Q4 2019 Earnings Call
[music], ladies and gentlemen, thank you for standing by and welcome to the H C. S.
Q4 earnings call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question answer session to ask a question during the fashion really depressed star one on your telephone.
If you heard any further assistance. Please press star zero, when I like to hand, the conference over to Ted Wahl, President and CEO.
The matters discussed on today's conference call include forward looking statements about the business prospects of health care services group Inc. within the meaning of the private Securities Litigation for Reform Act of 1995.
Forward looking statements are often preceded by words, such as believes expects anticipates plans will call me intends assumes or similar expressions for Lucky King statements reflect management's current expectations as of the date of this conference call and involve certain risks and uncertainties forward looking statements are based on assumptions that we.
I have made in light of our industry experience in our perceptions of historical trends current conditions expected future development. Another factor is that we believe are appropriate under circumstances as with any projection or forecast they are inherently susceptible to uncertainty and changes in circumstances.
Health care services group actual results could differ materially from those anticipated in these forward looking statements as a result of various factors in the forward looking statements are not guarantees of performance.
Some of the factors that could cause future results to materially differ from recent results are those projected in the forward looking statements are included in our earnings press release issued prior to this call and in our filings with the Securities and Exchange Commission, including the Fccs ongoing investigation, there can be no assurance that the FCC or it's another regulatory body will not make further.
Culinary inquiries or pursue further action that could result in significant cost and expenses, including potential sanctions or penalties as well as distraction to management, the ongoing SCC investigation and or any related litigation could adversely affect or cause variability in our financial results you're under no obligation expressly disclaim.
Any obligation to update or alter the forward looking statements whether as a result, as the changes you information subsequent events or otherwise.
[music].
We also plan on filing our 10-K by the end of next week.
During the quarter, we continued to take actions that position the company for long term growth.
We delivered solid facility level outcomes as we continue to prioritize managing the base business.
Assigning account managers to new opportunities and maintaining discipline in our credit related decisions.
In 2020, we will maintain our focus on these near term priorities as the industry continues to work its way through the latter stages of this challenging cycle and transitions to the patient driven payment model.
Our longer term growth out longer term growth outlook remains positive as we believe there's great opportunity for continued expansion as the demand for our services remain strong with significant white space to drive long term growth.
We remain committed to returning capital to shareholders as evidenced by our stable and growing dividend and well continue to capture growth opportunities to create value for all stakeholders.
With that abbreviated overview I'll turn the call over to Matt for a more detailed discussion on the quarter.
Thanks, Ted and good morning, everyone.
Revenue for the fourth quarter was $447 million with dining and nutrition at 224.9 million and housekeeping and laundry segment revenues reported at 222.1 million.
Net income for the quarter came in at $18.9 million and EPS was 25 cents per share.
Direct cost of services is reported at 86.5% with housekeeping and laundry and dining and nutrition segment margins reported at 9.5% and 4.1% respectively.
Temporary cost increase relates to approximately $4 million a payroll for account managers, who transitioned out of a facility that we're no longer servicing as well some cost related to starting out new business. During the quarter. We expect that that this cost impacted decrease as account managers continue to be assigned new facilities that which they are budgeted.
And the new business additions operate on budget.
Direct costs also included an approximately 2 million dollar benefit primarily related to favorable workers compensation loss development trends as we continue to successfully execute on its strategy of reducing claim frequency scope and severity overall, our near term goal is to manage direct cost at 86% excluding the.
Temporary investments in management capacity and any new business startup that inefficiencies that may occur.
Asked you name it was reported at $36.8 million were 8.2% after adjusting for the 2.4 million dollar change in deferred compensation. Actual asked you name. It was $34.4 million were 7.7% during the quarter asked you name. It was impacted by approximately 1 million and a half dollars of legal and professional fees.
As related to the previously announced as he matter the company expects SG NATO approximate 7.5% and a year ahead, excluding any SCC related costs and there's an ongoing opportunity to garner additional efficiencies.
Other income for the quarter was reported at $2.5 million, but again after adjusting for the 2.4 million dollar change in deferred comp actual investment income was around $100000.
We reported an effective tax rate of 27% and 24.1% for the fourth quarter end the year respectively.
Fourth quarter, and the 2019 tax rates were impacted by a reduction in the worker opportunity tax credit program credits, primarily due to the fact that there was historically low unemployment rates and the resulting decrease in watsi eligible new hires we expect our tax rate for 2020 to being a 24% to 26%.
