BioScrip Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 7.13 | About: BioScrip, Inc. (BIOS)

BioScrip (NASDAQ:BIOS)

Q3 2013 Earnings Call

November 07, 2013 8:30 am ET

Executives

Lisa Wilson

Richard M. Smith - Chief Executive Officer and Director

Hai V. Tran - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Brian Tanquilut - Jefferies LLC, Research Division

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Michael John Petusky - Noble Financial Group, Inc., Research Division

Dana Hambly - Stephens Inc., Research Division

Wilson S. Jaeggli - Southwell Management, L.P.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the BioScrip Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, November 7, 2013.

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

Lisa Wilson

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've 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 also 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 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 21682095. An audio webcast will also be available for 30 days following the call under the Investor Relations section of the BioScrip website at bioscrip.com.

Before we get started, I would like to remind everyone that any forward-looking statements made during the call are protected under the Safe Harbor of the Private Securities Litigation and Reform Act. Such forward-looking statements are based upon current expectations, and there can be no assurance that the results contemplated in these statements will be realized. Actual results may differ materially from such statements due to a number of factors and risks, some of which are identified in our press 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, which can be obtained from our website at bioscrip.com.

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

Richard M. Smith

Thank you, Lisa. Good morning, everyone, and thank you for joining us on our third quarter earnings call.

During the quarter, we continued to deliver solid revenues, stable organic growth and strong margins, demonstrating the successful execution of our infusion expansion strategy and our focus on growing this core business. We also closed the acquisition of CarePoint Partners and began the integration of its 28 locations and 600 employees into our company.

While the third quarter was heavily impacted by headwinds associated with our non-core businesses, as well as recent distractions relating to our discontinued operations, we are successfully executing on our strategic plan and intend to stay focused on building a leadership position in the home infusion industry.

Our Infusion revenue growth remained strong as a result of executing on our clinical programs with our referral sources and payor relationships. As in past quarters, this growth was primarily due to increases in patient census. I would highlight that BioScrip is one of the few companies whose infusion business has consistently delivered double-digit organic revenue growth year-over-year, and this quarter was no exception. Overall, we are taking appropriate steps to position the Infusion business for success and capitalize on the scale we have built over the past 2 years.

Each of our 3 recent acquisitions has brought strong clinical capabilities and customer relationships that have enabled BioScrip to substantially shift revenue mix toward core treatments. As you know, our legacy Infusion business was heavily weighted towards chronic therapies. As a point of reference, last year, approximately 24% of our revenue came from core infusion therapies. This year, that number is 35%. In terms of revenue, this amount has doubled from the third quarter of 2012. Through the clinical programs we have previously discussed, we are targeting future revenue contributions from core therapies to represent a higher percentage of consolidated revenue. As this trend continues, we expect this will provide a margin profile consistent with that of other national providers.

We're advancing our goal of becoming the industry leader in infusion services. We now have more than 80 infusion locations, twice as many as we did in the third quarter of last year. And relative to our market presence, our sales force is now 3x the size that it was 3 years ago. We also have strong relationships with local hospital systems throughout all of the regions where we operate, and we've put significant effort into strengthening our relationships with managed care organizations. Today, we are a national partner with all the leading plans. We also have a strong presence with local payors in all of the markets we service. We believe we have a solid foundation that will allow us to drive strong levels of revenue growth.

As we move forward, we are focused on seamlessly integrating HomeChoice Partners and CarePoint into our system. We've previously said we are targeting long-term EBITDA margins of 12% to 14% from all of our acquisitions once fully integrated. I'm pleased to report that we're on -- we're meeting those targets with InfuScience and on track to do so with HomeChoice. Our most recent acquisition, CarePoint, has been with BioScrip for about 11 weeks and is still being integrated.

While 3 acquisitions in 1 year was necessary for us to build a national platform, it was also consuming. However, we are pleased to have turned the corner in this regard and believe our integration process is well managed. Over the next 6 to 9 months, we will be focused on the fundamentals. This includes the continued focus on delivering strong revenue growth and targeted margin improvements. At the same time, we are focused on driving stronger operating results through the implementation of a company-wide profit improvement plan. This plan, which we commenced with the CarePoint acquisition and which will take full effect by year-end 2013, will generate more than $10 million in annual savings beginning in 2014. These savings will be generated through acquisition-related synergies, improved operating efficiencies and other reductions in SG&A.

With a focus on the fundamentals, we have implemented initiatives targeted at improving the operating cash flow generation of the company. Our accounts receivable balances have grown due to both our strong organic growth in sales and from the acquisition of the HomeChoice and CarePoint Partners businesses. As a result, our investment in working capital is higher than we like, and we are currently taking aggressive steps to increase our cash collection levels, we're increasing our internal teams and have augmented our own staff with outside resources.

Our Home Health Services segment will continue to make valuable strategic contributions to our infusion programs. You may recall that we have been aligning this platform with our infusion offerings to build our transitional care management model. However, there are challenges impacting the performance of this segment that we must overcome, including continued headwinds from sequestration, weakness in our hospice business and limitations associated with our Medicare and Medicaid mix.

With regard to our PBM Services segment, revenues were down this quarter due to the reduction of volume from our discount card distributors. As previously communicated, we do anticipate additional pressures on EBITDA from PBM in the fourth quarter due to a cap on reimbursements imposed in early October by one of the national retail chains.

Finally, as previously disclosed in our 8-K filings on September 23, we are responding to a civil investigation regarding certain operations of our legacy specialty pharmacy division. In accordance with accounting rules, we are required to provide an estimate of a potential loss. Accordingly, we have accrued $15 million in discontinued operations, which represents our estimate at this time. The actual outcome is uncertain, and the actual loss could be higher.

