Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Stephen B. Paige -General Counsel

Ronald A. Malone - Chairman of the Board

H. Anthony Strange - President, Chief Executive Officer

John R. Potapchuk - Chief Financial Officer

Analysts

Whit Mayo - Robert W. Baird & Co.

Ralph Giacobbe - Credit Suisse

Newton Juhng - BB&T Capital Markets

Arthur Henderson - Jefferies & Company

Pito Chickering - Deutsche Bank Securities

John Ransom - Raymond James

Sheryl Skolnick - CRT Capital

David Macdonald - Suntrust Robinson Humphrey

Jeffrey Englander - Standard & Poor’s

Brian Tanquilut - Jeffries & Company

John Ransom - Raymond James

Gentiva Health Services, Inc. (GTIV) Q4 2008 Earnings Call February 18, 2009 10:00 AM ET

Operator

Good morning ladies and gentlemen, I am Steve Paige, General Counsel of Gentiva Health Services. Welcome to the Gentiva Fourth Quarter 28008 Earnings Results Conference Call. Speaking on the call today are Ron Malone. Gentiva’s Chairman, Tony Strange, Chief Executive Officer and President and John Potapchuk, Chief Financial Officer.

We hope that each of you had a chance to review the company’s earnings report, which we 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 a 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 can be made in individual inquiries. Today’s call also conforms to Regulation G regarding the reconciliation to GAAP and non-AAP disclosure. 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 replay of this call on our website for the next seven days. Transcripts of the call will be posted on our site within the next 36 hours 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 that we can accommodate as many callers as possible in the allotted time.

Let me now turn the call over to Gentiva’s chairman, Ron Malone.

Ronald Malone

Good morning and thank you for joining us. Gentiva produced a very solid fourth quarter that wrapped up an outstanding year for our company. In addition to delivering excellent financial results, we completed and integrated three acquisitions that expanded our footprint in the core business. We grew our clinician base significantly while improving retention. We saw the continued growth of our leading specialty programs with the launch of two new services and the expansion of existing programs into many new markets. We divested our sales of the majority of the CareCentrix business and we significantly strengthened our balance sheet to support our future growth objectives. These achievements left Gentiva stronger and healthier than ever before as we entered 2009.

We are sharply focused on growing and improving our business. Our fourth quarter results, which represented our first full quarter since the closing of the CareCentrix transaction, illustrate the benefits of this focus.

I want to take the opportunity to thank all of our employees who have worked so hard to accomplish all of these key objectives. They continue to demonstrate a strong commitment, not only to performance, but also to delivering on our mission of improving the health and well-being of our patients and their families.

As you know we know we transitioned the CEO role to Tony Strange effective January 1. I have high expectations for Tony and his team as they continue to drive a vision of growth, excellence, and service to the patients and communities where Gentiva operates. During 2009 I will serve as Chairman and advocate for our patients and our industry, as we continue to drive the message to policy makers and regulatory leaders that home health is a key part of the solution to the nation’s healthcare challenges.

With that I would like to turn the call over to Tony.

Tony Strange

Thanks Ron and good morning everyone. I would like to take a moment to personally thank Ron for his support and guidance over the last couple of years and for his continued support in the role as chairman. I would also like to thank our entire board of directors for the confidence that they have displayed in me and the rest of the management team at Gentiva.

Over the past several weeks I have been asked on more than one occasion, as the new CEO of Gentiva, what change in direction can be expected. Based on our results over the last several years, including improved clinical outcomes, success in becoming the employer of choice and the continued growth and improved profitability in our Home Health business, the answer is clear. Our current direction is a good one, the stage has been set, and I believe that we are well positioned to accelerate our performance in 2009. With that, let’s turn our attention to our results.

Overall we delivered outstanding performance for the quarter as well as for the whole year. Our 2008 EPS exceeded the raise that we established at the beginning of last year. It is particularly worth noting that we did this in spite of the divestiture of CareCentrix late in Q3. Revenue for the fourth quarter totaled approximately $283 million, which represents a 19% growth rate excluding CareCentrix. Our reported EBITDA for Q4 was $30 million, which represents an increase of over 50% year-over-year excluding CareCentrix. Finally our adjusted net income was $0.44 for the quarter and $1.55 for the year, which is about $0.04 better than the high end of our most recent outlook.

The major drive of these results has been the performance of our core Home Health business. Our Home Health revenues grew by 20% year-over-year and 4% sequentially. Medicare revenues were up 26% compared to last year and we continue to see positive movement in all of our key metrics.

Within Home Health, an underlying driver to continued success is our specialized clinical care. At year end we had expanded our specialty offerings to 300 programs compared to 268 at the end of Q3. Clinical care offered through one of our specialty programs now makes up more than 1/3 of our Medicare revenues for Home Health.

We have made progress with our two newest programs, Senior Health and Neurorehabilitation, expanding them into 24 locations at year-end. The addition of Dr. Charlotte Weaver as our Chief Clinical Officer and our commitment to advancing the care delivery system for the aging populations sets the stage for Gentiva to be a leader in clinical innovations specifically targeted to produce better outcomes for our senior population.

