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Gentiva Health Services, Inc. (NASDAQ:GTIV)

Q4 2012 Earnings Conference Call

February 7, 2013 09:00 ET

Executives

John Camperlengo - General Counsel

Tony Strange - Chairman and Chief Executive Officer

Eric Slusser - Chief Financial Officer

Analysts

Darren Lehrich - Deutsche Bank

Kevin Ellich - Piper Jaffray

Sheryl Skolnick - CRT Capital Group

Whit Mayo - Robert Baird

Ralph Giacobbe - Credit Suisse

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gentiva Health Services Fourth Quarter and Full Year 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 period. (Operator Instructions) As a reminder, the conference call is being recorded today, February 7, 2013.

It is now my pleasure to turn the floor over to John Camperlengo, General Counsel. Sir, you may begin your conference.

John Camperlengo - General Counsel

Thank you, Christie, and good morning, everyone. And welcome to Gentiva’s fourth quarter and full year 2012 earnings conference call. Speaking on the call today are Tony Strange, our Chairman and CEO; and Eric Slusser, our CFO.

We hope that each of you had a chance to review the company’s earnings report, which was released this morning. All statements made during this call relating to future results and events are forward-looking statements that are based on our current expectations. Actual results could differ materially from those projected in forward-looking statements because of number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings and in the cautionary statements contained in our press release and on our website.

Our call today will be consistent with the SEC’s Regulation FD. We encourage participants to ask their questions during the call since we have certain limitations on comments that could be made in individual inquiries. Today’s call also conforms to Regulation G regarding the reconciliation of GAAP and non-GAAP disclosures. As a result, we will not discuss non-GAAP financial measures on this call, except for those set forth in our press release. You may access a telephone replay of this call later today, through February 14.

A transcript of the call will be posted to our website and will be available for the next 12 months. Following today’s prepared remarks, we will open the call to questions. Please limit your initial comments to one question and one follow-up so we can accommodate as many callers as possible in the allotted time.

With that, I’ll turn the call over to Gentiva’s Chairman and CEO, Tony Strange.

Tony Strange - Chairman and Chief Executive Officer

Thank you, John and good morning everyone. Thank you for joining our fourth quarter 2012 earnings call. Overall, I am pleased as continued strong home health volume growth, good expense management, and very strong cash flows drove our results.

Our fourth quarter results capped the year in which we exceeded the earnings guidance that we established at the beginning of the year despite continued low levels of healthcare utilization across all sectors and very tough regulatory environment. Equally as important, we significantly increased our financial flexibility during the year by generating strong cash flows and amending our credit agreement. And despite the difficult operating environment, we continued to invest heavily in our clinical delivery model and our sales infrastructure to ensure that we are positioned for long-term success.

From an industry perspective, I am very pleased with how we came together this past year to promote the value of home health and hospice services in Washington. While this work is never done, we have come a long way these past few years in getting our messages understood and we enter 2013 with a solid plan to continue these efforts. Today, I am going to focus my comments on our fourth quarter and full year results, key activities in DC, and then I’ll wrap up with some thoughts on our priorities heading into 2013.

So, let’s jump right into our results. For the fourth quarter, revenues from continuing operations were $425 million and adjusted EBITDA from continuing operations was $44 million producing earnings of $0.32 per diluted share, which include a $0.01 impact from Hurricane Sandy. Our adjusted EBITDA margins were 10.4% for the quarter. Full year EPS from continuing operations was $1.27 per diluted share and adjusted EBITDA from continuing operations was $180 million or 10.5% of revenues.

Looking first at our Home Health division, revenues from continuing operations for the quarter were $238 million and EBITDA from continuing operations was $31 million or 13%. Margins were slightly impacted during the quarter by a higher benefit and labor expenses as well as the addition of 40 new sales FTEs as we ramp up for continued growth in 2013. Full year adjusted EBITDA from continuing operations was $131 million or 14% of net revenues.

During the quarter year-over-year episodic volumes and admissions grew 5% excluding the impact of closed or sold locations. This marks the sixth consecutive quarter of at least mid-single digit admission growth, as the sales investments that we’ve made over the last couple of years have produced solid and consistent results. For the full year admissions grew 5% and episodes grew 6% excluding the impact of the closed and sold locations. Given the softness in hospital and physician volumes that we have seen all year, I am very proud of these results. I am extremely pleased with the performance of our Home Health division overall. They have grown their business in a difficult time, they have done a great job with expense management and most importantly they have delivered consistent quality care to the patients that we serve.

Turning to our hospice division revenues from continuing operations for the quarter were $187 million and adjusted EBITDA was $31 million or 17%. The full year adjusted EBITDA from continuing operations was $134 million or 18% of net revenues. During the quarter our admissions were flat with prior year but ADC declined 3.5% from a year ago after excluding the impact of the closed or sold locations. For the full year ADC was flat at 13,300 and admission were down 3% compared to the prior year after excluding the impact of the closed or sold locations. While not yet reflected in our growth rate, the hospice team is executing on the growth playbook that I outlined for you on our last call, which includes ensuring that we have the right level of sales resources and providing our sales team with the latest training, technology and analytical tools that they need to be successful.

