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Omnicare, Inc. (NYSE:OCR)

Q3 2007 Earnings Call

October 31, 2007, 11:00 AM ET

Executives

Cheryl D. Hodges - Sr. VP of IR and Secretary

Joel F. Gemunder - President and CEO

David W. Froesel, Jr. - Sr. VP and CFO

W. Gary Erwin, Pharm.D. - VP of Health Systems Programs and President, Omnicare Senior Health Outcomes

Analysts

Jason Gurda - Bear Stearns

Lisa Gill - JP Morgan

Steven Halper - Thomas Weisel Partners

Matt Ripperger - Citigroup

Adam Feinstein - Lehman Brothers

Charles Rhyee - CIBC World Markets

Eric Gommell - Stifel Nicolaus & Co.

Presentation

Operator

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

Thank you. Ms. Hodges, you may begin your conference.

Cheryl D. Hodges - Senior Vice President of Investor Relations and Secretary

Thank you, Ashley. Good morning everyone and welcome to Omnicare's Third Quarter 2007 Earnings Conference Call. Here today from Omnicare are Joel Gemunder, President and CEO; Dave Froesel, Senior Vice President and Chief Financial Officer; and myself, Cheryl Hodges, Senior Vice President, Investor Relations.

Before we begin, let me remind you that as we conduct this call various remarks that we make concerning our expectations, our predictions, our plans, and our prospects constitute forward-looking statements, as a result of a variety of factors including those identified in this morning's news 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 or to make additional forward-looking 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 our results today excluding special items in all periods. A reconciliation of this non-GAAP information has been attached to our press release and is also available on our website under supplemental financial information on the Investors page. With that let me turn the call over to Joel.

Joel F. Gemunder - President and Chief Executive Officer

Well thank you Cheryl and good morning everyone. Thanks for joining us today to discuss our third quarter 2007 results. Given the events of the past year, we are going to focus our remarks today largely on comparisons between the third quarter 2007, and the second quarter of 2007, which we believe represents the most meaningful measurements engaging the current state of operations our progress, and our future results. We will also exclude as Cheryl mentioned all special items and reimbursable out-of -pocket expenses.

For the third quarter, we reported adjusted results of $0.44 per diluted share. And this compares to adjusted results of $0.51 per share in the second quarter of 2007. Clearly these results were below the street's expectations, as well as our own. Undoubtedly, we are disappointed with the earnings as they reflected continuing challenges arising from the dynamic and difficult operating environment that we have faced since the implementation of Medicare Part D.

Unfortunately, the volatility in our third quarter earnings obscures some good news including positive bed growth for the first time in seven quarters, and record operating cash flow that has allowed us to exceed our full year cash flow guidance in just nine months. We will provide more color on both of these in just a minute. As noted in the press release, much of our earnings shortfall related in some fashion to lower than anticipated sales volumes largely related to timing. Please let me explain.

Revenue for the quarter of approximately $1.54 billion were about $12 million below the second quarter of 2007. But this includes approximately $8 million and incremental sales from flu vaccine, a very low margin service we provide to our customers that is not present in the second quarter. So on an apples-to-apples basis excluding the Flu vaccine sales were down about $20 million or about 1.3% sequentially. And I know you are probably wondering how this could be the case with positive net bed growth in the quarter and the answer is that a significant portion of our bed growth came from acquisition activity the timing of which is often unpredictable. In fact, we closed several acquisitions in the last few days of the quarter. Therefore, we had no meaningful sales or profits from these transactions in the quarter. So given the flow-through of the lower number of bed served in the second quarter and into the third quarter, the timing here caused ourselves to be lower than expected for the third quarter.

We also saw the level of dispensed prescription volumes and branded product mix unfavorably impact better margins. And then too, I would have made much progress in reducing our temporary labor costs, which were down 16% sequentially. Our overall payroll and delivery cost were relatively flat sequentially. Said another way, our operating expenses were not fully leveraged given the drop in sales. Now much of this the deleveraging of our labor and delivery cost relates to balancing our desire to drive increased efficiency with maintaining and improving customer service levels. And this is a balancing act that obviously becomes more difficult when revenue declines as it did in the third quarter.

So while down modestly on an absolute level, labor cost actually increased as a percentage of sales versus declining as we had anticipated. The other side of this equation is that customer attention improved markedly this quarter. Gross bed losses for the quarter improved by 13% sequentially with most of the improvement occurring in the latter part of the quarter and this follows a 10% improvement in the second quarter, and represents our lowest quarterly level of gross bed losses since 2005.

Overall, 2007 year-to-date bed losses are 15% lower than in the same period last year. The progress of our pharmacy operation staff here was supplemented by the continuing success of our specialized customer retention team, which has since December saved nearly $60 million in annualized revenues. Bottom line, we believe we are making a substantial progress here. And we are adding significant resources to this team.

With respect to bed adds, as I mentioned, our acquisitions activity picked up pace significantly this quarter. In fact our acquisition team added the highest number of beds in any quarter, since the implementation of Medicare Part D. And as I also noted earlier the addition of the majority of these beds was at the end of the quarter, so we are going to see a full contribution in the fourth quarter. With respect to beds added into service from our sales force and our pharmacy operation staff as distinguished from new bed signings, the numbers were moderately lower than last quarter. That said it's important to focus on the leading edge of the spear, our new contract signing.

As you are aware in May of this year, we made a change in senior sales management placing Beth Kinerk in charge of our national sales efforts. Beth is working to increase the overall size and productivity of our national sales force. In fact, our sales force has been expanded to 34 from 26 since last quarter and only nine members have tenure of more than one year with Omnicare.

As we have discussed in the past it takes time for these new sales associates to become acclimated and build a pipeline. And since the beginning of June, these new sales associates have increasingly contributed representing approximately 25% of our total bed signings during this time period. So we believe our strategy is working and will continue to gain momentum, as many of our more recent hires begin building their pipelines and signing new beds.

Overall, our new contracts signing from all sources were up 14% sequentially. I should also point out that these signing's exclude the previously announced new three-year agreement with a major account that we discussed in our second quarter earnings call. This contract represents approximately 13,000 incremental beds to Omnicare, of which less than 1000 were in services during the third quarter. We look forward to adding most of these beds over the next six months or so.

