Q2 2019 Earnings Call

The negotiating with the new operators.

Having initiated the conversation with respect to the transition to weekly payment with you know at this point the significant majority of our customers of our current customer base.

We feel good about where we sit presently but this is an ever evolving business. It always has been and always will be so you know will remain diligent we will continue to have conversations with our customers will continuously assess their position both financially operationally and otherwise. So there may be a continuation of that trend of elevated transitions maybe in Q3, but we would certainly envision that diminishing in Q4 and the expectation is that Q3 wouldn't approach you know what we saw unfold in Q2 and even in Q1, So I think.

The bulk of that transitional.

Activity has occurred we've navigated are well our way fairly well through it.

Some expectation for continued transitions in Q3, although we do believe we're very well positioned looking out at the likely transitions that we see ahead, but we will remain vigilant will do the work and will continue to.

Continually assess not only transitional customers, but the the current book of business as well and just to add a little more context than mats.

Matt.

Feedback I think bill just to help just to help kind of again some color around it typically if you look at what our historical conversion rate has been more than nine out of every 10.

Operator type change we are successfully transitioning here with seven out of 10 and you know when you when you look at it in in in terms of sheer volume coupled with where some of the facilities were situated what the make up of those facility facilities was in terms of their historical experience lay and then layered on top of that the operators some of the operators coming in.

As I mentioned earlier with with in some cases limited access to capital and varying degrees of experience.

It just made sense for us to.

Exit with our best day being our last day is always the goal, but to exit and kind of move forward and and lay in wait until it makes sense to maybe reengage. So that's that's a typical in terms of leaving more.

This quarter both in terms of you know seven out of 10, instead of our typical greater than nine out of 10 and the sheer volume amplified you know the impact it had on revenues.

Right, but that's helpful to.

Just one more.

What is your exposure in Texas now going forward.

Oh, it's really you know pretty pretty relative to the size of the state as is our typical geographical distribution. If you look at you know each state based on the number of facilities. They have you know we don't we don't talk about specific exposures by customer or by state per se, but we're very comfortable you know on the heels of the senior care reorganization.

And the fact that we're fully reserve there and obviously the impact that had with some of those facilities transitioning this quarter coupled with.

You know the that some of the other work we've done in Texas to solidify existing customer relationships were comfortable with where we're at in that state.

Okay. Thanks, guys.

Hey, Thanks <unk>.

Yeah next question comes on the line <unk>. Please go ahead.

Yes, how yeah. Good morning, I'm, just a couple of questions.

Just trying to get a sense in terms of the adjusted contractual relationships you started in a three q. 18, how those progressed any surprises.

We'd like to see some of those again.

Later this year.

Yeah, you know as we alluded to at the time Mitra, we've largely remained in contact with those folks in some instances we have gone back in in some capacity or another whether it's you know dipping the toe back in in a management capacity or you know fully reengaging into full service operation, but there hasn't been significant movement that would be noteworthy relative to that total book of business. So I would say that the conversations are ongoing.

You know, we we of course as Ted said you always wanted your last day to be your best day, you want to shake hands and part ways as friends remain in contact so there are varying degrees of.

Progress that we've made in in sort of reengaging with those folks and finding ourselves back into the facilities in a full service capacity, but I would say looking at that total book of business as we sit here presently.

Not a significant amount of which would have resumed to a full service partnership but.

As is the case, we continue that dialogue and and that is alternately the direction that we'd like to end up with those folks and.

Feel <unk> you know, we we remain optimistic that that is a possibility with those customers specifically from the Q3.

18 housekeeping adjustments.

Okay. That's great and then just going back in terms of the candidates you've brought on I'm. Just wondering where you are relative to your goal given the tight labor market how difficult it is to.

Get them and.

Are we going to see ease it up now.

2020.

I I think you know Matt mentioned, it but you know by virtue of some of the facility exits the higher than what we've typically experience facility accents, the silver lining wouldn't be the strength and the depth that that added to our existing management team. So you know the the hard work we've done over the past year to to.

Replenished the management pipeline.

Continues by we expect that that kind of stuffing of the final to subside during the third quarter coupled with.

The additional management capacity, we have now as a result of that facility accents I think puts us in a very good position, but you know as you know Metra management development.

Making sure we're hiring and developing high quality people.

That you know or or acclimated to the company have the benefit of going through some apprenticeship period, that's where everything begins for us that's the life of the company, that's where all of our successes or lack thereof. Ultimately emanating from so that's an ongoing process that we're going to have to continue to we just don't continue to focus on we just don't expect to see the stops and starts.

You know that we have seen over the past year or so.

