Healthcare Services Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 25, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Healthcare Services Group Third Quarter 2023 Earnings Conference 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

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. Most recent forward looking statement notice. Please refer to the press release issued this morning, which can be found on our website at 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 and A and other sections of the Annual Report on Form 10 ks and Healthcare Services Group, Inc.

Operator

Other SEC filings and as indicated in our most recent forward looking statements notice. 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

Thank you. Ted Wall, President and CEO, you may begin your conference.

Speaker 1

Thank you, and good morning, everyone. Matt McKean, I appreciate you joining us today. We released our Q3 results this morning and plan on filing our 10 Q by the end of the week. Today, in my opening remarks, I will first discuss our Q3 financial highlights and key accomplishments. Next, I'll provide an update on recent client restructuring actions.

Speaker 1

I'll then share our perspective on the latest industry trends and developments. And then finally, I'll share our Q4 and 2024 outlook. I'll then turn the call over to Matt to provide a more detailed discussion on the quarter, including our basis for GAAP to non GAAP reporting. So with that overview, I'd like to now discuss our Q3 financial highlights and key accomplishments. For the 3 months ended September 30, 2023, we reported revenue of $411,400,000 and adjusted revenue of $424,000,000 in line with our expectations of $420,000,000 to 430,000,000 We reported net loss and diluted loss per share of $5,500,000 and $0.07 per share and adjusted net income and adjusted diluted earnings per share of $12,500,000 and $0.17 per share, a 13.9% 13.3% increase, respectively, over Q3 2022.

Speaker 1

We reported adjusted EBITDA of $23,300,000 a 10.2% increase over Q3 2022 and we reported cash flow from operations of $2,900,000 and adjusted cash flow from operations of 18,000,000 a 208.9 percent increase over Q3 2022. We entered the second half of the year with 3 clear priorities and made substantial progress on all three during the quarter. The first was continuing to manage adjusted cost of services at 86%, which we did. The second was collecting what we bill, building on the strong momentum that we gained in May June. In Q3, we delivered our strongest cash collections of the year, collecting over 98% of what we billed with the modest shortfall primarily related to the timing of new business adds during the quarter.

Speaker 1

The 3rd priority was executing on our organic growth strategy. Adjusted revenue for the quarter was up sequentially, our sales pipeline is growing and our recruiting and management development efforts are ramping up as we ready ourselves for growth. Now moving on to some of the recent client restructuring actions. We had 2 long term clients initiate restructurings during the quarter. As part of their restructuring actions, These customer groups divested facilities to new operators.

Speaker 1

We're pleased to report that we've entered into new agreements with those new operators to retain the business and ensure many more years of partnership. As a result, we expect a neutral to positive effect on future revenue and earnings related to these facilities. These client downsizing actions are in line with the ongoing shift in the sector from large multistate operators to smaller regional operators. This shift is a very good thing for us for many reasons, not the least of which is diversity of AR risk. I would also add that notably, Genesis is not one of the restructurings.

Speaker 1

We continue to be very encouraged by the positive direction of their organization as they work towards their goal of having a leaner, healthier regional footprint and with our most recent conversations regarding our partnership going forward, both operationally and financially. I'd like to now share our perspective on the latest industry trends and developments. As we look towards 20 24, 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. On the regulatory front, on September 1, CMS proposed the minimum staffing rule, which triggered a 60 day comment period that will remain open until November 6, 2023. A final rule is expected mid-twenty 24.

Speaker 1

There is a growing list of stakeholders opposed to the rule, including healthcare industry leaders, trade associations like AHCA, MedPAC members, and a bipartisan group of including 28 senators and counting. The reasons for their opposition include the unfunded nature of the mandate, the one size fits all approach, the apparent disregard for the realities of present and future nursing availability, and the near certainty that if implemented as proposed, the rule would lead to facility closures and ultimately reduce access to care, particularly in rural areas. In addition to the public comment period, any rule would have to survive an onslaught of litigation, perspective, there remains great uncertainty as to whether any final rule would ultimately be implemented, at least a rule that resembles the current proposal. As far as our outlook for the Q4 and 2024, we enter Q4 with 3 clear priorities. The first is continuing to manage adjusted cost of services in line with our target of 86%.