Now before I turn in the call over to Dave I want to comment on a couple of additional items. Obviously the United Health matter continues to adversely impact our results. The differential in rates between the originally negotiated contact with the United and the any willing provider contract with PacifiCare totaled $33 million or $00.17 per share in the quarter, which is up marginally on a sequential basis and is $8.5 million higher than the same period last year. The total impact since April 2006, when United unilaterally imposed the Pacific Care contract on us to cover all United beneficiaries totals $164.1 million or approximately $00.84 per diluted share in lost earnings.

As you are aware this matter is currently the subject of litigation against United pending in the federal court in the northern district of Illinois and on September 28, 2007, Judge Paul Maynard [ph] denied United's motion to dismiss our anti-trust claims. So our case is moving forward with both the anti-trust claims and the fraud claims against United and PacifiCare intact.

We are now in the midst of depositions. We believe our claims are strong and we look forward to facilitating our case on behalf of our shareholders and the resident we serve. On an operational note, we continue to ramp up repackaging activities at Cardinal Health. At the end of the quarter Cardinal was filling approximately 30% of the planned volume, which represents 17 of our largest volume unit dose products. And as I am sure you realize there's a validation process for each drug that Cardinal must undertake before distribution of that product can take place.

We are pleased with Cardinal's performance along the learning curve and are satisfied with the progress being made. As the ramp-up continues, we expect to gradually see certain repackaging activities transition back out of the field lowering our labor cost, increasing productivity, and allowing our pharmacy managers to devote more time to customer service. An important part of our growth strategy has been to broaden our growth platform by entering adjacent markets.

Our Hospice pharmacy business continued to see solid growth in the census during the third quarter, but margins continued to be hampered by competitive pricing in some areas as well as patient mix issues and higher labor costs.

The performance of our specialty pharmacy services business was in line with last quarter, still continuing to show strong year-over-year growth. And lastly, with respect to our CRO, the success of the reorientation of this business, which began two years ago, continues to be demonstrated by solid operating results. While revenues were modestly lower sequentially, operating margins widened. On a year-over-year basis the CRO business has shown very strong top-line growth in excess of 16% and operating profit has more than doubled and backlog remains near its all-time high. And the growth in this business over the past year has in part been generated through a steady stream of projects awarded by existing clients, particularly large pharmaceutical manufacturers, and moreover 19 new customers have been added so far this year, many of whom represent biotech, specialty and virtual pharma companies.

And in line with the growing trend to our globalization of clinical trials during the quarter, we doubled the size of our facility in Bangalore, India. A very large population, quality investigated insights, and the recent shortening of timelines for global clinical trial approval, all make the Indian market attractive. As a result we have seen the number of clinical trials steadily increase since we entered the market five years ago. We now have a staff of 75 in Bangalore and plan to continue adding resources in clinical monitoring, data management, and of course business development. And with that I will turn it over to Dave.

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Yes, thanks Joel. As most of you are aware, given the difficult operating environment and volatility in our earnings over the past year, maximizing operating cash flow has been a major priority for 2007. On this front, I am pleased to share with you the progress we have made. As you saw on the press release, we generated operating cash flow of $195.3 million in the third quarter of 2007 which represents a new all time high, surpassing our previous quarterly cash flow record set earlier this year.

For the first nine months of this year cash flow from operations reached $431.2 million more than double the operating cash flow generated from operations through the first nine months in 2006. So in just nine months, we have exceeded the top end of our current operating cash flow guidance of $425 million. Given this and our expectations for the fourth quarter, which will include our semi-annual interest payments, we are now raising and I repeat raising our full-year operating cash flow guidance to $460 million to $500 million. We are even more pleased by the cash flow performance considering where our earnings came out. Adjusted EBITDA for the third quarter totaled approximately $153.5 million, or 10% sales verses $169.6 million or 11% of sales last quarter. Joel has already touched on the major elements responsible for this trend.

So clearly cash collections reducing working capital needs drove our cash flow performance. First, net receivables declined by $41.6 million in the third quarter verses the second quarter. And this is actually understated, given the inclusion of the receivable balances of the quarter-end acquisitions in our overall receivables balance at September 30th. Excluding these acquired receivables, our overall receivable balance actually dropped by $58.4 million. Either way, this represents the second consecutive quarterly decline in our account receivable balances this year. Moreover, our days sales outstanding decreased two days sequentially to 89 days, our first quarterly decline since the implementation of Part D.

This too is understated given that approximately $17 million or about one day sales was included in receivables related to the acquisitions for which there were no meaningful sales in the quarter. As we discussed previously, the build up of accounts receivable during 2006 was largely attributable to the transition to Medicare Part D and the shift in payer mix along with certain nursing home facility accounts.

During the quarter, we continued our aggressive collection efforts across all payer types. We are pursuing all available means, including legal options, where necessary to collect the monies owed to us. With respect to the Part D issues, we continue to see total incorrect co-pays outstanding at September 30, 2007, of $36 million of which $20 million relate to the 2006 transitional year. Part D reject the claims outstanding from 2006 stood at $21 million at September 30, 2007.

We believe, we are making some progress here, but it requires time to move through the reconciliation process with each plan or alternative payer source. Unfortunately, major systemic problems remain under the Medicare part D program and this comes at a cost, as we continue to have to direct resources to these issues. We and our entire industry are continuing to seek solutions, particularly on the co-pay issues through CMS and the PDPs to resolve these issues on a retrospective and prospective basis.

With respect to inventories, our overall inventory levels were down modestly and our days on hand declined two days to 34 days, which again is impacted somewhat by the acquisition inventories. This is the result of careful management of inventory levels and the impact of the increasing penetration of lower priced generics.

Capital expenditures for the third quarter of 2007 totaled $14.2 million, nearly $4 million higher than the second quarter of 2007. The increase in capital expenditures is primarily associated with the receipt of automation equipment related to the Omnicare full potential plan. We continue to anticipate capital expenditures of approximately $50 million for the 2007 full year, which reflects both maintenance CapEx as well as expenditures for the Omnicare full potential plan.

Importantly, the balance sheet remains strong. We ended the quarter with over $270 million in cash. This cash balance was our highest in a year and was after paying down $50 million in debt during the third quarter bringing year-to-date debt repayment to $150 million.

As a result our total debt to total to capitalization at quarter end stood at approximately 46.1%, representing an 80 basis point improvement sequentially and approximately 270 basis point improvement over September of last year. On a net debt basis, it's about 43.6%. Our total debt to annualized EBITDA stands at 4.6 times. Our net debt to annualized EBITDA stands at 4.2 times and our annualized EBITDA to net interest, 4.0 times. So ladies and gentlemen, even as we continue to manage through significant change in volatility in our earnings, we are maintaining our financial strength and flexibility. With that, I will turn it over to Cheryl.

