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Executives

Patrick Lee - Vice President, Investor Relations

John Workman - Chief Executive Officer

Nitin Sahney - President and COO

Rocky Kraft - Chief Financial Officer

Analysts

Charles Rhyee - Cowen & Company

Lisa Gill - JP Morgan

Steven Valiquette – UBS

Stephan Stewart - Goldman Sachs

Frank Morgan - RBC Capital Markets

Glen Santangelo - Credit Suisse

Omnicare Inc. (OCR) Q3 2012 Results Earnings Call October 31, 2012 9:00 AM ET

Operator

Good morning. My name is Danielle, and I will be your conference operator today. At this time, I would like to welcome everyone to Omnicare’s Third Quarter 2012 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. I would now like to turn the call over to Patrick Lee, Omnicare’s Vice President of Investor Relations. Mr. Lee, you may begin your conference.

Patrick Lee

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

Before we begin, let me remind you that during this call we will make remarks that constitute 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 sake and to focus on what we believe are the best indicators of our operating performance we will discuss results from continuing operations and we’ll also exclude special items for all periods in our discussion today.

The reconciliation of this non-GAAP information has been attached to our earnings release and is also available on our website. Also on our website you will find third quarter supplemental slides which we will follow during our discussion today.

Before turning the call over to John, I would like to remind analyst to limit themselves to one question and one follow-up during our 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 Workman

Thank you, Patrick, and good morning, everyone. We appreciate you are being on the call, especially those of you in the Northeast. First, we wanted to start by discussing the impact of Superstorm Sandy.

We had 11 sites across eight states impacted. All were backed up with emergency power or were able to divert the orders via hub-and-spoke network. Our dedicated employees worked tirelessly to meet all emergency needs. As of last night, we’re making routine deliveries though some are more challenging due to the roads.

Turning to the quarter, as you know I was named the CEO in early September 2012 and Nitin Sahney became the President and Chief Operating Officer. Rocky Kraft is also promoted the position of Chief Financial Officer at the same time, so we now have certainty on those positions and appreciate the Board’s confidence in us.

I’m going to provide an overview of the quarter. Nitin is going to discuss our operations and Rocky will cover our third quarter financial results. I will then conclude with comments on our 2012 guidance before we open up the call for questions.

Before covering our third quarter results, I would like to share the key priorities for the next 12 months that we covered with our Board of Directors recently. First, achieving sustainable net organic growth in Long-Term Care; second, continuing the momentum and the strong growth being demonstrated in our Specialty Care Group; and third, continuing to allocate capital efficiently. I will have some additional comments about these priorities after we hear from Nitin and Rocky.

Now, turning to the quarter’s financial results. It is evident we have had another strong quarter. Adjusted cash-based earnings per diluted share were $0.86 for the quarter, compared to $0.74 a year ago and $0.83 in the second quarter of 2012.

We now had four quarters in the row where we have seen year-over-year improvement. These strong results benefited from generic drug efficiencies and another strong specialty performance.

Cash flow from operations was $196 million for the quarter as a result of our earnings and strong quarterly working capital improvements.

Long-Term Care adjusted operating income from continuing operations of $154 million were the 10% improvement over the same quarter a year ago fueled by the branded generic wave we expected in 2012.

Specialty Care Group adjusted operating income of $33 million was a 26% improvement over the third quarter of 2011. Clearly, we had strong performance in both segments.

Next, turning to metrics, our retention rate for the quarter in Long-Term Care was 92.6% remaining in the 92% to 94% range we saw in 2011. Importantly, service-related losses were 39.6% lower as compared with the third quarter of 2011.

Our net organic bed activity for the quarter in Long-Term Care was a loss of 7,000 beds, excluding the acquired beds and those losses result the sale of our Canadian pharmacy. The organic loss number includes about 1,000 beds lost from Pharmacy Advantage acquisition in 2011 which were large anticipated.

Our total scripts dispensed in the third quarter were 29.8 million scripts, down approximately 300,000 scripts from the second quarter of 2012.

Finally, a few additional highlights before I turn it over to Nitin for his observations and then to Rocky Kraft for a more detailed review of our financial results.

We finished the acquisition of Five Star’s pharmacy business in the quarter adding 13,500 beds. The synergy from this acquisition is expected to start in 2013. We disposed the two smaller operations in the quarter, namely the Canadian pharmacy I mentioned previously, and a pharmacy operational software business.

