Q1 2025 Healthcare Services Group Inc Earnings Call
Regina: Hello, and thank you for standing by. My name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Healthcare Services Group Inc. first quarter 2025 earnings call
Regina: All lines have been placed on mute to prevent any background noise
Regina: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again.
Speaker Change: The matters discussed on today's conference call include four looking statements about the business prospects of Healthcare Services Group Inc.
Speaker Change: Please refer to the press release issued this morning, which can be found on our website www.hcst.com.
Speaker Change: 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, MDNA and other sections of the annual report on Form 10K and Healthcare Services Group Inc's other SEC filings, and it's indicated in our most recent board looking statements notice.
Speaker Change: Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to US Gap can be found in this morning's press release. I would now like to turn the conference over to Ted Wall, President and CEO . Please go ahead.
Speaker Change: Good morning everyone and welcome to HCSG's first quarter 2025 earnings call. With me today our Matt McKee, our chief communications officer and the cost saying our chief financial officer.
Speaker Change: Earlier this morning, we released our first quarter results and plan on filing our 10Q by the end of the week.
Speaker Change: Today, in my opening remarks, I'll discuss our Q1 highlights, share our perspective on the overall business environment, and discuss our strategic priorities for Q2 and the rest of the year.
Speaker Change: Matt will then provide a more detailed discussion on our Q1 results, and then Vikas will provide an update on our balance sheet and capital allocation progression.
Speaker Change: We will then open up the call for Q&A So with that overview I'd like to now discuss our Q1 highlights
Speaker Change: First quarter revenue and cash flows were our best results in five years and we have carried that positive momentum into the second quarter.
Speaker Change: New client, Winsgrove, Organic Growth, Collections Exceeded Revenue, and we continue to strengthen our balance sheet.
Speaker Change: These favorable dynamics have positioned us to execute on our growth plans while delivering sustainable, profitable results in the year ahead.
Speaker Change: and cash flow from operations, excluding the change in payroll accrual of $32.1 million in increase of $41.3 million over the prior year.
Speaker Change: I'd like to now share our perspective on the overall business environment.
Speaker Change: Industry Fundamentals continue to gain strength, highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the long-term and post-acute care system.
The most recent operating trends remain positive as well [inaudible]
Workforce availability and occupancy continue to grow.
Speaker Change: The reimbursement environment is stable, and on the regulatory front in early April , a Texas federal court struck down the key provisions of CMS's final minimum staffing rule, and the outcome applies nationwide.
regarding the recent change in administration.
Speaker Change: While it's still too early to know exactly what, if any reimbursement or regulatory changes could be implemented the Trump administration was incredibly supportive of the industry during its first term and overall industry sentiment on the new administration remains positive.
Speaker Change: Looking ahead to Q2 and the rest of the year are top three strategic priorities remain.
Speaker Change: Driving Growth by Developing Management Candidates, Converting Sales Pipeline Opportunities, and Retaining Our Existing Facility Business.
Speaker Change: Managing costs through field-based operational execution and prudent spend management at the enterprise level, and optimizing cash flow with increased customer payment frequency, enhanced contract terms, and disciplined working capital management.
Speaker Change: We are confident that continuing to execute on our strategic priorities, supported by our strong business fundamentals, will position us to accelerate growth, enhance profitability, and maximize cash flow throughout 2025 and beyond.
Matt Mckee: So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.
Matt: Thank you, Ted, and good morning, everyone. Revenue was reported at $447.7 million, an increase of 5.7% over the prior year's corresponding quarter.
Matt Mckee: Environmental Services Revenue and Margin, were $196.3 million and 10.8%
Matt Mckee: Dietary Services Revenue and Margin were $251.3 million and 7.6%
Matt Mckee: We estimate Q2 revenue in the range of $445 to $455 million and expect second half of the year revenue to grow sequentially compared to the first half of the year revenue.
Cost of services was reported at $379.7 million, or 84.8%.
Matt Mckee: Our 2025 goal is to manage cost of services in the 86% range.
Matt Mckee: Reported SGNA was $45 million. After adjusting for the $1.4 million decrease in deferred compensation, actual SGNA was $46.4 million or 10.4%.
