Healthcare Services Group Q1 2025 Earnings Call Transcript

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April 23, 2025
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Operator

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Healthcare Services Group Inc. First Quarter twenty twenty five Earnings Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. 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, 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

I would now like to turn the conference over to Ted Wall, President and CEO. Please go ahead.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

Good morning, everyone, and welcome to HCSG's first quarter twenty twenty five earnings call. With me today are Matt McKee, our Chief Communications Officer and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our first quarter results and plan on filing our 10 Q by the end of the week. Today, in my opening remarks, I'll discuss our Q1 highlights, share our perspective on the overall business environment, and discuss our strategic priorities for Q2 and the rest of the year. Matt will then provide a more detailed discussion on our Q1 results, and then Vikas will provide an update on our balance sheet and capital allocation progression.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

We will then open up the call for Q and A. So with that overview, I'd like to now discuss our Q1 highlights. First quarter revenue and cash flows were our best results in five years, and we have carried that positive momentum into the second quarter. New client wins drove organic growth, collections exceeded revenue, and we continue to strengthen our balance sheet. These favorable dynamics have positioned us to execute on our growth plans while delivering sustainable, profitable results in the year ahead.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

For the three months ended March 31, we reported revenue of $447,700,000 an increase of 5.7% over the prior year net income and diluted EPS of 17,200,000.0 and $0.23 and cash flow from operations, excluding the change in payroll accrual, of 32,100,000.0 an increase of $41,300,000 over the prior year. I'd like to now 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 operating trends remain positive as well. Workforce availability and occupancy continue to grow.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

The reimbursement environment is stable. And on the regulatory front, in early April, a Texas federal court struck down the key provisions of CMS's final minimum staffing rule, and the outcome applies nationwide. Regarding the recent change in administration, while it's still too early to know exactly what, if any, reimbursement or regulatory changes could be implemented, the Trump administration was incredibly supportive of the industry during its first term, and overall industry sentiment on the new administration remains positive. Looking ahead to q two 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 throughout 2025 and beyond.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

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

Matthew McKee
Matthew McKee
Chief Communications Officer at Healthcare Services Group

Thank you, Ted, and good morning, everyone. Revenue was reported at $447,700,000 an increase of 5.7% over the prior year's corresponding quarter. Environmental services revenue and margin were 196,300,000 and 10.8%. Dietary services revenue and margin were $251,300,000 and 7.6%. We estimate Q2 revenue in the range of $445,000,000 to $455,000,000 and expect second half of the year revenue to grow sequentially compared to the first half of the year revenue.

Matthew McKee
Matthew McKee
Chief Communications Officer at Healthcare Services Group

Cost of services was reported at $379,700,000 or 84.8%. Our 2025 goal is to manage cost of services in the 86% range. Reported SG and A was $45,000,000 After adjusting for the $1,400,000 decrease in deferred compensation, actual SG and A was $46,400,000 or 10.4%. The company expects to manage SG and 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. Net income and diluted earnings per share were reported at $17,200,000 and $0.23 per share.

Matthew McKee
Matthew McKee
Chief Communications Officer at Healthcare Services Group

Cash flow from operations was reported at $27,500,000 After adjusting for the $4,600,000 decrease in the payroll accrual, actual cash flow from operations was $32,100,000 These numbers include a $12,200,000 benefit from the receipt of CARES Act related employee retention credits, or ERC. At the present time, there is no income statement impact from ERC as these credits are being recorded on our balance sheet. We raised our 2025 cash flow from operations expectations, excluding the change in payroll accrual, from a range of 45,000,000 to $60,000,000 to a range of 60,000,000 to $75,000,000 I'd now like to turn the call over to Vikas for a discussion on our balance sheet and capital allocation progression.