Range, including Watsi.
To the balance sheet at the end of the fourth quarter, we had over $118 million of cash and marketable securities and a current ratio better than three to one.
Cash flow from operations for the quarter was $13.4 million inclusive of the 17.7 million dollar decrease in accrued payroll and cash flow was $93.6 million for the year do yourself for the quarter was reported at 70 days consistent with our previous quarter, it's worth noting that we've continued to make.
Progressing converting customers to a weekly payment model as we now have around 60% of our customers paying us with the frequency greater than monthly and as we've discussed previously and that conversion both parties collaborate on a solution that works for both sides for instance in the fourth quarter as part of converting one of our customers to weekly payments, we wrote a portion of their.
Receivable into a promissory note with the three year term and just want to reiterate the ultimate benefit of this strategy is better, allowing us to collect what we bill and to reduce the rollover impact of a miss payment and because we had called this out previously we did want to talk to the timing of the payroll and the impact of the payroll accruals.
So we wanted to point out that the 2020 payroll accruals will have a bit of a different cadence than we've seen in the past two years. That's the first quarter, we'll have the pipe highest payroll accrual of 17 days Q2 will be 10 days Q3, only four days and then Q4 12 days and that compares to 15 eight six.
Teen and 10 days that we had in 2019 during corresponding period, but of course, the payroll accrual only relates to the timing and in fact, ultimately washes out through the full year.
As we announced yesterday the board of directors approved an increasing the dividend of 20.1 to five cents per share payable on March 27, the cash flows and cash balances supported and with the dividend tax rate in place for the foreseeable future. The cash dividend program continues to be the most tax efficient way to get free cash flow and ultimately.
Maximize return to the shareholders. This will mark the 67th consecutive cash dividend payments since the program was instituted in 2003, we're proud that it's now the 66 consecutive quarter that we've increased the dividend payment over the previous quarter now 17 year period. That's included four three for two stock splits.
With those opening remarks, we'd like to now open up the call for questions.
If you like to ask a question at this time. Please press Star then the number one on your telephone keypad, if you'd like to withdraw your question press. The pound Keith first question comes from Andrew Wittmann with Baird.
Great. Thanks for taking my questions, we're going to start I ought to start just trying to understand the quarter, a little bit better than we'll talk.
More about what you guys were seen in the marketplace.
Hi, guys tender, Matt on the on the workers compensation 2 million dollar benefit to the quarter.
I wanted to understand I mean, there's there's this the actuarial adjustment that you guys have to do I guess annually and is this is this far in period doesn't in 2019 or is this a prior period adjustment that drove that I just wanted to understand the source of although the accounting related benefit here that you got in the quarter.
So you're exactly right. Andy this is a component of the annual actuarial review that is in part of the captive insurance subsidiary. So typically during the fourth quarter of each year. We now have that complete actuarial review, which does two things it it trues up the accrual that we had made in the previous year and then at all.
So establishes the rate at which we accrue a as a percentage of payroll for the upcoming year. So that 2 million dollar adjustment relates to the 20.
18 accrual and it's a true up of that accrual based on the experience in development in claims that we've seen through that period and then the actuarial.
Report also then will trigger the upcoming percentage of payroll that will accrue for a 2020 here and then have that.
Year end adjustments as needed as well.
Okay. That's helpful. And then I guess the other thing I wanted to understand here a little bit more detail was on the $4 million that you called out related to access manager.
As well the startup cost could you just break that into the two components I guess that is the to the total that is down sequentially from last quarter. So.
Just wanted to understand.
The pace at which you see this improving I mean, you did mentioned that over the course of 2020, you expect that those will get better absorbed as they're going to take the entirety of 2020 do you think or what's the best way or the proper way to think about those costs and those cost cutting absorbed with a new revenue in 2020.
Yes, so you called out the $4 million, Andy and that the split is roughly three and a half million or sell relates to management cost management salaries that we continue to carry and then about a half a million dollar related to inefficiencies that come with starting the new business that we did in the quarter. So you know the anticipation is that.
Yeah, we'll continue to selectively and with a very disciplined approach find new business opportunities and obviously assigning the managers to new business opportunities I wish there budgeted has the impact of.
Not only the topline implications, but from a cost perspective, having those books budgeted is beneficial to the company, but we're going to you know the emphasis will be on caution and disciplined. So you know I would allow ourselves likely the balance of 2020 to fully assign those books, we continue to have.
