Healthcare Services Group, Inc. (NASDAQ:HCSG) Q3 2023 Earnings Call Transcript October 25, 2023
Healthcare Services Group, Inc. misses on earnings expectations. Reported EPS is $-0.07388 EPS, expectations were $0.17.
Operator: Good morning. My name is Rob, and I'll 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 Instructions] The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. For Healthcare Services Group, Inc.'s most recent forward-looking statements notice, please refer to the press release issued this morning which can be found on our Web site 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&A and other sections of the Annual Report on Form 10-K and Healthcare Services Group, Inc.'s other SEC filings.
And as indicated our most recent forward-looking statements notice. Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP can be found in this morning's press release. Thank you. Ted Wahl, President and CEO, you may begin your conference.
Ted Wahl: Thank you and good morning, everyone. Matt McKee and I appreciate you joining us today. We released our third quarter 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 third quarter financial highlights and key accomplishments. Next, I will provide an update on recent client restructuring actions. I will then share our perspective on the latest industry trends and developments. And then finally, I will share our fourth quarter and 2024 outlook. I will 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 third quarter financial highlights and key accomplishments.
For the three months ended September 30, 2023, we reported revenue of $411.4 million and adjusted revenue of $424 million, in line with our expectations of $420 million to $430 million. We reported net loss and diluted loss per share of $5.5 million and $0.07 per share, and adjusted net income and adjusted diluted earnings per share of $12.5 million and $0.17 per share, a 13.9% and 13.3% increase respectively over Q3 2022. We reported adjusted EBITDA of $23.3 million, a 10.2% increase over Q3 2022, and we reported cash flow from operations of $2.9 million, and adjusted cash flow from operations of $18 million, a 208.9% increase over Q3 2022. We entered the second-half of the year with three 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 and 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. The third 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 two long-term clients initiate restructurings during the quarter.
As part of their restructuring actions, these customer groups divested facilities to new operators. 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 multi-state 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. 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 2024, 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-2024. There is a growing list of stakeholders opposed to the rule, including health care industry leaders, trade associations like ACA, MedPAC members and a bipartisan group of legislators, 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, political changes in administration, and at least on some level would be funded. From our 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 fourth quarter in 2024, we enter Q4 with three clear priorities. The first is continuing to manage adjusted cost of services in line with our target of 86%. 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 2023 cash flow from operations from $20 million to $30 million to what is now $35 million to $45 million.
The third priority is continuing to execute on our organic growth strategy. Our Q4 adjusted revenue estimated range is $420 million to $430 million. 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.
Matt McKee: 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 will 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 $411.4 million. Adjusted revenue was $424 million, Housekeeping & Laundry and Dining & Nutrition segment revenues were $190.9 million and $220.5 million respectively. Adjusted Housekeeping & Laundry and Dining & Nutrition segment revenues were $194.6 million and $229.4 million, respectively.
Housekeeping & Laundry and Dining & Nutrition segment margins were 5.4% and 0.9% respectively. Adjusted Housekeeping & Laundry and Dining & Nutrition segment margins were 7.2% and 4.7% respectively. Cost of services was $377.6 million. Adjusted cost of services was $366.2 million or 86.4% in line with our target of 86%. And our goal is to continue to manage adjusted cost of services in the 86% range. SG&A was $39.0 million. Adjusted SG&A was $40.3 million or 9.5%, within the company's targeted range of 8.5% to 9.5%. And we expect to continue to manage adjusted SG&A within that targeted range. Third quarter cash flow and adjusted cash flow from operations were $2.9 million and $18.0 million, respectively. As Ted mentioned in his opening remarks, we raised our expectations for second-half 2023 cash flow from operations from $20 million to $30 million to $35 million to $45 million.
DSO for the quarter was 82 days. Adjusted DSO was 79 days, a four-day improvement over last quarter. Also, as part of our adjusted results, we adjust for the impact of the change in payroll accrual. But 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 seven days that we had in the third quarter of 2023 and 14 days that we had in the fourth quarter of 2022. 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.
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