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Omnicare, Inc. (NYSE:OCR)

Q4 2013 Results Earnings Conference Call

February 19, 2014, 09:00 AM ET

Executives

Patrick C. Lee - Vice President of Investor Relations

John L. Workman - Chief Executive Officer

Nitin Sahney - President and Chief Operating Officer

Robert O. Kraft - Chief Financial Officer

Analysts

Brendan Strong - Barclays Capital

Lisa Gill – JPMorgan

Frank Morgan – RBC Capital Markets

Glen J. Santangelo - Crédit Suisse AG

Robert P. Jones - Goldman Sachs

Steven Valiquette - UBS

Operator

Good morning. My name is Jennifer, and I will be your conference operator today. At this time I would like to welcome everyone to Omnicare's Fourth Quarter 2013 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question-and-answer session. (Operator Instructions). Thank you.

And I would now turn the call over to Patrick Lee, Omnicare's Vice President of Investor Relations. Mr. Lee, you may begin your conference.

Patrick C. Lee

Thanks, operator. Good morning, ladies and gentlemen, and thank you for joining us today. With me on the call today are John Workman, Chief Executive Officer; Nitin Sahney, President and Chief Operating Officer; and Rocky Kraft, Chief Financial Officer.

Before we begin I would like to make you aware of a few items starting with our upcoming investor calendar, which includes the following conferences. The RBC Capital Market Healthcare Conference on February 25; the Cowen and Company Healthcare Conference on March 3rd and the Barclays Global Healthcare Conference on March 11th.

Our remarks in today's call will include forward-looking statements. Actual results may differ as a result of a variety of factors, including those identified in our earnings release and in our various filings with the SEC. You are also cautioned that any forward-looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future.

For simplicity's sake and to focus on what we believe are the best indicators of our operating performance, we will discuss results from continuing operations only and will also exclude special items for all periods in our discussion today unless otherwise noted. A reconciliation of this non-GAAP information has been attached to our earnings release and is also available on our website.

Also on our website are fourth quarter supplemental slides, which we will follow during our discussion today as well as restated financial quarterly financials from continuing operations. Before turning the call over to John I would like to remind analysts to limit themselves to one question and one follow-up during the question-and-answer session so others may ask their questions.

With that it is my pleasure to turn the call over to John Workman.

John L. Workman

Thank you, Patrick, and good morning. We appreciate you joining us. For this morning's discussing I will being with an overview of our fourth quarter performance; Nitin will then review our segment results and ongoing operating initiatives; Rocky will provide a review of our financial results and 2014 guidance from continuing operations. As you have read we had some businesses that became discontinued operations in the quarter; and then lastly I will provide closing comments.

We are pleased with our strong results in 2013 and the important milestones we achieved, which include the following. First, achieving full year net organic bed growth in Long Term Care; Second, generating double-digit growth in our Specialty Care Group while eclipsing $100 million in full year adjusted operating profit for the four platforms in the Group's configuration; and lastly returning over 50% of our operating cash flow to shareholders for a second straight year.

Fourth quarter cash earnings per diluted share of $0.87 represent a 9% increase bringing our full year total to $3.43 or 10% increase over the same prior year period while also representing the second consecutive year of double-digit growth. Adding the adjusted earnings of our discontinued operations to our continuing results would sum to $0.90 per diluted share for the fourth quarter and $3.61 per diluted share for the full year 2013. $3.61 was the mid-point of our revised guidance which had revised upwards from the midpoint of our initial $3.52 this time last year.

Our cash earnings per diluted share of $0.87 was driven by another quarter of strong underlying operating results, demonstrated by a 5% overall revenue increase fueled by strong double-digit revenue growth in our Specialty Care Group principally from our Specialty Pharmacy platform though as you know this platform has a low gross margin rate.

Also our adjusted operating profit grew 14% and our operating margin expanded 75 basis points as realization of efficiencies and other cost containment initiatives from programs established during the year more than offset any negative gross margin impact; and finally, the leverage creating growing revenue 5% and operating income 14% points to the leverage and the quality of our earnings.

Lastly, our fourth quarter results reflect a modestly lower share count which is worth about $0.01 per share offset by higher effective tax rate which cost us about $0.03 per share and lower cash-based EPS adjustments which costs us about $0.02 per share. If you consider these variances results would have been $0.94 a share for the quarter including discontinued operations.

Fourth quarter operating cash flows were $24 million, impacted by a timing issue related to inventory purchases paid for on December 24 which Rocky will cover in his comments. During the quarter we initiated a 43% increase to our quarterly cash dividend, while also announcing a record $500 million share repurchase authorization. We believe we remain well positioned to return capital to shareholders through 2014, while also evaluating potential acquisition opportunities.