Needless to say, I am disappointed that we haven’t seen the impact from our sales investment, by its nature of hospice is the longer, more complex sales process than home health as the patient, the family and the physician all need to come together and believe it’s the right time to begin palliative care. On a positive note, however, since mid-December I have been encouraged by our admission growth trends, which hopefully will continue and put us back on the path of growth as the year progresses. To-date these trends have not carried over into our average daily census due to the higher death and discharge rates that we typically see in January and February. However as the death and discharge rate return in normal levels I would expect that the census will catch up as long as we stay focused on admission growth. I am as confident as ever that hospice will be a great long-term business for Gentiva and an inter-goal component of our growth story.

Throughout 2012 the hospice team did a good job in managing expenses, collecting cash and providing great end-of-life care to our patients. From a cap perspective I am pleased to report that we completed the sale of our Phoenix location which reduces our cap exposure heading into 2013 and allows our management team to focus on higher potential growth markets.

Turning to our legislative update, I would like to comment on our latest activities in Washington. As you know the fiscal cliff was adverted as the year end without any pay forwards from home health or hospice. And additionally sequestration was delayed until March the 1st. Given the recent events in Washington it’s anybody’s guess as to whether we will get reprieved from sequestration or whether there will be some type of bipartisan grand bargain that takes place. But regardless, we are running our business as its sequestration cuts will occur as that’s the law today.

In the recent weeks we have heard reports on how sequestration maybe implemented many of which are conflicting. As late as this week, we have all seen an effort from the President to offer a package that would further delay sequestration. As a result we have decided to delay offering any guidance on 2013 until we can gain some clarity on whether sequestration will occur. And if it does how it might be implemented, which should be forthcoming in the next several weeks we hope. When we get through the uncertainty of sequestration, our next challenge will be rebasing, which is scheduled to begin implementation in 2014.

To-date, there has been nothing published by CMS on how rebasing would occur. I am hopeful that we can gain some insight into rebasing with the Proposed Home Health Rule for 2014, which should be published sometime in July. I can tell you that our industry advocates in Washington are taking the stance that through the 11.5% reductions to reimbursement that we have already suffered in 2011 and 2012, the effects of rebasing has already occurred. This becomes even more apparent when you consider that since 2010, home health spending has been cut by $54 billion over a 10-year period compared to the original rebasing savings estimate of about $14 billion.

With all that said, it’s our hope and I am sure yours as well that sometime in the third or fourth quarter of 2013, we’ll begin to see clarity that our industry so desperately needs. In the face of this uncertainty, the partnership for quality home healthcare along with our national trade associations continues to be very active in DC. We continue to promote the value of home health and hospice as a part of the solution to the fiscal crisis facing our country’s healthcare delivery system. In particular, the home health community has looked internally to analyze the data and understand the concerns by MedPAC and others related to fraudulent behavior. The community has offered legislative recommendations to address these aberrant practices. We refer to these efforts as our Fight Fraud First campaign. These policies aim targeted cuts at bad providers producing real savings while preserving the ability of quality providers to service our seniors.

During the past few months, the partnership has met with numerous policymakers and legislators to provide a longer term discussion on post acute care considerations. The research known as the Clinically Appropriate and Cost Effective Placement work, the CACEP study reviews cares after hospitalization for most appropriate placement for patients to receive post acute care in a cost effective manner. This study highlights that home health can save significant dollars when appropriately used following an acute hospital stay.

Another important piece of research that is currently under development is the Avalere’s Group’s analysis of home health company’s margins. Initial data from this study confirms that the true margin of home health companies is considerably lower than estimated industry margins calculated by MedPAC which are based on cost report data. This research will be finalized shortly and should provide further insight into home health margins from MedPAC and CMS.

Another interesting development that we are tracking is the settlement of the GMO case in which the Chief Judge of Vermont’s U.S. District Court approved what is being referred to as the improvement standard. This settlement could allow care to be delivered to clinically appropriate patients that might not have met the previous guidelines for continuing services.

CMS has committed to putting out further clarification at some point in the future. This could be a win for the entire healthcare delivery system and the federal government by continuing to provide care to patients in a less costly setting and avoid costly hospital admissions.

Also during the quarter, we continued to see a lot of activity related to care delivery and reimbursement innovation. Potential changes associated with ACOs and post acute reform, bundle payments, new medical home models are all on the horizon and are creating some uncertainty, but with the uncertainty comes opportunity. With these changes, Gentiva is uniquely positioned to broaden its market position from a company offering home health and hospice to being a provider of transitional post acute care focusing on managing complex and chronic disease states in the most cost effective setting available in the patient’s home.

