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Edited Transcript of HCSG earnings conference call or presentation 22-Apr-20 12:30pm GMT

·36 min read

Q1 2020 Healthcare Services Group Inc Earnings Call BENSALEM Jun 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Healthcare Services Group Inc earnings conference call or presentation Wednesday, April 22, 2020 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Matthew J. McKee Healthcare Services Group, Inc. - Chief Communications Officer * Theodore Wahl Healthcare Services Group, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Albert J. William Rice Crédit Suisse AG, Research Division - Research Analyst * Andrew John Wittmann Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Jason Michael Plagman Jefferies LLC, Research Division - VP * Lalishwar Mitra Ramgopal Sidoti & Company, LLC - Healthcare Sell Side Analyst * Nicholas Charles Spiekhout William Blair & Company L.L.C., Research Division - Associate * Sean Wilfred Dodge RBC Capital Markets, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the HCSG Q1 Earnings Call. The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc., within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often preceded by the words such as believes, expects, anticipates, plans, will, goal, may, intends, assumes or other similar expressions. Forward-looking statements reflect management's current expectations as of the date of this conference call and involve certain risks and uncertainties. The forward-looking statements are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions and expected future developments and other factors that we believe are appropriate under the circumstances. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Healthcare Services Group's, Inc., actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, and the forward-looking statements are not guarantees of performance. Some of the factors that could cause future results to materially differ from recent results or those projected in forward-looking statements are included in our earnings press release issued prior to this call and in our filings with the Securities and Exchange Commission, including the SEC's ongoing investigation. There can be no assurance that the SEC or another regulatory body will not make any further regulatory inquiries or pursue further action that could result in significant costs and expenses, including potential sanctions or penalties as well as distraction to management. The ongoing SEC investigation and/or any related litigation could adversely affect or cause variability in our financial results. We are under no obligation and expressly disclaim any obligation to update or alter the forward-looking statements, whereas as a result of such changes, new information, subsequent events or otherwise. (Operator Instructions) After the speaker's presentation, there will be a question-and-answer session. (Operator Instructions) I would now like to hand the conference over to your speaker today, Ted Wahl, President and CEO. Please go ahead, sir. -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [2] -------------------------------------------------------------------------------- Okay. Thank you, Jacklyn, and good morning, everyone. Matt McKee and I appreciate all of you joining us for today's conference call. Yesterday, we released our first quarter results and plan on filing our 10-Q by the end of the week. COVID-19 quickly became the dominant theme during the quarter. The pace at which the virus presented and altered operational protocol for our customers was unlike anything we've experienced. The industry responded with innovation and resolve, even if predictably, the worst outcomes or scenarios made the headlines, and there certainly have been some heart-wrenching stories. Overall, we've been extremely impressed and proud at the level of planning, preparation and execution that we've seen and been part of, sector-wide. The countless behind-the-scenes examples of customers and their employees going above and beyond during these times is certainly far underreported, if not underappreciated altogether. The vast majority of long-term and post-acute care operators are providing exceptional care. And we've been right there with them at our absolute best, delivering in the most extraordinary way. Our subject matter expertise in infection control and supply chain management has been rivaled only by the incredible dedication and commitment of our employees at every level, but especially our heroes working in the facilities. Their passion, perseverance and courage in the face of great adversity is nothing short of inspirational. And although it doesn't come close to approaching the level of gratitude that's appropriate, I'd once again like to thank our dedicated field-based employees for all that they are doing and tirelessly supporting our customers and most importantly, helping to preserve the well-being of America's most vulnerable. Our highest priority remains ensuring the health and overall well-being of those employees. To that end, since the outset of the virus, we implemented enhanced compliance protocols for PPE, training programs and in-services, and operational policy and procedure. Additionally, many of our customers have instituted wage premiums and attendance bonuses for facility staff, which we've strongly encouraged and endorsed. Nearly all of our customers have included our employees in these programs as they are every bit as much on the front lines as the direct patient care staff. I'd also like to acknowledge the team here