Q4 2021 Healthcare Services Group Inc Earnings Call

Speaker 1: current operating environment has pressured our profitability, we are taking decisive action to ensure we have a durable, scalable business model that will enable us to deliver sustainable, profitable growth over the long term.

<unk> has pressured our profitability we are taking decisive action to ensure we have a durable scalable business model that will enable us to deliver sustainable profitable growth over the long term.

Speaker 1: To that end, we remain actively engaged with our customers to modify our service agreements to adjust for the extraordinary inflation experience during the second half of 2021, as well as account for future inflation on a more real-time basis.

To that end, we remain actively engaged with our customers to modify our service agreements to adjust for the extraordinary inflation experienced during the second half of 2021 as well as account for future inflation on a more real time basis.

Speaker 1: The goal of this initiative is to one, get billing increases from our customers to capture past cost increases and two, amend our service agreements for both current and prospective customers so future cost increases are passed through in a way that is automatic and real time.

The goal of this initiative is to one get billing increases from our customers to capture past cost increases and to amend our service agreements for both current and prospective customers. So future cost increases are pass through in a way that is automatic and real time.

Speaker 1: We expect these service agreement modifications to be completed throughout the first half of 2022, with a goal of exiting the year with cost of services in line with our historical target of 86%.

We expect these service agreement modifications to be completed throughout the first half of 2022 with a goal of exiting the year with cost of services in line with our historical target of 86%.

Speaker 1: During the quarter, as we were actively engaging with our customers to modify our service agreements, we continued to take a longer-term view in staffing and supplying our client facilities to get the job done, even though in many cases our service agreements had not yet been modified to adjust for the inflation experience during the second half of 2021.

During the quarter as we were actively engaging with our customers to modify our service agreements. We continue to take a longer term view and staffing and supplying our client facilities to get the job done.

Even though in many cases, our service agreements had not yet been modified to adjust for the inflation experience during the second half of 2021.

Speaker 1: If that meant incurring overtime hours, introducing special employee bonuses, or increasing wage rates and premium pay, that's what we did.

Is that meant incurring overtime hours, introducing special employee bonuses or increasing wage rates and premium pay that's what we did.

Speaker 1: We did this while we were actively engaging with our customers to modify our service agreement.

We did this while we were actively engaging with our customers to modify our service agreements.

Speaker 1: We did this to maintain client satisfaction, systems adherence, and compliance.

To maintain client satisfaction systems adherence.

Okay.

Speaker 1: He did this because it best positions us to collaborate with our clients and modify our service agreements in a way that is mutually beneficial and durable over the long term.

Is it because it best positions us to collaborate with our clients and modify our service agreements at the way that is mutually beneficial and durable over the long term bottom.

Speaker 1: bottoms up, client by client action that will be long-lasting as opposed to top down unilateral action that would be short-lived.

Bottoms up client by client action that will be long lasting as opposed to top down unilateral action that would be short lived.

Speaker 1: Although the extraordinary costs that we incurred without a corresponding billing increase had a significant impact on our two four financial results, we believe this is a temporary challenge that will be resolved in 2022 by our service agreement modification effort.

Although the extraordinary cost that we incurred without a corresponding billing increase had a significant impact on our Q4 financial results. We believe this is a temporary challenge that will be resolved in 2022 by our service agreement modification efforts.

Speaker 1: We are encouraged that we've seen relative stability in industry census since August , as operators have worked through the clinical challenges of both the Delta and Omicron strains. Having managed through those challenges, we are cautiously optimistic that the availability of staff improves, labor market pressure stabilizes, and operators are able to build back their census in the year ahead.

We are encouraged that we've seen relative stability in industry census, since August as operators have worked through the clinical challenges of both the delta and home <unk> strains.

Having managed through those challenges we are cautiously optimistic that the availability of staff improves labor market pressure stabilizes and operators are able to build back their census in the year ahead.

Speaker 1: We will continue to monitor industry recovery and remain confident that despite these near-term headwinds, the long-term growth outlook for the company remains strong, given our market leadership, efficient operating model, and the attractive demograph.

We will continue to monitor industry recovery and remain confident that despite these near term headwinds the long term growth outlook for the company remained strong given our market leadership efficient operating model and the attractive demographics.

Speaker 1: So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

So with those introductory comments I'll turn the call over to Matt for a more detailed discussion on the quarter.

Speaker 1: Thanks, Ted. Good morning, everyone. Revenue for the quarter was $420.4 million with housekeeping and laundry and dining and nutrition segment revenues of $200 million and $220.4 million respectively.

Thanks, Good morning, everyone revenue for the quarter was $424 million with housekeeping and laundry and dining and nutrition segment revenues of $200 million.

$224 million respectively.

Speaker 1: Direct cost of services was reported at $377.2 million or 89.7%. And was impacted by increases in labor and supply costs.

Direct cost of services was reported at $377 $2 million or <unk> 89, 7% and was impacted by increases in labor and supply costs again, we expect the service agreement modifications that Ted described in his opening remarks to be completed throughout the first half of 2022 with the goal of exiting the year with cost of services.

Speaker 1: Again, we expect the service agreement modifications that Ted describes in his opening remarks to be completed throughout the first half of 2022, with the goal of exiting the year with cost of services in line with its historical target of 86%.

In line with its historical target of 86%.

Speaker 1: housekeeping and laundry and dining and nutrition segment margins were 5.7% and 2.1% respectively.

Housekeeping and laundry and dining and nutrition segment margins were five 7% and two 1% respectively.

Speaker 1: Selling General and Administrative was reported at $44.3 million. After adjusting for the $2.7 million increase in deferred compensation, actual SGNA was $41.6 million. And SGNA was impacted by $2 million of non-recurring items. And the year ahead the company expects SGNA between 8.5 to 9.5% with the opportunity for ongoing inefficiency.

Selling general and administrative was reported a $44 3 million after adjusting for the $2 $7 million increase in deferred compensation actual SG&A was $41 6 million.

And SG&A was impacted by $2 million of nonrecurring items in the year ahead, the company expects SG&A between eight 5% to 95% with the opportunity for ongoing efficiencies.

Speaker 1: Investment and other income for the quarter was reported at $2.7 million. But again, after adjusting for the $2.6 million change into third compensation, actual investment income was about $100,000.

Investment and other income for the quarter was reported at $2 7 million, but again after adjusting for the $2 $6 million change in deferred compensation actual investment income was about $100000.

Speaker 1: The company reported an effective tax rate of 25.8% for the year. The fourth quarter tax rate was impacted by lower income, the four taxes and other discrete items. And the company expected a 2022 tax rate of 24 to 26%.

The company reported an effective tax rate of 25, 8% for the year the fourth quarter tax rate was impacted by lower income before taxes and other discrete items and the company expects its 2022 tax rate of 24% to 26% net.

Speaker 1: that income for the quarter came in at $2.1 million and earnings were three cents per share.

Net income for the quarter came in at $2 1 million and earnings were <unk> <unk> per share.

Speaker 1: Cash flow from operations for the quarter was $31.3 million, and was impacted by a $3.9 million increase in the accrued payroll, including the impact of one half or $22.1 million of CARES Act deferred payroll tax repayment. The DSO for the quarter was 64 days.

Cash flow from operations for the quarter was $31 3 million and was impacted by a $3 $9 million increase in the accrued payroll include.

Including the impact of one half or $22 $1 million of cares act deferred payroll tax repayment.

DSO for the quarter was 64 days.

Speaker 1: Also, we would point out that the Q1 payroll at Kurola is five days, and that compares to 13 days in Q4 and four days that we had in 2021 during the corresponding period. But the payroll at Kurola only relates to timing and the impact ultimately washes out through the full year.

Also we would point out that the Q1 payroll accrual is five days and that compares to 13 days in Q4.

And four days that we had in 2021 during the corresponding period, but the payroll accrual only relates to timing and the impact ultimately washes out through the full year.

