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Executives

Steve Paige – SVP, General Counsel and Secretary

Tony Strange – CEO and President

John Potapchuk – EVP, CFO and Treasurer

Analysts

Ralph Giacobbe – Credit Suisse

Darren Lehrich – Deutsche Bank

Newton Juhng – BB&T Capital

Brian Tanquilut – Jefferies & Company

Whit Mayo – Robert W. Baird

John Ransom – Raymond James

Sheryl Skolnick – CRT Capital

Gentiva Health Services, Inc. (GTIV) Q1 2009 Earnings Call Transcript April 30, 2009 10:00 AM ET

Operator

Good morning, my name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to Gentiva Health Services First Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. (Operator instructions)

As a reminder, this conference call is being recorded today, April 30th, 2009. It is now my pleasure to turn the floor over to Steve Paige, General Counsel. Sir, you may begin your conference.

Steve Paige

Good morning everyone. I am Steve Paige, General Counsel of Gentiva Health Services and this is Gentiva’s first quarter 2009 earnings call. Speaking on the call today are Tony Strange, Chief Executive Officer and President; and John Potapchuk, our 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 will also conform to Regulation G regarding the reconciliation of GAAP and non-GAAP 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. A transcript 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 CEO, Tony Strange.

Tony Strange

Thanks Steve, and good morning, everyone. Gentiva started 2009 with a very good first quarter. Our financial results are on track with our plans for the year and we reaffirmed our 2009 guidance in our earnings press release issued this morning.

Revenue for the first quarter totaled approximately $289 million, which represents growth of 18% over last year’s first quarter excluding CareCentrix of which the majority interest was sold in Q3 of 2008. Our EBITDA for Q1 was up 19% to $28.2 million, and our adjusted net income came in at $0.43 for the quarter, 59% increase over last year.

Our core Home Health business continued to lead to the way for Gentiva in Q1. Home Health revenues were up 19% in first quarter compared to last year to $258 million, that’s also sequentially higher than the $249 million that we reported for the fourth quarter.

Along with our financial results, I am pleased with the progress that we have made on several of our operational fronts. We’ve increased our specialty offerings to 315 programs in the field. In the first quarter, we rolled out 15 new programs and have ramped up to a pace that should meet our target of a 120 new programs in 2009.

I am specifically proud of the outcomes that are being achieved with these programs and the important that they will play in our communications to policy makers about the value of Home Health and the impact that it can have on the overall healthcare spin. I will have more to say about in just a few minutes.

Along with our specialty programs, another key strategy in Home Health is increasing both the capacity and the productivity of our clinician base. On the capacity front, Gentiva had an outstanding recruiting effort for the first quarter by adding over 200 new clinicians as the demand for the home care services continues to increase, it is imperative that we create the capacity to support the growth and manage the cost appropriately.

We continue to make progress on our effort to convert clinicians to a pay-per-visit structure. This strategy allows the company to flex its direct cost structure with the changes in revenue, while at the same time allowing the clinician to exert more control over their income.

In Q1 of 2009, 70% of our clinicians repaid on a per-visit basis up 10 percentage points from the 60% in Q4 of 2008, while we will never be at a 100%. I would expect this trend to continue over the next couple of quarters as we identify areas to further improve productivity. I am also proud to report that the first quarter marked our ninth straight quarter of reduced turnover.

In summary, it’s been another good quarter for our Home Health business and I would like to thank everyone throughout the field organization and our leadership teams who continue to our results.

Turning to our other services, revenues and profitability, each grew by 14% compared to Q1 in 2008 and inline with our projections. The profit growth was primarily driven by increased margins in our hospice business. Our hospice revenues are continuing to grow and we’re beginning to see some traction in converting this growth to profitability. While there remains additional work to be done in this area, I am pleased with our progress in the first quarter and I really appreciate the effort by these employees as well.

So all-in-all, it was another good quarter for Gentiva and we are going to continue to focus on executing our strategies and delivering the types of results, we’re able to share with you today. I will ask John to go in more detail on those results in a just a moment. But first I would like to comment on a couple of topics that have been in the news from both a Gentiva and a Home Health industry standpoint.

