Healthcare Services Group, Inc. (NASDAQ:HCSG) Q2 2023 Earnings Call Transcript

Healthcare Services Group, Inc. (NASDAQ:HCSG) Q2 2023 Earnings Call Transcript July 26, 2023

Healthcare Services Group, Inc. misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.17.

Operator: Hello, my name is Kirsten, I will be your conference operator today. At this time, I would like to welcome everyone to the HCSG 2023 Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] The matters discussed on today’s conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. For Healthcare Services Group, Inc.’s most recent forward-looking statements 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 and Healthcare Services Group, Inc.’s other SEC filings.

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And as indicated our most recent forward-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. Thank you. Ted Wahl, Chief Executive Officer, you may begin.

Ted Wahl: Thank you and good morning, everyone. Matt McKee, I appreciate you joining us today. We released our second quarter results this morning and plan on filing our 10-Q by the end of the week. For the three months ended June 30, 2023, we reported revenue of $418.9 9 million, GAAP net income of $8.6 million or $0.12 per share, and adjusted EBITDA of $26.3 million. Today in my opening remarks, I’ll discuss our second quarter key accomplishments as well as our outlook for the back half of the year. I’ll then turn the call over to Matt for a more detailed discussion on the quarter. Overall, we delivered strong service execution during the quarter. Our KPIs related to customer experience, systems adherence and regulatory compliance, all trended positively in Q2, leading to high quality and consistent outcomes for our client partners.

I’d now like to highlight our second quarter key accomplishments. The first accomplishment I’d like to highlight is our strong core earnings. For the third consecutive quarter, we achieved our direct cost target of 86% excluding CECL, we managed SG&A within our targeted range, and we delivered adjusted EBITDA of $26.3 million. The second key accomplishment I’d like to highlight is collecting what we build in May in June. This achievement came on the heels of falling short of our April cash collections target as our clients brace for the May 11 expiration of the public health emergency. And although we did not meet our quarterly cash collection objectives, the results we delivered in May and June provides us with positive momentum heading into Q3 and positions us well for a strong back half of the year.

Lastly, I’d like to highlight the continued progress we made in replenishing our new business pipeline during the first half of the year, as we continue to have a growing pipeline of future client partners heading into the back half of 2023 and 2024. And while the timing of new business ads remains dynamic, we are planning for sequential top line growth in the second half of the year, compared to the first half of the year, an estimated Q3 revenue range of $420 million to $430 million. Looking ahead, industry fundamentals continue to improve and a stabilizing labor market and select state based reimbursement increases have contributed to the gradual but steady occupancy recovery. And while there remains uncertainty as to what a minimum staffing requirement might look like for the industry, we remain hopeful that CMS will fully consider the impact on operators before finalizing a rule and have confidence in our customers’ ability to manage any such rule.

We enter the second half of the year with three clear priorities. The first is continuing to manage direct cost at86% Excluding CECL, the second is collecting what we bill building on the strong momentum gained in May and June. The third and perhaps the most impactful is the realization of our business development efforts yielding new facility starts. There is a high level of internal enthusiasm as we pivot the growth mode through the back half of 2023 and then to 2024. So with those introductory comments, I’ll turn the call over to Matt, for more detailed discussion on our Q2 results.

Matt McKee: Thanks, Ted. Good morning, everyone. Revenue for the quarter was recorded at $418.9 million, with housekeeping and laundry, and dining and nutrition segment revenues of $190.8 million and $228.1 million, respectively. Housekeeping and laundry, and dining and nutrition segment margins were 8.7% and 5.5%, respectively. Direct cost of services was reported at $367.7 million, or 87.8%. Direct costs included an $11.3 million increase in our CECL AR reserves. As Ted mentioned in his opening remarks, we again met our goal of managing the business with cost of services in line with our historical target of 86%, excluding CECL. SG&A was reported at $41.4 million after adjusting for the $2.3 million increase in deferred compensation, actual SG&A was $39.1 million, or 9.3%.

We expect 2023 SG&A between 8.5% to 9.5%. The effective tax rate was 24.6%. And the company expects that 2023 tax rate of 24% to 26%. Cash flow from operations for the quarter was $7.4 million, and was impacted by an $18.8 million increase in accrued payroll and a $39 million increase in accounts receivable related to the timing of cash collections. DSO for the quarter was 83 days. Also we would point out that the Q3 payroll accrual will be seven days. That compares to the 13 days that we had in the second quarter of 2023. And the six days that we had in the third quarter of 2022. But the payroll accrual only relates to timing, and the impact ultimately washes out through the full year. And with those opening remarks, we’d now like to open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Sean Dodge with RBC Capital Markets.

Sean Dodge: Yes. Thanks. Good morning. Ted, I just want to start with your comments around collections stuff in April. But sounds like improved in May and June, I guess post, the close of the quarter. Are there any big outstanding balances you’ve now collected? That kind of helped through some of this up? I maybe just kind of give us a sense of DSOs for 83 in the second quarter? Are those going to be able to come down as we go through the balance of the year?

Ted Wahl : Yes, it’s a great question, Sean. And we’ve talked about DSO before in this forum and other forums, DSO for us, we view more as a byproduct of executing our collection strategies and an indicator as to our success. Obviously, it’s something we consider and we focus on but we do view each and every account holistically in terms of our assessments. I think to your question, specifically, if we’re going to be recapturing some of the specifically the April delayed payments, and I can tell you, we are actively working with our customers on finalizing plans, including in the form of promissory notes to make up some of that April shortfall in the coming months. The timing is TBD on that. But we are actively engaged on repayment plans, which could be a nice cashflow tailwind for the back half of the year.

Beyond that our goal remains to be to collect what we build in the quarter ahead. And we’re going to continue to focus on increasing payment frequency, proactively using and utilizing promissory notes and then remaining disciplined in our decision making for both new customers as well as existing business. So again, it’s, we did not meet our objective in April, but the momentum we gained in May and June and what we’ve seen, July to date has really been positive and we feel good about the back half of the year from a collection standpoint.

Sean Dodge: Okay, great. And then if we look across the sales and adjust up to CECL reserves, through the first two quarters, you’ve actually been able to manage that closer to 85%. With your comment that you’re continuing to target 86% for the full year, is that just a function of the investments you’re making around kind of staffing up and positioning now for growth or there’s something else that’s happening there that we should expect kind of core cost of sales, again, excluding CECL to the kind of kind of increase over the course of the year?

Ted Wahl : Yes, at or below 86%, Sean, to your point is the target. We exited the year with the 86% run rate, third consecutive quarter now that we’ve been able to ex CECK, deliver on that target. And to your point, it’s accounting for, of course execution risk, which is always a consideration of growth, when we factor in growth the back half of the year, that’s always going to be a temporary, having a negative temporary impact on cost of sales. As well as anyone, when we start a new piece of business, we’re inhering the existing payrolls, we’re inheriting the supply budgets. Typically, there’s a degree of margin compression, as we work to implement our systems and staffing patterns over the first 60 to 90 days. But I think that’ll be viewed and should be viewed as a positive as we head into the second half of the year because we are expecting and have pivoted already to growth mode going into the second half of 2023.

Operator: The next question is from Andy Wittmann with Baird.