at our home office, who seamlessly transitioned to a remote work environment. Our IT team did yeoman's work in getting every employee set up with hardware, software and ongoing technical support. We're not a company that has historically had any of our home office departments working remotely, much less all of them. These employees continue to deliver best-in-class support and service to our customers and field-based operators. And for that, we are grateful. Looking ahead, we'll continue to closely monitor the impact of COVID-19 on the industry as we work with our customers in managing this unique challenge. It's important to recall that prior to this crisis, industry fundamentals were showing signs of improvement from the positive tailwinds of favorable occupancy trends, the patient-driven payment model, and 2.4% Medicare increase. And while quite a bit of uncertainty remains as to the impact of this virus on the industry, we've been encouraged by both the pace and significance of the enacted and proposed federal and state relief measures, which are providing meaningful financial support to an industry committed to combating this crisis. And although more needs to be done and we remain cautiously optimistic that more will get done, longer term, this crisis certainly shines a light on just how crucial long-term care and post-acute care is to the health care continuum, and how important adequate funding and responsible reimbursement programs are to the financial health of the industry. In the coming months, we will continue our intensive operational focus on mitigating the effects of COVID-19 and remain proactive in delivering the best possible outcomes on all fronts. Above all, we are deeply committed to supporting our customers in the care of their patients and residents, while simultaneously continuing to protect company resources, including our most valued resource, our employees. So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter. -------------------------------------------------------------------------------- Matthew J. McKee, Healthcare Services Group, Inc. - Chief Communications Officer [3] -------------------------------------------------------------------------------- Thanks, Ted, and good morning, everyone. Before I review the first quarter results, I wanted to emphasize that in addition to our intensive operational focus on COVID-19 that Ted spoke about, we have and we'll continue to prioritize our strategic priorities. To that end, we will remain vigilant in ensuring contract integrity between us and our customers, whether it relates to increased labor and supply cost for spending that falls outside typical scope of services, or timely payments for services rendered, our customers' commitment to both the operational and financial aspects of the partnership is necessary for the sustainability of our business relationships. Further, we'll continue to prudently manage a strong balance sheet with no near-term maturities that appropriately complements our cash position. We believe these priorities not only best position the company for long-term growth, but are more relevant than ever in a COVID-19 environment. As far as the first quarter results, revenue for the quarter was $449.2 million with Dining & Nutrition and Housekeeping & Laundry segment revenues of $224.9 million and $224.3 million, respectively. Net income for the quarter came in at $20.2 million and earnings per share was $0.27 per share. Direct cost of services was reported at $387.2 million or 86.2%. The temporary cost increase primarily relates to approximately $2 million of payroll for account managers who've transitioned out of a facility that we are no longer servicing as well as costs related to starting up new business during the quarter. We expect this cost impact to decrease as account managers continue to be assigned to new facilities at which they're budgeted and the new business additions operate on budget. Overall, our goal remains to manage direct costs at 86% by the end of the year, excluding any COVID-19-related costs, temporary investment in management capacity, or any new business start-up inefficiencies that may occur. Dining & Nutrition and Housekeeping & Laundry segment margins were 6.4% and 10.7%, respectively. SG&A was reported at $30 million, or 6.7%. But after adjusting for the $5.7 million decrease in deferred compensation, actual SG&A was $35.7 million, or 8%. And we expect SG&A to remain at that level in the near-term as those costs are largely fixed, but continue to target SG&A of 7.5%, excluding any COVID-19 or SEC-related costs, with the primary pathway to leverage that existing in the top line growth. Investment and other income for the quarter was reported as a $5.2 million expense. Again, after adjusting for the $5.7 million change in deferred compensation, actual investment income was around $500,000. We reported an effective tax rate of 24.6% for the quarter and expect our tax rate for 2020 to be in the 24% to 26% range, including WOTC. To the balance sheet, at the end of the first quarter, we had net cash of approximately $105 million and a current ratio of nearly 3:1. Cash flow from operations for the quarter was $12.7 million, inclusive of the $4.6 million decrease in accrued payroll. And because we previously had called out that the quarter-to-quarter impact of the 2020 payroll accruals, we wanted to confirm that the actual Q1 payroll accrual was 8 days, not the 17 days that we previously anticipated. The reason for that was that due to some of the COVID-19-related uncertainty regarding potential delays in direct deposit