Q2 2025 Healthcare Services Group Inc Earnings Call

Operator: The matter discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group Inc.

Operator: 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, www.hcsg.com. 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 MD&A and other sections of the annual report on Form 10-K of Healthcare Services Group Inc's other SEC filings and as indicated in our most recent forward-looking statements notice.

Thank you for standing by and welcome to the Healthcare Services Group Inc. Second quarter, 2025 earnings conference. Call the matters. Discussed on today's conference, call include forward-looking statements about the business. Prospects of Healthcare Services Group Inc,

Operator: 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.

Operator: 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 followed by the number one on your telephone keypad.

Theodore Wahl: I'd now like to turn the call over to Ted Wahl, President and CEO. You may begin.

For Health Care Services Group Inc, most recent forward-looking statement notice, please refer to the press release issued this morning which can be found on our website. Www.hcsg.com 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 of Healthcare Services Group, Inc, other SEC filings and as indicated. In our most recent 4-l looking statements notice, additionally management will be discussing certain non-gaap Financial measures. A Reconciliation of these items to us. Gaap can be found in this, morning's press release 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 followed by the number 1 on your telephone keypad, I'd now like to turn the call over to Ted wall, president and CEO. You may begin.

Theodore Wahl: Good morning, everyone, and welcome to HCSG's second quarter 2025 earnings call.

Theodore Wahl: With me today are Matt McKee, our Chief Communications Officer, and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our second quarter results and plan on filing our 10-Q by the end of the week. Today, in my opening remarks, I'll discuss our Q2 highlights. share our perspective on the overall business environment, discuss our strategic priorities, and provide details on our $50 million share repurchase.

Ted Wall: Good morning everyone and welcome to 8. Csg's second quarter, 2025 earnings call with me today are Matt mcke our chief Communications officer and the cost saying our Chief Financial Officer

Ted Wall: Earlier this morning, we released our second 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 Q2 highlights.

Speaker Change: Share our perspective on the overall business environment.

Matthew McKee: Matt will then provide a more detailed discussion on our Q2 results, and then Vikas will provide an update on our balance sheet and capital allocation progression.

Speaker Change: Discuss our strategic priorities and provide details on our fifty million dollar. Share repurchase plan.

Theodore Wahl: We will then open up the call for Q&A. But first, I'd like to comment on the previously announced Genesis Healthcare restructuring.

Speaker Change: Matt will then provide a more detailed discussion on our Q2 results and then the costs will provide an update on our balance sheet and capital allocation progression. We will then open up the call for Q&A.

Theodore Wahl: Genesis filed for Chapter 11 bankruptcy on July 9. Following the petition date, we have continued our contractual relationship with the Genesis facilities without disruption in services or payment. And while we're disappointed in the impact that this event had on our second quarter results, we believe its root causes are specific to Genesys and its past circumstances and decisions, and is not a reflection on the current state of the industry. There's been a great deal of external attention paid to Genesys through the years, and rightfully so. They are an important customer of ours, and we've had a long-standing partnership.

Speaker Change: But first, I'd like to comment on the previously announced Genesis HealthCare restructuring.

Speaker Change: Genesis filed for chapter 11, bankruptcy on July 9th.

Following the petition date. We have continued, our contractual relationship with the Genesis facilities without disruption in services or payments.

Speaker Change: In the impact that this event had on our second quarter results, we believe its root causes are specific to Genesis and its past circumstances and decisions. And is not a reflection on the current state of the industry.

Speaker Change: There's been a great deal of external attention paid to Genesis through the years and rightfully. So

Theodore Wahl: That said, we believe this event will result in stronger, healthier client facilities. provide balance sheet clarity for our stakeholders, and remove an overhang that has weighed on our stock for years.

They are an important customer of ours, and we've had a long-standing partnership.

Speaker Change: That said, we believe this event will result in stronger healthier clients facilities.

Theodore Wahl: And now I'd like to move on to discuss results that are more indicative of our underlying business fundamentals and the exciting opportunities that lie ahead. Second quarter growth exceeded our expectations. Q2 was our fifth consecutive sequential revenue increase and our highest rate of growth since Q1 2018. New client wins and high retention drove our organic growth and we have carried that positive momentum into the back half of the year. Despite the genesis news and the resulting impact on our Q2 reported results, our 2025 growth plans and cash flow outlook remain strong. We are reiterating our 2025 mid-single-digit growth expectations and raising our 2025 cash flow from operations forecast, excluding the change in payroll accrual, from $60 to $75 million to $70 to $85 million.

Speaker Change: Provide balance sheet Clarity for our stakeholders and remove and overhang that has weighed on our stock for years.

And now I'd like to move on to discuss results that are more indicative of our underlying business fundamentals in the exciting opportunities that lie ahead

Speaker Change: Second quarter growth, exceeded. Our expectations. Q2 was our fifth consecutive sequential Revenue, increase and our highest rate of growth. Since q1 2018.

Speaker Change: New client wins at high retention drove our organic growth. And we have carried that positive momentum into the back half of the year.

Speaker Change: Despite the Genesis news and the resulting impact on our Q2 reported results, our 2025 growth plans and cash flow, Outlook remains strong.

Speaker Change: We are reiterating our 2025 mid single digit growth, expectations, and raising our 2025 cash flow from operations forecast, excluding the change in payroll approval from 60, to 75 million to 70 to 85 million.

Theodore Wahl: I'd now like to share our perspective on the overall business environment. 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 industry operating trends remain positive as well, highlighted by steady occupancy, increasing workforce availability, and a stable reimbursement environment.

I'd now like to 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.