Okay and I'm finally, just trying to get a sense. If you are seeing increased or haven't increased conversations in terms of potential clients looking to give you your business give them.

Indicated you know starting in October going forward with respect to the industry to start.

No things to improve if you're.

Seen that in terms of the calls you're making or receiving.

Yeah or or new business.

Pipeline is as large as it's been at any point in time in the history of the company. So you know the demand for the services as well as the opportunity to grow.

Has never been greater but for US again, given the environment the industry cycle and some of the as we talked about even this past quarter that number of ownership and operator transitions out of taking place you know we are being more selective.

Certainly in the near term so we're ready when that opportunity to present itself will be prepared to re accelerate growth.

Okay, thanks against taking questions.

Thank you <unk>.

Your next question comes from the line of frying Pan Kulich friend Jeffries. Please go ahead.

<unk>.

A question on S.G.N.A.. So you know normalized S.G.N.A. was about 37 million, excluding a deferred compensation cruel and that was down a little bit from you one even though.

The acceptance from the S.P.C. investigation.

Dropped pretty significantly I think from 6 million to 2 million or were there other items impacting S.G.N.A. you to <unk>, yeah. They they would call out.

Well I think I think the the Firstcomp adjustment gets you to 37 million, but then there's another 2 million of S.C.C. related cost as well, which which would get something closer to 35.

Yeah, I I was saying.

In Q1, I think the normalize level after backing out the S.G.N.A., oh with with a little bit lower than 35 right <unk>.

According to my map is any anything that [noise].

Would it would have caused that s. you need to step up and Q2 or was it just kind of normal course.

Yeah nothing notable.

Okay.

I wanted to clarify that and then you know your ability to <unk> redeploy you know the freed up managers you know how how should we be thinking about that.

Pace of that and given that you know you talked about you know kind of increase you know that in and then scrutiny. If clients. You know you know how quickly should be expect to see yeah.

Those folks back on to enter new clients or moved to existing clients you know, replacing the underperforming.

Editors.

Yeah, it's interesting Jason the the way you frame the question because.

With respect to new facility ads timing is always the greatest variable for US you know certainly we've always talked very openly about management capacity is the first box that we have to check clearly as an organization, we find ourselves with that management capacity in hand at the moment and largely distributed evenly geographically so.

The other component of course is the fact that the conversations regarding growth are happening locally. It's the combination of the sales conversation building out that sales pipeline, coupled with the operational coordination to ensure that we do in fact have the management capacity to on board that business. The first.

Question of witches do you have a manager that you can place into that facility secondarily, obviously in a geography in what you're managing a greater number of ownership changes in operational transitions, you're not going to be equipped to handle new facility ads per se because in many respects when there's an ownership change or even an operator change we treat that as a new facility start right. I mean, there's often a getting to know you period of a new administrator, often with several new department heads as well so that does require operational resources to manage through those transitions.

Ultimately as we've talked about.

Management capacity exists we are in fact, initiating and continuing conversations with folks with prospective customers about initiating an engaging to add new facilities likewise, having conversations with existing housekeeping customers of ours to think about adding dining services, but we will take that you know selective approach almost a cautious approach as we work through the diligence in assessing the financial footing of all of those.

Customer and prospective customer types to ensure that now is the right time to engage with them. You know we want to make sure that we're adding business to benefit the company not only in the near term, but in the long term and doesn't in fact, you know handcuff us as it relates to you know credit assessments or payment related decision. So expectation as Ted said, we'll see.

The impact from a revenue perspective of the facility transitions fully run through Q3 results all the while expecting to be adding selectively adding facilities in Q3 expectation being that we'd be adding a greater number of facilities in Q4 than Q3, and then having that position us very favorably to be looking at 2020 at the point to be able to assess you know what is the right go forward growth rate for us given the.

Management considerations operating environment, and then of course layering and those customers specific considerations.

Okay.

That's very helpful. And then last one just any.

Thoughts are framework.

For you know the numb the split of the you know approximately 150 managers that have been freed up how many you know will ultimately end up with new clients versus how many will be you know kind of backfilling or you know, replacing under a vacancy current vacancies are under performers.

Very hard for us to to talk to that kind of a top side level here, Jason the reality as as I said those assessments are and decisions are executed locally within the district framework and it may roll up to a regional level.

In which the director of operations is making those assessments. Obviously, we've talked about this consistently for you know since 1976 that we already management company and having management capacity always benefits us as it relates to upgrading current management management folks and of course looking at the the management pipeline as a means to feed the business development pipeline. So.

We would have to look in the very bottom up type way, but just.

