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Executives

Ron Malone - Chairman and CEO

John Potapchuk - CFO

Tony Strange - President and COO

Tom Boelsen - VP of CareCentrix

Brendon Ballew - VP of Finance

Analysts

Darren Lehrich - Deutsche Bank

Newton Juhng - BB&T Capital Markets

Ralph Giacobbe - Credit Suisse

Bill Bonello - Wachovia

John Ransom - Raymond James

David MacDonald - SunTrust

Adam Boisar - Lehman Brothers

Sheryl Skolnick - CRT Capital

Eric Gommel - Stifel Nicolaus

Gentiva Health Services Inc. (GTIV) Q4 2007 Earnings Call February 14, 2008 10:00 AM ET

Operator

At this time, I would like to welcome everyone to Gentiva’s fourth quarter and fiscal 2007 Earnings Call. (Operator Instructions) Thank you. It is now my pleasure to turn the floor over to your host, Brandon Ballew, Vice President of Finance. Sir, you may begin your conference.

Brandon Ballew

Thank you. Good morning, everybody. I am Brandon Ballew, Vice President of Finance for Gentiva Health Services. This is Gentiva’s fourth quarter and fiscal 2007 earnings call. On the call today are Ron Malone, Gentiva’s Chairman and Chief Executive Officer, and John Potapchuk, our Chief Financial Officer. Also with us today is Tony Strange, President and Chief Operating Officer; Tom Boelsen, Senior Vice President of CareCentrix and other key executives.

We hope that each of you had a chance to review the company’s earnings report, which was released earlier 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 web site.

On our call today, we’ll be consistent with SEC 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 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 web site for the next seven days. A transcript of the call will be posted to our site within the next 36 hours and will be available for the next 12 months.

Following today’s prepared remarks, we’ll 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 Chief Executive Officer, Ron Malone, for comments on our fourth quarter activities.

Ron Malone

Thanks, Brandon. Good morning and thanks for joining us today. Our positive results in the fourth quarter capped off a good year for Gentiva. During 2007, we continued to benefit from the successful execution of our growth and performance improvement strategies.

Looking ahead, we are optimistic and ready for the opportunities that lie ahead. I’d like to thank all of our employees for their willingness to change and for their dedication to excellence and growth. I also look forward to welcoming our new employees, who will join us in Gilbert’s Hospice Care in Mississippi when this acquisition closes later in the first quarter.

Right now, I would like to discuss the operating highlights of the quarter. Companywide revenues for the fourth quarter increased 7%, while gross margin for the quarter was up nearly 8% from the prior year period. Net income, EPS, and EBITDA all had significant double-digit increases versus the prior year period. Home Health Medicare revenues rose nearly 12% over the prior year period, continuing the trend of double-digit growth. Home Health operating contribution rose by 18%.

CareCentrix grew both its revenues and operating contribution by about 12% in the fourth quarter. Our operating cash flow for all of 2007 was close to $63 million, up 22% from the prior year. And we reduced our long-term debt to $310 million by the end of the year, after making another $6 million in voluntary prepayments during the quarter.

It is also worth mentioning that, beyond these results, we devoted considerable time, energy and resources to a number of key initiatives during the fourth quarter and into the New Year. We have executed the training and systems adjustments necessary to ensure a smooth transition to the Medicare reimbursement changes that went into effect January 1.

We made progress in our growth strategy with last week’s announcement of our plans to purchase one of Mississippi’s largest home health providers. And CareCentrix signed a contract extension with CIGNA HealthCare that extends that relationship through January of 2011.

The acquisition of the home health and hospice businesses in the CON State of Mississippi will compliment our national presence and bolster our already strong position in the Southeast. We’ve said many times that we would continue to pursue meaningful acquisitions, which add to our geographic reach and provide critical mass. This acquisition certainly fits both of those objectives.

When the transaction closes, Gentiva will be a major home health provider in the state. Also supporting our growth are Gentiva’s home health specialty programs, which exceeded our expectations in both revenues and admissions and remained a positive driver for Medicare revenue growth in the fourth quarter.

We ended the year with over 225 specialty programs in nearly 150 locations. And we are continuing to launch specialty programs in a number of new locations and expect to do the same in Mississippi after that acquisition closes.

Since their inception, Gentiva Orthopedics, Gentiva Safe Strides(r), and Gentiva Cardiopulmonary have treated almost 190,000 patients. These programs and our outstanding clinical practices are helping to reduce the rate at which our patients are hospitalized during an episode of care.

Just over a year ago, we joined a national campaign co-sponsored by CMS to reduce hospitalization for seniors. At that time, Gentiva was already operating below the average home health hospitalization rates reported by CMS. During 2007, we saw continued improvement in all four quarters and anticipate the same trend in 2008, thanks to the outstanding work of our clinicians. These results reinforce the value of home health care.

You may recall that we have a key initiative to improve employee retention rates and we ended the year with solid improvement in this area. Recruitment and retention will certainly continue to be a focus in 2008 as we strive to increase capacity to meet growing demand.

Turning to CareCentrix, we are pleased with this unit’s revenue and operating contribution growth in the fourth quarter as well as the overall progress it made during 2007. The revenue increase for CareCentrix came primarily from our ability to service a growing managed care membership, especially among our fee-for-service customers, as well as a full quarter of business from new agreements signed last fall, including the implementation of an exclusive contract in Georgia.

We are proud of the CareCentrix results in 2007. We are equally proud of the recently signed contract extension with CIGNA HealthCare. This latest agreement lends even more stability to the CIGNA business and extends this relationship through January 2011. We believe the renewal almost a year before its January 2009 expiration date is a testimony to the CareCentrix team and its ability to deliver high quality care and highly efficient and innovative services to CIGNA and its membership.