Theodore Wahl: The One Big Beautiful Bill Act has generated intense political debate and speculation as interest groups on all sides seek to control the narrative. We view this as a predictable response to such significant legislation and anticipate the level of commentary will remain elevated through the midterm. On balance, and specifically as it relates to the industry, we hold a constructive view of the ABBA. Beneficial provisions include the 10-year moratorium on the minimum staffing mandate, in addition to the already successful legal actions. The Industry Exemption from Provider Tax Reductions And the $50 Billion Investment in Rural Markets In the near term, these measures promote even further strength and stability in the industry, and in our view, more than offset any potential longer-term questions about other Medicaid provisions, which may or may not be phased in at some point in the future over several years, and even if phased in, are unlikely to directly or meaningfully impact long-term and post-acute care.

Speaker Change: The most recent industry operating Trends remain positive as well. Highlighted by Steady occupancy, increasing Workforce, availability and a stable reimbursement environment.

Speaker Change: The 1 big beautiful, bill act has generated intense political debate and speculation as interest groups, on all sides seek to control the narrative.

Speaker Change: We view this as a predictable response to such significant legislation and anticipate, the level of commentary will remain elevated through the midterms.

Speaker Change: On balance and specifically as it relates to the industry, we hold a constructive view of the Abba beneficial Provisions. Include the 10-year moratorium on the minimum Staffing mandate in addition to the already successful legal actions,

Speaker Change: the industry exemption from provider tax reductions and the 50 billion dollar investment in rural markets.

Theodore Wahl: Looking ahead, we are optimistic that the administration and Congress will continue to prioritize the changing and expanding needs of our nation's most vulnerable and the providers who care for them each and every day.

Speaker Change: In the near term. These measures promote even further strength and stability in the industry. And in our view, more than offset, any potential longer-term questions about other Medicaid Provisions, which may or may not be phased in at some point in the future over several years. And even if phased in are unlikely to directly or meaningfully impact long-term and post-acute care facilities,

Theodore Wahl: As we enter Q3 and the rest of the year, our top three strategic priorities remain. driving growth by developing management candidates, converting sales pipeline opportunities, and retaining our existing facility business. Managing cost 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. 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 through the second half of 2025 and beyond.

Looking ahead. We are optimistic that the administration and Congress will continue to prioritize the changing and expanding needs of our nation's most vulnerable and the providers who care for them each and every day.

Speaker Change: As we enter Q3 and the rest of the year, our top 3 strategic priorities remain.

Speaker Change: Driving growth by developing management, candidates converting, sales pipeline opportunities and retaining our existing facility business.

Speaker Change: Managing cost 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 through the second half of 2025 and Beyond.

Theodore Wahl: Finally, in conjunction with our earnings release, we announced plans to further accelerate the pace of our share buybacks and over the next 12 months, intend to repurchase $50 million of common stock under our February 2023 share repurchase authorization. Over the course of the last several years, we have continuously strengthened our balance sheet and expect strong cash flow generation over the next 12 months and beyond. We have demonstrated a prudent and balanced approach to capital allocation, including first and foremost, investing in our growth initiative. The current valuation of our stock relative to our long-term growth potential offers a unique opportunity with the buyback to return significant capital to shareholders.

Finally, in conjunction with our earnings release, we announced plans to further accelerate the pace of our share BuyBacks. And over the next 12 months intend to repurchase $50 million of common stock under our February 2023, share repurchase authorization.

Speaker Change: Strengthened our balance sheet and expect strong cash flow generation over the next 12 months and Beyond.

Matthew McKee: So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on Thanks Ted, and good morning everyone. Revenue was reported at $458.5 million, an increase of 7.6% over the prior year. Segment revenues for environmental and dietary services were reported at $205.8 million and $252.7 million respectively.

Speaker Change: We have demonstrated a prudent and balanced approach to Capital allocation, including first, and foremost investing in our growth initiatives. The current valuation of our stock relative to our long-term growth potential offers, a unique opportunity. With the buyback to return, significant Capital to shareholders

Matt: So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Matt: Thanks Chad and good morning. Everyone Revenue was reported at 458.555% over the prior year.

Matthew McKee: We estimate Q3 revenue in the range of $455 to $465 million and reiterate our 2025 mid-single-digit growth expectations. Cost of services was reported at $455.5 million, or 99.4%, and includes the impact of the $61.2 million, or 13.4%, non-cash charge related to the previously announced Genesis restructuring. Our goal is to manage the second half of 2025 cost of services in the 86% range. Reported SG&A was $49.2 million, but after adjusting for the $4.7 million decrease in deferred compensation, actual SG&A was $44.5 million, or 9.7%.

Matt: Segment revenues for environmental and dietary Services were reported at 205.8 million and 252.7 million respectively.

Matt: We estimate 23 Revenue in the range of 455 to 465 million and reiterate our 2025 mid single digit growth expectations.

Matt: Cost of services was reported at 4555.5 million or 99.4% and includes the impact of the 61.2%. Non-cash charge related to the previously announced Genesis restructuring.

Our goal is to manage the second half of 2025 cost of services in the 86% range.

Matthew McKee: The company expects to manage SG&A in the 9.5% to 10.5% range in the near term based on investments that we've made and spoken about in previous quarters, with the longer term goal of managing those costs into the 8.5% to 9.5% range. Segment margins for environmental services were reported at 0.8% and include the impact of a $20.3 million or 9.9% non-cash charge related to the previously announced Genesis restructuring. Segment margins for dietary services were reported at negative 10.1% and include the impact of a $40.9 million or 16.2% non-cash charge related to the previously announced Genesis restructuring.

Matt: Reported sgna was 49.2 Million. But after adjusting for the 4.7 million, decrease in deferred compensation actual sgna was 44.5 million or 9.7%.

The company expects to manage sgna in the 9 and a half to 10 and a half percent range in the near term based on investments that we've made and spoke about in previous quarters with the longer term goal of managing those costs into the 8 and a half to 9 and a half percent range.