We believe we are well positioned going into the fourth quarter and 2014. Over the next 12 to 24 months, we expect to realize positive contributions from our recent acquisitions, execute strategic cost reduction programs and build additional momentum through our organic growth initiatives.

We maintain our focus on building a leading position over the long term in the infusion industry, implementing and growing our transitional care management model in all of our markets to take advantage of the technology solutions and outcome programs we have developed over the past 2 years. We believe these efforts will continue to help us deliver effective solutions to patients, payors and physicians while generating compelling shareholder value.

With that, I'll turn it over to Hai to discuss our financial results in greater detail.

Hai V. Tran

Thank you, Rick, and good morning, everyone. As a reminder, before we review our third quarter 2013 financial performance, we report the following 3 segments: Infusion Services, Home Health Services and PBM Services. In addition, the financial statements reflect continuing versus discontinued operations classifications for all periods presented. Therefore, in reviewing our financial performance, we will focus primarily on the continuing operations.

We will continue to report adjusted earnings per diluted share, which takes into account the same element in calculating adjusted EBITDA and also adjust for the impact of acquisition-related intangible amortization, as noted in our press release.

With that, for the third quarter of 2013, we reported revenue of $208.9 million compared to $170.4 million in the prior year period, an increase of $38.5 million or 22.6%. Infusion Services segment revenue increased 38.8% or $48.9 million, partly as a result of continued double-digit organic revenue growth and revenue related to our acquisitions. Excluding the impact of InfuScience, HomeChoice Partners and CarePoint Partners acquisition, organic revenue growth in the Infusion Services segment accounted for $18.5 million or 15.6% gain over the same period last year. The remaining change in revenue stems from a 4.5% increase in the Home Health Services segment, resulting from growth in volume of private duty nursing activity, offset by a decline in PBM Services segment revenue of $11.1 million, due primarily to the previously disclosed contract termination of a low-margin funded PBM Services client on March 31 and a decrease in prescription discount card volume.

Gross profit was $68.7 million compared to $58 million for the same period in 2012, an increase of $10.7 million or 18.4%. Gross profit as a percentage of revenue was 32.9% and 34% for the quarters ended September 30, 2013 and 2012, respectively. Consolidated gross profit margin percentage was impacted by mix of business, as the Infusion Services segment has grown more quickly than the higher-margin PBM Services segment. Additionally, the Infusion Services segment gross profit margin increased by 110 basis points from the prior year, and the PBM Services segment gross profit margin increased by 9.8 percentage points from the prior year.

The improvement in gross profit margin percentage in the Infusion Services segment resulted primarily from an improved shift in therapy mix towards core therapies, as Rick discussed, as well as the impact of the acquisitions. The improvement in gross profit margin percentage in the PBM Services segment was primarily due to the departure of one low-margin client in the funded business.

SG&A for the third quarter was $58 million, an increase of $11.2 million over the prior year. SG&A for the third quarter, as a percentage of total revenue, was 27.8% compared to 27.4% of total revenue in 2012. The increase in SG&A expense was primarily due to the consolidation of our acquisitions and the continued investment in the growth of the Infusion business.

Total operating expense increased from $54.6 million in the third quarter of 2012 to $68.6 million in the current quarter, a $14 million increase. This increase in operating expense for the third quarter of 2013 was primarily driven by growth in SG&A and an increase of $3.9 million of acquisition and integration expenses over the same period last year.

Interest expense in the third quarter of 2013 was $7.2 million, as compared to $6.5 million reported for the prior year.

The company reported a loss from continuing operations, net of income taxes, of $22.4 million for the quarter compared to a loss of $600,000 in the prior year. Loss from discontinued operations, net of income taxes, was $11.6 million in 2013 compared to a loss of $10.9 million in 2012.

Consolidated net loss for the quarter was $34.1 million, or $0.53 per diluted share, compared to a net loss of $11.5 million, or $0.20 per diluted share. The net loss from continuing operations was impacted by a loss on early extinguishment of debt of $15.9 million recognized in order to retire our 10.25% senior notes, as well as acquisition and integration expenses of $4.9 million in the third quarter.

BioScrip reported adjusted EBITDA from continuing operations of $12.1 million compared to $11.6 million in the prior year. The performance in the quarter reflects robust growth in the Infusion business, offset by lower-than-expected performance in other non-core segments, due primarily to volume mix and pricing. Of note, we continue to see meaningful progress in our infusion-focused growth strategy, as we are beginning to demonstrate not only sustained revenue growth but also operating leverage. This can be seen in the third quarter of 2013, as Infusion Services segment adjusted EBITDA increased 48% year-over-year, inclusive of the acquisition. However, corporate overhead only increased by 13% during the same period.

As Rick mentioned, the company has initiated a profit improvement plan that will yield over $10 million in operating expense reduction beginning in 2014. These cost reductions began at the end of the third quarter in conjunction with the acquisition of CarePoint Partners. We will implement most of these cost reductions throughout the fourth quarter.

Turning to cash flow. BioScrip used $25.4 million in net cash from continuing operating activities compared to $56.9 million generated from operating activities during the first 9 months of 2013. Cash flow from operations during the 2013 period was primarily impacted by the acquisitions of HomeChoice and CarePoint Partners. Cash flow from operations during the 2012 period was primarily impacted by the collection of accounts receivable retained after the Pharmacy Services asset sale, net of accounts payable paid related to those businesses, as well as the impact of acquisition.