Turning to our other Related Services segment, we continued to experience some challenges during the fourth quarter. While segment revenues were essentially even with the fourth quarter 2006, operating contribution, as expected, declined from the prior year period. In hospice, the largest part of the related segment, our revenues were in line with our expectations, slightly above the third quarter and below the fourth quarter of 2006. We have invested in the sales structure and leadership to position hospice for growth and recent trends indicate that these changes are effective. John will have additional comments on this segment.

With that let me once again thank our employees for their contribution to the quarter and the year as I turn the call over to our CFO, John Potapchuk. John?

John Potapchuk

Thanks, Ron, and good morning, everyone. We are pleased with Gentiva’s financial performance in the fourth quarter and for all of 2007. During the next few minutes, I will discuss the highlights of our financial results and operational trends. And before I close, I’ll provide you with additional commentary on our updated 2008 financial outlook.

As noted in our earnings release, total company net revenues for the fourth quarter were up 7%, or more than $20 million compared to the fourth quarter of 2006. As Ron mentioned, Medicare, Home Health and CareCentrix were the key contributors to revenue growth. Those increases were moderated somewhat by the continued planned reductions in revenues of certain lower margin non-Medicare Home Health business compared with the prior year period.

Let’s take a closer look at these trends. In Medicare Home Health, the growth rate has continued to be in the double-digits for each of the past few years and for all of 2007. Medicare Home Health revenues grew by 12% in the fourth quarter and, on a same-store pro forma basis, increased 14% for the full year 2007. Specialty programs will continue to drive our diversity of growth in Medicare Home Health and become an increasingly important part of our business mix.

In fact, within the past year, specialty program revenues have grown from 22% of our total Medicare Home Health revenues in the fourth quarter of 2006 to 28% of Medicare Home Health revenues in the most recent fourth quarter. As we have said before, we believe there are many untapped opportunities for expansion of these programs into other markets, especially acquired locations.

At the same time, we continued to see solid revenue growth from the traditional Medicare Home Health business in the quarter. Our non-Medicare Home Health revenues were down about $4 million in the fourth quarter of 2007 as compared to the fourth quarter of 2006, although this category of revenues was approximately even on a sequential basis with the ‘07 third quarter.

These results underscore our strategy to eliminate or reduce low gross margin revenue in Medicaid and state contract business, as well as commercial insurance situations where pricing doesn’t meet our margin requirements. However, some commercial payers are resuming the use of our services at more acceptable pricing.

In our Other Related Services segment, which consists of hospice, home medical equipment and respiratory services, infusion services and consulting, net revenues were essentially flat when compared with both the fourth quarter of 2006 and the third quarter of 2007.

However, we were somewhat encouraged that hospice revenues showed moderate -- modest improvement on a sequential basis in the 2007 fourth quarter. This was during a season when we would typically see lower admissions.

Turning to CareCentrix, this business unit continued its trend of double-digit revenue growth with a 12% increase in the fourth quarter. This was the third consecutive quarter of double-digit revenue increases versus the corresponding prior year periods. The majority of CareCentrix’ revenue growth came from membership increases in CIGNA’s PPO and Open Access plans, contractual rate changes and implementation of the recently signed contract in Georgia.

It is also worth noting that Home Health revenues generated from CareCentrix, known as intersegment revenues, declined in the fourth quarter to less than $1 million as compared to over $2.4 million in the fourth quarter of 2006. This demonstrates our continuing strategy to separate Home Health from CareCentrix. Home Health continues to focus primarily on elderly care services reimbursed by Medicare, while CareCentrix serves managed care through its large third-party provider network.

Our payer mix continued to shift toward Medicare in the fourth quarter. Medicare as a percentage of total company revenues edged closer to 50% and Medicare Home Health revenues as a percentage of total Home Health revenues was nearly 68%, slightly higher than the third quarter.

Revenues from CIGNA continued to represent about 20% of total company revenues and Medicaid and local government, which represented less than 12% of total company revenues in the fourth quarter, continued to decline as a percentage of our total business mix while non-CIGNA,

Commercial and Other Business represented 18% of total revenues in the fourth quarter. So as we look at our payer mix over the past few years, our strategies have clearly resulted in a dramatic shift toward Medicare and higher margin commercial business and less Medicaid, less lower margin commercial business and less intersegment revenues between Home Health and CareCentrix.

Turning to our margin performance, Gentiva also had a solid quarter with respect to operating margins. As indicated in the earnings release, reported EBITDA increased 33% to $25.3 million. If restructuring and integration costs described in note 5 of our earnings release were excluded, our adjusted EBITDA would be 8.2% of net revenues in the fourth quarter of 2007 compared to about 7.6% of net revenues in the fourth quarter of 2006.

The increase in total company EBITDA resulted from improvements in operating contribution in our two major business segments, Home Health and CareCentrix, and control of corporate expenses, offset to some extent by a decline in profitability of the Other Related Services segment.

Operating contribution, which represents EBITDA before corporate expense allocation, increased in the Home Health segment by $4 million, or over 15%, in the fourth quarter of 2007 versus the prior year period after excluding restructuring and integration costs.

These improvements resulted primarily from increased revenues and significant changes in the business mix, which drove higher gross profit performance. In fact, gross profit margins increased by over 200 basis points in the Home Health segment between the fourth quarters of 2006 and 2007.

Operating contribution margin in the Home Health segment, excluding restructuring and integration costs, was 14.5% in the fourth quarter, this was well above the 13.2% in the fourth quarter of 2006, but somewhat lower than the 15.2% operating margin reported in the third quarter of 2007.

