Q4 2024 Healthcare Services Group Inc Earnings Call
Speaker Change: Good day. 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,
Speaker Change: Actual results may differ materially from those expressed or implied as a result of various risks.
Speaker Change: Uncertainties and important factors including 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 statement notice.
Speaker Change: Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to USGAAP can be found in this morning's press release. I'd now like to hand over to Ted Waltz, CEO. You may now begin.
Ted Waltz: Good morning, everyone, and welcome to HCSG's fourth quarter 2024 earnings call. With me today are Matt McKee, our Chief Communications Officer, and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our fourth quarter results and plan on filing our 10K by the end of the week.
Ted Waltz: Today, in my opening remarks, I'll discuss our Q4 highlights, share our perspective on the latest industry trends and developments, and discuss our 2025 outlook.
Ted Waltz: Matt will then provide a more detailed discussion on our 2-4 results, and then Vikas will provide an update on our liquidity position and share our 2025 capital allocation priorities.
Ted Waltz: We will then open up the call for Q&A. So with that overview, I'd like to now discuss our two four highlights.
Ted Waltz: 2024 was a transitional year for HCSG, as it marked a pivotal shift from recovery to renewed growth. This shift was highlighted by our Q4 results and the positive momentum we're carrying into the new year.
Ted Waltz: For the three months ended December 31st, we reported revenue of $437.8 million, net income and diluted EPS of $11.9 million and $0.16, inclusive of new business startup costs.
Ted Waltz: and reported cash flow from operations of $36.2 million and actual cash flow from operations excluding the change in payroll accrual of $27 million.
Ted Waltz: I'd like to now share our perspective on the latest industry trends and developments.
Ted Waltz: Industry fundamentals continue to gain strength, highlighted by the powerful multi-decade demographic tailwind that is now beginning to work its way into the long-term and post-acute care system.
Ted Waltz: In 2026, the first baby boomers will turn 80 years old, and by the year 2030, all 70 million-plus boomers will be over the age of 65, with the oldest being in their mid-80s, the primary age cohort for long-term and post-acute care utilization.
Ted Waltz: We expect that the demand and opportunities for service providers in this space, especially for those with compelling value propositions, durable business models, and market-leading positions, to only increase in the months and years ahead.
Ted Waltz: The industry's most recent operating trends remain positive as well, highlighted by a steady increase in workforce availability, with the industry adding over 100,000 jobs since the beginning of 2023.
Ted Waltz: rising occupancy which now sits at 80% in line with pre-pandemic levels
Ted Waltz: and a stable reimbursement environment, which includes October's 4.2% increase in Medicare rates for fiscal year 2025, as well as continued positive reimbursement trends at the state level.
Ted Waltz: On the regulatory front, we continue to believe that CMS's Final Minimum Staffing Rule will either undergo significant revision during the extended phase-in period or be eliminated in its entirety, especially given the pending litigation and recent change in administration.
Ted Waltz: Regarding the change in administration, we believe that President Trump's pro-business priorities on taxes, energy, and regulation will be a net benefit to most US domestics, including ours.
Ted Waltz: Specifically to the industry, the Trump administration was very collaborative and supportive of the provider community during the first term.
Ted Waltz: And while it's still too early to know exactly what, if any, reimbursement, regulatory, or administrative changes will be pursued, overall industry sentiment on the new administration remains positive.
Ted Waltz: As far as the outlook for 2025, our top three strategic priorities continue to be as follows.
Ted Waltz: Our first priority is driving growth by executing on our organic growth strategy through hiring, training, and developing future management candidates, converting opportunities from our sales pipeline into new business ads, and retaining our existing facility business.
Ted Waltz: We expect mid-single-digit revenue growth in the year ahead and estimate a Q1 revenue range of $440 to $450 million.
Ted Waltz: Our second priority is managing costs, managing costs of services in line with our target of 86%, and managing SG&A into the targeted range of eight and a half to nine and a half percent.