The company had no cash at the end of the third quarter, and over $15 million in outstanding borrowings under the revolving credit facility as of September 30, 2013. In April 2013, the company raised net proceeds of $118.6 million from a public offering of its common stock. In July of 2013, we also entered into a $475 million senior credit facility, comprised of a $75 million revolving credit facility, a $250 million senior secured term loan B and a $150 million secured delayed drawn term loan B. The proceeds from the public offering of the company's stock, in conjunction with the new credit facility, were used for the redemption of its 10.25% senior notes, as well as the acquisition of CarePoint Partners, and to fund the additional working capital needs of our acquisitions.

Turning to the outlook. As indicated in our release, we believe our 2013 revenue will be in the range of $830 million to $850 million. And our 2013 adjusted EBITDA will be in the range of $50 million to $52 million, reflecting continued weakness in the Home Health Services segment, as well as the impact from the previously announced pricing adjustment for the PBM Services segment.

The change in the outlook from the Investor Day was primarily driven by continued weakness in our non-core businesses, as well as a more conservative approach regarding our Infusion Services segment. As Rick discussed, our Home Health Services segment was impacted by continued headwinds in sequestration, weakness in our hospice business and limitations associated with our Medicare and Medicaid mix. Our PBM Services segment volume continues to weaken in advance of the pricing adjustments in the fourth quarter. And in terms of a more conservative approach related to our Infusion business, the low end of the outlook range only assumes that the current September run rate for the Infusion Services segment will continue with modest sequential growth to reflect seasonality. Actual performance in Infusion Services segment in the fourth quarter will be influenced by the impact of seasonality, the strength of organic growth, the timing of synergies from the acquisitions and timing of the impact from the profit improvement plan.

As Rick mentioned in the beginning of his remarks, we continue to make progress on our infusion-focused strategy. This progress is evident by continued double-digit organic revenue growth, the fact that our InfuScience and HomeChoice acquisitions are at or tracking to EBITDA margins between 12% and 14% and improved operating leverage.

With that, operator, we'll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes the line of Brian Tanquilut from Jefferies.

Brian Tanquilut - Jefferies LLC, Research Division

Rick and Hai, just first question for both of you guys. After essentially missing numbers 3 quarters in a row and guiding down twice in a span of 41 days, how would you give confidence to investors that the current guidance is attainable, one, and how do you guys internally think of strategizing to regain investor confidence and credibility with the Street going forward?

Hai V. Tran

Yes, I mean, that's a good question, Brian. I mean, I think that in terms of the outlook itself, what I tried to highlight in my prepared remarks was the level of conservatism or -- even that we place in terms of the low end of range, right? And it has been a difficult year to project when we look at the trends in our non-core businesses, particularly the PBM business. Volume has clearly continued to decline. On top of that, we have the pricing impact that we had alluded to on Investor Day coming into play in the fourth quarter. So I think that -- from the PBM perspective, I think the pricing impact has been reflected in the current guidance. The volumes are always difficult to project, but we try to reflect the current trends, and we tried to reflect that at Investor Day as well, but volumes continue to decline, so we try to be more conservative on the volumes as well. So that is reflected in the low end of the guidance here. On top of that less [ph] with regards to our Infusion business, our Infusion business continues to do well from organic growth perspective. Clearly, it's less of a revenue issue, as we indicated, and it's a challenge for us on the cost side. We have highlighted here the fact that we had implemented, not that we just identified or develop, but we've actually already began implementing a cost reduction program to get at those costs, right, and to improve our margins. But in the low end of the range, all we've done is taken the September run rate number. And September -- the actual September performance for Infusion kind of back out all the onetime nonrecurring elements, multiplied that by 3 and made a modest adjustment for seasonality. We believe that is conservative, and that's our approach in terms of looking at the numbers now. And hopefully, we'll give investors confidence that we've been conservative enough. In terms of rebuilding credibility, that's a very good point. I mean, I think, for us, it is about getting the company streamlined throughout the fourth quarter and ready and prepared to go into 2014 more efficient, leaner and with good growth prospects, right? And that's all that we're looking for right now. And if we do that and we can end the year hitting these revised numbers, I think that we'll be able to be -- continue to have a more conservative approach towards guidance in 2014 that will enable us to meet or exceed expectations.

Brian Tanquilut - Jefferies LLC, Research Division

And then, Hai, just a follow-up on that last point. As you think about organic growth, you guys have done a great job driving organic growth in that Infusion business. But as you look at it today, what do you think will enable you to sustain that double-digit organic growth rate?

Richard M. Smith

I'll take this. Brian, this is Rick. I mean, we've spent the last 2 years building a -- our footprint out. We've been essentially working on this to attach to the national relationships we have, the preferred positions that we have on some of those national panels, and also increasing the level of feet on the street, leveraging our clinical programs. And so we believe that based on the investments we've made, the efforts we've done and the expansion of our resources, that we believe that we can continue to drive very strong organic growth levels. As Hai mentioned, revenue has not been an issue for us. We continue to get the pull-through activities from all our relationships in all of our markets, and it's really essentially focusing in on streamlining the operating platform of the company to improve our margins, increase our operating cash flow and our operating earnings levels as well.

Hai V. Tran

And I think, Brian, on -- from a -- first, from a cost perspective, I think that Rick and I agreed to that, that $10 million is just kind of the -- our first block, right? I think that there are other opportunities we're going to take a look at, and we'll update our investors in our February year-end call as to any incremental cost reduction opportunities that we've identified or -- and will be implementing that will also impact 2014 as well. So we will -- we continue to seek opportunities to further reduce our cost structure. I think in terms of the organic growth, sustainable organic growth side, I go back to the -- at the macro level, kind of the framework we talked about, right, which is the growth in the industry itself, which are driven by census growth and a strong infusion drug pipeline. Those factors are still there. Our organic growth continues to be driven by our ability to take market share due to the elements that Rick highlighted. We've proven that. We can continue to take market share. We see that because we -- when we look at the acquisitions we've done, they have grown organically at lower levels, so we know we're taking market share, right? We look at some of the initiatives with the payors around site of service, around out-of-network opportunities that really help them drive down out-of-network. That's clearly still there as well. So, I mean, all of those kind of more macro drivers are still intact, and we don't see that changing, per se, in 2014.