We’ve also made good progress this quarter in our efforts to become the employer of choice for clinicians. Excluding acquisitions we’ve added approximately a net of 700 new clinicians in 2008 including 160 in Q4. I’m particularly proud of these results given that the holiday season is usually a fairly slow period for people to change jobs. With all the emphasis on recruiting we’ve also maintained our commitments to retention. We saw a continued decline in turn-over making eight straight quarters of improvement.

Along with increasing our capacity we continued to make progress towards meeting our productivity targets by converting our clinicians to a pay per visit model. During the fourth quarter 60% of our field commissions were paid on a per visit basis. This compares to 53% and 56% for the second and third quarters respectively.

Overall, our Home Health business is performing very well and I’m confident that with continued focus and discipline that trend will continue.

Turning to Other Related Services, overall revenues were up 11% compared to last year. Revenue in EBITDA improved sequentially as HME and respiratory services had another good quarter. Hospice revenue increased 12%, but I’m still looking for that growth to translate into higher earnings.

To wrap up on the results, the fourth quarter was a strong finish to a terrific year for Gentiva. We expect another good year in 2009 as is indicated in our press release this morning, where we announced that we are raising our outlook for the year. John will provide some more insight on our outlook in just a few minutes.

We expect 2009 to be a very active year for us on several fronts that compliment our operating goals. This year we will officially establish Atlanta as the corporate headquarters for Gentiva. This decision is driven by the need to strategically align our support services with our field offices. Our goal is to create a corporate structure that is efficient as well as effective.

2009 is also a year when we will be stepping up our advocacy efforts for the home health industry in Washington. You’ve heard a lot about the incoming administrations plan to focus on healthcare reform. There is already speculation about how any reform might affect programs like Medicare. We will be working to ensure that one constant message is communicated and that is that home health is among the best solutions to the nation’s health care challenges. It is among the most cost effective forms of care for seniors in particular. It’s preferred by our patients and care is being delivered with increasing sophistication yielding improved outcomes for those dealing with acute episodes as well as chronic diseases.

Along with other industry leaders, we will co-sponsor data analysis, research and education, as we collaborate with government agencies and patient advocacy groups, clinicians, and others interested in shaping policy and benefits.

I started my comments by indicating that our strategic direction will not change. In closing I’d like to reemphasize the three core strategies for the company in 2009: first, growth, both in same source sales and in acquisitions; second, enhancing our clinical and operational delivery systems both in their effectiveness and in their efficiencies; third, expanding capacity through our recruitment and retention efforts.

I’m proud of our employees and the role that they play in the success of Gentiva. I’m particularly proud of the care that they provide to our patients. I believe this level of commitment makes Gentiva the place to work in home care.

With that, I’d like to turn the call over to John for some further insight in to our results. John?

John Potapchuk

Thanks Tony and good morning everyone. Gentiva 2008 fourth quarter and full year were highlighted by the successful execution of our growth strategy and a strong overall financial performance from our core Home Health business.

Before I detail our results, I want to note that the 2008 fourth quarter does not include the operating results of CareCentrix, but the prior year quarter does. Full year 2008 results also included CareCentrix’s operations through September 24, as well as a non-recurring pre-tax gain net of transaction costs for about $108 million with $3.72 per diluted share from the sale of the majority interest in that business.

During my discussion, I will provide adjusted numbers, which exclude the non-recurring gain in 2008 as well as special charges relating to restructuring, integration and merger and acquisition activities for all periods, to give you an apples-to-apples comparison.

During the 2008 fourth quarter revenues were $282.9 million, compared to $313.4 million the same period last year. Excluding CareCentrix net revenues grew 19%, driven by the Home Health segment that contributed 20% revenue growth. For the full year 2008 net revenues were $1.3 billion versus $1.23 billion for the full year 2007, representing growth of approximately 6%. If we exclude the revenue contributions from CareCentrix from both years, net revenue grew 14%.

EBITDA results were strong as well. EBITDA increased 19% to $30 million and EBITDA as a percentage of net revenues increased from 8.1% in the fourth quarter of 2007 to 10.6% in this years fourth quarter.

On a full forward basis, the CareCentrix operating contribution and related corporate expenses were excluded from the fourth quarter of 2007 and its special charges were excluded in both the current and prior year periods. EBITDA would have increased 51% in the fourth quarter of 2008 compared to the prior year period. As a percentage of net revenues pro forma EBITDA increased from 8.6% in the 2007 fourth quarter to 10.8% or revenues in the fourth quarter of 2008. This clearly demonstrates the leverage we can generate as a home health focused company with a better mix of episodic revenue.

For the full year 2008 adjusted EBITDA excluding $2.7 million of special charges increased 14% to $116.8 million. This is at the high end of the original guidance of $112 to $133 million that was provided on our Q4 2007 earnings call. As Tony noted earlier, this is particularly noteworthy as the original guidance included CareCentrix for the full year.

