Q2 2023 Healthcare Services Group Inc Earnings Call
Yeah.
Hello, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the HCS G 2023 second 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.
Press Star then the number one on your telephone keypad.
To withdraw 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.
For Healthcare Services Group, Inc. 's. Most recent forward looking statement notice. Please refer to the press release issued this morning.
It can be found on our website www dot H C. S. G dotcom.
Actual results may differ materially from those expressed or implied as a result of various risks uncertainties and important factors.
Putting those discussed in the risk factors MD&A and other sections of the annual report on Form 10-K, and healthcare Services Group, Inc. 's other SEC filings.
And as indicated in our most recent forward looking statements notice.
Additionally, management will be discussing certain non-GAAP financial measures.
A reconciliation of these items to U S. GAAP can be found in this morning's press release.
Thank you Ted Wahl, Chief Executive Officer, you may begin.
Thank you and good morning, everyone, Matt Mckee and I. Appreciate you joining us today, we released our second quarter results. This morning and plan on filing our 10-Q by the end of the week.
The three months ended June 30th 2023, we reported revenue of $418 9 billion GAAP net income of $8 6 million or <unk> 12 per share and adjusted EBITDA of $26 3 million.
Today in my opening remarks, I'll discuss our second quarter key accomplishments as well as our outlook for the back half of the year.
Then turn the call over to Matt for a more detailed discussion on the quarter.
Overall, we delivered strong service execution during the quarter, our kpis related to customer experience systems adherence and regulatory compliance all trended positively in Q2, leading to high quality and consistent outcomes for our client partners.
I'd now like to highlight our second quarter key accomplishments.
The first accomplishment I'd like to highlight is our strong core earnings for.
For the third consecutive quarter, we achieved our direct cost target of 86% excluding seesaw.
We managed SG&A within our targeted range and we delivered adjusted EBITDA of $26 3 million.
The second key accomplishment I'd like to highlight is collecting what we build in May and June .
This achievement came on the heels of falling short of our April cash collections target as our clients braced for the may 11th exploration of the public health emergency.
And although we did not meet our quarterly cash collection objectives. The results. We delivered in May and June provides us with positive momentum heading into Q3 and positions us well for a strong back half of the year.
Lastly, I'd like to highlight the continued progress we made in replenishing, our new business pipeline. During the first half of the year as we continue to have a growing pipeline of future client partners heading into the back half of 2023 and 2024.
And while the timing of new business adds remains dynamic we are planning for sequential top line growth in the second half of the year compared to the first half of the year and estimate of Q3 revenue range of $420 million to $430 million.
Looking ahead industry fundamentals continued to improve and a stabilizing labor market in select state based reimbursement increases have contributed to the gradual but steady occupancy recovery and while there remains uncertainty as to what a minimum staffing requirements might look like for the industry we remain hopeful.
CMS will fully consider the impact on operators before finalizing a rule and have confidence in our customer's ability to manage any such rule.
We enter the second half of the year with three clear priorities the.
The first is continuing to manage direct cost at 86% excluding Cecil.
Second is collecting what we bill building on the strong momentum gained in May and June .
The third and perhaps the most impactful is the realization of our business development efforts, yielding new facility starts there is a high level of internal enthusiasm as we pivot the growth mode through the back half of 2023, and then into 2024.
So with those introductory comments I'll turn the call over to Matt for a more detailed discussion on our Q2 results.
Thanks, Ed Good morning, everyone revenue for the quarter was reported at $418 $9 million with housekeeping and laundry and dining and nutrition segment revenues of $198 million and $228 $1 million respectively.
Keeping in laundry and dining and nutrition segment margins were eight 7% and five 5% respectively.
Direct cost of services was reported at $367.7 million or <unk> 87, 8% direct costs included an $11 $3 million increase in our system our reserves is.
As Ted mentioned in his opening remarks, we again met our goal of managing the business with cost of services in line with our historical target of 86% excluding seasonal.
SG&A was reported at $41 $4 million after adjusting for the $2 $3 million increase in deferred compensation actual SG&A was $39 1 million or nine 3%.
We expect 2023 SG&A between eight five to nine 5%.
The effective tax rate was 24, 6% and the company expects the 2023 tax rate of 24% to 26%.