Total proceeds from the two dispositions were approximately $19 million. We also took advantage of the capital markets in refinancing our bank facility on improve terms that Rocky will cover.

Lastly, we purchased a little over 900,000 shares in the third quarter of 2012. During the quarter our Board authorized the doubling of our dividend and a $350 million increase in our share repurchase authorization, between dividends and share repurchases we have returned 34% of our cash flow from operations to shareholders during the first nine months

Now, let me turn the call over to Nitin Sahney.

Nitin Sahney

Thank you, John. During the third quarter we made a number of changes to begin building the right structure in our Long-Term Care business and in stellar sense of urgency throughout the organization.

While we are pleased with how our team has responded to these changes we still have work to do to reach our operating objectives. I would like to share with our assessment of where we are in this process along with the appropriate timelines for which we are holding ourselves accountable.

Our plan encompasses three distinct intervals. Phase 1 consisted of our first 100 days. During this period our goal was to insert the right people in key positions. We have started the process of enhancing our key functions like sales, retention, national account and automation by making leadership changes in these areas.

We look forward to bringing more coordination and discipline to these groups especially in the area of automation where we stand behind the need for more advancement, require validation of the business case before going to market. In addition to these and other key executive appointments, we also completed an initial assessment across the businesses to identify structural opportunities.

Phase 2 is currently underway and will run through the second quarter of 2013. During this period we have begun to act upon takeaways from Phase 1 and have started implementing the necessary operational changes.

We recently condensed our number of divisions from five to four. We believe this move will drive more consistence service delivery while also ensuring a more balanced distribution of revenue across our divisions.

We have also begun revamping the sales structure. We believe an appropriate sales strategy requires understanding a market opportunities and dedicating resources methodically through clearly defined rules at each point in the sales process, beginning with the pipeline development.

Another key component in effective sales strategy is developing the right go-to-market message tailored to the specific customer need. We believe Omnicare has a robust service offering, all the different types of customers tend to focus on distinct elements of our value proposition.

Therefore, we are repositioning a sales message to relying with the unique customer need in order to appeal to a broader group. We expect to exit 2012 with our sales strategy fully in place.

On completing the second quarter of 2013 we expect to enter Phase 3. It is at this point that we expect to generate the benefits from the structure refinement, positioning the company for improved operating performance.

We also intend to make ongoing adjustments to ensure a model and value proposition is appropriately positioned with our customers and prospects. We believe this multi-step plan is necessary for Omnicare to accelerate its progress toward operational excellence and to better leverage its assets.

Our team understands the urgency required and is focused on achieving our operating objective in accordance with its clearly established timelines.

We are also confident in our abilities to continue reducing service-related losses but also instilling a sales structure that drive consistent results. In conjunction with these efforts in the Long-Term Care business, we’re also focused on capitalizing on opportunities within our Specialty Care Group.

Our third quarter SCG results reflect the continued benefit from the structure we established less than two years ago, which is very similar to the structure we are implementing in our Long-Term Care business.

Within our SCG business we have in place a very precise operating plan with our team aligned with its objective and the required timeline. Our focus remains on growth within our fee-for-service business and we are actively developing new solutions for our bipharma client.

Our specialty pharmacy platform is also gaining traction through limited distribution networks. One unique example is the drug XENAZINE where we have utilized the Long-Term Care footprint to become the exclusive provider of product within the Long-Term Care channel.

We will continue to evaluate opportunities like this to better leverage our assets. With both our businesses now under the leadership of one team we believe we are in a better position to do so.

And now, I’d like to turn it over to Rocky who will cover our third quarter financial results.

Rocky Kraft

Thanks, Nitin. As mentioned earlier, we have filed supplemental slides that I will refer to during my remarks. First, I’d like to discuss our operating metrics, which can be found on slides five and six.

In the third quarter, we dispensed 29.8 million scripts, down slightly from the 30.1 million scripts we dispensed in the same period last year. Within our Long-Term Care Group where script volumes are more directly correlated to revenue, third quarter script volumes were 1% lower on a year-over-year basis to 28.2 million. This change in scripts was driven primarily by our lower average number of bed served and a slight decline in utilization across SNF and outpatients.