Ted Waltz: Our key operating trends for customer experience, system adherence, regulatory compliance, and budget discipline continued to trend positively throughout 2024, and our field-based team remained laser-focused on exceeding expectations in the year ahead.
Ted Waltz: Our third priority is optimizing cash flow. Our cash flow continued to gain strength throughout 2024, culminating in an outstanding fourth quarter, largely fueled by our strongest cash collection results in over three years.
Ted Waltz: We estimate 2025 actual cash flow from operations, excluding the change in payroll accrual, in the range of $45 to $60 million.
Ted Waltz: Looking ahead, we are confident that focusing on our strategic priorities, supported by our strong business fundamentals, will enable us to further accelerate growth, enhance profitability, and maximize cash flow through 2025 and beyond.
Matt Mckee: So with those opening comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.
Matt: Thanks, Ted, and good morning, everyone. Revenue was reported at $437.8 million. Housekeeping and laundry revenue was $192.7 million, and the housekeeping margin was 10.2%. Dining and nutrition revenue was $245.1 million, and the margin was 4.7%.
Matt: Our Q1 revenue estimate is in the range of $440 to $450 million.
Matt: Cost of services was reported at $379.2 million, or 86.6%, which includes new business startup costs. Our 2025 goal is to manage cost of services in the 86% range.
Matt: Reported SG&A was $44.8 million. After adjusting for the $400,000 increase in deferred compensation, actual SG&A was $44.4 million or 10.1%. SG&A is also inclusive of new business startup costs.
Matt: Our 2025 goal is to manage SG&A into the 8.5% to 9.5% range.
Matt: Having said that, based on investments that we've made and spoken about in previous quarters, SG&A has been elevated as a percentage of revenue, so realistically we expect to be tracking in the 9.5 to 10.5% range for the near term, but remain committed to the opportunity for leverage as we continue to grow the top line.
Matt: Net income and diluted earnings per share were reported at $11.9 million and 16 cents per share, inclusive of an estimated three to four million dollars of new business startup costs.
Matt: We've reported cash flow from operations of $36.2 million dollars. Actual cash flow from operations, excluding the change in the payroll accrual, was $27 million dollars.
Matt: We expect 2025 actual cash flow from operations, excluding the change in payroll accrual, in the range of $45 to $60 million.
Matt: I'd now like to turn the call over to Vikas for a discussion on our liquidity position and 2025 capital allocation priorities.
Vikas Singh: Thank you, Matt, and good morning, everyone. I will briefly discuss our liquidity and balance sheet as well as our capital allocation priorities for the year.
Vikas Singh: Our primary sources of liquidity continue to be our cash flow from operating activities, cash and cash equivalents, and our credit facility.
Vikas Singh: We wrapped up 2024 with cash and marketable securities of $135.8 million and a $500 million credit facility. The credit facility is inclusive of a $200 million accordion. At year-end, the credit facility was undrawn and was utilized only for LCs.
Vikas Singh: Turning to our capital allocation, the board regularly reviews our capital allocation strategy to ensure it supports our goal of creating value for shareholders by delivering on our operational objectives and our growth outlook.
Vikas Singh: Our 2025 capital allocation priorities are fully aligned with our strategic plan to direct investments in organic growth drivers, inorganic growth opportunities, and opportunistic share repurchases.
Vikas Singh: First and foremost, internal investments and organic growth will continue to be our highest priority.
Vikas Singh: Recruitment, training and development, and employee engagement, as well as customer and resident experience are central to our business plans and will be further enhanced in the future. We will also continue to invest behind increasing awareness and brand positioning.
Vikas Singh: Secondly, we will prioritize investments in high-quality, inorganic growth opportunities to expand our footprint, accelerate growth, and increase earnings.
Vikas Singh: While we have been measured and deliberate in making acquisitions in the past, we want to explore these opportunities with greater intent going forward.
Vikas Singh: In our core market of long-term and post-acute care, we will focus on complementary opportunities from strategic alliances to investments in emerging technology to adjacent service offerings.