Speaker 1: We're pleased with the ongoing strength of the balance sheet and the ability to support the business while continuing to return capital to the HCSG shareholders. We now set the board of directors approved and increased in the dividend to 21.125 cents per share, payable on March 25th, 2022. The 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 shareholders.

We're pleased with the ongoing strength of the balance sheet and the ability to support the business, while continuing to return capital to the <unk> shareholders, We announced that the board of directors approved an increase in the dividends at 21 125 per share payable on March 25 2022 to.

The cash balances support it 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 shareholders.

Speaker 1: This will mark the 70-fit consecutive cash dividend payments since the program was instituted in 2003 and the 74th consecutive quarterly increase. That's now 19-year period that's included for 3-for-2's DOCS blitz.

This will mark the 75th consecutive cash dividend payment since the program was instituted in 2003 and the 74th consecutive quarterly increase that's now 19 year period. That's included four three for two stock splits additions.

Speaker 1: Additionally, the company repurchased $16.1 million of its comments doc pursuant to its previous authorization during the quarter. And with those opening remarks, we'd now like to open up the call for questions.

Additionally, the company repurchased $16 $1 million of its common stock pursuant to its previous authorization during the quarter.

And with those opening remarks, we'd now like to open up the call for questions.

Speaker 1: Thank you. As a reminder, if you'd like to ask a question, please press star then one on your telephone. Keep that.

Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.

Speaker 1: question is from Andy Whitman with Beard. Your line is open. Great. Thanks guys for taking my question.

Our first question is from Andy Wittmann with Baird. Your line is open.

Great. Thanks, guys for taking my question.

I guess.

Speaker 1: Ted, I wanted to start with just trying to understand the status of the discussions with your clients.

Ted I wanted to start with just trying to understand the status of the discussions with your clients.

Speaker 1: regarding these marine negotiations. And I think historically, you guys have always tried to get reasonable price that was in the terms of how you've always done things. But this idea of amending the contract of the business model to automatically pass through these inflationary items is clearly...

Regarding these negotiations.

I think historically you guys have.

Ride to get reasonable price.

Was in terms of how you've always done things, but this idea of.

Amending the contracts or the ability of the.

The business model to automatically pass through these inflationary items this quarter.

Clearly different from the past.

Speaker 1: Is it your expectation that effectively all of your customers will move to this and what to your early discussions regarding terms like that today indicate you about your success in achieving that?

Is it your expectation that effectively all of your customers will move to this and what's your early discussions regarding terms like that today indicates you about your success in achieving that.

Speaker 1: The early indicators are positive, then we would expect to show some progress in Q1 to that end. Andy, our expectations, yeah, are that our value proposition remains, right? The costs that we're incurring are no different than what the clients are experiencing with their own similarly situated workforce, and they clearly understand our position. I think the challenge with...

Yes. The early indicators are positive then we would expect to show some progress in Q1 to that and Andy our expectations are that.

Our value proposition remains right the cost that we're incurring are no different than what the clients are experiencing with their own similarly, situated workforce and they clearly understand our position I think the challenge with.

Speaker 1: you know, the model, the fixed price model in this environment is not the fact that we're unable to get increases. It's that even for able secure increases for past wage inflates.

The model the fixed price model in this environment is not the fact that we're unable to get increases it's that even if we are able to secure increases for past wage inflation.

Speaker 1: It doesn't necessarily account for the potential for future inflation in a timely basis, given the environment and the uncertainty of the environment. So our expectation is, in some cases or many cases, it's a simple sitting down with the customer, working through an agreement on the past inflation and then putting in quarterly trigger, similar to what we have in food.

It doesn't necessarily account for the potential for future inflation in a timely basis, given the environment and the uncertainty of the environment. So our expectation is in some cases or in many cases, it's a simple sitting down with the customer working through an agreement on the past inflation and then putting in quarterly <unk>.

Similar to what we have in food.

Speaker 1: and that served the company well for years. So it's not far into the client for that, to have that type of mechanism in place. And then there's others that it's a more holistic conversation. You know, that could involve maybe it costs something along the lines of a cost transparency model, where, you know, it's a more open and airy type of relationship, whether that's cost plus or a version of that.

And that served the company well for years, so it's not foreign to the client.

For that to have that type of mechanism in place and then there's others that its a more holistic conversation.

Could evolve maybe it costs something along the lines of a cost transparency model, where it's a more open and airy type of relationship whether that's cost plus or a version of that.

Speaker 1: There's no one size fits all. This doesn't affect all of our customers, but there's many that it does.

There is no one size fits all this doesn't affect it doesn't affect all of our customers, but there is many that it does so again our expectation is that we're going to have a very high success rate and it's a matter of doing the work and as you can imagine there is a variety of different approaches you could have top down bottoms up we decided.

Speaker 1: So again, our expectation is that we're going to have a very high success rate and it's a matter of doing the work. And as you can imagine, there's a variety of different approaches you could have. You know, top down, bottoms up. We decided early and often during Q4 bottoms up.

It early and often during Q4 bottoms up.

Speaker 1: recognizing every single one of our clients unique set of circumstances was the right approach. Also consistent with our past approach.

Recognizing every single one of our clients unique set of circumstances was the right approach also consistent with our past approach and while that may require a bit more patience and I'll say investment on our part and the current state. We think it's going to have a very positive long lasting effect and really set us up.

Speaker 1: And while that may require a bit more patience and I'll say investment on our part in the current state, we think it's going to have a very positive long lasting effect and really set us up well going forward because aside from our existing business, this also relates to new business prospective customers that we're going to be engaging with. And this red

Well going forward because aside from our existing business. This also relates to new business prospective customers that we're going to be engaging with them.

This resonates very our value proposition resonates very well in the current environment. The same pressures we're experiencing in our business are all the more reasons why the demand for the services are increasing and are as strong as they've ever been so I think we will continue to prioritize this exercise that.

Speaker 1: very, you know, our value proposition resonates very well in the current environment. The same pressures we're experiencing in our business are all the more reasons why the demand for the services are increasing and are as strong as they've ever been. So I think we will continue to prioritize this exercise that we're going through with our customers. And again, expect that to be completed mid-year.

We're going through with our customers and again expect that to be completed midyear.

Speaker 1: and exit the year with a direct call to services line, you know, consistent with our 86% historical target.

And exit the year with a direct cost of services line consistent with our 86% historical target.

Thanks for that Matt just maybe a follow up for you regarding the staffing levels that you're currently seeing in the facilities, where you are involved can you just give us some context.

Speaker 1: Thanks for that. Matt, just maybe a follow up for you regarding the staffing levels that you're currently seeing in the facilities where you are involved. Can you just give us some context maybe about the progression of the number of open positions you have today versus maybe normal staffing which would have probably been actually a few years ago now versus six months. Is it getting better? Is it getting worse? Where are you on the open positions curve today? Yeah, I would say we're seeing.

Maybe about the.

Progression of the number of open positions you have today versus maybe <unk>.

Normal staffing, which would have probably been actually a few years ago now versus six months is it getting better.

Is it getting worse, where are you on the open positions curve today.

Yes, I would say, we're seeing modest improvement and some of our data are actually encouraging theyre not yet kind of bearing out in the form of <unk>.

Speaker 1: improvement and you know some of our data are actually encouraging they're not yet kind of varying out in the form of um you know actual hires or um you know replacement per se but when we look at some of our data with respect to you know the inbound applications that we're receiving and then our new hires relative to terminations a bucket that for us constitutes either somebody voluntarily exiting or us terminating their employment but just any separation from the company that if it's

Actual hires or.

Replacement per se, but when we look at some of our data with respect to the inbound applications that we're receiving and then our new hires relative to no terminations, a bucket that for us constitutes either somebody voluntarily exiting or us terminating their employment, but just any separation from the company.

If it's maybe a bit too early to call them trends, but I would say that the recent data are certainly encouraging and it really sort of relates to the fact that we've been consistent throughout and innovating and developing recruiting and retention strategies to better attract and retain employees at all levels that of course applies to our management development program, but likewise.