With respect to beds served, we ended the third quarter serving approximately 982,000 beds, which includes 13,500 beds attributable to five stars institutional pharmacy business, which we acquired late in the quarter. Including the beds of the acquired beds, we exited the quarter 3000 beds higher sequentially and 26,000 beds lower as compared with September 30, 2011.

Before discussing our financial performance, I’d like to briefly cover the third quarter special items which amounted to $24.1 million, $15.7 million lower than the same period of 2011.

The third quarter special items were primarily attributed to restructuring costs of $11 million from exiting certain leased facilities, debt redemption costs of $8.3 million associated with our September refinancing, separation costs of $5.5 million related to former executives and settlement and litigation charges of $4.9 million.

As we have mentioned before, there may be additional matters that arise against the company, but we believe that those that we are aware of are manageable given the company’s financial position and cash flow characteristics. As an example and as will be disclosed in our 10-Q to be filed later today. A new qui tam complaint against the company was unsealed during the quarter. The government has declined to intervene in this case.

In addition, during the quarter courts have dismissed all or a portion of certain previously disclosed qui tam complaints. Also included in special items for the quarter is a net gain of $7.9 million, resulting from the divestitures of our Canadian pharmacy and our Accu-Med software business.

I will now cover net sales and adjusted gross profit, both of which can be found on slide seven. Net sales were $1.501 billion in the third quarter of 2012, reflecting a 2.8% decrease from the $1.544 billion we generated in the comparable prior-year period. This change was driven principally by the introduction of low cost generic drugs, and the lower script volumes previously mentioned.

Third quarter adjusted gross profit increased approximately $25.2 million to $371.3 million, driven largely by the impact of low cost generic drug introductions, resulting in a 230 basis point year-over-year increase in gross margin to 24.7%.

Next, I’ll turn to SG&A expense and our provision for doubtful accounts, both of which can also be found on slide seven. Our third quarter SG&A expense was $12.3 million higher in 2012 than the prior-year period, but generally consistent with the second quarter of 2012.

As a percentage of sales, SG&A expenses were 117 basis points higher on a year-over-year basis, reflecting investments we have made in our people, our systems and the lower sales impact from new generics.

Our provision for doubtful accounts was 1.6% of revenue for the third quarter of 2012, a relatively even with the comparable prior year period. Third quarter day sales outstanding of $55.3 million was lower by 1.6 days than the third quarter of 2011. Interest expense of $25 million was $4.7 million lower than the third quarter of 2011, a direct result of our debt refinancing and reduction initiatives.

Excluding the impact of special items, our effective income tax rate was 39.1%. As a reminder, our cash tax rate is generally much lower, reflecting the goodwill we amortize for tax purposes and the comparable yields we deduct relating to the contingent interest on our outstanding convertible debentures. These items are added back to the income tax line and arriving at adjusted cash-based EPS, and have a weighted average life exceeding nine years.

Adjusted income from continuing operations for the third quarter of 2012 was $72.3 million, or 4.8% of net sales. This represents a 16% increase from the $62.3 million we reported for the third quarter of 2011. For the third quarter of 2012, we generated adjusted cash earnings per diluted share of $0.86, a 16.2% increase over the $0.74 for the third quarter of 2011.

Next, let’s turn to our segment results which can be found on slide nine. Our Long-Term Care Group generated a 10% third quarter adjusted operating profit, increased to $154.4 million -- $154.4 million on an 8% decrease in net sales, primarily due to the impact of new generic introductions.

As a result, we expanded third quarter operating margin in this segment by 216 basis points to 13.2%. The improved performance in our Long-Term Care Group was driven principally by the benefit from new generic drug introductions, which also have a favorable impact on our customers, payors and the broader healthcare system.

Our Specialty Care Group also had another strong performance. For the third quarter of 2012, our Specialty Care Group generated a 21% increase in net sales and a 26% increase in adjusted operating income over the comparable prior-year period. All five specialty operating platforms generated double digit adjusted operating income increases during the third quarter.

Next, let’s turn to the balance sheet. We believe we further strengthened our financial position during the quarter, ending the period with $648 million of cash on hand including restricted cash.

Our accounts receivable was approximately $30 million lower as compared to where we exited 2011. Third quarter inventories of $341 million were lower than where we exited, both the second quarter of 2012 and the fourth quarter of 2011, driven largely by an increase in our generic drug mix.