In order to position Gentiva as the leader in post acute transitional care, our executive team identified five key priorities heading into 2013. Our first priority is to drive organic growth through executing our sales plans and continuing to make the necessary investments in our sales infrastructure, which are critical for our long-term success. Our focus will continue to be on profitable growth, where we are able to realize an acceptable margin for the services that we provide. Our second priority is to continue to invest in our clinical delivery system to ensure that we provide our patients with the highest standards of care that produced the desired clinical outcomes in a compassionate and cost effective manner. We will continue to invest in specialized clinical delivery models focused on chronic disease management such as cardiopulmonary disease and chronic dementia.

Our third priority is to continue to invest time and resources in Washington in an effort to demonstrate the value of home health and hospice as a cost effective alternative for the delivery of healthcare services. Our fourth priority is to grow through acquisitions while balancing this with our commitment to pay down debt. In 2013, we’ll continue to look for opportunistic acquisitions that provide us market density and significant long-term growth opportunities as well as deploy capital to reduce debt, both of which effectively de-lever our balance sheet. And finally, our fifth priority is to continue to closely manage expenses and invest in technology that provides operating efficiencies or improves patient outcomes in order to position the company for ongoing success.

Overall, I am pleased with our results for 2012 given the tough reimbursement in healthcare services utilization environment. Home health exceeded our expectation throughout the year and we are taking the right long-term steps to improve our hospice growth while protecting margins. Additionally, we closed the year with an improved cash position, which provides us greater flexibility to execute our M&A strategies and to reduce our debt levels in the upcoming year. While there continues to be regulatory uncertainty in the near-term, 2013 has the potential to be a pivotal year for Gentiva as well as our industry.

One thing that is certain, the demographics and cost advantages inherent in this industry continue to be compelling. 10,000 Americans are turning 65 everyday. By the year 2030, over 65 – the over 65 population is expected to be grow by approximately 32 million people. Today, home health and hospice offer services that are clinically sophisticated, cost effective, and most importantly patient preferred, which I believe uniquely positions our industry as a compelling solution. And while there continues to be uncertainty, companies with size and scale are well-positioned to create opportunities out of the uncertainty.

Before I close, I’d like to take the opportunity to welcome Rod Windley into his new role as the Executive Chairman of Gentiva. For the last seven years, since the acquisition of health field, Rod has served as Vice Chairman. And as most of you know, Rod and I have worked together for 25 years now and have been successful on many fronts. In today’s challenging environment, where the post acute care landscape is at best unclear coupled with the need to reinvent your operating model every year due to reimbursement pressure. Having another set of hands in the wheelhouse greatly increases our chances of success. Having Rod devote significantly more of his time to Gentiva will be beneficial to meet personally to the company and as well as our shareholders.

In closing, I’d like to thank all of our employees for making the difference in the 80,000 lives that we’ll touch today. In addition, I’d like to thank our Board of Directors for their leadership and support during this year. And finally I’d like to thank our shareholders for their continued support.

With that, I’d like to turn the call over to Eric for some further details on our results. Eric?

Eric Slusser - Chief Financial Officer

Thanks, Tony and good morning. Overall, I am pleased with our results for the year given the significant headwinds we have faced this year. As we have seen throughout 2012, home health led the way this quarter by delivering mid single-digit volume growth and solid margins enabling them to post strong results in spite of the difficult reimbursement environment. Additionally, we posted strong cash flow during the quarter driven by solid operating results, lower cash taxes, and a further one-day reduction in our DSO.

I am also very pleased with where we finished on a per share basis with our adjusted income from continuing operations for the year given our expectations when we began the year. Before I discuss our results further, I’d like to cover a couple of other matters to facilitate your review. As discussed on previous calls, we undertook a comprehensive review of our branch locations, support infrastructure and other significant expenditures in the second half of last year in response to the Medicare cuts we were facing heading into 2012. In total, we sold or closed 46 home health locations and 13 hospice locations related to this review. Additionally the company completed three acquisitions during the third quarter of 2012 and completed the sale of its Phoenix area hospice operations during the fourth quarter 2012. Based on all these transactions net revenue comparisons were negatively impacted year-over-year by approximately $9 million this quarter and $70 million for the full year.

Finally, I want to remind everyone that similar to previous quarters, we will be highlighting results from continuing operations during our discussions. Now, on to the results, for the full year 2012 net revenues from continuing operations were $1.71 billion, which was down from $1.8 billion in 2011 based on the branch closings and sales along with the negative impact of the Medicare home health rate cut. Excluding branches sold or closed net revenues were down approximately 2% for the full year.

For the fourth quarter 2012 net revenues from continuing operations were $425 million compared to $449.2 million in the prior year. On a reported basis home health episodic revenues were down approximately 3% in the fourth quarter to $209.8 million. Home health revenues were negatively impacted during the part of the fourth quarter by an additional 1% decline in the 2013 Medicare reimbursement rates based on episodes that remained open at year end. If you exclude the revenues from the closed and sold locations from both years episodic revenues were up approximately 1%.

Hospice revenues were $187.3 million in the fourth quarter down 6% compared to $200.3 million in the fourth quarter 2011 based on lower growth and the reduced revenues from closed and sold locations. If you exclude the revenues from closed and sold locations from both years, revenues were down approximately 4%.