Operating margin in the 2007 fourth quarter was negatively affected by certain incremental expenses relating to selling activities, health benefit costs, and efforts to implement the new Medicare reimbursement changes by the January 1st effective date.

CareCentrix operating contribution increased by almost 800,000, or 12%, on approximately the same percentage increase in net revenues. As a result, the operating contribution margin for CareCentrix was 9.4% for the 2007 fourth quarter, nearly even with the margin percentage in the prior year period and slightly above the 9.2% margin reported in the 2007 third quarter.

This performance is particularly strong when one considers the investment that CareCentrix has recently made to implement a new contractual relationship, to expand business development efforts and to manage resources devoted in recent months to the CIGNA contract renewal initiative.

Fourth quarter operating contribution in the Other Related Services segment was $3.6 million, a decline of about $2 million from the prior year period after excluding prior year restructuring costs.

Operating contribution margin in this Other Related Services segment was 11.8% in the fourth quarter. This was well below the 18.5% reflected in the fourth quarter of 2006, but a good improvement from the 9.1% operating contribution margin reported in the 2007 third quarter.

The operating contribution for hospice in the fourth quarter of 2007 equaled that of the prior year quarter and was up somewhat on a sequential basis. The hospice business generated higher gross profit margins due primarily to a fourth quarter rate change and a positive adjustment to a prior year Medicare cap liability.

The performance of the rest of the Other Related Services segment consisting primarily of home medical equipment and respiratory services and infusion, has not met our expectations. We have seen a decline in these businesses and have had to increase certain back office costs and reserves relating to collection efforts.

As a result, we continue to evaluate these businesses and we’ll work diligently to improve their performance.

I’d now like to comment on our capital structure and leverage ratio. Gentiva incurred debt of $370 million in late February 2006 as part of the Healthfield acquisition. In the almost 2 years since the acquisition, we’ve repaid $60 million of this debt, including $6 million of voluntary repayments in the most recent quarter to the point that our long-term debt was $310 million on December 30, 2007.

You may recall that in August 2007, we began to benefit from a 25 basis point reduction in interest rates due to our improved leverage ratio. Well, effective today, we will enjoy the benefit of another 25 basis point reduction in our term loan interest rate as a result of our leverage ratio falling below a targeted threshold of 3.0 times.

At December 30, 2007, our leverage ratio stood at 2.87 times. We are certainly pleased with this development, although it is important to mention that the ratio could change if we decide to use debt to fund additional acquisitions or other initiatives.

You may also recall that, through the first three quarters of 2007, our days’ sales outstanding had increased from 56 days to 63 days. Although this increase was caused by various internal and external factors, I had indicated on our last earnings call that we have solid action plans in place and expected improvement in this area by year-end 2007. I am pleased to report that we did achieve a three-day reduction in DSO in the fourth quarter, bringing our DSOs to 60 days on December 30, 2007. I believe we can make further progress in this area in fiscal 2008.

The improvement in DSOs, together with solid operating earnings and low tax payments, resulted in strong cash flow performance in the fourth quarter. Operating cash flow exceeded $20 million in the fourth quarter of 2007 and was nearly $63 million for the whole year. Cash items and short-term investments at December 30, 2007 were $67.4 million.

Let me take a brief moment to comment on Gentiva’s full-year financial performance. Net revenues for 2007 approached $1.23 billion and were in line with recent expectations. Excluding special items and restructuring costs, adjusted EBITDA for 2007 exceeded $102 million and 2007 diluted earnings per share were $1.20. These two important metrics fell within ranges first presented when we announced our outlook back in January 2007.

We are pleased with our sustained and solid growth as evidenced by adjusted EBITDA of $35 million in 2005, $75 million in 2006 and over $102 million in 2007. We are also pleased with the growth in diluted earnings per share excluding special items and charges from $0.70 in 2005 to $0.89 in 2006 to $1.20 in 2007.

I’d now like to speak about our 2008 outlook. On our last earnings call, we provided a preliminary view of 2008 incorporating current business trends and a series of operating assumptions. Today, we are able to update the outlook for 2008.

The update reflects the impact of recent events including the following: refinements to the Medicare Home Health Prospective Payment System as well as the Medicare market basket increase of 3% that went into effect on January 1st.

Our updated outlook does not anticipate any other changes to Medicare reimbursement for the remainder of this year. Another factor involves the financial results of our recent Mississippi transaction. These are included in the outlook subsequent to this transaction’s closing, which is expected to occur before the end of the first quarter.

And our updated outlook also incorporates the Medicare reimbursement changes, as well as the impact of the amended CIGNA agreement, the trend toward lower interest rates and certain costs to begin the rollout of our LifeSmart clinical management system later in the year.

Based on the anticipated impact of these items and our operating plans, we’re raising our outlook for net revenues and diluted earnings per share and introducing a range for EBITDA for 2008. We expect net revenues to be in a range between 1.28 billion and 1.32 billion, EBITDA to be in a range between $112 million and $117 million, and diluted earnings per share in a range between $1.32 and $1.40.

These goals are supported by the following operating assumptions. Continued Medicare growth driven by expansion of our specialty programs into new and existing markets, reduction in non-Medicare Home Health revenues as we continue to shift our payer mix to higher gross margin business, solid revenue growth in CareCentrix as this unit continues its transition of new contractual relationships and the continued recovery of our hospice business to a more acceptable revenue growth rate and operating contribution margin, as well as the stabilization of the other businesses in our Other Related Services segment.