Gentiva’s adjusted net income rose 44% for the quarter to $13.1 million and 33% for the full year to $45.5 million. That translated into $0.44 per diluted share in the fourth quarter and $1.55 per diluted share for the full year 2008. Our growth was again driven by our emphasis on increasing the percentage of revenue we received from Medicare and higher rate commercial programs.

Our Home Health Medicare revenue grew 26% over last year, driven by double digit increases in number of episodes and revenue per episode. Excluding the acquisitions we have made, our same store Medicare growth in the 2008 fourth quarter was approximately 19% compared to the fourth quarter of 2007. Total episodic revenue for the quarter grew by 28% to over $191 million, with about $176.5 million of that amount related to Medicare EPS.

During the quarter 77% of our total Home Health revenue was paid on an episodic basis and all but 6 percentage points of that figure was Medicare revenue. This 77% figure of episodic revenue to total Home Health revenue is 5 percentage points higher than the comparable period in 2007. For the full year episodic revenue and Medicare Home Health revenue were up 21% and 18% respectively.

Moving to Specialties, Tony talked about the momentum we have achieved in the roll out of these programs. During the quarter Specialty comprised 33% of our total Medicare Home Health revenue, compared to 28% in the fourth quarter of last year. Specialty programs have driven our revenue growth and margin expansion. This is evident in our fourth quarter results.

Fourth quarter operating contribution margin for Home Health, which represents EBITDA before corporate expense allocations, was 16.8% up from 14.5% in the year ago period.

I’ll discuss some of the underlying operational statistics that are supporting our Home Health segment growth. During the fourth quarter there were about 39,900 Medicare admissions, an increase of 8% from the same period last year. For the full year we have had 160,400 Medicare admissions, an increase of 9% over the full year 2007. With regard to episodic admissions, we experienced 43,400 admissions in the fourth quarter and 174,700 admissions year-to-date. This represents increases of 9% and 12% respectively.

Total episodes in the fourth quarter were approximately 62,700 up 13% over 2007 fourth quarter. Revenue per episode was about $3,040.00, up about 13.5% from the prior year period. For the full year, total episodes approximated 246,000 growing 13% from last year. Revenue per episode for the full year is approximately $2,850.00, an increase of about 7% over 2007.

Fourth quarter revenues for Other Related Services, of which hospice represents about 56% of the total, showed some improvement in the quarter with an 11% increase compared to the prior year period. Operating contribution for the segment increased 3% to $3.5 million compared to the fourth quarter of 2007.

Fourth quarter hospice revenue grew about 12% over the prior year quarter. Hospice had a census of about 1,350 patients at the end of the fourth quarter.

Aggregate net revenues and contributions of the Other businesses in the segment, which include respiratory services and HME, infusion therapy and consulting, showed improvements compared to the fourth quarter of 2007. Overall, the Other Related Services segment performed better in the fourth quarter than any other quarter during 2008; however, we are not yet satisfied with this segments overall performance.

Shifting now to cash flow and balance sheet highlights, operating cash flow was about $71 million for the full year 2008 compared to $63 million for the prior year. Day sales outstanding or DSO’s were 57 days at the end of the 2008 fourth quarter, well below the 61 day level at the end of September and 50 day at December 2007.

Our billing and collection personnel have done a great job in allowing us to fulfill our commitment to achieve DSO below 60 days by year end 2008 and I thank each of them for their efforts. Each day of reduction in DSO translates to significant improvement in operating cash flow as we clearly demonstrated this quarter.

Cash and cash equivalents were $69.2 million at December 28, 2008 compared with $61.5 million at the prior quarter ’08. Long-term debt at December 28 stood at $251 million, a reduction of $10 million since the end of the third quarter as we repaid our remaining outstanding revolving credit borrowing in early October.

Our consolidated revenue ratio stood at 2.2x at December 28, compared to 2.4x at the end of the third quarter and 3.0x at year end 2007. Based on our cash position and borrowing capacity under the credit facility, we entered 2009 with approximately $75 million available for M&A activities. We are very comfortable with our current financial position and our ability to access financing to participate in M&A opportunities.

Now let me speak about our 2009 outlook. We offered a preliminary 2009 outlook in our third quarter earnings announcement and we are raising those target ranges today. Full year net revenues are expected to be in the range of $1.14 billion to $1.18 billion, compared to prior guidance of $1.12 billion to $1.17 billion. Our 2009 outlook reflects double-digit revenue growth after excluding the 2008 revenues from CareCentrix.

Diluted earnings per share, we expect it to be in a range between $1.72 and $1.80, up from the $1.62 and $1.72 range provided in October.

Gentiva’s 2009 outlook represents a diluted earnings per share increase of 20% to 30% as compared with 2008’s pro forma results, which assumed that the CareCentrix divestiture had incurred at the beginning of 2008.

Our outlook excludes any impact of future acquisitions and any special charges. Also, please note that our fiscal year ends on a Sunday nearest to December 31. The outlook 2009 will include 53 weeks of activity.

Gentiva is in a strong financial position and we are confident about the growth opportunities ahead. We are successfully executing on our strategy of focusing on our higher growth Home Health business and making investments in our specialty programs and in one of our most supported assets, our clinicians.