Matt: Segment margins for Environmental Services were reported at 0.8% and include the impact of a 20.3 million or 9.9% non-cash charge related to the previously announced Genesis restructuring.

Matthew McKee: Net loss and diluted loss per share were reported at $32.4 million and $0.44 per share. This includes the impact of a $0.65 non-cash charge or $61.2 million pre-tax, tax-affected at 22.7%, related to the previously announced Genesis restructure. As previously announced, we estimate a third quarter, four cents per share, non-cash charge related to the Genesys restructure. Cash flow from operations was reported at $28.8 million. After adjusting for the $20.3 million increase in the payroll accrual, cash flow from operations was $8.5 million.

Segment margins for dietary Services were reported at negative -10.1 and include the impact of a 40.9 million or 16.2%. Non-cash, charge related to the previously announced Genesis restructuring.

Matt: Net loss and diluted loss per share were reported at 32.4 million and 444 cents per share.

Matt: This includes the impact of a 65 Cent, non-cash, charge or 61.2 million pre-tax tax, affected at 22.7% related to the previously announced Genesis restructuring.

Matt: As previously, announced we estimate a third quarter, 4 cents per share, non-cash charge related to The Genesis restructuring.

Matthew McKee: We're raising our 2025 cash flow from operations forecast, excluding the change in payroll accrual from $60 to $75 million to $70 to $85 million.

Matt: Test flow from operations was reported at 28.8 million after adjusting for the 203 million increase in the payroll approval cash flow from operations was 8.5 million.

Vikas Singh: I'd now like to turn the call over to Vikas for a discussion on our Liquidity, Balance Sheet and Capital Allocation progression.

Matt: We're raising our 2025 cash flow from operations forecast, excluding the change in payroll approval from 60, to 75 million to 70 to 85 million.

Matt: I'd now like to turn the call over to vikas for a discussion on our liquidity balance sheet and capital allocation progression.

Vikas Singh: Thank you, Matt, and good morning, everyone. Our balance sheet strength and liquidity position have been driven by sustained collection trends and results in the current quarter as well as the last few quarters. We ended the second quarter with cash and marketable securities of $164.1 million. This includes 7.9 million of ERC receipts in the second quarter. At the present time, there is no income statement impact from ERC, as these credits are being recorded on our balance sheet only. Our credit facility was undrawn at quarter end with utilization limited to LCs only.

Vikas: Thank you, Matt, and good morning everyone.

Vikas: Our balance sheet strength and liquidity position have been driven by sustained collection Trends and results in the current quarter as well as the last few quarters.

Vikas: We ended the second quarter with cash and marketable securities of 164.1 million.

Vikas: This includes 7.9 million of ERC receipts in the second quarter.

At the present time, there is no income statement impact from ERC as these credits are being recorded on our balance sheet, only.

Our credit facility was undrawn at quarter end with utilization limited to LC's only.

Vikas Singh: On the capital allocation front, our priorities are to direct investments towards organic growth, acquisitions, and opportunistic share repurchases. Overall, our balance sheet and liquidity are well positioned to facilitate and support our growth journey through organic and inorganic emissions. As for activity during the second quarter, we repurchased 7.6 million of our common stock this quarter. This takes our year-to-date buybacks to 14.6 million. And while there were no completed acquisitions in the quarter, we continue to actively evaluate opportunities.

Vikas: On the capital allocation front row. Priorities are to direct Investments towards organic growth Acquisitions and opportunistic. Share repurchases. Overall, our balance sheet and liquidity are well, positioned to facilitate and support. Our growth journey through organic and inorganic initiatives.

Vikas: As for activity, during the second quarter, we repurchase 7.6 million of our common stock. This quarter, this takes our year to date, BuyBacks to 14.6 million,

Vikas: No completed Acquisitions in the quarter. We continue to actively evaluate opportunities.

Vikas Singh: Finally, as Ted highlighted in his remarks, in conjunction with our earnings release, we announced plans to further accelerate the pace of our share buybacks. And over the next 12 months, we intend to repurchase 50 million of our common stock under our February 2023 share repurchase authorization. We expect these repurchases to be made on the open market, which may include a 10B51 plan as well as through privately negotiated transactions.

Ted Wall: Finally as Ted highlighted in his remarks, in conjunction with our earnings release, we announced plans to further accelerate the pace of our share BuyBacks. And over the next 12 months, we intend to repurchase 50 million of our common stock under our February 2023. Share repurchase authorization.

Operator: With that, we will conclude our opening remarks and open up the call for Q&A. Thank you.

Ted Wall: We expect these repurchases to be made on the open market, which may include a 10 B 51 plan, as well as through, privately, negotiated transactions.

Ted Wall: With that, we will conclude our opening remarks and open up the call for Q&A.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again.

A.J. Rice: Your first question comes from the line of A.J. Rice from UBS. Your line is open.

Ted Wall: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again,

A.J. Rice: Hi, everyone. Maybe just a few quick ones here. Just to make sure I understand on the Genesis situation between the big charge you took this quarter and the little follow-on you're pointing to for the third quarter, well, you have effectively written off all of your exposure to Genesis at that point, and I assume your positioning is pretty strong within the capital structure there.

Speaker Change: Your first question comes from the line of AJ rice from UBS, your line is open.

Speaker Change: Uh, hi everyone. Um, maybe just a few uh, quick ones here. Um, just to make sure I understand on the Genesis situation between the big charge. You took this quarter and the little follow on your phone to you. For the third quarter, what you have effectively written off ever, all of your exposure to Genesis at that point. And I assume uh, your positioning is pretty strong within the

Matthew McKee: Do you have any sense about recoveries or where the process is and how quick there might be resolution on the outstanding receivable? Good morning, A.J., and yes to your first question, that after the third quarter, which will include some of the pre-petition amounts that fell into that quarter, it will effectively be reserved in its entirety. I think specifically as far as the process is concerned and potential recoveries, it's still very early, so we do not have much to report on in terms of developments other than the standard affidavits and motions one would typically see at this stage of the process.