Brian Tanquilut - Jefferies LLC, Research Division

Last question for me. As I think about cash flows, you've been burning cash, if you don't mind just addressing that and addressing how much liquidity you have, the availability in your revolver and all that -- all your credit facilities. And then related to that, would you be open to considering any strategic options at this point, whether it's pursuing more transactions, however you can finance it, or exploring other similar strategic options?

Richard M. Smith

Thanks, Brian. Look, our -- as I mentioned in my remarks, we've invested in our working capital, so the -- we've purchased some AR with the acquisitions we've grown organically very strong. And essentially, we've identified that investment in working capital on the assets that we -- that came over with the acquisitions need to be reduced and turned into cash. So we basically have identified that. We are not looking to -- in the short term, over the next 6 to 9 months, we're focused on getting the assets that we have, the locations we have, the business that we have continue to grow at double digits, driving the targeted margins in operating cash flow and earnings that we've projected. And essentially, we'll look at acquisitions down the road when it's the appropriate time to go back there. And we have enough availability under our lines to continue to do -- to fund the business and grow the business, but our focus is on generating operating cash flow, positive cash flow, to take our debt levels down and continue to invest in the organic growth of the business.

Operator

Our next question comes from the line of Brooks O'Neil from Dougherty & Company.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

I guess, probably on the minds of all investors, if you could just refresh us what the covenants are on your current debt packages, that would be helpful.

Hai V. Tran

Sure. So with our term loan B, we have $400 million in term loan B, has no maintenance covenant associated with it. So it's what they call a covenant light, right? So on -- and then, I mean, no financial covenants. There are clearly other non-financial covenants, but in the -- in our revolver, the $75 million revolver that we utilize only to fund working capital, and that has no covenant so long as our draw remains under 25% of the line. When we go over 25% of the line, then there will be a covenant test around -- a leverage test, debt-to-EBITDA test. And the way the covenant defines EBITDA as we do it different than just straight EBITDA because we get credit for synergies for the acquisitions and whatnot, right? And so our -- the EBITDA as calculated under our -- under that scenario would be higher -- under the credit agreement would be higher than the EBITDA that we report to -- for purposes of our earnings. So the right out the gate, I think the initial test is 6.25x in terms of initial leverage.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

So would you say, based on what you see today, that you are in compliance with covenants today? And how do you see it playing out over the next quarter or so?

Hai V. Tran

Yes, I mean, we are clearly in compliance today. In fact, if you look at the third quarter, right, so a couple things. We are absolutely in compliance in the third quarter. But point of fact, our borrowings and revolvers are only $15 million, so the covenants don't even come into play. But if they did come into play, we're clearly in compliance, right? And then so long as we continue to grow our businesses as we projected here and improve -- and get the operating cash flow that Rick alluded to, which is a priority for us, then, even in the fourth quarter, we don't anticipate an issue.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Okay, that's good. And then I'm just curious, I guess, as I look at the company, I'm focused on the segment level margin profile that you guys put in your releases. When I look back last year, from Q2 to Q3, the adjusted EBITDA margin in the Infusion business improved by, I don't know, 65 basis points or something like that. And this year, from Q2 to Q3, it looks like it deteriorated somewhere in the same range. And I'm just trying to think it through. In the last year, you've acquired a number of businesses in infusion that have meaningfully higher adjusted EBITDA margins, at least according to the press releases. And so I'm trying to be sure I understand exactly what's going on there and what the reasonable outlook is over the next quarter 2 to 3.

Hai V. Tran

Yes, I mean, so it is an operating expense issue, right? I mean, the sequential performance of the Infusion segment was due to a lot -- as we highlighted in the Investor Day, right, a lot of operating expenses necessary to make sure we facilitate a good transition here, right? So there are redundant costs that we can get at over time, it's just that we can't get at it fast enough, right? And that's what's driving the EBITDA margin trends today. And that's why we're focused so keenly on operating expenses and what we can do to improve that margin pro forma. With that said, with regards to the acquisition itself, and I think as Rick highlighted and I highlighted in our prepared remarks, we are confident we can get to the 12% to 14% EBITDA margin range with this acquisition. Why? Because we've already done so with InfuScience, right? That's already there, right? Because we're tracking to it with HomeChoice, and there's no red flags that we found post closing with CarePoint that tells us we can't get there with CarePoint as well, right?

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

And is there anything going on with the mix of the core business that would prohibit you from getting that business to a meaningfully higher adjusted EBITDA margin as well?

Richard M. Smith

No.

Hai V. Tran

No.

Richard M. Smith

No, I think that's -- as I said, the strategic plan is to continue to drive increased percentage reputation by the core therapies in the future periods.

Hai V. Tran

And with that said, Brooks, I mean, mix is the hardest thing for us to forecast, right? We know directionally it is improving, but to try to get at it perfectly quarter-to-quarter is very challenging for us.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Okay, that's good. And could you just -- you obviously reserved some for the civil investigation. Can -- I know you probably can't talk a lot about it, but can you just tell us what specific activities are going on with regard to that investigation and if there are any other activities related to some of the announced investigations, lawsuits that have painted the tape for the last couple of weeks?

Richard M. Smith

Yes, we really can't say more than what we've talked about, and that is contained in the 8-K we filed on September 23. All we can tell you that the accrual just represents our estimate at this time. So it's -- we really can't go into much more specific than that at this time, Brooks.

