Q3 2023 Healthcare Services Group Inc Earnings Call

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Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the health care Services Group third quarter 2023 earnings Conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your phone.

Pat.

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, which can be found on our website at www Dot H C. S. G Dotcom Acura.

Actual results may differ materially from those expressed or implied as a result of various risks uncertainties and important factors, including those discussed in the risk factors N DNA and other sections of the annual report on Form 10-K, and healthcare Services Group, Inc. 's other SEC filings and as indicated in her most recent forward looking statements.

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 President and CEO you may begin your conference.

Thank you and good morning, everyone that Mccain I appreciate you joining us today, we released our third quarter results. This morning and plan on filing our 10-Q by the end of the week.

Today in my opening remarks, I will first discuss our third quarter financial highlights and key accomplishments.

Next I'll provide an update on recent client restructuring actions.

I'll then share our perspective on the latest industry trends and developments and then finally I'll share our fourth quarter and 'twenty 'twenty four outlook.

I'll, then turn the call over to Matt to provide a more detailed discussion on the quarter, including our basis for GAAP to non-GAAP reporting.

So with that overview I'd like to now discuss our third quarter financial highlights and key accomplishments for.

For the three months ended September 30th 2023 we reported revenue of 411.4 million and adjusted revenue of 424 million in line with our expectations of 420 to 430 million, we reported net loss and diluted loss per share of $5 five.

And seven cents per share and adjusted net income and adjusted diluted earnings per share of $12 5 million and 17 cents per share.

A 13.9 and 13, 3% increase respectively over Q3, 2022.

We reported adjusted EBITDA of $23 3, Million% to 10.2% increase over Q3, 2022, and we reported cash flow from operations of $2 9 million and adjusted cash flow from operations of $18 million.

A 208, 9% increase over Q3 2022.

We entered the second half of the year with three clear priorities and made substantial progress on all three during the quarter. The first was continuing to manage it adjusted cost of services at 86%, which we did.

The second was collecting what we bill building on the strong momentum that we gained in May and June.

In Q3, we delivered our strongest cash collections of the year collecting over 98% of what we built with the modest shortfall primarily related to the timing of new business adds during the quarter.

The third priority was executing on our organic growth strategy adjusted revenue for the quarter was up sequentially.

Our sales pipeline is growing and our recruiting and management development efforts are ramping up as we ready ourselves for growth.

Now moving on to some of the recent client restructuring actions.

We had two long term clients initiate restructurings during the quarter.

As part of their restructuring actions these customer groups divested facilities to new operators. We're pleased to report that we've entered into new agreements with those new operators to retain the business and ensure many more years of partnership.

As a result, we expect a neutral to positive effect on future revenue and earnings related to these facilities.

These client downsizing actions are in line with the ongoing shift in the sector from large multistate operators to smaller regional operators. This shift is a very good thing for us for many reasons not the least of which is diversity of a our risk.

I would also add that notably Genesis is not one of the restructurings. We continue to be very encouraged by the positive direction of their organization as they work towards their goal of having a leaner healthier regional footprint and with our most recent conversations regarding our partnership going forward both operational.

Lee and financially I'd.

I'd like to now share our perspective on the latest industry trends and developments.

As we look towards 2020 for industry fundamentals continue to improve and a stabilizing labor market and select state based reimbursement increases have contributed to the gradual but steady occupancy recovery on.

On the regulatory front on September 1st CMS proposed the minimum staffing rule, which triggered a 60 day comment period that will remain open until November six 2023.

A final rule is expected mid 2024.

There is a growing list of stakeholders opposed to the role including health care industry leaders.

[noise] associations like Orca Medpac members and a bipartisan group of legislators, including 28 Senators and counting.

The reasons for their opposition include the unfunded nature of the mandate.

One size fits all approach the apparent disregard for the realities of present and future nursing availability and the near certainty that if implemented as proposed the rule would lead to facility closures and ultimately reduce access to care, particularly in rural areas.

In addition to the public comment period any rule would have to survive an onslaught of litigation.

Political changes in administration and at least on some level be funded.

From our perspective, there remains great uncertainty as to whether any final rule would ultimately be implemented at least a role that resembles the current proposal.

As far as our outlook for the fourth quarter and 'twenty 'twenty four we enter Q4 with three clear priorities. The first is continuing to manage adjusted cost of services in line with our target of 86%.

The second is collecting what we bill building on the strong momentum gained in May June and Q3, we're raising our expectations for second half of 2023 cash flow from operations from 20 to 30 million to what is now $35 million to $45 million. The third priority is continue.

We need to execute on our organic growth strategy.

Our Q4 adjusted revenue estimated range is 420 $430 million.

We look forward to ending the year on a strong note and expect our positive operating cash collection and new business trends to continue into 2024, so with those introductory comments I'll turn the call over to Matt for a more detailed discussion on the quarter, including our basis for GAAP to non-GAAP reporting.

Thank you Ted and good morning, everyone for those of you who saw the press release. This morning, you might've noticed that we introduced supplemental non-GAAP financial tables, the rationale for the supplemental schedules is to enhance transparency by providing even greater visibility into current business trends to increase period to period comparability and more closely.