That concludes my comments. Operator, we will be happy to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Whit Mayo of Robert W. Baird & Co.

Whit Mayo - Robert W. Baird & Co

My first question is starting out with the specialty programs. Could you kind of give us a sense of what the biggest challenge is that you face rolling that out right now? It sounds like it’s frankly just the people, but is there anything more mechanical there? Also, do you have any sense of just how penetrated you think you can be with those programs this year?

Ron Malone

Well Whit, to answer the first part of your question about what’s the biggest challenge, it is the same one we’ve been talking about now for a couple of years. As the demand for our services continues to increase so does the ability to create the capacity to say yes, so a lot of our specialty programs are really focused around highly trained clinicians being physical therapists as well as highly educated RN’s. Our ability to attract and retain that talent is going to continue to be our challenge, to get those specialties rolled out faster. Outside of that, mechanically there is really nothing that would slow us down.

The second part of your question was related to kind of, I think I understood it to be what the denominator is. If we put every specialty in every location, we can have in excess of 1,500 programs out there today and our current number is just over 300, so we’ve got a lot of room before we start fluffing up against the ceiling.

Whit Mayo - Robert W. Baird & Co

Okay but any sense of what a target is just for 2009?

Ron Malone

Well if you looked at our current pace, we’re probably rolling out somewhere in the ballpark of about 120 or so a year. So, provided that we can attract the clinicians, we can pick that up a little bit, but in the event that there is a gating factor related to our recruiting efforts, again as the demand increases we’re going to have to stay focused on the ability to recruit those. But, we’re going to be able to keep the pace we’re at and if we can step up our recruiting efforts, we might even pick that up a little bit.

Whit Mayo - Robert W. Baird & Co

Okay, that’s great. Could you provide us with some details regarding the announcement yesterday that you sold some of your pediatric home care agencies? Just any sense for the revenue or the contribution margin, or just any comments you have about that sale would be great.

Ron Malone

First of all let’s look strategically at the default process behind it. Gentiva had in total roughly $25, $26 million of pediatric business in total and for the most part pretty easily segregate able. They are in different branches, where we had pediatric focus branches. I think staying consistent with the strategy that we’ve been talking about now for the better part of two years, is really focusing on the adult and geriatrics businesses. The pediatric business really didn’t fit within our mission. A noble mission, but it’s just not the core competency of our company. The clinicians we’re hiring aren’t pediatric specialty type clinicians, so strategically it made better sense to find a home with a company that that’s what they’re doing, really focusing on the peds business.

Overall, the piece of the revenue that we sold was somewhere between $20 and $215 million in revenue. The contribution of that was probably in the $2.5 to $3 million range ballpark; but, if you look at our ’09 guidance that is built into that. The taking out of the revenue as well as the earnings is built into our ’09 projections.

Did that answer your question?

Whit Mayo - Robert W. Baird & Co

Yes, that was perfect. I appreciate it.

John, can you give us a sense of looking at CareCentrix, just the equity earnings and the P&L that was negative for the quarter. Can you give us any idea for what drove that?

John Potapchuk

Yes. In terms of their operations they had a pretty good quarter in terms of revenue and just basic EBITDA. There were a number of one time items in the fourth quarter as they’re setting up their new company; you know there are the specialties, legal fees and that sort of thing. Then some amortization of intangibles that brought that down to roughly a break even number. But, operationally we actually did pretty well.

Whit Mayo - Robert W. Baird & Co

Okay, so if you were to normalize for some of those one time items in a quarter and you share your ownership percentage, would that have been a significant needle mover?

John Potapchuk

Yes. I’m thinking in our guidance for 2009, which I think is really where you’re headed, we’re looking at our share of the net earnings in CareCentrix to be roughly about $1 million or so in 2009. Also, keep in mind that along with that we are getting additional interest income because of the annual amount of $2.5 million on our seller note and if we reduce the corporate expenses. So, those are bills that we individual line item, but the equity would be roughly about $1 million.

Whit Mayo - Robert W. Baird & Co

Okay, that’s helpful. Then I have just one final question. Tony, if you could maybe elaborate a little bit on the advocacy initiatives you mentioned in your prepared remarks. Just specifically maybe some of the data analysis that you were talking about and kind of where you guys are with that initiative.

Tony Strange

Well, Ron is still involved with the alliance that we’ve set up in Washington. The alliance is meeting now on a very frequent basis and we’ve hired some additional professional help in helping us build some models related to being able to demonstrate that the outcomes are overall going to save CMS money in the end. It’s going to take a concerted effort from all of the companies to make sure that we get that clear and consistent message throughout Washington.

Whit Mayo - Robert W. Baird & Co

Okay, thanks.

Operator

Your next question comes from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Credit Suisse

I have a couple of points I would like clarification on. In terms of Medicare same store home health revenues, there was 19%, is that right? I am just looking for the organic home health revenue.

John Potapchuk

Yes, 19%, right.

Ralph Giacobbe - Credit Suisse

And then what is the break down between pricing volumes in that 19%?

John Potapchuk

What we indicated, Ralph, was the revenue per episode, again this is the quarter, was up 13% to 13.5% and the volume same store was kind of mid of single digits, six or so.