Vikas Singh: In our emerging markets such as education, we will prioritize stocking opportunities that complement our premium dining and EVs brands, namely Meriwether, Godsey, and CSG.
Vikas Singh: And finally, we will continue to prioritize opportunistic share repurchases as a way to return capital to shareholders.
Vikas Singh: Since the February 2023 share repurchase authorization, we have bought back $16 million of our common stock and we have over 6 million shares remaining under that authorization.
Vikas Singh: Future repurchases will depend upon, among other considerations, alternative uses of capital outlined above, current liquidity, and our share price. With that, we will conclude our opening remarks and open up the call for Q&A.
Vikas Singh: We are now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. Your first question comes from Sean Dodge from RBC Capital Markets. Your line is now open.
Sean Dodge: Yeah, thanks. Good morning and congrats on the strong cash flows in the quarter.
Thank you, Sean.
Sean Dodge: and I guess maybe more importantly on the Eagles dominant performance. Thank you. Thank you very much for that. Yeah, it's been an exciting, exciting time. I think on this call, I have to go cash flow first, Sean.
yeah so Ted you mentioned now
Speaker Change: would you all pivoting back to more of a kind of a growth stance that gross margins are being burdened with some of these upfront investments you need to do to drive that? I think Matt said that was
Matt: $3 to $4 million in the quarter, in the fourth quarter.
Matt: How should we be thinking about those start-up cost levels for the next couple of quarters going forward? You've got the 86% cost of sales target that you're maintaining. Is the expectation where you'd be exiting the year at that level, or do you think you can kind of get closer to that a little bit sooner than end of year?
Matt: Yeah, to some degree, Sean, that'll vary depending on when the new business is added. If it's more disproportionate in a specific quarter, that's when you'll see greater
Matt: But, you know, you bring up cost of services, again, we're highly confident in our ability to execute.
removing some of the other considerations.
Matt: You know, I know we mentioned some of those trends at the outset in customer experience, system adherence.
Reg Compliance and Budget Discipline.
Matt: They're really the nearest of near-term margin drivers, and they're going to carry into Q1 and 2025, which again is why we remain confident in our ability to manage the business in that 86.
Matt: Percent Cost Range, but to your point when you think about these what could drive the month a month or quarter to quarter Movement, it's certainly start up related costs, and I would also expand that out to not just
Matt: whether it be payroll and or non-payroll related, but also, you know, the management development investments that we're making in the lead-up to and for the execution of that new business ads. And then, depending on the quarter, there may be some modest seasonality factors.
Matt: in the business, which really offset each other in the main, but could, you know, impact the margins in any given corner. But again, they're far outweighed by operational execution and some of the other factors I mentioned. So.
Matt: But, you know, you have our word. We'll call it out and provide that clarity, you know, once the quarter's passed and we're able to have this discussion.
And I think Sean just said that...
Speaker Change: Sorry, Sean, sorry, just as a bit of a reminder to put a finer point on some of the timing considerations, just a reminder that generally speaking, when we are starting a new piece of business, and as Ted noted, inheriting the budgets, the existing conditions, and the inefficiencies that are currently in place at that facility, the guidepost for us is generally about 90 days.
Speaker Change: to get a new housekeeping and laundry account on budget. And for dining, it stretches out a bit longer, just with some of the considerations relative to the provision of food and the implementation of some of the menu management programs, etc., whereas those starts can generally take about 120 days to get on budget. So again, relative to the timing of those new business starts, that's one way to think about the pressure that it could have on margin.
Speaker Change: Okay, that's that's good context Matt and maybe just on the cash from operations on an adjusted basis Q4 was up a lot from Q3 But you did you did kind of slightly miss the four-year target is that just related to these startup costs too? And then maybe just any thoughts on on how you kind of bridging you know 24 performance to the 25 guidance now
Speaker Change: Yeah, that's right. We would have reported stronger cash flow shown in the quarter, even stronger cash flow, if not for what really were higher than expected number of new business ads. We were able to pull in
Speaker Change: some opportunities that we had previously thought were going to be more first half of 2025.