Turning to our home health revenue metrics during the fourth quarter of 2012 there were approximately 49,300 admissions on an episodic basis and approximately 71,900 total episodes. On a year-over-year basis excluding the impact from branches sold or closed admissions and episodes both grew approximately 5%. The number of episodes per admission was 1.46 for the 2012 fourth quarter consistent with the range from previous quarters. Revenue per episode for the fourth was approximately $2,920 which was up slightly sequentially, but down approximately 4% from the prior year period due largely to the reduction in Medicare reimbursement rates.

On the hospice side our consolidated average daily census for the fourth quarter of 2012 was 13,200, down approximately 3% from the fourth quarter 2011 after excluding the impact of closed and sold locations. Our consolidated admissions were approximately 12,600, which was flat with the prior year after excluding the impact of closed and sold locations.

Our consolidated average discharge length of stay for the fourth quarter 2012 was 105 days compared to 94 days in the fourth quarter 2011. Our net patient service revenue per day in the fourth quarter 2012 was $155, consistent with the fourth quarter 2011. The mix in our levels of care for our billable days in the fourth quarter of 2012 was approximately 98% routine care and 2% for all other levels.

Our Medicare cap for the fourth quarter 2012 was approximately $1.8 million or 0.9% of gross patient service revenue, which improved from $3 million or 1.5% last quarter. Total company gross profit as a percent of net revenues was 46.1% in the fourth quarter 2012, down slightly compared to 46.4% in the fourth quarter 2011 and 47.3% last quarter.

During the fourth quarter home health gross margins were 47.8% slightly lower than the 48.8% last quarter and 48.1% in the prior year driven primarily by the impact of Medicare rate cuts. Hospice gross margins were 43.8% this quarter, down from 44.3% in the fourth of ‘11 and 45.3% last quarter.

Turning to our selling, general and administrative expenses, excluding charges relating to cost savings initiatives, restructuring, merger and acquisition activities, and legal settlements, SG&A expenses in the fourth quarter of 2012 were $156.7 million, down from $169.1 million in the fourth quarter of ‘11 and $161.2 million last quarter. SG&A as a percentage of net revenues was 37% for the fourth quarter compared to 37.6% in the prior year period and 38% last quarter as we benefited from continued expense management. From an adjusted EBITDA perspective, earnings before interest taxes, depreciation and amortization, excluding the charges related to restructuring merger and acquisition activities, legal settlements, and non-recurring gains were $44.2 million or 10.4% of net revenues in the 2012 fourth quarter, down from $47.1 million or 10.5% in the prior year quarter.

Full year 2012 adjusted EBITDA was a $180.5 million or 10.5% of net revenues compared to $199.2 million or a 11.1% of net revenues for 2011 with margins reflecting the impact of the home health Medicare rate reduction and lower hospice volumes offset by effective expense management. Our effective tax rate on continuing operations was 38.4% in the fourth quarter of 2012 compared to a tax provision of 40.5% in the fourth quarter of 2011. After excluding special charges and other items and including the $0.01 impact from Hurricane Sandy, fourth quarter 2012 adjusted income from continuing operations on a diluted basis was $0.32. On a full year basis for 2012, including the impact of Hurricane Sandy and the $0.03 add back for credit amendment fees incurred in the first quarter 2012, adjusted income from continuing operations on a diluted base was $1.27.

Switching to the balance sheet, cash and cash equivalents continued to be strong as we closed the quarter at $207.1 million, up from $156 million at September 30, 2012 driven by strong operating results collections and lower cash taxes during the quarter. DSOs closed the quarter at 51 days, down 1 day from the last quarter. On the strength of our operating and working capital results, fourth quarter 2012 net cash from operations was $51.4 million and free cash flow was $48.8 million. Full year 2012 free cash flow was a $114.2 million. From a debt perspective, we paid down $2.9 million on our term loans during the fourth quarter bringing our total debt outstanding at the end of the year to $935.2 million. For the full year 2012, we paid down $52.9 million. In 2013, we have mandatory debt payments of $25 million.

The company’s leverage ratio for the fourth quarter of 2012 was approximately 4.8 compared to a maximum allowed level of 6.25 based on the terms associated with the company’s credit agreement. The level was essentially flat with the last quarter. On a net basis, the leverage ratio came down to 3.8 for the fourth quarter 2012. Based on our 2012 results and strength of the debt markets, our term loans are now trading at or above par. Going forward, we will continue to focus on de-leveraging through debt pay down and/or strategic acquisitions. Additionally, we will continue to monitor opportunities to leverage our capital structure and cash position to further reduce our interest expense.

Turning to 2013, our business plans and priorities are now finalized subject to the final determination of when and how sequestration will be implemented. Given this significant uncertainty, we have decided to wait on providing guidance until this is clear whether sequestration will occur, and if so how it will be applied to our businesses. It is our intention to issue annual guidance within a reasonable timeframe after we have a sufficient level of clarity.

In summary, I am pleased with the overall results for the year, which were led by continued solid results from our Home Health division and good overall expense management. In large part, these results are the product of significant efforts by our employees and the difficult decisions we have had – we have made over the past 18 months in response to the severe reimbursement cuts we have faced over the last couple of years.