Speaker Change: Uh, capital structure there. Um, do you have any sense about recoveries or where the process is, and how quick there might be resolution on the outstanding receivables?

Matthew McKee: What I would add is that we are expert in navigating the process and our partnership within the four walls of the client communities we service with Genesys are as strong as they've ever been. As you know, Chapter 11 recoveries tend to vary case by case, and we're obviously going to leverage that strong role that you referenced and prioritize recovery, but again, it's still too early in the process to speculate on what that may look like.

Speaker Change: Good morning AJ. And yes to your first question that after the third quarter which will include some of the you know, the the the pre-petition amounts that fell into that quarter uh it'll effectively be reserved in its entirety. Uh I think specifically to the as far as the process is concerned and potential recovery is it still very early so we do not have much to report on in terms of developments other than the standard affidavit and motions, 1 would typically see at this stage of the process.

Matthew McKee: Okay, and then I just wanted to think about where you're at with respect to growth. You've got, on the one hand, retention and attrition that you have to deal with every year, albeit modest, hopefully. Are you back to sort of a normalized rate there? Can you just comment on that and comment on how much new business ads you've had and maybe sort of how that stays as you look at the back half of the year? Sure, and I know I referred to this in my opening remarks, but, you know, when you think about Q2, it was our fifth consecutive sequential revenue increase and our highest rate of growth we've had since the first quarter of 2018, and that's really driven, as you alluded to, the successful execution on our organic growth strategy, developing management candidates, converting the sales pipeline opportunities, and as you highlighted, retaining the existing business.

Speaker Change: What I would add is that we are expert in navigating the process and our partnership within the 4 Walls of the client communities. We service with Genesis or as strong as they've ever been. Uh as you know chapter 11, recoveries tend to vary Case by case and you know we're obviously going to leverage that strong role uh that you referenced and prioritize recovery. But again it's still too early in the process to speculate on what that may be.

Speaker Change: Okay, um, and then I just wanted to think about where you're at with respect to growth. Um, you've got on the 1 hand retention and attrition that you have to deal with every year. I'll be at modest. Hopefully are you back to sort of a normalized rate? Their can you just comment on that and uh, and comment on how much new business ads you had and, and maybe sort of how that stage as you look at the back end of the year,

Matthew McKee: The majority of the Q1 to Q2 sequential top line increase was really driven by new business wins that this quarter, this past quarter, were more heavily weighted towards the front end of Q2, along with, you know, 90% plus customer retention rates that we feel very positive about being able to maintain those trends going forward, and, you know, just for the benefit of everyone that's on this call, 90% client retention has been foundational to the company since its inception. You know, there was some choppiness over the past few years, you know, in the post-COVID re-kind of structuring and resetting of the industry, and, you know, very unusual amount of ownership changes coming into play, some of whom we weren't comfortable partnering with, so we had a disproportionately high number of exits relative to what we've seen historically, but when we look out, certainly for the back half of the year, and even beyond that, A.J., over the next three to five years, we absolutely expect 90% plus retention rates to be, you know, what the company experiences and what one could expect out of us going forward.

Speaker Change: Sure. And I I know I referred to this in my opening remarks, but, you know, when you think about Q2 it was our fifth consecutive sequential Revenue, increase and our highest rate of growth, we've had since the first quarter of 2018 and that's really driven as you alluded to the successful execution on our organic growth strategy, developing management, candidates converting the sales pipeline opportunities. And as you highlighted retaining, the existing business the majority of the q1 to Q2 sequential Topline increase was really driven by new business wins that this quarter. This past quarter where more heavily weighted towards the front end of Q2 along with, you know, 90% Plus customer retention rates. That we feel very positive about being able to maintain those Trends going forward and you know, just for the benefit of everyone that's on this call 90% client retention has been foundational to the company sits in the since its Inception. You know, there was some choppiness.

Matthew McKee: Specifically, I guess from a top line perspective, with the back half of the year, $455 to $465 is what we're expecting. And then we would expect the second half of the year revenues to grow sequentially compared to the first half of the year revenues.

Speaker Change: Over the past few years, uh, on, you know, on the PO in the postco re re uh, kind of structuring and resetting of the industry. And, you know, very high, very unusual amount of, uh, of ownership changes coming into play some of whom we weren't comfortable partnering with. So we had a disproportionately high number of exits, uh, relative to what we've seen historically, but when we look out, certainly, for the back half of the year and even beyond that AJ over the next 3 to 5 years, we absolutely expect 90 plus percent retention rates to be uh, you know what the company experiences and what 1 could expect out of us going forward.

Speaker Change: The year 455 to 465 is what we're expecting and then we would expect the second half of the Year, revenues to grow sequentially, compared to the first half of the Year revenues.

Matthew McKee: Okay, maybe just lastly, any update on food inflation? I know there's a lot of noise out there about tariffs and everything else. What are you seeing? And I assume you're getting that all passed through with your contract structure, but any update on that? Yeah that's correct AJ, I'm glad you pointed that out because even in a volatile scenario or a volatile market we do have the rights to pass through those increases to our clients. Now of course we're always aiming to mitigate specific menu items or food line items that are disproportionately showing signs of inflation and we have that flexibility to do so with our network of clinical dietitians working in concert with the food service directors at the facilities themselves as far as menu management.

Speaker Change: Okay, uh maybe just lastly on the um, any update on food inflation? I know there's a lot of noise out there about tariffs and everything else. Uh what are you seeing? And uh, I assume you're getting that all passed through with your contract structure, but any update on that?