Customer base, that's working their way through the tail end of some industry challenges and we're still not even six months into the transition to PD P.M.. So as far as the customer priorities now, we'll we'll consider that as well with respect to Onboarding new business I think expectation would be first half of the year continue.
I would caution will selectively find opportunities to place those managers into new opportunities, if our view and assessment becomes more.
More more.
Beneficial or or more positive than there is an opportunity perhaps to pull some opportunities forward, but I would expect that the.
Bulk of real business additions come more in the back half of the year. So I think fair to assume that every opportunity for us to reallocate those managers to new business opportunities.
Full expectation to do so within 2020.
I would likely allow ourselves the full year to do so.
Okay, Great and then I just my final question here was just around some of the Watsi commentary, it's an interesting dynamic said with the low unemployment the the groups that are.
Able to be watts seed if you all if I can make a verb there they're just it sounds like they're just not as available is maybe they used to be is that really what the dynamic is here. It's it seems like a pretty big change in your tax rate. So I just wanted to try to gauge your level of of of confidence that this is going to be.
Hiring environment in the impact to that tax rate around 25%.
Yeah, I think barring some significant change and the macroeconomic environment.
And unemployment rate, we would expect and this tight labor environment that there's just less employees that are receiving some of the governmental assistance.
That you know typically drives a watsi eligible watsi eligibility. So it's that it's that straight forward. So yeah, we're comfortable with the rate that we that we're guiding towards that 24% to 26% range, Andy but again almost exclusively driven by just few were eligible watsi employee.
Within the hiring pool.
Okay interesting alright, guys. Thanks for the time.
Terrific next question comes from Sean Dodge with RBC capital markets.
Hi, good morning, Thank you.
Maybe going back to the spare managers for a moment that the roughly three and a half million of elevated payroll costs, you're carrying there is the expectation that all of those managers are gonna be placed in in net new facilities or are there going to be some proportion of those that are used to backfill open spots or or things like upgrading a underperformers.
It will be in all the above strategy, Sean where you know obviously the single most desirable option is to place a freed up manager into a new newly minted account or to backfill for an existing manager who is being placed into a new account but.
You know like like any other.
Cycle any other time, it's a fairly dynamic business, where there's always opportunities both with new customers as well as within existing customer facilities. So a portion of the managers will be reassigned to backfill or to replace existing management strengthen the bench so to speak and then others will be.
Signed to new opportunities as they present themselves and still others, where are being used you know to further strengthen specific areas, whether it be as an assistant manager or supplement project work in a given area. That's required so all of the above strategy.
Okay and then it is we think about margins over the coming year, you'll get lift a in gross margins as these spare managers are deployed hi, it's Ted in your prepared remarks, it sounded like there could be some other cost levers or efficiencies you may be able to garner <unk> outside of those spare managers over the course of view that.
Give you a little bit of lift there.
Yeah, I think the I. I think it'll be levering SGN, a primarily you know as we as we grow the topline a significant portion of our SDMA is fixed so that's really the other I'd say near term margin lever. In addition to deploying some of the excess management capacity that we that we currently are carrying.
Alright, great. Thanks again.
Thank you Sean next question comes from Jason Plagman with Jefferies.
Good morning.
[noise] [noise] [noise] [noise].
[noise], yes, and having a little bit of difficulty hearing you there, Jason but I think I've got the questions. The first of which is about the timing of the new business that we onboarded in the fourth quarter nearly all of which.
It was in the early parts of the quarter, so they'll be very over very little rather carryover impact.
In Q1, so nearly all of the revenue impact of the new business that we on boarded in the fourth quarter.
Was recognized in that quarter and adds to kind of the 2020 growth prospects, which I think was the second part of your question you know, obviously, having exited quite a bit of business for various reasons. In 2019, you set up some challenging comps with respect to year over year revenue. So yes.
Spectator, one is I think probably generally speaking to think more of a couple of flattish to slightly.
Increased growth trajectory of the early parts of 2020, and and then the opportunity sequentially to step up from there. So I think all told when you look at 2020 compared to 2019.
A comparable year would be.
Successful year with respect to replacing the business that we exited in 2019. So if we saw 2020 revenue slightly down or even with 2019 revenues I think that would mean that not only have we done the right things and execution, but that we're feeling a lot more comfortable about the state of the industry.