Speaker 1: maybe a bit too early to call them trends, but I would say that the recent data are certainly encouraging. And it really sort of relates to the fact that we've been consistent throughout and innovating and developing, recruiting and retention strategies to better attract and retain employees at all levels. That of course applies to our management development program, but likewise, felt more acutely in recent months, for sure, at the line-to-that level. And that's, you know, encompassed.

<unk>.

Felt more acutely in recent months for sure at the line staff level and Thats.

Encompassed promoting our purpose vision and values through every level of the organization, but leveraging our existing recruiting platforms streamlining our onboarding process, we've talked about previously repurposing and deploying some resources to high need facilities and to other geographies and developing employee engagement initiatives and then ultimately.

Speaker 1: promoting our purpose vision and values through every level of the organization, but leveraging our existing recruiting platforms, streamlining our onboarding process. We've talked about previously repurposing and deploying some resources to high need facilities and to other geographies and developing employee engagement initiatives. And then ultimately, as a component of that, introducing employee incentive and referral programs. And again, without...

As a component of that introducing employee incentive incentive and referral programs and again.

Without speaking specifically to a trend per se, we have seen that the.

Speaker 1: speaking specifically to a trend per se, we've seen that the number of employees who are being infected and the impact of the Omicron variant has decreased significantly over the past couple of weeks. And that's certainly indicative of a more favorable environment to be able to get bodies into to fill positions at the facility level.

The number of employees, who are being affected and the impact of the omicron variant has decreased significantly over the past couple of weeks in and Thats, certainly indicative of a more favorable environment to be able to get bodies into to fill positions at the facility level.

Speaker 1: Okay, great. I might jump back in a little bit later, but thank you for those answers. And talk to you soon. Thank you. Our next question is from...

Okay great.

Jump back in a little bit later, but thank you for those answers. Unfortunately.

Our next question is from.

Total Q with Stifel. Your line is open.

Speaker 1: Good morning, Pat. I'm Matt. And I think the question now on the margin. And if you look at incremental margin, this quarter in 2000, we'll expand to increase this sequentially. And the certainly the growth has been slowing and we're from the last quarter. Just wondering what's your margin? I'll look for the next few quarters, no understanding that you're going through these contract negotiations.

Hey, good morning.

Turning to your question on the margin.

And if you look at incremental margin this quarter in terms of expense.

Increases sequentially suddenly the growth has been slowing from the last quarter. Just wondering what's your margin outlook for the next few quarters understanding that you're going through these contract negotiations.

We expect to see some progress beginning next quarter and ideally it would be a stair step.

Speaker 2: beginning next quarter and you know ideally it would be a stair step.

Speaker 2: to out throughout the year right where we're exiting the year back at that 86% or better.

Throughout the year, right, where we're exiting the year back at that 86% or better theres, probably going to be some fits and starts along the way I think part of our strategy here is to allow enough time and space to not get the quickest deal done to get the right deal done for the long term relationships. So we expect to see.

Speaker 2: There's probably going to be some fits and starts along the way. I think part of our strategy here is to allow enough time and space to not get the quickest deal done, to get the right deal done for the long-term relationship. So we expect to see progress beginning next quarter. And I think we'll have a more clear outlook on the rest of the year as far as the cadence of margin recovery when we talk in a couple months.

<unk>, beginning next quarter and I think we will have.

A more clear outlook on the rest of the year as far as the cadence of margin recovery. When we talk in a couple of months.

Speaker 1: God, is it fair to say that the inflationary environment in the fourth quarter is slightly better sequentially than the third quarter, or do you think could be the skill pretty, you know, acute right now?

Got it is it fair to say that the inflationary environment.

Fourth quarter is slightly better sequentially.

In the third quarter or do you think.

Pretty good.

<unk> right now.

Speaker 2: Yeah, I'd say Q4 relative to Q3 was similar, meaning a similar type of intensification, specifically on the labor side. We did see some of the food inflationary pressures stabilized a bit between Q3 and Q4, but we saw the labor.

Yes, I'd say Q4 relative to Q3 was with similar meaning a similar type of.

Intensification, specifically on the labor side, we did see some of the food inflationary pressures stabilize a bit between Q3 and Q4, but we saw the labor.

Speaker 2: inflationary pressures further intensified.

Inflationary pressures further intensify too early to tell year to date, where we are but that's again why.

Speaker 2: Too early to tell, you know, year to date where we are, but that's again why, you know, with this, you know, this modification of our service agreements, we're not only going to make sure we secure increases for our past costs increases to get the billing rate correct at the moment in time, but it's also equally as important to make sure to go forward.

With this.

Modification of our service agreements, we're not only.

Im going to make sure we secure increases for our pass cost increases to get the billing rate correct at the moment in time, but it is also equally as important to make sure. The go forward is taken care of and that the adjustments are done on a more real time basis, whether that's tying it to a third party index.

Speaker 2: is taking care of and that the adjustments are done on a more real time basis. Whether that's tying it to a third party index or if it's using our own data that we have internally or the client's data for the similarly situated employees. So that hopefully adds a little color to the types of conversations and engagement we're having.

Or if it's using our own data that we have internally or the clients' data for their similarly, situated employees. So that hopefully adds a little color to the types of conversations and engagement we're having.

Speaker 1: Gachi appreciate that. Any update on the Genesis contract, I know that you talk about when the price and coming back for quarter-twenth, when the two end, the terms will probably revert and up the year, any update there.

Got you I appreciate that.

Any update on the Genesis contract I know that you talked about the pricing coming back first quarter translating to the terms, we will probably be reversed.

At the end of the year any update there.

Speaker 2: No other than, you know, as we previously called out, the pricing modifications, sunsetted, you know, at the end of 2021, so that returns back to its historical rate, heading into, heading into the year effective January . And then as you highlight the VAR modifications, we'll begin, you know, we'll begin to reduce throughout the year. And, you know, that will sunset at the end of 2022.

No other than as we've previously called out the pricing modification sunset. It at the end of 2021, so that returns back to its historical rate.

Adding into heading into the year effective January and then as you highlight it var modifications.

We'll begin we will begin to reduce throughout the year and that will sunset at the end of 2022.

Speaker 3: Okay, got you. Maybe one last for me. Maybe I missed this time when you talk about it.

Okay got you maybe one last one.

Maybe I missed this.

When you.

We can talk about it.

Quarter.

Speaker 2: From a cash flow perspective, we were north of 30 million. At that end of one point, I'm sorry.

From a cash flow perspective, we were north of $30 million.

Right.

One point.

Yeah got it thank you.

Speaker 1: Our next question is from Sean Dodge with RBC Capital. You're line.

Our next question is from Sean Dodge with RBC capital. Your line is open.

Speaker 2: Yep, thanks. Good morning. Maybe Ted, going back to one of your earlier comments, on the labor challenges, is there a seasonal pressure that hits you in the fourth quarter too with the hourly workforce? I'd imagine you're all probably competing with Amazon and UPS and all the retail that are staffing up and offering premiums around the holidays. Now that we're through that, does that help things get sequentially better in the first quarter?

Yes, thanks, good morning.

Maybe going back to one of your earlier comments on the labor challenges is there.

Sure it's seasonal pressure.

In the fourth quarter too.

On the workforce I would imagine you are probably competing with Amazon in Etfs and all the retail that are staffing up and operating premiums around the holiday.

Now that we're through that does that help things get sequentially better in the first quarter.

I'd say I'd say it should.

Speaker 2: I'd say it should, like it's in a theoretical sense. Sean, that would be the case. I think you have to look at it. One is Matt pointed to some of the January data.

In a theoretical sense.

Sean that would be the case I think you have to look at it.

One is Matt.

Matt Matt.

<unk> pointed to some of the.

The January data.