Matthew McKee: So we're able to mitigate that certainly from both an operational and a financial perspective but to just bring it back to a higher level you know CPI for all items in the quarter was 60 basis points which was actually the same as what we saw in Q1. Food at home inflation specifically it's really and you sort of called this out AJ but it's continued to bounce around month to month. It was down quarter to quarter Q2 showed 20 basis points of inflation which compared to 1% inflation that we saw in Q1 and 50 basis points of inflation that we saw in Q4.

Speaker Change: Yeah, that's correct AJ. I'm, I'm glad you pointed that out. Because even in a volatile scenario or a volatile Market, we do have the rights to pass through those increases to our clients. Now, of course, we're always aiming to mitigate, um, you know, specific menu items, or or food line items that are disproportionately showing signs of inflation and we have that flexibility to do so with our network of clinical dietitians working in concert with the, you know, Food Service directors, at the facilities themselves, as far as menu management. So we're able to mitigate that certainly from both an operational and a financial perspective but to just bring it back to a higher level. You know CPI for all items in the quarter was 60 basis points, which was actually the same as what we saw in q1, um, food at home inflation specifically. It's really, you know, you sort of call this out AJ, but it's continued to bounce around month to month. It was down quarter to quarter, you know, Q2 showed, 20 basis points of inflation which can

Matthew McKee: Interestingly you know the month of April showed 40 basis points of deflation but then May and June were both coming in at about 30 basis points of inflation and that's for food at home. So certainly something we'll continue to monitor you know we'll manage and mitigate those cost increases as well as we possibly can for the benefit of our clients at the facility level and then ultimately in as much as we are seeing cost increases you know we've got the contractual rights to pass those increases through.

A.J. Rice: Okay, great. Thanks so much.

Speaker Change: Compared to 1% inflation that we saw in q1 and 50 basis points of inflation that we saw in Q4, interestingly, you know, the month of April showed 40 basis points of deflation but then May and June were both coming in at about 30 basis points of inflation and that's for for food at home. So certainly something we'll continue to monitor. You know, we'll, we'll manage and mitigate those cost increases as well as we possibly can for the benefit of our clients at the facility level. And then ultimately in as much as we are seeing, um, cost increases, you know, we've got the contractual rights that pass those increases through.

Speaker Change: Okay, great. Thanks so much.

Tao Qiu: Your next question comes from a line of Tao Qiu from Macquarie. Your line is open.

Speaker Change: Your next question comes from the line of taq from McQuarrie. Your line is open.

Tao Qiu: Hey, good morning, everyone. The first question I want to ask about guidance. So for the first half, you achieve 6.6% revenue growth. And based on the 3Q revenue guidance, it seems that the momentum will continue north of 7% at the midpoint. Any reason you reiterated that mid-single-digit guidance, which is clearly below the current trend line? Any downside risks we should contemplate in OS? It's a great question, Tao, and our goal is to provide as accurate a range as possible given the variables, most notably the timing of new business ads, which can be fluid quarter to quarter, knowing there's always going to be a subset, I'll call it, of intra-quarter opportunities that could be either pushed out or pulled forward.

Hey, good morning everyone. Um, the first question I want to ask about guidance. So for the first half, you achieved 6.6% Revenue growth and based on those 3Q Revenue guidance. It seems that the momentum will continue in north south 7% at the midpoint. Any reason you re reiterated that missing single digit guidance, uh, which is clearly below the current trend line. Any downside rates, we should contemplate in our estimates.

Matthew McKee: You think about in the context of even Q3, the difference between starting an opportunity on September 1 as opposed to October 1 may be insignificant on a year-over-year basis, but could be meaningful to a given quarter depending on the size or scale of a new business opportunity, which is why we're reiterating that mid-single-digit guidance, whereas with those brackets we're providing the 455, the 465, that's really sharing management's visibility and our thinking on what we expect in the specific quarter. I think to the heart of your question, we know where we're trending. There's no reason why we wouldn't expect to continue to trend in that direction, and I would just say we're looking at, we look at things in 12-month increments, not quarter to quarter, so we're, for the moment, sticking with the mid-single-digits, but your point's well taken.

Speaker Change: It's a great. It's a great question Tau and our goal is to provide as accurate a ranges as possible, given the variable variables most notably the timing of new business ads which can be uh fluid quarter to quarter knowing, there's always going to be a subset. I'll call it intra of intra quarter opportunities. That could be either pushed out or pulled forward. You know, you think about in the context of even Q3 the difference between starting and opportunity on September 1st to October 1, maybe insignificant on a year-over-year basis, but could be meaningful to a given quarter depending on the size or scale of a new business opportunity, which is why we're reiterating that mids single digit guidance. Whereas with that, those brackets were providing the 4555 to 4665. That's really sharing Management's visibility and our thinking on what we expect in the specific quarter. I think to the heart of your question, we know where we're trending. There's no reason why we would

Matthew McKee: We're certainly trending to the high single digits and potentially beyond that.

Speaker Change: Didn't expect to continue to Trend in that direction. And I would just say we're, you know, we're we're looking at, we, we look at, we look at things in 12-month increments, not quarter to quarter. So we're for the moment sticking with the bid single digits, but your points, well, taken, we're certainly trending to the high single digits and, and potentially beyond that.

Tao Qiu: Understood.

Matthew McKee: And the second question is about Genesis and more broadly your collection strategy. I think one of the reasons you cited for leveraging those receivable is better recovery expectation in a situation like this. So could you help us understand, you know, whether you expect any difference in the recovery through this process? And what do you, how does this process inform your future collection strategies that you guys have? Yeah, I think from a collection strategy, we continue to focus on increasing payment frequency. You alluded to promissory notes, but utilizing, proactively utilizing promissory notes because of the fact that they're memorializing the indebtedness, they're interest bearing, and they come with guarantees, personal, corporate, at times we're even successful in gaining or garnering a security interest, which may be junior to a senior secured lender, but it still provides us a seat at that secured lender table, and then obviously remaining disciplined in our decision making is the tie that bonds the entirety of the strategy.