Excluding special items and restructuring and integration costs, adjusted EBITDA and diluted earnings per share have improved each year since Gentiva became a publicly traded company in the year 2000. While 2008 appears that it will be a year of volatility in the general markets and one with reimbursement challenges for the Home Health industry, we are confident that the long-term trend of growth and improved financial performance for Gentiva can be achieved once again in 2008.

That sums up my comments on the quarter, fiscal 2007, and our prospects for the current year. With that I’d like to turn the call back to Ron before we take your questions. Ron?

Ron Malone

Thanks John. That concludes our review of the fourth quarter as we reported solid gains in revenue, EBITDA, and net income and continuing strong results in Home Health and CareCentrix.

With that I’d like to open up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Darren Lehrich of Deutsche Bank. Sir, go ahead.

Darren Lehrich - Deutsche Bank

Thanks. Good morning, everyone. I have a question about CareCentrix, just wondering, if there is any significance to the timing of your CareCentrix contract renewal? If we go back to the prior renewal cycle, it was announced, I think, in the fall timeframe, the last go around. So just wondering why you got so far ahead of it this go-around?

Ron Malone

Good morning, Darren. This is Ron. Frankly, in many, many years in the past, we found the task of renewing CIGNA in the last six months of the year to be almost overwhelming and we just simply thought it was better business to get ahead of that.

Darren Lehrich - Deutsche Bank

Okay. And I guess it’s just -- it seems to us and I am sure you have seen our note, but you may strategically be better off without CareCentrix, so I guess just the hardball question, can you give us your view on the business and how it fits with your strategy at this point, Ron, and is the Board thinking about different options for that business?

Ron Malone

What note Darren? Just kidding, Darren. Frankly, we’re very proud of what CareCentrix has done. We’re always mindful of how we can increase shareholder value and we are not commenting on any M&A.

Darren Lehrich - Deutsche Bank

All right. John, some housekeeping items I guess. The number of Home Health branches at the year-end and if you could just comment on the number of de novos you had in ‘07 and what your plans are for ‘08?

John Potapchuk

The de novos, Darren on the -- Darren, what I want to give you are the de novos associated with opening up specialty programs during the past year 2007. We opened up about 25, 25 to 28 and in connection with 2008, right now that plan is somewhat comparable to that. I mean it’s still, as I said on my remarks, part of that relates to building those into acquisitions and once those close, we will take a look at where we stand there.

Ron Malone

And as far as traditional Home Health operations, there’s over 300 branches today and if you look at de novo starting up a new branch in similar geography or geography that is in close proximity with existing locations, there’s probably plans on doing another dozen of those.

Darren Lehrich - Deutsche Bank

Okay. And then hospice in your average daily census in the quarter on that segment?

Ron Malone

Have we disclosed?

John Potapchuk

Yeah, we have in the past. The number on the census was, at yearend was about 1,160. That’s down a little from the third quarter as we expected because that’s a lower seasonal period, if that answers your question. And the average daily census for the quarter was right around the 1,200 mark.

Ron Malone

Thank you, Darren.

Operator

Thank you. Our next question is coming from Newton Juhng of BB&T Capital Markets.

Newton Juhng - BB&T Capital Markets

Good morning, gentlemen. I had a couple of quick questions here. One is just with the debt position. Has there been a determination about how much debt you are going to be taking on with the Mississippi acquisition and so how that’s going to kind of flow through and how it obviously affects your leveraging.

John Potapchuk

Newton, we, as you know, that transaction will be $55 million. We said that would be a combination of cash and debt. At this stage, we’ve planned to use more cash than debt, but we will utilize our revolving credit facility for that. At this stage we, depending on where we stand with rates, we may be able to continue to keep a leverage ratio below three times. But, we’ll make that -- we have the flexibility and we will make that determination on the closing date.

Newton Juhng - BB&T Capital Markets

I see, okay. And then just kind of further detail on the general M&A environment and obviously not in terms of you guys selling off pieces of your business, but more in terms of kind of what you are looking to acquire at this point.

Ron gave us a little bit of how you guys think about it. But I’m just wondering, as the environment looks, as you are looking at it post this transaction, do you have a pretty decent pipeline or targeted areas where you are looking to potentially expand?

Ron Malone

Yes. I think the pipeline is reasonably good. There seems to be a pretty robust lineup of reasonably sized acquisitions. There are always many smaller opportunities out there. As you know we’ve been more focused on what I’d call more meaningful acquisitions and I don’t think our criteria, our filter if you will, has change much in the past few years -- sort of more focused in the Sunbelt, more focused where we can gain critical mass in states where we don’t have it today and there is minimal overlap.

We believe that -- that winds up with higher value at the end of the day. I think that’s reasonable. Tony, you want to comment?

Tony Strange

Yes, I would agree with that. First of all, in terms of the pipeline, we’re actually seeing a lot more deals. We’re actually passing on a lot more deals today than we might have been a year ago. I mean, so the pipeline seems to be, the momentum seems to be picking up with available targets. And to add to what Ron said, is that we’re going to continue to look at shifting the mix of our company and so we would look for businesses that have a higher concentration in the types of payers and businesses that we want to -- that we’re really focused on.

Ron Malone

So I think, the critical filters for us would be mixed geography and quality. We’ve focused on higher quality companies that can be easily assimilated.

Tony Strange

We kind of took for granted that we’re really right now focused in the home health arena in looking at acquisitions more so than anything that might be in the other related services today.

Newton Juhng - BB&T Capital Markets

Okay, thank you very much for the comments and I’ll jump back in the queue.

Operator

Thank you. Our next question is coming from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Credit Suisse

Thanks, morning guys. Can you quantify at all how much of the upside to the guidance came from the acquisition of HHCA?