Cash flow from operations for the quarter was $7 4 million and was impacted by an $18 $8 million increase in accrued payroll and a $39 million increase in accounts receivable related to the timing of cash collections.
So for the quarter was 83 days.
Also we would point out that the Q3 payroll accrual will be seven days that compares to the 13 days that we had in the second quarter of 2023 and the six days that we had in the third quarter of 2022, but the payroll accrual only relates to timing and the impact ultimately washes out through the full year.
Now with those opening remarks, we'd now like to open up the call for questions.
Thank you.
Reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Sean Dodge with RBC capital markets. Your line is open.
Yes.
Hi, good morning.
Ted I just want to start with your comments around collections tough in April , but but sounds like improved in May and June .
Yes.
Post the close of the quarter or are there any big I've seen imbalances, you've now collected.
Is it that that kind of help through some of this up maybe just kind of give us a sense of dsos were 83 in the second quarter.
Theres going to be able to come down as we can.
So through the balance of the year.
Yes, it's a great question, Sean and we've talked about DSO before in this forum and other forums DSO for US we view more as a byproduct of executing our collection strategies.
An indicator as to our success, obviously, its something we consider and we focus on but we do view each and every account holistically in terms of our assessments I think to your question specifically, if we're going to be recapturing some of the specifically the April delayed payments and I can tell you we are actively working with our <unk>.
Customers on finalizing plans, including in the form of promissory notes to make up some of that April shortfall in the coming months. The timing is TBD on that but we are actively engaged on repayment plans, which could be a nice cash flow tailwind for the back half of the year.
Beyond that our goal remains to be to collect what we bill in the quarter ahead, and we're going to continue to focus on increasing payment frequency proactively using and utilizing promissory notes and then remaining disciplined in our decision making for both new customers as well as existing business. So again, it's a.
We did not meet our objective in April but the momentum we gained in May and June and what we've seen July to date has really been positive and we feel good about the back half of the year from a collection standpoint.
Okay, Great and then.
If we look at cost of sales and adjust out the seasonal reserves through the first few quarters, you've actually been able to manage that closer to 85%.
With your comment that Youre continuing to target 86 for the full year is that just a function of.
The investments youre, making around kind of staffing up in positioning now for <unk>.
Growth or is there something else that's happening there that we should expect kind of the core cost of sales again, excluding Stifel too.
Got it.
Kind of increase over the course of the.
Year.
At or below 86% Sean to your point is the target we exited the year with the 86% run rate third consecutive quarter now that we've been able to see so deliver on that on that target and to your point, it's accounting for of course execution risk, which is always a consideration but growth when we.
Factor in growth the back half of the year, that's always going to be a temporary having negative temporary impact on cost of sales.
As well as anyone when we start a new piece of business. We're inheriting the existing payrolls were inheriting the supply budgets typically there is a degree of margin compression as we work to implement our systems and staffing patterns over the first 60 to 90 days, but I think that will be viewed and should be viewed as a positive as we head into the second half of the year because we are.
<unk> and have pivoted already to growth mode going into the second half of 2023.
Okay. That's great. Thanks again.
The next question is from Andy Wittmann with Baird. Your line is open.
Yes, good morning, guys and thanks for taking my question I guess.
I wanted to ask about the new business pipeline here somewhat.
No.
Over the years.
A challenge for you has been keeping facility managers in your training program.
And having those people ready to go when you are ready to launch new facilities.
I guess in the last couple of years I haven't been asking about the strengths in the performance.
The amount of people you've got in this training program, but given that you are talking more confidently about growth now I thought it'd be worth talking to you and having you talk about.
<unk>.
Higher for those positions the fullness of that training pipeline and if you are ready to go should some of your customers decided to turn on the switch for health care services group.
Yes, Andy I'll address that this is Matt.
Glad you asked about this and I think we touched on this component of our growth trajectory a bit last quarter, but to dive in a little bit deeper youre exactly right. One of the major contingencies of our ability to grow historically has always been overall, our management capacity, but more specifically, having the appropriate number of managers working.
Through the queue and our management training program and our compelling pitch, if you will or the employee based value proposition. Historically has been that one is able to grow one's career with health care services group that as the company grows one has the opportunity to develop one zone career and.
Promotional trajectory in light of not having put up much topline growth over the course of the past few years that has created a different challenge for the organization and it's one that we were certainly mindful of if not outright concerned about what that required of us was to sort of be overly communicative and transparent with our managers both our existing manager.