We are proud to report that during the year in which we implemented a number of operating initiatives and strategically repositioned the business we generated solid financial results each quarter. We believe this reflects a disciplined approach instilled across the organization as well as the opportunity which we believe exist across our six core growth platforms.

I will now turn the call over to Nitin, who will provide a segment review and offer additional perspectives on our ongoing operating initiatives.

Nitin Sahney

Thanks, John and good morning everyone. We are very pleased with our fourth quarter performance which reflects the continued strength of our operations and benefits of our ongoing operating plan.

Within our Long-Term Care business we further improved our effectiveness in the market as demonstrated by our third consecutive quarter of net organic bed growth. This marks the first time we achieved this result in over ten years and we believe we have created a systemic environment for organic growth. Our fourth quarter customer growth was driven again by continued benefits associated with our sales and service initiative.

With respect to sales we generated another double-digit quarterly increase in beds added, which brings our full year 2013 increase to 32%. The new business excludes the signing of Kindred's skilled nursing facilities which we began servicing in early 2014. While it has only been one year since we have fully implemented our sales strategy we are pleased with its overall effectiveness. Our sales organization has been successfully serving our full value proposition which consists of our technology, clinical expertise and operational execution.

Regarding operations, we believe the changes we have made to drive more consistent service delivery have resonated well with our customers. This is reflected in the 260 basis points improvement in our fourth quarter customer retention rates over the comparable period of 2012. Importantly, controllable losses which are a reflection of service was 24% lower sequentially and 21% lower on a year-over-year basis.

For the full year 2013 our retention rate of 93.7% was the highest of any year in recent history, as the benefits of our service-related initiatives more than offset slightly elevated uncontrollable losses. Most importantly we generated year-over-year adjusted operating income growth of 3.5% for the fourth quarter in our Long-Term Care business as our team excelled at optimizing efficiency opportunity which led to a 47 basis points increase in operating margin to 13.7%.

Within our Specialty Care Group we continue to benefit from the increased development and utilization of complex pharmaceutical products. Our Specialty Care Group generated fourth quarter revenue growth of 26%, representing the 12th consecutive quarter in which we have exceeded 20% top line growth. While we experienced fourth quarter revenue growth from all four specialty platforms, our Specialty Pharmacy platform again grew at the fastest rate, impacting the Group’s operating margin due to its lower margin profile. Notwithstanding this dynamic the collective Group generated 16% operating income growth during the fourth quarter.

Regarding our Specialty Pharmacy platform specifically we continue to be pleased with the performance of our dispensing business. In fact, the majority of our pipeline of key limited distribution network proceeds is composed of products and multiple therapeutic areas. While we are having success with our Specialty Pharmacy platform we are also laser focused on growing our fee for service platforms.

We believe the integrated nature of these services provides a compelling end-to-end solution for manufacturers, positioning up well as pharma continues to consolidate outsourced services and more often products developed by pharmaceutical company that lack in internal commercialization infrastructure. In fact, we are seeing increased traction in converting fully integrated opportunities for our biopharma and orphan status clients.

Overall we continue to be pleased with the performance of our Specialty Care Group. We aggressively targeted the market in 2013 generating 78% more wins than losses while considering opportunities across all specialty platforms. We generated double-digit revenue and operating income growth for the third consecutive year and we believe that will continue into 2014.

Across all our operating platforms we are very pleased with the foundation that has been constructed for future growth. In just over a year we re-constructed our operations, implemented a sales transformation strategy, and centralized certain aspects of our business all while generating improved operating and financial results across all of platforms within our two business segments. We intend to build on the momentum we have established to generate continue growth across our business in 2014 and beyond.

And now I would like to turn it over to Rocky, who will cover our fourth quarter financial results and the 2014 guidance.

Robert O. Kraft

Thanks Nitin and good morning everyone. As Patrick mentioned earlier we have filed supplemental slides and I will refer to these slides during my remarks.

Our fourth quarter financial results were driven by another strong underlying operating performance with 5% and 14% growth in revenues and adjusted operating income respectively. This performance capped off a strong fiscal year 2013 characterized by 8% growth in adjusted operating income and a 46 basis points operating margin increase.

From a volume perspective, the detail of which you can find on slide five, fourth quarter Long-Term Care scripts dispensed from continuing operations were relatively even sequentially at 27.9 million and 600,000 scripts lower than the 28.5 million scripts in the comparable quarter of 2012. As I will detail later adjusted operating profit per script increased over the prior year.