Ralph Giacobbe - Credit Suisse

Okay that’s helpful. Then you mentioned that 33% of your Medicare Home Health revenue was from your specialty programs, is that right?

John Potapchuk

Correct.

Ralph Giacobbe - Credit Suisse

Then I guess what percentage of your admissions have a therapy visit associated with it?

John Potapchuk

Right now we’re up to about 2/3 of the episodes.

Ralph Giacobbe - Credit Suisse

Do you have any sort of point of comparison from maybe a year ago or?

Ron Malone

Actually if you go back to a year ago that number was in the, let’s call it today in the low 60% range. That number a year ago was in the high fifties; however, with the launch of one of our newest specialties, with senior health, we’ve actually seen that number drop back just a little bit. So it’s kind of hovering in that, as John said, that 2/3 range.

Ralph Giacobbe - Credit Suisse

Okay that’s great. Then can you help us, what percentage of admissions come from an acute or post acute setting versus directly maybe from a physician’s office, without prior stay at another setting?

Ron Malone

I don’t think we disclose much information about our referral trends; however, to give you a qualitative answer as opposed to a quantitative answer, when you look across our business it’s pretty diverse. We’re not heavily weighted in physician referrals or heavily weighted in hospital referrals, or heavily weighted, for that matter, in acute settings. Rehab facilities as well as assisted living facilities and even nursing homes. So when you look across that entire spectrum our business is pretty well spread out fairly even.

Operator

Your next question comes from Newton Juhng of BB&T Capital Markets.

Newton Juhng - BB&T Capital Markets

I was curious as to your thoughts on, kind of looking out a little bit longer-term, the pricing. I mean obviously Ron’s efforts are going to be to try and get the market back, but just in terms of the pricing environment as we look out to like 2010, obviously that is in discussion now. I’m wondering what your thoughts are at this point.

Ron Malone

That’s a great question, Newton. When we look out, obviously there has bee a lot of discussion about MedPAC and what MedPAC is recommending. I would like to remind everybody that MedPAC is one force and they make recommendations every single year. They sometimes GMS takes their recommendations, as well as congress, and sometimes they don’t, as evidenced by last year: MedPAC recommended that we would not have gotten the market basket increase for 2009, and we ended up getting the market basket increase for 2009.

When you look out over the last seven or eight years, I believe there was just once where we didn’t get the market basket increase or there about and the rest of the times we have. The rural add on has come in and gone out on several occasions.

So, when I think about 2010, I think we would be remiss if we didn’t think that there was a possibility that the market basket increase didn’t happen, but likewise there might be a likelihood that the rural add on might come back in. Projecting as to what it may or may not be, I think, at this point is a little premature on our part.

The one thing that I would like to point out though is that healthcare calls for doling out. We are paying for fuel; we’re paying for medical supplies. Wages are not going down. The ability to recruit and train our clinicians that cost is going up. When our legislatures put the market basket update methodology into place, it was an effort to make sure that healthcare providers had a methodology to keep up with the rising costs. I think it is a critical component of our healthcare delivery system and one that we’ve got to fight very diligently to protect.

The other comment that I’ll make is that larger companies and I know that you guys follow the public companies, but larger companies are probably better positioned to handle these kinds of variations in reimbursement. Whether a rural adult comes in or goes out or where the market basket stays in our goes out, I think the larger companies are better positioned to withstand some of these changes. But, I will make a comment and I think the National Association of Home Care has backed this up, should MedPAC’s recommendations be taken wholeheartedly for 2010, over 50% of the home health agencies in America would be put at risk, putting them in a loss position. I think that message needs to be carried very clearly through our alliance and through our advocacy efforts in Washington to make sure that we fully understand the impact of the whole industry, not through the largest providers.

With all that did I answer your question Newton?

Newton Juhng - BB&T Capital Markets

Yes, it’s just helpful to get your input on that. I do have a follow up that’s actually more geared towards John.

John, the provision for doubtful accounts looked like it came in a little bit lighter this quarter. I was just wondering if you could help us understand the factors that caused the sequential drop offs in that number?

John Potapchuk

Yes. I think we specifically, this quarter, it was $1.5 million with the provision. Third quarter was $3.3 and the fourth quarter of last year was $3.3 too; so you are right in your observation. In the third quarter of ’08 CareCentrix provision was $1.5 million, but that’s gone away, so that’s really the explanation relative to the third quarter. At the end of last year we did have some continent that there was some additional provision that we took with respect to our G&A and the future operation to short that reserve which didn’t reoccur, those are frequently different.

Newton Juhng - BB&T Capital Markets

Okay, so going forward we should be looking more at this level in the $1.5 million range?

John Potapchuk

Somewhere in the, I think, $6 $7 million during the year net [interposing].

Newton Juhng - BB&T Capital Markets

Internal, okay great, thank you.

Operator

Your next question comes from Arthur Henderson of Jefferies & Co.