Speaker 2: that are suggesting some stabilization and some actually improvement on our front. So that would add some credibility to your question and your thinking on it. I think the one thing that is yet to bear out is the niche within the niche, right? The healthcare labor market.

That are suggesting some stabilization and some actually improvement on our front. So that would that would that would add some credibility to your question and your thinking on it I think the one the one thing that has yet to bear out as the niche within the niche right. The health care labor market is kind of has its own.

Speaker 2: is kind of has its own pressures outside of say the the non-health care related labor and then even within long-term opposed to cute care i think it's it's it's it's a different type of impact and the broader health care market so that's why i'm a little reluctant to the latch on to your

<unk> pressures outside of say the <unk>.

Non health care related labor and then even within long term post acute care I think it's seeing a different type of impact than the broader healthcare market. So that's why I'm, a little reluctant to latch onto your.

Speaker 4: You know, so for lining there to some of the labor pressures that we saw on Q4 and there's so many moving parts.

The silver lining there to some of the labor pressures that we saw in Q4 and there's so many moving parts between.

Speaker 4: between Delta, Omicron, and not just the impact. That had less of an impact from a clinical sense on the industry. It had a significant impact on staffing with quarantining requirements. So there is optimism for a variety of reasons, one of which you pointed out, but again, still too early to tell if one or two months does not attrend me.

Between Delta Omicron in not just the impact that had less of an impact from a clinical sense on the industry had a significant impact on staffing with quarantining requirements. So.

There is optimism for a variety of reasons, one of which you pointed out, but then again still still too early to tell.

If one or two months does not a trend make.

Speaker 2: Sure, okay, fair enough. And I guess now with the plan, I'm forgetting cost of sales back in order, what are your, where are you now on new manager development or are you back out recruiting and training again? What are your thoughts around when you might start adding new facilities?

Okay fair enough.

Sure.

I guess now with the plan.

Forgetting cost of sales back in order what are your.

Where are you now on new manager development are you back out recruiting and training again, what are your thoughts around when you might start adding.

New facility.

Speaker 4: Yeah, absolutely Sean. And I would say, you know, not dissimilar to our typical strategy. You know, that's really the managerial needs assessment occurs at the local levels, right? And that's of course, primarily to ensure that we have the management capacity to effectively manage the existing portfolio. But just as importantly, in this environment, given the increasing demand for the services that had noted to ensure that we've got the requisite managerial wherewithal to be able to think about onboarding new business opportunities. So there are, as is always the case, some geographies that are further ahead in that exercise than others. But without a doubt, you know, this is a conversation that's happening throughout the company. You know, to number one, continue to stabilize the operating environment in the face of, you know, some of the remaining challenges that are presenting as a result of COVID. But, you know, the optimistic view is certainly that we continue to drive recruiting efforts and manage your real development efforts. With an eye toward future growth opportunities and said for all the reasons that we talked about previously, you know, suggestive of modest, but suggestive of industry recovery. We're definitely beginning to think about getting back into growth mode. And obviously, the management development is a significant component of that.

Yes, absolutely Sean I don't I would say not dissimilar to our typical strategy. That's really the managerial needs assessment occurs at the local levels right and Thats of course, primarily to ensure that we have the management capacity to effectively manage the existing portfolio, but just as importantly in this <unk>.

Environment, given the increasing demand for the services that Ted noted to ensure that we've got the requisite managerial wherewithal to be able to think about onboarding new business opportunities. So there are as is always the case. Some geographies that are further ahead in that exercise than others, but without a doubt. This is a conversation that's happening.

Throughout the company.

Number one continue to stabilize the operating environment in the face of some of the remaining challenges that are presenting as a result of COVID-19 .

But the optimistic view is certainly that we continue to drive recruiting efforts and managerial development efforts with an eye towards future growth opportunities.

For all the reasons that we've talked about previously suggestive of.

Modest, but but suggest above industry recovery, we are definitely beginning to think about getting back into growth mode and obviously the management development is a significant component of that.

Speaker 2: Great. Thank you again for the talk.

Great. Thanks again for the time.

Speaker 1: Our next question is from Ryan Daniels with William Blair.

Our next question is from Ryan Daniels with William Blair. Your line is open.

Speaker 2: Hey guys, Nick, here you go. I'm Brian . They've stayed my question. I guess to start with like clarifying one on those new contract structures, would those be eliminating the current, I think you said 90 day lag that most of your contracts has such that it would be much more immediate to where increases in input costs would be mitigated within the quarter.

Hey, guys, Nick <unk> on for Ryan. Thanks for taking my question I guess with Barca quick clarifying one on those new contract structures.

Eliminating the current.

You said 90 day lag.

Most of your contracts has such that.

It would be much more immediate where increases.

Input costs would be mitigated within the quarter.

Speaker 4: Well, yeah, the reason for that 90-day lag on this, if you're speaking specifically to the food component of our dietary contracts is really just a function of administratively, not on our end, of when, you know, the data are published by, you know, the requisite, you know, government agencies. So, I think that's just a simple matter of when it's published. As soon as it's published...

Well the reason for that 90 day lag on if Youre speaking specifically to the food component of our dietary contracts is really just a function of administratively not on our end of when the data are published by the.

The requisite.

Government agencies. So I think that's just a simple matter of when it's published as soon as it is published its provided to the client and then where we're adjusting the following quarter. So that's not really where the.

Speaker 4: provided to the client and then we're adjusting the following quarter. So that's not really where the

Speaker 4: The impact is being felt most acutely if we have a similar and again there is no one side fits all but if we had a similar type of adjustment even with the 90-day lag on the weight

The impact is being felt most acutely if we had a similar and again there is no one size fits all but if we had a similar type of adjustment even with the 90 day lag on the way each on the wage piece, we'd still be in a much better we'd be we'd be in a much better spot now there are different.

Speaker 4: on the WHA piece, we'd still be in a much better spot. Now there are different...

Speaker 4: variations to that. We have to implement a monthly adjustment.

<unk> two that we have taken to implement a monthly adjustment.

Speaker 4: and the customer is open to that. That's something we would consider as well, but again, we want this to be long lasting and durable. So we're not in a race, not racing to try to get kind of the quickest, quickest deal done that we possibly can. We're building this for the next four and a half decades, quite frankly.

And the customer is open to that that's something we would consider as well, but again, we want this to be long lasting and durable.

So we're not in a race not not racing to try to get kind of the quickest quickest deal done that we possibly can we're building. This for the next four and a half decades quite frankly.

Okay, great. Thank you and then I guess, so you're planning on kind of second half being through most of that when did the when did these kind of.

<unk> start and I guess, how far along are you.

In that kind of rollout between your total kind of facility base.

They've been they've been ongoing really throughout.

Beginning as early as kind of the beginning of Q4 and had been ongoing since then with all with the continued.

Speaker 4: inflation, right? It's not a matter of inflation happened and it's over. It continues to evolve. So those conversations have continued to evolve as well. As you highlighted, we expect all of the agreements and conclusions with our clients to be reached by mid-year.

Inflation right, it's not a matter of inflation happened and it's over it continues to evolve. So those conversations have continued to evolve as well as you highlighted.

Should we expect all of the I guess agreements and conclusions with our clients to be reached by mid year.

Speaker 4: And then our goal is to exit the year, exit 2022, kind of with a run rate of 86% or better cost of services, which would be in line with our historical target.

And then our goal is to exit the year exit 2022 kind of with a run rate of 86% or better cost of services, which would be in line with our historical target.

Speaker 4: and just just to sort of put a finer point on that you know we've had initial at least initial meetings with every one of our client groups at this point so as Ted mentioned there's not a unilateral approach it is client by client the efforts that are undertaken it's not a one-size-fits-all solution per se but all of the conversations have been initiated and then it's just going to take some time to come to agreement and of course that'll be a moving target to a degree as to the timing of the closure of these but we're confident that by mid-year we'll have some some clarity and some conclusion and be able to move forward and ultimately see the effects run through the results of the business.