Last month, we filed an 8-K reporting that five of our Directors have informed us that they would not stand for reelection at our May 14th, Annual Meeting of our Shareholders. I thank them for their past service and wish them well as Gentiva’s Board will consist of six Directors immediately following our annual meeting. As a result, our Corporate Governance and Nominating Committee will seek additionally highly qualified Independent Directors to serve on our Board. We expect to complete this process within the timeframe set forth in the NASDAQ rules and in accordance with the company’s bylaws.

I would like to turn our attention toward the events in Washington affecting our industry. As you’re aware, the Obama Administration proposed budget and contained reductions specifically targeting Home Health reimbursement. In early April, both the House and the Senate published their budget resolutions and while both had reductions related to the overall healthcare spending, neither targeted Home Health specifically. Our Chairman, Ron Malone and I have spent a great deal of time in Washington working with industry leaders, focusing on educating legislatures on the value of Home Health and specifically the role that it plays in reducing the overall healthcare spend.

Our industry association, the National Association of Home Care, has stepped their best communication efforts in collaboration with other advocacy groups, in order to ensure that policy makers understand that the Medicare Home Health benefit and how it can be used to mitigate the high cost of more expensive settings while giving older Americans what they want, independence at home.

One of those groups is the Alliance for Home Health and Quality and Innovation. Formed by six industry leaders including Gentiva about a year ago, the Alliance’s mission is to further education, research and advocacy in support of the patients who benefit from Home Health and to have a strong and effective voice in shaping healthcare policy for our seniors.

Last year, the Alliance commissioned Avalere, a well respected independent research group, to perform the first study of the CMS data to evaluate how the use of Medicare Home Health benefit impacts the total healthcare cost for patients being discharged from acute care facilities with home care versus those discharge without home care. We believe this type of work will prove to be very valuable in getting the message out to legislators and policymakers that home care is really a part of the solution and not a part of problem.

With the National Association of Home Care and the Alliance working closely together, we believe the industry has never been more united in its efforts on behalf of the Medicare beneficiaries and their families. We expect all of these constituencies to play a role in the industry’s advocacy efforts as we demonstrate how important it is to our healthcare continuum that Home Health be a vibrant, innovative as well as an accountable industry.

With that, I will summarize by saying that I am extremely proud of the results that our leadership team is producing and I am confident in our outlook for 2009. I am also confident in the work that’s being done in Washington by the Alliance and the National Association of Home Care. And while I can’t speculate about the outcome of the proposed healthcare reform, I can attest to the most proactive and unified effort in Washington by our industry that I have witnessed in my 24 years in the home care business.

I would like to again thank all of our employees, especially our caregivers in the field for their commitment to our patients and our performance. I will now turn the call over to John, for some further insight into our results.

John Potapchuk

Thanks Tony, and good morning, everyone. Gentiva’s first quarter results were highlighted by the strong overall financial performance from our core Home Health business and a continued successful execution of our growth strategy.

Before detailing our results, I want to note that the 2009 first quarter does not include the operating results of CareCentrix, but the prior year quarter did. During my discussion, I will provide adjusted numbers which exclude CareCentrix operating results as well as special charges relating to restructuring and integration cost for both the 2008 and 2009 period to give you an apples-to-apples comparison.

During the first quarter of 2009, revenues were $288.9 million compared to $321.6 million the same period last year. Excluding CareCentrix, net revenues grew 18% driven by the Home Health segment which contributed 19% revenue growth. EBITDA results were strong as well.

As Tony noted, EBITDA was up 19% over the year-ago quarter. However, our adjusted EBITDA which excludes restructuring and integration costs, increased 21% to $29.1 million. Adjusted EBITDA as a percentage of net revenues increased from 7.5% in the first quarter of 2008 to 10.1% in this year’s first quarter.

If the year-ago EBITDA number were further adjusted to exclude CareCentrix operating contribution and related corporate expenses, adjusted EBITDA would have increased 48% in the first quarter of 2009, compared to the prior year period. And the adjusted EBITDA margin would have increased about 200 basis points between the 2008 and 2009 first quarter periods.

Our GAAP net income was $18 million or $0.60 per diluted share for the first quarter of 2009. These results included a non-recurring pre-tax net gains of $5.8 million or $0.19 per diluted share from the sale of certain branch offices specializing primarily in pediatric home healthcare services and the charge of the $0.02 per diluted share relating to restructuring and integration cost associated with the consolidation of various corporate and back office functions.