Got it thanks, and one of the asks about the the bad debt accrual you you called out you know that adjustment for accounting related reason.
And my math and say that should be about a 30 to 40 million dollar incremental accrual that you'll be taken in Q1 is that is that accurate.
Yes, that's a that's a fair range.
Got it and will that impact the go forward.
Quarterly accrual as you as you move forward.
For what you're allow accruing for allowance for bad debt going forward or.
Can you just walk through that on any impact on the revenue going forward.
Yeah, I think as far as the go forward bad debt expense impact I think Jason if we continue to meet our goal.
Collecting what we bill weekend in week out then will likely have a very stable if not decreasing.
Bad debt expense levels likely more in line with what we saw the past three quarters or the last three quarters in 2019 to the extent there's accounts rolling over in the aging buckets or if theres a specific events like a customer restructuring that we would likely see elevated bad debt expense levels.
Again, our goal in the year ahead is to collect what we bill weaken and week out.
Got it and last one for me I just wanted to make sure we understood. The moving parts around investment income in in Q4. So did you treatment of secured the deferred compensation a change in you know if so what changed where that was hitting the income state.
In Q4 versus prior quarters.
No in fact deferred comp has been treated.
You know in the same matters really set since inception over a decade ago. So.
It's again just to remind all of our all of our shareholder partners what would that deferred compensation represent investments that are held by and for our management people and the deferred compensation adjustment that takes place each and every quarter is the market mark to Mark.
Good for the non HCS destocked portion of those investments.
And the way that's reflected in our PML is it to the extent the mark to market is is made upward than it represents an increase in our ESG in a cost as well as an increase in investment income like we saw this past quarter to the extent theres a downward adjustment in that mark to market than the inverse would be true would represent.
It would be reflected as a decrease in SNA costs and a corresponding decrease and investment income Theres no net impact on earnings, but that's why we call. It out the way, we do each and every quarter.
Okay I think that's helpful.
There was a footnote in the press release.
On.
Mentioning previously recorded as revenue and related costs in constant services. So I can follow that actually just yet I've got to that relate to that relates to our captive insurance subsidiary and voluntary health and welfare benefits that the captive insurance administered that.
The captive insurance.
Subsidiary administers.
On behalf of the company.
To its employees.
Okay got it unrelated deferred compensation correct.
Next question comes from Ryan Daniels of William Blair.
Yeah. Good morning, guys. Just a one question for me this morning, I'm curious Ted.
For your state of the industry I noted for the first time in a while you commented in a press release about the new payment models in the rate update and increasing occupancy. So I'm curious what you're seeing both on the reimbursement front, how it's impacting your client base and stability and then also on the occupancy front, if there's something notable.
That you're seeing in the space, but that gives you more comfort to state that thanks.
Hey, Thank you Ryan I think peak I will just specifically PDP M. I mean, it's still the early stages, obviously five months in but the initial certainly reimbursement data.
As well as the initial feedback from the operators.
Generally positive that revenue trends have been neutral to slightly favorable as expected.
And there's been some modest rehab cost savings that had been realized again as expected. So overall specific that pdps PDP M. Both from the limited data theres not a ton of data out there, but from the data as well as from our our customers and just the general operator community we continue to here.
Both positive expectations and experiences.
Again, I caution that were only five months into the transition, but certainly so far so good I think even beyond that though overall, we definitely see industry fundamentals continue to improve.
Longer term demographic trends aside which as we all know are extraordinarily favorable the data. We're seeing are encouraging you mentioned occupancy trends.
Since.
The end of 2018, we continued to see each of the past three quarters a stable.
Not improving occupancy environment, both as a result.
Perhaps of the tip of the baby boom spear entering the long term care continuum, but also from the reduced supply that's in the marketplace today from let's say some of the hard work that's been done the past decade, or so in the space as well as you know the reimbursement programs improving PDP am I mentioned.
The two 2.5% Medicare increase which also took place October onest. So again, we're seeing these improvements and I think hearing the positive sentiment first hand within our customer base, but.
Again, we're not out of the woods, yet we have to remain disciplined in our decision, making especially when it comes to credit related matters.
And Ryan we're going to continue to apply that discipline, when we're evaluating both existing customers as well as new business opportunities, but overall I do believe we're in.
In the latter stages of this what has been by all accounts a difficult cycle.
Okay. Thanks for the color guys.