Additionally, from a balance sheet perspective, our cash position remained strong provides us with significant financial flexibility to drive value through accretive acquisitions or debt repayment. We continue to face the challenges of uncertainty from a reimbursement perspective. We are hoping that with the ultimate resolution of sequestration and a ruling on rebasing we will have greater reimbursement clarity sometime in the second half of 2013. That concludes my comments. Operator, let’s open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Darren Lehrich of Deutsche Bank.

Darren Lehrich - Deutsche Bank

Thanks. Good morning everybody. So, I guess I just wanted to ask the question here about the 2013 outlook and certainly can’t blame you given the uncertainty of sequestration. I guess two things first I just want to confirm that the original impact or annual impact from sequestration that you have been talking about still stands. And if you just remind us, what do you think about that number that you floated obviously it will change based on what CMS says and how many months are at stake, but just to clarify that? And then the second part is really just thinking about the business ex-sequestration, in terms of your priorities, Tony you mentioned organic growth is the first one. So, if you could maybe give us a sense for what you think the businesses capable of growing in both segments, just so we can frame that a little bit around ‘13? Thanks.

Tony Strange

Well, both good questions, Darren. And I’m willing to kind of wrap the both answers up into one package. And first of all, thank you for your consideration. It is extremely difficult to sit here and not be able to provide guidance, because we really just don’t understand how sequestration might be implemented. With your first question, no, we haven’t changed our outlook in the way we are looking at sequestration. The only thing that can change is if and how – if, how, and when sequestration might be implemented. So, for example, it has an effective date of March 1st. There are some continued season in DC that says that would be an effective date in April for healthcare providers, but it might have a look back provision associated with it, further complicated that with home health, is it going to be – might it be implemented for episodes ending on or after or may there be a retroactive aspect of that as well for home health. So, because of that predicting the impact of sequestration, it is almost impossible.

But to answer your question directly, we have not changed the way we are looking at sequestration only how, if, and when it might be implemented. As it relates to the rest of the business, without regards to sequestration, well I can’t give you guidance for ‘13. Darren, when I think about the business we are thinking of consistent growth rates with where we are. Obviously, we are planning on hospice, to have a growth rate in 2013, but if you were to think still in that kind of low to mid single-digit growth, that’s kind of where our plans are without the impact to sequestration for volume growth. Does that help with both of your questions?

Darren Lehrich - Deutsche Bank

Yeah. No, it does very much. I will come back in the queue. I had some other questions in hospice. Thanks.

Tony Strange

Okay. Thanks, Darren.

Operator

Thank you. Your next question comes from Kevin Ellich of Piper Jaffray.

Kevin Ellich - Piper Jaffray

Good morning, thanks for taking the questions. I guess, let’s pickup there on the hospice side. Tony, you provided some good interesting comments about seeing improvements that are being pleased since mid-December with the admissions growth trends. Just wondering if you can provide a little bit more color on, how we should think about that for models going forward in terms of growth in census?

Tony Strange

Well, first of all, I think it’s an appropriate question, Kevin. And I want to be careful, because I don’t want to wave a flag and I don’t want you to misunderstand saying that I am declaring victory here. If you recall on our last call, we had taken all of our sales. We have about 450 sales FTEs in hospice on the streets. And we have a lot of those we have just brought in over this summer. We have taken all of the sales organization do a training. Late summer, we had implemented some new technology in the field, had a lot of sales training related to that and a new – some new technology of their – so that they have a better ability to track referrals and referral sources at discrete level. And all of that occurred through call it August, September, October – even into October. And so when we got into November, it was really the first time we had all of our resources on the street knocking on doors and making sales calls.

And it was about three weeks before Christmas and we began to see a slight up-tick in the number of admissions on a weekly basis. And the reason that I have pointed that out three weeks before Christmas typically in our hospice business we don’t see increased admissions in the month of December. So, I was encouraged by the fact that our admissions not only did they hold in December, but three weeks before Christmas, we began to see some improvement in the admissions and that has carried into January. Now you would expect an increase in admissions in January. So, I’ll be cautious about that, but I think what I have seen in the first several weeks of January is not only the typical increase that we would expect to see, but even a little bit better than I had anticipated in the first several weeks of January from an admission perspective.

So, that’s the color, that’s the fact. If you are asking me to translate that into kind of an outlook for ‘13, I don’t think I am ready to do that yet. I think the way – the word I used in my prepared remarks was I was encouraged. And I think that’s where I sit today. I am encouraged that admission trend has continued. And if we continue with the trend that we saw over the last call it, six or seven weeks, then I think I will begin to feel that we have made the right investments in our sales organization, but I am not ready to declare – not ready to declare victory yet.

Kevin Ellich - Piper Jaffray

Got it, that’s helpful, Tony. I appreciate that. And then the second question was obviously you generated pretty nice – pretty good cash flow this quarter sitting on a pile of cash on the balance sheet. I was just wondering how you balance the thought of doing acquisitions or paying down debt. And then there was a deal that was announced this morning, decent size deal on a kind of a struggling business, just wondering if you had – if you guys to look at that as well?