John Potapchuk

On balance again relative -- we are still not certain on the closing date, although we expect in the first quarter, about $0.03, given the fact that it’s a part portion of the year.

Ralph Giacobbe - Credit Suisse

Okay. Great. And then, I guess, what are you seeing almost two months into the new payment system? We are hearing there are some glitches on the CMS side. I guess, first, are you seeing any impact from that, and I guess clearly you are feeling better today than when you gave that preliminary guidance. Is it the top-line that maybe made you feel a little bit better than you thought under the new payment system or is it a function more of what you see yourselves to do on the cost side?

Tony Strange

I think more of the -- this is Tony, Ralph. I think it’s more the latter. In terms of the glitches, we were able to get our systems addressed so that we were able to get claims to Medicare and we are seeing cash coming in from Medicare, so we are feeling fairly confident that the mechanics of the new system, while there have been a few little bugs to work out here and there, we’ll be able to get that settled down and be able to get bills out and get cash in the door.

As it relates to the other, we are continuing to focus on our training with our employees to capture better OASIS data, and we believe that over the long-term, that’s going to have a positive impact for us.

Ralph Giacobbe - Credit Suisse

Okay, great. And then just my last one, did you guys -- is there an EBITDA run rate or margin that you’ve given for the HHCA acquisition? Or how should we think about sort of the margin profile of that business?

John Potapchuk

It’s in total 81% Medicare, so it’s in the margins of -- EBITDA margins exceed double-digits.

Ralph Giacobbe - Credit Suisse

Okay. Thank you.

Ron Malone

Thank you, Ralph.

Operator

Thank you. Our next question is coming from Bill Bonello of Wachovia.

Bill Bonello - Wachovia

Hi, good morning. Just a couple of follow-up questions. John, you talked about on the call some of the factors that drove SG&A expense up in the quarter. But, I am wondering if you can just give a little bit more detail on that and then give us some sense of, sort of, where that expense line goes from here?

John Potapchuk

I mentioned, Bill, a few items. One being selling expenses and we continued to add to our sales force. That was on a – I will call it a run rate basis that was up relative to the third quarter to the tune of 6, $700,000. We’ve made comments throughout the year about our focus on caregiver retention and the work we’ve done over the course of the year on improving that. One of them being health benefits and I commented on that. Those health benefits during the course of the year have been up, that actually had an impact on the overall margins, if you go from one year to the next, of four-tenths to five-tenths of a point.

And if then there was cost involved in certain resource allocation associated with implementing PPS and that was a distraction and cost, a little bit more difficult to quantify, but that certainly had an impact on the quarter also.

Tony Strange

And Bill, to comment about where the dollars were spent, those, like the sales resources John talked about primarily in Home Health and secondarily in hospice, is where we put in the additional sales resources.

John Potapchuk

And finally, Bill, there were expenses associated in the CareCentrix side in supporting new business and again if I look on a sequential basis, those expenses overall were up about $0.5 million in the quarter.

Bill Bonello - Wachovia

Okay and so, I mean, as we think about a couple of those items, maybe the implementation of the new Medicare billing system and the CareCentrix contract negotiations, would we think going forward that either there would be greater leverage to SG&A as a percent of revenue from this point and/or maybe even an absolute dollar reduction from this point or not necessarily?

John Potapchuk

I don’t think I would go there with respect to a dollar reduction, there is -- we have the ability to gain some leverage, but I couldn’t say that costs would remain stable throughout the year. I mean we expect some increase in costs.

Bill Bonello - Wachovia

Okay, that’s helpful. And then I’m just curious on the CIGNA contract if there is anything more you can tell us about it, in other words, one of the positives is obviously the length of time that you extended it. Did you have to give up anything to get that extra length of time and should we be looking for any kind of margin pressure on that business as a result of the contract negotiations?

Ron Malone

Bill, this is Ron. No, I don’t think there is any more give and take in this renewal cycle then there always, there is -- trying to get at what is most important to each side and with the positive momentum in the membership, we think it’s a very, very good agreement.

Bill Bonello - Wachovia

Okay. Great. Thank you very much.

Ron Malone

Thanks Bill.

Operator

Our next question is coming from John Ransom of Raymond James.

John Ransom - Raymond James

Hi. Good morning. Looking at the new PPS versus the old PPS and assuming a full market basket, can you give us a little more direction about whether you view it as a positive, negative or neutral? And my second question is, I mean, are there behavior changes that you anticipate making that will bear greater fruits as you move through the year?

Tony Strange

John. This is Tony. I don’t think we have changed our outlook from our previous calls. When you look at the PPS refinement, I believe that we have indicated that, that is a reimbursement reduction. And so from a mechanical standpoint, we haven’t changed our look at that.

To the second part of your question, are there things that we can do to help mitigate that? I think there’s always things that we can do to become a better provider. And whether that is ongoing training with our employees that are doing OASIS assessments, re-looking at how, continuing to look at how services are utilized and how that can affect hospitalizations.

I believe that there is always room for improvement and those are initiatives that we have underway regardless of the changes in payment methodology. And I believe that we will continue to get better and better at providing home health services to the Medicare beneficiary.

John Ransom - Raymond James

So, I guess what I am getting at, Tony, is that something that it might take you a year, year-and-a-half to fully adjust to this. So, I guess, I’m just wondering, you have the initial --. This is kind of an awkward quarter, the first quarter because you have episodes kind of old and new. But is this something that you look out a year from now and you think you can make significant headway in terms of some behavior changes, or is this something that it’s always going to be a negative and our ability to make changes is somewhat limited?