Matt Mckee: Net income and diluted earnings per share were reported at $17.2 million and 23 cents per share.
Matt Mckee: Cash flow from operations was reported at $27.5 million. After adjusting for the $4.6 million decrease in the apparel accrual, actual cash flow from operations was $32.1 million.
Matt Mckee: These numbers include a $12.2 million benefit from the receipt of CARES Act related employee retention credits for ERC.
Matt Mckee: At the present time, there is no income statement impact from ERC, as these credits are being recorded on our balance sheet.
Matt Mckee: We raised our 2025 cash flow from operations expectations, excluding the change in payroll from a range of $45 to $60 million to a range of $60 to $75 million.
Matt Mckee: I'd now like to turn the call over to Vikas for a discussion on our balance sheet and capital allocation progression.
Vikas Singh: Thank you Matt and good morning everyone. In terms of our balance sheet and liquidity position
Vikas Singh: We ended the first quarter with cash and marketable securities of 143.9 million, and a 500 million credit facility, inclusive of a 200 billion accordion.
Vikas Singh: In addition, we have taken steps to rebalance our cash position, our marketable security portfolio as well as our utilization of the current facility, which has further reduced our
Vikas Singh: DSO at the end of 1st quarter was reported at 78 days versus 88 days at the end of Q1 2024.
Vikas Singh: Across the same period, our revenues have increased each quarter and our gross receivables have declined
Vikas Singh: And while DSO and AR balances as stand-alone metrics are important,
Vikas Singh: They are certainly not the only indicator as to how successful we are in executing our cash collection strategy as our 2025 focus contributes to beyond increasing customer payment frequency, proactively utilizing promissory notes.
Vikas Singh: and remaining disciplined in our decision making for both new and existing business.
Vikas Singh: On the capital allocation front, our priorities are fully aligned with our strategic plan to direct investments in organic growth drivers in organic growth opportunities and opportunistic share repurchases.
We continue to prioritize investment in organic good drivers.
Vikas Singh: In addition, we made a small tuck-in acquisition last month. The 2025 revenue impact from the acquisition is about 1% of our total revenue and the revenue impact for the quarter was minimal since the acquisition closed mid-March. Notably, this is our first acquisition since late 2021.
Vikas Singh: We also opportunistically repurchased approximately seven million of common stock during the first quarter to capitalize on our strong liquidity position.
Vikas Singh: The stakes are total buyback to about 23 million since our February 2023 share repurchase authorization.
Vikas Singh: We have another 5.4 million shares remaining outstanding under the authorization at this point of time.
Vikas Singh: and we do expect to continue these opportunistic purchases for the rest of the year.
Vikas Singh: With that, we will conclude our opening remarks and open up the call for Q&A.
Speaker Change: At this time, I'd like to remind everyone in order to ask a question, press star, followed by the number one on your telephone keypad. Our first question will come from the line of Andy Wittmann with Baird. Please go ahead.
Andy Whitman: Yeah, great. I guess I wanted to start at high level, Ted. And so I've just done the regulatory environment. I heard the comments in the prepared remarks. Maybe I just give you a little platform here to expand on what you're hearing. Maybe from your customers about any changes that have happened yet. I don't think there have been any. [inaudible]
Speaker Change: or what things that they're looking at that they think have high probability to affect their position in the industry.
Ted Wahl: Sure Andy, and good morning to you. I think just to frame out your question and the response a bit, I think overall the fundamentals, and I know I mentioned this in the prepared remarks, but the underlying industry fundamentals continue to gain strength.
Ted Wahl: Just when you think about and consider the multi-decade demographic tailwind that has been trickling into the system, that's becoming more notable and that's only going to amplify the strength of the industry.
Ted Wahl: No, in the months and years ahead, so that's a real positive. I do think the key aside from a lot of the noise you may hear out of DC, the key you would hear from most of our customers and the provider community at large is that link between staffing availability and census.
Ted Wahl: because more than any other factor, labor availability is the key to occupancy growth and occupancy.
Ted Wahl: is the key to consistent financial outcomes as well as predictable.
Ted Wahl: Financial Outcomes, and the most recent occupancy data continues to be very positive.