Speaker 1

The second is collecting what we bill, building on the strong momentum gained in May, June and Q3. We're raising our expectations for second half of twenty twenty three cash flow from operations from $20,000,000 to $30,000,000 to what is now $35,000,000 to $45,000,000 The third priority is continuing to execute on our organic growth strategy. Our Q4 adjusted revenue estimated range is $420,000,000 to $430,000,000 We look forward to ending the year on a strong note and expect our positive operating, cash collection and new business trends to continue into 2024. So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter, including our basis for GAAP to non GAAP reporting.

Speaker 2

Thank you, Ted, and good morning, everyone. For those of you who saw the press release this morning, You might have noticed that we introduced supplemental non GAAP financial tables. The rationale for these supplemental schedules is to enhance transparency by providing even greater visibility into current business trends to increase period to period comparability and more closely align our reporting with how management views the business. So with that context, I'd like to now move on to a more detailed discussion of the quarter. Revenue was $411,400,000 Adjusted revenue was $424,000,000 Housekeeping and Laundry and Dining and Nutrition segment revenues were $190,900,000 and $220,500,000 respectively.

Speaker 2

Adjusted Housekeeping and Laundry and Dining and Nutrition segment revenues for $194,600,000 $229,400,000 respectively. Housekeeping and Laundry and Dining and Nutrition segment margins were 5.4% and 0.9%, respectively. Adjusted Housekeeping and Laundry and Dining and Nutrition segment margins were 7.2% and 4.7%, respectively. Cost of services was $377,600,000 Adjusted cost of services was $166,200,000 or 86.4 percent, in line with our target of 86%. And our goal is to continue to manage adjusted cost of services in the 86% range.

Speaker 2

SG and A was $39,000,000 adjusted SG and A was $40,300,000 or 9.5%, within the company's targeted range of 8.5% to 9.5%, and we expect to continue to manage adjusted SG and A within that targeted range. 3rd quarter cash flow and adjusted cash flow from operations were $2,900,000 $18,000,000 respectively. As Ted mentioned in his opening remarks, we raised our expectations for second half twenty twenty three cash flow from operations from $20,000,000 to $30,000,000 to $35,000,000 to $45,000,000 DSO for the quarter was 82 days, adjusted DSO was 79 days, 4 day improvement over last quarter. Also as part of our adjusted results, we adjust for the impact of the change in payroll accrual, Since it will still be included in our reported cash flow from operations, we would point out that the Q4 payroll accrual is 15 days. That compares to the 7 days that we had in the Q3 of 2023 and 14 days that we had in the Q4 of 2022.

Speaker 2

But again, the payroll accrual only relates to quarter to quarter timing. So with those opening remarks, we'd now like to open up the call for questions.

Operator

Your first question comes from the line of Sean Dodge from RBC Capital Markets. Your line is open.

Speaker 3

Yes. Thanks. Good morning. Maybe just starting with the impact of the 2 restructurings. Ted, you said Some of the facilities were divested, but East Time contracts with the new operators.

Speaker 3

Did either of those new agreements contribute any revenue in the quarter? I guess, I'm Just looking for a little bit of help squaring. That was the revenue and the adjusted revenue you reported. Should we think about the $424,000,000 of adjusted revenue numbers. Is that kind of the jumping off point into Q4?

Speaker 1

It is, Sean. And really that In terms of the impact on restructurings, there was no other than the way it was accounted for as a temporary one time step down in revenue. In terms of the go forward, we believe that there's going to be more opportunity because divestiture of facilities was a large part of the restructuring activities of both of these groups. So they provide us new operators and smaller nimbler organizations to grow within the future. And that's why we expect going forward from a revenue and earnings perspective it to be neutral to positive event.