Operator

Our next question comes from the line of David MacDonald from SunTrust.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Couple questions. First of all, on the $10 million in cost savings, do you expect to be at that run rate level exiting the fourth quarter?

Richard M. Smith

Yes.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then can you guys -- just back to CarePoint, in terms of the 12% to 14%, do you expect to be able to get to that level by the end of 2014? So will you be exiting -- do you think that acquisition, exiting 2014, will be at those type of margin levels?

Richard M. Smith

Yes. We'll get there before the end of 2014.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then, Rick, can you just run through the numbers again on the core percentage? I think you said 24% last year, now mid-30s. I just want to make sure I add those numbers right.

Richard M. Smith

Yes. Year-over-year, in the third quarter of last year, that we were at about 20 -- 24% in terms of the core therapies and then 35% as of this third quarter, but double in terms of revenue concentration of the consolidated Infusion revenue.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

And can you give us some type of sense of -- I don't know if you want to get into this, but if we look 12, 18 months out, whatever time frame, what type of percentage you're kind of targeting and hoping to be at, at that point.

Richard M. Smith

Well, I mean, minimally, 50% 1 year to 2 out in terms of our overall mix. This -- as Hai mentioned, we've got a number of initiatives going on with regard to our payor relationships opportunities on a national level. We now have 81 locations, so 2x what we had a year ago in terms of the numbers of facilities to drive that traditional core mix closer to our targeted levels.

Hai V. Tran

Okay, David, another way to look at that is, as we called on the Investor Day, we talked a lot about trying to double the size of our Infusion business within the next 3 to 5 years, right? And the question we get a lot is, why can't you get to the same margins as we see some of your larger competitors get to, and really it's just 2 things, right: driving that mix north of 50%, which is where we believe our competitors are at; and scale. And so we can get scale to drive operating leverage and get mix to improve our gross profit margins and drop through, we'll be able to generate those margins.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

And can you guys remind us just what changes you made in terms of compensation and incentives internally, in terms of focusing on the core therapies and growth there?

Richard M. Smith

Our commission program is heavily focused primarily on targeted therapies.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then, guys, can you just -- last question, just with regards to cash flow, can you provide us a little bit more detail on some of the initiatives that are being put in place to help drive cash flow? And has there been any change or will there be any change internally in terms of incentives, compensation, et cetera, tied to cash collections?

Hai V. Tran

Yes, I mean, I think I'll let Rick talk to compensation. But in terms of details of initiatives we got in place, so one of our challenges, David, this year is that we may -- we get 2 sizable acquisitions, we have strong organic growth, and so -- and I'm not sure that we'd done a good job in terms of keeping up with the volume growth, right, from that activity, both organic and inorganic growth. So what we've done is we've augmented our team with a third-party partner to help just have more resources to touch all the bills, right, and touch all that documentation to be able to move them more rapidly and improve and accelerate collections, right? Secondly, what we'd done is that not only are they helping us there, but we're integrating them into our workflows and our processes, so it's more seamless. And what that means is that once we get caught up, right, from the backlog that's grown from the acquisitions, theoretically, it should never rise again, right, if they're baked into our workflow, okay? So we'll have kind of permanent expansion of those resources effectively. I think, lastly, what we've done is that we've got a targeted group right now focused on our intake process because one of the best ways for us to accelerate collections in the back end is to have very, very clean documentation on the front end. And obviously, given all the acquisitions, there are real opportunities for us to standardize processes across the enterprise and help drive better performance on the front end.

David S. MacDonald - SunTrust Robinson Humphrey, Inc., Research Division

And then just, Rick, on compensation, I mean, are you guys giving some serious thought of tying part of piece full comp [ph] to what happens on the cash collection side?

Richard M. Smith

Yes, we're looking at essentially rolling out the -- we have cash collection bonuses for the reimbursement team, as well as we're adding more field operations to that as well. We've got our entire organization -- sales organization involved as well in terms of accelerating documentation sooner to drop cash into the big cash collection cycle moving faster. And so the opportunity is -- continues to provide us a -- the additional resources we brought in will enable us to accelerate touching our paper. The good news is that we've had strong organic revenue growth. The bad news is that, that volume has consumed a lot of our team. And as we've acquired the businesses, there's additional inventory that's come on. So we've already moved large blocks of AR to some of these outside resources, and they're already starting to have an impact in terms of cash collections and accelerating -- getting our receivables down. So our -- we -- again, we're focused on the fundamentals. Everyone in the organization will be aligned with incentives to achieve the targeted objectives we've set for ourselves.

Operator

Our next question comes the line of Mike Petusky from Noble Financial.

Michael John Petusky - Noble Financial Group, Inc., Research Division

Just a few questions. On the double-digit organic growth you guys are assuming can continue for the foreseeable future, I mean, what -- is there a way to quantify, essentially, the difference between what's organic growth for industry and what's organic growth for you, what's driving that? I mean, is that mostly the national contracts shift aside? I mean, can you just talk about and, to the extent you can, quantify what your assumptions there are that will keep that organic -- double-digit organic growth?

Richard M. Smith

Yes, we're seeing it from contributions from our national agreements but also from our local payor relationships, as well as from our hospital relationships, where we've been able to provide a more meaningful role in terms of the transitional care programs that a number of hospital systems have initiated. Given that opportunity, there are higher levels of census that come out related to -- covered by the various payors, depending on the marketplace.

Michael John Petusky - Noble Financial Group, Inc., Research Division

And I understand you guys have made some progress in terms of some of the higher-margin therapies, but I guess my question -- I mean, has this gone slower than you guys had anticipated? Has it been more challenging in terms of getting to that 50%? I mean, what's your true confidence level that you can achieve that over the next year or 2?