Speaker Change: Understood. And the second question is about Genesis and more broadly, your collection strategy. I think 1 of the reasons you cited for leveraging notes, receivable is better. Recovery expectation and situation like this. So could you help us understand? You know, whether you expect any difference in the recovery through this process and uh, what do you what? How does this process inform your future collection? You know, strategies that you guys have.

Matthew McKee: I think specific as Genesis, and I mentioned it, you know, as a response to AJ's question, it's just too early to tell Tao in terms of potential recoveries. It really, you know, Chapter 11s tend to vary case by case. You know, we're hopeful and we're certainly going to leverage our position within the context of the process, and as a key stakeholder, certainly a priority vendor who expects to have a longstanding partnership with the client facilities on a go forward basis post reorg, but at this stage specific to recovery, it's just too early to comment or to really provide anything meaningful.

Speaker Change: Ful and gaining or garnering a security interest, which may be junior to a senior secured lender, but it still provides us a seat at that secured lender table and then obviously remaining disciplined in our decision-making. Uh, is the Tie that bonds the entirety of the strategy? I think specific as Genesis and I mentioned it, you know, as a as a response to AJ's question, it's just too early to tell tell in terms of potential recoveries it it really you know chapter 11's tend to vary Case by case you know we're hopeful and we're certainly going to leverage our position within the within the context of the process. And as a key stakeholder certainly a priority vendor who expects to have a long-standing partnership with the client facilities on a go forward basis. Post reorg but at this stage specific to recovery, it's just too early to to comment or to really provide anything meaningful.

Tao Qiu: We'll wait the update there.

Theodore Wahl: Just curious, lastly, on the macro front, I think, Ted, you mentioned a lot of the positive, you know, discussions coming out of the budget bill and, you know, and the policies from Washington. Just curious, you know, I think the states are setting, you know, healthcare budgets for 2026 and beyond. We have seen some cuts, or at least moderated growth going forward. I know this is still early, but any particular geographies that worries you longer term? No, and we certainly keep tabs on the reporting that you do, and, you know, we have our own regulatory and reimbursement experts here, Tao, that, you know, on a weekly basis are active and engaged in analyzing, assessing that.

Speaker Change: You just we'll wait the update there. Um, just curious. Lastly on the macro front. Um, I think Ted you mentioned about the positive, um, you know, discussions coming out of the the budget Bill. And, you know, and the uh and the policies from Washington just curious. You know, I think the states are setting, you know, Healthcare budgets for 2026 and Beyond. We have seen some Cuts or at least moderated growth going forward. Um I know this is still early but any particular geographies that worries you longer term.

Theodore Wahl: They're corroborating with customers, third-party experts, industry lobbyists, we're seeing the same things. I'd say in some, it's more of a moderation of some of the Medicaid growth, but at the end of the day, from our perspective, the industry fundamentals are continuing to gain strength. And, you know, I talk about... and I alluded to the demographic tailwind that's now, you see the tip of that spear working its way into the long-term and post-acute care system, but we still see the primary driver is that continued interplay between staffing availability and census is going to be the key to any facility's success, because more than any other factor, labor availability is the key to occupancy growth, and occupancy growth in any type of Medicare or Medicaid we view as the key to consistent financial outcomes, and the most recent occupancy data continues to be very positive, external data sources as well as our own, 80% plus trends across all geographies, urban, suburban, rural, facility types, long-term, short-stay, etc.

Speaker Change: No and we certainly keep tabs on the reporting that you do. And you know, we have our own Regulatory and reimbursement experts here to that, you know, on a on a weekly basis, our active and engaged in analyzing assessing that they're correct their corroborating with customers, Third Party, Experts industry lobbyists. We're seeing the same things. I, I'd say in some, it's more of a moderation of some of the Medicaid growth but at the end of the day, from our perspective, the industry fundamentals are continuing to gain strength and you, you know, I I talked about

Theodore Wahl: So that continues to be our view, and when you layer in our more constructive view of ABA, especially the near-term provisions, coupled with what you highlighted, maybe a given state may see some pressure around the edges, but we're still seeing at the state level continued increases, so that's our view.

Speaker Change: And I alluded to the demographic Tailwind. That's now you see the tip of that spear working its way into the long term and post-acute care system, but we still see the primary drivers. That continued interplay between Staffing, availability and census is going to be the key to any facilities success because more than any other Factor. Labor availability is the key to occupancy, growth and occupancy growth in any type of Medicare or Medicaid environment. We view as the key to consistent Financial outcomes. And I the most recent occupancy data continues to be very positive, you know, external data sources as well as our own, you know, 80% plus Trends across all geographies, Urban Suburban, rural facility, types, long-term short, stay Etc. So that's our that continues to be our view. And when you layer in

Speaker Change: You know, are more constructive view of ABA, especially the near-term provisions. Coupled with what you highlighted, maybe a given state. May see some pressure around the edges but we're still seeing at the state level, you know, continued increases. So that's our view.

Theodore Wahl: Thanks for the color.

Operator: to grab some clothes.

Thanks for the color.

Congrats on the call.

Speaker Change: Thank you, T.

Andy Wittmann: Your next question comes from a line of Andy Wittmann from Baird. Your line is open. Oh, great, thanks for taking my question, guys. I guess just kind of to build on the last question and the last answer there, you know, a lot of the offsets in the beautiful bill, we're looking at those states that expanded Medicaid coverage, I guess, way back in Obamacare, and those are the states where I guess it looks like there's going to be a reduction in their ability to to do the healthcare taxes and as a way to fund Medicaid. So, Ted, I just thought maybe there's also, I think, an element of this where During COVID, there was an increase, kind of a more incentive for more states to expand Medicaid that's going to get pulled back.