Tony Strange

Well, I’ll start with the second half and then Eric you join me chime in if you’d like. We did take a look at that. We are looking at all opportunistic acquisitions and but with that said, Kevin, we are being very careful about the kinds of deals that we’d look at. We want to look at businesses that are well run and that are that build density around our existing markets for us to stretch into other markets where we currently are not today and don’t already have the infrastructure to handle it. I don’t know that that’s the kind of opportunity for us, but we did look at it. As it relates to cash, Eric, you want to.

Eric Slusser

Yeah, really at this point in the year, early in the year we are going to look at this cash. We talked about we’ve got a debt payment obligation. And really again a lot of this may be impacted by what the ultimate resolution on sequestration will be so that we know how much cash – what cash flow will look like for 2013. But certainly we are looking at that everyday as I indicated in my script around opportunities for debt pay down, opportunistic acquisitions, the credit markets are very active right now. And so, a lot of opportunities, we are analyzing all of those as we’ve closed out this year and we’ll be discussing that more at the point that we do come out with guidance.

Kevin Ellich - Piper Jaffray

Got it. Eric, can you just remind us is that debt pay down, does that happen here in Q1?

Eric Slusser

Well, I don’t want to comment on that we are still wrapping up and filing our bank documents. Right now, it’s scheduled the amortization takes place the $25 million as a quarterly basis, but we are looking at that and whether we accelerate it, leaving alone again all of that’s going on right now as we look at our cash, cash management, what we are going to do. But from a schedule basis, it’s really broken down in a fourth per quarter.

Kevin Ellich - Piper Jaffray

Okay, understood, thank you. I’ll hop back in queue.

Operator

Thank you. Your next question comes from Sheryl Skolnick of CRT Capital Group.

Sheryl Skolnick - CRT Capital Group

Good morning. Just as a comment I understand the difficulty of not being able to predict when the government can do whatever the government wants to do, but – and it’s comforting know that you have a view of your core operations, but I respectfully disagree and think you would be doing your shareholders and not to mention as analysts we are heavily dependent upon you guys for knowing what our estimates should be. Service in telling us about what you perceive is the strength of your business, particularly with respect to the turnaround in the hospice business? And then the turnaround that you anticipate because it’s been long in coming and it sounds like you are beginning to get handle on it and it would be nice to see that ex the sequestration so that we can value your company for that effort appropriately. But it’s done, so here we are, so here is my question.

As you look at your home health business you are able to excluding, so on a same store basis let’s call it that way you are able to generate mid-single digit admission growth. And that’s pretty good, do you see yourself as taking market share from others and if so on what basis do you think you are gaining that share or is the demand still growing at or above your admission growth rate?

Tony Strange

Well first of Dr. Skolnick I understand your sentiment related to guidance and respect it, but I think that right now we just need to hold tight and try to better understand that. So, the good minds can differ on occasion. Related to the growth, I don’t – I do believe we are taking market share, but I wanted to take you back to if you recall in 2011 we – our growth story in home health was similar to where it is in hospice today matter of fact our growth in the year 2011 in home health was flat or slightly negative. And we doubled down and made significant investments into the sales organization in 2011 in the first half of 2000 – I am sorry late 2010 and the first half of 2011. And what you are seeing today is the result of those investments that we made now a year and a half ago, almost two years ago.

So, with those additional resources with the additional training with the additional data that we have in the hands of the sales folks in the field, I do believe we are taking market share I don’t believe that the home health industry right now is growing matter of fact if you look at episodes in ’11 compared to ’10 episodes across the entire industry were down. And so I do believe we are having to take market share in order to hit those kind of gains. I think the industry is growing at a pace a little bit less than that. But with that said another thing that’s helping to fuel our growth is we are being very disciplined about the kind of business that we are going after I made a comment in my prepared remarks that we are really targeting businesses that pay approximately for the value of the services that we provide. So, I think both of those things impact that growth rate.

Sheryl Skolnick - CRT Capital Group

Can you just clarify does that mean that you are less inclined to take per visit episodic – per visit rather than episodic managed care contracts?

Tony Strange

Well, we are less inclined to take business from anybody that’s not willing to pay us appropriately for the value of the services we provide. I want to be careful because I don’t – I am not suggesting that we don’t have any per visit types of managed care contracts. But it’s certainly not – it’s certainly not the type of business that we are going after. We are looking to provide quality care to chronically ill patients and in order to do that and episodic reimbursement system pays more appropriately for that level of care. And so we are pretty disciplined about how we go about that.

Sheryl Skolnick - CRT Capital Group

Thank you so much.

Tony Strange

Thanks Dr. Skolnick.

Operator

(Operator Instructions) And your next question comes from Whit Mayo of Robert Baird.