And just just to sort of put a finer point on that we've had initial at least initial meetings with every one of our client groups at this point so as Ted mentioned there is not a unilateral approach. It is client by client. The efforts that are undertaken there is not a one size fits all solution per se.

But all of the conversations have been initiated and then it's just going to take some time to come to agreement and of course that will be.

Moving target to a degree as to the timing of the closure of these but we're confident that by midyear. We will have some some clarity and some conclusion and be able to move forward and ultimately see the effects run through the results of the business.

Speaker 1: Great. Thanks for the color. And then I guess just really quick on the labor side of things. Is this, are you guys seeing this as more of an issue on recruiting new employees or more on kind of maintaining your current workforce such that you, you know, you're making it more enticing for them to stay on versus go somewhere else?

Great. Thanks for that color and then I guess, just really quick on the labor side of things is this are you guys. Seeing this is more of an issue on recruiting new employees or more on kind of maintaining your current workforce.

Such that you youre, making it more enticing for them to stay on where things go somewhere else.

Speaker 4: it's more the former than the latter you know i would be dismissive to suggest that you know we assume all of our employees will want to stay with us but you know we talked about some of the employee engagement initiatives that we've initiated over the course of the past few years and there is an element of emotional connection that employees establish to the facility now that doesn't run in perpetuity uh... when it's you know substantially challenged in their happen challenges but we're definitely finding that the availability of labor on the new higher front has been far greater a challenge than retaining our you know longer established employees

It's more the former than the latter.

<unk> be dismissive to suggest that we assume all of our employees will want to stay with us, but we've talked about some of the employee engagement initiatives that we've initiated over the course of the past few years.

And there is an element of kind of that emotional connection that employees established to the facility now that doesn't run in perpetuity when it.

Substantially challenged and there have been challenges, but were definitely finding that the availability of labor on the new hire front has been far greater challenge than retaining our longer established employees.

Speaker 5: Great, thanks so much guys, I appreciate it.

Great. Thanks, so much guys I appreciate it.

Speaker 1: Our next question is from Brian Tangle it with Jeffries. Your line is open. Hey good morning guys.

Our next question is from Brian <unk> with Jefferies. Your line is open.

Hey, good morning, guys, Jack Levine on for Bryan.

Speaker 2: I guess I want to start and just make sure I understand sort of the puts and takes as we bridge to your end and sort of what's happening in the industry versus the outlook with these contracts. So I think if you're looking to adjust the contracts, we're sort of looking at industry data, occupancy is flattened off in the fourth quarter and is still sort of 10% below pre-COVID levels.

I guess I want to start and just make sure I understand sort of the puts and takes as we bridge to.

Year end and sort of what's happening in the industry versus the outlook with these contracts.

So I think if youre looking to adjust the contracts were.

Looking at industry data.

Currency is.

<unk> in the fourth quarter and is still sort of 10% below pre COVID-19 levels.

Speaker 1: We've got clinical staffing shortages that are at their highest levels we've seen.

You've got clinical staffing shortages that are at their highest levels we've seen.

Speaker 2: and significant wage inflation and wage pressure there for your clients, you know, and so kind of piecing those two things together with the step up that you're expecting to get adjusted into your contracts. I guess I'm just wondering, you know, like, is there a risk or how you're thinking about what needs to happen from an occupancy standpoint to stave off risk that you'll need to do more on the price conception side as we move forward?

And significant wage inflation and wage pressure there.

For your clients.

So kind of piecing those two things together with the step up that you're expecting to get adjusted in your contracts.

I guess I'm, just wondering is there a risk or how youre thinking about what needs to happen from an occupancy standpoint to stave off risk that youll need to do more on the price concessions that side.

Side as we move through 2021.

Speaker 4: Yeah, Jack, I would say, you know, clearly, the census is not a panacea, but it is a significant component. If you think about the financial makeup for any one of our particular customers at the facility level, I would say that the fact that you noted that

Yes, I would say clearly census is not a panacea, but it is a significant component. If you think about the financial makeup for any one of our particular customers at the facility level.

I would say that the fact that you noted that census has plateaued a bit that's a major win right. If you think about the clinical impact that both delta.

Could have had on the industry and then on the heels of Delta that had the omicron variant, but the reality is that going back from about the second week of August we've been above 72% occupancy on an average national level throughout the industry and to have maintained that to this point is a big win from a clinical perspective, that's likewise.

Speaker 4: from about the second week of August , we've been above 72 percent occupancy on an average national level throughout the industry. And to have maintained that to this point is a big win from a clinical perspective. That's likewise in the face of the clinical staffing shortages that you noted, the forced quarantines that have been required for infected individuals down to the frontline staff level. So that's, in our view, a fairly significant accomplishment. So we're starting at a level that's significantly more favorable than where we stood at this point last year with respect to expectation for an ongoing census improvement. So you're correct in noting that the clinical staffing shortages will have an impact on census. But we are, again, there are some data that are encouraging, not only internal healthcare services group data, but some of the external anecdotes that we're beginning to hear from customers and industry groups. So there is an expectation that even if it's modest, we do begin to see that uptick in census. And that bodes well from a financial perspective for our industry and market. And we'll be getting a point of assessment that we make in analyzing the performance of a current partner of ours and likewise looking out to future growth opportunities with prospective customers.

In the face of the clinical staffing shortages that you noted the fourth quarantines that have been required for infected individuals down to the frontline staff level. So that's in our view fairly significant accomplishment. So we're starting at a at a level that's significantly more favorable than where we are.

At this point last year with respect to expectation for an ongoing census improvement. So youre correct in noting that the clinical staffing shortages will have an impact on census.

But we are again there are some data that are encouraging not only internal health care health care services group data, but.

Some of the <unk>.

External anecdotes that we're beginning to hear from customers and industry groups. So.

There is an expectation that even if it's modest we do begin to see that uptick in census, and that bodes well from a financial perspective.

Speaker 4: for our industry and market. And we'll be yet another point in assessment that we make in analyzing the performance of a current partner of ours and likewise looking out to future growth opportunities with prospective customers.

Our industry and market and we will be yet.

Assessment that we make in.

Analyzing the performance of our current partner of ours, and likewise looking out to future growth opportunities with prospective customers.

Speaker 2: Got it, thanks, that's helpful. And then last one for me, you know, just if you look at the cash flow from operations, numbers really strong in the quarter relative to sort of a pressured P&L, I guess can you just walk through it a little more detail, you know, what's going on there or what's driving that? And then talk about how we should be thinking about cash flow as we move into.

Got it. Thanks, that's helpful. And then last one for me just if you look at the cash flow from operations number is really strong in the quarter relative to sort of a pressured P&L I guess can you just walk through it a little more detail, what's going on there or what's driving that and then and then talk about how we should be thinking about cash flow as we move into 2022.

Speaker 4: Well, we, you know, our goal always is to collect what we bill and in the fourth quarter we had strong cash collection. So I think we were six or 7 million to the positive of what we what we build. So that was a strong year. I think when you look at cash, the outlook.

Our goal always is to collect what we bill and in the fourth quarter. We had strong cash collections. So I think we were six or $7 million to the positive of what we what we build so that was a strong year I think when you look at cash the outlook for the year maybe just.

Speaker 4: for the year, maybe just taking it looking at Q1. I know we do have the Matt highlighted it in his opening remarks, the change in the payroll rule to eight days. So we would expect that alone to result in cash outflow for Q1.

Looking at Q1, I know, we do have.

Matt highlighted in his opening remarks, the change in the payroll accrual to eight days. So we would expect that we.

We would expect that alone to resolve it.

Cash outflow for Q1.

Speaker 4: So, without going through, say, a cash flow model for the year, I think what we can confidently say is our goal remains to collect what we bill. There will be quarter-to-quarter timing differences, depending on the payroll accrual, which is the biggest driver or fluctuation, driver of changes from any one given quarter. And again, our goal is to collect what we bill.