Ted Wahl: and growing across all geographies, whether it be urban, suburban, rural and facility types as well. So that's foundational when you think about industry stability. On the reimbursement side, CMS recently proposed the 2.8% increase.
Ted Wahl: for Medicare rates for fiscal year 2026. That's been generally well received. There continues to be.
positive reimbursement news at the state level as well.
Ted Wahl: You know that Texas ruling that came out which is applied nationwide that all but eliminates the you know minimum staffing or the key provisions of the minimum staffing rule which I believe has been an overhang for the industry since it was announced even if the likelihood of it ultimately being implemented
Ted Wahl: was low. I think specific to the things coming out of DC, I know for instance provider taxes.
types of facilities or communities that more fit our
Ted Wahl: is different depending on a variety of factors occupancy, patient mix
etc. So that's too early to tell.
Ted Wahl: If there were changes, that's the one that you hear whispers about, but I think if you pulled the provider community at least within the sniff
Ted Wahl: of only increasing the demand for the types of services we offer when you think about the central theme of our value proposition, which is certainly financial regulatory and otherwise.
Speaker Change: I guess it's around health and human services, but specifically around there's a belief that it could affect Medicaid reimbursement, federal support for Medicaid. And so I was just wondering if you could comment specifically on that, what you're hearing on that, how that might or may not affect you.
Speaker Change: Yeah, I would say there's a great confidence within the SNF community specifically that the Trump administration was incredibly supportive during its first term.
Speaker Change: You know, that's not going any changes potentially would have no impact on, you know, the funds that are flowing to and from skilled nursing facilities specifically and, you know, the rhetoric out of DC, I think has been consistent with that.
Okay, cool thanks guys, have a good day [inaudible]
Fantastic.
Speaker Change: Our next question comes from the line of AJ Rice with UBS. Please go ahead.
A.J. Rice: Thanks, hi everybody. Just put a fine point on the comment about the court rolling and the minimum staffing rules. Is that just removing overhead or do you think that actually was somehow starting to impact behavior in the way people staff their facilities today in any way?
A.J. Rice: We believe the former, more than the latter, you know, around the edges, AJ, people were complying with maybe some of the initial administrative.
A.J. Rice: types of requirements that were required, but you think about when the actual impact would have happened, it was years out facing over period of time. So it was more the former, not the latter.
Speaker Change: Right, and in the first quarter of your, it looks like your gross margin, your EBITDA margins were above your targets. Is there anything unusual in the first quarter comment on the sustainability of that? I know you did move up your SGNA ratio guidance for the year.
Speaker Change: Yeah, I think specific to the margins and either the EBITDA margins that you called out, service execution continues to be the most significant driver of that if you think about the trends
Speaker Change: Really adjusting for some of the variability we've seen with Cecil.
Speaker Change: We've continued to show consistency and I'll be a modest improvement quarter to quarter but year over year within those calls to services line and just tying it back to your commentary or your remark on S-GNA.
Now, if you think about-
Speaker Change: into our business, into our organic growth strategy that has helped drive increased employee engagement, retention of those employees, customer experience, the regulatory compliance I referred to and ultimately directly correlates to those.
Speaker Change: You know, consistently consistent and improved margins you called out so in many respects the two work hand in glove with one another
Speaker Change: But, you know, we do expect to continue tracking on the SG&A side more than that nine and a half to ten and a half percent range. But, you know, as we grow the top line, expect to leverage that, not in a linear type of way but over time.
Speaker Change: Okay, major's last question on the inflation both on the food side as well as with the hourly workers any updated thoughts on what you see in there.
Speaker Change: Yeah, so you know CPI AJ for all items in the quarter was 60 basis points compared to 90 basis points in Q4.
in Q4 and 50-bepsh in Q3.
Speaker Change: You know, notably, notably the month of January and March were both 50 basis points.
Speaker Change: which matches what we saw in November and that had been the highest monthly inflation level that we've seen since October of 2022. So, you know, we'll definitely be keeping an eye on that. Obviously, you know, with the pastor provisions that we have in our contractual agreements. Thank you very much.