To sort of summarize I would say that.

Feel very good at total company that were able to have those discussions and have the options of upgrading management within the local management structure and or be in a position to think about adding new facilities within the local districts and regions.

Okay fair enough.

Thanks.

Your next question comes from like <unk>. Please go ahead.

Alright, thank you.

So.

I hadn't met and given that you're making management changes in operations, what sort of operational improvements do you think we can affect near term and what levels and types of extent savings or efficiency is can your car in the next 12 months.

Yeah <unk> it wasn't as I mentioned earlier with one of the questions is that there wasn't a catalyst per se as as your maybe alluding to we're thinking about it it was more the natural evolution of the work design the structure and then the leadership teams. So.

That's the that nothing that we would call out as saying as a result of X., we're going to be <unk> be able to execute in on why and see it just wasn't about that.

Alright, well, yeah, I I was just sad chat of course.

As is always the case and probably with any organization, where in a perpetual state of seeking operational improvements and seeking efficiency. So now that will always have a mindful ion attempting to be better, but there as Ted said, there aren't any explicit opportunities that we've identified in which we're saying a. plus b. yield c. by way of specific financial outcomes per se.

Alright, well Jason to that question would be that you mentioned a shift to more internal focus and take some time you know look at your structure and a and how you're doing things.

On the other side of that should we expect some some more up front investment eight or people were systems from now to the end of the year.

As we sit here Chad, we wouldn't expect that and when we talk about sort of that internal focus just want to be clear that that and making sure that our internal designs appropriately reflect customer needs right. I mean, it's an ever changing environment. Our aim is to deliver a tremendous customer experience. So of course, we want to be mindful that our organization continues to evolve to position us to be most favorably.

Positioned relative to customer expectations customer needs. So no I I would say that you know sitting here today, there will be continued evolution of our organization both in the near term and most likely in the long term, but we don't expect that that'll work acquire any further investment or any additional cost from a a management or personnel perspective.

Alright.

In your comments, you know, maybe a pause on new business and taken out of that more internal focus.

What would it take for H.P.S.G. to return to signing contracts again at the levels that we've seen historically isn't it.

Sorting out of existing customer base or as a function of assessing how reimbursement changes affect customer credit quality.

Yeah, I think one is is related to the other and and that's why we have we have as as you're well aware of these two significant.

Industry events happening.

In October both the implementation of P.D.P.M., coupled with the 2.5% increase.

In Medicare reimbursement as well as and along side of the the improving and ongoing improvement around census, and occupancy trends. So I think that certainly bodes well if not for Q4 you know as as all of that is being implemented an integrated but certainly for 2020, meaning we believe the industry is going to be stronger and 2020 then it is.

In in 19 generally so our goal is to be well positioned heading into next year. So we can take advantage of those opportunities I mentioned earlier because pipeline demand for the services growth opportunities with both new customers Greenfield opportunities as well as cross selling.

No dining in nutrition services to existing customers, all <unk>, all available and all as great as it as they've ever been it's a matter of us executing on it. So there is no specific bright line, we're looking to cross to say Hey, now we're ready to go it's going to be a customer by customer assessment and obviously the local operators have something to say about that our local leadership teams have something to say about that because in order for us to take full advantage of all those opportunities we have need to have the management capacity, which we're much further along today than we were a year ago.

Well given that you've just given up some contracts does that actually give you the necessary management capacity to go ahead and expand when you need to.

Absolutely that that's.

That's an additive.

Sort of management capacity benefit relative to the trainees that have been built into the training program via the recruiting in Onboarding efforts that we undertook in Q4 of 18 and she one of 19. So this does nothing but further supplement the existing and developing management capacity.

Alright, I'll leave it at that.

Hey, Thank you chat thanks Jed.

There are no further questions at this time, they turn the call back over to Mister <unk>.

Okay, well. Thank you Jessa and you know 2000 in 19 is our 43rd year of business and the companies underlying fundamentals are strong as ever our leadership and management team our business model and visibility we have into our business performance are key learning platforms.

Operating trends around systems at hearings customer experience employee engagement and margins.

A rock solid balance sheet.

Strong demand for the services.

And the growth opportunity that lies ahead for the company our employees and all of our stakeholders, it's exciting to imagine all of the future possibilities and know that our future begins with our great people going beyond in living out our purpose exemplifying our values and fulfilling our vision.

PVV is our company Touchstone and is the pathway to west delivering sustainable profitable growth over the long term.

So on behalf of Matt and all of US had H.P.S.G. I wanted to thank jessup for hosting the call today and thank you again to everyone for participating.

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

Oh.