Hey, thanks.
Next question comes from Mitra Ramgopal versatility.
Yes, Hi, good morning, just one question for me.
And the focus is also an improving efficiencies and driving margins and I was just hoping they get some color in terms of promotion of Andy a the COO and maybe something to change as we should expect as result of that.
Yeah, well look Andy's Ben I'll start with the comments around Andy but he certainly been a great contributor to the company.
In many respects over the past decade, as a leader in risk management and human resources operational excellence and most recently, leading the day to day field based operations over the past six months or so so his promotion to chief operating officer. His well deserved promotion is really a natural progression as leader.
Ship within the organization I would also add that he's demonstrated a pretty remarkable level of capacity and expertise in each and every one of those roles and maybe most importantly metro he's always help lead and deliver strong result, so we're certainly excited about the possibilities of his expanded role but.
The reality is the hard work still has to happen in the four walls of every facility our businesses is oriented around the facilities and our success is determined by the outcomes and the facility, which is led by local leadership and it gets back to the same kind of fourk critical aspects of the business delivering on customer satisfaction, but.
Versus actual systems implementation and compliance objectives and that is a seven day, a week 365 day a year exercise.
Okay. Thanks, and then.
Quick follow up regarding the I think you've converted about 60% now of your customers to the advance or accelerate the payment model how much.
I don't know until its I do remaining customers and potentially how those conversations are going and kind of where you see yourself by the end of 2020 on that front.
Yeah, we've not drawn down a marker mitra as far as a specific quantitative objective, although the two major components as we see at our number one that weekly payment structure, absolutely being the default position with new customers. So that's definitely a stance that we've taken and we're holding.
From to that as we think about new business opportunities coming onboard here in 2020, no as we think about onboarding, new customers and new facilities that dynamic in of itself with the commitment to the weekly payments will have an impact of lifting that overall percentage and then the other bucket would be with existing customers of ours, obviously as we've discussed pre.
Obviously this was a strategy that was somewhat born out of necessity and the customers that we converted in the early stages of the strategy, where those where there was I had there the greatest concern or the greatest opportunity. So we've moved through those as we look at the balance of our customers within the customer.
Portfolio, there's less urgency short of a specific catalyst or a significant change in their financial conditions will more selectively and opportunistically look to convert those folks. So there's that theres nothing that is a fundamental obstacle to ultimately continuing to drive that number upward which.
I'll do as I said as a result of Onboarding, new customers and selectively converting within the existing customer base.
Okay. Thanks for taking the questions.
Next question comes from Bill Sutherland with the benchmark company.
Thanks, Good morning, guys.
Thinking about as you move back into more of a growth mode here I'm.
Just looking at the incredibly low unemployment situation.
How are you thinking about the challenges of the salaries.
Churn and whether that might impact direct cost in some way that.
It's a little more than normal.
Well, it's interesting bill as you sort of frame up the question unrelated to growth.
The typical gating factor on our ability to grow the company is in management capacity, we find ourselves in somewhat of a unique situation relative to the company's history and now having management capacity at our avail.
Spread fairly well geographically throughout the country. So those are local assessment as to the qualification of pipeline opportunities and making sure that we have the corresponding availability of managers to place into those new business opportunities. So.
As it relates to the overall labor environment.
We find ourselves with managers ready to go as we've discussed previously they are being put to productive purposes, as we sit here, but to have that flexibility to place them into new facilities, new business opportunities as they arise is certainly advantageous to us the other component from a labor perspective is the line staff employees are.
Associates that are that the housekeepers, the pot washers, the dishwashers and the benefit that we face in that regard is that the customer in fact controls the conditions of employment at the facility specifically as it relates to starting wages, the timing and amount of any wage increases any adjustments to benefits.
And the the the component of cost savings that we bring in the value prop is that we can typically operate more efficiently. So we can do more with fewer body, so and as much as theres an opportunity for us to potentially reduce the cost of a prospective customer but at a minimum certainly better contained their costs.
Yes, that's viewed very favorably and as you can imagine that's a significant driver of the increase that we're seeing in the demand for our services and the continued build out of our sales pipeline.
Right, so even even with.
Even with your existing facilities, where I assume hourly.
Please just going to be a little harder to get.
At least on the incremental side.
You're actually would you actually freeing up in most cases some of those hourly people when you take on new business. So some some offsets there.
Finally the.
The cash front, which is going the right direction.