processing and FedEx delivery times, we decided to prefund the payroll at the end of the quarter to mitigate any risk of paycheck disruption for our employees. So whereas we would have typically funded payroll on the Wednesday, in the last pay period of March, we funded it on that Tuesday. For the rest of the year, we're expecting payroll accruals of 10 days in Q2, 4 days in Q3 and 12 days in Q4. But of course, the payroll accrual only relates to timing and the impact ultimately washes out through the full year. DSO for the quarter was reported at 61 days, consistent with the previous quarter after adjusting for the implementation of the current expected credit loss, CECL, as required by the Financial Accounting Standards Board, effective January 1, 2020. The new accounting standard required a transition from an incurred loss methodology to an expected loss methodology when evaluating potential credit loss, primarily relating to the company's accounts and notes receivable. The implementation of CECL resulted in an initial onetime increase of $42.2 million to the company's allowance for doubtful accounts through a reduction of stockholders' equity. As announced yesterday, the Board of Directors approved an increase in the dividend to $0.2025 per share, payable on June 26, 2020. Cash flows and cash balances supported it. And with the dividend tax rate in place for the foreseeable future, the cash dividend program continues to be the most tax-efficient way to get free cash flow and ultimately maximize return to the shareholders. This will mark the 68th consecutive cash dividend payment since the program was instituted in 2003. We're proud that it's now the 67th consecutive quarter we've increased the dividend payment over the previous quarter, that's now a 17-year period that's included 4 3-for-2 stock splits. We recognize that dividend is important to our shareholders, and we've increased it in line with our long track record. And with those opening remarks, we'd like to now open the call up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Andrew Wittmann from Baird. -------------------------------------------------------------------------------- Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2] -------------------------------------------------------------------------------- Great. I guess my first question is just a technical question. Given that we just have partial balance sheet, it looks like something on the liability side is up. Did you guys draw on your revolver in the quarter, like a lot of companies did? Can you just maybe talk about how you manage the balance sheet? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. We didn't specifically draw at quarter end per se. But during any quarter, Andy, we're carrying some level of debt just to short -- cover short-term working capital needs in light of the timing of what is our largest outflow, payroll, and the timing of cash collections from our customers at any point in time. This quarter, we ended with $50 million, whereas the most recent quarter, we ended with $10 million. So we did for 2 reasons: One, as you suggested, to have some additional liquidity in light of COVID-19 and some of the uncertainty around financial institutions and how it would impact the banking system, at least in the short term. Also, what Matt alluded to in his opening comments, just as an additional -- to have some additional liquidity on hand to pre-fund payroll for the employees. -------------------------------------------------------------------------------- Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. That's helpful. And then I just want to talk a little bit more about the numerous kind of funding provisions that have been put in for the benefit of your customer. Even some, I think, like the payroll tax holiday that will benefit you. Ted, could you just talk a little bit about some of the things that -- maybe talk about how your customers are being compensated through this challenging time for them to keep the liquidity in place so that they can get paid and serve and they can pay you to do your services. I think just understanding the myriad of things going on right now would be helpful for everybody to hear. -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. It's -- there's certainly a lot of moving parts here. I think it's worth noting, and I tried to cover some of this at a high level in my opening remarks, that since the beginning, I think the administration has certainly asked operators to continue to prioritize providing care to the residents. And every understanding we have is that the intention of both the federal and state governments is that operators will be kept whole. If they're not whole in real time, the intention should be and will be, as we understand it, that they will be made whole relative to any lost revenues or spend that they may incur as a result of COVID. So obviously, ordinary reimbursement and funding sources remain in place. But certainly, to deal with COVID-19-related costs, there's been a number of programs, as you suggested, to mitigate the financial impact. I think from a short-term cash flow perspective, certainly the $30 billion in grants that was part of the CARES Act, which was the 6.2% prior year Medicare's fee-for-service billings, had a beneficial impact, immediate impact to the industry, and was tilted towards the heavier Medicare providers along with the accelerated payment program and the ability to withhold payroll taxes. Both of them are loans, not grants, but again, what the industry needs is more grants and less loans. I think for