Vikas Singh
Vikas Singh
EVP & CFO at Healthcare Services Group

Thank you, Matt, and good morning, everyone. In terms of our balance sheet and liquidity position, we ended the first quarter with cash and marketable securities of $143,900,000 and a $500,000,000 credit facility inclusive of a $200,000,000 accordion. The credit facility was undrawn at the end of the quarter and the only utilization was for LCs. In addition, we've taken steps to rebalance our cash position, our marketable securities portfolio as well as our utilization of the credit facility, which has further reduced our interest expense. DSO at the end of first quarter was reported at seventy eight days versus eighty eight days at the end of Q1 twenty twenty four.

Vikas Singh
Vikas Singh
EVP & CFO at Healthcare Services Group

Across the same period, our revenues have increased each quarter and our gross receivables have declined consecutively. And while DSO and AR balances as standalone metrics are important, they are certainly not the only indicator as to how successful we are in executing our cash collection strategy as our 2025 focus continues to be on increasing customer payment frequency, proactively utilizing promissory notes and remaining disciplined in our decision making for both new and existing business. On the capital allocation front, our priorities are fully aligned with our strategic plan to direct investments in organic growth drivers, inorganic growth opportunities and opportunistic share repurchases. We continue to prioritize investment in organic growth drivers. In addition, we made a small tuck in acquisition last month.

Vikas Singh
Vikas Singh
EVP & CFO at Healthcare Services Group

The 2025 revenue impact from the acquisition is about 1% of our total revenue and the revenue impact for the quarter was minimal since the acquisition closed mid March. Notably, this is our first acquisition since late twenty twenty one. We also opportunistically repurchased approximately $7,000,000 of common stock during the first quarter to capitalize on our strong liquidity position. This takes our total buyback to about $23,000,000 since our February 2023 share repurchase authorization. We have another 5,400,000.0 shares remaining outstanding under the authorization at this point of time and we do expect to continue these opportunistic purchases for the rest of the year.

Vikas Singh
Vikas Singh
EVP & CFO at Healthcare Services Group

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

Operator

Our first question will come from the line of Andy Wittmann with Baird. Please go ahead.

Andrew Wittmann
Senior Research Analyst at Baird

Yes, great. I guess I wanted to start high level, Ted. And so just on the regulatory environment, I heard the comments in the prepared remarks. Maybe I'd just give you a little platform here expand on what you're hearing maybe from your customers about any changes that have happened yet. I don't think there have been any or what things that they're looking at that they think have high probability to affect their position in the industry?

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

Sure, Andy, and good morning to you. I think just to frame out your question and then the response a bit, I think overall the fundamentals and I know I mentioned this in the prepared remarks, but the underlying industry fundamentals continue to gain strength just when you think about and consider the multi decade demographic tailwind that has been trickling into the system, that's becoming more notable and that's only going to amplify strength of the industry now in the months and years ahead. So that's a real positive. I do think the key aside from a lot of the noise you may hear out of DC, the key you would hear from most of our customers and the provider community at large is that is that link between staffing availability and census. Because more than any other factor, labor availability is the key to occupancy growth, and occupancy is the key to consistent financial outcomes as well as predictable financial outcomes.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

And I the most recent occupancy data continues to be very positive and growing across all geographies, whether it be urban, suburban, rural, and facility types as well. So that's foundational when you think about industry stability. On the reimbursement side, CMS recently proposed the 2.8% increase for Medicare rates for fiscal year twenty twenty six. That's been generally well received. There continues to be positive reimbursement news at the state level as well.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

And then from a regulatory perspective, I know I mentioned this as well, but I I wanna emphasize the clarity this provides to the provider community is, you know, that Texas ruling that came out, which is applied nationwide, that all but eliminates the, you know, minimum staffing or the key provisions of the minimum staffing rule, which I believe has been an overhang for the industry since it was announced, even if the likelihood of it ultimately being implemented was low. I think specific to the the things coming out of DC, I know, for instance, provider taxes are getting some attention recently, specifically for hospitals, and I do wanna differentiate between hospitals, SNPs, behavioral health, other types of facilities or communities that more fit our business model. I would still include that in the too early to tell category in terms of what, if any, changes will be proposed or ultimately implemented. And even when you unpack a provider tax, the mechanics of that program vary depending on the type of provider as I just outlined. The rates vary state to state.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