I know you're committed to the dividends aboard.
Possibly going to start to think about any other capital.
Direction, such as a buyback.
Look at its that specifically, it's something we certainly discuss each and every quarter I know, we've we've had conversations about just that on calls like this in the past.
The board's thinking around capital allocation continues to be.
The same as it was previously.
At first and foremost in terms of capital allocation organic organic growth is the priority beyond that which really consistency and sustainability as the guide post which leads us to the first commitment after organic growth being the dividend. So certainly with continued strong.
Cash flow and cash generation Bill you could foresee.
You could foresee a scenario where.
Either the the dividend is increased.
For a buyback could make sense, but I would not anticipate anything in the year ahead specific to either one of those.
Scenarios. However, it is something we discuss each and every quarter.
Got it thanks guys.
Hey, Thank you.
Once again, if he would like to ask a question. Please press star one on your telephone we have a question from Chad Vanacore with Stifel.
Chad Your line is open.
Okay and you hear me.
Yes, we've got enough.
Okay got it alright so.
Thinking about the new business that you wanted to quarter, what was characteristics of those accounts and how do they compare to the accounts that you lost in the quarter.
Could you be more specific had I'm not sure exactly what you mean, we mark Tarr. These are your local local players regional players national players.
What made them want to outsource to you rather than in source and how does that compare with accounts that you lost.
So I would say that you had this the growth that we add where with a a couple of smaller regional type players.
There was one player that kind of skew to the larger side relative to the business that we did onboard in the quarter, but it was really a number of different regional chains pretty fairly distributed geographically.
And it pretty nice split likewise between housekeeping and dining. So you know really kind of just like we talked about the business that we onboarded in the third quarter, it's really kind of the optimal sort of mix that you'd like to see with respect to geography customer type and split of services.
And I'm, assuming that when you say split of services, you're providing both services do most of those accounts.
Correct.
Okay.
And then just thinking about the write down for doubtful account that you expect in the first quarter.
Can you give us some more details on the mountain then how did you go about evaluating the Collectability and then determinant impairment to it.
And as what would trigger further write offs.
Yes, well just a trigger just to be very clear chat it wasn't a write off.
This this was driven by new FASB standard that was required that required us and all public filers.
To adopt beginning January one.
And that that adoption changes the a our allowance reserving methodology from what was with us and most public filers and incurred loss model to what now is an expected loss approach. So I think there was two components. So at one is that initial I guess, you're referring to the enough.
The short reserve.
Right off initial reserve adjustment.
Was developed based on a seven year look back period analyzing.
Having said collection experience write off percentages litigation and restructuring actions also considering industry and macroeconomic considerations now obviously using a seven year look back meant that 2018, and Q1 of 19 bad debt levels, which were.
Clearly elevated relative to the past four decades of the company's experience had a disproportionate impact in determining that initial reserve.
But that aside that was the methodology for determining.
The initial reserve, which again is it increases the reserve and then has a corresponding tax effected reduction to equity I think beyond that I mentioned earlier as far as the go forward bad debt expense impact. It's very simple we continue to meet our goal of collecting what we bill which is in fact.
Patient than we should have it certainly a stable if not decreasing.
Bad debt.
Bad debt levels, certainly in line or maybe more favorable than what we saw.
The past three quarters.
If we have.
Eroding experienced were challenged accounts that are rolling over from one bucket to another than we would have four if theres a specific customer related event that we have to specifically identify than we would likely have elevated bad debt levels.
All right on the flip side of that you had a $2 million benefit from workers' comp quarter is that a continuing benefit that you're going to continue to book in subsequent quarters or is that a onetime benefit.
So that relates to the adjustment looking back on the 2019 period Chad so.
We reserve the accrual based on a percentage of payroll that comes at the recommendation of the actuary based on their annual review so that 2 million dollar adjustment relates back to 2019 and prior year experience and now we'll.
Make an adjustment in the percentage of payroll that we've reserved for 2020 will go through that same actuarial assessment at the end of this year to determine did we.
Appropriately accrue did we accrue enough or not enough and make those adjustments. So that the expectation is that as we gain further experienced in the captive.
The predictability from an actuarial perspective gets tighter and tighter and you've obviously in the end of year adjustments continued to diminish.
All right. So that's an unusual true up that happens at the end of the year, we shouldn't expect that benefit going forward.
Not necessarily as a benefit now there will be a true up but like I said.