Speaker Change: You're our next question. Comes from a line of Andy Whitman from beard. Your line is open.

Andy Whitman: Okay, great. Thanks for taking my question, guys. Um, I guess this kind of

Andy Whitman: to to, to build on the last question in the last answer there, you know, the

Andy Whitman: a lot of the offsets in the

Andy Whitman: uh, beautiful bill. Um, we're we're looking at those states that expanded Medicaid coverage, I guess way back in Obamacare. Um, and those are the states where I I I guess it looks like there's going to be a a reduction in their ability to um uh to to do the healthcare taxes and as a way to fund Medicaid. So Ted I just thought maybe,

Andy Whitman: there's also, I think an element of this where, um,

Theodore Wahl: Now, the phase in timing for all these things is not all immediate, but I just thought maybe given that this passed, you could talk about those states where it was expanded specifically coming under a little different funding thing and how this may or could, no, it's not today, but how this could affect your customers. Well, look, I think we called out the big-ticket items that are going to have the near-term, we believe, positive effect, the 10-year moratorium on minimum staffing, the industry exemption from provider tax reductions, Andy, which is notable, highly notable, considering how other providers along the healthcare continuum were impacted, and the $50 billion investment in the rural markets, we think they are the three keystones in the near-term that are going to promote further strength and stability.

Andy Whitman: Uh the during Co there was a, there was an increase kind of a more incentive for more states to expand Medicaid that that's going to get pulled back. Now the phase and timing for all these things is is not all immediate but I just thought maybe given that this past you could talk about those those those states where it was expanded specifically coming under a little

Andy Whitman: A little different, uh, funding thing and how this may or could I know it's not today but how how this you affect how this uh, could affect, uh, your your customers.

Theodore Wahl: Some of the other provisions, a few that you alluded to, you really need to conduct full assessments and see what providers they may affect, whether the provision even that's being affected has even been implemented yet. So we have, and I mentioned it or alluded to it with Tao, our regulatory and reimbursement experts for the One Big Beautiful Bill conducted a full assessment of the 21 Medicaid subchapters that are referenced in ABA, analyzed the potential impact on provider types, effective dates, phase-in periods, even implementation guidance. They then took that work and independently corroborated it with our customers, with third-party industry experts, with lobbyists.

Andy, which is, which is notable, uh, highly notable considering how other providers along, the healthcare Continuum were impacted and the 50 billion dollar investment in the role markets. We think they are the 3 key stones in the near term that are going to promote further strength and stability. Some of the other Provisions. A few that you alluded to, you really need to conduct full assessments and see what, what providers they may affect whether whether the, uh, provision, even that's being affected, has even been implemented yet. So we have, and I mentioned it or alluded to it with tal, our Regulatory and reinvest and reimbursement. Experts for the 1, big beautiful, Bill conducted a full assessment of the 218 subchapters that are referenced in Abba, analyzed the potential impact on provider types, effective dates, phase and periods, even implementation guidance. They then told

Theodore Wahl: That's really what informs our more constructive view on the legislation, specifically as it relates to the industry.

Theodore Wahl: That said, and really to the heart of your question, we recognize and appreciate that the political football of Medicare and Medicaid is always in play, and we're going to remain engaged and nimble so we can react appropriately if needed as Okay, that makes sense.

that that work and independently corroborated it with our customers with third-party industry, experts with lobbyists, that's really what informs our more constructive view on the legislation specifically as it relates to the industry that said and really to the heart of your question. We we recognize and appreciate that the political football of Medicare and Medicaid is always in play and we're going to remain engaged and Nimble so we can react appropriately if needed as needed.

Matthew McKee: And then, I don't know... Matt, just a clarification here, I guess in your announcement with Genesee... recently about as many as 62 cents and regards came in its 65 for the quarter. It sounds like the 4 cents that was mentioned then is still coming in three case. A little bit higher here. Was that just an increase in the assessment of the Genesis or was there something else in their different customer that affected here the quarter was coming in a little bit bigger charge than it was initially expected? Yeah, really, Andy, that was just tax rate related for Q2, and then just from a timing with respect to pre-petition monies, there was a drag between second quarter and ultimately third quarter, which is why you'll see that modest estimated four cents per charge that'll impact Q3.

Speaker Change: Yeah. Okay, that makes sense. Uh, and then I don't know. Um,

Speaker Change: Matt, just clarification here, I guess in your announcements with jennis, you know, recently thought it was going to be a 62 Cent charge came in at 65 for the quarter. Uh, it sounds like, the, the 4 cents that was, uh, mentioned then is, is, is still coming in through Q. So, a little bit higher here. Was that was that just an increase in the assessment of of the Genesis? Or was there something else in there? Different customer that affected here, the quarter with coming in a little bit bigger charge than was initially expected.

Andy Wittmann: Okay, that makes sense.

Yeah, really Andy. That was just tax rate related for Q2 and then just from a timing with respect to pre-petition monies, um, there was a a drag between second quarter and ultimately third quarter, which is why you'll see that modest, um, estimated 4 cents per charge, that'll impact Q3

Andy Wittmann: Those are all my questions for today. Thanks, guys.

Speaker Change: Okay. That makes sense. Uh those are all my questions for today. Thanks guys.

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

Your next question comes from a line of Brian Daniel.

Speaker Change: William Blair, your line is open.

Matthew Mardula: Hey, good morning, everyone.

Matthew Mardula: This is Matthew Mardula on for Ryan Daniels.

Matthew Mardula: Thanks for taking a question. And I'm curious on how has the cross selling of dining services into environmental services been? And can you provide maybe an update on your outlook for it in the second half and just an insight into a long term would be great.

Speaker Change: Hey, good morning, everyone. This is Matthew mullah on for Ryan, Daniels. Thanks for taking a question.