Speaker Change: So that puts some additional pressure on the near-term cash flows.
Speaker Change: of how we think of cash flow in a mid-single-digit world. We would expect the second half of the year to be stronger than the first half of the year, which is, again, consistent with what we've seen historically.
Speaker Change: But aren't going to provide for all the reasons we just discussed specific quarter to quarter
Speaker Change: cash flow ranges, specifically because of the considerations related to new business ads and some of the other factors. And I think to really illustrate that point further.
Speaker Change: You know, that 45 to 60 range assumes mid-single-digit growth. If new business ads are disproportionate to one specific quarter, you know, in a mid-single-digit world, that would have an effect on that quarter, but not our full-year range.
Speaker Change: may require us to revise that forecast. So again, we have a high degree of confidence in that 45 to 60 range in a mid-single-digit growth world without getting into the quarter-to-quarter estimates because of the considerations we spoke about, primarily new business ad timing.
Speaker Change: Cash generation was the fact that our cash collection for the quarter was in excess of 100 percent.
Speaker Change: If you look at the back half of last year, Q3 and Q4, our collection rate was in excess of 99.5%, so I think the emphasis on cash collections has been the driver of your initial observation around cash flows.
Sean Dodge: Okay, perfect. And then just to make sure we can calibrate our models here, Matt, do you have the payroll accrual days in the fourth quarter, and then maybe just what they should be for the next few quarters?
Sean Dodge: Yes, Sean, so in Q1, the change in payroll accrual will have an $8 million negative effect on cash flow, so that's a three-day decrease.
From the 12 Days
a payroll that was accrued in the fourth quarter.
Sean Dodge: to then nine days in the first quarter. And then looking out over the balance of the year, we'll have a seven day increase from nine days in Q1 to 16 days in Q2. So that'll have a $20 million positive effect.
Sedano result.
Sean Dodge: in a $17 million negative effect on reported cash flow and then in the fourth quarter it'll be another six day decrease.
Sean Dodge: from 10 days in Q3 to 4 days in fourth quarter. So the change in payroll accrual will have a $17 million negative effect on reported cash flow in the fourth quarter as well.
Okay, perfect. Thanks, and congratulations again. Hey, thank you.
Sean Dodge: Your next question comes from Andy Whitman from Baird. Your line is now open.
Sean Dodge: All right, and then just to finish up on the last one, it looks like, so the 45 then, Ted, is that staying basically new businesses at the high end of your expectations and then the 60 would be the low end. Are there any other factors?
Sean Dodge: credit issues or other investments in the P&L that we should be thinking about, or is it really just 45 to 60 is the range of your startup costs and the working capital injection that's required? In a mid-single digit world, that's exactly right.
Yeah.
Sean Dodge: Okay any just and then just to keep going on that a little bit further just anything that you'd say on overall credit quality in the quarter we didn't see a call out anything large here in the quarter but just
Sean Dodge: Was there was there any impact that we should know of? What can you tell us about you know some of the numbers that we're gonna see later in the queue? Maybe those are some of the questions that are worth investigating here.
Yeah, look I think Andy on the
Andy Whitman: collection front credit quality front what we would say is we saw some positive trends over there
Sean Dodge: specifically with respect to DSOs. We brought that DSO number down and I think that is a result of a few factors at play, right? We had a strong collection in the back half of the year, as I just mentioned, that allowed us to bring down our aggregate AR and NR balance.
Sean Dodge: $10 million, which again, if you look at the average for the back half of the year
Sean Dodge: turns out to be about 1.2% of revenue, which is where you would expect it to be if you look at the historical trends. I would say between the momentum on collections...
Speaker Change: The majority of it was cost of services, Andy, and there was a portion of it that was SG&A related, but more than 75% of it would have ran through cost of services.
Was that dining?
largely dining. That's exactly right, yeah.
Okay.