Cheryl D. Hodges - Senior Vice President of Investor Relations and Secretary

Thanks, Dave. Before getting started, let me just reiterate that the comparisons I make for our pharmacy services segment will be made against our most recent second quarter 2007 results. Looking at the third quarter 2007, our pharmacy services segment sales totaled approximately 1.5 billion and we are about 1% below the second quarter of 2007.

Third quarter revenues were primarily impacted by the flow-through from the lower number of beds served in the second quarter and into the third quarter, increased utilization of generics, lower acuity and reduce the utilization of EPO-related drugs partially offset by drug price inflation and incremental flu vaccine sales.

Our payer mix remained stable for the September quarter with Part D at 41%, Medicaid at 11%, private pay, third party and facilities at 42% and 6% other. As of September 30th, we served long-term care facilities and other chronic care settings comprising 1,396,000 beds and that is net increase is 7000 beds sequentially. It's still noted, this is the first time in 7 quarters that we have shown positive bed growth, and was largely a result of improvements in our customer retention and increased acquisition activity.

On the revenue per bed basis, revenue was down slightly compared to the second quarter; revenue per bed for the third quarter was $1,069 per bed versus $1,075 in the second quarter. Of course, beds added at the quarter end from acquisitions, with no meaningful sales in the quarter affected that calculation slightly. Sales of EPO-related drugs used for anemia were as expected down sequentially by that $4 million. As we discussed last quarter, this relates in part to a lower number of scripts, but more importantly a reduction in dosing related to new guidelines on weight-base dosing and the impact on hemoglobin levels.

IV sales for the quarter totaled $65.1 million, down $2.2 million sequentially. This decrease reflects a modest seasonal downtick acuity along with a fewer number of beds served throughout most of the quarter. As we move into the fourth quarter we will begin to monitor the strength of the flu season, which can result in an uptick of IV sales of utilization generally associated with seasonally higher acuity.

Adjusted pharmacy EBITDA for the third quarter of 2007 was about $173 million or 11.6% of sales as compared with $190 million or 12.7% of sales reported last quarter. As Joel discussed earlier, the reduction in profitability relates largely to the lower revenues associated with the timing of bed adds, the impact of dispense volumes and branded drug mix on margins and the deleveraging of operating cost.

Turning to our CRO business excluding reimbursable out-of-pocket expenses, revenue for the quarter was $41 million down about 4% sequentially, but nearly 17% on a year-over-year basis. Operating profit for third quarter of 2007 was $3.8 million, up 21% sequential and 179% versus the third quarter of last year. EBITDA of 4.3 million for the quarter followed a similar pattern and represented 10.5% of revenue, up 190 basis points sequentially and 510 basis points versus the prior year.

At September 30, 2007, our book to bill ratio stood at 1.3 to 1 and our backlog stood at $311 million, relatively consistent sequentially but up about 8% year-over-year. With that recap I will turn it back to Joel.

Joel F. Gemunder - President and Chief Executive Officer

Thanks for the update Dave and Cheryl. Now before I turn it over to questions, I would like just to touch on a couple of items. First, with respect to Medicare Part D as Dave noted, we continue to grapple with the resolutions of co-pays and rejects from the 2006 transitional year, and working at the government level, the industry level as well as the company's specific levels to reconcile and resolve these issues. And also in a normal course of business, we are in the process of renegotiating certain of our PDP context with the 2008 planned year. We are now in active discussions but still in the early stages here and nothing has been yet finalized. So at this time, we are not in the position to handicap this for you. We do believe we bring several advantages, both clinically and economically to the PDP including our scale and comprehensive nature of our network. Our clinical expertise and effectiveness in working with physicians and caregivers at the point of care and long-term care facilities to achieve the best clinical and cost outcomes to beneficiaries and payers and the fact that we have among the highest generic utilization rates in the industry.

These are particularly valuable attributes given that the traditional utilization techniques employed by the PDP to manage formulary charges on cost, are less applicable in long-term care with the majority of patients at dual eligibles has no co-pays or premiums and where formularies are relatively open such as with the anti-psychotics for example. And we look forward to completing negotiations by the end of the fourth quarter and would definitely factor these results into our 2008 guidance.

Yet another issue under Part D for 2008 is the reassignment of dually eligible beneficiaries. As I have said on many occasions, the Medicare drug benefit was largely designed as a retail drug benefit for the cognitive beneficiary able to chose among plans that best meet his or her needs. However in the institutional setting where many of the patients are cognitively impaired and qualify as dual eligibles that were randomly placed into PDPs with no consideration given to matching their needs with the benefit designs of a given plan. And moreover because the results of the 2008 re-bidding process in the next 50 days, many of these same dual eligibles are going to arbitrarily and randomly moved out of their current plans by CMS and reassigned yet to another plan. As this is the direct result of bids of certain PDPs, notably united and Humana coming in above the low income premium benchmarks established by Medicare in a number of PDP regions.

So this will cause many of our patients to be randomly reassigned in and out of PDPs. As is likely the case for most long-term care pharmacies, there will be significant movement in market shares among plans given the sizeable share currently held by those plans that are net loses of dual eligible beneficiaries under Part D. We can't handicap the financial impact today because one, we don't know precisely which plans these patients will land in yet. And some portion of them will self select mid-plans; two, the rates and other financial terms of certain plans of 2008 are not yet known; and three, while we are doing as much as possible to prepare ourselves and our customers, and do believe that databases are better today than at the inception of Part D. There will undoubtedly be some administrative and operational challenges here.

That said from a strategic standpoint, we believe that the realignment among the PDPs will ultimately be a good thing for us. From a legislative standpoint, CMS's final rule for the calculation of AMP or Average Manufacturers Price, used in the calculation of the federal upper limit on multi-source drugs, remains open for public comment until yearend. In response to CMS's final rule, members of congress have introduced various bills. Representative Nancy Boyda, democratic Kansas along with a 120 co-sponsors has introduced a bill that would establish a new benchmark price code retail acquisition cost of RACs to replace AMP entirely. In different chambers of Congress, Senator Max Baucus, Democrat of Montana along with 32 co-sponsors and representative Frank Pallone, Democrat of New Jersey with 10 co-sponsors, are supporting a bill named The Fair Medicaid Drug Payment Act of 2007. This bill recommends using the weighted average price available to retail pharmacies and what is food mail order as low as nursing home pricing in calculating the AMP.

