Sunday, August 4, 2013
Gentiva's Q2 Earnings Call Had Tony Strange Eating Humble Pie
"Nice job in a difficult environment" was the refrain from investment house analysts to Gentive CEO Tony Strange and CFO Eric Slusser. Gentiva's story remains essentially on the same arc. Our highly leveraged company struggles in a declining volume and revenue environment. Hospice admissions were down 3% year over year and average daily census even lower at 4% vs. the prior year.
CEO Strange expected the company's home health marketing strategy could be replicated in hospice. After five quarters with no positive impact, Strange finally believes the company needs to do something different. I know a few people who could've saved him five quarters, had anyone asked.
Strange believes the U.S. is back to the mid to late '90's in terms of health care financial disruption and dislocation. Uncle Sam, as the main payor, intermittently scorches the health care earth. In such a scenario Congress and the White House signal their sponsors that they will soon be able to buy great healthcare assets at a deep discount. The Centers for Medicare and Medicaid, under the leadership of 25 year HCA executive Marilyn Tavenner, provides the financial pain to healthcare providers, including those specializing in post acute care.
Credit markets provide dirt cheap, easy credit, enabling the Genitva's of the world to de-lever by buying distressed health care providers. To a normal person it makes no sense, de-levering by taking on more debt. If one had too much debt from rent houses, how does it make sense to buy more? Think of it like toxic chemicals, where the solution is dilution. It's very difficult to dilute/de-lever over $900 million in debt. That's Gentiva's formidable task.
Strange didn't mention hedge fund investor Mario Gabelli's recent major buy of Gentiva stock. He did mention that Sales, General and Administrative expenses went down due to lower incentive compensation payouts. How might a major hedge fund investor with an eye on big gains combine with an executive team intent on a return to major incentive compensation payouts? It feels like Gentiva might start swinging for the fences.
Back to the call. Capital expenses for the first six months were $7 million, 1% of revenue. This is a paltry amount for a firm expected to transition to electronic health records. Gentiva conducted a hospice marketing campaign in four Southeast markets. Strange said admissions and ADC increased in these markets, although he did not say by how much. The company plans to expand the TV/Radio campaign to six more markets by the end of 2013. That's ten out of 165 locations, a mere 6%. The capex and marketing expenditures are hardly significant investments for a firm sitting on $185 million in cash and appear to be window dressing for analysts.
Tony said Gentiva plans to use its cash to buy down debt or grow through consolidation. That leaves employees, who he thanked at the end of the call, waiting for dressing crumbs to fall from the executive table. My fellow employees say it's been a rough three years under the Gentiva banner. How're things at Generic Hospice?