Script volumes were impacted by a shift in bed mix for assisted living which generally has fewer scripts on a per bed basis and modestly lower occupancy rates in skilled nursing. Utilization levels were generally higher on a year-over-year basis. As we have said regarding volumes we are simultaneously focused on gaining share in skilled nursing and assisted living while also increased penetration rates within our existing assisted-living customer base. We believe these factors will contribute to script growth in 2014, which would mark our first full year increase since our re-organization began in 2010.

Let me now cover net sales and gross profit which you can find on slide seven. Our fourth quarter net sales of $1.536 billion reflect a 5.1% increase from the $1.462 billion in the comparable prior year period. This improvement was driven by rapid growth of our Specialty Care Group and drug price inflation both of which more than offset the aforementioned lower scripts volumes.

Fourth quarter gross profit increased 1.2% on a year-over-year basis to $359.7 million as operational efficiency gains, strategic sourcing improvements and growth in Specialty more than offset lower script volume and normal pricing adjustments for payers.

On a year-over-year basis gross margin declined 90 basis points, due to a revenue mix shift towards our lower margin Specialty Pharmacy business and general pricing adjustments with PDPs and other payers. Partially offsetting these factors were increased purchasing efficiencies. Sequentially, our fourth quarter gross profit increased 2.2% on an 18 basis points margin improvement, driven primarily by the strong performance from our Specialty Care Group.

As we had discussed previously our gross margin rate can vary between periods based on a number of factors such as the mix of growth within our business and the timing and magnitude of generic drug introductions. Our focus remains on growing profit dollars.

Next I will turn to SG&A expenses and our provision for doubtful accounts. Fourth quarter SG&A expense of $190.9 million equated to 12.4% of net sales or approximately a 143 basis points improvement compared to the prior year period, due to the disposition of certain non-core ancillary business in 2013, increased efficiencies and other cost containment initiatives.

Sequentially, SG&A increased 37 basis points as a percentage of sales as a result of a variety of factors including several unfavorable year-end adjustments, increased marketing expenditures and higher delivery costs. This sequential change followed with similar increase over the same quarters of 2012.

Going forward we anticipate our SG&A run rate to be between our Q3 and Q4 2013 levels. Longer term we expect our SG&A to grow along with the organic growth of the business. Our provision for doubtful accounts of $24.4 million was 1.59% of net sales for the fourth quarter of 2013 or 22 basis points lower on year-over-year basis. Fourth quarter day sales outstanding of 41.7 was lower by nine days than the year earlier period. We have made steady progress with the receivables balance from the three years prior when DSOs were in the mid-60s, this improvement has been from more efficient billing and collection activities.

I’ll now look below the SG&A line. You can find the details on slide eight. Fourth quarter adjusted EBITDA of $171.7 million was 12.3% higher than the prior-year period. Adjusted depreciation and amortization expense was $27.4 million for the fourth quarter of 2013, reflecting a 3% increase over the comparable year earlier period. We expect depreciation and amortization expense to increase throughout 2014 reflecting our increased investment in the business during the last few years.

While net interest expense of $23.8 million was consistent with the prior year period we have made several recent changes to our capital structure primarily with the intent of reducing the dilutive impact of our in-the-money convertible notes. We intend to continue to evaluate opportunities to optimize our capital structure.

Excluding the impact of special items, our fourth quarter effective income tax rate was 39.3% or 284 basis points higher year-over-year as a result of non-recurring discrete tax provision adjustments. While our effective tax rate is variable from one quarter to the next we expect our go forward run rate to be 50 to 75 basis points lower than our fourth quarter 2013 rate.

As a reminder our cash tax rate is generally much lower reflecting the goodwill we amortized for tax purposes and the comparable yields with the [DARTs] relating to the contingent interest on our outstanding convertible bonds.

Adjusted income from operations for the fourth quarter of 2013 was $73.2 million, a 12.3% increase over the $65.2 million we reported for the same period of 2012. Our fourth quarter cash EPS adjustments were $21 million or $0.19 per share, representing an 8.3% decrease from the prior year period. These items generally are not expected to grow at the same pace as underlying earnings, especially in 2014 when we anticipate a negative contribution between $3 million and $4 million driven by lower amortization from intangible assets as well as reduced benefit from the tax amortization of goodwill.

Adjusted cash earnings from operations of $94.3 million increased 6.9% versus the fourth quarter of 2012. Our diluted average share count declined 1.1 million shares on a year-over-year basis as a result of our share repurchase program, more than offsetting the increased dilutive impact of our in-the-money convertible notes.