Furthermore the FUL would be based on 300% rather than 250% of the weighted average of all AMPs for generics that are nationally available for purchase by retail pharmacies. But we really don't know any more today about where this issue will settle out.

Turning to our outlook for the balance of the year, as I said in my opening remarks, we are disappointed with the lack of visibility and volatility that has affected our earnings. I know it must be difficult to understand from your vantage point outside the company and the industry to comprehend the breadth and depth of change that has occurred as a result of Medicare part D in virtually all aspects of our business. And while it is difficult to see beyond the third quarter results, we do believe we have seen some encouraging signs that our strategies are taking hold. However progress can't necessarily be measured in 90-day increments and as I've said earlier many of the factors compressing earnings this quarter was a result of lower than expected volume and its ripple effects on the business.

Now let me address these issues head on. From a top line perspective, that were affected by issues of timing this quarter we had positive bed growth for the first time in a long time. A couple of points here. First our acquisition program kicked into high gear and made a substantially higher contribution that will be felt in the fourth quarter, and probably see the financial strength that Medicare Part D has put on smaller institutional pharmacies, who don't have our scale and financial strength and is creating willing sells.

Secondly, our customer retention rate has improved through the last two quarters and we are organized and to provide even better customer service across the organization, as well as adding to our specialized customer retention team.

And finally, our contract signings improved during the third quarter which should we believe provide a better backlog of beds. Moreover, as promised, we have expanded the sales force and have newer members of which quite... there are quite a few become productive; we believe this will have a salutary impact on sales.

So while we are focused squarely on generating top-line growth, we are also working to bring our cost down further to better leverage ourselves. Through appropriate actions and the further implementation of best practices around the organization, we will be looking to increase productivity and lower payroll costs. Moreover we're renegotiating many key contracts in various expense categories, including our courier contracts to bring down the cost of operation.

So we are focused squarely on producing growth that is well leveraged to increase margins, as we move forward. That said we have only 90 days of results left to report for the year. The acquisitions we made at the end of the third quarter coming to the fourth with lower margins until the synergies can be realized. Then too the volumes of certain drugs where national utilization patterns are shifting, such as Procrit, Aranesp, Avandia will not likely come turn back nor will the benefits of the margins on those drugs.

We want to take a conservative view of bed growth until we see a few more quarters of progress. So taking these factors into consideration along with the level of third quarter earnings, we see a fourth quarter diluted earning per share excluding special items, coming in at $0.45 to $0.50 and this would bring full-year diluted earning per share to a $1.87 to $1.92 excluding special items.

While we are of course not pleased with these results, we do believe we are making progress in all of our top priorities in 2007. Many of you have previously heard me articulate these priorities, first to resolve the Medicare Part D issues, while we in the industry continue to work on these issues such as incorrect co-pays and rejected claims; we at Omnicare have enhanced our own ability to deal with numerous changes brought about by this major new system.

Rejected claims on a daily basis are well under 3% and we have re-engineered how we do business with respect to handling formulary issues, prior authorizations and the like through our CICs or Clinical Intervention Centers, which has greatly improved the efficiency of how we handle the very large number of plans of varying plan designs.

Second, maximizing cash flow. You have already heard that we have been exceeded the high-end of our upwardly revised operating cash flow projection for the year and now expect operating cash flow for 2007 to be in the range of $460 million to $ 500 million. Clearly, we have more than achieved our goals here, and this is important for many reasons. What we have learned after living through the Medicare Prospective Payment system or DIGs in the hospital business, EPS in the nursing home market, and now Medicare Part-D in the long term care pharmacy market has had a solid balance sheet, and strong cash flow are the keys to survive, and provide the financial strength, and flexibility to adapt and grow again. Clearly we are starting repackaging capacity.

This is important to our ability to reduce expenses, increase productivity, and free up resources for growth. And as I noted earlier we and our partners Cardinal Health are making good progress here. And four, and the most importantly top line growth. I have already enumerated the various strategies we are pursuing here regarding bed growth, and the fact that we are seeing promise in many areas here. One swallow does make a summer, so it is little early to call the turn here complete, but I will say that the entire organization is focused intently on this goal.

Moreover, we see substantial opportunity to bring our resources and skill sets to the large, and growing assisted-living market. The demographic trends that we believe will drive growth in the skill facility market are equally applicable here. And as we look ahead, we see continued opportunity to offer our unique clinical skills and information technology to attract new assisted living communities as customers. Moreover, we are also very focused on increasing our penetration among the residents within the facilities we currently serve, as this represents an opportunity to add revenues that are highly leveraged.

And lastly and perhaps as important as top-line for our long-term growth is the execution of the Omnicare full potential plan. And as much as pricing in the long-term Care market is largely set by reimbursement agencies, we must grow earnings by managing cost. And our scale provides the unique opportunity to reconfigure this business to become more efficient to enhance growth. Let me give you a very quick update on this important initiative. We are in full gear with all 31 hubs, regional support centers now somewhere in the implementation process. In fact 8 hubs are now providing either front-end activity such as order entry or back end activities such as providing routine refills for certain of their local pharmacies.

The transfer of these activities will continue in 2007 and accelerate throughout 2008, as technology and automation are deployed. Now speaking of technology, equipment continues to arrive at our regional support centers. Currently, we have received 5 out of 25 pieces of equipment from MTS Technology. And if you recall the MTS express two machine allows us to process prescription by filling individual unit dose cards, and applying patient specific labels to them on a fully automated basis. And this equipment is capable of producing a minimum of 600 cards per hour and will be used with drugs with lower volumes that are repackaged... then are repackaged centrally through Vanguard and Cardinal.

Furthermore, we are scheduled to receive our first ALV or Automated Label and Verification Machine during the first quarter of 2008. Currently, we are running a prototype ALV machine and this trial enables us to make small modification that significantly enhances productivity of this equipment. As a reminder, this proprietary technology begins at the unit dose cards and boxes that have already been repacked. Cards and boxes are picked using a pick-to-light system and then the ALV automatically labels, verifies, and delivers the script to the appropriate tote for each nursing home wing. We expect this technology to process 960 cards or boxes per hour.

In addition, we signed a major new contract during the third quarter that we believe will allow us to reduce substantially the cost of our medical record functions. Based on the pilot we completed in the third quarter, our accuracy in this area increased while costs were fed [ph] in hand. So as you can see, we continue to make progress, and we believe we are on track to achieve annualized pre-tax savings over $100 million to $120 million or $0.50 to $0.60 per diluted share when completed by the end of 2008.