We do not expect to have working capital benefits of this magnitude in the fourth quarter. In fact, we expect working capital to be a slight use of cash for the period, as a result of timing and quantities of payment to our prime vendor.

Turning to cash flows, which you can find the detail on slide 10. Third quarter net cash flows from continuing operations were approximately $196 million, representing the highest quarterly output in the company’s history. As a reminder, these cash flows do not include our semiannual interest payments, which occur in the second and fourth quarters. For detail regarding deployment of our cash flows, refer to slide 11.

Our third quarter CapEx of $25 million reflects continued investment in certain technology initiatives that are expected to improve the efficiency of our operations and to enhance customer service, all while providing an attractive return to shareholders. As a reminder, our maintenance CapEx normally runs between $30 million to $40 million per year.

During the third quarter, we also amended and extended our bank credit agreement. In summary, we extended our $300 million senior unsecured credit facility, and $425 million senior unsecured term loan to September 28, 2017 and we reduced pricing. At the end of the third quarter, our interest rate was 50 basis points lower on the new credit agreement than it would have been with the previous agreement.

As John mentioned earlier, we continued our disciplined plan of returning cash to shareholders through dividends and share repurchases. During the third quarter of 2012, our Board authorized a doubling of our quarterly dividend to $0.14 per share. As a result, we paid dividends of $15.2 million or more than tripled the $4.5 million we paid in the comparable prior-year period.

Additionally, we repurchased approximately 947,000 shares for nearly $31 million in aggregate. It is worth noting that our third quarter window period for repurchases was shorter than in a normal period for various reasons.

Following the Board’s authorization of an additional $350 million, we have a total of $498 million authorized for share repurchase. Collectively, our third quarter dividends paid and share repurchases represented approximately 23% of our operating cash flows.

With that I’d like to hand the call back over to John.

John Workman

Thanks, Rocky. Earlier in the call, I mentioned the three priorities for the next 12 months. Nitin gave you an update on the process we are undertaking in Long-Term Care and Specialty Care.

We are purposely not been specific about a day to have sustainable, organic growth in Long-Term Care, but believe we should be there sometime in 2013. Our primary focus is to grow scripts, but we recognized beds are proxy for scripts.

Our efforts in Specialty Care are obviously much further along, and we expect to continue to benefit from the existing structure. Related to capital allocation, I believe the action taken in September to increase our dividend and share repurchase authorization demonstrate our commitment to increase our return to shareholders.

We will also be looking at selected acquisitions to fund out of cash flow from operations and further de-leveraging in 2013 in addition to our current and more elevated capital expenditures.

Unlike the prior year where we characterized all three elements, acquisitions deleveraging and return to shareholders of being equal, we now view return of value to shareholders as a larger priority than we look at the allocation of our cash flow from operations.

In fact, if you assume $400 to $500 million per year of cash flow from operations, our current dividend rate and the full completion of our share repurchase authorization, the return of value to shareholders should approximate 50% over the next two years. We remain very focused on the aims to drive success both now and the future.

Because of our strong performance, we are raising guidance for adjusted cash EPS and our cash flow from operations excluding settlement payments as follows. Adjusted cash-based EPS per diluted share is now $3.30 to $3.36, up from our revised $3.22 to $3.28 in our original $3.10 to $3.20 guidance.

Cash flow from operations is now at $500 million to $550 million, compared to our revised guidance at $425 million to $525 million, and our original guidance of $400 million to $500 million.

The midpoint of our revised EPS guidance is a 15% increase over 2011 adjusted cash EPS from continuing operations. This guidance includes an assumption for federal upper limit pricing that is based on average manufactures price or AMP. As you know, we have moved a number of contracts off this benchmark limiting our exposure to 3% to 4% of revenues.

It’s also important to note that most state Medicaid reimbursement is already at MAC pricing. So, they expect to change in pricing generally between the new FUL and the state MAC and not between the new FULs and the previous FUL.

Our assumption for AMP also contemplates no relief on a dispensing fees which are currently inadequate given dispense giving -- given pharmacy dispensing costs. In addition to AMP, we also continue to monitor major events out of Washington, so we are prepared to deal with those. One of these is short cycle dispensing, which becomes effective on January 1, 2013. We believe we are prepared both operationally and with the Part D plans to minimize the added cost.