Gentiva’s adjusted net income which excludes the non-incurring gain on sale and the restructuring and integration cost, rose 61% for the quarter to $12.7 million that represents $0.43 per diluted in the 2009 first quarter, up from $0.27 per diluted share in the first quarter of 2008.

Total episodic revenue for the quarter grew by 29% to over $202 million with about $186 million of that amount relating to Medicare PPS. The growth in episodic revenue was driven by double-digit increases in both number of episodes and revenue per episode. About 4 percentage points of the growth in episodic revenue resulted from the impact of acquisitions completed during the year 2008.

During the quarter, 78% of our total Home Health revenue was pay down in episodic basis, compared with 72% in the prior year period. Almost 6 percentage points of the 78% figure was Medicare revenue.

Moving to specialties, our innovative specialty programs continued to help drive Gentiva’s revenue growth. During the quarter, specialties comprised about 35% of our total Medicare Home Health revenue compared to 28% in the first quarter of last year and 33% in the 2008 fourth quarter. First quarter operating contribution for Home Health which represents EBITDA before corporate expense allocation was $43.2 million, up about $12 million from the first quarter of 2008.

I will now review some of the underlying operational statistics that are supporting our Home Health segment growth. During the first quarter, there were about 46,900 admissions on an episodic basis, a 7% increase from the same period last year. Total episodes in the first quarter were approximately 66,700 up 12% over the 2008 first quarter.

The revenue per episode was about $3,030, up about 16% compared to the prior year period. The increase in the revenue per episode between the 2008 and 2009 first quarters resulted from the continuing shift in mix to a higher acuity patients and a very conservative view towards revenue recognition in the initial months following revisions to the Medicare reimbursement system implemented in January 2008. On a sequential basis, revenue per episode in the 2009 first quarter was down about $10, compared with the fourth quarter of 2008.

First quarter revenues from other services of which hospice revenue represents about 56% showed improvement with a 14% increase compared from the prior year period. Operating contribution toward the segment also increased 14% to $2.3 million compared to the first quarter of 2008. Hospice revenues in the 2009 first quarter was $17.6 million, up $3.6 million versus the prior year period, due to both acquisitions and same-store growth.

Hospice census was about 1,470 at the end of the first quarter, prepared with 1,250 at the end of the 2008 first quarter and 1,350 at year-end 2008. Aggregate net revenues and contributions of the other businesses in the segment, which include respiratory services and HME, infusion therapies and consulting, was down slightly as anticipated given the recent reimbursement reduction in the medical equipment business by CMS.

Corporate expenses between the first quarter of 2008 and 2009 increased by about $1.6 million, a portion of which related to incremental restructuring and integration cost. The remaining increase resulted from higher personnel and administrative cost in support of our growing Home Health business, changes in estimates related to certain accrued expenses and timing issues relating to the transition of CareCentrix support functions.

Shifting now to cash flow and balance sheet highlights, operating cash flow was $25 million for the first quarter of 2009, compared to $8.1 million for the prior year quarter. In the 2009 period, we used $5.7 million of cash for capital expenditures and $4.8 million to repurchase nearly 328,000 common shares in open market transaction at an average cost of $14.68 per share. Based on the terms of our credit agreement, we don’t expect share repurchases in the near term.

We also used $14 million of cash in the first quarter to pay down all term loan, resulting in a long-term debt balance of $237 million at March 29. The debt repayments were made in accordance with amendments to our credit agreement using both proceeds from the sale of our pediatric Home Health branches and proceeds from the CareCentrix transaction that we’re not reinvested into the business during the six-month period following the transaction date. At this point, we had no required principle payments under the term loan until March of 2013.

Turning to other balance sheet items, net accounts receivable was $181.6 million at March 29. Days sales outstanding which represents net accounts receivable divided by average daily revenues was 57 days at the end of the 2009 first quarter, comparable to the level at the of December 2008. I am very pleased with this result as we have historically seen an increase in DSOs during the first quarter on the past several years.

During the first quarter, we also made arrangements to liquidate one of our remaining auction rate securities in early April. As a result, we reflected a short-term investment of over $2.5 million in the March 29 balance sheet. The resulting $450,000 loss under its investment will be included in interest expense in the 2009 first quarter statement of income.