So while we have faced much adversity over the past 21 months, we have also made tangible progress with a number of our operational and strategic initiatives. We have recognized, however that much remains to be done. We believe, we are taking the right actions and making the right investment to lay the foundation for long-term sustainable growth. And above all, we remain committed to restoring and building shareholder value. We very much appreciate your patience and the support many of you who have shown. And with that we would be very happy to take your questions

Question And Answer

Operator

[Operator Instructions]. And you first question comes from Jason Gurda with Bear Stearns.

Jason Gurda - Bear Stearns

Good morning and happy Halloween. Looking at the quarter, it looks like a sequential decline in adjusted EBITDA of about $15 million. Was the lower volume the biggest contributor to the decline?

Joel F. Gemunder - President and Chief Executive Officer

I believe that's correct Dave. You want to comment on that?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Yes Joel. The bigger component is going to be the lower volume, which as we talked about before is volume, and mix associated with our dispensed prescription, drugs, and some branded product mix combined with lower pharmacy sales, due to continued bed loss in the quarter.

Joel F. Gemunder - President and Chief Executive Officer

We had bed loss in previous quarter which -- the impact of which rolls in like a snowball over the next couple of quarters. And the new signings we have in the go-lives [ph] that we have will take another quarter or so to roll that back and overtake that downward slide.

Jason Gurda - Bear Stearns

You gave the number of beds that you expect to sign or expect... you expect to add at the beginning of the call, but I missed that number. Do you have that again?

Joel F. Gemunder - President and Chief Executive Officer

Why don't we...

Cheryl D. Hodges - Senior Vice President of Investor Relations and Secretary

I am not sure what you... could you clarify what you said we gave a number of?

Jason Gurda - Bear Stearns

Of beds that you expect to add over the next six month, I think?

Cheryl D. Hodges - Senior Vice President of Investor Relations and Secretary

No, no what that was is a... what we talked about is our contract signings for the quarter from all source of sales force and otherwise we are up 14%. And that number excluded the major contract, a new -three year contract that we announced last... on last quarter's call that has the opportunity to add about 13,000 beds to Omnicare over the next six months or so.

Joel F. Gemunder - President and Chief Executive Officer

: We have those beds there assigned, only 1000 or so of those beds are actually live because it takes the -- you have to give notice to the former provider and that is usually a 30, 50 or 90 days process. And it takes some time to transfer the item files and to get ready to accept a new business. So there is always a lag, but we see that as a very nice cushion for us and new signings and hopefully this will be the parody [ph], we will have move past the parody [ph] of our bed losses, hopefully.

Jason Gurda - Bear Stearns

Do you have a quantitative number of the percentage of change and the number of prescriptions going from last quarter into this quarter?

Joel F. Gemunder - President and Chief Executive Officer

No, but my guess is and this would be a guess, is that it would be about give or take 1% difference at most from these dollars.

Jason Gurda - Bear Stearns

Okay. And now... this is due to industry level changes which are occurring rapidly?

Joel F. Gemunder - President and Chief Executive Officer

Well we are seeing in part for example, there is a reduction in medical practice with respect to Procrit and Aranesp. And these are very expensive and high margin drugs. And when they go away, as they go away because the utilization has been curtailed, because the dosing instructions are now being -- the recommended dosing instructions are by weight and by hemoglobin. And on top of all of that, CMS is putting in some limits on what they will reimburse for as a Part D in hemoglobin.

They are looking at 12% as a max I believe; no... excuse me in Medicare. They are looking at 12% hemoglobin, 12 as a max, and they are guiding people toward 10, or so, 9 or 10. Right. So we have that problem, we've also had a situation with Avandia and Avandia also had a medical problem with the... brought about by people at the Cleveland Clinic and as a result of that, those products are moving to other products which are less profitable.

Jason Gurda - Bear Stearns

Do you have a feeling for how... what stage we are in going through... is this still ongoing, could it get worse?

Joel F. Gemunder - President and Chief Executive Officer

Well, Gary Irwin, our outspoken clinical fellow in charges of professional services and clinical elements in our business. Do you want to add to that question? Are we near the end, the question is are we near the end of the erosion of Aranesp and Procrit?

W. Gary Erwin, Pharm.D. - Vice President of Health Systems Programs and President, Omnicare Senior Health Outcomes

It's our belief that there will be smaller declines, but we're near the end. And we think that because of changes that we see in utilization, we see that because of a pushback of clinicians on CMF. And we see that because in the report issued about the use of these drugs in patients with renal failure, there were no changes in the guidance whatsoever around that particular area of utilization. The changes occurred in people that had chemotherapy induced anemia and that's a very small portion of who we see in nursing homes.

Joel F. Gemunder - President and Chief Executive Officer

So, does that envelop... what I gather from Gary's comments is that we are nearing a lower abs and toes [ph] and which should happen hopefully quickly.

Jason Gurda - Bear Stearns

Does the... just the final question is, does you new guidance for the fourth quarter, is that still assuming a little bit of decline in those drugs?

Joel F. Gemunder - President and Chief Executive Officer

Yes, I simply took all those things into account, you know once burnt twice shy. Trying to get in front of my estimates for a change and some of our competitors... in an industry where visibility is limited for two major reasons. We have two overwhelmingly large industry factors at work here. We have the Medicare Part D problem which is still a roiling market subject to all kinds of change particularly with the reallocation and the renegotiations and so on. And on top of that we have a massive change going on in the pharmaceutical industry where there's been a very significant shift from branded to generic products without a concomitant increase in new branded products. And that is creating volatility. Some of it good, some of it not so good. So the ability to see clearly and to anticipate is not as good as it is in times when things are reasonably stable.

Now we could as some of our competitors do refuse to give guidance but I think it's our job to give you the best judgment we have at the time. And as responsible executives we want or we take the risk that we are going to wrong but we want to give you the best thinking we have at the time.

Jason Gurda - Bear Stearns

Okay, Thank you.

Joel F. Gemunder - President and Chief Executive Officer

Thank you,

Operator

Your next question comes from Lisa Gill from JP Morgan.

Lisa Gill - JP Morgan

Thank you and good morning. Joel you talked a little bit about the changes that will happen with the dual eligibles going into 2008. And I'm just trying to put our arms around this. If United is going to lose a lot of dual eligibles, do you have contracts where the terms are equivalent to United. I am just trying to understand why, no matter [multiple speakers] for you?

