Q1 2022 Healthcare Services Group Inc Earnings Call
[music].
Good morning, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the healthcare services Group 2022 first quarter earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Your question. Please press star one again.
The matters discussed on today's conference call include forward looking statements about the business prospects of healthcare Services Group Inc.
Forward looking statements are often preceded by words, such as believes expects anticipates plans will goal may intends assumes or similar expressions.
Forward looking statements reflect management's current expectations as of the date of this conference call and involve certain risks and uncertainties.
The forward looking statements are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends current conditions expected future developments and other factors that we believe are appropriate under the circumstances.
As with any projection or forecast they are inherently susceptible to uncertainty and changes in circumstances.
Healthcare Services Group, Inc. 's actual results could differ materially from those anticipated in these forward looking statements as a result of various factors and the forward looking statements are not guarantees of performance.
Some of the factors that could cause future results to materially differ from recent results or those projected in forward. Looking statements are included in our earnings press release issued prior to this call.
Filings with the Securities and Exchange Commission.
We are under no obligation and expressly disclaim any obligation.
Date or alter the forward looking statements whether as a result of such changes new information subsequent events or otherwise.
Ted Wahl, President and Chief Executive Officer, you may begin.
Thank you Christy and good morning, everyone, Matt Mckee and I. Appreciate you joining us today, we released our first quarter results. This morning and plan on filing our 10-Q by the end of the week.
Overall, I'm very pleased with our start to the year more efficient labor management, specifically related to premium pay programs and over time, along with the catch up of food inflation pass through increases and continued progress on our service agreement modification efforts all contributed to improved financial outcomes in the quarter.
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We remain actively engaged with our customers to modify our service agreements to adjust for the extraordinary inflation experienced over the past year as well as account for future inflation on a more real time basis.
We expect these service agreement modifications to be completed by the end of Q2 with the goal of exiting the year with cost of services in line with our historical target of 86%.
Looking ahead, while the industry continues to face workforce availability inflation and supply chain challenges. We are encouraged by the most recent positive facility census trends.
We remain confident in our ability to execute on our near term objectives and the long term growth outlook for the company remains as strong as ever given the increasing residents of our value proposition and the attractive demographics. So with those introductory comments I'll turn the call over to Matt for a more detailed discussion.
On the quarter.
Thanks, Pat and good morning, everyone revenue for the quarter was $426 $8 million with housekeeping and laundry and dining and nutrition segment revenues of $201 $7 million and $225 $1 million respectively.
Cost of services was reported at $373 $3 million or <unk> 87, 5% as the company continued to be impacted by increases in labor and supply cost again, we expect the service agreement modifications that Ted alluded to in his opening remarks to be completed throughout the first half of 2022 with the goal of exiting the year at.
Cost of services in line with our historical target of 86%.
Housekeeping and laundry and dining and nutrition segment margins were 10, 1% and four 2% respectively.
Selling general and administrative was reported at $35 $7 million, but after adjusting for the $3 $8 million decrease in deferred compensation actual SG&A was $39 $5 million and the company expects 22022, SG&A to approximate eight and a half to nine 5%.
Investment and other income for the quarter was reported as a 2 million dollar expense after adjusting though for that $3 $8 million decrease in deferred compensation actual investment income was $1 $8 million and that includes a one time $1 6 million dollar mark to market adjustment of a previously recorded long term liability.
Normalized investment income was $200000.
The company reported an effective tax rate of 28, 2% due to discrete items that impacted the Q1 rate and expect that 2022 tax rate of 24% to 26%.
Net income for the quarter came in at 11 $3 million in earnings was <unk> 15 per share.
Cash outflow from operations for the quarter was $30 $2 million and was impacted by a $27 $2 million increase in accounts receivable primarily related to the timing of cash collections and a $24 $9 million increase in accrued payroll and DSO for the quarter was 68 days.
And also we'd point out that the Q2.
Of 2022 payroll accrual will be 12 days and that compares to 11 days that we had in the prior year period of Q2 2021 .
That being 11 days and just for additional reference in Q1 of 'twenty to the payroll accrual was five days and in Q1 of 'twenty 'twenty. One it was four days, but again that payroll accrual only relates to timing and the impact ultimately washes out throughout the full year.