So without going through say a cash flow model for the year I think what we can confidently say is our goal remains to collect what we bill there will be quarter to quarter timing differences, depending on the payroll accrual, which is the biggest driver.

We're fluctuation driver of changes from any one given quarter and again our goal is to collect what we bill.

Got it thank you.

Yes.

Speaker 1: Our next question is from Mitra Ramgopal with Sidoti. Your line is open.

Our next question is from Mitra <unk> with Sidoti Your line is open.

Speaker 3: Yes, hi, good morning and thanks for taking the questions. First, just on the top line, Matthew, you announced a pretty nice business edition on the food services side. I know you mentioned you're in talks in terms of bringing on new business. Just curious in terms of how optimistic you are given the environment right now that might be getting some positive announcements on that front in 2022.

Yes, hi, good morning, and thanks for taking the questions.

First just on the top line, Matthew you'd announce a pretty nice.

Business edition on the Foodservice side I know you mentioned you're in talks in terms of bringing on new business. Just curious in terms of how optimistic you are given the environment right now.

Be getting some positive announcements on that front in 2022.

Speaker 4: you know, I would say with all of the unknowns and ongoing uncertainty in the variables that we've spoken about in the current environment, we'd be reluctant to sort of project or forecast too specifically on growth opportunities, but that doesn't mean that there are not opportunities for growth or that we won't grow. You know, we don't have necessarily specific visibility.

I would say with all of the unknowns and ongoing uncertainty in the variables that we've spoken about in the current environment, we'd be reluctant to sort of project are forecast to specifically on growth opportunities, but that doesn't mean that there are not opportunities for growth are that we won't grow we don't have necessarily specific vis.

<unk> ability to next quarter or the quarter beyond that so we wouldn't really guide on expectations per se, but we continue to be confident around our capabilities to deliver long term growth and as I said, we are increasingly optimistic about pulling forward. Some of these growth opportunities that have presented themselves.

Speaker 4: to in the next quarter or the quarter beyond that so we wouldn't really guide on expectations per se, but we continue to be confident around our capabilities to deliver long-term growth. And as I said, we are increasingly optimistic about pulling forward some of these growth opportunities that have presented themselves in light of increased access now to facilities that depends up to man that's been in our pipeline. More.

In light of increased access now to facilities that the pent up demand that's been in our pipeline.

More.

<unk>.

I'd say more more.

Speaker 4: imminent I would say would be opportunities to expand partnerships with existing EBS customers to include dining services and then all of the above of course layered against the backdrop of that assessment of the financial health of of any prospect and yeah that remains a little bit tricky with the state of the industry recovery that we've talked about and I guess all of this kind of brings us back that you know all the more reason why the changes

Imminent I would say would be opportunities to expand partnerships with existing evs customers to include dining services and then all of the above of course layered against the backdrop of that assessment of the financial health of of any prospect and yes that remains a little bit tricky with the state of the industry recovery that we've talked about.

And.

I guess all of this kind of brings us back that all the more reason why the changes to our service agreement structure are so important to really make sure that we're creating the most durable.

Speaker 4: to our service agreement structure are so important, you know, to really make sure that we're creating the most durable value proposition and model and that it's a sellable model going forward.

<unk> proposition and model in that it's a sellable model going forward.

Speaker 3: Okay, thanks. And on the SGA side, I think you know, you're expecting eight and a half, the nine and a half percent this year. I guess pre-COVID, we typically see a SGA, maybe seven and a half, eight percent on the high end. Should we expect any, I know you hinted at some potential deficiencies, but you might be able to realize what is this sort of the new normal as we look at SGA.

Okay. Thanks.

And on the SG&A side, I think youre expecting eight five to nine 5%. This year I guess pre COVID-19 , we typically say SG&A, maybe 758% in high end.

Should we expect any I know you hinted at some potential efficiencies that you might be able to realize but is this sort of the new normal as we look at SG&A.

Speaker 4: Yeah, I think certainly with where revenue sits today, again, there's a fixed and a variable portion of S-GNA. The majority of S-GNA is payroll related, but yeah, we would expect that range to continue until we ramp up revenue over the next 12, 18, 24 months in a way that Matt kind of just highlighted, but that will be scalable to a degree, but there will be some incremental costs as we grow the top line as well.

Yes, I think certainly with where where revenue sits today again.

There is a fixed and a variable portion of SG&A. The majority of SG&A is payroll related but yes, we would expect that range to continue until we ramp up revenue.

Over the next 12 to 18 to 24 months in a way that Matt kind of just highlight it but that will be scalable to a degree, but there will be some incremental costs as we grow the top line as well.

Speaker 3: OK, thanks. And then finally, just I think you mentioned there was about $2 million of nonrecurring costs in the quarter. If you maybe can provide some color on that and going forward, if there are any more one-time items that need to be cleaned up maybe in one queue.

Okay. Thanks, and then finally, just I think you mentioned there was about $2 million.

Nonrecurring costs in the quarter. If you maybe can provide some color on that and going forward. If there are any more onetime items that need to be cleaned up maybe in <unk>.

Speaker 4: Yeah, they were one was there was about a million dollars. It was just an adjustment to the one of our amortization schedules that we had like a catch up adjustment. The other was the other million was related to a state tax.

Yes. They were one was there was about $1 million. It was just an adjustment to one of our amortization schedules that we had like a catch up adjustment.

The adjustment the other was the other $1 million was related to estate tax relate.

Speaker 4: related to education credit, the other side of which you see in the tax rate. So that's an annual program that we participate in where you see the expense in SG&A and then the corresponding 90% credit in taxes.

Related to education credit the other side of which you see in the tax rate. So that's an annual.

Program that we participate in and where you see the expense in SG&A and then the corresponding 90% credit in.

Taxes.

Okay. Thanks, again for taking the questions. Thanks Mitra.

Speaker 6: Our next question is from Andy Whitman with Baird. Your line is open.

Our next question is from Andy Wittmann with Baird. Your line is open.

Speaker 1: That's a two-centre-counting. So I just noticed that you're good when your enhanceables are up. I actually have pretty decent amount in the fourth quarter over the third quarter level. That is that the amortization schedule that this may have mentioned, this may have anything else that will be into your schedule.

Let's do some accounting so I just noticed that your goodwill and intangibles are up actually a pretty decent amount in the fourth quarter over the third quarter level.

Is that does that.

Amortization schedules.

Matt mentioned that.

But.

Turning to intangibles.

Speaker 4: No, so that's unrelated to the adjustment that Ted just referred to. Actually, during Q4, we acquired a small food service company. They're focused in the education space.

No. So that's unrelated to the adjustment that I just referred to actually during Q4, we acquired a small foodservice company.

They are focused in the education space, they do about $3 million $30 million or so annualized in sales and what we liked about them. Andy is they've got really a great product and in our view a scalable model. So obviously, a small acquisition, but we view that along with our environmental services opportunity and that education niche.

Speaker 4: They do about 30 million or so annualized in sales.

Speaker 4: What we like about them, Andy, is they've got really a great product and in our view a scalable model. So, you know, obviously a small acquisition, but we view that along with our environmental services opportunity and that education niche as a nice complement to our longer term growth strategy as a company.

As a nice complement to our longer term growth strategy as a company.

Speaker 1: I guess that makes sense. Glad I asked. Okay, so then Ted, just, I wanna, I guess, ask on the, I guess the balance sheets of your customers. There's been plenty of federal money over the last couple of years to various programs as you will know.

Okay.

Makes sense quite a asked okay. So then.

Todd.

I wanted to ask on the.

I guess the balance sheets of your customers there has been plenty of federal.

Over the last couple of years.

Through various programs as you well know.

Speaker 1: You guys and your customers had to pay back the payroll tax to throw that kind of a knock against everyone's balance sheet including those a little bit. I was just one, I mean, you guys haven't seen any material DSO write offs here. Well, obviously look at the queue and get a little bit more detail and obviously you've changed your processes a lot for the last several years even before COVID. But I guess I'd want to check in with you about the credit quality of where your customers sit today.