On excellent offers and comments on our longer-term targets, at the beginning of 2011, we indicated we expected to grow adjusted EPS over the three-year period ending in 2013 at double-digit rates. In 2012, we move to an adjusted cash-based EPS to indicate we would grow adjusted cash-based EPS at a high-single digit rate over the two years ending in 2013.

We also provided targets for cash flow from operations. We are still comfortable with those targets. Having said that, we are in the process of preparing our budget for 2013 and plan to give specific guidance on our year-end call for 2012. We do want to offer a few observations of 2013. Obviously, 2012 is proving stronger than we expected creating a tougher comparable.

We started the year with the midpoint of our EPS guidance representing a 9% increase over 2011 and are now looking at the mid-point as a 15% increase driven by branded generic conversions and strong Specialty care results. While we do not see a clip regarding branded generic conversions, it will not be the lift we saw in 2012.

We do expect continued reimbursement pressures from Part D plans and facilities consistent with what we have been experiencing for the last few years, in addition to the impact of AMP, which I already discussed. Scripts for net organic bed losses will be drained until we have achieved sustainable net organic growth.

On the plus side, we continue to expect to see continued growth in specialty care. We also expect benefit from efficiency that is cost saving initiatives, which will provide the positive contribution and we are in early stages this process, so we will have some added cost for short-cycle dispensing.

Lastly, our use of cash return value to shareholder for share buybacks also creates increased adjusted cash-based EPS from continuing operations.

With that, we’d like to now open the call to questions, operator.

Question-and-Answer Session

Operator

Your first question comes from the line of Charles Rhyee with Cowen & Company.

Charles Rhyee - Cowen & Company

Yeah. Thanks, guys. Hey, thanks for taking the questions and congrats on the quarter. Just a two questions here, one for Nitin when you talk about where Phase 2 of the plan here, can you give us anymore thoughts around particular on the rebounding the sales force and where do you see areas for them to be focused on. Is there going to traditional -- do you still see opportunities in traditional skilled nursing or is it more appropriate to have them folks on other areas within the Long-Term Care market?

Nitin Sahney

Thanks, Charles. Our sales strategy is basically, it’s a refreshing look to look at it and say where our market both on ALF and SNF areas. So we are dedicating more resources to other areas like assisted living. And we have a full scale strategy in process on how to go and leverage our existing assets to go after the ALF market. So that’s one part of our sales strategy.

Second is more structural. So, we have looked at new markets where our sales force are already dedicated to see if there is enough markets in those areas or should we redeploy them and other growing market and that’s really what we are doing with our sales structure. So, it’s a fresh look. It’s redeploying our resources appropriately where our markets are and also horizontally looking into other markets.

Charles Rhyee - Cowen & Company

Great. And if I could have a follow-up question for Rocky, kind of related to John, your comments about your comfort with the guidance to sort of long-term targets you are given last year. But obviously we are having a very strong year this year. Just trying to square the two, is this -- obviously we’re going to have tough comps relative because of 2012. But is it fair to think that we could still sort of meet this longer-term target of the high-single digits even in the face of tougher comps in ‘12?

Rocky Kraft

In ‘12 or ‘13, I think?

Charles Rhyee - Cowen & Company

In ‘13.

Rocky Kraft

Yeah. What we wanted to do Charles, we didn’t want to -- we are not in position to give to give specific guidance for 2013. So you shouldn’t read that negatively or necessarily positive either way. What we wanted to do let’s say look we’re still comfortable with the long-term targets that we put out there. And there is variety of issues in 2013 and as we develop our end of year 2012 will gives specific 2013 guidance. But I think the underlying principle is all the steps we are taking are the right steps to position the company for continued growth.

Charles Rhyee - Cowen & Company

Great. Thanks a lot, guys.

Operator

Your next question comes from the line of Lisa Gill with JP Morgan.

Lisa Gill - JP Morgan

Thank you and good morning.

John Workman

Good morning, Lisa.

Lisa Gill - JP Morgan

John, can you just talk about -- I know I always ask about the beds but can you talk about who you are losing some of the beds to, number one? And number two when you talk about the goal of getting back to net organic growth, do you think that something you can achieve in 2013 and would you think it takes for you to finally get there?

John Workman

Yeah. I’ll start and maybe Nitin’s wants to add comments, Lisa. I think that we’re focused on tracking customer service losses. And we’ve seen steady improvement in those, which will improve our retention rate. As to who were losing to from a competitive standpoint, some of those are situations where we’re declining to bid on business because the pricing is not as attractive as we would like.