Speaker Change: Okay, just last question for me then is with the with the federal bureaucracy being addressed, and I know this is very real-time here,
Speaker Change: but but are your customers seeing impact to the way they're getting paid or the timeliness from which they're getting unpaid or responses to their questions I was just wondering if there's any impact
Speaker Change: that's flowing through to them, to you, that we should be aware of in these very early days. And obviously, this is rapidly changing, but I just thought I'd check in on this one specifically.
Speaker Change: Yeah, nothing to report on that front. You know, we made it a point to include in our opening remarks the fact that it's, you know, while it's early, there is a recognition that there's likely going to be changes.
Speaker Change: that any changes would be done collaboratively, and likely to the extent there are any changes on any entitlement.
Speaker Change: specifically Medicaid. I think there's a long record of, you know, of the President
Speaker Change: speaking about, you know, his feelings towards Medicare and Social Security.
Speaker Change: and even more recently Medicaid, but to the extent there's any changes, we don't see any near-term effect. I think the idea would be it would be done collaboratively, and that's why the sentiment with the new administration remains remarkably positive among the provider community.
Speaker Change: Alright guys, thanks a lot for your time. Have a good day. Great, thank you.
Speaker Change: The next question comes from AJ Rice from UBS. Your line is now open.
AJ Rice: Hi, everybody. Just to think about the movement and revenues from Q4 to Q1, I think at the midpoint you're stepping up, if I got the math right, about $7 million. Is that all new business? And how much of the new business
AJ Rice: Whatever it was, was reflected in the fourth quarter, or was that something that was?
AJ Rice: carry over that really is largely going to be reflected in Q1.
AJ Rice: And then I would also ask along the new business lines.
AJ Rice: Is there, when you get back in that mode, does there tend to be a seasonal pattern too?
AJ Rice: New business wins, does it tend to happen towards the beginning of the year or later in the year? Any thoughts on that?
AJ Rice: AJ, I would answer the second part of your question first in that there's no real, if you look back, historically seasonal pattern per se to speak to and it's more client-specific, opportunity-specific and then when you look back over the past
AJ Rice: 3-4 years where a significant portion of which we've been in more or less a holding pattern to a degree, one degree or another from a growth perspective.
AJ Rice: Now in terms of the first part of your question and revenue growth
and carry over into Q1.
AJ Rice: Our leaders, they are out, especially our district managers, our training managers, our PDMs.
for their overall stewardship of our management training program.
AJ Rice: and AJ, the commitment they have to the candidates and just the overall program integrity over the past year has been extraordinary as we begin to ramp up into growth mode and the outcomes as far as management trainees has followed suit.
AJ Rice: It's those positive trends, really quality and quantity of management candidates, along with the demand for the services, the business development efforts.
and client retention rates that provide
AJ Rice: that visibility, if you will, for 2025 expectations. I think specifically to Q4, to your question, the new business we added
AJ Rice: was spread fairly evenly throughout the quarter and we had greater than 90% retention rates of our existing client base so no meaningful facility exits and that's really what drove that top line increase.
between Q3 and Q4 were carrying that positive momentum
AJ Rice: business we added in Q4 will roll over into Q1 and then the balance of it
AJ Rice: is related to more newer activity and prospect discussions or the maturity of prospect discussions that have been ongoing but haven't been realized yet. So again, overall, the demand is strong and we're well-positioned to take advantage of these opportunities in the year ahead.
AJ Rice: Okay that's great and then maybe just ask is a follow-up on the expectations around labor inflation and food inflation embedded in your thing in about 2025?
AJ Rice: Yeah, obviously something that we continue to monitor, AJ, looking at the fourth quarter CPU for all items was
90 basis points.
AJ Rice: 10 basis point deflation that we saw in the second quarter.
AJ Rice: This is now the highest level that we've seen since the fourth quarter of 2022. So notably, the month of November was 50 basis points in and of itself, which is the highest monthly inflation we've seen since October of 2022. So certainly, to your point, something that we'll continue to be mindful of and monitor.
AJ Rice: On the wage side, you know, we did see specifically in the nursing and residential care facilities, you know, across the U.S.
you know, 70 basis points of inflation, continuing the...