The effect on operators and facilities within those states is different depending on a variety of factors, occupancy, patient mix, etcetera. So that's too early to tell. If if there were changes, that's the one that you hear whispers about. But I think if you pull the provider community at least within the sniff market, they would still say it's more likely than not that that is not impacted. And to the extent it is in any way impacted, it would likely be more modest.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

It would be phased in over a period of years and manageable. And then just to bring it back to us ultimately, which is time tested, it would have the effect of only increasing the demand for the types of service services we offer when you think about the central theme of our value proposition, which is certainty, financial, regulatory, and otherwise.

Andrew Wittmann
Senior Research Analyst at Baird

It might be a little

Andrew Wittmann
Senior Research Analyst at Baird

bit early to talk about the tax bill or the budget bill that's being talked about from the new administration trying to extend the Trump tax cuts and the impact. One of the one of the pay fors that's being talked about is around, I guess, it's around health and human services, but specifically around there's a belief that it could affect Medicaid reimbursement, federal support for Medicaid. And so I was just wondering if you could comment specifically on that, what you're hearing on that, how that might or may not affect you.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

Yeah. I would say there's a great confidence within the sniff community specifically that the Trump administration was incredibly supportive during its first term. And, you know, they're hanging their hat on the from from the conversations that are happening on the hill and otherwise that, that's not going any changes potentially would have no impact on the funds that are flowing to and from skilled nursing facility specifically. And the rhetoric out of D. C.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

I think has been consistent with that.

Andrew Wittmann
Senior Research Analyst at Baird

Okay. Cool. Thanks guys. Have a good day.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

Fantastic.

Operator

Our next question comes from the line of A. J. Rice with UBS. Please go ahead.

A.J. Rice
A.J. Rice
Managing Director at UBS Group

Thanks. Hi, everybody. Just to put a fine point on the comment about the court ruling and the minimum staffing rules. Is that just remove an overhang or do you think that actually was somehow starting to impact behavior, in the way, people staff their facilities today in any way?

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

We believe the former more than the latter. You know, around the edges, AJ, people were complying with maybe some of the initial administrative types of requirements that were but were required. But, you know, you think about when the actual impact would have happened, it was it was years out phased in over a period of So it was more the former, not the latter.

A.J. Rice
A.J. Rice
Managing Director at UBS Group

Right. In the first quarter, your it looks like your gross margin, your EBITDA margins were above your targets. Is there anything unusual in the first quarter? Comment on the sustainability of that? I know you did move up your SG and A ratio guidance for the year.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

Yes. I think specific to the margins and the EBITDA margins that you called out, service execution continues to be the most significant driver of that. If you think about the trends that we have within the four walls of each community we service, customer experience, systems adherence, regulatory compliance and budget discipline, all of which are the primary near term margin drivers. That was evident in Q1, and we expect that to carry into Q2 and the remainder of 2025. And if you look back, AJ, over the past twelve months, really adjusting for some of the variability we've seen with CECL, we've continued to show consistency and, albeit modest improvement quarter to quarter, but year over year within those cost of services line.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

And and just tying it back to your commentary or your remark on SG and A, you know, you think about the primary driver of some of the increased SG and A spend, it directly relates to investments we're making into our business, into our organic growth strategy that that helped drive increased employee engagement, retention of those employees, customer experience, the regulatory compliance I referred to, and ultimately, directly correlates to those, you know, consistently consistent and improved margins you called out. So in many respects, the two work hand in glove with one another, But we do expect to continue tracking on the SG and A side more in that 9.5% to 10.5% range. But as we grow the top line, expect to leverage that, not in a linear type of way, but over time.

A.J. Rice
A.J. Rice
Managing Director at UBS Group

Okay. Maybe just last question on the inflation, both on the food side as well as with the hourly workers. Any updated thoughts on what you're seeing there?