the remainder of 2020 and into 2021, grants like the 2% sequestration holiday, which begins in May through the end of the year, is going to be impactful, the 6.2% increase in the federal medical assistance percentage match. Now that's still 50-50 in terms of which states are or are not participating, but that could change at any given moment. And then, I think the underreported benefit for the industry is the new payment rule, which proposes a 2.3% increase and leaves PDPM in place, which I think has been a solid reimbursement or responsible reimbursement design for the industry. All of those have been and are positive immediate steps. More certainly needs to be done. I think the one that we're most interested and anxiously awaiting is on the Medicaid side. And that, as far as we can understand, is going to be more in the second tranche of funding that's going to come out. And that will further fortify some of the providers that were, maybe, left out -- some of the more Medicaid-centric providers that were left out of the first 6.2% Medicare CMS grant. -------------------------------------------------------------------------------- Matthew J. McKee, Healthcare Services Group, Inc. - Chief Communications Officer [6] -------------------------------------------------------------------------------- And Andy, just to the final component of your question related to Healthcare Services Group and our ability to defer payroll taxes. We do have that opportunity, and we will be taking advantage of that. So that will result in a deferral of approximately $40 million in payroll taxes. So half of that will be repaid by the end of 2021 and the other half at the end of 2022. So that will have a positive cash flow impact this year with the offsets in '21 and '22. And as we sit here, there are no other government programs that we anticipate participating in or benefiting from directly. Most relevant for us, as Ted said, will be the programs, grants and opportunities that are made available to our clients. -------------------------------------------------------------------------------- Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7] -------------------------------------------------------------------------------- Super helpful. I had just one last question that I wanted to ask, and it has to do with the fact that usually, your business is very steady and predictable when your contract is X and you do X. But certainly with operations being affected in so many ways, there's probably times where your customers are going to ask you to go outside of that contract. And Ted, I know you alluded to some of it. Can you just talk about the processes you have in place and the relationship and how it works with your customers when you have to go outside the written contract? And how you get kind of compensated and if you get compensated for those things? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [8] -------------------------------------------------------------------------------- Yes. Overall, I guess, in this environment, but really in any environment, overall, our expectation is that for any additional spending related to staffing, wages, supplies that falls out the typical scope of services. And again, in this environment, COVID-19 related or otherwise, is tracked and communicated to the customer as part of our standard supplemental building process. The internal acronym for that is our BCR, which is outlined in all of our service agreements and very familiar to our customers. So we would expect, inside or outside the COVID-19 environment, that process to be followed. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Your next question comes from Sean Dodge from RBC Capital Markets. -------------------------------------------------------------------------------- Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [10] -------------------------------------------------------------------------------- Can you maybe give us a little bit more color on what is happening at the facility level? Ted and Matt, you both alluded to it in your prepared remarks. It sounds like workers are still showing up and doing their jobs for the most part. Have you seen any pickup in turnover in those positions? Are job applications trending up given the higher unemployment? Or are people maybe avoiding SNFs because of the risk? Are you seeing things like -- or are managers having to pitch in more to help out? Just anything kind of how things are functioning at the facility level? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- Yes. It's a great question, Sean. And obviously, specifically related to our ability to fully staff the facilities. That was something that we were exceptionally mindful of and have been monitoring very closely. To date, staffing, thankfully, has not been an issue. I think there's really a few reasons for that. First off, our people deal with communicable illnesses all the time. It's just a part of the job, whether it's MRSA, C. diff, influenza, scabies, and that's not to minimize the impact of coronavirus, but there's confidence among our employees in our training and how well prepared and protected they are. So that's definitely been a significant component in the education and the confidence that they bring to work each and every day. The reality is that there's likely a part of them that sees the unemployment data. And a lot of people out of work and appreciate the reality of the current labor market and environment. And this -- a cynic may question the validity of this, but among many of our employees, there's a significant emotional commitment