Arthur Henderson - Jefferies & Company

I know you talked about $75 million dollars being available for acquisitions or M&A activity and I was just wondering, Tony, kind of, as you look to this year as I recall previously you guys were kind of in the market looking for bigger things. What is your appetite today in light of what could potentially happen on the reimbursement front going forward? I assume you are going to continue to do smaller stuff, but is bigger stuff potentially in the pipeline as well?

Ron Malone

Well Art, that’s a good question. We’re open for business as it relates to acquisitions. With that said, I don’t think we are going to change our thought process. We’re going to be very disciplined in our approach. As John mentioned, our balance sheet is in really good shape. We’ve got cash put aside to do acquisitions. We have access to financing to raise capital if necessary. So if the right opportunity presented itself, whether it’s a large acquisition or a small acquisition, I think we’re prepared to move opportunistically.

With that said, I think we want to be very disciplined because the credit markets, at least in our opinion, for the foreseeable future aren’t going to change a lot. So, we want to make sure that we’re spending that cash wisely in making acquisitions that are going to be most accretive to our business. We’re going to stay disciplined, we’re going to look for well run companies, we’re going to stay focused on our core Home Health business. As it relates to size, whether it’s a larger acquisition or a smaller acquisition, we’re open to both.

Arthur Henderson - Jefferies & Company

Are you more comfortable with this leverage ratio or something a bit higher, I guess, given the current credit market environment?

John Potapchuk

Right now we’re 2.2 and again we’re very favorable terms, I think. We certainly have the ability to go up a little bit on that. I wouldn’t be uncomfortable in the range up to three-ish.

Ron Malone

That’s big words coming from John.

Operator

Your next question comes from Darren Lehrich of Deutsche Bank Securities.

Pito Chickering- Deutsche Bank Securities

It’s actually Pito Chickering in for Darren. I have two questions for you. Back into the EBITDA margin guidance from your new EPS it’s at 11% EBITDA margin. I was curious what sort of cost cutting measures you guys are taking since the third quarter in order to get to that margin level?

Ron Malone

I don’t know that it solves any cost cutting. If you go back and remember one of our goals is to continue to change our mix. I think John mentioned that 77% of our revenues today came from an episodic reimbursement on an episodic basis. That number, if our plans all work as we hope, that number will continue to increase over 2009; that in and of itself will help improve gross margin.

If you look at the other issue that we talked about, making sure that we continue to make our productivity targets, as we move our clinicians from, I think what I said in several calls was 53%, 56% and now 60%. As that number moves up to 65% and 75% of our clinicians paid on a per visit basis, that will also help protect the margins.

Then I think we made a couple of comments during the call about making sure that our operations were both effective and efficient and so there are some things that we want to do from an organizational structure perspective to help take a little bit of cost out. All of those things combined will help continue to move that margin in the right direction.

Pito Chickering- Deutsche Bank Securities

Okay. In looking to 2009 what is your target pay per visit for your [inaudible] set stuff on the variable comp?

Ron Malone

You mean what percentage do we expect to be on a pay per visit basis by the end of 2009?

Pito Chickering- Deutsche Bank Securities

Yes.

Ron Malone

I don’t think we put a hard number out there. As a matter of fact, more specifically, we’ve talked about that this is a tool in which we use to help address where we have productivity issues. In places where our clinicians are fully productive today, our margins are protected. Those are places where it might not make sense to implement pay per visit. So, I don’t want to arbitrarily put a number out there and go this is a number we’re working toward. This is a tool. This is a wrench within our bag that we use to address specific margin issues in specific locations.

Operator

Your next question comes from John Ransom of Raymond James.

John Ransom - Raymond James

John you mentioned that your Q4 revenue per episode was $3,040 versus $2,850 for the year. What explains the higher number in the fourth quarter versus the full year?

John Potapchuk

We mentioned earlier, John, about the increasing use of therapies that 67% of our episodes now involve therapies and that certainly, with respect to our specialty programs, are a driver of that increase.

Ron Malone

And another thing, it’s not just that we’re doing more therapy on the same patient, as a matter of fact to the contrary. As we roll out these specialty programs, a lot of these specialty programs really bring us a higher level of acuity in the patients that we’re serving. Those patients, for example coming out of rehab settings or coming out of skilled nursing facilities are more acute patients demanding a higher level of service and that is really what is changing that revenue per episode.

John Ransom - Raymond James

So how much of the 13% growth per episode is higher acuity versus just technical changes in the new 2008 version of the HHRG’s?

Ron Malone

The majority of it is acute.

John Potapchuk

It’s really changing the mix and the kind of patients that we’ve been taking care of.

Operator

Your next question comes from Sheryl Skolnick of CRT Capital.

Sheryl Skolnick - CRT Capital

I have a question that I hope you can help me to understand. You’re getting very significant demand growth and I’m trying to understand where the demand growth is coming from. I recognize that specialty programs are having a big affect on that, but do you believe that the margin at 11% perhaps and you’re growing at 13% because you’re taking share from someone and if so where are you taking the share from? Also, how sustainable is it to continue to take that share, recognizing that you could do 1,500 programs. Realistically how many years do you think you would be able to take share before others aggregate and come in and maybe mitigate some of that growth?