On a sequential basis, the diluted share count was 2.5 million shares lower, primarily due to the exchange we completed on a portion of our 2025 convertible bonds in the third quarter of 2013. Keep in mind, the diluted share count can vary quarter to quarter based on the timing of share repurchases and the price of our stock which correlates to dilution on our convertible bonds.

For the fourth quarter of 2013 we generated adjusted cash earnings per diluted share of $0.87 or 8.7% increase over the $0.80 reported in the comparable year earlier period. This concludes the collective $0.05 per share negative impact from taxes and cash based adjustments. Additionally, our fourth quarter adjusted cash earnings per diluted share excludes $0.03 per diluted share of discontinued operations which relate to our hospice business and certain retail operations.

As John mentioned earlier our hospice pharmacy business and certain retail operations met the requirement for discontinued operations accounting during the fourth quarter. For the full year 2013 discontinued operations contributed $0.18 of adjusted cash earnings per diluted share, which includes the associated cash-based adjustments.

Next let me turn to our segment results which can be found on slide nine. Our Long-Term Care Group generated fourth quarter revenues that were consistent with the prior years $1.17 billion as drug price inflation offset lower script volume. The segment's fourth quarter adjusted operating profit of $160.4 million increased 3% as compared to the comparable 2012 period. Adjusted operating income per script increased to $5.75 an increase of 6% per script. This was primarily driven by the favorable effect increased efficiencies had on the segments margin rate.

Our Specialty Care Group generated a 26% in fourth quarter net sales to $367 million with all four platforms generating year-over-year top line growth. Fourth quarter operating income for our Specialty Care Group increased 16% over the comparable prior year period with the mix shift towards our Specialty pharmacy platform adversely affecting the segment's operating margin rate.

For the full year 2013 we generated revenue and adjusted operating income increases of 28% and 22% respectively for our Specialty Care Group. We believe our Specialty Care Group will generate another double-digit growth performance in revenue and adjusted operating income for 2014.

Fourth quarter special items were $14.6 million on an after tax basis. In addition the fourth quarter included a charge of $148.5 million recognized for the impairment loss and other related expenses and discontinued operations these were also considered special items.

Next let me turn to the balance sheet. We ended the year with $356 million of cash on hand including restricted cash following nearly $150 million in share repurchases and dividends paid during the fourth quarter. The cash balance did not factor in outstanding settlement amounts of approximately $120 million which are expected to be paid during the first quarter of 2014. Our accounts receivable of $695.7 million were $126 million lower than the amount at which we exited 2012. Fourth quarter inventories of $512.4 million were elevated at year-end 2013 as a result of increased purchases prior to year-end.

Next let me turn to cash flows you could find the detail on slide 10. Fourth quarter operating cash flows were $24 million as the effect of the aforementioned purchasing initiatives resulted in a working capital use which we believe is a timing issue that will reverse in the first quarter of 2014. Operating cash flows were also adversely affected by one additional payment to our prime vendor in addition to our regular semi-annual interest payment.

For the full year 2013 we generated operating cash flows of $480 million. Excluding settlement payments our operating cash flows were $500 million in-line with our previously stated guidance despite the timing issue in Q4.

Next I'll cover the redeployment of cash flows which you can find of slide 11. Our fourth quarter capital expenditures of $21.7 million moderated slightly but continued to reflect elevated investments in the business that are expected to improve the efficiency of our operations and to enhance customer service. We expect CapEx for the next couple of years to remain close to our current run-rate as we continue to invest in the business especially in our Specialty Care Group.

We repurchased $130 million in common shares during the quarter and had $500 million in remaining repurchase authorization at the end of 2013. We also increased our quarterly dividend by 43% in the fourth quarter to $0.20 per share. Between dividends and share repurchases we returned 59% of cash flows from operating activities to shareholders in 2013 reflecting the second consecutive year in which we returned more than 50%.

I will now discuss our 2014 guidance which you can find on slide 12. We expect 2014 net sales between $6.3 billion and $6.4 billion which reflect a 5% to 7% increase over 2013. Adjusted cash earnings per diluted share from continuing operations are expected to be $3.64 to $3.72, reflecting a 6% to 8% increase over 2013. This range reflects two important items. First the $19.3 million adjusted cash earnings contribution in 2013 from our hospice and retail business that is not expected to contribute to our 2014 results since they have been moved to discontinued operations. And second an expected $3 million to $4 million year-over-year decline in after-tax cash-based adjustment, based on the re-stated cash adjustment from continuing operations.