Speaker Change: And I'm curious on how has the cross-selling of Dining Services into Environmental Services been and can you provide maybe an update on your outlook for it and the second half and just any insights into a long term would be great.

Matthew McKee: Yeah, good morning, Matthew. As far as the segment breakdown, our new business pipeline is split fairly evenly between EVS and dietary. And that's a good thing from our perspective, because, you know, our general preference is still to initiate services with environmental services, and then to view dining as a cross-sell opportunity. It allows us to have a front row seat in the facility to really observe and, you know, make an expert assessment in their current dining operation, such that the point in time when we determine it makes sense to then provide a proposal and initiate discussions about converting dining services, we can really come with that much of a better informed proposal and recommendation to really enhance the value proposition that we're providing for that particular client.

Matthew McKee: So, you know, from a top-line perspective, obviously, on a same-store basis, that dining contract typically has about a 2x impact on revenue. So, you know, we want to be able to continue to grow the pipeline of new business opportunities in EVS, you know, to be able to ultimately continue that cross-sell. But as we sit here, you know, we're still barely 50% penetrated in providing dining services within the existing environmental services customer base. So, the demand is unbelievably high. So, plenty of opportunities for us to continue to pull through that dining cross-sell, but likewise have, you know, an eye out towards the future and recognizing Greenfield sales pipeline opportunities for EVS as well.

Yeah, good morning, Matthew um, you know, as far as the segment, breakdown our, our new business pipeline is is split fairly evenly between EVs and dietary. And and that's a good thing from our perspective. Because you know, our general preference is still to initiate services with environmental services and then to view dining as a cross sell opportunity, it allows us to have a front row seat in the facility. You know, it's a really observe and, um, you know, make an expert assessment in their current dining operations such that the point in time, when we determine it makes sense to then provide a proposal and and initiate discussions about converting dining services and we can really come with that much of a, a better informed, uh, proposal and recommendation to really enhance the value proposition that we're providing for, that particular client. So, you know, from a, a Top Line perspective, obviously on a same store basis that dining contract, typically, has about a 2X, um, impact on Revenue. So, you know, we want to be able to continue

Speaker Change: Continue to grow the pipeline of new business opportunities in EVS. Um, you know, to be able to ultimately continue that crossed out. But as we sit here, you know, we're still barely 50% penetrated and providing dining services within the existing environmental services, customer base. So the demand is is unbelievably high. So plenty of opportunities for us to continue to pull through that dining cross sell. Uh, but likewise have you know, an eye out towards the future and and recognizing Greenfield sales pipeline opportunities for EVS as well.

Matthew McKee: Great, thank you for that.

Matthew McKee: And then regarding the educational segment, I know it is still a small percentage of revenue, but with school starting again, how are you viewing it for the second half of the year? Yeah, it's amazing. We've been at it for over three years now, and the ongoing returns have been remarkably positive. There are many similarities, as we've discussed previously, between our core market and this still emerging market in that they're both highly fragmented, largely insourced, and our value proposition very much resonates. So we talked about previously some of the seasonality that exists both operationally and from a sales perspective in the education space, and we're coming to what is the end of what's generally considered the sales season right now, for obvious reasons in anticipation of the upcoming academic year.

Speaker Change: Great, thank you for that and then regarding the educational segment, I know it is still a small percentage of Revenue but with school starting again, how are you doing it for the second half of the year?

Matthew McKee: And we've had some really nice wins and continue to put up some nice growth rates. So from a revenue perspective, it's still less than 5% of total company revenues, but certainly an opportunity that we remain committed to moving forward. So positive early returns, strong commitment to the opportunity moving forward, and really a nice complement to the 2025 growth strategy and perhaps something more meaningful beyond that.

Speaker Change: As we've discussed previously, between our core market. And, you know, this still Emerging Market in that they're, you know, both highly fragmented. Largely insourced and our value proposition very much resonates. So, you know, we've talked about previously, some of the seasonality that exists both operationally and from a sales perspective in the education space and, you know, we're coming to what is the end of, you know, what's generally considered the sails season right now, you know, for obvious reasons and anticipation of the upcoming Academic Year and and we've had some really nice wins and continue to put up some nice uh growth rates. So, from a revenue perspective, it's still less than 5% of total company revenues, but certainly an opportunity that we've remained committed to moving forward. So positive earlier returns strong, commitment to the opportunity, moving forward and really a nice complement to the 2025 growth strategy and and perhaps something more meaningful beyond that.

Matthew McKee: Great, thank you so much.

Great, thank you so much.

Operator: And we have reached the end of our question and answer session.

Theodore Wahl: I will now turn the call back over to Ted Wahl for closing remarks. Okay, great. Thank you, Rob. As we enter the second half of 2025, the company's underlying fundamentals are stronger than ever. Our leadership and management team, our enhanced value proposition, our business model and the visibility we have into that model, our training and learning platforms, our KPIs and key business trends, and our strong balance. And with the industry at the beginning of a multi-decade demographic tailwind, we are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful, long-term shareholder value.

Speaker Change: Remarks.

Rob: Okay. Okay, great. Thank you rob. As we enter the second half of 2025. The company's underlying fundamentals are stronger than ever, our leadership and management team. Our enhanced value proposition,

Rob: Our business model and the visibility we have into that model, our training and learning platforms, our kpis and key business Trends and our strong balance sheet.

Theodore Wahl: So on behalf of Matt, Vikas, and all of us at Healthcare Services Group, thank you, Rob, for hosting the call today, and thank you again to everyone for joining.

Rob: And with the industry at the beginning of a, multi-deck a demographic Tailwind. We are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful. Long-term shareholder value.

Operator: This concludes today's conference call. You may now disconnect.

Rob: So on behalf of Matt Vaz and all of us at Healthcare Services Group, thank you, rob, for hosting the call today and thank you again to everyone for joining.

Speaker Change: you may now disconnect