Can't predict whether it's to the good or to the bad and certainly expectation is that that should be a continuing to decline.
Okay, and then just thinking about cash flow in the quarter.
Pretty solid.
Talk us through how you expect cash flows. It go is there any reversals in terms of.
Use of or source of net working capital that we should expect.
How should we expect 2020 to look.
Yeah, well I would say and not to take issue with your solid word I would say cash flow when you really take a step back in what arguably is the most challenging environment.
Industry has ever experienced.
Maybe be maybe rivaled by the the late Ninetys and the balanced budget Act.
Im frame.
I would suggest that record cash flows.
Not even close I mean record cash flows for this year and certainly on the heels of a record cash flow.
Prior year is.
Certainly a great accomplishment for the company and and a direct testament to not only the mindset that has been instilled here.
The collaboration with our customers and the partnership that we have with our customers and then ultimately the strategy that we develop.
Vis-a-vis the weekly payment.
I should have so I think all of that puts us in a very good position to be able to execute in a consistent way moving forward on our cash collection strategy.
Again and week out from a from a expectation perspective in the year ahead, Chad I think you know pointing more towards that 80 million dollar target and that is lower than the 94 million that we had in 2019, but the reason for I think maybe that conservative.
Baseline that we have in the year ahead would be more oriented towards the fact that we want to maintain flexibility and I know, Matt talked about some of the opportunities both in his opening remarks as well as in some of the Q1 day around weekly payment conversions, we want to maintain that flexibility where when there's a mutually benefit.
Actual opportunity with a particular customer.
To convert them to a weekly paper weekly payer, which is which we we add we hold and high regard from the sustainability of relationship and scalability of the company's model perspective, there may be an opportunity with that customer too.
Collaborate and if they're in fact paying January services that are due at the end of February today, maybe maybe it's in the best interest to us and then that they pay.
January services four times in March so they get.
Some sort of additional cash flow benefit that does create a temporary dis synergy if you will relative to DSL and cash flow, but again, we believe that certainly puts us in the best position from a long term sustainability of that customer relationships. So they are the types of discussions and conversations we're having.
Right now and that's why our outlook for the year head is in and around 80 million.
Alright.
And then just thinking about one key aspect of this we're expecting.
Slow topline growth in the year and then.
So that margin becomes an important aspect the store in specifically direct costs. So.
Can you can you give us some idea of what the upside to your direct costs is that and maybe some risk to that in 2020.
I think the goal the stated goal remains Chad and that's to get direct costs to 86% on the pathway to that is really by the end of the year, primarily driven by the growth you just exactly as you call out it's the growth, but it's in placing the managers into.
Deliveries at which they are budgeted there tends to be a little bit of a put and take with respect to growth in that obviously as we're able to assign those managers to new facilities. That's beneficial there tends to be corresponding margin pressure, though as we inherit the inefficiencies of a new facility and a new operation. It does take us some time to get those.
These on budget, so I would say that expectation is to return to 86% cost of services.
But likely given the dynamics I just described.
Following ourselves until the end of year to accomplish that.
Okay. So.
Some some progression through the year, but it's difficult just given unlimited topline growth to deploy those managers any faster.
I think Thats fair.
Okay all right.
All right that's it for me. Thanks, so much for taking all the questions.
Hey take care chat.
Last question comes from AJ Rice with credit Suisse.
Hi, everybody I'm, just a couple of things.
Do you have the margins by the two segments. I know you said you hope to get to 14% overall grows more gross margin by the end of the year, but when you normalize for the unusual items with the dining in a housekeeping did in the fourth quarter.
Yes, the margin that while the margins for the segments for the quarter, our nine 9.5% and housekeeping at 4.1%.
In dining.
Now the way that relates back to the that relates to the company total company margins.
In that that's directly off of our operating statements which has.
A fixed pay roll up fix workers comp burden of fixed general liability burden et cetera. So theres some eliminations between those segment level margins and the total company margin that's reported on the external results.
So to get to the 14% where you add as you exit.
2019 on a relative basis was.
Again, eliminating the unusual items.
Yes.
I wouldn't I will admit I wouldn't be able to guesstimate that on this call AJ.
In terms of where we're at what I can say is the pathway for us to.
To the work our way back to 14% margins are pretty clear in that as we Alex as we reallocate and reassign that at the excess management cost that we have that will have a direct and natural lift to both to the segment level margins and the corresponding total company margins.