You guys and your customers have to pay back the payroll tax deferral, that's kind of a knock against.

One's balance sheet, including those a little bit.

I was just one I mean, you guys haven't seen any material DSO write offs here, we'll obviously look at the queue and get a little bit more detail and obviously you've changed your processes a lot.

Several years, even before Covid.

I guess I would wanted to check in with you about the credit quality of where your customers today.

Speaker 1: and anything you can tell us about the level of federal funding that is helping or maybe not helping enough.

And anything you can tell us about the level of federal funding that is helping or maybe not helping enough from your seat.

Speaker 4: Well, this may be starting with your final point. I think at the federal level, there's really not a lot that appears to be on the comm. There are some positive puts and takes at the state level. You know, you have some states that, and that's really where at least at the association level, that's where the engagement.

Well, just maybe starting with your final point I think the fed at the federal.

Level, there is really not there's really not a lot that appears to be on the comp. There are some positive puts and takes at the state level you have some states that.

That's really where that at least at the association level, that's where the engagements.

Speaker 4: Our efforts are focused is with the state opportunities rather than at the federal level.

Our efforts are focused is with the state opportunities rather than at the federal level you made a comment Andy that we changed our processes and I would point to the weekly payment initiative that we launched a couple of years ago is certainly, helping giving us the ability to navigate not just.

Speaker 4: You made a comment, Andy, that we changed our processes. And I would point to the weekly payment initiative that we launched a couple years ago is...

Speaker 4: Certainly, helping, you know, giving us the ability to navigate, not just through the COVID environment, but in a post-COVID world.

Through the Covid environment, but in a post COVID-19 world.

Speaker 4: You know, if we were sitting here a couple of years ago, we would be talking about very few of any of our clients that were paying us at a frequency of greater than monthly. Here we are today. We have over 60% of our customers that are paying us at a frequency greater than monthly. The vast majority of those are weekly.

If we were sitting here a couple of years ago, we would be talking about very few if any of our clients that were paying us at a frequency greater than monthly here. We are today, we have over 60% of our customers that are paying us at a frequency greater than monthly the vast majority of those are weekly so that aside from all the other.

Speaker 4: So that, you know, aside from all the other, you know, the quantitative data that we...

The quantitative data that we have.

Speaker 4: are able to glean from our clients, whether it's census-related or otherwise. That, more than anything, allows us to stay one step closer to our customers and monitor their behaviors and then be able to react quicker.

We're able to glean from our clients, whether its census related or otherwise that more than anything allows us to stay one step closer to our customers and monitor their behaviors and then be able to react quicker. So.

Speaker 4: While there's no guarantees, I think we're very well positioned. If there are if there is some, you know, strain in the year ahead as as the federal money dries up, and you know, the the census continues to recover, you know, we're going to be able to and will continue to be disciplined in our decision making. And again, that's something we'll monitor closely.

Theres no guarantees I think we're very well positioned if there are if there is some strain in the year ahead as the federal money dries up.

<unk>.

The census continues to recover we're going to be able to and will continue to be disciplined in our decision, making and again thats something we monitor closely.

Okay fair enough thanks, guys.

Speaker 6: Our next question is from AJ Rice with Credit Suisse.

Our next question is from a J rice with credit Suisse. Your line is open.

Speaker 1: Hi everybody. Maybe just to try to drill down on the expectation around, first of all, on margin improvement in the first

Hi, everybody maybe.

Maybe just to try to drill down on the expectation around first of all on margin improvement in the first.

Speaker 1: quarter. It sounds like some of that's a reworking some terms on the agreement. Maybe can you talk a little bit about that? I mean, there you I know you've shown some margin improvement is sort of from time to time when you've held.

Quarter it sounds like.

Some of Thats a reworking some terms on the agreement maybe can you talk a little bit about that.

I know you've shown some margin improvement as sort of from time to time, when you've held operating income constant, but given our revenue concession.

Speaker 1: operating income constant but given a revenue concession to the, as you've had, you know, need less workers because the census has been down. How much is that type of thing versus some other concessions that might be a more sustainable benefit to give us a little more color on how you're going to get that margin improvement in the first quarter.

To the.

As you need less workers because the census has been down how much is that type of thing versus.

Some other concessions that might be a more sustainable.

Benefit can you give us a little more color on how youre going to get that margin improvement in the first quarter.

Speaker 4: Yeah, I would say directionally the expectation is for improvement. AJ, as we've noted, you know, we'd be hard pressed to sort of quantify that at least for the Q1 impact. But it is the expectation is that those improvements are driven by

Yes, I would say directionally the expectation is for improvement.

As we've noted we'd be hard pressed to sort of quantify that at least for the Q1 impact but is the expectation is that those improvements are driven by really more substantial and durable adjustments to the contract structure right the service agreements rather than any.

Speaker 4: really more substantial and durable adjustments to the contract structure, right, the service agreements rather than any

Speaker 4: you know, sort of nuance that may occur in kind of the option downs of staffing relative to census within the four walls of a facility.

Sort of nuance that may occur in kind of the ups and downs of staffing relative to census, within the four walls of a facility.

Speaker 4: Okay, last quarter there was the discussion about the fact that the nursing homes were choosing not to raise rates to really adequately cover their hour some of the customers our hourly workers and therefore you had to unilaterally do that because you're passed through

Okay last quarter, there was the discussion about the fact that the nursing homes, we're choosing not to raise rates.

To really adequately cover there.

Some of the customers our hourly workers and therefore, you had to unilaterally.

Do that because you are pass through.

Speaker 1: sort of requires them to raise rates for their existing hourly. Have you, um, how is that now trending as you go into the first quarter? Is it?

Sort of requires them to raise rates for their existing hourly.

Have you.

How is that now trending as you go into the first quarter is it is.

Speaker 4: Is that getting better? Is it getting worse? Is it about the same as you saw in the fourth, in the third quarter, in fourth quarter? Yeah, I would say...

Is that getting better is it getting worse is it about the same as you saw in the fourth and third.

Third quarter and fourth.

Quarter, yes.

Yes, I would say realm.

Speaker 4: relatively comparable age, Q4 to Q3. And the reality is that given the dynamics of the labor environment, we have been making those adjustments in relative real time. And that's been the challenge, right? The disconnect between when the customer would make an adjustment to the wage scale at the facility. That would have historically triggered the adjustment that we would then pass through. That's not been the case. We've had to be much more nimble in adjusting in real time to be able to adequately staff the facility. So I would say that the environment, generally speaking in that regard, comparable from Q3 into Q4. It's not a bit worse than Q4.

Relatively comparable AJ Q4 to Q3 and the reality is that given the dynamics of the labor environment, we have been.

Making those adjustments and relative real time, and that's been the challenge right. The disconnect between when the customer would make an adjustment to the wage scale at the facility.

That would have historically triggered the adjustment that we would then pass through that's not been the case, we've had to be much.

Much more nimble and adjusting in real time to be able to adequately staff the facilities. So I.

I would say that the environment generally speaking in that regard comparable from from Q3 into Q4, if not a bit worse in Q4.

Speaker 4: Okay, okay. There's been several high-profile re-negotiations with some skilled nursing operators.

Okay. Okay.

Several high profile REIT renegotiations with some.

Skilled nursing operators.

Speaker 4: I don't know whether any of those are your customers, but when that type of activity is happening, where they're being asked for rent concessions and so forth and the REITs agree to that, you typically, they sort of bring all the vendors, including you into the table to discuss that, are these being done one off between the REIT and the operator.

I don't know whether any of those of your customers but.

That type of activity is happening, where they're being asked for rent concessions and so forth and the REIT has agreed to that do you typically do they sort of bring all the vendors, including you into the table to discuss that are these being done one off between the.

And the.

And the operator.

Speaker 4: You know, in just about every situation and we are familiar with some of the groups that you alluded to, but it's typically directly between REIT and, you know, their tenant rather than anything that filters through to other, the rest of the vendor community.