Tony Strange

No, I think it something that we’ll see positive changes throughout this year and kind of using this year to establish our new baseline for the next year.

Ron Malone

Right. And John, you may recall from our last call, we said we just --what we couldn’t accurately -- comfortable inaccurately predicting is whether it might take us a quarter or two quarters to really put in all of the changes we’d like to see in order to deal with…

John Ransom - Raymond James

My second question is, could you remind me -- and I am old and you may have said this and I forgot -- but can you remind me, point-of-care for lack of a better word, when do you anticipate having that rolled out?

Ron Malone

I anticipate we will have it in several markets during the second quarter, in the final phase -- what I believe to be the final phase of sort of what I call defect resolution, making sure that that the system is ready. We set a very high bar for ourselves as it relates to not having errors in the system when we introduce it into the branches, because we want to get it right the first time and have our people really support it. I know we also have completed the development work of rating the new system for the PPS changes. So we made a decision to finish the application and then do the PPS changes to it. Those are now complete. So it’s in user acceptance testing. We’ve made a lot of progress since our last call in this area, the defects are going down and we are pretty optimistic about the outcome. We’re very, very pleased with the way the product looks in shape now.

John Ransom - Raymond James

And so as we look out to ‘09, I know your cousins in Louisiana had developed some fairly material SG&A savings because they eliminated some costs at the branch level in terms of just data entry. Is that something we should think about in ‘09 as you implement this system as potential upside on the cost side?

Ron Malone

Well, we are certainly hopeful that we gain efficiencies at the branch level, whether that that may be in two or three forms. It certainly could be reduced head count. It could be additional volume with the same help in the branch. We are also hopeful of gaining efficiencies in the back office unit, because we should have higher data integrity on the front-end. Data is going to go in faster. We expect the cash to improve, so we see some positives on the back-end of the business as well.

We think the most significant hard -- sort of hard impact of the system, though, is inside the branch. There would be impact in giving a more powerful, a powerful tool and a better set of processes to the field clinicians is a little bit of a softer impact that we think will help our recruiting and retention and perhaps a little bit on productivity.

John Ransom - Raymond James

Great. And I guess my last area of inquiry is, your industry has just had wonderful organic growth for a number of years. You hear reports of states, such as Florida, are starting to become somewhat alarmed at the growth in branches vis-à-vis their Medicaid budgets and what have you.

Are we running out of room to open branches? Is that something -- are we going to have to shift more to an acquisition mode as some of this greenfield expansion room for branches starts to pare down?

And, concurrently is there going to be some pressure on organic growth in the industry because of this as we look over the horizon?

Ron Malone

I don’t see that, John. I see robust demand for our services. I mean, we are just now approaching the point where we are starting to see the boomers start to draw down on services. For several years, we’ve seen it in our managed care roles. They start to draw down on the types of services they are expecting to once they become Medicare beneficiaries.

I think, your question about room to grow branches is really more about need to grow branches. I mean, there are markets like Florida were we don’t, or Alabama or North Carolina, we don’t have great need. We could fill in a few gaps here and there. We don’t have great need to open new buildings, but I think the growth that John mentioned a little while ago of our specialty services, we expect to expand the number of specialties we offer. We expect to introduce them into new markets and I assure you there is plenty of room for us to grow, to go deeper in the markets that we already serve.

So I think that that’s an important growth opportunity and important distinction for us in a way we approach the business. I just don’t see a short runway out there myself.

John Ransom - Raymond James

Okay, and is anybody offering to pay you 14 times EBITDA for your infusion business? If they would, I’d encourage you to take a look at that.

Ron Malone

You know, we’re always open to ideas from thoughtful people regardless of their age, John.

John Ransom - Raymond James

All right, thank you.

Ron Malone

Thank you John.

Operator

Thank you. Our next question is coming from David MacDonald of SunTrust.

David MacDonald - SunTrust

Good morning, guys, just a couple left. Just wanted to see if you could give a little more detail on the repricing initiative? How much of that are we kind of winding down there and also have you seen any of the folks that you’ve walked away from because of insufficient terms come back and actually come off their spot in terms of pricing and come back and give you guys some reasonable rates?

Tony Strange

Well, first of all, thanks for the question, it’s a good question. I made a comment several calls ago that talks about when will it be over, when will it wind down. And I think the answer is that it’s not, it’s an ongoing process and what might be a contract with great pricing today, if we do a good job of moving other contracts forward and up the pricing scale, hopefully next year that contract that’s good today will be one of our worst performers next year and we’ll have the opportunity to relook at that again.

The second part of your question is about, have we seen people that we’ve walked away from come back to us, and the answer to that is absolutely. We’ve just signed several contracts that, where we had said no a year ago and they’ve come back to the table and agreed to pay us what we consider to be attractive rates for our services. And as the demand continues to grow faster than the supply, I believe this trend will continue over the next couple of years.

David MacDonald - SunTrust

And, Tony, when we think about these contracts, should we think about the vast majority of them being one-year deals, so you guys would just constantly be kind of rolling through the pricing cycle here?

Tony Strange

Not necessarily. I mean, we’ve done multiple-year deals with the ability to adjust pricing throughout the year accordingly or exit the contract, but it’s not just all short-term, it’s not just all short-term business. We’ve been successful in getting a few payers to reimburse us on an episodic methodology just the way that Medicare reimburses as well.

David MacDonald - SunTrust

Okay. I guess the better way to ask the question is, on an annual basis it sounds like you guys do have some flexibility to adjust terms if they get out of whack?

Tony Strange

That’s absolutely.

Ron Malone

Yes, we are not going to -- we just -- I can’t imagine the circumstance where we would lock into an inflexible agreement. I mean, we have certainly not. We’ve made the conscious decision not to do that in the past year.