At March 29, 2009 cash and cash equivalents was $79.6 million compared with $69.2 million at the prior quarter end. We currently have outstanding borrowings under our revolving credit facility and our consolidated leverage ratio stood at 2.0 times at March 29, compared to 2.2 times at the end of the 2008 fourth quarter and 3.0 times at the end of the prior year’s first quarter. As a result, we are very comfortable with our current financial position and our ability to access financing to participate in the M&A opportunities.

We are reaffirming the full-year outlook that we provided on our February 18th earnings call. Full-year net revenues are expected to be in a range of $1.14 billion to $1.18 billion. Our 2009 outlook reflects double-digit revenue growth after excluding from 2008 revenues both CareCentrix and the Home Health branches that were sold early this year.

Diluted earnings per share is expected to be in the range between $1.72 and $1.80, excluding restructuring and integration cost which are estimated to range between $3 million and $5 million for the full year. Gentiva’s 2009 outlook represents an increase in diluted earnings per share of between 20% and 30% as compared with 2008 pro forma results which are based on the assumption that the CareCentrix divestiture had occurred at the beginning of 2008.

Our outlook excludes the $0.19 per diluted share net gains resulting from the sale of our pediatric care branches during the first quarter. Also, please note that our fiscal year ends on the Sunday nearest to December 31st. Therefore, 2009 will include 53 weeks of activity. Gentiva is in a strong financial position and we are confident about the growth opportunities ahead.

That concludes my remarks. Operator, we will be happy to open the call up to questions.

Question-and-Answer Session

Operator

(Operator instructions) Management requests that in the interest of time that callers limit themselves to one question and one follow up. Our first question comes from the line of Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe – Credit Suisse

Great, thanks, good morning. Actually I guess can you help us out on the organic side? The Home Health revenue is up 19%, did you say 4 percentage points was acquisition related? Is that fair?

John Potapchuk

Ralph, the episodic revenue, overall was 19%. The episodic revenue was up 29% and of that 29%, 4% was the carryover effect of acquisitions completed in 2008.

Ralph Giacobbe – Credit Suisse

Okay. Anyway to sort of break that down, price, volume? I am sorry, price – yes, price, volume.

John Potapchuk

Well if you think about and I will focus on the episodic revenue, of that 29% we are seeing, 4% relates to acquisitions, 16% relates to revenue per episode increases, and the remaining amount is volume. So that’s 8% to 9% on just same-store volume.

Ralph Giacobbe – Credit Suisse

Right, okay. Right that’s helpful. And then just a follow-up question, can you tell us what percentage of your admissions come directly from the physician office?

Tony Strange

I don’t think we’ve – I don’t think we’ve broken that down. I don’t think we’ve broken that down publicly before. But as in general comment, we’re pretty well – we’re pretty well diversified between that which comes out of a hospital, that which comes from the physician, but there is also another segment of long-term care like assisted living facilities and nursing homes, and across that spectrum we’re pretty well diversified amongst those three buckets.

Ralph Giacobbe – Credit Suisse

Okay, so think of it as somewhat kind of even percentages among those three?

Tony Strange

I don’t think we’ve given that in terms of specific percentages in the past.

Ralph Giacobbe – Credit Suisse

Okay, thank you.

Tony Strange

Thanks Ralph.

Operator

Your next question comes from the line of Darren Lehrich with Deutsche Bank.

Darren Lehrich – Deutsche Bank

Thanks. I wanted to just touch on the SG&A levels we saw this quarter and get your thoughts about where do you think you are with regard to bringing SG&A cost down as a percentage for the balance of the year. Can you just help us think about that line item in particular and whether you think there were any unusual one-time cost besides the restructuring that you’ve outlaid in the press release inside this quarter?

John Potapchuk

Yes, I think, Darren, a couple of things. When you look at our SG&A cost overall for the period, it's a little more than $125 million. Part of the growth of that expense really is in the field to support the grown business, but we are getting some leverage on that. I mean just to put in perspective while Home Health revenue grew 19%, the related expenses of Home Health were up about 17%. So you are getting a little bit of leverage there and I think that will continue as time goes on.

On the corporate side, what you see there is an increase year-over-year of $1.6 million. But keep in mind, reflected in the prior year were some support costs for CareCentrix that will go away. So when you look at the corporate expenses year-over-year and really dissect those, there are some pieces of those which relate to kind of I will say non-recurring items. I mentioned on in the prepared remarks about changes in estimates. There are some changes there which year-over-year having impact of roughly $1 million. That I don't anticipate will recur in total.