Speaker 3

Okay, great. And then On the guidance for the cash from operations for the second half of the year, the $35,000,000 to $45,000,000 is that an adjusted number or would that be GAAP? And then maybe if you could just walk us through the visibility you have into that. What gave you the confidence to raise that range by the $15,000,000

Speaker 1

To be consistent with how we presented it last quarter and the quarter before in terms of our second half of the year Patients were just presenting and sharing a gap number. So that's our revised range has moved from $20,000,000 to $30,000,000 to $35,000,000 $45,000,000 And in terms of our conviction around that number, I think it's a function of We've talked about before, while the industry is still recovering, it hasn't fully recovered. We talked about coming into the year even on the heels of a strong Q4 last year, we expected The fits and starts on the collections front, especially in the beginning of the year, which is why we provided more modest cash flow estimates in the first half of the year. But during the Q3 and really starting in the Q2 with May June, we continued that strong momentum. And this quarter Collected over 98% of what we build, and I mentioned it in the opening remarks, but the modest shortfall was really related to some of the startups we had intra quarter.

Speaker 1

So we have positive momentum heading into Q4. And visibility, On visibility is a big thing in any business, including ours. So I think the signals that Matt and I are trying to send To our investors and all of our stakeholders as we're continuing to gain visibility into our future performance and that's what gives us conviction.

Speaker 3

Okay, great. Thanks again and congratulations on the progress in the quarter.

Speaker 1

No, I appreciate it, Sean.

Operator

Your next question comes from the line of Andy Wittmann from Baird. Your line is open.

Speaker 4

Great. Good morning, gentlemen. Appreciate you taking the time for my Question here. And I guess, Matt, maybe I wanted to just dig into the $21,300,000,000, the item here in the reconciliation, just to get a little bit more color. It seems like there Two factors here.

Speaker 4

It looks like there's some of the revenue recognition that you talked to in the prior question, but Also component that's just, I guess, I just call it kind of bad debt write downs judging from the footnote. Can you just tell me how much the 21,700,000 was? What would be it, I guess, considered the bad debt write down?

Speaker 1

Sean, I think and this is Ted speaking. About 12.5 would have impacted the top line with the balance impacting bad debt. And that's just A function of the way the accounting guidance works, there's still a there was still a partial ongoing relationship With the smaller, much leaner operation that, the existing customer is organized. So because there's still an existing That's accounted for as a onetime revenue step down in the quarter. And then conversely, the other restructuring Has been divested in full to 2 separate operators and because that's a former customer that's accounted for as bad debt.

Speaker 1

So it's just geography in terms of P and L, but the same impact non cash one time from our perspective, legacy issue.

Speaker 4

Got it. So then I guess the Question is from a process point of view, given that you've got about $9,000,000 of kind of bad debt, Is this idea of adjusted revenue that's going to add back some of the bad debt unique to the circumstances this quarter? Or should we expect that this is a metric that you're going to report on an ongoing basis.

Speaker 1

We would believe it's going to be circumstance driven. I would expect in most, if not In most quarters, it would be a 0 in terms of the adjusted revenue. But we at least wanted to introduce that Possibility because again, the accounting rules for revenue are pretty clear. I believe it's ASC 606 that if you're in a negotiation and you're And you're accepting getting paid less on what you had previously billed and that's with an existing customer that you continue to provide some level of services to, Then you're expected to record that adjustment as a reduction to revenue rather than bad debt expense. So to the extent An incident like that or an action like that happens in the future, we would account for it in accordance with the guidance.

Speaker 1

But otherwise, we wouldn't expect it to be a recurring theme moving forward.

Speaker 4

Okay. That makes sense. And then maybe, Ted, just one other one here, just On the increased cash flow guidance here, was there I mean, we heard your answer before to the prior question about the visibility and the confidence since May, And that all makes sense. Was there an item here collecting on a past maybe bad debt that happened in the quarter or that's expected to happen In the balance of the year that gives you some of this confidence for this increase?

Speaker 1

No. It's really the intra quarter collections and billings that gives us the confidence. And with that said, we continue to work on our with our customers on plans, whether they're in hand and promissory notes We talked about before as an important tactic in our overall collection strategy, which can add a degree of tailwind to it, but there was nothing specific to this Quarter or notable that would have been unusual. It was really large it was largely intra quarter, collecting what we bill and again a function of our strategy working, the increased payment frequency, the proactive use of promissory notes and then discipline in our decision making, Coupled with and perhaps even more importantly, Andy, the recovering environment. Every quarter that goes by, census Occupancy continues to recover and the state based reimbursement benefits are starting to take hold.

Speaker 1

October is The 1st month that the 4% CMS increase would be realized. So you have confluence of events that I think environmentally make for a stronger a strengthening industry.