John Potapchuk

Yes, Dave….

David MacDonald - SunTrust

Just wanted to check what the timing was of that flexibility though. Couple of questions, John, just on kind of housekeeping items. One, can you give us a sense of cap ex for ‘08 that you expect, and also what should our expectations be in terms of the tax rate, should it be relatively consistent with ‘07?

John Potapchuk

Yes, I think cap ex, Dave, will be in a range in the $22 million to $24 million range. The tax rate right around where we finished this year at, so say right around the 41% mark. But, one thing I will mention to you, our cash payment of taxes, which in ‘07 was less than 5%, in ‘08 will likely be more in the 25 to 30% range since we have utilized most of our NOLs.

David MacDonald - SunTrust

Okay, John. When I think about the way that the taxes are going to fall, should we think about it being a little heavier in the front-half of the year, like this year, and then trailing off as you kind of true up in the back-half of the year?

John Potapchuk

In terms of the rate or the cash?

David MacDonald - SunTrust

Just the percentage from, just purely an income statement standpoint?

John Potapchuk

It’s close, I think, there will be, maybe, a little trail off in the fourth quarter under FIN 48. We have to take a look at tax reserves and generally we have clarity at time of statute of limitations pass, which would be more towards the latter half of the year. So it might be a little bit of a downturn toward the end.

David MacDonald - SunTrust

Okay. And then just a last question, John. You talked a little bit about DSOs and the further opportunity there. But when we think about the year, should we expect a modest bump in DSOs in Q1 just with the change in the reimbursement system?

John Potapchuk

Slightly, not dramatic. But again, I will stay with the remarks I made, that overall for the year, by the time we get through the end of ‘08, we do expect further reductions from our current 60-day limit.

David MacDonald - SunTrust

Okay. Thanks, guys.

Tony Strange

Thanks David.

Operator

Thank you. Our next question is coming from [Adam Boisar] of Lehman Brothers.

Adam Boisar - Lehman Brothers

Good morning. I know you guys talked about the kind of disappointment in Other Related Services outside of hospice. Can you give us a little more color? I guess what is going on there and maybe when you would expect to see some improvement?

Tony Strange

This is Tony. Specifically, in our HME business and in our infusion business, we have not seen the growth there that we would have liked to have seen in 2007. In addition to that, we have struggled with some of our, as John mentioned, we have struggled with some of our collection efforts and have caused us to have to increase the type of reserves that we are taking in that business.

So while it is a pretty small -- from an overall Gentiva perspective that represents a very small piece of our business -- one, nonetheless, that we would really would like to have had perform better, but, if we’re going to stay in those businesses, we are going to have to see significant growth and we are going to have to see better collection efforts to turn those results around.

Adam Boisar - Lehman Brothers

Okay, great. And I guess the last thing, maybe, I am not sure if I missed this, but how many full-time clinicians did you add in the quarter?

John Potapchuk

We are up to, give me one second. Full-time clinicians are just under 2,400.

Adam Boisar - Lehman Brothers

And at the end of Q3 that was -?

John Potapchuk

That number was comparable. What we did add, though, I am sorry, it is about 2,400 in terms of full-time benefit clinicians. I will also point out that, we’ve talked quite a bit about our full-time per-visit program, if you will, and we continue to add there. That’s another 1,250 and that’s up about 100 during the course of the fourth quarter.

Ron Malone

Which is where we will see…

John Potapchuk

Yes, that’s where the growth is.

Ron Malone

That’s where we will see the majority of the growth at this point.

Tony Strange

And to describe that clinician, that clinician is a full-time clinician with benefits, but they are paid on a per-visit basis.

Ron Malone

Correct.

Adam Boisar - Lehman Brothers

Okay. Great Thanks.

Operator

Thank you. Our next question is coming from Sheryl Skolnick of CRT Capital.

Sheryl Skolnick - CRT Capital

Good morning, gentlemen, and what a very nice change of events over a long period of time for CareCentrix, as well as the Home Health business. So, congratulations.

Ron Malone

Thank you.

Sheryl Skolnick - CRT Capital

And if it were up to me, I wouldn’t have you sell CareCentrix or spin it off or doing anything else, but you are not asking. So, it’s okay. All right. So, I am going to want to dig a little bit deeper into the reimbursement situation. It’s now a month-and-a-half old for you and the Medicare PPS refinements.

Are you finding that you are needing to or able to change your patient mix in any way to mitigate the impact of the rate changes? Are you having to work with physicians to change scripts for average number -- or for the number of therapy visits, for example?

And can you also give me a sense of whether perhaps the non-therapy changes, meaning to, perhaps some of the diabetes HHRGs and some of the other non-therapy clinical reimbursements including the expansion of the number of HHRGs.

What has been the push and pull, the positives and negatives, so perhaps we can understand what the challenges that you face might be and what the opportunities that you might have for expansion of specialty programs if there is a category of reimbursement that does appear to be more attractive with an unmet need for patients?

Tony Strange

Goodness, Sheryl, you and I, we’d have to spend a week together. Let me go back to the first part of your question. As it relates to the kind of business, I think we talked about -- on our third quarter call, we talked about that we were not going to have to take a hard left or a hard right from the kinds of patients that we’re servicing and we continue to stand behind that.

The types of business that we are selling into is the same type of business that we were selling into prior to the changes in PPS reimbursement. As it relates to the second part of your question, we don’t see major changes in our protocols in how we are delivering the care. We are going to continue to have to improve our ability to collect the right data and through our OASIS assessments which we talked about earlier. But, in terms of changing our behaviors, in terms of not providing this service or providing more or less of another service, we really don’t see any deviation from what we were doing before. Does that answer your question?

Sheryl Skolnick - CRT Capital

Yes, it kind of does, because as I looked at your patient mix, you’ve pretty much treated all comers as they needed to be treated from the data. So you weren’t real peaky at ten.

Tony Strange

That’s correct.

Sheryl Skolnick - CRT Capital

And you are still not.

Ron Malone

One of the things, Sheryl, we said is that on a relative basis, the older population and the Medicare as a payer, were attractive growth areas for us and we weren’t going to expend a lot of energy worrying about whether one diagnosis was two points higher in gross margin than another. We want to specialize in this area and offer referral sources and the patients’ extraordinary care and differentiation, and let the volume answer the rest of the question.

Sheryl Skolnick - CRT Capital

So, just to be clear, your clinical protocols working with your clinicians, they are treating their patients the same way they did before January 1. What they need they get?

Ron Malone

Yes, basically. Yes, I mean they are operating on physician orders and we were very clear last quarter that we did not anticipate a shift in our strategy here.

Sheryl Skolnick - CRT Capital

Right.

Ron Malone

If the same patient with the same diagnosis needed 15 visits last quarter, guess what, they probably need 15 this quarter. They probably don’t need 18 and they probably don’t need 12.

Sheryl Skolnick - CRT Capital

Right. Good, okay, so just so that I understand those specifics. And that’s very helpful. Let me switch gears completely and focus on cash flows if I might. Sometimes, given the end of your fiscal year, there is one more or one less payroll in a period, there are bonus accruals. There are those kinds of things. John, can you walk me through sort of the year-end adjustment impact on your cash flow, which I will admit was very nice for the quarter and for the year?

John Potapchuk

Yes. Sheryl, what you are referring to is one quarter. We will have seven payrolls, the other quarter we will have six.

Sheryl Skolnick - CRT Capital

Right.

John Potapchuk

And this particular quarter, the fourth quarter, we actually did have that additional payroll, but in spite of that, our cash flow was very strong.

Sheryl Skolnick - CRT Capital

That’s what I thought from looking at the balance sheet. Okay. And, finally, with this being a leap year, if I read the calendar correctly, will that have any impact on either the quarter or the pattern of cash flows and quarter-ends and this is not a 14-week fourth quarter, right?

John Potapchuk

That’s correct. That happens in another year or two. Again, our fiscal year ends on the Sunday closest to December 31. So we will have in every year 364 days, except every fifth year, we have an extra week.

Ron Malone

Thanks, Sheryl. Appreciate you joining the call.

Sheryl Skolnick - CRT Capital

Thank you.

Operator

Thank you. This concludes our question and answer session. I would now like to...

Ron Malone

Whoa, I think we have some other people in the queue. Don’t we?

Operator

Our next question is coming from Eric Gommel of Stifel Nicolaus.

Eric Gommel - Stifel Nicolaus

Hi, thanks for taking my question. Most of my questions were answered, but I just -- I wanted to follow-up on the M&A environment. You said that the pipeline is full of opportunities, that you’ve passed up on some -- I’m curious if there’s a disconnect at this point in the valuation of these acquisitions. Do you think the multiples that are being asked for might be, be high? Could you see that maybe contracting as people get a better understanding of the impact of the home health rule?

Ron Malone

I think the answer to your latter question is yes, they could, but I don’t think they are going to contract materially if they are larger and higher quality businesses. When we say that we pass on businesses, we pass for a variety of reasons. It could be multiple expectations, geography, cultural compatibility, over our assessment of overall quality and mix. Any of those things might effect -- overlap is clearly an issue. We see opportunities from time to time and had seen them in the past. It made good sense for other people, just maybe not as much sense for us, particularly considering all of those things.

Tony Strange

And, Eric, we’ve just taken a very disciplined approach and the types of acquisitions that we might be passing on right now really haven’t been related to multiples. It’s really been more about the business mix. It’s, you know, you take a business that’s 30 or 40% private duty, that’s not the kind of acquisition that we are looking for. Or you take a business that’s geographically not desirable for us, you know there’s some markets that we don’t necessarily want to pursue right now, and those are the kind of things we are passing on not related to multiples.

Eric Gommel - Stifel Nicolaus

And then, just my follow-up with the Gilbert’s acquisition, you gave some information about revenue and certainly the Medicare mix. Would you consider -- if you contracted that business with your core Medicare business today, would you say that, would you characterize that business as better, comparable, or maybe operating at less than what you would want to see that business operating at?

Ron Malone

Well, Eric, if you look at our business today, I think John mentioned it today in our Home Health business, we are about 68% Medicare and I think he mentioned that Gilbert’s was north of 80% Medicare.

John Potapchuk

Correct.

Ron Malone

So the business is comparable to our Medicare business, however, there is more Medicare business in Gilbert’s than is in our overall Home Health.

John Potapchuk

And obviously, Eric, one other difference from a standpoint of where it’s provided, Gilbert’s is predominantly rural areas. I think it’s close to 70% rural areas and at the company overall, about 15% of our business is in those rural areas.

Ron Malone

That answer your question?

Eric Gommel - Stifel Nicolaus

Yes, thanks.

Ron Malone

Okay. Thank you, I’d like to thank each of you for your participation this morning and for your continued interest in and support of Gentiva. We look forward to keeping you informed in future calls.

Operator

Thank you. This does conclude today’s, Gentiva’s fourth quarter and fiscal 2007, earnings conference call. You may disconnect, and have a wonderful day.

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Source: Gentiva Health Services Q4 2007 Earnings Call Transcript
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