Joel F. Gemunder - President and Chief Executive Officer

United is clearly the worst of all of our contracts as I have been on the... as I have said ad nauseum by now. But we don't know where the patient that are been reallocated from United are going to land. Wherever they land, I think the situation will be an improvement but how much of an improvement, we can't say until we know where they are going to land and what our renegotiated prices will be for some of the contracts that we're renegotiating. So it's still... the jury is out and we can't tell. As soon as we have a good feel for that we will let you know. We are as I excited to know the answer to that as you are; much more so.

Lisa Gill - JP Morgan

All right, I would agree with that. And for 2008 I think you also made a comment that plan rates have... are not yet known across the board. So does that mean that you still have some contracts that are up for renewal for 1/1/2008?

Joel F. Gemunder - President and Chief Executive Officer

Yes we have a couple, it's not... the picture looks brighter than I thought it might be earlier in the year but we still have a couple that we are in the middle of discussions with and we haven't come to a conclusion yet. So you have to just give us a couple of more weeks to go thought the process.

Lisa Gill - JP Morgan

Okay, great. And then David if you could just give us some color around cash collections, obliviously you have done fairly well, your DSO are down as you talked about by about 2 days. Cash flow coming in even better than what we expected. How should we look at this going forward, I mean are you cleaning up your AR and therefore this will be an unusual year or do you anticipate that as we look forward in time that things will continue in this direction, both on a cash collection basis as well as cash flow.

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Well thanks for your comments. We are making aggressive inroads into collecting a lot of our past due and putting more efforts on the front end. So on a go-forward basis, I think overtime as we continue to make improvements in working capital, we'll have improvement but it's going to overtime normalize with your earnings. So this is going be to be obviously a very, very great year and we are trying to make progress for 2008 but remain to be seen how much we are able to further bring down our accounts receivable and bring down our inventories.

Lisa Gill - JP Morgan

Okay and then one last question if I can sneak this in. On the full potential plan, Joel, you had talked about the fact that if you are like by the end of 2008, you'll start to see some of the benefits of what you have put in place so do you really see that the financial benefit to your model in 2009 that's not quite as much in 2008 is that how you should be thinking about that?

Joel F. Gemunder - President and Chief Executive Officer

Well it's a rolling thing, Lisa. We will see progress made throughout 2008 I believe, as we go. But the full annualized impact won't happen until 2009. We will get a piece of it, and an increasing piece of it as the year progresses, depending of course of how soon we can get our deliveries automated, equipment in, how soon we can finish out build-out. We are making good progress and we are on track and we have a dedicated team of very experienced people working with a lot of things to do. It's a very complicated, technical and engineering process but we are on top of that thing God and I am very proud of the people who are working on it because they are managing to stay on schedule through a whole panoply of different issues that come up everyday.

Lisa Gill - JP Morgan

Great. I will stop there. Thanks for the comment.

Joel F. Gemunder - President and Chief Executive Officer

Okay.

Operator

Your next question comes from Steve Halper with Thomas Weisel Partners.

Steven Halper - Thomas Weisel Partners

Yes. Hi. Given the strong operating cash flow and free cash flow, has the Board considered share repurchases versus your continued pay-down in debt at these levels?

Joel F. Gemunder - President and Chief Executive Officer

Well Steve we look at all the uses of the cash we have. We review that routinely. As I said a number of times before, the uses of our cash are to pay down debt, to invest in projects like hub and spoke which I think will encompass almost $150 million of expenditure by the time we are finished, 18 million plus about 15 million in CapEx. And then external acquisitions of both large and small and finally buying in our own stock. This is a Board level decision which I can tell you will come up at our next board meeting, as it does routinely. And I am one member of board, it's a board level decision and when they make a decision, I am sure we will make that known to the public.

Steven Halper - Thomas Weisel Partners

That list; is that in rank order of the historical preference or that is --?

Joel F. Gemunder - President and Chief Executive Officer

No, no, no, no. I am just giving it to you as I can recall them. We don't have a rank order of preference; preferences change depending on the need to the Company at the time. We will certainly look at these issues and the Board looks at them continually and when they make a decision, they make a decision.

Steven Halper - Thomas Weisel Partners

And just on the acquisition front, can you talk about pricing and then how you look at the fully loaded cost of a new bed coming online through a direct sales effort versus acquiring a company and a local pharmacy?

Joel F. Gemunder - President and Chief Executive Officer

That is a great question. We have said, when you add it all up and look at the cost of maintaining a sales force and the delay in signings... in the signings to closing and when we look at acquisitions that are folded into bolt-ons or step-outs, whatever you want to call them where they blow in a very limited incremental cost over the gross margin. We find that the returns are pretty much the same and are acceptable either way. So I am relatively speaking indifferent as to which way we get the business because the return on capital is about the same. And also we want to do both and we want to do it as we are wide open to do deals, we have a robust program time, we have I think increased... at least doubled I think our staff... our M&A staff in the last couple of months and I think we are moving forward on that end. We've increased significantly our sales force as I think I said from 26 to 34 with just about doubled our retention staff and I'll probably double it again because it's working and the most important thing that we have to do is to build that top-line because building the top-line enables us to enhance our scale and enhancing our scale enables us to bring down our cost and since we have no ability realistically to reduce pricing because pricing is set by Medicaid to PDPs and Medicare we just have to do the best we can by scale and cost control and we have been very successful at doing that.

Steven Halper - Thomas Weisel Partners

Great. Thanks.

Operator

Your next question comes from Matt Ripperger for Citigroup

Matt Ripperger - Citigroup

Hi, thanks very much. I just wanted to go back to the cash flows of the quarter. Your couple of other items that seem to contribute. I just want to see if you can provide a little more clarity. It appears like there was $61 million sequential increase in other current liabilities and I just want to see if you could give a little more detail about what that was and how sustainable that is.

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Yes, we are going to look that specific question and we'll get back to you on it.

Matt Ripperger - Citigroup

Okay, I have got two other related questions that maybe I can go forward with. Year-to-date, you've got about 50 million of deferred taxes. Do you anticipate paying those over the next-near?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

No, no.

Matt Ripperger - Citigroup

Okay. And then third is...

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

[Multiple speakers]. I don't know one likes to pay taxes but, there must be a reason why.

Joel F. Gemunder - President and Chief Executive Officer

The reason is that we have a number of tax strategies that we've continuously employed which net-net reduces our actual cash that we payout each quarter to both the federal and to a lesser extent state government.

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

So this is a book keeping entry.

Joel F. Gemunder - President and Chief Executive Officer

Yes.

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

All right. Does that answer your question Matt?