What we are doing is making sure our offering is able to go up against not only national change, which we really not seen losses to any national change, but also on the small independents. We also believe as 2013 progresses short-cycle dispensing will put more pressure we’re prepared for that, because of our automation that’s going to put more pressure on the smaller independents.

And lastly, branded generics, which have been a benefit both us in 2012, a huge benefit. We don’t see the clip in 2013, but as you know for independents since they don’t buy direct that’s going to put more pressure on them too.

So, we also think that competitive market may change. But I think most importantly is what Nitin talked about and is the basic to sales. And it’s aligning our resources in the markets where we have opportunities, which wasn’t always the case.

I think it’s also important to when we talked about redeployment we’re looking at using the same sales dollars just using them more effectively and we think we have a tried and true approach, which will increase the sales side which should result in net organic growth in beds in 2013. We’re just not -- we don’t want to go out all on them and put us the state down right now.

Lisa Gill - JP Morgan

Okay. Great. And then just as a follow-up, if we look at specialty obviously great result again this quarter growing your profits even more have been revenue and the revenue growth is great. Can you maybe just talking in about what kind of trends you are seeing there and this is just leverage of the business model or are you seeing that you are selling one product or consulting product more or so and that’s really helping to drive that overall profitability. I am just trying to get an understanding of what’s going on with that side of the business right now?

Nitin Sahney

Lisa, actually is both. Well, I think the trends are there but the structure we put in place especially our sales and marketing efforts in May, 2011 and first two quarters are showing result. We are focused on a fee-for-service business and that has started showing traction. And in the meantime, I think you mentioned, we have started penetrating our Specialty platforms -- Specialty pharmacy platform a lot more by signing of the foundation and limited distribution networks, signing some exclusive deals.

So, really it is -- it’s a methodical approach that we anticipated which show results ‘13 and forward. So, that’s really what it is. It’s basically all platforms that are really working well. They are well coordinated. Our marketing and sales strategy is very robust there and I think we are renovating with all our existing clients and new clients.

Lisa Gill - JP Morgan

Okay. Great. That’s very helpful. Thank you.

John Workman

Thanks, Lisa.

Operator

Your next question comes from the line of Steven Valiquette with UBS.

John Workman

Good morning.

Steven Valiquette - UBS

Thanks. Good morning, John and Rocky. So, somewhat similar question, I don’t want to beat this to dead because you guys have taken a lot of positive steps over the past 18 to 24 months to improve the organic bed count, I guess I’m curious of the primary reasons today why some customers are walking away. Is it different than what it was 12 to 24 months ago, just curious to get some color maybe from that perspective and the overall bed count?

John Workman

Yeah. I mean I think that if you look again that customer service issues we’ve made continued improvement for those. I think we’ve mentioned in the past that we are working through some legacy, AR issues, some legacy, I would call them per diem issue. So, we are also more selective today. We want solid customers that are financially viable themselves and we can build a relationship with versus customers may just be price shopping for six months or year.

So, I would also say, we’re more targeted about going after the right long-term customers in our approach. So, we do believe progress is being made. I think the -- we’ve been frustrated. I would say on the sales side for period of time. We’ve talked about that on prior calls. And now that we’ve had a chance to look at it most importantly under Nitin’s leadership, we’re taking a different look which we think.

Again, it’s not rocket science, it’s looking at your markets and putting your resources and end markets where those opportunities exist. And we expect to see some plus on the sales side.

Steven Valiquette - UBS

Okay. And then also just a quick follow-up here. You guys have gotten pretty good traction obviously on some of the reimbursement contract going for MAC based to AWP base. I am just curious, is there still additional opportunity to convert further contracts or do think you’ve done most of way you can do there just trying to get a sense for kind of where we are in that process? Thanks.

John Workman

Well, I mean that’s a great question. What we primarily did was to provide a predictability in terms of -- what our reimbursement would be like going forward, but also to again pushing us from the AMP impact.

But I don’t want to mislead you. I mean there is continued pressure with the Part D plans from our reimbursement side as well as facilities. And with that, that’s something we’ve been experiencing for years and AWP minus kind of helps provide some more predictability both for them on the Part D plan as well as facility side. I would say that our relationships with Part D plans are improving.