Our reporting with how management views the business, so with that context I'd like to now move onto a more detailed discussion of the quarter.

Revenue was $411 $4 million adjusted revenue was $424 million housekeeping and laundry and dining and nutrition segment revenues were $199 million and $225 million, respectively, adjusted housekeeping and laundry and dining and nutrition segment revenues were 194.

$4 $6 million and $229 $4 million respectively.

Housekeeping and laundry and dining <unk> nutrition segment margins were five 4% and 0.9%, respectively, adjusted housekeeping and laundry and dining <unk> nutrition segment margins were seven 2% and four 7% respectively cost of services was $377 $6 million adjusted cost of.

<unk> was $366 $2 million or <unk> 86, 4% in line with our target of 86% and our goal is to continue to manage adjusted cost of services in the 86% range.

SG&A was $39.0 million adjusted SG&A was $43 million or nine 5% within the company's targeted range of eight five to nine 5% and we expect to continue to manage adjusted SG&A within that targeted range.

Third quarter cash flow and adjusted cash flow from operations were $2 $9 million and $18.0 million, respectively. As Ted mentioned in his opening remarks, we raised our expectations for second half 2023 cash flow from operations from $20 million to $30 million $35 million to $45 million.

DSO for the quarter was 82 days adjusted DSO was 79 days, a four day improvement over last quarter.

Also as part of our adjusted results, we adjust for the impact of the change in payroll accrual, but since it will still be included in our reported cash flow from operations, we would point out that the Q4 payroll accrual is 15 days.

That compares to the seven days that we had in the third quarter of 2023, and 14 days that we had in the fourth quarter of 2022, but again, the payroll accrual only relates to quarter to quarter timing.

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

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Your first question comes from the line of Sean Dodge from RBC capital markets. Your line is open.

Yes, thanks, good morning.

Maybe just starting with the impact of the two restructuring.

You said.

Some of the facilities were divested you sign contracts with new operators.

Either of those new agreements contribute any revenue in the quarter I guess I'm, just looking for a little bit of help squaring.

Hi.

That with the revenue and the adjusted revenue you reported should we think about the $424 million of adjusted revenue numbers.

Is that kind of the jumping off point into Q4.

It is Sean and really that in terms of the impact on restructurings. There was no other than the the way it was accounted for as a temporary one time step down in revenue.

Terms of the go forward, we believe that there's going to be more opportunity because divestiture of facilities was a large part of the restructuring activities of both of these groups. So they provide us new operators and smaller nimbler organizations to grow within the future and that's why we expect going forward from a revenue.

And earnings perspective, it could be neutral or neutral to positive event.

Okay, Great and then.

On the guidance for the cash from operations for the second half of the year, the $35 million to $45 million is that an adjusted number or would that be gap and then maybe if you could just walk us through.

Visibility you have into that would give you the confidence to raise that range by the fifth patent.

To be consistent with how we presented it last quarter and the quarter before in terms of our second half of the year expectations, We're just presenting and sharing a GAAP number. So that's the our revised range is has moved from 20 to 30 million to $35 million to $45 million and in terms of in.

Terms of our conviction around that number I think it's it's a function of what we've talked about before while the industry is still recovering it hasn't fully recovered.

We talked about coming into the year, even on the heels of a strong Q4 last year, we expected some fits and starts on the collections front, especially in the beginning of the year, which is why we provided more modest cash flow estimate for the first half of the year, but during the third quarter and really starting in the second quarter with May and June we continued that.

Momentum and you know this quarter collected over 98% of what we build and I mentioned it in the opening remarks, but the modest shortfall was really related to some of the startups, we had intra quarter. So we have positive momentum heading into Q4 and visibility Sean visibility is a big thing in any business.

S, including ours. So I think the signals that you know, Matt and I are trying to send to to our investors and all of our stakeholders as we're continuing to gain visibility into our future performance and that's what gives us conviction.

Okay great.

Great. Thanks, again, and congratulations on the progress in the quarter no I appreciate it John.

Your next question comes from the line of Andy Wittmann from Baird. Your line is open.

Great. Good morning, gentlemen, appreciate you taking the time for my question here.

Matt maybe I wanted to just dig into the 'twenty one three the item here in the reconciliation just to get a little bit more color. It seems like there's two factors here. It looks like there is some of the revenue recognition that.

You talked to in the prior question, but it's also a component of it is just I guess I would just call it kind of bad debt write downs judging from the footnote can you just tell me how much of the $21 seven was well what would be considered a bad debt write down.

Okay.

Okay.

Sean I think and this is Ted speaking about 12, five would have impacted the top line with the balance impacting bad debt and that's just a function of the way the accounting guidance works Theres still a there was still a partial ongoing relationship with the smaller much leaner operation there.

At the existing customer is organized so because theres still an existing customer that's accounted for as a one time revenue step down in the quarter and then Conversely, the other restructuring.

Has been divested in full to two separate operators and because that's a former customer that's accounted for as bad debt. So it's just it's just geography in terms of the P&L, but the same impact noncash onetime from our perspective.