Richard M. Smith

Yes, we -- well, we feel very confident over the next year or 2. I think in terms of the operating performance, it's lagged based on some of the timing of some of the expected contributors to improve performance and step up in performance. And we are taking the steps necessary to get those lagging areas back to the operating performance levels that we expect out of each one of our areas of the company. And so the mix has grown nicely in a lot of our legacy locations, on a trend basis, in patient service and the core therapies. The acquisitions that we've made have come with a baseline of core therapies, and those businesses have grown and are starting to attach to some of our national agreements in terms of that level of pull-through. And so we believe that, looking out to the next year or 2, that continued progress in that area in terms of shifting the mix is available to us.

Hai V. Tran

Yes, Mike, another way to put it is that, I mean, as I mentioned earlier, right, directionally, we're very confident of the trends and the direction. So I think that if it's a 2-part question, and part one is, say, could you get to the 50%? Over time, the answer is yes, we feel that we can, right? But the first part of your question is, has it gone slower than we like? Absolutely, right? So as I mentioned, mix is one of the most difficult things for us to be able to forecast, and it has gone slower than we would like. But I think that, directionally and from a trend perspective, we feel confident we can continue to move the ball down the field.

Michael John Petusky - Noble Financial Group, Inc., Research Division

Okay. I mean, if you basically feel like you're figuring it out or at least you're getting there?

Hai V. Tran

Yes.

Richard M. Smith

Yes.

Michael John Petusky - Noble Financial Group, Inc., Research Division

Okay. All right. And then it sounds like, essentially, you guys are saying that the M&A program for now is basically being put on hold. And if that's not accurate, then please correct me. But I guess my question would be, is De Novo then going to be a bigger part of filling out the national footprint, say, over the next 3 quarters?

Hai V. Tran

Well, I mean, I think that when I say -- I think what Rick is saying is that we're clearly focused on the fundamentals. But with that said, I don't expect for us to go out there and do another acquisition with the size of even an InfuScience, which is the smallest of the 3 acquisitions, right? If we do an acquisition, it'll be probably a single mom-and-pop that is in a strategic location that we can bring volume to immediately because they are national contracts, for a change, okay? That's the type of acquisition we'll do, if any.

Michael John Petusky - Noble Financial Group, Inc., Research Division

Okay. And then last question, because there's been a lot of confusion, including with me, around this business, the PBM business, the revenue run rate you expect kind of over the next couple of quarters?

Hai V. Tran

Well, I mean, I think that the -- I think it comes back on the -- well, actually, I can tell you exactly what I think the revenue run rate is. But on the EBITDA side, right, what we said was, from an EBITDA perspective, that we do -- I think in the Investor Day, we said $17 million for the year, which would imply given our performance in the third quarter. But I did say that's part of the reason we sort of shifted the guidance down as well. It's more like in between $1 million to $2 million in EBITDA in the fourth quarter. From a revenue perspective, you're talking about a $10 million or $11 million revenue -- per quarter revenue business at this point in time.

Michael John Petusky - Noble Financial Group, Inc., Research Division

Okay. Any chance for actual growth in that business next year? Or is that going to be kind of a flat to continuing declining business?

Hai V. Tran

Well, I -- once again, I hesitate to be optimistic, but here's the fact, right, I mean, that business is still challenged, right? The good news is -- it's still challenged, right? But the good news is we have signed up some sizable clients, right, that will take time to ramp. We don't know what that ramp might look like, but if they ramp anywhere close to kind of our experience with other clients, right, then there'll be some growth, right? But once again, that's not something I would put out there as a reason to alter your expectations for that business today.

Operator

Our next question comes from the line of Randy Horstmann [ph] from Apeiron [ph] Capital.

Unknown Analyst

So if I run through the numbers, I mean, your guidance implies -- and this is important, your guidance implies about $210 million in Infusion Services revenues for Q4, right? That's just -- that's basic math. And if you were to -- if you annualize that, without assuming any growth, you get to $840 million. The margins that are implied in Q4 is something -- to get to your EBITDA guidance for the full year, it implies something like 8.5% to 9% margins in the Infusion Services business on an EBITDA basis in segments. So you got about -- you got a decent amount of recurring EBITDA. But if that 9% margin level holds for next year on $840 million of Infusion Services EBITDA, that gets a decent amount of cash flow, right? You get to $70-plus million in cash flow in Infusion Services?

Richard M. Smith

Yes.

Unknown Analyst

Plus whatever the PBM, as it is, you got it to $11 million, at this point, who cares? What's important is your core business. So if you guys are running already at the 9% levels, and you're telling us you're going to get an additional $10 million in corporate overhead savings, plus you're kind of running at double-digit organic growth rates, so that $840 million could become over $900 million, and the margins should increase, not decrease, from here, what am I missing in terms of looking at something like an $80 million EBITDA rate from that core business?

Richard M. Smith

Yes, we're -- I mean, that's -- we -- the unfortunate thing is we've got 2 non-core businesses that have created a lot of noise this year for us, and it's unexpected that the deterioration of the PBM business and in terms of that cash flow. But from my remarks and everything we've done over the last 2.5 to 3 years, as we've transformed this company, it's been a steady march to building out a national infusion footprint. We've been very clear and consistent that our march has been to drive a very strong national competitor and provider in the home infusion space, targeted towards the core therapies that require the strong clinical programs that we showcased at the Investor Day, the technology tools and solutions that we've built in terms of outcomes, and transitional care management is more of the patient census moves to home or alternate site for administration. And part of the issue in terms of the drag in the Infusion business the last couple of quarters has been really the infrastructure that we pulled with these acquisitions to support the successful integration and, essentially, to enable our field to not be distracted in terms of patient service, patient census level growth and, essentially, making sure that our customer service level in each market is the highest relative to our competition. And so, as Hai mentioned, in terms of our September run rate times 3, in terms of our Q4 forecast, that is -- we believe we have a very strong and profitable Infusion segment, we have some noise in some of the non-core areas, we've got some cost structure that we've already identified and have taken action on, and we expect that we'll find more than the $10 million by 10 years [ph]. So yes, we're very focused, and I believe we got a very strong platform.