We're pleased with the ongoing strength of the balance sheet and the ability to support the business, while continuing to return capital to our H S. G shareholders, we announced that the board of directors approved an increase in the dividend to 20 125 per share payable on June 24th of 2022 and.
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.
This will mark the 76th consecutive cash dividend payments since the program was instituted in 2003 in the 75th consecutive quarterly increase that's now a 19 year period. That's included four three for two stock splits so with those opening remarks, we'd now like to open up the call for questions.
Okay.
Thank you and as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Andy Wittmann with Baird. Your line is open.
Yes.
Oh, great. Good morning, Thanks for taking my question guys.
I guess I just have.
Our first question is on.
The service contract discussions that you're having.
Maybe Ted can you talk about the progress that you realized in terms of maybe describing the percentage of contracts that you've.
Modified maybe as of the first quarter, and maybe where you are today.
So it could get.
Glide path in terms of how that's going and how much more is left to do obviously, there's tangible results on your margins.
No.
This would be helpful and I was trying to see.
So to where your margins might be at the end of all of this I mean, obviously you gave your guidance, but I'm just trying to see how it's factoring it.
Right and just just for some context, Stephen Andy before that update because I think it'll help kind of add some perspective to the answer to your question I think from a margin improvement perspective, you know we were about 2% better in Q1 than we were in Q4 only about a third of that related to.
The the service agreement modification efforts the balance of that was really the sunsetting of the Genesis pricing adjustment as well as more efficient labor management on the base business overtime and premium pay and we can talk about that a bit more but just for some perspective only about a third of the improvement quarter to quarter actually related to the.
The service agreement modification efforts, but I think overall I guess to answer your question. We continue to make very good progress in some of what I alluded to was reflected in the Q1 results as far as quantifying I think we've touched and remain actively engaged with all of our customers around the inflation related issues and I think the overwhelming majority.
Already have clients certainly recognized that the cost of doing business has increased and they very much appreciate the value of the partnership so as we've talked about before now it's a matter of working collaboratively to arrive that to the extent there is a contract modification to write contract for the partnership and agreed to a fair price for the <unk>.
Services, but theres still more work to be done there is what no one size fits all solution. It continues to be a bottoms up client by client exercise and rather than quantifying progress. This quarter in terms of percentages I would point to our our goal of exiting the year at 86% cost of services and.
Updating the contracts by the middle of the year and Andy I can say, we are on pace to meet both of those goals.
Got it Okay, and then just maybe.
A couple of more technical questions I guess for Matt.
Was there anything in the quarter.
That was more one time ish in nature in terms of being able to get reimbursed for maybe some of the overtime or other things that improve the gross margin in the quarter.
Also could you just talk about.
The revenue contribution from your acquisition in the education food services for the quarter. So maybe we could back into an organic growth rate and was there any stock repurchased in the quarter. Thanks.
There was no stock repurchased Andy just to start with the last question first.
And then as to sort of one time.
Impacts.
Impacts on margin for the quarter I would say the answer to that is no you know really as Ted alluded to there was a sort of a confluence of operational benefits that came by way of more efficiently managing the labor and being able to.
I have a positive impact on the utilization of overtime.
And and drive down some of the incremental spend related to some of those other premium pay type programs.
Sort of call those out as onetime in nature per se, but I would say outside of that it really comes down on a go forward basis to continuing to effectively manage our costs, namely in primarily that the labor management and the associated costs. The payroll related expenses and then likewise continuing to manage our purchasing and supply probe.
Grams and capturing those increases.
Adequately via the pass through mechanism in the contract.
As to the revenue contribution of the the small foodservice company that we acquired in the fourth quarter. It was about $3 million Andy that.
From a revenue perspective in Q1.
Great. Thanks, guys for all your answers have a good day.
Thanks, you too.
Our next question is from Tao Chu with Stifel. Your line is open.
Yeah.
Good morning, guys. So just to expand on the earlier question about you know one time items. If you look at the dining margins certainly snap that snaps back pretty quickly and we look at the direct cost of services. You know you achieved 87% this quarter, which is kind of about the end of the year target of 86%.
Just trying to see if you guys can quantify the impact of chewing up food costs from prior quarters.