Matthew McKee
Matthew McKee
Chief Communications Officer at Healthcare Services Group

Yeah. So, you know, CPI, AJ, for all items in the quarter was 60 basis points compared to 90 basis points in q four. You know, we actually saw 10 basis points of deflation in the month of March, which is encouraging. But food at home inflation continued to increase sequentially, showing 1% inflation, which compared to 90 bps in Q4 and 50 bps in Q3. You know, notably notably, the month of January and March were both 50 basis points, which matches what we saw in November, and that had been the highest monthly inflation level that we've seen since October of twenty twenty two.

Matthew McKee
Matthew McKee
Chief Communications Officer at Healthcare Services Group

So we'll definitely be keeping an eye on that. Obviously, with the pass through provisions that we have in our contractual agreements, we have the right to pass that through. But having said that, we want to work with our client partners to make sure that we're managing those costs as best we can and have that flexibility in our menu offerings to be able to help accommodate that. The BLS data from an overall wage inflation perspective won't be published until next week on the thirtieth. But really from an overall labor market as it relates to the industry and Health Care Services Group, really a strong eighteen month period.

Matthew McKee
Matthew McKee
Chief Communications Officer at Healthcare Services Group

The Health Care sector added jobs at really a higher pace than all other industries, which is a great reversal of what we've seen in prior periods. So that's largely fueled by the demographic trends that Ted alluded to in his previous comments and then increasing demand for health care. On a national basis, the skilled nursing industry still has work to do to reach full employment recovery, but there was incredibly strong growth in Q1 that raised about half of that remaining deficit. If you think about kind of pre pandemic as compared to where we stand today, the industry added about 24,000 new jobs, which was about double the pace of what we would have seen in Q4 I'm sorry, in 2024, where we were only averaging about 3,400 new jobs per month within the industry. So we're now about 47,000 jobs short relative to pre pandemic levels.

Matthew McKee
Matthew McKee
Chief Communications Officer at Healthcare Services Group

And that's as a reminder from a loss of nearly a quarter of a million jobs at its peak. But at these current rates of recovery, we should be at pre pandemic levels in less than six months. So definitely encouraging trends and dynamics for the industry. And then just to again bring it back to Healthcare Services Group, we remain in a good spot. We've seen ongoing improvement, stabilization.

Matthew McKee
Matthew McKee
Chief Communications Officer at Healthcare Services Group

Our wage growth has remained stable. Our applications are high and continue to grow month to month. There are certainly still some lingering markets where there are ongoing challenges, but obviously, we have the flexibility and the resources to be able to allocate our focus and address those situations as they arise.

A.J. Rice
A.J. Rice
Managing Director at UBS Group

Okay, great. Thanks a lot.

Operator

Our next question comes from the line of Tayo Key with Macquarie. Please go ahead.

Tao Qiu
Tao Qiu
Equity Research Analyst at Macquarie Group

Thank you. Good morning. Just want to clarify on the revenue guide for the second quarter. If you look at the midpoint of the guidance, it suggests a small $3,000,000 step up in revenue next quarter. I think, Vikash mentioned that there's a tuck in acquisition that will add 1% to revenue.

Tao Qiu
Tao Qiu
Equity Research Analyst at Macquarie Group

So if you back that out, it implies a relatively flat sequential movement next quarter. Is that the right way to think about it? And if so, what does that say about the pace of growth for the balance of the year?

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

Yeah. I think from I think that's April. If you think about our goal relative to that guidance you referenced, Tal, our goal is really to provide as accurate a range as possible given the variables. And aside from the acquisition you mentioned, the greatest variable for us is really the timing of new business adds, which can be fluid quarter to quarter knowing there's always going to be a subset of opportunities that could be pulled in or pushed out depending on the customer, the prospective customer, the management development pace, etcetera. So that's really why our mid single digit guidance that we offer for annual expectations is the best guide to kind of think about the company in the cadence of growth, whereas the quarter to quarter estimates are really ranges we're providing to add some additional near term visibility based on what management is seeing.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

So again, the acquisition that Vikas described in his opening remarks, it will represent about 1% of revenue or so. So that contribution along with the consideration given to the management candidate pipeline, the timing of the new business opportunities, and then the retention of our existing customer base is what informs that four forty five to four fifty five.

Tao Qiu
Tao Qiu
Equity Research Analyst at Macquarie Group

Okay. Got you. And in terms of the cash flow, the operating cash flow guidance raise, 15,000,000 there. I think I heard a mention of $12,000,000 CARES Act benefiting first quarter. How much of that raise is driven by this onetime item?

Tao Qiu
Tao Qiu
Equity Research Analyst at Macquarie Group

And what's your confidence of your cash collection momentum for the rest of the year? Thank you.

Vikas Singh
Vikas Singh
EVP & CFO at Healthcare Services Group

Yeah. So that raise is a combination of the two factors that you pointed to. Look, we've received these ERC funds, of 12,000,000 plus. That definitely did contribute to the popping of the guidance. But the fact that we had a standout q one, as Ted mentioned, the best in five years, the collection momentum was strong, that contributed as well to us upping the range.

Vikas Singh
Vikas Singh
EVP & CFO at Healthcare Services Group

So I I think it's a combination of the two factors. And look, I I think what I'll say on the collection front is, while q one was strong, so was q three and q four. So we are seeing emerging trends supported by the dynamics in the industry where we feel confident about, sustaining the positive momentum on the collection front. And I think that contributes to the overall confidence around how we think about cash flows for the rest of the year.

Tao Qiu
Tao Qiu
Equity Research Analyst at Macquarie Group

Great. Thank you.

Operator

And that will conclude our question and answer session. And I will now turn the call back over to Ted Wall for closing remarks.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

Okay. Thank you. It's an incredibly exciting time for HCSG. The innovations of the past few years have further solidified our value proposition, the durability of our business model and market leading position. The company's underlying fundamentals are stronger than ever.

Theodore Wahl
Theodore Wahl
President, Chief Executive Officer at Healthcare Services Group

And with the industry at the beginning of a multi decade demographic tailwind, we are very favorably positioned to capitalize on the opportunities ahead and deliver meaningful long term shareholder value. So on behalf of Matt, Vikas and all of us at Healthcare Services Group, thank you, Regina, for hosting today's call, and thank you again to everyone for joining.

Operator

This will conclude today's meeting. Thank you all for joining. You may now disconnect.

Executives
    • Theodore Wahl
      Theodore Wahl
      President, Chief Executive Officer
    • Matthew McKee
      Matthew McKee
      Chief Communications Officer
    • Vikas Singh
      Vikas Singh
      EVP & CFO
Analysts
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Key Takeaways

  • Record Q1 performance: Revenue rose 5.7% year-over-year to $447.7 million, net income was $17.2 million (EPS $0.23), and operating cash flow (ex-payroll accrual) reached $32.1 million—the best quarterly cash flow in five years.
  • Favorable industry environment: A multi-decade demographic tailwind, improving workforce availability and occupancy, stable reimbursement, plus a Texas court ruling striking down CMS’s minimum staffing rule nationwide all support stronger fundamentals.
  • Q2 guidance and margin targets: Revenue is expected in a $445 million–$455 million range, with cost of services managed around 86% of sales and SG&A in the 9.5%–10.5% range to drive sustainable profitability.
  • Strong liquidity and cash flow outlook: Q1 ended with $143.9 million in cash and marketable securities, an undrawn $500 million credit facility, improved DSO to 78 days, and 2025 operating cash flow guidance raised to $60 million–$75 million (ex-payroll accrual).
  • Disciplined capital allocation: Completed a small tuck-in acquisition (~1% revenue boost), repurchased $7 million of stock in Q1 (total $23 million since Feb 2023), with $5.4 million shares still authorized for buyback.
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Earnings Conference Call
Healthcare Services Group Q1 2025
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