Unknown Analyst

I want to run through -- Rick, I just -- I want to run through the specific numbers because if your run rate is $210 million in the Infusion Services segment, okay, and that includes CarePoint for Q4 because that's what's basically implied by the guidance...

Richard M. Smith

Right.

Unknown Analyst

At 9%, okay, that's $18 million in quarterly Infusion Services EBITDA. I'm just ignoring everything else, okay?

Richard M. Smith

Right.

Unknown Analyst

If -- even if there's no growth, okay, that's $72 million in annualized cash flow, because there's -- I assume there's not really much seasonality, and your current corporate base is about $30 million a year, your corporate overhead, to get to a consolidated EBITDA number, but you're going to take $10 million out of that $30 million. So even if you had 0 growth in Infusion Services and nothing else, you have $72 million minus $20 million, which would be $52 million in EBITDA. But you're growing the revenue in the Infusion Services by 10% a year, so that $210 million becomes $230 million a quarter, something like that.

Richard M. Smith

Right.

Unknown Analyst

And you're growing margins as well. So just ignoring PBM and everything else, your core cash flow should be $60 million plus or something. Am I -- so what I'm asking is the math, is that kind of the correct way to think about it?

Richard M. Smith

Right.

Hai V. Tran

Yes, I mean, I think, Randy [ph], I think your logic is sound. Obviously, we'll give guidance come February, but your logic is sound. There is some seasonality, but there's 2 things. One, there is some seasonality, by the way, in the fourth quarter, so just bear that in mind. I think, secondly, although the $10 million adjustment is correct, one point I want to highlight is the $10 million is absolutely going to impact 2014. But the only thing I wanted to just tweak in terms of your comment there is you're not going to see all of the corporate overhead line item. Some of that is going to come out of Infusion segment, some of it going to come out of Home Health, some of it is going to come out of the corporate, right? But on a consolidated basis, if you're ignoring the PBM and you're ignoring the Home Health, your logic, I mean, I can't argue with the logic.

Richard M. Smith

Right.

Unknown Analyst

Right. So you're going to have $60-ish million or something in cash flow just from Infusion Services, and that's growing. PBM is kind of flat line, maybe it's the $10 million or whatever. So you're at $70 million in EBITDA.

Richard M. Smith

Right.

Unknown Analyst

And you've got a company that, despite your debt load right now, you guys are saying that you're not going to do a huge amount of M&A. You're -- and you've got an enterprise value that's where the markets trading is going to be $800 million, so you're trading kind of 10-ish times cash flow. And that's before any growth -- any assumed underlying growth. So that's kind of the math, right?

Hai V. Tran

I mean, I think -- as I said, I think I can't argue with the logic, Randy [ph].

Operator

Our next question comes from the line of Dana Hambly from Stephens.

Dana Hambly - Stephens Inc., Research Division

Rick, I appreciate the details on the percentage from core therapies. I don't know if you gave it but I'll ask it anyway, could you give just the difference in the margin between core versus chronic therapies?

Richard M. Smith

Well, the core is typically in -- the differential can be 25% to 35% differential.

Dana Hambly - Stephens Inc., Research Division

Okay. Is it fair to assume that if you get to kind of a 50-50 mix, is that what gets you to somewhere in the 12% to 14% margin for that segment?

Richard M. Smith

We've always stated that our longer-term objective was to get into that 12% range in terms of after corporate allocation relative to the Infusion segment.

Dana Hambly - Stephens Inc., Research Division

Okay. And, Hai, just the DSOs ticking up sequentially -- obviously, the acquisition impact to that. I mean, we're in kind of the high 70s right now. As you implement some of these changes, where should we think about that DSO going to?

Hai V. Tran

I mean, I think, clearly, the low-hanging fruit has just definitely come down at least into the 60s in the near term. Then our internal targets, they are much more aggressive than that.

Dana Hambly - Stephens Inc., Research Division

Okay. And just how much cash do you need to run the business on a day-to-day basis?

Hai V. Tran

I mean, I think we should be -- once we absorb what's always the initial working capital drag on the -- with these acquisitions, we saw that with InfuScience on a smaller scale, we saw that with HomeChoice, we've seen that with CarePoint. But honestly, we're not doing any more sizable acquisitions in that horizon. We should turn cash flow positive.

Dana Hambly - Stephens Inc., Research Division

Okay, that's good to hear. And just lastly, on the cost reduction, I mean, I've been to your headquarters, you guys run pretty lean as it is, and I appreciate that it's not all coming out of that $30 million in corporate overhead. I'm just concerned with the organic growth being double digits. You're running lean. If you start to make reductions, how do you do that without impacting the organic growth profile?

Richard M. Smith

Yes, none of the targeted reductions will be at any position that will touch customer service, patient service, billing or cash collection. I mean, there's -- we've got opportunities to streamline our cost structure.

Operator

Our next question comes the line of Wilson Jaeggli from Southwell.

Wilson S. Jaeggli - Southwell Management, L.P.

Just on the cost reduction of the $10 million, can you put a little meat on the bones there? Where -- what exactly -- where are you going to focus? You just mentioned what you're not going to do. What are you going to do?