And are there any.
It's a problem supplemental bidding revenue this quarter.
Would you repeat the last part of your question Tao.
So I'm just trying to assess the impact of food costs no adjustment from acquired quarters are there any what's the amount during this quarter and did you guys see any benefit from the supplemental bidding revenue this quarter.
Got it so with respect to supplemental building revenue no benefit.
In terms of of kind of historical what we've seen during COVID-19 with specific premium pay related programs being funded by the client.
So our employees were arm in arm with the clients' employees. So those programs had really ran off in full by the end of last year.
Specifically to the food inflation question I would say the benefit that we saw this quarter was you know the Q3 inflation. If you recall that the third quarter CPI increases are processed administratively and reflected in Q1, So Q3 and Q1 more closely mirror.
One another than say Q2, and Q4 dead. So we didn't have as much of a delta now what we have seen is continued acceleration.
Of inflation, both in labor as well as food I think this past quarter, we saw nearly 3% on the labor side of the business and upwards of 4% on the food side, so that should create or will create another delta next quarter between actual food inflation in <unk>.
What we are being reimbursed for but again over time that will catch up and ultimately when inflation stabilizes you know it'll turn into a temporary benefit but the idea is not to have intra quarter variances with respect to the timing of inflation and the reimbursement or the payment.
Through the CPI mechanism is to have those to more closely mirror one another going forward.
Gotcha, just to just to clarify so you are saying because of the two quarter lag rights for the next where do you see a positive delta because of the higher food inflation during the fourth quarter, but yeah and I'm glad you clarified we'll actually see a negative delta because Matthew yes exactly exactly.
Because we would anticipate that Q2 inflation will be greater than what we experienced in Q4, which is what we'd be being reimbursed or paid for.
He's a V. The CPI food at home mechanism.
Gotcha that's helpful. Rick.
Guarding the DSO.
Eight days.
It's up from the prior quarter and you mentioned that it's mostly due to timing of collection. Just wondering are you guys seeing on the ground in south new operators ability to pay and maybe what their financial health.
Any comments regarding.
The status of the industry, particularly when you consider the.
The revenue you're going to see I mean October was PDP M adjustment. It sounds like they are now getting additional Medicare increases while expenses still growing pretty fast any common or color on that would be much appreciate it. Thank you.
Yeah, I mean, specifically to your question tell we haven't seen anything I'd say systematic at this point, we're always theres always facilities or specific client groups that we're in repayment or workout discussions with but.
In light of the some of the potential reimbursement pressures that are on the comp and the you know the regulatory environment that you know has turned into a political football again, we haven't seen.
That manifests itself in client payments I know when you look at the first quarter. There certainly was a shortfall relative to our goal of collecting what we bill that continues to be our expectation to meet that goal for Q2 and the rest of the year. We did as you pointed out highlight that Q1 was primarily related to timing.
You have the seasonal element of collections in Q1, as well where you have the attention of Q4 and compared to Q1, you did at the end of the year, where we tend to have higher cash collections and some clients make up for shortfalls that they had earlier in the year. So to the extent, we haven't already caught up on payment we're going to continue work.
King with those clients, which the vast majority of which we collaborated with and we're aware you know coming into those final weekly payments or biweekly payments in some cases, they were still monthly payers that there is going to be a shortfall for the month, but again, assuming we meet our cash collection goals we'd expect.
Q2 cash flow to return back to a favorable say, 30% to $35 million type range and expect to continue to meet those collecting what we bill goals for the rest of the year.
Got you. Thank you.
Okay.
Our next question is from Sean Dodge with RBC capital markets. Your line is open.
Hey, Good morning. This is Thomas Keller on for Sean Thanks for taking the questions.
Just starting off on the Genesis contract pricing modifications that were kind of sunset at the end of the year can you confirm how much of that contributed to Q1 revenue and EPS I guess relative to Q4 and was there any upside to the previous pricing or did it kind of revert back to the previous rate.
Yes.
Yeah, so as to as to Genesis Thomas.
The sort of sunsetting of those.
Pricing adjustments contributed about two and a half million dollars in Q1.
And then as to sort of the balance of the adjustments with respect to the E. R. We're still on track to be able to have those modifications reduced throughout this year and they'll ultimately sunset at the end of 2022.