Collectively, these items resulted in $0.22 of adjusted earnings per diluted share in 2013 that is not included in our 2014 expectation. We have considered share repurchases in our guidance and have also included assumption for incremental dilution from our convertible bonds. Operating cash flows are expected to be between $475 million and $550 million excluding settlement payments which factors in the expected reversal of the timing issues that impacted fourth quarter 2013 cash flows.

With that, I would like to turn the call back over to John.

John L. Workman

Thanks Rocky. I would like to make a few additional points regarding our 2014 guidance. Our growth expectations for the underlying business are strong in 2014 notwithstanding; first, a fairly quiet year in terms of benefits from new generic introductions; and secondly a higher contractual pricing adjustments with PDPs and other payers though we believe this impact will moderate in subsequent years.

While historically these factors would have impacted our success in a given year we have restructured our operations to allow for continued growth under such circumstances. Having said that we do want to highlight that the midpoint of our 2014 adjusted cash-based EPS guidance represents a three year compounded annual growth rate of 10.7% from 2011.

While we are not providing 2015 guidance today we believe 2015 will have more favorable external factors including a more attractive brand and generic year and the introduction of our more Specialty products, both of which will augment the organic growth we believe that becomes sustainable across our business.

Finally, I note that it was a landmark year for us in terms of how much we accomplished operationally and financially. This was attributable to the efforts of our employees and management team throughout Omnicare. We take talent development seriously as part of good governance and succession planning.

We have a solid team and growing bench led by Nitin who is a key part of the company's current and future success. Nitin was the driving force behind operating initiatives and strategic repositioning of our business while continuing to assume increased responsibility of other functions. His leadership and guidance will continue to play an invaluable role in defining Omnicare's long-term strategic direction. With the foundation firmly in place we believe this team is fully aligned on the steps required to continue creating value for our shareholders.

With that we would now like to open up the call for questions.

Question-and-Answer Session.

Operator

(Operator Instructions). And our first question comes from the line of Brendan Strong with Barclays Capital.

John L. Workman

Good morning Brendan.

Brendan Strong - Barclays Capital

Good morning, John. I think, maybe first just on the hospice business, I think one thing that people may be trying to understand better is, these businesses added recall $0.18 in 2013 but you're divesting them. So what's the rationale for divesting an accretive business and then is there some plan for capital deployment that will eventually offset that? Just walk us through that a little bit.

John L. Workman

Sure. So I think if you go back Brendan, we have been, I think we have been signaling in the drivers that, that's been a little bit of negative headwind to the company in that business. But when we were re-organizing the six platforms we looked across the business and as you know this did not include a hospice or retail. That's consistent with our prior efforts to identify non-core businesses that may no longer fit strategically within our business operations.

We are always evaluating our portfolio, but with a tendency to want to focus on those businesses which are growing, and we made a decision that we could spend time on that business but we probably get better returns by spending more time in our Long-Term Care and Specialty Care and give better return value to shareholders. Just based on the accounting rules, hospice and retail met the discontinued operations definition and we re-classified those businesses accordingly.

On the second part of your question, dealing with the proceeds, it's too pre-mature to speculate on the proceeds of the business. We have not factored anything into the proceeds of those businesses being used to repurchase additional shares or anywhere, any wise, otherwise earmark that cash proceeds from the usage by the company. So we have not built that into expectations. I hope that answers your question.

Brendan Strong - Barclays Capital

Yeah, no it does. Thank you. And then maybe just on if you could spend a little time just talking about the mix shift within the Long Term business, it sounds like so you are delivering net organic bed growth but scripts are still down and it sounds like the answer is make shift from nursing homes to assisted living. So do you expect that to be a continued drag on script growth and that makes up for the drag on script growth in 2014? I know you are expecting script growth but you got the Kindred contract in there too. So just maybe spend a little time on mix shift going forward.

Robert O. Kraft

Sure. Hey, Brendan it’s Rocky. Let me start with that, year-over-year we had about 2.3% decline in scripts. A big driver of that was the mix at the outset. As you know because of our penetration rates and the time that it takes to ramp up typically you are going to have a little lower [QODNL] and you are going to have a few less scripts. We also saw slight a little bit less than 1% decline in script census year-over-year although I will tell you on the outside that’s favorable.

The other factor that I would put in place is that we have seen in the fourth quarter milder flu season in 2013 than we saw in 2012 and so all of those kind of contributed to what you saw in the fourth quarter.

On a longer term basis as we think about the demographics of our patients and our customers coupled with the underlying business that we are growing organically we do believe we will see growth in our script numbers and our plan is for 2014 that we will grow scripts. Nitin you want to add anything?