Ron Malone

You know Sheryl, that’s a very insightful question. If you look back into 2008, how much of the growth was just that the market is growing versus how much is taking market share? I think in 2008, from a mentioned perspective, we did a pretty good job of keeping up with the market growth and protecting our market shares. If you look towards the last quarter or the last 30%, 40% of 2008, I think we began accelerating our ability to take market share from other people. So, when I look into ’09, let’s say in ’08 the ratio between what was taking market share versus what was keeping up with the growth, we’re going to inverse that relationship in 2009. Specifically, if you look on average on any given day in 2008 we had about 450, 460 sale [inaudible] on the street. We ended the year with a number the a little bit higher than that approaching 500. One of the things that we’re targeting to do in 2009 is really invest in those sales resources and put more feet on the street and begin taking it and being really more aggressive about taking market share.

Did that answer your question?

Sheryl Skolnick - CRT Capital

It sure did. Then my second question is more another sort of strategic question. You’ve said a number of times, Tony, and I want to compliment you on how well you’ve done solo. You’ve said a number of times that you are focusing on the core Home Health operation, yet you have this other related services business which I would look at as while improving, still lagging the much improved performance you demonstrated in ’08 in the Home Health business. So, why shouldn’t I assume that that means that you’re, or I’ll put it positively, what are you going to do with that other related services business and why, if you want to focus on the Home Health business, do you still retain that other related services part?

Tony Strange

Well, that’s a fair question and I think the answer is really the same; I’ve said this before. I think all of our businesses; we’ve got to continually look at to make sure that they’re strategically aligned with the mission of our company and really any business. As a matter of fact, it’s not only any business line it could be any branch. It could be just like the pediatric business, which was within our Home Health business already. So, it’s really not related to just our segment reporting. It’s really across all of our business and even within branches i.e. the pediatric business that we did, that we just sold.

I do believe that hospice is a core component of the home health industry. I think that over the next couple of years we’re going to experience some change in reimbursement related to hospice whether it comes in another HHRG within home health or not, I don’t know. But, your point is well taken. I think it is something we’re going to constantly have to focus on, in our company, is going to be what our strategic focus and how do we continually adjust that while we’re still flying the airplane.

Operator

Your next question comes from David Macdonald of Suntrust Robinson Humphrey.

David Macdonald - Suntrust Robinson Humphrey

I have two housekeeping questions. Could you give us some sense, in terms of timing, talking about moving corporate to Atlanta and then secondly on the extension side, could you give us a sense of where that number is at? I know it keeps improving, but give us a sense of what the actual number is?

Ron Malone

I will try to do both, David. As it relates to moving the corporate headquarters to Atlanta, there is a technical aspect of that and that is going to be when are we going to officially change the corporate headquarters to Atlanta? I think we’re planning on doing that this proxy season when we file this year. So, within the next several weeks we’ll be making a formal announcement and publicizing that Atlanta will be the corporate headquarters for the company.

As it relates to kind of more pragmatically when we move things, we’ve already begun that process. We talked about it on some of our previous calls. Some functions we’ve already moved here. Some of the finance functions, some of the procurement, we’ve already moves. We’ve recently moved the marketing and sales support functions to Atlanta. We’ve moved some additional HR functions to Atlanta and some training functions to Atlanta. We’re in the process of doing those as we speak.

I think to give you a quantifiable end, our goal is by the end of the year 2009 that all of the corporate functions for Gentiva will be here in Atlanta. All of the executive team and corporate functions will be in Atlanta.

David Macdonald - Suntrust Robinson Humphrey

Okay and then just on the retention side?

Ron Malone

On the retention side, if you look at kind of the health care industry retention rates, late in 2008 our results, say third quarter, got to be what I would consider to be even with the healthcare industry. I think as we ended 2008, in my opinion, we are beginning to see results that are better than you might see in the health care industry. Without getting into specifics, my goal is that from a retention standpoint there is going to be the healthcare industry in general and then there is going to be Gentiva. We are going to continue to focus and I would like to make Gentiva kind of the magnet status of what it means to retain employees in healthcare.

Operator

Your next question comes from Jeffrey Englander of Standard & Poor’s.

Jeffrey Englander - Standard & Poor’s

In terms of the other side of the retention can you talk about recruiting? And given the current economic conditions what are you seeing both on the therapist and RN side and given my presumption that that is probably a little easier now, any sense that you’re going to try and speed that up a little?

Ron Malone

I think in theory your assumptions work. I would think that with the way the economy is there ought to be more clinicians staying in the work force as well as possibly coming back in to the work force. That makes a lot of sense to me. We really haven’t seen that yet.

Now, I happen to agree with you. I think that as time goes on and the economy doesn’t improve, we are going to see people that might have been considering retirement two years ago, they may say well we’re going to have to stay and work another three or four years longer. We think that that will help us in the long run, but we’re not going to take our foot off the gas as it relates to our recruiting efforts.

The demand for our services is growing at such a high rate that it’s going to take, in order to go back to Miss Skolnick’s question about taking market share, the company with the ability to take market share will be the company that is excelling its recruitment and retention efforts.