Speaker 4

Okay. That's all really helpful perspective. Thank you, Ted. Have a good day.

Speaker 1

Thanks, Andy.

Operator

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

Speaker 5

Yes. Hey, guys. This is Jack Stunt on for Ryan Daniels. Thanks for taking my question. In terms of margins, It looks like both the Housekeeping and Laundry and then Dining and Nutrition segments decreased from last quarter on an adjusted basis.

Speaker 5

Is there anything to call out here that caused this decrease? Was it anything to do with restructurings or possibly just even attributed to seasonality? Just curious if you can kind of double click on that. Thanks.

Speaker 6

Yes, more the latter than the former, Jack. There's always going to be some movement month to month, quarter to quarter depending on Timing of new business adds or exit, management development ramp ups, operational execution and other considerations that are happening really at each and every day as a part of our business within our field based operations. Year to date, our adjusted segment margins are 8.8% 5.6% And we'd expect to track in and around those levels for 2024, again, with the degree of that quarter to quarter variability. So overall, we continue to have Positive operational trends related to customer experience, system adherence, regulatory compliance and budget discipline, all of which are near term margin drivers, Which is why we remain confident in our overall ability to continue to manage adjusted cost of services in that 86% range that we've targeted.

Speaker 5

Okay, perfect. Thanks. And then just a quick follow-up too. In your prepared remarks, I think you noted that the sales pipeline was ramping up nicely, which Obviously, correlates really well with you guys entering this growth mode phase. Just curious if you can dive a bit deeper on the sales pipeline and if you can kind of touch on and just like in terms of what you're in terms of demand and as you kind of head into 2024.

Speaker 6

Yes. We appreciate that question because as we've discussed previously, our value proposition Continues to resonate more strongly than it ever has even historically. So the demand for the services is absolutely there. And Not to suggest that increased demand necessarily yields an increased growth rate, but certainly to have greater demand allows us to be that much more Selective in determining with whom we would like to establish new partnerships and in many instances expand our existing relationships. So The demand for the services is certainly strong.

Speaker 6

We've built an organization on both the sales side of our field based organization and also within our operations to develop the management pipeline such that we have the management capacity to be able to onboard new facilities, all of which are operating at full capacity right now. So the demand we do anticipate will turn into new business growth and new business opportunities. So given that, we did talk about our expectation for the second half of the year to demonstrate top line growth sequential relative to the first half of the year and expect that growth trajectory to continue into 2024 such that we have every expectation that we see Year over year growth 2024 compared to this year.

Speaker 5

Awesome. Thanks guys.

Operator

Your next question comes from the line of Brian Tanquilut from Jefferies. Your line is open. Brian, your line is open. And there are no further questions at this time. I will turn the call back over to Ted Wall for some final closing remarks.

Speaker 1

Okay, great. Thank you, Rob. As we look ahead, we remain confident in our ability to control the controllables, realistic about the challenges that remain within our industry and broader economy and focused on executing on our strategic priorities to drive growth and deliver long term value to shareholders. So on behalf of Matt and all of us at Healthcare Services Group, I wanted to again thank Rob for hosting the call today. And thank you again everyone for joining.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • In Q3, Healthcare Services Group reported adjusted revenue of $424 million, adjusted net income of $12.5 million (13.9% YoY growth), adjusted EBITDA of $23.3 million (10.2% YoY growth), and adjusted cash flow from operations of $18 million (209% YoY improvement).
  • The company managed adjusted cost of services at its 86% target and achieved its strongest cash collections of the year, recovering over 98% of billings due to improved billing practices and timing.
  • Following restructurings by two long-term clients, HCSG secured new service agreements with the divested operators, expecting a neutral to positive impact on future revenue and earnings.
  • Industry fundamentals are strengthening with occupancy recovery and state-based reimbursement increases, though the proposed CMS minimum staffing rule faces significant stakeholder opposition and potential litigation, leaving implementation uncertain.
  • HCSG raised its second-half 2023 cash flow from operations guidance to $35 million–$45 million and projects Q4 adjusted revenue of $420 million–$430 million while maintaining priorities on cost control, cash collections, and organic growth.
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Earnings Conference Call
Healthcare Services Group Q3 2023
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