Nitin Sahney

Our focus is now on growing our med business and our [assist] business and they are not including Kindred if you look at the number, that Kindred bed majority of them in fact all of them are on the net value and our targeting et cetera is going to be on both [inaudible] and mix and we believe that the mix will turn out to be more favorable by the time we reach end of 2014.

Brendan Strong - Barclays Capital

Okay, great. Thank you.

Robert O. Kraft

Thanks.

Operator

And your next question comes from the line of Lisa Gill of JPMorgan.

John L. Workman

Good morning, Lisa.

Lisa Gill – JPMorgan

Good morning. John I just want to follow up on your comment around how your contractual adjustments with PDP, is that you had a number of contracts that were up for renewal this year with the PDPs or other type of things that happened? Contractually I am just trying to understand that comment a little bit better and how it impacts 2014.

Robert O. Kraft

Sure. Hey, Lisa it’s Rocky. You know typically as you know on the reimbursement side and with our PDPs it’s typically a negative year-over-year. We did see a little more negativity in ’14 and we’ll see a little more, there are some stepped out in some contracts and some new contracts that came in place. The other thing that I would tell you in ’14 we did see a negative impact more so than we saw in ’13 around reassignment of our customers and so as we look out to the future and we look to ’15 we think that, that impact should be less than what we saw in ’14. And what I would tell you just fundamentally as we look at growing the business and growing it organically we think that’s a key to offsetting any reimbursement pressures that we would have in the future.

Lisa Gill – JPMorgan

And then also on the reimbursement side Rocky any thoughts around AMP based FUL, I mean it looks like it’s finally going into place this year?

John L. Workman

Yeah I will answer that. Lisa, this is John. So I mean clearly CMS hasn't advanced any new pricing and haven’t gotten to the point of publishing final price list. They did delay AMP-based FULs from January to July, fix date have adopted acquisition cost. The extended delay has allowed us to rework a lot of our contracts and we have limited exposure primarily in the Medicaid area. So while we figured something into our guidance, slight negative for 2014 Lisa it’s a fairly small number.

Lisa Gill – JPMorgan

Okay, great. And then I guess just one other one which is drug price inflation you did call out drug price inflation. Can you remind me is that generally a positive or a negative for you? You definitely talked about buying some inventory going into the end of the year so are you taking advantage of the pricing around buying products before price goes up and then secondly if you can remind how drug price inflation works on your side. Thank you.

Robert O. Kraft

Sure. It’s just at a high level. Lisa it’s Rocky. I mean drug price inflation obviously it helps us on the revenue line. And then as we look at our gross profit typically as we run through the year that’s going to be negative because it’s going to come at lower rates than our existing businesses. So positive on the revenue line, negative on the gross margin percentage line but positive from the gross margin dollar perspective and as we talked about many times we are looking to drive gross profit and operating profit dollars in the business. We are not as focused on the percentage.

Lisa Gill – JPMorgan

Okay, great. Thank you.

Operator

And your next question comes from the line of Frank Morgan with RBC Capital Markets.

Frank Morgan – RBC Capital Markets

Good morning. Hoping you can remind us about the actual relative stats between the assisted living business versus your traditional skilled nursing business and how you think that mix changes by the end of the year and may be over next year? And then secondly, with regard to the specialty side of the business, as you look at that or expect that 20% plus top line growth within those sub segments of that Specialty business what we should expect to be the biggest driver? Thanks.

John L. Workman

Maybe Frank, let me begin on assisted living and skilled nursing spread. Assisted living today is about 15% of our business and as we look in '14, we are looking to grow skilled nursing and assisted living and so our plan is to grow each of those. As we talked about historically, on the skilled nursing side, that's primarily around gaining back our market share. On the assisted living side it's around market share coupled with increased penetration and quite frankly just growing the market growth.

Robert O. Kraft

And Frank, I would add just one thing. That 15% number was scripts. If you are looking on bed it's probably more 28% to 30% of the -- if the penetration rates are close to the 50 we kind of have to have that number.

Nitin Sahney

And this is Nitin, Frank. I think as we enter '14 with our new strategy for penetration of ALF we expect to grow those scripts with additional penetration to the existing customers. Regarding specialty all our four platforms have grown. Obviously our dispensing business has been growing faster on the revenue side. We also believe that with our pipeline for our fee-for-service business entering '14 which is higher EBITDA margin business that should start contributing in latter half of '14 and going to '15. So all our platforms are going to be positive in terms of growth in '14 and in the future.

Frank Morgan – RBC Capital Markets

So fee-for-service business will help the mix and the margins in the second half of the year. The actual reason I asked is that assisted living is you commented about the impact on margin there. So what do you think that mix will ultimately be on assisted living versus SNF in terms either on a bed basis or scripts basis, is it going to move the needle enough this year to see it or should we just expect the same ratio?