Richard M. Smith

Well, every other area is essentially up for evaluation to ensure that there's contribution to our growth and our strategic objectives. So we are ensuring that our patient service, our clinical capabilities and our cash flow generation activities are not touched. But as we said, we've essentially had some drag and some infrastructure that has been retained to ensure a level of focus on the integration and ensuring the seamless integration of the platforms we've bought this year. And so we just need to ensure that every position in the company is contributing towards our strategic objectives of improved profitability and revenue growth. And so we've identified not only positions but also have identified other facilities, duplication of costs that can be taken out relative to our service models.

Wilson S. Jaeggli - Southwell Management, L.P.

You'd be shutting down some locations?

Richard M. Smith

Well, we've also have -- we've got duplicate facilities that are being held right now that will close in some of the overlapping markets that we've had. At the same time, consistent with the cost reductions, both Hai and I are taking salary cuts as part of the cost reduction effort as well. And so every area in the organization will contribute to the targeted cash flow and operating margin improvement that we're discussing today and what we expect we can deliver in 2014.

Wilson S. Jaeggli - Southwell Management, L.P.

Okay. And another subject in here, it looks like your EBITDA margins on Infusion right now are 8.4%. You're talking about moving that to 12% to 14%, which looks pretty Herculean, even though I know you're going to try to change the mix between core and chronic. Help us understand, we maybe do our own math here, what's the fixed cost you have associated with the Infusion division? So that we can work our own numbers here and see what kind of revenues and gross margins you're going to need to get to that EBITDA margin.

Hai V. Tran

Yes, I mean, I think that is the point, Wilson. I think what we're try to do is we're trying to change that dynamic between fixed and variable costs, right? Right now, as we look at reengineering the organization and we look at the targeted cost reduction, what we have is the model that has higher fixed costs than we would like, right, and we're trying to convert that to more variable cost, right? So we're looking at everything, right? And every -- we're looking at the processes as well to -- are there ways to reengineer the processes so that we're less siloed, right, so we can take advantage of kind of the enterprise scale and really can unleash that opportunity to drive margin expansion. It is about us looking at converting the fixed to more variable costs, you're absolutely right. But I think one way to take a look at it -- I mean, another way to just kind of take a look at it is when I quote the growth effectively in the services -- Infusion Services segment, we talked about not only the mix, but we talked about scale and operating leverage as well, right? I mean, one way to get at the math is you get 48% year-over-year growth in Infusion Services, right, and -- but yet only 13% growth in corporate overhead. So you can -- if you even just extrapolate those numbers, right, you can very quickly build a model to see that -- the margin expansion that can occur. Another way to think about it is, well, from a margin expansion perspective is, when I look at it, every $10 million in cost reduction is about 100 basis points in EBITDA margin improvement, right, under our model today. So when you think about the ability to -- as we drive scale, we drive profitability and the cost -- that we cut more cost. That's 100 basis points for every $10 million of improved EBITDA, right?

Wilson S. Jaeggli - Southwell Management, L.P.

Okay. All right, that's helpful. The question was asked earlier about what you need -- what are you going to do to improve customer -- I'm sorry, shareholders' confidence in your management group, and I'll answer that question for you. You need to quit lowering guidance. You need to have a guidance here that we can live with. And certainly, that hasn't been the situation over the past quarter. And secondly, you need to deliver on what you say you're going to do. So that hasn't happened either. So I know it's been a tough time, you've had major changes in the corporation, but us shareholders out here have really had a tough time with the performance of the company and management here. So I hope you're on the right track now.

Richard M. Smith

We agree.

Hai V. Tran

Yes, no disagreement.

Operator

Our next question comes from the line of Matt Weight from Feltl and Company.

Matthew J. Weight - Feltl and Company, Inc., Research Division

I'll try to be quick here. Hai, if I try to exclude EBITDA contributions from InfuScience and HomeChoice Partners this quarter, it will look like the legacy business didn't come [ph] closer to 8% margin. Can you comment if my math is right there? And also, how much of a drag are the additional resources that you're holding onto from the acquisitions?

Hai V. Tran

Yes, I mean, I think that what we said on the legacy business is that the legacy business is off -- its starting point was heavily weighted towards chronic therapies. So single-digit EBITDA margins is right. I mean, that's -- but that our acquired entities have had better mix. That was part of the calculation when we go after the acquisitions, that they had better mix. And we knew that if we brought our national contracts to bear, we brought our purchasing scale to bear, and we brought our infrastructure, right, our kind of the operating expense infrastructure to bear, we could drive margin improvement in gross profit, and we can drive operating leverage, right? And so absolutely, the acquisitions are performing better than the legacy business, from a margin perspective.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Okay. And then can you talk about gross margin rates with PBM coming down as a percent of your business. Is Infusion Services closer to a 32% longer-term? Is that more realistic?

Hai V. Tran

Yes, I mean, I think, once again, it's all going to be driven by mix, right? I mean, I think that if we -- as Rick said, if we can get mix above 50%, then in the mid-30s is not unreasonable, right? It depends on where mix goes. I mean, I think that if mix continues on the trend it has, kind of in the 30-ish percent range is very feasible.

Matthew J. Weight - Feltl and Company, Inc., Research Division

All right. Last question, and I'll get off here. Just on United national platform, clearly, there's volume advantages, but can you comment -- is the profitability of that contract less than others?

Richard M. Smith

No, the mix in terms of traditional therapies are pretty consistent with other contracts.

Operator

Mr. Smith, there are no further questions at this time. Please continue with your presentation or closing remarks.

Richard M. Smith

Great. Thank you, everyone, for your time today and your participation in our third quarter call. Have a good day. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. Have a great day, everyone.

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