In addition, while we're starting to extract CareCentrix support functions away from us and we do see transition services revenue, we are doing in a thoughtful way and reorganize in certain functions. So as a result of that there were some duplicative costs in essence in the first quarter, but again as the year goes away or the year continues, some of those costs should go away.

So if you look at a corporate expense number of 18.2 in the first quarter, I think going forward on an average basis somewhere in the 17 million, the high 16 million, 17 million, taking out those one-time costs would be a better number to use going forward.

Darren Lehrich – Deutsche Bank

Okay, that’s helpful. I guess my follow up just relates to your buyback and the uses of capital. I think you mentioned John that you don’t expect any additional buyback, can you just remind us what you can do under the current credit facility and then maybe Tony, just give us a sense for your uses of capital going forward this year. I guess after you sold CareCentrix, the expectation was that you put aside some cash to do deals. Where are you in executing on more deals?

John Potapchuk

Let me – I will take the first piece. A chunk of our credit facility, we do have flexibility in certain areas such as acquisitions without getting an additional amendment. I mean we have a basket of up to a couple hundred million dollars of acquisition. But including that facility was a limitation on buyback of $5 million. So without getting an amendment, we couldn’t do anymore in the near term, so that’s a per year limitation.

Tony Strange

Darren, as John mentioned earlier, we've really not tapped our line of credit. We’ve got cash in bank. One of the things that we’ve seen in the last couple of months is actually an increase in the pipeline in acquisition opportunities. We want to be very careful and very disciplined about how we approach that, because like the rest of the industry, we are wrestling with how to value these acquisitions when we look in the 2010 and 2011.

However in some of the smaller deals, right now, we have – we’re being very opportunistic as we look forward to potential acquisitions. So I don’t think we changed our strategy in terms of looking and executing own appropriate acquisitions and if anything might have even stepped up on a sense of urgency just because the pipeline we have more deals coming at us to look at. Did we answer your question?

Operator

Your next question comes from the line of Newton Juhng with BB&T Capital.

Newton Juhng – BB&T Capital

Thank you very much. On the hospice side, the decision to change how you were accounting of the reimbursement of the nursing home room and board charges, I was just curious what prompted the change in this particular quarter? And also do you have any amount that was related to that in the current quarter?

John Potapchuk

Newton, the prior policy whereby we reflected that as revenue was really a carryover policy from the time we acquired the hospice business a few years ago. And as we entered 2009, we just took a look at accepted practice in the industry. And given the fact that this reimbursement is more of a pass through, what we decided to do was confirm to industry practice and mix that reimbursement against the direct – related direct cost. The amount for the first quarter was about $2.1 million.

Newton Juhng – BB&T Capital

All right. So it was similar to what was posted in the year-ago quarter?

John Potapchuk

Yes.

Newton Juhng – BB&T Capital

Okay, got you. All right, thank you very much.

John Potapchuk

Sure.

Tony Strange

Thanks, Newton.

Operator

Your next question comes from the line of Brian Tanquilut with Jefferies & Company.

Brian Tanquilut – Jefferies & Company

Hi, good morning, guys. Hi John, just going back to Darren’s question on SG&A, looking at the SG&A line or the corporate expense line in a quarter-to-quarter basis, those rose 110 basis points in SG&A, 80 basis points on the corporate expense line. I mean what is it sequentially that changed between Q4 and Q1?

John Potapchuk

Yes when you look at – at the expenses in the first quarter, I commented to Darren that on a normalized basis that should be maybe about $17 million, so there was some one-time items in there. But if you look at that $17 million versus what we reported in Q4 of 15.2 million, couple of things that affect that. There were some additional restructuring charges, that’s about $300,000 more.

There were some expenses that you normally incur early part of the year and go away as the year continues. Things like FICA and unemployment costs, things like that. That’s about $0.5 million. And then the other thing that’s a little bit different is FAS 123(R) expense in the fourth quarter that was $1 million – I’m sorry in the – and yes in the fourth quarter, it was $1 million, in the first quarter it was $1.8 million. That had $800,000 impact. The reason for that is in the fourth quarter we incurred additional forfeitures of our stock options, so we had artificially lower expense in the fourth quarter.