Yours who've committed at least a significant portion of their careers to the organization and folks to whom we were having with whom we are having discussions from a recruiting perspective, and we've been very transparent about the rationale as to why it didn't make sense for us to be on boarding new business and in growth mode over the course of the past few.
Two years.
That's enabled us quite honestly, Andy to be a bit more selective and judicious not only in our hiring but in replacing managers, who perhaps were underperforming and what has clearly been significantly challenging operational times and an overall challenging operating environment, we think back to the clinical challenges.
And limitations that Covid presented.
On the heels of that the labor challenges in the overall.
Struggles that we faced with respect to the availability of labor and managing our payroll related costs. So we needed topnotch top notch managers through all of those conditions. So that's been a bit of a carrot that we've been able to hold out for folks to keep them motivated and engaged within the organization Ted alluded to.
In his opening remarks, the sort of palpable enthusiasm that's running through the organization as we pivot to growth mode and that has massive effects in reverberations in that not only is everyone excited to see our results in putting up top line growth but.
From a more personal career developmental perspective, what does that mean by way of growth opportunities. So.
Long end around an answer to your question.
I'd remind you that the recruiting efforts and our management training program is executed locally. So of course as is always the case, we're going to have variability as to some districts and regions being far ahead of the curve and really being prepared for specific onboarding opportunities as to new business in the third and fourth quarters here, whereas other.
Geographies may still be struggling with labor market implications and staffing challenges, so perhaps they're not quite as far along that continuum, but as an organization in total andi very much having been focused on the back half of the year as the inflection point toward growth, we have been building and managing our management capacity toward that and we feel extremely.
<unk> confident that our management capacity aligns very well with the geographic opportunities that we've indicated as most likely to come onboard here in the back half of the year.
Great. That's helpful. I guess, just as a follow up to that I guess I just wanted to understand.
A little bit more on the confidence level of the second half revenue growth rate. You gave this $4 20 to $4 30, obviously that suggest sequential growth which is good.
I guess, maybe the first question would be.
It goes at $4 20 to $4 30 range is that already is that business. That's already been started as we sit here today or are there other facilities that still need to transition here during the during the rest of the quarter enable to hit that target.
Then I guess.
Maybe just more broadly are Ted maybe if you could just comment on it sounds like the pipelines. There you made a comment that.
If and when I think you said it.
If and when the customers decide to go what needs to happen do you think for those customers to really pull the trigger that you've been having dialogue with that you feel like you could add to the topline what needs to happen to get them over the hump.
Yes, I think in terms of the confidence or conviction around the $4 20 to $4 30, It's a mix Andy we obviously, we wouldn't have provided that range. If we didnt have a high degree of conviction that we were going to be able to deliver in that range. So.
It's a combination of business that we've already have in hand that we started towards the end of Q2 and new business adds that we'll have throughout the quarter.
The bigger question you had about the pipeline and what's what's the what's the gating factor to a customer pulling the trigger into collaboration the pipeline's robust every customer group every prospective customer has a different set of circumstances to it in many cases, it's just to piggyback off of Matt's commentary Matt.
<unk> development, it's a function of where do we have the depth, where do we have the bench strength to be able to take on new business. We've always talked about the single greatest gating factor on growth the demand for the services or the amount of opportunities that are out there, it's our own ability to hire develop train and then successfully deploy man.
<unk> candidates that remains that remains as true as ever today I know, we haven't talked about it in recent quarters and years as much as we had historically, but pivoting to growth mode here that will be front and center in our own internal assessment and analysis and focus in <unk>.
I would imagine it will be a conversation we have quarter to quarter in this forum so.
Nothing necessarily as generally speaking as a catalyst to put a specific customer group over the hump. It's just.
Prospective client by client assessment, and where our management development efforts and capacity match up with the demand Thats where were able to execute on the growth strategy.
Okay, great. Thank you very much have a good day. Thank you Andy.
The next question is from Brian <unk> with Jefferies. Your line is open.
Hi, Good morning, just housing on for Brian . Thank you for taking my question. So my first question has to do with our margins in both segments right you had housekeeping at eight 7% dining at five 5%.
We think about your pivot into growth mode for the second half of the year, just curious what particularly needs to happen in order for you to see alleviation and margins, especially throughout the year in both segments and for you to see that translation to the bottom line.