Whit Mayo - Robert Baird

Hey good morning. You guys have done a pretty good job managing working capital this past year and Eric looks like maybe call it $40 million or so your free cash flow was driven just from AR is that a number that you think you can continue to do better on over the course of 2013 and maybe can you talk a bit about the build up in paybles in the quarter.

Eric Slusser

Yeah, Whit hey, you are pretty well spot on in that number, but if you remember last year at year end, we had the bike spike in ADRs and the challenges around putting in the new hospice billing system upgrade that caused our receivables to spike at the end of the year. We have the spent the whole year actively managing those and actively managing a lot of our older buckets in the hospice division and managing working capital to get down to where we are at. So, we had a very successful year in that. We are down to 51 day DSO. I think as we have said in the past, DSO will range in that 48 to 52 range. With the cycles in Medicare and the way the process work, I don’t expect to continue to see that balance come down. I think we have optimized that as much as we can this year in our working capital.

Whit Mayo - Robert Baird

Yeah. And then the build and payables in the quarter, the $15 million or so?

Eric Slusser

Yeah. Again, as we see every quarter, timing at the end of quarter payroll of when it’s paid versus when it’s earned and some quarters you have that payroll to hit the last day of the quarter and you have a very significant impact if you go back to our first quarter of last year. Again and this year we have that payroll fell a day after the end of the year. So, a lot of that is accrual movement, because of the significance of payroll.

Whit Mayo - Robert Baird

Okay. And I guess my question just for Tony, I didn’t know if Rod is in the room, but just was looking for maybe you would elaborate a little bit more on where Rod will be spending the majority of his time, it’s pretty exciting that he is coming back to engage more in the business and just wasn’t sure if he was going to spend more time focusing on advocacy or really rolling the sleeves up and getting into operations and strategy?

Tony Strange

Yeah, Whit, it’s a great question. Thanks for bringing it up. It’s really good to have more of Rod’s time here. If you look over the past seven years just due to some personal reasons and then other ventures that he has been involved in, I would probably guess we have been fortunate to get about 20% of his time. And just kind of from where he is from a personal perspective and where some of the other ventures are, I think he is ready to roll up his sleeves and come back to work and now we will be getting all of his time, with that which he don’t give his family. And it’s really good. I think you and everybody else in the call know that Rod and I have been together since the late 80s and have been very successful in almost all of our ventures. And so having him back in the wheelhouse is really a big help. To answer your question, he is going to be very beneficial as it relates to strategy. He is going to be extremely helpful in managing our board and helping us with strategic issues, the deployment of cash, business development, all of those kinds of things. So, it will really be – if you look at the way Rod and I work together, it will just be the exactly the same way that we work together the entire time we were building Healthfield.

Whit Mayo - Robert Baird

That’s exciting. And maybe just one really quick one for Eric, I know you are not giving guidance around 2013, but any spot number to think about in terms of CapEx for the year?

Eric Slusser

Yeah, I think with this year’s actual number was $12 million. We got some system things we are doing. So, early on somewhere in that, I am comfortable saying that $12 million to $15 million range.

Whit Mayo - Robert Baird

Perfect. Okay, thanks guys.

Tony Strange

Thanks Whit.

Operator

Thank you. Your next question comes from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Credit Suisse

I think I hopped in the line a little bit late, so if you went through this already we can follow-up offline, but can you just give general thoughts around kind of the increased partnerships with either providers or payers, I think that either some of your peers have talked about or that you may or may not be sort of interested in going forward. Just help us think about strategically where you fit with that and how important that is to your strategy?

Tony Strange

Ralph, it’s a good question. And we are probably having more conversations today than ever with different entities that either are in the post acute space or are greatly affected by the post acute care space. We are having multiple discussions. We have entered into some relationships with hospital, with large hospital and healthcare delivery systems that are looking for assistance and making sure that patients don’t come back into the hospital within the 30-day period. We have relationships where with – with Medicare advantage plans where we are taking risk and helping reduce the re-hospitalization rate. We have long-term care facilities that are in discussion about ways that we can help reduce their costs. So, there are more strategic discussions going on today especially as it relates to the impact of post-acute care than have ever occurred in the past. And I think Gentiva is pretty well positioned because that we can provide home health and hospice, I think that gives us a little bit of advantage as we poke around how we are going to fit into all these discussions on a go forward basis.

Ralph Giacobbe - Credit Suisse

Okay that’s helpful. And then I guess along those lines have you guys talked about what percentage of your overall volume or revenue or anything is dual eligible today?

Tony Strange

We’ve not talked about – we’ve not talked about that publicly. But I will take it under consideration, it might be something we talk about in the future.

Ralph Giacobbe - Credit Suisse

And then I guess the reason I asked the question is going forward obviously your managed care is getting sort of more involved in the benefits and seemingly you are kind away from fee-for-service and I would imagine that your solution will be attractive one for them in terms of trying to lower costs within a population base that is very costly to the system. So, I guess one, it would be helpful to know sort of where you currently sit in terms of managing dual population, one. And then two, whether you do see that kind of as an opportunity and how that would work going forward, is it partnerships with your managed care or do you think that you could do it sort of not necessarily having to go there with sort of fee-for-service mentality in mind? Thanks.