Speaker Change: You know, we have the rights to pass that through, but having said that, we want to work with our client partners to make sure that we're managing those costs as best we can and have that flexibility in our menu offerings to be able to help accommodate that. The BLS data from an overall wage inflation perspective won't be published until next week on the 30th The BLS data from an overall wage inflation perspective won't be published until next week on the 30th
Speaker Change: That really a higher pace than all other industries, which is a great reversal of what we've seen in prior periods So that's largely fueled by the demographic trend that Ted alluded to in his previous comments and then increasing demand for healthcare and healthcare.
Speaker Change: on a national basis, the skilled nursing industry still has work to do to reach full employment recovery.
Speaker Change: But there was incredibly strong growth in Q1 that it raised about half of that remaining deficit, if you think about kind of pre-pandemic as compared to where we stand today, the industry added about 24,000 new jobs.
Speaker Change: which was about double the pace of what we would have seen in Q4, I'm sorry in 2024.
Speaker Change: where we were only averaging about 3,400 new jobs per month within the industry. So we're now about 47,000 jobs short relative to pre-pandemic levels.
Speaker Change: But at these current rates of recovery, we should be at pre-pandemic levels in less than six months so definitely encouraging trends and dynamics for the industry and then just to again bring it back to Healthcare Services Group. We remain in a good spot. We've seen ongoing improvement stabilization. Our wage growth has remained stable. Our applications are high and continue to grow month to month. [inaudible]
Speaker Change: There are certainly still some lingering markets where there are ongoing challenges but obviously we have the flexibility and the resources to be able to allocate our focus and address those situations as they arise.
Okay, great. Thanks a lot.
Speaker Change: Our next question comes from the line of a tail key with McWari. Please go ahead.
Teoki: Thank you, good morning. Just want to clarify on the revenue guide for the second quarter.
Speaker Change: If you look at the midpoint of their guidance, it suggests a small $3 million step-up in revenue next quarter.
Teoki: I think Vikas mentioned that there's a tucking acquisition that we're at 1% to revenue, so if you back that out implies a relatively flashy sequential movement next quarter, is that the right way to think about it? And if so, what does that say about the pace of growth for the balance of the year?
Teoki: as possible given the variables and aside from the acquisition you mentioned the great is variable for us is really the timing of new business ads which can be fluid quarter to quarter knowing there's always going to be a subset of opportunities that could be pulled in or pushed out depending on you're going to be able to do that.
Teoki: You know, the customer, the prospective customer, the management development pace, etc. So that's really why our mid-single digit guidance that we offer for annual
Teoki: Expectations is the best guide to kind of think about the company and the cadence of growth whereas the quarter to quarter estimates are really ranges we're providing
Teoki: to add some additional near-term visibility based on what management is seeing. So again,
Speaker Change: Okay, got you. And in terms of the cash flow, the operating cash flow guidance raised.
Speaker Change: $15 million there. I think I heard a mention of $12 million cares at.
Speaker Change: in a benefiting first quarter. How much of that raise is driven by this one-time item? And what's your confidence of your collection momentum for the rest of the year? Thank you.
Speaker Change: Yep, so that raises the combination of the two factors that you pointed to, look, we've received these ERC funds of 12 million plus.
Ted Wahl: That definitely did contribute to the upping of the guidance, but the fact that we had a standout Q1, as Ted mentioned the best in five years.
The collection momentum was strong, that contributed as well.
Ted Wahl: to us upping the range. So I think it's a combination of the two factors and look I think what I'll say on the collection front is
Ted Wahl: while Q1 was strong, so was Q3 and Q4. So we are seeing emerging trends supported by the Dynamics and the industry where we feel confident about
Ted Wahl: and sustaining the positive momentum on the collection front. And I think that contributes to the overall confidence around how we think about cash flows for the rest of the year.
Great. Thank you.
Speaker Change: And that will conclude our question and answer session and I will now turn the call back over to Ted Wahl for closing remarks.
Speaker Change: Okay, thank you. It's an incredibly exciting time for HCSG. The innovations of the past few years have further solidified our value proposition, the durability of our business model, and market leading position.
Speaker Change: So on behalf of Matt, Vikas, and all of us at Healthcare Services Group, thank you Regina for hosting today's call, and thank you again to everyone for joining.