Yes, <unk>, it's a great.
Question, I think specifically from a segment perspective, theres always going to be some movement, whether it be month to month or quarter to quarter, largely due to execution and you alluded to it new business adds and theres. Other considerations that are happening each and every day in our field based operations just as an add on to that there is there is we don't talk.
About it because it's not really material, but around the edges theres, even some seasonality whether it's the number of holidays in a quarter, sometimes the timing of supplemental billings, we had union buyouts at different times during the year I would say just for some additional context from a margin perspective, if you look back pre COVID-19 our segment margins.
We're in that 9% to 10% range for Evs, and 5% to 6% range for dining we would expect to track and trend in and around those levels for 2023, even with the expectation expectations, we have around growth and the margin compression that could create again with the degree of quarter to quarter variability.
Thanks, That's really helpful. And then just last question for me just curious as we think about.
Cecil refer our reserves and other adjustments.
Can you maybe talk about the sustainability of these adjustments I think you had talked about how with Stifel is pretty formulaic and at times volatile but.
Any thoughts around.
Where this could settle out when you expect to I guess.
See adjustments kind of taper out.
Your P&L.
Yes, and I know we've discussed it at previous times on this call just to maybe take a step back to your question Tashi, but the industry is still recovering it has not yet recovered and that's the primary reason why coming into the year, even on the heels of a very strong Q4 cash collections quarter, we expected some fits.
And starts on the collections front, especially in the first half of the year. That's why we provided coming into the year more modest cash flow estimates and that's why we highlighted our expectation for volatility around C. So we don't expect that to be the new norm.
In the quarters and years ahead, but in this current environment. It was expected that we would see some seasonal volatility I think that said specifically to this quarter.
It was a difficult environment, we expected that especially with the may 11th exploration of the public health emergency we saw clients really looking to maximize their own liquidity and flexibility and that impacted our April efforts, but overall any negative impact on our customer base specific to the public.
Emergency was really less than feared and we were successful in executing on our strategies in May and June which is why we highlighted that strong momentum heading into the back half of the year. So getting back to your question around seasonal specifically as we're consistently collecting what we bill we would absolutely.
Expect seasonal to moderate and to become more normalized we will continue to make the adjustment in the in the adjusted EBITDA table irrespective of whether it's an upward adjustment or a downward adjustment because we do believe longer term.
Write offs actual write offs as a more effective way and probably a more indicative of what.
Would actually be a P&L charge for ATSG, but again in terms of the actual business side of it as cash flow and cash as cash collections improve which we expect them to do the back half of the year, we would expect to see sort of moderate.
Thanks Ted.
<unk>.
The next question is from Jack Melick with William Blair. Your line is open.
Yes, hi, good morning, Jack on for Ryan This morning.
<unk>.
Any additional insight into how youre getting comfort over any potential exposure to the finalized rule that might increase staffing requirements.
The comfort coming from client conversations are you doing more site specific analyses to gauge risk just kind of curious how youre thinking about this potential headwind.
Yes, Jack its a good question and it's certainly as you alluded to it certainly.
<unk> within the industry right now and I think the latest is that the proposed plan is expected soon although we've heard that for.
For months at this point, but all industry stakeholders remain on high alert.
I'd say the industry view slash perspective is around minimum staffing is that if there were inappropriate pilot an appropriate phase in periods and with it a recognition of the labor constraints and it was fully funded.
And the industry would and really has leaned into that type of framework, but if it's an unfunded mandate without recognizing the realities on the ground I do not believe that would be well received.
From our perspective, assuming there is a minimum staffing requirement announced later this year.
Our our assessment of it is it would likely be very narrow, meaning it would be related to patient care staff only it would likely have a phase in period of up to five years, probably in the three to five year range, there would likely be a robust waiver process, especially for world facilities.
And it would have to certify political changes in administration and all the inevitable litigation that would come with it. So there's a lot of road to hoe here, Jack but I would say stay tuned theres going to be more to come from a minimum staffing perspective, but in the meantime, we'll wait and see.
Just to bring it back to us for a moment.
That that uncertainty is out there.
Around not just the regulatory environment, but also recover.
Recovery of the industry the reimbursement environment does forced to a degree providers to look for ways to create more certainty in their business and we've talked about this before but the central theme in our value proposition is providing operational and financial peace of mind, so not just with the minimum staffing requirement, but all of the.