Tony Strange

Well, I think that might different greatly state-by-state. And while we haven’t disclosed the number for dual eligibles, what I can point you toward is that dual eligible population is a minority piece of our business, it’s not an overwhelmingly large piece of our overall business. But my guess is that we won’t be working directly with states on dual eligible. It would probably be more through some type of relationship with a Medicaid management plan.

Ralph Giacobbe - Credit Suisse

Okay, alright. Thank you.

Operator

Thank you. Your next question comes from Darren Lehrich of Deutsche Bank.

Darren Lehrich - Deutsche Bank

Taking the follow-up here, I just wanted to cover a few topics related to hospice, it obviously it’s going to be a big focus for all of us in 2013. So, I thought maybe you could provide a little bit more detail for us just around some operating items like that the number of programs you have and if you can maybe characterize or slice the programs in terms of small, medium, large where you think some of the opportunities are in that regard. I know you’ve done a re-branding or working through that, are you seeing any real benefit from that. And then we didn’t get a cap number in the quarter, but you did make mention of the Phoenix situation, so maybe just help us think about what that will mean from a cap perspective in 2013?

Tony Strange

Well, that was a lot. So Darren, I’m going to trying to take those all if I skip over one or don’t get it – don’t be embarrassed to remind me. In terms of locations, we have about approximately 150 programs. Our locations are not really concentrated in one large market, so we have – if you were comparing us to other national providers, we have more locations, but our locations are more rural and smaller locations. About 98%, 99% of what we do is 98% of what we do is our routine home care hospice, we with a much smaller piece in in-patient and then we do very few – there is only for billing codes and we do very little continuous care and very little respite as a percent of our overall business. So, routine home care hospice program is about 150 and mostly you are in smaller and rural markets. We don’t have a lot giant locations to have 1000 and 2000 ADCs in one location so small businesses. As it relates to the re-branding, we are in the process of re-branding and no, I can’t point anything to you and say this is the impact that re-branding is having, nor, well, that point and say I think re-branding is going to translate into this kind of census growth. What re-branding will do is it will allow us to build a transitional care post acute provider brand that focuses on home health and hospice in the markets were in the 94 markets where we have overlapping businesses.

Eric Slusser

Yeah, I think Darren, this is Eric. The other question was cap, if we go back to what I talked about in my opening comments, we did have about $1.8 million of cap in the fourth quarter. I just remind you that’s really the first quarter of the new cap year and is mostly an estimation process, I can tell you we are very focused on cap, the hospice divisions very focused on cap, selling off the Phoenix business that was a large portion of the overall cap and any other site that was in cap they are very focused on a day-to-day base system managed that down as we start 2013. But again it’s kind of early in the year to draw a lot of conclusions because you got 10 months more of it admissions to go to impact that.

Darren Lehrich - Deutsche Bank

In Phoenix, what was – how much the Phoenix comprised of your cap?

Tony Strange

Well, I mean, Darren, I don’t think we have disclosed individual cap liabilities by location, but what I can’t tell you it was well – it was the majority of our cap level.

Darren Lehrich - Deutsche Bank

Okay, that’s helpful.

Tony Strange

In a matter of fact, I’ll help you Eric made this comment in his prepared remarks. I think you said that in the third quarter of Eric help to make sure I get this number right. In the third quarter of ’12, our cap liability represents about a 1.5% and that number was down to less than 1% in the fourth quarter and to his comment early, we would expect over the next 10 months to see that number even level out further.

Darren Lehrich - Deutsche Bank

Got it, okay.

Tony Strange

Hopefully, that’s helpful, good and Darren of your list that if we touch on all three of them.

Darren Lehrich - Deutsche Bank

Yeah, I think you got to, we’ve been used to different segmentation of the business from hospice from – from honesty disclosure so, psychotic take a stab at that, but we’ll come back to you.

Tony Strange

Okay.

Darren Lehrich - Deutsche Bank

Maybe we get some different disclosure, thanks.

Tony Strange

Alright, operator, do we have any other callers?

Operator

Yes, we have a follow-up from Whit Mayo of Robert Baird.

Whit Mayo - Robert Baird

Eric, how much will your amortization decline due to the re-branding of all your agencies and how much did you write-off of intangibles and I guess just asked the question in different way, the $5.2 million of D&A, is that a decent run rate going forward?

Eric Slusser

It’s in the ballpark, yeah, if you look at the impairment on the trade names took place that the third quarter. So, naturally amortization dropped the fourth quarters more of appropriate run rate.

Whit Mayo - Robert Baird

Okay, great, thanks.

Operator

Thank you. This concludes today’s question-and-answer session. I would now like to turn the call over to management for any closing remarks.

Tony Strange - Chairman and Chief Executive Officer

Thanks operator and once again I want to say thank you to all of our employees for what you do every single day and I appreciate everybody on the call for being patient with us and if there is anything we can help you if we would be glad to schedule some follow-up time. Thanks a lot, thanks operator. Good bye.

Operator

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

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