Robert O. Kraft

Yes. I think Frank, I think the comment was not about and our operating profit per script has actually gone up. I mean we have had steady growth in our operating profit which is again what we are focused on. I think the comment was on the script count itself. It doesn't shows as robust growth because the out mix is not as strong. As Nitin said growing penetration in ALF but more importantly also continuing to focus on growing share in skilled nursing, we feel obviously a lot more comfortable in 2014 about script growth.

Nitin Sahney

And Frank we expect that mix to be contributing to more positive scripts in '14 if that was your question. I think as the penetration increases, as our sales for both our platforms within Long-Term Care SNF and ALF also organically increases we should see both of those platforms producing additional scripts.

John L. Workman

Frank, I think the reason why scripts didn't actually go up in 2013 is because the SNF segment was actually down. But because we expect to grow that platform, anything we grow in assisted living is kind of incremental on top of that growth. That's kind of the way to look at it.

Frank Morgan – RBC Capital Markets

Okay. Thank you very much.

John L. Workman

Thanks, Frank.

Operator

And your next question is from the line of Glen Santangelo with Crédit Suisse.

John L. Workman

Good morning Glen.

Glen J. Santangelo - Crédit Suisse AG

Good morning. John, I just want to ask you about that hospice business once again, I mean could you may be give us the current EBITDA run rate for that business so we can may be think about what it might be worth and how it might actually impact your share repurchase assumption down the road?

John L. Workman

Yes. We don't break out the EBITDA components Glen but I mean we did give you the earnings per share. So you can kind of back into our calculation. And again, to our comment, we haven't factored anything into the use of proceeds in terms of share repurchases. Obviously that's going to depend upon the timing of it and what our available items are but clearly we have been focused on returning value to shareholders. All those are built into our guidance but we don't have a number to tell you. If we had a number to tell you proceeds we would also than address how we will use proceeds.

Glen J. Santangelo - Crédit Suisse AG

Okay, maybe if I can follow up and ask Rocky a couple of questions around the guidance. Rocky, I thought I heard you to say cash-based EPS adjustment will not grow as fast as I think you said operating income or net income in the future?

Robert O. Kraft

Yes. As we look into '14 Glen, I mean it's actually a $3 million to $4 million negative and so it's a headwind in '14. As we look out to '15 and we put on our drivers chart and our supplemental slide we see '15 as being more neutral and clearly we are growing the business obviously those numbers aren't growing as quickly as the underlying business, neutral in terms of the cash adjustments…

John L. Workman

I think if you go back Glen we have -- since we haven't made acquisitions there's been a little bit of wind down of some of those adjustments. But as Rocky said as we look at '15 and beyond it will start to go back-up with some of the other initiatives we have put in place.

Glen J. Santangelo - Crédit Suisse AG

And then Rocky you sort of said that the company is taking some steps to minimize the impact of the future dilutive impact of the converts, or the impact to that. Are you suggesting that the company has already taken these steps or is going to take more steps, could you elaborate on that comment a little bit longer, because that's obviously going to impact our share count assumptions. And then as sort of a related to question to that you said you contemplated share repurchases within the guidance. And how should we think about the level of share repurchases in 2014 will be somewhat comparable to '12 and '13 because I think a lot of people are getting hung up on how to model the share count going forward?

Robert O. Kraft

Sure I mean as you could -- in the third quarter Glen we did the convertible exchange which actually reduced the diluted share count by 2.5 million shares in the fourth quarter. We are going to be opportunistic around what we do and look at what has the best return to Omnicare. And so if there are favorable conditions to look at doing something around these convertible bonds, we will do that but we will have to weigh that relative to returning capital to shareholders or any other opportunities that we have. That's probably all I can say around that. - go ahead.

John L. Workman

On the share buyback I mean we have a $500 million authorization that exists as of the end of 2013. It runs for two years. You can presume kind of optimal use of that portion. Again anything that might happen with the proceeds from the -- a potential divestiture would be additional money available to the company for use. But we would declare that at the time we would know the actual proceeds.

Glen J. Santangelo - Crédit Suisse AG

Okay. Thanks very much.

John L. Workman

Thanks, Glen.

Operator

And our next question is from the line of Robert Jones with Goldman Sachs.

Robert P. Jones - Goldman Sachs

Good morning.

John L. Workman

Good morning.