And just on the topic of Genesis, it's worth noting that when we talk about the bucket of all of our customers with whom we're having conversations about having the right contract structure and fair pricing moving forward Genesis is included in that as well so we feel comfortable about the.
You know the sunsetting, if you will of the adjustments that we made with Genesis that were agreed upon in 2021, but all the same we need to make sure that on a go forward basis, we have the right contract structure and fair pricing in place as well.
Okay. That's helpful. Thanks, and then I guess I guess, what the plan in place for getting the cost of sales back in order.
Where are you now on new manager development are you back out recruiting and training again and I guess what are your thoughts around when you might start adding new facilities again.
I would say that without a doubt the priority and this is really company wide for Q2 is to make sure that we're doing all the work necessary to make sure that we're adjusting those service agreements and contracts with each and every one of our customers to be able to adequately capture costs as we've discussed and to make sure that the contract structure.
On a go forward basis is favorable and durable as well outside.
Outside of that though certainly pushed down to a regional and local level. There is a significant focus on management development efforts.
As we've discussed in prior quarters, we are still in the midst of a pandemic or at a minimum the sort of.
No consequences that have come as a result of the pandemic and COVID-19 .
In the facility, so making sure that we have adequate management capacity to appropriately manage the business from an operational perspective from a systems and a compliance perspective is first and foremost and then of course beyond that the recruiting the management training and development efforts are certainly in service of business development efforts, So I would say that.
At varying place.
Places from a development perspective, geographically and based upon the local conditions, but when we look at the pipeline of new business opportunities and you know as we've mentioned previously our value proposition resonates today greater than it ever has in the queue of opportunities is significant so we're excited about.
What that ongoing management development and are very optimistic that before long well have the opportunity to translate that into business development opportunities.
Okay, Great. That's all for me thanks, guys.
The next question is from Mitra <unk> with Sidoti Your line is open.
Yes. Good morning, Thanks for taking the questions actually just wanted to follow up on the previous question in terms of with management and if you're having great a challenge in terms of retaining especially at a senior level, given the tight labor market and opportunities out.
Out there.
You know I would say mid sure I wouldn't want to sort of deflect and suggest that it's ever easy right. I mean, we always have to.
Work hard and actively engage with our employees throughout the continuum from the line staff levels up through senior management to make sure that we're actively engaged with them that they buy into the company's purpose and vision and that the values that we've established as an organization continued to resonate, but I would say that in spite of the chat.
<unk> of the labor market, we've had tremendous success in retaining our managers and that applies not only in the senior management ranks, but likewise down through the facility levels and we definitely credit the.
The significant dependence upon and referral to our company values right and the.
Purpose and the vision that we've established and very much in support of all of those would be the employee engagement programs that we've implemented and those touch again throughout the continuum of employees from senior management, all the way down to the line staff level. So retention thankfully has not been as significant a challenge as has been.
<unk> really filling new vacancies specifically down at the line staff levels and that's just based upon the availability of bodies in the Labor Force and obviously like we've discussed previously those challenges are more acute in certain markets as compared to others, but generally speaking back to the crux of your question Mitra really.
Pleased with the retention that we've had you know really throughout the organization.
Okay. Thanks, that's great and then quickly on D M.
Do you have have you are having success in terms of with the top nursing home operators and implementing some price increases I was just wondering if youre getting any a lot of pushback as it relates to their occupancy our sense is down and obviously.
They have to make it up somewhere in terms of being able to.
Hey, you more.
Of course, Mitch you are right I mean of course anyone's going to push back when they're when they're facing rising cost and they have a vendor partner who's asking for an increase in billing and they're not seeing a corresponding increase in their revenue streams right and that primarily in this environment relates to you know the reimbursed.
<unk>, so without a doubt that element of the conversation, but the reality is.
As Ted alluded to in one of his earlier comments, our customers recognize that the cost of running our business has increased and they certainly you know from.
The overwhelming majority of them at least appreciate the value of our partnership and what it is that we bring to the table operationally.
And you have a conversation where.
It's very much cards on the table and we can.