In the first quarter because of the volatility of our stock price which is one of the assumptions in calculating the expense on our employee stock purchase plan, we incurred incremental cost of extra $200,000 or $300,000. So between the incremental restructuring charges, it’s the timing of FICA and unemployment and the FAS 123(R), that really explains the sequential change.

Brian Tanquilut – Jefferies & Company

Okay. And then Tony, you mentioned that you guys hired quite a bit of new FTEs in Q1, should we expect that as a potential driver for gross margins and those new clinicians ramp up over the course of the year or were they pretty much ramped up by the end of Q1?

Tony Strange

Yes, I don’t think you would see any big change between Q1 and Q2. Most of the new clinicians that we’re hiring were hiring on a pay-per-visit structure. We have that guaranteed productivities built in. The incremental costs that you might see is just as time of orientation where we’re really during the onboarding process and the expense associated with that. But if you look back at Q3 of ’08, Q4 of ’08, Q1 of ’09, that’s a – it should be a pretty consistent number. So I am not expecting a big change between Q1 and Q2.

Brian Tanquilut – Jefferies & Company

Okay. And then Tony, last question, you mentioned you've been going to DC (inaudible) quite a bit. Just wondering if you can give us some color on how people in DC, legislators have been receiving the education effort that you guys have been doing up there? Thanks.

Tony Strange

Well that’s obviously the million dollar question. I will tell you in our trips to Washington where we're meeting with individual legislators, the overwhelming response is that they understand that Home Health plays a cost effective role in helping to reduce the overall healthcare spent. And that's the response that you almost – without exception that's the response you get meeting individually or at least I have gotten meeting one-on-one with legislators.

The issue about the industry and its fraud and abuse that’s something that’s in the front of people’s minds when you talk to them, the negative publicity specifically in South Florida, Texas and a couple of other states. So from that standpoint, I think the industry has to address how we are going to make sure that we can help and be helpful in the process of weeding out the bad providers.

The other thing that I hear a lot of discussion on is the industry is going to have to do a better job of presenting data, while everybody knows intuitively that Home Health is a more cost effective means of treating patients with chronic diseases. The industry has not done a good job in presenting data to help back that up. Now I mentioned in my prepared remarks that the Alliance for Home Health Quality and Innovation was formed about a year ago and I mentioned the Avalere study.

While I don’t know the results of that study but I am in hopes that that study will be available to the public – will be made available to the public somewhere in the first part of May and I am in hopes with that study actually does produce data from CMS to show that patients that are discharged into – that have used home care after an acute care stay actually spend overall less healthcare dollars than those that do not have home care. And I think that’s what the legislators are longing for is hard facts to show that what they believe to be true they can now walk in and support it with data, specifically with CMS’ data. Kind of long-winded, but did we get your answer to your question in there somewhere?

Operator

Your next question comes from the line of Whit Mayo with Robert W. Baird.

Whit Mayo – Robert W. Baird

John, can we go back to the accrual changes for a second, that you mentioned changes in estimates. Just can we get a little more granularity as to specifically what that is, what drove it, and just any color? Thanks.

John Potapchuk

Yes, I'll give you a couple of different examples, Whit. In the first quarter of 2008 as an example, we had had an accrual for certain professional costs, audit fees, that sort of thing relating to 2007. We ultimately found that that was a – that was over accrued by a few hundred thousand dollars, so we took that credit back in the first quarter of 2008. Soon a comparative basis, that's lowering the expense from the prior year.

The other thing you may recall is we're matching up as we go through the year certain benefits. For instance, an incentive compensation accrual. And in the first quarter of last year we were running below plan in that first quarter. You'll recall that $0.27 was below estimates. And now I think it’s fair to say that this first quarter of this year were above estimates. So there's a difference in the accrual between one year and the other as a result of just the company’s performance and that’s reflected in corporate expenses.

Whit Mayo – Robert W. Baird

Okay, so it sounds like it's as much of a prior event as it is this year?

John Potapchuk

Yes.

Whit Mayo – Robert W. Baird

Out of top line. Okay.

John Potapchuk

Yes.

Whit Mayo – Robert W. Baird

And my second question I know I'm risking getting shot down here pretty quickly. But I got ask just about the Board, the size of the Board. Now, I don’t if Ron is there, but can kind of talk about what’s your targeting in terms of an overall size going forward and remind us just sort of the rules and timing and what to expect over the next few months?