Matt Ripperger - Citigroup

Yes that is, thank you. And then could I ask you... can you give a little color in terms of AG university [ph] revolves and the different tranches and how that trended this quarter?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Sure we will be filing our 10-Q this afternoon and with respect to the ageing, what you'll basically see is on the payer types greater than 181 days, the facility or the nursing home balances went up approximately $16 million or $17 million over the second quarter. And that's largely attributable to the geographic market places that we have talked about before in the northeast Chicago and Florida; and we're continuing to work on those efforts. Combined with a little higher receivables in the insurance area, many in the combination of third party commercial insurance, Medicare Part D and Medicaid. But more importantly, you will see as you would expect as our overall net receivables went down, you'll see a significant change in our receivable balances in the bucket from zero to 180 days, basically across all major payer types.

Matt Ripperger - Citigroup

Okay. Great. And then...

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

And to answer your question on the... the first question it's largely attributable to the interest accrual on a long-term debt. As you will know in the second quarter in the second quarter and fourth quarter of every year, our interest payments are approximately $50 million higher than what they are in the first quarter and the third quarter.

Matt Ripperger - Citigroup

Great. Now thank you, that's helpful. Then second question is just on the CapEx related to the full potential plan, can you just review how much you are going to have to spend to just sort of oversee this transition to a new platform?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Well in total, we will spent in personnel and other cost lease hold, cost and that sort of thing, somewhere around 80 million or so maybe a little more. And there's about 50 million or so in total for automation equipment. But the return on... it's almost self-funding within fewer than 18 months. And if we spend $150 million say and we get back $120 million in free tax cash flow, it's going to pay off less... in less... just a little over a year, it's a tremendous investment. And it enables us to massively increase our scale and make the management structure infinitely easier because we are going to 31 hubs and possibly fewer overtime. But 31 hubs we feel is about the right amount to kind of parallels what the major wholesalers have in distribution centers to optimize the cost and service levels across the country and it will rightly take down our cost.

So as we look to the future, we don't see pharmaceutical costs and reimbursement increasing tremendously. We see them as we move towards the increasing pharmaceutical benefit for everyone in this country we think prices will be tight and cost control will be paramount and we think we are very much on the right track. We are fortunate that we have the scale in order to do this, couldn't do this if we were a lot smaller than we were. So we see this as a massively important project for the future growth of our company.

Matt Ripperger - Citigroup

Great. That's very much.

Operator

Your next question comes from Adam Feinstein with Lehman Brothers.

Adam Feinstein - Lehman Brothers

Pretty close, good morning. Just a few questions here. I guess... I was wondering if you could just break out the average beds relative to the period ending beds just with your comments a lot of the beds came on towards the end of the quarter, we are just curious, if you have any breakout?

Cheryl D. Hodges - Senior Vice President of Investor Relations and Secretary

No. I mean we just have the beginning and ending bed balances. I mean we didn't do it...I don't have a weighted average calculation.

Adam Feinstein - Lehman Brothers

Okay. All right.

Joel F. Gemunder - President and Chief Executive Officer

We are not...we don't, but the reason Cheryl mentioned that I believe is because included in our bed counts as the beds we get from acquisitions and they came in for the end of a quarter. So it tends to wait until the end of the quarter. Now perhaps our acquisition people will be a little more free to put this quarter and get it done in the middle of the quarter. So I believe as we get this quarters' deals will contribute something.

Adam Feinstein - Lehman Brothers

Okay, all right. And then just a final question just on the margins. I am just trying to figure out what is going on with the gross margins. I know you talked about some of the mix issues in various others items. But I was just curious if you could comment... has there been any changes in rebates. There has been a lot of discussion about that; just curious in terms of... there's been any change there? And then just up on the same topic, I guess have you guys changed your forward buying and respect buying, so just trying to think just about your acquisition costs, and just seeing anything that would have had any impact?

Joel F. Gemunder - President and Chief Executive Officer

We... that's a very interesting question. The answer is it's been pretty stable on the branded side. There... those were a couple of cases on the downside. There are... some of that went on the upside. And I think what's happening as a general phenomenon is post purchasing discounts or discounts of any sort on branded drugs are eroding because the number of drugs that remain branded are eroding. Drugs are moving from branded status to generic status and as I said before our margins on generic drugs are quite for some period of time higher than the margins in both in dollars and percent on the branded drugs. And we have paid a great deal of attention to our generic drug purchasing. It's a pretty much of an E-ride as they say in Disneyland.

The movement to exclusivity period, yes or no. There is a lot of volatility, when one expect in exclusivity period, and they are knocked down in the courts, but whether there isn't. We have made a significant investment in our ability to track pricing to be certain that we are getting the best available pricing possible, it's something very unique and proprietary to Omnicare and I don't really want to talk about it too much. But I think, we do better as good a job applying generics as anyone in the industry. And that is where the focus of the market is going to be Adam until we see a renaissance of the new drugs coming through the FDA process, and into the market, because there is, as you know a paucity of these drugs coming in while many more drugs are going out, and are coming in, so we have to focus on the generic market. And that's the discount and rebate structure. They are just going away naturally, because their drugs are going off patent. And I think this process is going to continue for another three years or so.

Adam Feinstein - Lehman Brothers

Okay, but just a follow-up Joel. I appreciate all of the detail, but some Part D you haven't seen any changes in the rebate structures, it seems more just so a function of just more products?

Joel F. Gemunder - President and Chief Executive Officer

You mean, you are talking about multi-source drugs rebates. No, we don't see any massive changes at all. It's just normal day-to-day business. Part D had an impact on it, perhaps in the earlier stages, but there hasn't been any significant changes in the Part D structures and on rebates that I am aware of.

Adam Feinstein - Lehman Brothers

Okay. Thank you very much.

Joel F. Gemunder - President and Chief Executive Officer

Okay.

Operator

Your next question Charles Rhyee with CIBC World Markets.

Charles Rhyee - CIBC World Markets

Yes thanks for taking the question. I had a question about the third growth. You talked about either expanding your presence in assisted living and I was wondering if you could give us a sense on in terms of the bed increase may be how much of that was coming from assisted living growth and assisted living versus traditional long-term care pharmacy. And if you could also give us a sense of sort of what is the difference in the revenue per bed; my understanding is assisted living beds general with lower equity and sort of lower revenues?

Joel F. Gemunder - President and Chief Executive Officer

Now that's a common misconception, and I am finally glad somebody asked me that question, I was hoping somebody would. The... actually this quarter our increases, I believe, in the... in beds was essentially more on the sniff side than it was on the AOF side. That's not always the case but it just happened to be there though. In this case there ALF go lives were about flat with last quarter, I mean our total beds were about flat with the last quarter.