Can speak to true data and experience that we're seeing by way of those rising costs at the facility level with our customers and remind them of the components of the value proposition and the benefits of the partnership and really a significant way to do that is to paint the picture of what life looks like without health care services group right and the fact that if we exit.
The partnership.
Number one we take the manager with us so in what would.
Very obviously be described as a challenging labor environment that customer is going to have to identify recruit hire train and develop a manager to run the departments that were exiting hope that they can operate them anywhere nearly as efficiently as we do certainly they wouldn't have the additional company or managerial support and resources to be able to support that.
Facility level, so from a compliance perspective and from an operational outcomes perspective, you know a high likelihood that they would be facing deficiencies relative to what it is that health care services group was providing and oh by the way all of the line staff employees are going to go back on their payroll and theyre going to have to pay them market wages and increase their wages.
Lately, whether that's inclusive of overtime hours or simply increasing their wages. So any cost increases that had been borne by health care services group would ultimately flip back to the operator and and the final sort of component would be that obviously any any monies that are owed to healthcare services group.
Would be due upon exit of the relationship. So when you paint that picture without using that in a in a threatening way and certainly not intending to be used as a stick.
But when you educate and you go through the process and talk through the value proposition and our customers recognize that you know this is the state of the world that our costs are increasing and it's only fair that we be kept whole.
And Mitch I would just add I think so it doesn't get lost in and kind of your question.
Your your thinking on Hey, how are the clients reacting to this really the approach. We took was I'd say novel to what most companies or many other companies in the industry or in other industries would have done.
Admittedly it could it could have been criticized like why are you incurring costs that are not being reimbursed by the client on a real time basis why is it taking as long as it is to go go through the process why can't you send a letter why can't you just shut off the lights and walk out the door, but we decided early and often.
That wouldn't be Matt referenced purpose vision and values that certainly not in line with what we've tried to establish as a company as an organization reputation Lee or otherwise you know there is a different level of responsibility we have carrying for this nation's most vulnerable population. So we believe we stepped up during the most.
Difficult time, right that FERC that back half of last year when inflation was rapidly increasing there was no end in sight and we continued to provide the services we continued to step up.
And do what we believe was the right thing and our belief was doing the right thing is always good for business.
I don't think the two are mutually exclusive so I believe from a client perspective. It just enriched their appreciation I think of the conversations we're having now and I think that long term view as we believed all along a while while it resulted in some short term pain, perhaps that long term view I think is in the best interest of the company and.
The organization and I think we'll see the fruits of that labor in the months and years to come.
So really appreciate the color.
Thanks for taking the questions again.
The next question is from Ryan Daniels with William Blair. Your line is open.
Hey, guys Nick speak on for Ryan most of my questions been asked but I guess, just a kind of follow up to that last line.
Have you had a decent amount of contracts and because of because of these renegotiations or because of the new service agreement conversations at all.
When you are receiving some of that like you know moderate pushback.
We haven't at this point in time, our expectation is that the vast majority of our clients recognize.
Recognize appreciate and that will be successful in delivering on our outcomes that we've <unk>.
And when you when you are commenting on your goal.
To reach our goal by Q2 that goal is 100% of your outstanding contracts.
To have service agreements are negotiated without losing kind of value and that is kind of like your target.
Yes, our target is to you know.
<unk> be as successful as we possibly can if 100%, but we're also not going to and in all call. It at all cost type of way try to meet 100% there has to be willing participation from both parties and that word fare right needs to be the governing force of both whatever contract modifications needed to be made.
As well as what the pricing adjustment is so we're confident in what we bring to the table. We have the utmost respect and appreciation for the position of our clients are in and I think we believe that it's in the best interest of everyone to be able to move forward in a collaborative way and reached the agreement so a 100%.
Is the goal, but not in an at all cost type of way at the sacrifice of the greater.
Outcome that we're trying to achieve longer term, which is exiting the year at 86%.
But also to set the company up for success in the future and we think we'll be able to achieve all of those objectives.
Got you. Thanks, and then I guess just on the positive facility centers trying to those still tracking you know through April .
Pretty positively as well.
Yes.
Yeah from a from an occupancy perspective I think.
And just overall industry, you highlighted kind of one of the two.
