what we have seen is the new contracts that we signed essentially the site of service initiatives communication has gone out to physicians and hospitals to move the patients out of the outpatient center into the home on those chronic therapies, so we expect to be a beneficiary of that, given our preferred status in 2015. I think on the core therapies we have 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 are a good year or two away from seeing any level of that coming in to our industry.

All right. Thanks very much.

All right. Thank you.

Mr. Smith, I will now turn the call back to you.

Okay. Great. Thank you everyone for your time today. Appreciate it. Have a great day. Thank you.

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