Robert P. Jones - Goldman Sachs

Thanks for the questions. I just one big picture question, John. We continue to see consolidation across generic purchasing throughout the supply chain, seems to be a pretty fluid movement if you will. I was wondering if you could just remind us how you view generic purchasing today as you think about the increased wholesaler platforms?

Nitin Sahney

This is Nitin. Historically we've been buying based on access to products, I would say Bob. Now we are really starting to explore what do all these JV's and the new structural alignments when it comes to sourcing new products. All we can tell you is we have great relationship across supply chain as you know we buy generics directly from manufacturers and we also deal with wholesalers on the branded side of it. So this is an opportunity that we are exploring but it's too early to tell what that could mean for us. This is a good chance now after all the years of buying based on access to products now looking at access and cost efficiencies and buying efficiencies.

So we believe that by end of '14 we will have a better idea in terms of how Omnicare can explore these opportunities just like others have done right now.

John L. Workman

And one thing I would add Bob is that if you look at our buy on generics remember there are certain categories of drugs we are the number one or two buyer which makes us attractive to some of these other relationships. When you look at our total spend and you say well it's not as big as maybe some of the others but when you look at our spend by product or by certain drug categories it's very substantial and that can be an attractive opportunity, as Nitin has said. And we will as '14 develops we will have a better feel for that by the end of the year.

Nitin Sahney

And here on the branded side as you have grown Specialty our branded portfolio of drugs is also growing. And I think by end of '14 our leverage in terms of both branded and generics as a whole is going to be a lot more than it was in the past few years because of organic growth.

John L. Workman

And also remember that some of the generic manufacturers are also some of the companies that maybe opportunities for us within the specialty segment as bio-similar come about.

Robert P. Jones - Goldman Sachs

Got it. But no potential benefit around any of those areas contemplated in the outlook?

John L. Workman

Not in the guidance.

Robert O. Kraft

It's contemplated and we think those are all opportunities. They will be probably more developed by the end of '14.

Robert P. Jones - Goldman Sachs

Got it. And then I guess just one specific follow-up, I know you guys covered a lot of the moving pieces around guidance. But any update around the Ocean initiatives I know in the past you had expected this to be completed in '14. Just wondering where we are in the progress and is there any savings from that baked into the 2014 guidance?

John L. Workman

We have stopped singling out single items. Bob I mean today it's just part of part of just our overall cost initiatives and upgrades and things that we are doing in our cost to company so you those flowing through and you see benefits flowing through those overall but they have kind of gotten commingled with that and standardization initiatives this point in time.

Nitin Sahney

Bob it’s not in our guidance but as we have laid a good foundation for our pharmacy network and LTC and SCG we believe that the standardization initiative that was started in ’12 got some steam in ’13, will actually be more in ’14 and beyond because we will be able to implement them more now that we have laid a good solid operational infrastructure.

Robert P. Jones - Goldman Sachs

Okay, got it. Thanks so much.

Operator

And your next question is from the line of Steven Valiquette with UBS.

John L. Workman

Good morning, Steve.

Steven Valiquette - UBS

Hey, good morning. So I just wanted to quickly confirm the earnings run rates on the discontinued operations. So I guess in the press release it looks like it was like $0.20 in 2012 and you mentioned the $0.18 in 2013, it presumably would have been probably something less than that in 2014 and that's why you are discontinuing. Is that the right way to think about it?

Robert O. Kraft

Yeah it’s hard to say since we didn’t really look at it as we thought about 2014 but it did have a decline there’s no doubt between ’12 and ’13. Then again we are focused on businesses. Our overall theme here is we have got a solid foundation; we have looked at the fixed platforms. To remind everybody that was an asset acquired in 2005, back when the company acquired lots of disparate assets. It’s a good asset we don't dispute that but it’s not one that’s going to have the same growth characteristics we are looking for going forward.

John L. Workman

And also you know earlier on we knew we did not see it as a fit in our specialty side of our business even though operationally we took advantage of it. And then on Long-Term Care side we evaluated whether this could be a service offering that could be incremental to our clients today and our view is that even though it is a good business it does not add that incremental sales width to what we offer to our clients and as a result of it strategically we have made the determination to focus on high growth areas mainly specialty and transforming our Long-Term Care growth platforms.

Steven Valiquette - UBS

Okay, got it. Okay, thanks.

Robert O. Kraft

Thank you.

Operator

And at this time we have no further questions and I would like to turn the call back over to our speakers for any closing remarks.

John L. Workman

Again, thank you. We know there were few more things to explain in the quarter. We hope this was helpful and we’ll be following up with you with follow-up questions and comments and appreciate your time. Thank you.

Operator

Thank you. This does conclude today’s conference call and you may now disconnect.

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