Healthcare Services Group, Inc. (NASDAQ:HCSG) Q4 2023 Earnings Call Transcript
Healthcare Services Group, Inc. (NASDAQ:HCSG) Q4 2023 Earnings Call Transcript February 14, 2024
Healthcare Services Group, Inc. beats earnings expectations. Reported EPS is $0.18, expectations were $0.16. Healthcare Services Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thanks for standing by, and welcome to the HCSG 2023 Fourth Quarter Earnings Call. I would now like to welcome Ted Wahl, President and CEO to begin the call. Ted, over to you.
Ted Wahl: Thank you, and good morning, everyone. Matt McKee and I appreciate you joining us today. We released our fourth quarter results this morning and plan on filing our 10-K by the end of the week. Today, in my opening remarks, I'll first discuss our Q4 financial highlights and key accomplishments. I'll then share our perspective on the latest industry trends and developments. And then lastly, I'll discuss our 2024 outlook. I'll then turn the call over to Matt to provide a more detailed discussion on the quarter. So with that overview, I'd now like to discuss our Q4 financial highlights and key accomplishments. For the three months ended December 31, 2023, we reported revenue of $423.8 million and adjusted revenue of $425 million, which was in line with expectations.
Net income and diluted EPS of $22.6 million and $0.31 and adjusted net income and adjusted diluted EPS of $14.6 million and $0.20. Adjusted EBITDA of $26.5 million, a 14.2% increase over Q4 2022, and cash flow from operations of $49.5 million, and adjusted cash flow from operations of $27.9 million, a 7.1% increase over Q4 2022. Our team delivered strong fourth quarter results, building on our momentum throughout 2023. Against the backdrop of an ongoing industry recovery, we achieved 98% cash collections, managed adjusted cost of services under 86%, and exceeded cash flow projections for the quarter and second half of 2023. We also continued to grow our new business and manager and training pipelines and remain confident that we will deliver on our goal of year-over-year growth in 2024.
I'd now like to share our perspective on the latest industry trends and developments. Industry operating metrics continue to improve, highlighted by a stabilizing labor market with the sector adding over 60,000 jobs in 2023, bringing the total workforce to 1.45 million, 100,000 jobs higher than the April 2022 low, but still 140,000 jobs below pre-pandemic levels. A solid reimbursement environment with the October Medicare increase of 4%, and continued positive trends at the state level, and rising occupancy, which now sits at 79.2%, only 100 basis points below pre-pandemic levels. On the regulatory front, on September 1, 2023, CMS proposed the minimum staffing rule, which triggered a 60-day comment period that remained open through November 6.
Over 46,000 comments were submitted and although the timing of a final rule remains uncertain, CMS has indicated it hopes to publish a final rule by the end of the year. There is a growing list of stakeholders opposed to the rule, including healthcare industry leaders, trade associations like ACA, MedPAC members, and a bipartisan group of legislators, including 30 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, especially in rural areas. In addition to the public comment period, any rule would have to survive inevitable litigation, potential legislation, political changes in administration and at least on some level 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. That said, we remain hopeful that CMS will fully consider the significant impact on operators before finalizing a rule, and if one is ultimately implemented, have confidence in our customers’ ability to manage it in a prudent manner. As far as our outlook for 2024, our top three priorities continue to be as follows. The first is managing adjusted cost of services in line with our target of 86%. We do not take operational execution for granted, but have full faith in the ability of our operators to deliver the services on budget. It took a considerable amount of work in 2022 to modify our contracts to better capture wage inflation and cost increases in our pricing on a closer to real time basis.
Those contract enhancements, along with recent positive trends in customer experience, systems adherence, regulatory compliance, and budget discipline, provide strong operating momentum heading into 2024. We expect Q1 adjusted cost of services of 86%. Our second priority is delivering year-over-year growth by executing on our organic growth strategy through hiring, training and developing future manager candidates, converting opportunities from our sales pipeline into new business ads and retaining our existing facility business. We estimate a Q1 adjusted revenue range of $420 million to $430 million. The third priority is collecting what we bill. We view cash collections as a lagging indicator of industry recovery, and while our recent trends have improved compared to 2022 and the first half of 2023, this remains an area of opportunity for the company in 2024.
We expect some continued choppiness in the year ahead, but anticipate that our cash collections will continue gaining strength throughout 2024 and further still into 2025. We estimate Q1 and 2024 adjusted cash flow ranges of zero to $10 million and $40 million to $55 million, respectively. It's an incredibly exciting time for the company as we're rounding the turn of what has been a prolonged recovery for the industry. The challenges we navigated the past few years have further solidified our value proposition, the durability of our business model, and our market-leading position. As we enter 2024, the company's underlying fundamentals are stronger than ever, and with the industry at the beginning of a multi-decade demographic tailwind, we are favorably positioned to capitalize on the opportunities ahead and deliver meaningful long-term shareholder value.
So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.
Matt McKee: Thank you, Ted, and good morning, everyone. Revenue was $423.8 million. Adjusted revenue was $425 million, in line with the company's expectations of $420 million to $430 million. Housekeeping & Laundry and Dining & Nutrition segment revenues were $191.4 million and $232.4 million, respectively. Adjusted Housekeeping & Laundry and Dining & Nutrition segment revenues were $191.7 million and $233.3 million, respectively. Housekeeping & Laundry and Dining & Nutrition segment margins were 7.5% and 6.2%, respectively. Adjusted Housekeeping & Laundry and Dining & Nutrition segment margins were 7.7% and 6.5%, respectively. Cost of services was $350.4 million. Adjusted cost of services was $362.6 million, or 85.3%. The company's goal is to continue to manage adjusted cost of services in the 86% range.
SG&A was $46.3 million. Adjusted SG&A was $42.2 million, or 9.9%, and the company's goal continues to be achieving adjusted SG&A in the 8.5% to 9.5% range. Net income and diluted earnings per share were $22.6 million and $0.31, respectively. Adjusted net income and adjusted diluted earnings per share were $14.6 million and $0.20, respectively. Adjusted EBITDA was $26.5 million, a 14.2% increase over the fourth quarter of 2022. Fourth quarter cash flow and adjusted cash flow from operations were $49.5 million and $27.9 million, respectively. DSO for the quarter was 82 days. Also, as part of our adjusted results, we adjust for the impact of the change in the payroll accrual. But since it will still be included in our reported cash flow from operations, we would point out that the Q1 payroll accrual is eight days.
That compares to the 15 days that we had in the fourth quarter of 2023 and six days that we had in the first quarter of 2023. 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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