to the patients and the residents that they see on a daily basis, and they want to be there to provide care and to help in any way. So thankfully, staffing has not been an issue. And I guess more specifically, Sean, it's kind of to our operational protocol, the fortunate part from where we sit is that all of the recommendations, whether from CDC or CMS as to preventing and containing the spread of coronavirus, fall within the guidelines related to influenza. So from a true operational perspective, we're very well equipped. The only real additional requirement would be additional personal protective equipment requirements, which, in coordination with our clients, we're obviously providing to our employees to make sure that they're fully -- not only educated, but protected as well. -------------------------------------------------------------------------------- Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [12] -------------------------------------------------------------------------------- Got it. That's great. And then maybe a little more directly on how all the industry relief is flowing through to you. Can you talk a little more about -- from a cash collection standpoint, you've had a few weeks impact in March from this. I guess moving most everyone to a weekly payment basis, the timing on that, hopefully, is working out really well. You've had several looks now on how cash collections payments have trended for at least 60% of your base thus far in April. Has there been any meaningful or noticeable change so far in April? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [13] -------------------------------------------------------------------------------- No. And that would be our expectation, Sean. Look, we're working proactively with our customers to understand exactly where they're at financially. But our customers very much depend on the services we provide. And our expectation is that full payments will continue to flow to HCSG, especially in light of the fact that the vast majority of our costs that we're incurring are payroll and payroll related, critical to the care and continuity of the facility operations. So just like the final aspect of a business, any given business, or in this case, provider would not fund would be their payroll, and we have the same expectation as it relates to us. That's further aided by the fact that we have over 60% of our customers paying us on a weekly basis, or at a frequency greater than monthly. So again, plenty of conversations ongoing related to payment terms, but our expectation is that we're going to continue to be paid for services in a normal course of business type way. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from Ryan Daniels from William Blair. -------------------------------------------------------------------------------- Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [15] -------------------------------------------------------------------------------- This is Nick Spiekhout in for Ryan. I guess to start off, if you can provide a little color on the sales outlook right now with the virus. I might imagine, on one hand, it's a little bit difficult given the less travel and SNFs kind of preoccupied, but on the other hand, it seems like the need for your expertise is up a little bit? -------------------------------------------------------------------------------- Matthew J. McKee, Healthcare Services Group, Inc. - Chief Communications Officer [16] -------------------------------------------------------------------------------- You're exactly right, Nick, that without a doubt, and we certainly never wish for circumstances like this and want to be hypersensitive in how we sort of phrase things. But as it relates to the services that we provide, as Ted just alluded to, in the nursing home environment, you'd be hard-pressed to find departments that are less directly affiliated with infection control, when you think about housekeeping and laundry departments. And certainly, dining services are always paramount within that environment. So a very important service, and it gives us an opportunity to distinguish ourselves relative to would-be competition or the in-house managed models. So this does, without sounding opportunistic, certainly offer us an opportunity to bolster our reputation. Now having said that, we are clearly not focused on selling the business or on-boarding new business right now. We certainly don't want to lead with our chin and overextend ourselves operationally. But there are conversations that are happening. Our sales folks are primarily supporting our existing customers right now and supplementing our operations team. But they are engaging in dialogue with prospective customers as well. And if anything, this offers us an opportunity to sort of further add to and refine our pipeline of new business opportunities, for when we do reach that point at which it makes sense to reaccelerate into growth mode. We had talked previously about the expectation for really growth to kind of resume in the back half of the year. I think that time frame still makes sense. Highly unlikely that we'll be prioritizing any new business additions here in the second quarter. More likely, they will be pushed out to the back half of the year. But the hope is that at least by midyear, we'll have additional clarity as to the dust having settled from the transition to PDPM and obviously, much more of a priority coronavirus, not that the virus or the treatment of COVID-19 will be in the rearview, but at least to have a better sense for the industry landscape and what the go-forward proposition really looks like as it relates to growth. -------------------------------------------------------------------------------- Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [17] -------------------------------------------------------------------------------- Great. That's really helpful. And then I guess turning to margins. They look pretty close to kind of where you guys have been targeting. I was just wondering if the managers have been deployed actively this quarter and kind of what to expect going forward? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [18] -------------------------------------------------------------------------------- Well, we -- I know Matt spoke to some of the margin profiles in his opening remarks. But from a direct cost of services perspective, we continue to carry some of the excess management capacity that we had coming into the year. Currently, we did make progress in assigning some of the managers that we are carrying into facilities where they're specifically budgeted at. And obviously, COVID-19 created an opportunity to further and more specifically, deploy still other of the managers. So we're still -- we still have about $2 million of management cost that we're carrying, and we're deeply committed to continuing to invest in those managers. That is our most -- that is -- truly, the most difficult part of our business is the hiring and developing of management people and often the gating factor, primarily the gating factor on our growth, especially in light of the demand for the services. And in this environment, that demand has only been further heightened. So we're going to continue to invest there. And would expect direct cost to be -- our target is 86%. We're going to continue to try our best to manage it in and around that range in light of COVID-19, especially. When you consider SG&A, Matt mentioned in his opening remarks that in the current state, we're going to be in and around 8% or at least at the current levels. Once we start to ramp up the top line, that's when you'll really see that leverage in SG&A because, again, the majority of those costs are fixed. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Your next question comes from A.J. Rice from Crédit Suisse. -------------------------------------------------------------------------------- Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [20] -------------------------------------------------------------------------------- Maybe just to dwell on that margin question a little bit more specifically. I mean your Dining margins at 6.4% were up 230 basis points sequentially and your Housekeeping at 10.7% was up 120 basis points sequentially. So decent -- big improvements actually. I know it bounces around a little bit from quarter-to-quarter, but was there anything unusual in there? I don't remember seasonality, but was there seasonality in there or anything that is particularly helping? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [21] -------------------------------------------------------------------------------- As I just building off of the last answer to the question, we did have some success this past quarter in assigning some of that excess management capacity. It was about $1 million of management that was -- is now assigned within a budget at a given facility and a significant portion of that directly benefited Dining margins. So that was certainly part of it. Even coming into the year, A.J., one of our strategic priorities simply said was managing the base business. But that, for us, means a relentless focus on systems implementation and adherence, customer satisfaction, compliance and budget to actual, really taking care of the customer and the operations within the existing customer base. So I think that focus certainly paid off in some improved underlying performance. And you mentioned seasonality. We generally don't call that out because there are some -- of course, there are some puts and takes every quarter that generally washes in any given quarter. But in Q4, you do have some higher food-related costs, specifically for Thanksgiving and Christmas celebrations, and the timing of those supplemental billings, or BCRs, at least a portion of them may fall into the subsequent quarter. Now that's hundreds of thousands of dollars. That's not millions. But I think it's the collective of those 3 things that helped improve the Dining margins specifically. -------------------------------------------------------------------------------- Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [22] -------------------------------------------------------------------------------- And thinking about the nursing home customer base, I do -- my understanding is there is pressure on the occupancy side of that because of, a, some holds in some facilities; b, you're not getting the throughput from the hospitals, downstream from orthopedic surgeries and other things like that. So I guess there is some level of pressure on them. Your -- the message that you're conveying is that the government funding has been sufficient to offset that and therefore, you're seeing the customer base be sort of even-keel at this point in terms of credit quality and all. Is that the way to think about it? Or I mean I've seen various 3 to 6 percentage point pressure on occupancy rates in nursing homes. Are you seeing something like that? And is -- I mean absent the government funding, I'm assuming that you might be a little more concerned about that. Is that right? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [23] -------------------------------------------------------------------------------- Right. And I would never use the word sufficient to describe or adequate to describe the government funding that's occurred. What I will say is that it did plug a short-term liquidity hole for the vast majority of providers, although more still needs to be done because, to your point, A.J., and we're seeing the same type of data, the 3% to 6% impact on census to date, really less pronounced among the true, long-term care resident population and felt more in the post-acute segment. As you suggested, hospital elective procedures are down, the corresponding discharges have decreased. Most of our customers have a mix of both long-term residents as well as short-term or short-stay rehab patients. Depending on the facility, it's weighed more heavily in one direction or the other. So we're likely going to see additional near-term occupancy pressure as procedures remain -- as hospital procedures remain at a reduced level and facilities with confirmed COVID cases are even temporary closed to new admissions. So continues to be uncertainty. I -- we strongly believe more is going to need to be done, especially as the impact of occupancy pressure is felt as well as ongoing COVID-19 pressures on the cost side because this -- the reality is this virus, especially in long-term and post-acute care is likely to be a major issue for the industry unless or until there's a vaccine. And you think about the perfect storm for the type of environment. It's highly contagious and it poses the greatest threat to those with underlying conditions, which -- oh, by the way, is nearly the entire resident and patient population in a long-term and post-acute care setting. So we do believe that, at least to date, the government has certainly stepped up, although much more needs to be done over -- in the coming months from our perspective. -------------------------------------------------------------------------------- Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Okay. And then last question. I understand about there's extra demand for additional cleanings or whatever, that tip is going to get passed through to the underlying customer. What happens if your hourly employee base either gets COVID and has to be sent home for 14 days? Or I don't know whether you're seeing it, I know some are seeing, this issue of workers not want to go in because of they're just afraid that they're going to get the virus. Are you experiencing anything on either of those fronts? And is the underlying client responsible in picking up the extra labor costs associated with having someone stay at home and quarantine and having to replace them with someone else? -------------------------------------------------------------------------------- Matthew J. McKee, Healthcare Services Group, Inc. - Chief Communications Officer [25] -------------------------------------------------------------------------------- So to your question, A.J., there's a couple of things that I mentioned in previous comments that apply. Thankfully, we've to date not had trouble staffing the facilities. That's obviously always a primary area of focus for us and especially during this environment and times, but we have fortunately been able to continue staffing the facilities. The reality is that there has not been much of a need for additional staffing beyond what's typically required. As I mentioned earlier, really from October through April, each and every year, it's influenza season. And while that may not resonate as much in the general U.S. population, it's certainly very impactful within the skilled nursing environment. So all of the CMS and CDC recommendations for containing and controlling the spread of coronavirus fall within what's currently recommended for influenza. So fortunately, from an operational and a staffing perspective, as I say, nearly all of what's required from a coronavirus containment perspective is already in place each and every year as it relates to containing influenza. And the other component is that it runs a bit counterintuitive on the surface, but we've actually seen record numbers of applicants fully recognize that, that's largely to do with the overall labor environment and unemployment scenario for the U.S. population, but that's further enabled us to keep the facilities fully staffed. That's imperative. So whether it's dealing with employees who are afraid to come to work or whether they or someone in their household, ultimately becomes infected, or if somebody needs to be home with children because of schools being closed, we are required to staff the facilities. And fortunately, thus far, we've been able to manage that with the existing employee population. And as I said, record numbers of applicants at both the line staff levels and also into the management training program. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Your next question comes from Mitra Ramgopal from Sidoti. -------------------------------------------------------------------------------- Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [27] -------------------------------------------------------------------------------- Pretty much my questions have been answered. I just wanted to follow up again in terms of some longer-term business opportunities as a result of the pandemic. I know the focus has been on the nursing homes, and I am just wondering some other areas like assisted living, et cetera, if you're also seeing some heightened interest in terms of customers -- potential customers looking for you to maybe help them on that end. -------------------------------------------------------------------------------- Matthew J. McKee, Healthcare Services Group, Inc. - Chief Communications Officer [28] -------------------------------------------------------------------------------- That's not, as you call out Mitra, been a primary area of focus for us. But this is a pandemic that is certainly influencing all components of the health care continuum and certainly, senior living falls within that as well. So in certain markets, we've had more advanced conversation with prospective clients in senior living. But that really, as you would recall, only relates to the Dining opportunity for us. So where there's cross ownership, we may lend an additional temporary operational hand from a disinfection perspective or to educate the employees in a senior living facility. So our long-term view as it relates to that opportunity remains unchanged. A very appealing Dining opportunity. But really from a Housekeeping & Laundry perspective, which would be more relevant as far as COVID containment, not exactly applicable. -------------------------------------------------------------------------------- Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [29] -------------------------------------------------------------------------------- Okay. No, that's great. And just looking back again, obviously, you've pointed out in terms of the elevated payroll costs, and you certainly have a number of managers you can deploy to facilities, et cetera. I assume the game plan is, obviously, no one knows when -- how this all plays out and the timing. But at least the plan right now is to continue to carry everyone. Is that fair? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Your next question comes from Jason Plagman from Jefferies. -------------------------------------------------------------------------------- Jason Michael Plagman, Jefferies LLC, Research Division - VP [32] -------------------------------------------------------------------------------- Just wondered if you could expand a little bit on your outlook for sequential revenue growth for the next few quarters. It sounded like you're thinking revenue is close to flat sequentially, maybe for the next quarter or 2, and then you might be more comfortable taking on new business towards the end of the year or into 2021. Is that a fair characterization? Or just how are you thinking about kind of the trajectory for the next 2 to 4 quarters? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- Yes. I would not characterize it that way. I would characterize it as we are highly focused on mitigating the effects of COVID-19 and will continue to be through the quarter, while also focusing on our other strategic priorities that we called out at the beginning of the year around managing the base business, assigning our managers to new opportunities and maintaining a disciplined view on growth and credit decisions. I think what Matt tried to add some color to, and I'll just reiterate that is that we would expect by the end of the second quarter, certainly not for COVID-19 to be in the rearview mirror, but expect to have some further visibility on our level of comfort or discomfort in ramping up to -- ramping up growth or being more selective with certain opportunities that are out there. So short answer would be, we'll have more visibility, we believe, in the coming couple of months than we do today because, again, the path of COVID-19 nationally, worldwide, but certainly within the industry is still littered with uncertainties. -------------------------------------------------------------------------------- Jason Michael Plagman, Jefferies LLC, Research Division - VP [34] -------------------------------------------------------------------------------- Okay. That makes sense. And then as far as just the vetting of your potential new clients, how -- any changes in how you go about that? Or how is -- any -- how that's complicated by just the disruption related to COVID with short-term potential disruption in occupancy or in expenses for your clients and just the impact in their financial health? -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- It will continue to be a holistic evaluation of all the criteria you mentioned. And obviously, qualitatively, we would consider both -- quantitatively, we would consider the impact of COVID-19. And then qualitatively, we would impact the potential uncertainty in any given opportunity. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- There are no further questions at this time. I will now turn the call back over to Ted Wahl, President and CEO. -------------------------------------------------------------------------------- Theodore Wahl, Healthcare Services Group, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- Terrific. Thank you, Jacklyn. In the coming months, we will continue our efforts to mitigate the effects of COVID-19, while delivering the best possible outcomes for all of our stakeholders. We will continue to prioritize managing the base business, ensuring that our managers are assigned to exciting new opportunities and maintaining a disciplined view on growth and credit-related decisions. Above all, we are deeply committed to supporting our customers in the care of their patients and residents, while simultaneously prioritizing the health and safety of our employees and protecting company resources. So on behalf of all of us at HCSG, Matt and I would like to thank Jacklyn for hosting the call today. And thank you, again, everyone, for participating. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.