And we’re strengthening those relationships that doesn’t mean necessarily we’re going to get better pricing. But it does mean that some of the things that we’ve seen in the past or at least years ago where there was a lot of animosity between the two, we’ve overcome that.

Steven Valiquette - UBS

Okay. Got it. Okay. Thanks.

Operator

Your next question comes from the line of Robert Jones with Goldman Sachs.

Stephan Stewart - Goldman Sachs

Hi guys. Thanks for the questions. It is Stephan Stewart calling in for Bob. Just wanted to touch on the script growth and utilization trends, Specialty down slightly year-over-year and Long-Term Care down as well. Maybe beds had some impact there but could you guys touch briefly on what you’re seeing on the script growth front or maybe just for utilization?

Nitin Sahney

Yeah. I’m not sure I completely understood the question but on the specialty side when we look at scripts really aren’t a good measure, growth in the profitability because of the fee-for-service piece of the business. We also have our hospice business on the specialty side that is primarily per diem model and that business we have seen script declines partially because of some loss of customers but additionally just as we run the business, we run it more effectively. That’s a good thing because it costs us money.

On the Long-Term Care piece of the business, as scripts have declined because of primarily the loss of beds, we have seen a little bit of less utilization inside in our SNFs and ALFs but that’s a minor piece primarily related to the bed losses.

Stephan Stewart - Goldman Sachs

Great. And then …

John Workman

It was only a 300,000 script decrease from the prior quarter. And it’s actually kind of leveling off a little bit. And then I think part of the focus as we look at going after the ALFs, remember you can get increased scripts without additional beds on the outside by increasing penetration. And that was part of Nitin’s comments about focusing on ALFs.

Stephan Stewart - Goldman Sachs

Got it. I might have missed this earlier but on the buyback. I think you have about $500 million less. Is there any -- you can give on timing as we end ‘12 and go into 2013 and how are you thinking about overall buybacks number?

John Workman

Well, I think what we said is we haven’t stressed physically in terms of our plan of execution. But to your point, we have little under $500 million. And I think if you look at $500 million that’s available and runs through 2014, along with our dividend, it’s clear that based on the cash flows that we’ve expressed before. It starts at $400 million to $500 million per year, we’re looking at 50% of that being returned to shareholders. So it is a -- it’s clearly a step-up in the program from where we’ve been.

Stephan Stewart - Goldman Sachs

Got it. Thanks for the questions, guys.

Operator

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

John Workman

Good morning, Frank.

Frank Morgan - RBC Capital Markets

Good morning. Hey, I wanted to go back to the Specialty business one more time. I apologize if it’s already been addressed but obviously very strong operating income growth in that part of the business. And I’m just curious longer term within those various sub segments of Specialty what do you really see it the best growth opportunities that really drive this thing to a new level and at some point, what would it take for you to consider maybe even spinning this out as a separate business? Thanks.

John Workman

The second part of your question is I’ll let John answer that later on but the first part of the question is, we can tell you that currently all our platforms as we design them two years ago are performing as per expectations. As you know, our revenue is coming from our specialty pharmacy business. That’s been consistently growing every quarter this year and last year. We expect to be in the same situation going forward for -- in the future.

On our fee-for-service business, which is longer term business, that business also is now showing results with the efforts we’ve put in structurally, operationally and strategically last year. So we feel that we’re still leveraging those platforms and in the mix of it of doing that, not towards the end of it.

Rocky Kraft

John, I would just add that I think that it is an attractive growing business. I would also say we continue to look at acquisitions. I mean, we look at acquisitions today both in Long-Term Care and Specialty that were much more discerning about those acquisitions. And in Specialty, we want to make sure they had the same growth characteristics.

Now, your other collection, Frank, about the spinout, I mean, we obviously believe today they’re well fit together. We believe that Specialty care is a great asset within the Omnicare portfolio but longer term we’re going to do what’s right for shareholders and we expect that to create value. And if that does not happen than it’s our responsibility to look at other alternatives but we’re not doing that today. Today, we believe it fits within the Omnicare portfolio.

Frank Morgan - RBC Capital Markets

And from a capital allocation standpoint, how much capital that you feel like you’ve got to devote to the Specialty business that you would kind of call out for either acquisitions or future development and then I’ll hop off. Thanks.