Tony Strange

Well I am not going to shoot you down. I think that’s a fair question. The – let’s start with first of those and I as said in my prepared remarks, on May the 14th, we will be down to six Board members. We currently have 11 members today. Our goal is to very quickly bring on an additional three members.

Specifically what we are looking to bring on in terms of expertise is we would like to find an Independent Director that brings some IT experience with him. In addition to that, we would like to find a Director that has some clinical and policy experience. And then a third Director that brings operational and financial type of experience with them. That would take our Board back up to nine and we believe that's a manageable number for a Board for a company our size.

As it relates to the timing, the NASDAQ Rule say that we have 180 days from May the 14th to be in compliance with the majority of our members being independent. Our goal is to bring all three of the members on at really one time to just to be a little more efficient in the process. But in any event, we expect to have those members on board well within the 180 days. Our goal is to some kind before the end of the summer to kind of have that wrapped up.

Whit Mayo – Robert W. Baird

Very helpful. Thanks a lot guys.

Tony Strange

Sure.

Operator

Your next question comes from the line of John Ransom with Raymond James.

John Ransom – Raymond James

Just looking at your numbers it's implied that maybe your recertification rate is starting to move up a little bit. Is that the case or is there something missing?

John Potapchuk

On a percentage basis, yes it’s moving up a little bit. But I think John when I look at – one statistic I look at episodes per admission for the quarter, I believe that was 1.42. And when I go back over the last year, year-and-a-half it’s been hovering that 1.1 mark.

Tony Strange

But that was a quantitative response to your question. A qualitative response is that as we roll out – as we roll these additional specialties programs, specifically and within the neuro rehabilitation program, that patient, that patient profile, that CVA patient, that patient is going to stay on our service longer because of the acuity levels of the patient. So as we get those programs rolled out, it wouldn’t surprise me if that number were to eek up a little bit. But we don’t expect massive changes in it in any time soon.

John Ransom – Raymond James

Thanks. And secondly, Baucus' document out yesterday gives a little more granularity on bundling. And so this has moved from something Obama proposed to something Congress is considering in detail as part of the healthcare plans. So I wondered what’s your updated thoughts about bundling and how you would manage the process of cutting deals with thousands of hospitals and going from being a direct contractor to Medicare to being a subcontractor to hospitals.

Tony Strange

Well let me go back and review something that was asked on earlier question. The referrals coming to us from post acute facilities doe own and represent a portion of our business. So the background of your question is only talking about a smaller portion – a lesser majority portion of our business. With that in mind, there is still a lot of open discussion about who may – who may control that process and again you’ve made a reference to what came out late yesterday afternoon while I have looked at it, I don't profess to being an expert at some of the ideas.

Some of the ideas that I read about actually were positive in my view. While other things that I read about did leave me with pause and to ask question. Specifically your question about how we will go about if it works it will be the case where hospitals control an episode within 30 days of the discharge of the hospital, we would find ourselves in a position to go out and do contract with hospitals under that scenario. That by the way is not something that’s fine to – so it’s something that we would just have to react to.

John Ransom – Raymond James

And Tony, do you think it will be on the table to sharing some of the savings if you were to achieve some type of rehospitalization reduction target? Could you – or is that going to be a risk too far in terms of the sophistication in contracting abilities of not for profit hospitals?

Tony Strange

Well, I certainly think it’s a reasonable request. In other words, it’s depending on how you negotiate payments and rates and I think it’s a reasonable request to do. It is not unheard of – as a matter of fact, I had some experience in negotiating – we have had a contract where we shared in the upside, we had an incentive plan based on a reduced hospital length of stay days. And so that’s – it’s not foreign; it’s something that has been done. But to speculate as to the sophistication of thousands of hospitals and their ability to do, I don't know that I'm prepared today to try guess about that.

John Ransom – Raymond James

Sure. And my other question is – I know one of your competitors is doing a pilot with a payer. Have you guys put your feelers out there yet with your payer contacts to start to look at some global capitation or rehospitalization reduction plans just to start getting some data so that you’re – I know this is 2014 so you've got some time, but do you have any strategic things going on the payer side?