Components that I think over the next three to six months are going to we're going to be watching closely and I think our aside from all the other dynamics within the industry are going to be critical to recovery and that would be.
The interplay between occupancy our census recovery, and then staffing, but you reference.
April if you compare it to where we were in February I think occupancy is up about 120 basis points from 72 and a half two.
73, 673, seven which is about 15 basis points a week.
Over that eight week period, so that would put the industry on a pace to recover back to that 80% threshold or benchmark. That's been set by January of 'twenty, three which is admittedly slower than kind of the the most desired pace, but I think that would.
If the trend work to continue that would that would be something I think the industry would likely be able to work with and I just for context before the Delta variant the occupancy recovery rate was about 20 basis points a week between January and July of.
Of 'twenty, one so yeah. The recent trends are favorable, but I think staffing levels.
<unk> care staffing levels in particular need to be sufficient to take full advantage of this rising demand in.
And Thats TBD, but we're going to monitor that both of those dynamics very closely.
Okay, great. Thanks, guys. That's it for me.
Yeah.
Yeah.
The next question is from Bill Sutherland with Benchmark Company. Your line is open.
Ted Matt Good morning.
The.
Sensus.
A trend that Youre seeing Ted.
As it applies to where you guys had four density your key markets.
Is it better the same do you seeing any.
Any weightings that matter to you guys.
Nothing I'd say, it's still too early to tell bill nothing nothing noteworthy I and II.
I wouldn't want a broad brush it and say well on a relative basis, you know you'll see the same kind of trends between Texas and New York I mean every state every locality has its own story I would say since we're only I'd say eight weeks a couple of months into these positive trends I think though the trend is positive I think.
Overall, it's still nothing nothing that I would highlight on a on a local level and our state based level that that would raise our eyebrows okay.
On the M&A front anything.
Is that sort of an opportunistic approach.
Would you call it going forward are there other opportunities.
Very much so I would say that we're not actively pursuing any opportunities, but as you can imagine there are plenty that are floated in our direction.
As to sort of the core market in the core services, the environmental services in dining and nutrition services within the long term and post acute care space. There's really very few of those kind of pure play opportunities that would be available bill, but when we think about the ancillary market and the adjacency that exists.
Certainly in the education space.
Per the acquisition that we did in the fourth quarter of last year. There may be some additional opportunities there to explore so I would say not actively pursuing but as is always the case open opportunistically.
Mhm.
I noticed in the 10-K, you changed the language slightly in the competitive section.
National competitor.
<unk>.
Having a nash having national competitors I think it was the.
Was there anything.
Sort of triggered that change in language.
Yes that was really bill just prompted by the fact that Aramark had done an acquisition.
And operator that now predominantly plays in the long term and post acute care space. So just a little bit of a shift given that aramark had made that acquisition.
Oh I see Okay, and then last.
A little.
I'm trying to trying to figure out the leads and lags here on your in your inflation.
Thanks, Ted so.
In the quarter just ended labor was up about 3% food for.
Then when.
When do you feel that.
Just if you wouldn't mind repeating the impact sort of flow through.
To H C S G.
Yeah that that's difficult to quantify because it's it's intra quarter there is different.
Wait between states.
And depending on kind of the overall, yes, the percentage increase but depending on the timing of that and how it ultimately flows through it's a dynamic type of number of bell so I'd be reluctant to try to quantify that.
In dollars in any given quarter I don't know.
<unk> ended.
It's more intended to provide you down pads I, just I mean, yeah yeah.
The kind.
Yeah.
It's more to provide some directional insight into the type of inflation, we're saying relative to some of the national benchmarks right. When you look at CPI. When you look at BLS data when you look at.
The food at home metrics that we base the majority of our.
Food related contract pricing adjustments off of it was to provide context.
And so just from a timing perspective than you will.
You will get a catch up.
A quarter later is that.
On the food side on the food side in particular, yes, we would get really two quarters. Later, so Q1 inflation would be reflected with the pass through on the food side in the third quarter of 2022, so it's like a two quarter lag.
And that's exactly what we're working on with the majority of our clients as well on the labor side to have a similar a similar type of mechanism. So inflation is adjusted in the places where we have fixed price contracts, so wage and labor related inflation is adjusted on a more real time basis as well.