Other variables within the industry some of which are not necessarily new creates that demand for the types of services that we're able to provide.
Yes.
Okay, that's super insightful I appreciate that and I guess, just switching gears a little bit.
Yes.
Any update on your capital allocation strategy.
Yeah.
No from a from our perspective it continues to.
Go down the path, we expected it to our number one capital allocation priority continues to be internal investment and investment in organic growth drivers. We remain active on the inorganic front and exploring activities looking to build selectively inorganic opportunities that we can.
<unk> strategically within the company, there's nothing to announce but thats something we remain active in and.
We continue to keep an eye open for buyback opportunities. We did not have any buybacks in Q2, but that will continue to be a very selective a very opportunistic approach that we take towards buybacks.
Got it that's all for me thank you.
Thanks Jack.
The next question is from Bill Sutherland with Benchmark Company. Your line is open.
Hey, good morning, guys. Thanks for the question.
The.
State based reimbursement.
You called out.
Good morning.
Can you give us a little color on the states.
Yes.
A higher number of contracts just kind of curious.
Those facilities are starting to see kind of state level.
Yes, bill over the past 12 months really theres been a number of state based wins in some of those states are.
High density states for us with respect to our client facilities, when you think about Florida, Illinois, Pennsylvania.
More recently, Texas and Ohio.
And there is variability there right I mean, although.
One may classify a reimbursement increase in a particular state as a win there's degrees right for instance, the state of Ohio, just had a pretty substantial dollar PPD increase that was above what was expected, Ohio historically has not been the best Steve from an operating perspective, you contrast that with Texas that did in fact.
An increase but it was.
I'll say less than what operators were hoping for its been quite some time since the state of Texas did in fact get an increase so you could put that on the board technically as a win in that it was an increase that providers were able to secure but still deemed insufficient. Another state would be new York, which was a bit mixed where there was.
Six 5% reimbursement rate increase that was a bit higher than what was initially proposed but certainly sub but what the industry was looking forward in light of massively increasing costs for operators in that state and.
Really quite a lag in time from the prior reimbursement rate increase so it's a mixed bag and certainly something that we pay attention to bill.
At the state based levels and from an overall regulatory and reimbursement based perspective, but much more important for us obviously is how that trickles down and impacts the facility and the operator. So it's one component of that overall financial assessment inclusive of occupancy payor.
Mix, and how they're able to staff and manage their nursing departments as well and the effect that that has overall occupancy.
Okay.
I think just housekeeping revenue was down just a bit.
Quarter on quarter.
<unk>.
A couple more exits involve there I'm just curious about the renewal rate.
Yes, that's right Bill we would we did exit some business, we would classify that as more normal course exits. So nothing substantial the full run rate of which was reflected in the quarter.
While we're talking about the segment level revenue I would note that dining we saw a bit of a step up there and that was just a couple of new business adds again nothing substantial so both the housekeeping exit in the dining ads really were fully reflected in the run rate revenue for the quarter.
Okay.
And.
Are your contract.
The expansions that you are getting an education youre, reflecting.
And the overall numbers.
Alright.
That's correct Bill there reflected respectively in housekeeping and laundry.
And then also dining segment as well.
Okay.
Is that part of the back half.
<unk>.
It is thats correct.
Okay.
And then last one you mentioned doing at least.
$30 million of free cash in the for the full year is that still look quite good.
Right the right way to think about it.
Yes.
Looking to the back half of the year, specifically, we're still we're still targeting that $25 million to $30 million range. So depending on where we fall in that range or if we exceed that range that that could obviously have an impact on the number you just shared but 20% to $30 million as our back half of the year target for free cash flow.
Okay. Thanks.
Thanks, Dan Fantastic great. Okay. Thank you Bill.
We have no further questions at this time I will turn it back to the presenters for any closing remarks.
Great. Thank you, Chris and the in.
In the months ahead, we remain confident in our ability to control the controllable.
<unk> about the ongoing challenges that remain within our industry and broader economy and focused on executing on our strategic priorities to drive growth and deliver long term value to our shareholders. So on behalf of Matt and all of US at healthcare services group I wanted to thank Chris for hosting the call today and thank you to.
Everyone for joining.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
Yeah.
Yeah.