Tony Strange

Well, probably one of the – one of – I can’t attest to all of the home care companies in America, but at the ones that I know about, we probably have one of the largest capitated contracts that's still in place today. And we’ve been gathering data under that contract now for better part of 15 years. So we do have the capability and the data behind capitation to go out and do that if that opportunity were to present itself.

John Ransom – Raymond James

And I guess the direct question, and I'll jump off after this, is let's say you have an unmanaged group of patients’ post-hospital discharge and then a managed group of patients post-discharge through Home Health. I mean do you have any kind of preliminary thought as to how much you can move the needle on preventing rehospitalization with some of your specialty programs? Is it 30%, is that too much? Is it a big number?

Tony Strange

I don’t know how to give you a specific number, John. But in terms of affecting rehospitalization, I think we have demonstrated that we do have the ability to help to move the needle on that number. To give you a percentage number, I don’t think we are prepared to do that today.

John Ransom – Raymond James

Okay, thank you.

Tony Strange

Thanks John.

Operator

Your next question comes from the line of Sheryl Skolnick with CRT Capital.

Sheryl Skolnick – CRT Capital

Thank you very much. I have just one quick detail question on the cash flow statement, John, and then a follow up. The accounts receivable had a big outflow last year relative to this year. Is that related – it was almost $20 million last year as to $5.8 million. Is that related by chance to CareCentrix? Or is there some other shift, because I would imagine that in CareCentrix the DSOs would be longer?

John Potapchuk

Yes, there's a little bit of that relating to CareCentrix, but, but part of it also Sheryl, was – remember in the early part of 2008, the beginning period after the PPS changes there was some delay in collecting cash on Home Health. So at the end of the first quarter as an example, our DSO was 63 days at the end of the first quarter of 2008.

Sheryl Skolnick – CRT Capital

Right, okay. I thought there was something that I didn’t remember what that was. Thank you for that detailed refresher. And then this is a question that I don’t know – I don’t know how to answer, so maybe you will be able to help me think this through. Tony, you've spoken about having a more – and I'd say truly and cautious approach to making acquisitions in this environment, trying to figure out how to value these companies in the face of what might happen or what might not happened in 2010 or 2011. And I’ll guess since you’re an expert on Home Health operations – you've bought companies, you’ve sold companies. If you all can't value these companies, how can we be expected to value your stock appropriately?

Tony Strange

Well I mean I think that’s a fair question. And I think what it appears to me is that the way people have valued not only Gentiva stock but the stock in our industry is you have to look at it worst-case scenario. And that’s – it appears to be how folks are evaluating our stocks today when we look at an acquisition, we look it from the standpoint of maybe a couple of different scenarios, worst-case scenario what did it look like – what does it look like if a more expected scenario would occur. And so – but I think your points are fair point. It is difficult to value any business today with any kind of uncertainty in reimbursement. And I think as we move through out the year and through the summer and we get into the fall and even late fall, I think that will become a little bit clear.

Sheryl Skolnick – CRT Capital

I just argued that if it was truly worst-case, that cut that was proposed in the Obama budget, no healthcare – no Home Health company would have a positive stock price, so that was a pretty nasty cut that was proposed. I would – yes, so I'm just trying right now to understand that.

Tony Strange

And sure, mathematically I agree with you. That’s pretty Draconian. However, having lived through – having lived through some Draconian changes, it also creates opportunity and the stronger companies with the balance sheets in place, companies with our size and scale, maybe acquisition – maybe the acquisition strategy moves from being opportunistic to being predatory under a scenario like that, so the big gets bigger.

So I agree with you mathematically that worst-case scenario is that is pretty bad. But with that would also come opportunity and I think John – I think John in Gentiva has done a really good job of protecting our balance sheet. And because of that, I feel almost – while I certainly don’t want it to be Draconian, I am also prepared to react on appropriately if that were to be the case.

Sheryl Skolnick – CRT Capital

Fair enough. Thanks so much.

Tony Strange

Okay, Sheryl.

Operator

Thank you. We have reached the allotted time for questions. I will now turn the call back to management for closing remarks.

Tony Strange

Well, I would like to thank everyone again for joining today’s call and we look forward to keeping you updated on Gentiva’s progress and results throughout 2009. I hope you have a great day. Thanks a lot.

Operator

This concludes Gentiva Health Services first quarter 2009 earnings conference call. You may now disconnect.

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Source: Gentiva Health Services, Inc. Q1 2009 Earnings Call Transcript
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