So that's the intention and part of this service agreement modification effort that we're undertaking.
And real time would be.
Realistically.
One quarter or so lag.
That's fair Yeah, Yeah, that's fair okay.
Thanks, gentlemen have a good day.
You.
The next question is from Brian <unk> with Jefferies. Your line is open.
Hey, Good morning, guys I guess my first question just on the cash flows right negative $30 million operating cash for the quarter I look at some of the moving parts at least what you've given us accrued payroll up 25 million are up 27 and change so as I think about this.
What are the other factors that drove that negative $30 million operating cash number because obviously the the two things I mentioned kind of offset each other.
I actually know the that they were actually both moved in the same direction. So it was a cash of $27 million increase in AUR, which would be a cash outflow and then the $24 million decrease in accounts receivable would also be a buy in.
Payroll, rather would be a cash outflow.
Alright, Okay got.
Got it I thought it was great alright got it that makes sense and then I guess as I think about the improvement in the Dsos that youre expecting.
As we think about the PHA potentially sunsetting here and obviously the sniff industry has had a lot of tailwind and contributions from the government I mean, what are the conversations like with your clients in terms of their ability to pay and ability to take the increases in costs.
As we think about.
The government subsidies kind of dying down.
Yes, without a doubt Brian that the challenge is exactly what <unk> alluded to previously right I mean not to suggest that increasing sensus is a panacea, but certainly that ongoing census improvement is critical to the financial health and well being of operators.
And sort of working and providing a headwind to that in this current environment is the availability of staffing right and I think we talked about this last quarter spin.
Specifically with the caregiving staff that professional caregiving staff. So that's definitely been a challenge, but assuming that they are able to continue to find ways to provide appropriate staffing and to continue to foster that ongoing census improvement that's going to be really beneficial so.
You know with the new.
Payment rule as currently proposed which was not wholly unexpected I think theres going to be certainly some greater visibility as that final rule comes out in early June and the hope is I think within the industry that there'll be some provisions are allowed allowance for a phase in approach as far as kind of the PD P. M.
PDP and pullback.
But operators are focused on on staffing the facility in providing care and ultimately driving census, so this is a challenging environment. There's no doubt about that but I would say that the operators are.
Happy with the fact that we're starting to see steep by state Medicaid rate improvements.
The pullback on PDP EM was expected theyre able to plan for that with the fiscal year going into effect on October one 2022, and ultimately assuming that it can continue to drive census through these challenging times.
Secular tailwind that awaits by way of the baby Boomer demographics is really what has operators.
Very optimistic about the go forward prospects.
Got it and then last question for me as I think about dividend philosophy at the board level.
Obviously cash balances down to 33 million here and your dividends north of $60 million a year.
How are we thinking about that I mean, you've obviously had good success raising the dividend pretty consistently so just curious what your thoughts are there.
Well, it's evaluated quarter to quarter right, so that that hasnt changed but for the current quarter. As we opened this conversation with the cash balance is not the cash flow for the quarter, but the cash balances in the board's view still more than supported it and I would say just philosophically organic growth and internal.
<unk> remained the number one priority in terms of capital allocation, followed by the dividend and we've talked about this before but there is no payout ratio per se, it's always been consistency and sustainability of the dividend.
That has served as the board's guidepost. So again, we'll continue to evaluate it quarter to quarter, just like we always have but.
After organic growth and internal investment Brian It it remains the board's next highest priority from a capital allocation perspective.
Got it I appreciate it. Thank you so much guys. Thank.
Thank you.
We have no further questions at this time I will turn the call over to Ted Wahl for any closing remarks.
Okay. Thank you Chris in the quarter ahead, we will continue to prioritize engaging with our customers to modify our service agreements to adjust for the inflation experienced over the past year as well as account for future inflation on a more real time basis, we'll continue to expect we continue to expect the.
Service agreements to be completed by the end of Q2 with the goal of exiting the year with cost of services in line with our historical target of 86% will also continue to execute operationally with an eye towards opportunistic growth.
Above all we remain committed to making decisions that best position the company to deliver long term shareholder value.
So on behalf of Matt and all of US at HCS G. I wanted to thank you Chris for hosting the call today and thank you again to everyone for participating.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
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