Jeffrey Englander - Standard & Poor’s

Just so I’m clear, but you are saying you are not at this point seeing or experiencing any easier recruitment of either clinicians or RNs?

Ron Malone

I can’t see a noticeable difference. We very well may have clinicians that were considering retiring that are now staying in the work force, but in terms of us seeing a significant decline in our recruitment dollars, a significant decline in our training dollars that we’re spending, we haven’t seen that.

Jeffrey Englander - Standard & Poor’s

Thanks very much.

Operator

Your next question comes from Brian Tanquilut of Jeffries & Company.

Brian Tanquilut - Jeffries & Company

Hey it is actually Brian this time around, but John just a quick question on wage inflation related to the last question on recruitment. Are you guys seeing a change in wage inflation yet for nurses?

Ron Malone

Nothing remarkable, I mean there is certainly a market here or there that you may have to pay more, but overall when you look at our costs and we are up in that 3.5% range barely.

Brian Tanquilut - Jeffries & Company

Okay and then corporate headquarters relocation, should we expenses related to that?

John Potapchuk

Yes, there will be certain special charges that will go through the year. I am still in the process of quantifying that. I would say right now, and I will give a fairly wide range, somewhere in a $3 to $5 million range, but as the year goes on we’ll tighten up that number for you.

Operator

Your next question comes from John Ransom of Raymond James.

John Ransom - Raymond James

John, on the corporate overhead what are you building in for 2009 for the cost and/or savings?

John Potapchuk

I just mentioned that in terms of a special charge, which isn’t built into the guidance, right now the range in terms of cost would be $3 to $5 million.

John Ransom - Raymond James

No, I heard the special charge. I wanted the net savings involved, outside the special charge.

John Potapchuk

It’s a toying point, as there is movement through out the year. 2009 would be a significant savings from that standpoint.

John Ransom - Raymond James

So as you look at 2010 then, what’s the new baseline? I should only say 2009 is a wash for the special charge, what is a kind of savings baseline for 2010?

John Potapchuk

Really from a savings standpoint, John, it is more rent expense in the area of $1 million, $1.5 million, something like that.

John Ransom - Raymond James

So there is no FTE reduction?

John Potapchuk

There may be FTE reductions, but we’re also growing and then we maybe spending those dollars in other places.

Operator

Your last question comes from Sheryl Skolnick of CRT Capital.

Sheryl Skolnick - CRT Capital

I just need a clarification and then a follow up. Did you say, John, that you only have $75 million available for acquisition?

John Potapchuk

On our situation today, Sheryl, I used the number $75 million, but keep in mind we have a $96 million credit facility. I mean take out what we have on the letters of credit and the fact that the facility, at the date of acquisition we had that $20 million available, we have roughly $30 to $35 million available on the facilities. When we look at our cash position today, $70 million, roughly $69, $70 million, we want to maintain some level of cash on the balance sheet.

So, I’m saying at any given time I would want to hold on to $20, $25 million. With that, today we have $75 million, but keep in mind we do have an effective shelf registration out there, more up to $300 million and that gives us maximum flexibility with respect to cash warrants, equity, etc… which we haven’t touched at this point.

Sheryl Skolnick - CRT Capital

Okay, that’s kind of where I was going. Also, you’re not including any incremental excess cash flow that would be committed to your term loan?

John Potapchuk

Right, as we ended 2009 this is our position. [Interposing].

Sheryl Skolnick - CRT Capital

Okay, I was a little bit concerned about that. Then my follow up is clearly your number of episodes is greater than your admissions. Can you just give us a sense of what’s happening with recertifications’ within the business? With the specialty programs do you note that recertifications with the specialty programs are significantly higher than they would be in, sort of, normal course of home health business? And, what is the average number of episodes per patient that you treat and how that has changed?

Ron Malone

Let me use one example to tell you about that. One of our newest specialties that we’ve launched is the neurorehabilitation program. The typical profile of the patient that enters into that program is a post CVA patient. That patient is going to be on our service longer than a patient who has just had his knee replaced and is working his way back onto the golf course.

To answer your question broadly, as we bring out more and more of these highly sophisticated specialty programs related to senior health, related to neurorehabilitation, we would expect length of stay to increase specific to those patients. Hourly per stay for our joint replacement for example, that number is not going to go down. So, as those programs become mature, I would expect that length of stay to go up.

As it relates to your question for the average episode per patient…

John Potapchuk

Cheryl, I did give the typical information and when you go through the math for the year, we’re at episodes per admit of 1.4 and for the full quarter was 1.44, so it hasn’t changed remarkably.

Operator

I would now like to turn the conference back over to Mr. Tony Strange for any closing remarks.

Tony Strange

I would like to thank everybody again for joining us on today’s call. We look forward to keeping you updated on Gentiva’s progress and our results throughout 2009. I hope each of you have a great day. Thanks a lot.

Operator

Ladies and gentlemen, that concludes Gentiva Health Services Fourth Quarter and Full Year 2008 Earnings Conference Call. We appreciate your time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Gentiva Health Services, Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts