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Executives

John Mongelli

Tony Strange - Chairman, Chief Executive Officer and President

Eric R. Slusser - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Darren Lehrich - Deutsche Bank AG, Research Division

Bradley D. Maiers - Piper Jaffray Companies, Research Division

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Gregory M. Macosko - Lord, Abbett & Co. LLC

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Gentiva Health Services (GTIV) Q3 2012 Earnings Call November 1, 2012 9:00 AM ET

Operator

: Good morning. My name is Paula, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Gentiva Health Services Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, November 1, 2012. It is now my pleasure to turn the floor over to John Mongelli, Vice President of treasury and Investor Relations. Sir, you may begin your conference.

John Mongelli

:

Good morning, everyone, and welcome to Gentiva's Third Quarter 2012 Earnings Conference Call. Speaking on the call today are Tony Strange, our Chairman and CEO; and Eric Slusser, our CFO.

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

Our call today will be consistent with the SEC's Regulation FD. We encourage participants to ask their questions during the call since we have certain limitations on comments that can be made in individual inquiries. Today's call also conforms to Regulation G regarding the reconciliation 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 telephone replay of this call later today, through November 8.

A transcript of the call will be posted to our website and will be available for the next 12 months. Following today's prepared remarks, we will open the call to questions. [Operator Instructions] And with that, I'll turn the call over to Gentiva's Chairman and CEO, Tony Strange.

Tony Strange

:

Thank you, John, and good morning, everyone. Thank you for joining our call for our third quarter 2012. Before we get started, I'd like to recognize the impact of the hurricane this week. There are probably people on this call who have experienced personal losses during the storm, and our thoughts and prayers are with you and your families. The Gentiva family has also been affected. There are a total of 50 offices that have been affected by the storm, but I'm proud to say that while there are 5 that still don't have power today, all of our offices are open and providing care for existing patients and accepting new patients with all employees and all patients accounted for.

I'm always impressed when I see our employees execute on our disaster recovery plans and how efficiently they return to the business of providing care. I'm proud of all of you. Let's turn to our results.

Overall, I'm pleased with our results for the quarter as continued strong home health volume growth and good expense management offset the typical seasonality that we see during the third quarter.

For the third quarter, revenues from continuing operations were $424 million and adjusted EBITDA from continuing operations was $46 million, producing earnings of $0.32 per diluted share. Adjusted EBITDA margins were approximately 11% this quarter, driven by strong contribution margins in both home health and hospice and lower expenses at our corporate level. Given the overall softness in health care volumes across all sectors, I'm pleased that our year-to-date results have positioned us to raise our guidance for the full year 2012.

During the quarter, we also continued to make good progress with our collection efforts, which coupled with our strong operating results, enable us to post strong, free cash flow once again this quarter. Eric will take you through the details of the increasing guidance and the strong cash flow results in just a few minutes.

Today, I'm going to focus my comments on our third quarter results, key activities in Washington D.C., and then I'll wrap up with some thoughts on the industry outlook heading into 2013. Let's jump right into our results.

Looking first at our home health division, revenues from continuing operations for the quarter were $235 million and EBITDA from continuing operations was $32 million or 13.8%. Year-over-year episodic volumes increased by 6%, while admissions grew 5%, excluding the impact of closed or sold locations. This marks the fifth consecutive quarter of at least mid-single-digit admission growth as the sales investments that we've made over the last couple of years have produced solid, consistent results. Given the softness in hospital and physician volumes, I continue to be very pleased with these results. Our home health team continues to execute on its growth plans while demonstrating strict discipline around cost measures.

Margins were impacted during the quarter by higher labor expenses associated with the increased time off for summer vacations, which is typical for Q3, as well as the addition of 32 new sales FTEs as we ramp up for continued growth in 2013.

During the quarter, in an effort to further strengthen our market position, we acquired Family Home Care based in Spokane, Washington. This transaction enables us to increase our market density in Eastern Washington and Northern Idaho, and provides us with a significant long-term growth opportunity as we leverage our home health and hospice capabilities in these markets.

Turning to our hospice division, revenues from continuing operations for the quarter were approximately $190 million and EBITDA was approximately $35 million or 18.3% of net revenue, which is consistent with our results in Q2.

While our ADC declined only 0.6% from a year ago, our admission growth continues to show declines year-over-year consistent with our results in Q1 and Q2. While not yet reflective in our growth rates, the hospice team is executing on the growth playbook that I outlined for you on our previous call. Remember, this is the same sales plan that we implemented in home health in 2011, which ultimately took some time to gain traction, but it subsequently provided solid consistent mid-single-digit growth.

Our hospice team continues to work the playbook which consists of: One, adding sales resources in markets that can support the growth; two, top-grading our sales leadership; three, arming our sales team with the latest technology and analytical tools that provide extensive data on historical referral patterns and it helps our sales team be more productive on their sales goals; and then finally, we also continued to aggressively implement our bridge program in the 94 markets that we currently offer home health and hospice services. We've begun to see some improvement both in the number of referrals to hospice from our home health sales team, as well as the number of patients being discharged from home health and admitted to hospice. Our goal here is to provide the very best care to patients in the most appropriate setting based on the desires of the patient, the family and the physician.

While admissions remain below expectation, the hospice team is doing a great job in managing expenses and collecting cash. As I mentioned earlier, hospice contribution margin was 18.3% for the quarter, which includes approximately $1.5 million in increased cap accrual over the first half of our 2012 run rate due to the softness in first-time admissions.

On a positive note, we have one market that accounts for approximately 1/2 of our cap exposure. And just this week, we entered into a definitive agreement to sell this location and exit that market. We expect this transaction to close within the next few weeks.

While we don't like leaving any market, we have struggled from a cap perspective in this market since the acquisition of Odyssey and feel that our capital can be deployed better elsewhere.

Finally, we're supplementing our organic growth initiatives with bolt-on acquisitions. On our last call, I discussed our acquisition of Advocate Hospice in late July. During the quarter, we also acquired North Mississippi Hospice which provided good geographical fit with our existing Mississippi operations. Looking ahead, we'll continue to pursue acquisitions in hospice and home health that offer market density, a strong commitment to quality and long-term growth opportunities.

Given continued rate pressure and other industry challenges, we expect the pace of consolidation will accelerate. Over the next few years, our plans are to continue to grow through acquisitions funded by free cash flow, while at the same time, balancing our desire to pay down our debt. Let's turn to Washington.

I'd like to touch briefly on the legislative environment in Washington and the results of an important study that was just released. As expected, the summer produced little in the way of legislation as the folks in D.C., along with the rest of the country, await the outcome of the elections, which is now just 5 days away. During the next few weeks, the folks in Washington will clearly shift to the lame-duck session and a host of issues facing the winners, including the SGR physician fix and the tax cuts, which both expire on December 31.

Sequestration is also scheduled to begin on January 1, but it's not clear how this will be implemented. There are lots of discussions in D.C. about postponing all of the above in preference of a larger deal. Only time can answer these questions for us.

In the face of uncertainty, the partnership for our quality home health, along with industry trade associations, continues to be very active in D.C. and is growing in membership and resources. In particular, we continue to promote our Fight Fraud First campaign with legislators to ensure the benefits of home health are understood ahead of congressional discussions regarding the expiring payroll taxes cuts, as well as the physician fix.

During the campaign season, the partnership has met with numerous policymakers and legislators to advocate the value of home health. Additionally, the Alliance for Home Health Quality and Innovation has been active in positioning home health as a part of the solution. Of particular note, in early October, the landmark Clinically Appropriate and Cost-Effective Placement project, we refer to it as CACEP, was produced by Dobson and DaVanzo, a well-respected health care research firm. This study highlights the fact that home health can save significant dollars when appropriately used, following an acute hospital stay.

The research sought to answer 4 frequently asked questions related to Medicare post-acute care services. One, what is the optimal clinical setting for a patient being discharged from a hospital for a specific disease state; two, what are the various providers that can care for these patients after discharge and what are the clinical pathways that should indicate care; three, what are the Medicare costs associated with those patient pathways; and four, what happens to the patient when they're rehospitalized. To answer these questions, the study analyzed 5% of all Medicare part A, B and D claims data across all care settings between 2007 and 2009. The research concluded that 50% of the Medicare fee-for-service spend was associated with hospitalization and post-acute care services. This indicates that there is an opportunity to improve clinical outcomes and reduce costs through better care coordination for patients discharged from the hospital.

CACEP determined that by simply placing the patients after hospital discharge in the most clinically appropriate setting, the Medicare program could have saved over a $35 billion over a 10-year period, creating significant savings. This research highlights the critical importance of making changes to our current Medicare program that will increase care coordination of patients while reducing Medicare expenditures. And clearly, this research further validates that home health and hospice play a significant role in the health care delivery system.

This research is being briefed to CMS, MedPAC and other key legislators to provide alternatives, as further changes to the Medicare system are contemplated.

Before I turn the call over to Eric for a deeper dive into our results, I want to share with you a few thoughts related to changes that are underway in the post-acute care space and Gentiva's initial responses to these changes heading into 2013.

Needless to say, Medicare service providers are operating in an uncertain but at the same time, exciting environment. Potential changes associated with ACOs, post-acute care reform, bundled payments, rebasing and new medical home models are all in the horizon, creating uncertainty. But with uncertainty comes opportunity.

While new health care delivery models are evolving and being tested, one constant going forward is that home health and hospice will remain a critical part of the solution. Home health and hospice offer services that are clinically sophisticated, cost-effective and patient-preferred, which uniquely position the industry as a compelling solution.

Amidst the changes that are underway, I believe that we have a unique opportunity to broaden Gentiva's market position, from a company that offers home health and hospice, to a true transitional, post-acute care provider focused on managing complex and chronic disease states in the most cost-effective venue available, the patient's home.

I believe that while home health and hospice are clinically sophisticated and cost effective, the driving force will be patient preference. Patients want to be in their homes. Therefore, I believe that post-acute care providers that have a regional or a national footprint and have a brand identified by uncompromising service and commitment to compliance will have a distinct advantage. We are positioning Gentiva to be this provider of post-acute care services.

Gentiva currently operates our home health and hospice division under multiple brands, including Odyssey and VistaCare, Tar Heel Home Health and many others. While these brands are well respected in their communities, the time has come for us to unify our entire service offering under the Gentiva brand. The consolidation of our brands identifies Gentiva as a single company committed to quality, clinical care and customer satisfaction that can be delivered in a compliant and consistent manner, market by market, across the 41 states that we service. It also allows us to continue to explore other post-acute care services that are consistent with our mission of helping seniors age in place.

In closing, I'm pleased with our overall results for the quarter. Home health is exceeding expectations and we're taking the right long-term steps to improve our hospice admission growth, and in the meantime, improving margins in both divisions through better expense control measures. While there continues to be regulatory uncertainty in the near term, the entire management team is energized toward achieving our vision of being the transitional post-acute care provider for seniors.

From a long-term perspective, the demographics and the cost advantages inherent in this industry continue to be compelling. 10,000 Americans are turning 65 every day and that trend continues for the next 20 years. Whether it's traditional Medicare or Medicare advantage, ACO, post-acute bundle or site-neutral payment reform, home health and hospice will play a significant role in providing care to these seniors. And companies with size and scale that can weather the storm and the uncertainties of our health care delivery system will prevail.

Before I turn the call over, I'd like to offer a special congratulations to Rod Windley, our Vice Chairman of the Board, and Eric Slusser, our Chief Financial Officer. Rod, having served in the home health and hospice industry for over 35 years, was inducted into the Home Care Hall of Fame this week. Thank you, Rod, for all that you've done for me.

Eric is also a graduate of Washburn University was also honored this week by being named a 2012 Alumni Fellow for his alma mater. Congratulations to both of you.

I'd also like to welcome the employees of Family Home Care and North Mississippi Hospice to the Gentiva family. And finally, I want to thank all of our employees for your commitment to our patients and our company during these trying times. I appreciate all that you do for our patients, referral sources, shareholders and each other. With that, I'm going to turn the call over to Eric for a deeper dive into our results. Eric?

Eric R. Slusser

:

Thanks, Tony, and good morning. I am pleased with our overall results this quarter as strong home health volume growth and margin contributions in both divisions drove a 19% year-over-year improvement in adjusted EPS. Additionally, free cash flow generation was strong once again this quarter as we benefited from solid operating results and collection efforts.

On a year-to-date basis, free cash flow is now $90.4 million after excluding the $25 million OIG payment in the first quarter, exceeding the level we expected when we began the year.

Before I discuss our results further, I would like to cover a couple of other matters to facilitate your review. As discussed on previous calls, we undertook a comprehensive review of our branch locations, support infrastructure and other significant expenditures in the second half of last year, in response to the Medicare cuts we were facing, heading into 2012.

In total, we sold or closed 59 home health and hospice locations related to this review. Additionally, we completed 3 acquisitions during the third quarter of 2012.

Based on these transactions, net revenue comparisons were negatively impacted year-over-year by approximately $20 million this quarter and $62 million year-to-date. Finally, I want to remind everyone that similar to previous quarters, we will be highlighting results from continuing operations during our discussion.

Now on to our results. For the third quarter of 2012, net revenues from continuing operations were $424.4 million compared to $449.7 million in the prior year. Excluding the impact of branches sold or closed, 2012 third quarter net revenues were down approximately 1% compared to the third quarter of 2011.

On a reported basis, home health episodic revenues were down approximately 6% in the third quarter to $206.4 million. If you exclude the revenues from closed and sold locations from both years, episodic revenues were up approximately 1%.

Hospice revenues were $189.8 million in the third quarter, down 3% compared to $196.5 million in the third quarter of 2011 based on lower admissions and the reduced revenues from closed locations. If you exclude the revenues from closed and sold locations from both years, revenues were essentially flat.

Turning to our home health revenue metrics. During the third quarter of 2012, there were approximately 48,600 admissions on an episodic basis and approximately 71,300 total episodes.

On a year-over-year basis, excluding the impact of branches sold or closed, admissions grew approximately 5% and episodes grew approximately 6% in the quarter, which marks the fifth consecutive quarter of mid-single-digit admission growth.

The number of episodes per admission was 1.47 for the 2012 third quarter, consistent with the range from previous quarters. Revenue per episode for the third quarter was approximately $2,900, down 5% from the prior-year period, due largely to the reduction in Medicare reimbursement rates.

On the hospice side, our consolidated average daily census for the third quarter of 2012 was 13,600, down approximately 1% from the third quarter of 2011 after excluding the impact of closed and sold locations. Our consolidated admissions were approximately 12,200 for the third quarter of 2012, down approximately 5% year-over-year after excluding the impact of closed and sold locations.

Our consolidated average discharge length of stay for the third quarter 2012 was 101 days compared to 86 days in the second quarter of 2012. Our net patient service revenue per day in the third quarter of 2012 was $152, consistent with the third quarter of 2011. The mix on our levels of care for our billable days for the third quarter 2012 was approximately 98% for routine care and 2% for all other levels.

Our Medicare cap for the third quarter of 2012 was approximately $3 million or 1.5% of gross patient service revenue, which was up from the last quarter, based on admission trends. Total company gross profit as a percent of net revenues was 47.3% in the third quarter of 2012, up compared to 46% in the third quarter of 2011, but down slightly compared to 48% last quarter, due in part to seasonality of costs.

During the third quarter, home health gross margins were 48.8%, slightly lower than 49.8% last quarter and 49.1% in the prior year, driven primarily by the impact of Medicare rates. Hospice gross margins were 45.3% this quarter, up from 42% in the third quarter of 2011 but down slightly from 45.6% last quarter.

Turning to our selling, general and administrative expenses, excluding the charges relating to cost-saving initiatives, restructuring, merger and acquisition activities and legal settlements, SG&A expenses in the third quarter of 2012 were $161.2 million, down from $172.8 million in the third quarter of 2011 and $163.9 million last quarter. SG&A as a percent of net revenues was 38% for the third quarter compared to 38.4% in the prior-year period and 38.3% last quarter, as we benefited from expense management, which offset the impact of expanding sales personnel.

From an adjusted EBITDA perspective, earnings before interest, taxes, depreciation and amortization, excluding charges relating to restructuring, merger and acquisition activities, legal settlements and nonrecurring gains, were $46.1 million or 10.9% of net revenues in the 2012 third quarter, up from $41.5 million or 9.2% in the prior-year quarter.

Our effective tax rate on continuing operations was 39.8% in the third quarter compared to a tax provision of 39.6% in the third quarter of 2011. Additionally, in conjunction with the rebranding efforts which Tony discussed in his remarks, we recorded a one-time $19.1 million noncash write-off of existing trade name balances during the quarter.

Switching to the balance sheet. Cash and cash equivalents continue to be strong as we closed the quarter with a balance of $156 million, up slightly from $155.3 million at June 30, 2012, as strong operating results and collections offset our semiannual bond interest payment and acquisition outflows during the quarter.

DSOs closed the quarter at 52 days, flat with last quarter but down 9 days from the end of the first quarter. On the strength of our operating and working capital results, third quarter 2012 net cash from operations was $25.5 million and free cash flow was $23.2 million.

From a debt perspective, our total debt outstanding at September 30, 2012, was $938.1 million, consistent with the level at the end of the second quarter of 2012 as there were no mandatory principal payments this quarter. On a year-to-date basis, we have paid down $50 million on our term loans.

The company's leverage ratio for the third quarter of 2012 was approximately 4.7 compared to a maximum allowed level of 6.25 based on the terms associated with our March 6, 2012 credit agreement amendment. The level was down slightly from last quarter. On a net basis, the leverage ratio was 3.9 for the third quarter.

Going forward, we will continue to focus on deleveraging through debt paydown and strategic acquisitions. During the quarter, we completed 3 acquisitions that further strengthen our market position in the Pacific Northwest, Indiana and Mississippi, and should contribute to our EBITDA levels over time.

Our next mandatory debt payments are approximately $2.9 million in the fourth quarter and then $25 million for all of 2013.

Turning to our outlook. Based on year-to-date results and recent trends, we raised our full year 2012 outlook for adjusted income from continuing operations to $1.20 to $1.30, this is up from the previous range of $1.00 to $1.20. Additionally, we tightened the range for net revenues to $1.71 billion to $1.74 billion to reflect the impact of branches sold or closed and current trends. The previous revenue range for net revenues was $1.7 billion to $1.76 billion.

I will caution you that this outlook does not include any potential fourth quarter impact from sequestration, which is currently scheduled to become effective on January 1, 2013, but for which implementation has not yet been defined. In addition, the outlook does not include any impact from Hurricane Sandy this week, as it is too early to assess the impact to our operations from the storm.

In summary, I am pleased with our results this quarter which were led by continued solid results from our home health division. As Tony discussed, our hospice admission results are not where we want them to be yet, but we will continue to take aggressive steps to improve admission trends.

From a balance sheets perspective, our cash position remains strong and provides us with financial flexibility to drive value going forward. Longer term, we continue to believe there are significant growth opportunities in this industry giving the aging baby boomers growing demand for home health and hospice services and expected consolidation over the years to come.

That concludes my comments. Operator, let's open the call up for questions.

Question-and-Answer Session

Operator

:

[Operator Instructions] Your first question comes from Darren Lehrich.

Darren Lehrich - Deutsche Bank AG, Research Division

:

It's Darren Lehrich with Deutsche Bank here. I want to just ask about hospice. And you've obviously spent a lot of time restructuring the sales force and the incentives there and I guess I'm just curious, when you think about growth and your competitive positioning in hospice, is there anything that you need to be doing over the next year or 2 to better position yourselves, whether it's developing more inpatient or doing anything new or different relative to how the hospice programs and referral base is set up as it currently stands?

Tony Strange

:

I think the thing that we're focused on, if you look at a very big picture, is really looking at the hospice footprint and how it lines up with our home health operations. I believe that there is a significant opportunity in the post-acute care provider space to be this comprehensive provider. And in doing that, I think we're going to need in our markets to be able to offer home health and hospice and currently, we have roughly 94 markets with overlapping locations. We're going to look at places where we have home health and don't have hospice, and those are good expansion markets for us. That, to me, is the thing we need to focus on, outside of just basic blocking and tackling that I outlined on the call. But eventually, that's going to produce the same-store, street-level admission growth but strategically, I think expanding that footprint makes sense to us.

Darren Lehrich - Deutsche Bank AG, Research Division

:

And is there any sense for when you think you'll be able to drive better growth, volume growth in hospice? I know it's hard to predict, but do you think we ought to start to see a more positive trend in 2013?

Tony Strange

:

Well, I think so. I mean my preference would have been last quarter sometime, but I think as we look forward, the things that we're doing will, I believe, will produce results in the future. Now whether it takes -- we're really into our -- this is our second quarter since we made the change in our senior -- most senior level sales role with Dean Johnson. He's got 2 quarters under his belt now, and so I do believe we will see that in the future. Whether it's going to be in one quarter or 2 quarters, I just couldn't predict that, Darren.

Operator

:

Your next question comes from Brad Maiers with Piper Jaffray.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

I'm jumping in for Kevin here. I just wanted to ask a little bit about hospital readmission penalties. I know they've only been in effect for about a month now, but have you seen any impact from that or are seeing any more interest from hospitals?

Tony Strange

:

Well, Brad, that is a great question, and I appreciate you asking, because I do believe that's setting the stage. And it's not within the last month since they've started, it really goes back probably about a year now. We've seen a lot more interest from hospital systems to have strong home health and hospice partners that offer an alternative for patients coming back in the hospital. As a matter of fact, we've been working with some hospital systems as well as some payer systems on this project now for going on a year and are beginning to have some true results coming back in. And what we're demonstrating a very significant impact to rehospitalization with some of the hospital partners. And so because of that, I think over the next, you know, a couple of years or foreseeable future, you'll see more and more hospital systems really engaging home health providers and hospice providers that can demonstrate the ability to keep these patients out of the hospital in order to avoid the readmission penalty. So yes, it is new, you're right, we've got just 1 month or 2 under our belt, but I think that trend will continue over the next 12 to 18 months.

Bradley D. Maiers - Piper Jaffray Companies, Research Division

Okay. And then just one more question here. Looks like length of stay jumped up quite a bit year-over-year to 101 in hospice. Any additional commentary on that number?

Eric R. Slusser

:

Yes, I'd be happy to. When you look at the softness in admissions, one of the areas that we were probably most soft from an admission perspective is in our inpatient units. And our inpatient unit, that's where you have a very, very short length of stay when we have patients coming to the inpatient unit. And so that has an impact on an increased length of stay when you don't have your short-term admissions that are discharged to offset that. In addition to that, one of the metrics that we have talked about publicly when I've been asked a question is our patients that reside in nursing homes. And I've always said that, that number represents less than 20% of our patient population. If you look at over the last year, while we haven't given that number previously, I will indicate to you that, that number has gone from roughly 20% down to about 15% now. So we've seen quarter after quarter after quarter decline in the number of patients that we have residing in nursing homes. Because of that, the nursing home patients are usually our longer length of stay patients, and we have -- and we're not replacing them. So as those patients either are discharged or due to death are discharged, that has caused this spike in our discharge length of stay. Our non-discharge -- our average length of stay is 93 days. We would expect this to be somewhat of a spike, and we'll see that normalize over the course of the next couple of quarters.

Operator

:

[Operator Instructions] Your next question comes from Sheryl Skolnick of CRT Capital Group.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

:

As you look at your -- the competitive environment in the home health business, do you think that there are very many other agencies or companies that are experiencing the kind of adjusted or same agency growth in admissions? Because I know there's a sense that the market should be expanding, but that doesn't necessarily mean, with all the pressures upstream, that it is. And 5% is a pretty good clip. So do you think that really, the investments that you've made and the sales that you've done and taking market share, or that the market is growing at more than 5%, then you're not quite fully up to where the market growth is yet.

Tony Strange

:

Well, first of all, Dr. Skolnick, in that question, I picked up on two compliments, and I want to tell you, thank you for both of those. As it relates to the question, I do believe that the investments that David and Dean have made into our home health division and our sales organization, and we started making those in late 2010, we've made those investments throughout 2011. We began to see some traction in those investments later in the year in 2011, and then we've really seen them pay off in 2012, I believe that's blocking and tackling. So I do believe that the investments that we've made are producing results. Now as it relates to the market, while I'm not going to comment on our competitors and their growth rates, what I will tell you that we're in an unprecedented times in terms of health care volumes overall. You, as well as the rest of us, we look at hospital volumes and you look at hospital volumes in Q3 and they continue to be really at very abnormal low rates. So I think that our growth rate is probably better than most would anticipate especially given the softness in volume across all of health care. If you go back 2 and 3 years ago, if the hospital volumes and physician volumes had been what they where 2 or 3 years ago, my guess is our growth rate would probably be approaching double digits. But I think I am only looking at this as if we're in a new norm of these softer volumes. And therefore, we have to work harder to get every single admission that we have and I think our home health team, I think the things we did 2 years ago are paying off. And I think whether it's a year from now or whether it's 6 months or whether it's 2 years from now, the same things that we're doing at hospice eventually will produce the same kind of results.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

:

Okay. That's interesting. And then, it's not a follow up but I'll ask a second question, if I can. Mr. Strange, but I told you, please call me Sheryl, that's okay. Have you seen much of an impact as yet from RAC audits of the home health business, or do you anticipate seeing that same kind of thing? The hospitals, obviously, have been struggling with this for a while, because this environment isn't friendly to any provider given that sort of open season on healthcare providers when it comes to alleging fraud and alleging overpayments and the like. So not a particularly friendly environment. So if you could characterize if you're seeing any additional RAC or for that matter, MAC insight in the oversight, you've clearly done a good job on your collections, but we're always looking out for the next concern.

Tony Strange

:

Well, a good question. We have certainly seen the level of activity increase. And it's really whether it's RAC, MAC or whether it's state surveys, we've seen a heightened sense of activity related to audits of all kinds. Now knock on wood and fortunately, I give our operators as well as our compliance teams credit for this, they've done a good job in preparing for audits. And as a matter of fact, we have kind of an internal joke that our internal survey process is actually harder than our external survey process. So I think our teams have done a very good job of preparing for these audits and we've seen nothing that is out of the ordinary related to recoupments or anything like that. So our folks have done a good job with collections, I think our operations are solid with their documentations and I just don't anticipate any problem from that perspective.

Operator

:

Your next question comes [indiscernible] of Barclays.

Unknown Analyst

:

A couple questions from my side. One is, can you just explain to us what the adjusted EBITDA estimates would based under the revised guidance? And secondly, could you talk about what you're seeing on the Medicare Advantage side in terms of from a reimbursement perspective? This is particularly in the context of sort of the changes which we saw with the contractors renegotiation from one of your competitors.

Eric R. Slusser

:

Okay. This is Eric, I'll handle the first and then Tony will handle the second. As far as, we typically don't discuss EBITDA targets this year, given everything going on at the beginning of the year, we gave out an initial range of $170 million to $190 million because we were putting some numbers out to the street in relation to activities that were going on at the time related to our credit agreement amendment. But beyond that, we haven't given out an annual number, but given again, our guidance and the raise in guidance, I would lean to the upper part of that range. But we don't give out really quarterly EBITDA targets and that impact.

Tony Strange

:

As it relates to the second half of your question to the managed care contracts, Medicare Advantage is playing a significant role in the market and in our business. And while we don't comment on any one contract, I mean we have many, many contracts and we're in some form of negotiation with some of those contracts at all times, what we would do is we would really look to -- when we give our guidance for 2013, it has all of those factors in place. So with that, we don't really get into the specifics of any one contract.

Operator

:

Your next question comes from Gregory Macosko of Lord, Abbett.

Gregory M. Macosko - Lord, Abbett & Co. LLC

:

Well, that was my question was with regard to the Medicare contract, was one. But could you talk a little bit more about the sales and marketing plans that you're doing in the hospice area? It sounds that this is a critical aspect relative to what you're going toward with regard to the hospice area.

Tony Strange

:

Gregory, this is Tony. I walked through the 4 steps, I won't repeat that. But I mentioned on the last call that I think we had or we're in the process of replacing close to 18 out of 24 sales leaders in our hospice division. And so we've got -- when you think about the area vice presidents and above, we have 18 folks that are relatively new within the company and new to Gentiva and so we spent a good bit of time in the latter half of Q2 and in the first part of Q3 really bringing those people in, training them, spending a tremendous amount of time on compliance training, a tremendous amount of time on sales leadership training, as well as the implementation of some new sales software that we're using in the field, as well as a CRM system that we've put in the hands of our sales teams. So we're just continuing to make lots of investments into that organization. And again, I don't know if it will be in 2 quarters, and 3 quarters or when it will be. But if the same things that we did with our home health team that ultimately position us to what I consider to be a leader or at least one of the leaders in growth, really in all of healthcare, specifically into the home health business. So I'm confident that I think these same things will produce that result in hospice as well.

Operator

:

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

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

:

Just a couple questions. Eric, is this a good run rate for D&A going forward as we presumably was impacted by the intangible write-offs? I'm just curious if that's a good number to plug in our model.

Eric R. Slusser

:

Yes, I think so. That amortization, we did write off those trade names that were being amortized. Those are pretty insignificant in relation to the overall, but I would take kind of that current quarter amount thinking that you'll have additional add-on stuff as new stuff comes into service. So it should for the most part be in the ballpark.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

:

Got it, it makes sense. And I may have missed this, but did you frame up the size of the hospice market that you're selling? I don't know if you've divested that market yet. I'm just curious whether or not it was EBITDA negative or positive.

Tony Strange

:

Yes. And, Whit, I didn't. That transaction hasn't closed. We're under a definitive agreement. We expect to close it within the next few weeks and then I'll be happy to disclose it at that point or on our next call. But until that transaction is closed, we're not really giving much specifics around it. But I think it would be safe to assume because it does represent about half of the company's cap exposure, I think it would be safe to assume that it's not going to be dilutive to earnings.

Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

:

Yes, I wouldn't think so. And maybe, Eric, if you could you just spend a minute talking about the cash flow trends in the quarter, and maybe talk about your collection rates. You've done a pretty good job bringing the AR down, so just wanted to get a sense of the level of satisfaction that you guys have internally with that.

Eric R. Slusser

:

Well, with, first, Tony, both myself, and I think everyone here, is very satisfied, especially given where we were last year at year-end and the first quarter, where some of our system challenges around hospice billing, we've really placed a lot of emphasis and focus in our older buckets in the last quarter in addressing those and collecting those and I've had some good success. I think where we're at today, I think we're at kind of a run rate level. DSOs, again, I think we talked about in the past. At some point in time, you're just a victim of the Medicare cycles and what they dictate when you bill and how your payments are collected. So the ability to continue to bring that down gets more challenging as you get down into the 50 and high 40s. So I think those trends as we talked about, cycle up and down in that 49 to 51, 52 range, I think we're very pleased with the quarter, with cash, and we will continue to watch cash. And again, we're going to use it, balance between strategic acquisition activity or debt paydowns, which I talked about earlier in my discussion.

Well, operator, are there any other questions?

Operator

:

At this time, we have no further questions.

John Mongelli

:

Okay. Well, thanks, everybody for joining us and we look forward to talking with you again soon. And for those of you that are still dealing with the impacts of the storm, good luck. And if there's anything we can do to help, let us know. Thanks a lot.

Operator

:

Thank you. This concludes today's conference. You may now disconnect.

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