Proportionately.
And I'd say the visibility that we do you have AJ is in the base business right and from our perspective the base business is performing to budgetary expectations. So you know the challenge is headset in kind of giving you a.
Specific answer to your question on this call is do you look at the impact of some of the onetime or at least nonrecurring costs that we faced in the year whether it was.
Bad debt or excess management cost or startup costs.
Those will always be a factor and should have as we've talked about a diminishing impact on the 2020 results and beyond but as we look at the base business, which is the most important uncontrollable factor for us.
We're doing a really good job and and that's going to be the most important driver of us achieving that 86%.
Okay. I know you made the comment that it was a strong economy, you're able still get to management.
And you need and that obviously, you've got the pass through aspects of your contract for the hourly workers, but I know that the contracts do re said.
Up if you're seeing a wage inflation. So is the rate of increase overall is a.
Contracted rates moving up or is it still sort of steady with what we're seeing.
It's customer specific AJ and the reason, we called that out is that and in some facilities. If there's if it's a union environment and Theres a collective bargaining agreement that will have a prescribed specifically prescribed wage increase whereas other non union facilities its dependent upon the customers assessment tool.
Respond to the labor market conditions, and the benefit from where we sit as that they need to respond to the same labor market conditions that we do they're essentially hiring from the same pool of would be employees that we are.
For us to higher into the housekeeping laundry and dining departments you typically talking about the same caliber of candidate that the customer would hire into their activities maintenance and often cneighty departments. So it really is in the hands of the customer will certainly advise them and we will share the experience that we're seeing with respect.
To the facility specific challenges in Onboarding, new employees, if we think the starting wages too low or the challenge and keeping employees in the department. If there is requirement for a wage increase to remain competitive in a particular market. So it's a conversation with the customer but ultimately.
As in the hand of that customer specific to the facility.
I guess I was sort of thinking more in terms of.
If your rate increases on your contracts had been running 2% to 3% and now because the hourly wages on average are going up four or 5% said that that also affects the portion that you retain its profits and as a positive impact on that.
Is are you seeing today that yet or not really.
Relative to historical norms, it maybe a bit elevated in the aggregate AJ, but it's it's not significant to the point of really moving the needle.
Okay.
And then I.
I guess just to go back find legit comment about.
Proof you know you're you're still looking at the portfolio and all these C.
Either because of I guess, there's always the expectation that with this new PDP and in the skilled nursing area there'll be some winners in some losers any sense I mean do you feel like the bulk of the pruning is done.
Or are you is there's still a number of facilities jure you're watching and can you say with confidence you will you do expect to see net additions overall to the customer base in 2020.
Yeah, I would say the latter that we do expect to see net additions in 2020, having said that when you talk about pruning.
If a partnership is trending in the wrong direction A. J and we don't believe it's in the best interests of the company, we have to reserve the right and maintain committed to being able to make that decision that may be painful in the short term, but best positions us for the long term so nothing imminent.
And again, we've done quite a bit of pruning over the past 18 months.
Contract restructurings and otherwise so for US we feel good about where we're at and Matt talked about that growth cadence, where we do think of of more flattish first half the year with maybe more modest sequential growth in the back half of the year.
Having said all of that and you mentioned PDP Ed if we start to see you know the the initial favorable trends within PDP M., specifically continue that would certainly give us a higher degree of confidence of maybe pulling in some expected growth opportunities back half of this year first half of twice.
121, maybe into the first half of 2020.
So that's the way we're thinking about.
Certainly the current environment and our near term growth prospects.
Relative to that environment.
Okay, alright, thanks, a lot.
Okay. Thank you AJ and at this time I will turn the call over to Mr. Ted Wahl.
Great. Thank you Sharon.
We look forward to starting 2020 off strong and laying the groundwork for the rest of the year.
Industry fundamentals continue to improve with the positive impact of the PDP and to what 0.4% Medicare increase both of which took effect October onest of last year, along with more favorable occupancy trends.
Over the course of 2020, we will continue to prioritize managing the base business assigning account managers to new opportunities and maintaining discipline in credit related decisions.
We will also remain committed to taking actions that best position us to take advantage of the growth opportunity that lies ahead and deliver shareholder value over the long term.
So on behalf of Matt and all of US at Healthcare services group I wanted to again, thanks, Sharon for hosting the call today and thank you everyone for participating.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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