Legacy issue.

Got it. So then I guess the question is from a process point of view.

Given that you've got.

$9 million of kind of bad debt is this is this idea of adjusted revenue that's going to add back some of the bad debt unique circumstances. This quarter should we expect that this is the metric that youre going to report on an ongoing basis.

We we would believe it's going to be circumstance, driven I would expect in most if not just about in most quarters. It would be a zero in terms of the adjusted revenue, but we at least wanted to introduce that possibility because again the accounting rules for revenue are pretty clear. It's I believe it's a ASC 606 that if you.

In negotiating a negotiation and you're excepting getting paid less on what you had previously build and that's with an existing customer that you continue to provide some level of services to then you're expected to record that adjustment as a reduction to revenue rather than bad debt expense. So to the extent, an incident like that or not or eh and <unk>.

Actions like that happens in the future we would account for it in accordance with the guidance, but otherwise we wouldn't expect it to be a recurring theme moving forward.

Okay that makes sense and then maybe just one other one here just on the on the increased cash.

Cash flow guidance here what was there.

I mean, we heard your answer before to the prior question about the visibility and the confidence since may.

That all makes sense was there an item here collecting on a past maybe bad debt that happened in the quarter or that's expected to happen in the balance of the year that gives you. Some of this conference for for this increase.

No. It's really the you know the intra quarter collections and billings that gives us the confidence and with that said we continue to work on our on our with our customers on plans, whether they're in hand, and promissory notes, we've talked about before as a as an important tactic in our overall collection strategy, which can add a dig.

Three a tailwind to it but there was nothing specific to this quarter or notable that would have been unusual it was really large it was largely intra quarter.

<unk>, what we bill and again a function of our strategy working the increased payment frequency. The proactive use of promissory notes and then discipline in our decision, making coupled with and perhaps even more importantly, Andy the recovering environment every quarter that goes by you know census occupancy.

To recover and you know the state based reimbursement benefits.

Benefits are starting to take hold October is the you know the first month that the 4% CMS CMS increase would be realized so you have a pump a confluence of events that I think environmentally make for a stronger a a strengthening industry.

Okay. That's all really helpful perspective, Thank you tend to have a good day. Thanks Andy.

Your next question comes from the line of Ryan Daniels from William Blair. Your line is open.

Yeah, Hey, guys. This is Jackson on for Ryan Daniels, Thanks for taking my question.

In terms of margins it looks like both the housekeeping and laundry and dining and nutrition segment decreased from last quarter on an adjusted basis is there anything to call out here that caused the decrease was it anything to do with restructurings or possibly just you've been attributed to seasonality. Just curious if you can kind of double click on that.

Yes more of the latter than the former Jack you know theres always going to be some movement, you know month to month quarter to quarter, depending on timing of new business adds or exit management development ramp ups operational execution and other considerations that are happening really at each and every day as a part of our business within our field based operations.

Year to date, our adjusted segment margins or eight 8% and five 6% and we would expect to to check in and around those levels for 2024 again with a degree of that quarter to quarter variability. So overall, we continue to have positive operational trends related to customer experience system adherence regulatory compliance and budget discipline all of which are.

Near term margin drivers, which is why we remain confident in our overall ability to continue to manage adjusted cost of services in that 86% range that we've targeted.

Okay perfect. Thanks, and then just a quick follow up to in your prepared remarks, I think you noted that the sales pipeline was ramping up nicely, which obviously correlates really well with you guys I'm trying this growth mode phase.

I'm just curious if you can dive a bit deeper on the sales pipeline and if you can kind of touch and touch on it just like in terms of what youre seeing in terms of demand and as you kind of head into 2024.

Yeah. We appreciate that question because as we've discussed previously our value proposition continues to resonate.

More strongly than it ever has even historically so the demand for the services is absolutely there and not to suggest that increased demand necessarily yields an increased growth rate, but certainly to have greater demand allows us to be that much more.

Selective in determining with whom we would like to establish new partnerships and in many instances expand our existing relationships. So the demand for the services is certainly strong we've built an organization on both the sales side of our field based.

Organization and also within our operations to develop the management pipeline such that we have the management capacity to be able to onboard new facilities all of which are operating at full capacity right now so yeah. The.

The demand, we do anticipate will turn into new business growth and new business opportunities. So given that we did talk about our expectation for the second half of the year to demonstrate.

Topline growth sequentially relative to the first half of the year and expect that growth trajectory to continue into 2024, such that we have every expectation that we see year over year growth 2024 compared to this year.

Yeah.

Awesome. Thanks, guys.

Your next question comes from the line of Brian <unk> from Jefferies. Your line is open.

Yeah.

Brian Your line is open.

And there are no further questions at this time I will turn the call back over to Ted Wahl for some final closing remarks.

Okay, great. Thank you Rob as we look ahead, we remain confident in our ability to control the controllable realistic about the 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 shareholders. So on behalf of Matt.

And all of US at healthcare services group I wanted to again, thank Rob for hosting the call today and thank you again, everyone for joining.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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