Nitin Sahney

I would say from a Specialty perspective, really it’s a pretty like LTC, a low capital intensive business. The areas where we have to invest in that business is along the growth to the extent we run out of space in a warehouse -- at warehouse space. Thanks for that nature but nothing that will do anything that’s uncharacteristic of the LTC business.

John Workman

And Frank, as to acquisitions, we want to make the right acquisition. Obviously in 2012, we’ve been pretty minimal on the acquisition. We’ve only had the one basic one. But I think it’s reasonable to think in terms, longer term of $100 million a year, going on acquisitions but it maybe higher or lower in any one year depending upon what the opportunities are. Operator?

Operator

Your next question comes from the line of Glen Santangelo with Credit Suisse.

Glen Santangelo - Credit Suisse

Yeah. Thanks and good morning. John and Rocky, I just want to follow up on some of the capital deployment questions. Sort of, given the level of cash flow, that you currently generate in the balance sheet deleveraging at a pretty rapid rate. And so I want to get a sense from you, what you thought the appropriate amount of leverage for this business was on a go-forward basis?

Rocky Kraft

I mean, I think that I would start by we’re not uncomfortable with the level of leverage that we have to date. We would always caution you to make sure you’re looking at the amount of debt due though not the amount on the balance sheet because remember there is a pretty substantial discount on the GAAP balance sheet numbers.

But we’re not uncomfortable with the level of leverage. We think it’s prudent for healthcare companies to continue to work leverage down. When we look at comparable companies, we still might be a little bit higher. We’re really more focusing on managing the maturities to make sure we don’t have a refinancing risk. But we will expect to make some minimal deleveraging so far this year, we spent $25 million on deleveraging.

So it’s not as higher priority as it was. But it’s just as important tied at maturity level. It’s not our goal to be an investment grade company. I would tell you that. So some place between that and where we are is probably the appropriate level but we don’t have a specific target of leverage other than again we think it’s prudent for healthcare company that subject to reimbursement risk to have that cushion. Today, we clearly have ample cushion.

Glen Santangelo - Credit Suisse

Well, John, that’s kind of what I want to follow-up on. I’m trying to get a sense from you if it makes sense to retire any of debt outstanding early because based on your prepared remarks, you said you expected to use about 50% of your free cash flow on dividend and share repo over the next couple of years. And so I’m trying to get a sense for what you think are the necessary priorities for that free cash flow and these acquisitions are part of that. And if it is, does it make more sense to be buying properties on the Long-Term Care side or the Specialty side.

John Workman

Great question. That’s the same deliberation we go through. I mean, again what we’ve said is that clearly returning value to shareholders, higher priority today. We want to make certain we have opportunity to do attractive acquisitions whether those be in Specialty. And in Specialty side, they’re more expensive.

We’re looking at acquisition. We probably looked at more than 20 in the last year and we’ll continue to look at acquisition in both platforms. I would stay on the Long-Term Care. We’re more focused on those that have a lease some size to them today. I mean, like a five-star acquisition that we think was an attractive acquisition but we’re looking at those that have a little bit more size versus the one-off because at least those give you the ability to focus and make some changes.

But we’re especially intrigued by Specialty and those opportunities. But they go at higher multiples. So we have to make certain that we allocate some cash for that. I would mention also CapEx for the next year or two as we disclose this probably little bit higher than our typical maintenance CapEx.

As to debt, the only thing that we’re really focused on as we’ve got a maturity that comes due in 2015, so starting in chip away at that a little bit. It doesn’t make sense to probably retire too much of the debt early because our most expensive debts are 3.25%, 3.75% and our long-term -- our term loan that we just refinanced has effective rate of 2% or less.

So retiring that debt, it doesn’t seem to be something that necessarily real attractive right now. So we’re keeping our options open. I mean, we’re doing just as you described. We’re saying that we will look at acquisitions, some minimal debt deleveraging but also returning value to shareholders and we’re going to weigh those one against the other.

Glen Santangelo - Credit Suisse

Okay. Thank you.

Operator

That is all the time we have for questions today. I would now like to turn the call back over to our speakers for any closing remark.

John Workman

Well, again we appreciate you being on the call. We know it’s kind of an unusual day in the markets, just reopening and we appreciate your time and attention, your interest in Omnicare and hope that all of you on the Northeast get a good recovery.

Patrick Lee

And just real quick, I’d like to announce that we will host an Analyst Day on December 7th. So please contact Omnicare investor relations if you’d like additional information. Thank you.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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