Wednesday, March 11, 2015

KND Earnings Call Puts Gentiva in Spotlight

Kindred CEO Paul Diaz and his lieutenants spoke frequently of Gentiva during their Q1 earnings call.

We’re also very pleased with Gentiva’s strong results in the fourth quarter and for the full year of 2014, which reaffirms our confidence in the combination.

Strong results is clearly overstating the case.  Gentiva ended 2014 well below expectations generated when Gentiva purchased Harden Healthcare's hospices and home health agencies.

On a pro-forma basis the company should be able to generate revenues between $2.1 and $2.2 billion, while adjusted EBITDA should come in between $210 and $220 million, excluding share-based compensation.

My take on the expectation shortfall:

Gentiva financially engineered much of Harden's value into thin air in 2014, evaporating $16 to $26 million in adjusted EBITDA and $110 to $210 million in expected revenues

This could be restated as:
"After underperforming financially for eight months of 2014, the management team rallied to produce an acceptable number.  We didn't mention human resources or customer service losses because finance is all that matters."  

Kindred issued the same refrain for its purchase of Gentiva:

The addition of Gentiva will support and enhance our financial performance and will create significant value for our patients and shareholders

Referral sources and employees were not mentioned in the equation. as neither is of considerable value.  Customers spoke loudly the last six months and few bragged about our financial performance or value for shareholders.

Gentiva's David Causby stands to gain as President of Kindred at Home from meeting budget and cost saving targets.   Diaz continued on the earnings call:

Gentiva, I think has been and will continue to be one of, if not the best run home health companies in the country. There’s obviously been a number of struggles on the hospice side coming off of a number of years post Odyssey, but I think their team has a great handle on what’s happening in that business as well, with a lot of changes that we’ve made there. 

Gentiva proved they don't understand hospice in countless ways, from high pressure sales tactics to ignoring and reducing benefits for employees.  After Gentiva leaders realized they couldn't run hospice effectively, they intermingled it with home health though its OneGentiva initiative.   

OneGentiva drove away a significant chunk of Harden's revenue.  What will happen under the next David Causby led integration?   . 

There are some systems integration around payroll and benefits and some things that we’ll have to work on into 2016. But to tell you Chad, I mean our goal is really to do our best to stay out of the way of what is really a great group and a great team with some really sophisticated systems, a great sales pipeline and sales process, a group that’s executing extremely well. They have good processes in place and we’re just trying to let them continue to be who they are.

Gentiva's leaders excel at one thing, micromanaging dollars.  That's it.  Earnings call language indicates Kindred is cut from the same cloth.  This came from the SEC filing:

On August 13, 2014, Gentiva management and its financial advisors met with Kindred to address preliminary due diligence questions raised by Kindred and its advisors. 

Gentiva slashed jobs in late August 2014 while Kindred conducted due diligence in Atlanta.  These actions caused our hospice's customer service scores to plummet.  This should not have been a surprise.  Staff shared patient complaints in weekly meetings.

Gentiva executives and underlings consistently turned their back to the consequences of their actions.  Shooting the messenger remains alive and well.  Image must be maintained, even if it has no basis in reality.

Kindred has clear expectations of beating $35 million in cost savings and $20-$30 million in revenue synergies by year end. 

A lot of that is front ended and we have a great planning process to - let me just say, we have a high degree of confidence on our ability to achieve the $35 million of realized. There will be a big portion of that obviously that will come earlier than later, but it’s all of the above than what you described. It’s people, process, systems, redundancies, not running two public companies, there is a lot of things out there that we’re continuing to work on and that, as I said, we have a high confidence we’ll achieve it before the end of the year.

Hospice discord arises from running a team enterprise in a non-collaborative manner.  This "great planning process" never expressed at our site under prior corporate ownership.  Every major change the last few years provided no opportunity for employee input.  Zero. It appears Kindred will continue this sad trend.

Our new capital structure will carry interest costs totaling roughly $230 million

Kindred's interest expense for 2013 was $108 million, while Gentiva incurred $113 million for the same year.  That $9 million increase must come from somewhere. 

We expect our maintenance CapEx, or what we call routine CapEx to be approximately $120 million to $130 million for the year. This includes $100 million to $110 million per year of CapEx that has been traditional for Kindred, plus roughly $20 million for Gentiva.

This amounts to $5 million on a quarterly basis, higher than Gentiva's traditional $3 to $3.5 million per quarter.  For Gentiva's 46,000 employees, as listed in a Kindred-Gentiva combination presentation, the $20 million in capital expenditures equals $435 per employee.  That doesn't sound like enough money to fund an electronic medical record system.

Q1 2015 is around the corner.  The Kindred-Gentiva story will have more chapters written.  We'll see if Kindred understands hospice any better than Gentiva. The Magic 8 Ball is skeptical.

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