Kevin Caliendo: Thanks and thanks for taking my question. The inventory level comment is similar to what you had said last quarter. And I’m just trying to, I guess, understand if you’ve seen any easing of the inventory levels in the channel quarter-over-quarter? You said, I think in the next few quarters, you expect it to abate a little bit. Maybe a little more color there on what you’re seeing and maybe what products are still, sort of, clogging up the channels or inventory levels?
Craig McKasson: Sure, Kevin. This is Craig. I’ll start, and then Mike can add any additional perspective. But — so we definitely have seen improvement. We are seeing the levels come down and ordering patterns start to return. But there are some members, which was my commentary that are continuing to hold on to a lot of excess inventory that they purchased at points in time, the primary things being gowns, I would say, and then some glove activity that they had purchased up during the pandemic as well. But the overall theme is that we’re seeing it improve. It’s just not all the way out. And so we think that we’ll continue to see it through the first half likely of fiscal 2024.
Kevin Caliendo: And can you size the magnitude of this, like normal ordering patterns for these categories versus what we’re seeing? Is it like a 10%, 20% impact? Is there any way to quantify it in any sort of way, shape or form to what it is now?
Craig McKasson: Really wish we could. It does vary by provider. So I don’t have an overall kind of aggregate I would provide you. I would say, generally, it is getting back, it’s probably to the 85% to 90% level of where it used to be getting back to where it needs to be. But it’s just not all the way there yet with some of the members that really did over-procure some of that stuff at the height of the pandemic.
Kevin Caliendo: Helpful. And on the fee share, can we — this increase from low to mid-50s to mid to high-50% range. Is that helpful to understand? Should we now think about the fact that all of your members, generally speaking, are, I don’t know, say, locked up, but are you going to be partners with for at least the next couple of years through 2025 or 2026?
Craig McKasson: I mean, broadly, I would say, yes, I think generally speaking, there could be consolidation, which can create a situation where members have an opportunity to go to market or renegotiate. We do have a number of members that are not part of our historical restructuring that just always come up for contracts over a regular waterfall period. So we’ll have to evaluate those, although typically, those are already at a place that we wouldn’t see the sort of changes that we’ve been talking about. And then obviously, we’ll continue to recruit in the marketplace for new members. But broadly, I would say, yes, that our existing member footprint absent, sort of, unique circumstances is in place through the time period that was contracted at the time of the restructuring.
Kevin Caliendo: Great. Thank you so much.
Craig McKasson: Thank you.
Operator: The next question is from Eric Coldwell of Baird. Please go ahead.
Eric Coldwell: Thanks very much. I was hoping for some more discussion on the modeling of the Omnia transaction, several questions here. First, could you talk about the $111 million true-up adjustment to purchase price expected in eight months? What are the puts and takes on that? How will the and when will the $151 million escrow be released over time? And then I think there are some unique model dynamics on the balance sheet amortization of a debt treatment over 10-years and also interest expense, imputed interest expense impacts, things like that. There’s just seems like we could use some more help on the modeling dynamics of this unique transaction.
Craig McKasson: Sure, Eric. This is Craig. So the $111 million or $100-plus million or so of true-up is a function of relooking at the baseline fees as of the close date. So when we closed the transaction in August, it was based on a look back, back a number of months. So when we get forward, we will look at the actual revenues that came in the door through the close date, and then we’ll have the multiple applied to that. And so based on our expectations and monitoring, we believe that will be the additional proceeds that will come in at that point in time. So that’s the first question. The second question on the escrow balance, we actually are receiving payments weekly as we go through the next couple of months. So we’ve already seen a couple of payments, reducing that $151 million down.
So that’s progressing as the conversations with members to get their consents takes place and feeling good about how those consents are going and the cash flow is coming in to relieve that escrow. Number three, relative to the balance sheet and the debt balance, again, we — the proceeds that we received were recorded as debt on the balance sheet. That will be relieved over the term of the 10-year channel partnership agreement that we have as we record revenue associated with Omnia’s activity. So each quarter, we will get the level of purchasing and administrative fee generation that comes from those members that will relieve the debt balance. And as talked about previously, we’ll get an incremental 30% of revenue associated with growth above the baseline at the time of the close.
And then I’ll have to actually — I don’t have it at my fingertips, I apologize, but we’ll be happy to follow-up on the specifics around the imputed interest level. It’s a low-level imputed interest given the debt on the balance sheet, but I don’t have those specifics at my fingertips, so we’ll have to follow-up with that.
Eric Coldwell: Craig, if I might, two quick follow-ups. The debt, is that going to show up in a new line item? Where should we be building in a new model line item for this debt specific item?
Craig McKasson: It will be a single stand-alone line item on the balance sheet.
Eric Coldwell: Yes. And then final one. There also is the transition of the associated free cash flow to Omnia, I believe. So that is one of the headwinds to your free cash flow conversion rate in fiscal ’24? Is it not? And if so, can you tell us what that magnitude might be in terms of thinking about modeling the free cash flow impact?
Craig McKasson: Yes. To your point, that we will now have that revenue that will not have cash flow associated with it because we received that cash flow initially at the time of the transaction.
Eric Coldwell: So could you tell us ballpark what that headwind is in fiscal ‘24, what you expect it to be?
Craig McKasson: I’ll need to follow-up specifically based on — because it will depend based on the growth that Omnia has. I’ll go back — we’ll come back to you, Eric, with the specifics on the amount.
Eric Coldwell: Yes. Thank you very much.
Operator: The next question is from Allen Lutz of Bank of America. Please go ahead.