And just about every situation and we are familiar with some of the groups that you alluded to but.

It's typically directly between REIT and.

Their tenant rather than anything that filters through to other the rest of the vendor community.

Speaker 4: Okay. It's just a couple quick more. The 72% occupancy range that you're quoting is sort of steady.

Okay.

Just a couple quick more.

72% occupancy rates that youre quoting is sort of steady.

Speaker 4: Is that something where that's good enough for the, as long as it stays steady? And you'd say you're at the passenger area, I'm going to like customers can operate at that, or is there a requirement that it rebounds to get to sort of a sustainable level where they're operating cash flows sufficient to cover their needs in any comment? I don't have much of a rebound we need to have to sort of get the industry to a sustainable level. I know the government can.

Is that.

Something where that's good enough.

As long as it stays steady you would say.

The majority of the underlying customers can operate at that or is there a requirement that it rebounds to get to sort of a sustainable level, where they're operating cash flows are efficient to cover their needs any any comment on how much of a rebound and we need to have to sort of get the industry to a sustainable level I know the government can.

Speaker 4: potentially step in and help, but abs and fat, how much occupancy rebound do we do and really need to see you think?

Potentially step in and help.

But absent that how much occupancy rebound do we do we really need to see.

Speaker 4: Ultimately, AJ, I think the general consensus is that occupancy needs to be in and around 80% for the industry. Now, there is significant variability, you know this better than anyone, between say, New York, what New York needs versus what Texas needs, you know, picking two extremes of New York's need to be north of 90%, Texas needs to be in the, you know, high 60s, low 70s. So it's all state by state.

Ultimately a J I think that the general consensus is that occupancy needs to be in and around 80% for the industry. Now there is significant variability you know this better than anyone between say New York, What New York needs and versus what Texas needs picking two extremes of New York.

Need to be north of 90%, Texas needs to be in the.

Hi, <unk> low seventies.

So it's all state by state.

Speaker 4: area by area, but overall, you know, that 80% is really the touchstone. Now, if you look at, you know, optimistically, if you look at what happened between January and June of 2021, you know, the industry was recovering, you know, albeit slowly, but about two tenths of a percent per week.

Area by area, but overall that 80% is really the touchstone now if you look at optimistically. If you look at what happened between January and June of 2021.

The industry was recovering.

It slowly, but about two tenths of a percent per week.

Speaker 4: Once they bottomed out at 67% in January through June , and that's how, you know, that was the pathway to 72%. Matt mentioned it in some of his remarks earlier, but when you think about the impact of Delta and Omicron, and the fact that the industry kind of held the clinical line, I think is a real positive. So...

Once they bottomed out at 67% in January .

Through June and Thats, how that was the pathway to 72%.

Matt mentioned it in some of his remarks earlier, but when you think about the impact of Delta in <unk> and the fact that the industry kind of held the clinical line I think is a real positive.

So with.

Speaker 4: Some of the, I said cautious optimism, we have around staffing in the year ahead and specifically looking at it through a client or provider prism, as their staffing stabilizes and they're able to have adequate nursing staff, there is a demand for the provider services. So we're, again, cautious, he optimistic that we should see census begin to rebound in the coming months. And there's no reason why the end of year targeting that 80% would not be, I don't know if that's a base case or somewhere between the best case and a base case, but it's not wholly unreasonable to expect.

Some of the I said cautious optimism we have around staffing in the year ahead, and specifically looking at it through a client or provider prism as their staffing stabilizes and theyre able to have adequate nursing staff. There is a demand for the provider services. So we're again cautiously.

Optimistic that we should see sensitive begin to rebound in the coming months.

There is no reason why the end of year targeting that 80% would not be I don't know if thats a base case or somewhere between the best case, a base case, but it is not wholly unreasonable to expect 80% by the end of the year for the industry and Thats, where ultimately longer term as you said absent any sort of.

Speaker 4: you know, 80% by the end of the year for the industry. And that's where ultimately longer term, as you said, absent any sort of federal intervention, the industry needs to be healthy, to be healthy and self sustained.

Federal intervention the industry needs to be.

To be healthy to be healthy and self sustaining.

Speaker 4: Okay, maybe one final question. On the, obviously a big part of...

Okay, maybe one final question on the.

A big part of.

Speaker 4: Healthcare Service Group's story for years has been the dividend and gradual increase in the dividend.

Health care service groups story for years has been the dividend gradual increase in the dividend.

Speaker 1: I know pre-pandemic the discussion was, you know, roughly 90 percent payout ratio.

I know pre pandemic the discussion was roughly a 90% payout ratio.

Speaker 4: you have a very strong balance sheet so you know obviously if you view this as short term you could.

You have a very strong balance sheet. So obviously you view. These as short term you could borrow theoretically if you needed to cover the dividend or even a year or so but what's the thinking about it.

Speaker 4: borrow theoretically needed to cover the dividend for even a year or so. But what's the thinking about that dividend relative to the current?

That dividend relative to the current run rate of earnings where youre not youre not covering the dividend.

Speaker 4: run rate of earnings, if you're not covering the dividend, how long would that happen to be before you revisit?

How long would that happen to be have to be before you.

Revisit.

Speaker 4: think about that changing the long-term trajectory.

Think about that changing.

Long term trajectory.

Speaker 4: Well, and you pointed to our balance balance sheet, and I appreciate that for the quarter, really the cash balances as well as the cash flow.

Well and you pointed to our balance our balance sheet and I appreciate that for the quarter really the cash balances as well as the cash flow certainly supported I think more broadly, though to your question organic growth and internal investment.

Speaker 4: certainly supported. I think more broadly though to your question organic growth and internal investment, AJ, remained the number one priority in terms of capital allocation for the board followed by the dividend.

<unk> remained the number one priority in terms of capital allocation for the board followed by the dividend. There is no payout ratio per se and I know, we've talked about consistency and sustainability have really been the guidepost more than a payout ratio.

Speaker 4: There's no payout ratio per se, and I know we've talked about consistency and sustainability have really been the guidepost more than a payout ratio.

Speaker 4: We'll continue to evaluate quarter to quarter just like we always have.

We will continue to evaluate quarter to quarter, just like we always have.

Speaker 4: But again, the dividend remains of the highest priority right after organic growth and internal investment.

But again the dividend remains of the highest priority right after organic growth and internal investment.

Okay. Thanks, a lot.

Great. Thank you.

Speaker 6: We have no further questions at this time. I'll turn the call back to the presenters.

We have no further questions at this time I'll turn the call back to the presenters.

Speaker 4: Okay, great. Thank you. In the quarter ahead, we will continue to prioritize engaging with our customers to modify our service agreements to adjust for the extraordinary inflation experience during the second half of 2021, as well as to account for future inflation on a more real time basis.

Okay, great. Thank you in the quarter ahead, we will continue to prioritize engaging with our customers to modify our service agreements to adjust for the extraordinary inflation experienced during the second half of 2021 as well as to account for future inflation on a more real time basis.

Speaker 4: We expect these service agreement modifications to be completed throughout the first half of 2022 with the goal of exiting the year with cost of services in line with our historical target of 86%.

We expect these service agreement modifications to be completed throughout the first half of 2022 with the goal of exiting the year with cost of services in line with our historical target of 86% we.

Speaker 4: We will also continue to execute operationally with an eye towards opportunistic growth.

We will also continue to execute operationally with an eye towards opportunistic growth above all we remain committed to making decisions that best position us to deliver long term shareholder value. So on behalf of Matt and really all of US at healthcare services group I wanted to thank Chris for hosting the call today.

Speaker 4: Above all, we remain committed to making decisions that best position us to deliver long-term shareholder value.

Speaker 4: So on behalf of Matt and really all of us at Health Care Services Group, I wanted to thank Chris for hosting the call today. And thank you again to everyone for joining.

And thank you again to everyone for joining.

Sure.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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