Theodore Wahl, CFO Alphabet and Google
since
Speaker Change: to the nursing care industry, which is how the data are reported. You know, still close to 100,000, about 95,000 jobs short relative to pre-pandemic levels, but improved from an overall loss of nearly a quarter of a million at its peak.
Speaker Change: So, you know, in 2024, the industry jobs recovery averaged about 3,400 per month.
Speaker Change: compared to 2023, where we saw about 5,600 jobs recovered per month, so a little bit of a slowdown.
Speaker Change: recent comments. So there are some markets with ongoing challenges but we're able to allocate resources to focus and address.
those situations as they arise.
Speaker Change: And the final bow that I would put on this whole conversation is the fact that having gone through, you know, the bottoms-up, laborious exercise of the Contract Modification Initiative,
Speaker Change: We now have rights to pass through not only, you know, food-related inflation, chemical and supply-related inflation, but also the wage inflation that we're experiencing, something closer to real-time. So, with respect to the durability of our contract structure, you know,
Speaker Change: As it relates to managing the business, of course we'll be mindful of inflationary factors on both food supply purchases and wages specific to any given market, but we do have that confidence in the durability of the contract model to be able to recapture any and all such increases.
Speaker Change: Your next question comes from Ryan Daniels from William Blair. Your your line is now open.
Speaker Change: Manager, the Manager Training Program, but is environmental services and kind of education anything to speak to or I guess maybe how should we think about that going forward? Thanks.
Speaker Change: So, we expect to pull through, you know, new business fairly evenly between environmental services and dining. Now, of course, dining new business ads have a greater revenue contribution on a per facility basis. So, even if we're onboarding a comparable number of accounts.
Speaker Change: Yeah, just to level set and as a reminder Jack, you know, we've barely reached 50% penetration in providing
Speaker Change: District and regional management structure that exists in dining and nutrition. So healthcare be the primary driver hopefully looking at a nice split between both environmental services opportunities and dining and then you know supplemented by the ongoing growth in the education and market.
Speaker Change: Perfect. Makes a lot of sense. Thanks. Just as a follow-up, then, off of that, just given that you do have so much opportunity with what you're just speaking to, you know, as we kind of look into the next few years, and I understand you're not guiding to anything, you know, long-term, but maybe directionally, is kind of like the mid-single-digit growth rate kind of like a baseline you should be looking at? Just kind of want to get your thoughts on that.
Speaker Change: That's exactly how we're thinking about it, mid-single digits, when we look out over the last next three to five years. That's what our strategic plan and capital allocation priorities...
Speaker Change: are aligned around so there will be and should be years
Speaker Change: We're quarters where we're pushing higher than that, depending on, again, timing considerations and
Speaker Change: You know, management development efforts and ultimately management development capacity. But it's that mid-single digit that we see this company moving over the next three to five years at the top line.
Speaker Change: and with some additional benefit from an earnings perspective because we'll be leveraging SG&A along the way.
Speaker Change: Okay, understood. And then just one final question for me, what did client retention look like during this quarter? And then was that pretty steady during the course of 2024?
Speaker Change: greater than 90 greater than 90% for the year and trending you know higher than that in the back half of the year.
Thank you, Jack.
Speaker Change: I'd now like to hand back the call over to Ted Wall for final remarks.
Ted Wall: Thank you, Ellie. It's an incredibly exciting time for the company. The innovations of the past few years have further solidified our value proposition, the durability of our business model, and our market-leading position.
Ted Wall: The underlying fundamentals are stronger than ever, and with the industry at the beginning of a multi-decade demographic tailwind, we are very favorably positioned to capitalize on the opportunities ahead and deliver meaningful, long-term shareholder value.
Speaker Change: So on behalf of Matt, Vakas, and all of us at Health Care Services Group, Ellie, I wanted to thank you for hosting the call today, and thank you so much to everyone for joining.
Speaker Change: Thank you for attending today's call. You may now disconnect. Have a wonderful day, everyone.