When it comes to the utilization of drugs we don't see much of a change in utilization. There aren't about as many scripts if not more scripts in the assisted living market than they are in the sniff market, the acuity is a little different but then again OTCs are included in assisted living switch. Now where we see a huge opportunity is one, one has to understand that skilled nursing facility beds in total are flat to down. It's... there are replacements at buildings being built but there is no... a bullion growth in the skilled nursing facility market at the moment. The growth is commonly assisted living market. Now the problem with assisted living is that penetration rates are normally quite a bit lower than you find in a skilled nursing facility and in our case they run the range from marginal to 100%. But on average I would... I think roughly and this is just a rough inspired guess is that we have about a 40% penetration rate in assisted living give or take. Now if we can by the use of a number of a programs increase that penetration from 40% to 70% or 80%, we stand to increase our number of patients by somewhere in the range of 120,000 to 150,000 patients at roughly $6000 per year, so you can look at those numbers that's $800 million to $900 million, something like that. And the margins would be quite high because we're already going there. So you have a lot of lower incremental costs.

So this is a major undertaking for our company and we're working very hard at that and we've allocated resources to that project. That is a big upside for the company if we can move to increase penetration.

Charles Rhyee - CIBC World Markets

But then just Joel, the penetration is let's say, roughly 40% today, why would that necessarily change and why... what's keeping you from it being a 75%, 80% today?

Joel F. Gemunder - President and Chief Executive Officer

Well there are a whole... assisted living is practiced in very, very different... there is a whole effect. When we look at assisted living, and slightly looked at the skilled nursing facility market 20 years ago, and everybody did things differently. As we develop best practices throughout the company, best practices means we go around the country and we look at those facilities where they have 80% or 90% penetration and we look at those facilities that have 20% penetration and say what are these 90% guys doing that the 20% aren't and we catalogued those best practices and we get our user groups together and we formulate what the best practices are. We write manuals on how we are going to do things and we do it and then penetration rates go up. That's how it's done, it doesn't happen overnight. But that's how we do... that's how we've done it in the skilled nursing facility in our industry where you adopt best practices and pretty soon everybody works on best practices. I can remember 15 years ago, when we had some really peculiar methods of getting a processing that were far from best practices and all of those things have receded into history, I think. But we would do the same thing, and the assisted living business is a much newer business. It has much more variability into how it's served, how the market is serve. And as we develop our best practices without Macy's wanting to tell Kimball's how we do things. We are going to see hopefully a significant increase in penetration and certainly, one of the things I am working on.

Charles Rhyee - CIBC World Markets

Okay, thanks. And if I just could add one last question here, you know obviously... if I look at the pharmacy EBITDA margins, obviously you back out the restructuring charge. How much of the margins in this quarter aside from the volume issue maybe was impacted by the ongoing transition in terms of your staffing needs?

Joel F. Gemunder - President and Chief Executive Officer

I am not sure I got that question.

Charles Rhyee - CIBC World Markets

Sort of the impact of... as you are transitioning to your full time staff. Is that cost embedded in your structuring recharges?

Joel F. Gemunder - President and Chief Executive Officer

You mean terminate... moving temps out and permanent people in, is that what you--?

Charles Rhyee - CIBC World Markets

Actually, yes.

Joel F. Gemunder - President and Chief Executive Officer

Actually that it was a plus, I think we are dollars ahead significantly in the quarter, by taking out temporary labor and replacing it with permanent labor. I think just about a two for one exchange in the... during this quarter.

Cheryl D. Hodges - Senior Vice President of Investor Relations and Secretary

But the overall payroll was de-leveraged which negatively affected our [multiple speakers].

Joel F. Gemunder - President and Chief Executive Officer

Well the overall payroll is de-leveraged, because as volume goes down and your payroll in total is flat you are de-leveraged. Now the de-leveraging would have been worse if we had less the temporary payroll in but for each $2 we took out in temporary payroll we saved about a little over $1 by substituting permanent payroll for temporary payroll. Is that about right Dave?

David W. Froesel, Jr. - Senior Vice President and Chief Financial Officer

Yes Joel you are exactly right. As far as the function of leverage and it's all leveraged on terms of what happens on the top line with respect to our payroll cost and our fixed costs.

Charles Rhyee - CIBC World Markets

Great, thanks a lot

Cheryl D. Hodges - Senior Vice President of Investor Relations and Secretary

Okay, I think we have time for one more question. Ashley?

Operator

Okay. Your last question is from Eric Gommell with Stifel Nicolaus.

Eric Gommell - Stifel Nicolaus & Co.

Thanks for taking my question. Just one clarification though if I could, you commented about dual eligibles being moved around amongst plans, did you say that United and Humana would actually would gain more patients or lose patients from...

Joel F. Gemunder - President and Chief Executive Officer

I think if you met... I think somewhat correctly if I get these number wrong, but I think there's 650,000 duals from the United that United is dropping and I think there's about 250,000 or so give or take that Humana is dropping. They are not all ours of course. But we would say that United will be dropping, we think, about 60% of their duals in our service and where they are going we don't know and because the reallocation has not been made public by CMS. When it is and when we complete our renegotiations, we will just know how much of the pickup we get in profitability on the United situation net-net. It probably will take till the end of the year, to know that.

Eric Gommell - Stifel Nicolaus & Co.

Great. And then the question I was going to ask, in terms of absolute dollars or... I just want to understand, in the quarter, was there any benefit form some of the initiatives that you've put in place in the full potential plan because I think in the past you talked about starting to see some of the benefits of those things you are doing and I am trying to understand how much might be in there?

Joel F. Gemunder - President and Chief Executive Officer

There is a very small... there is some amount in there... there will be some amount in there by the end of the year but it will not be significant.

Eric Gommell - Stifel Nicolaus & Co.

Okay.

Joel F. Gemunder - President and Chief Executive Officer

As I said we are starting with our... we have signed a new contract on our medical records, that's coming in. We are doing some of the front-end and back end processing but that... but those are basically small potatoes compared to where we will be when we get our equipment in line and get our build-outs completed.

Eric Gommell - Stifel Nicolaus & Co.

Great, thanks.

Joel F. Gemunder - President and Chief Executive Officer

Thank you very much. Thank you all very much. I appreciate your attention to this very long conference call. Thank you again.

Operator

: This concludes today's conference, you may now disconnect.

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