Healthcare Services Group - Earnings Call - Q1 2025

Executive Summary

• HCSG delivered its strongest revenue and cash flow quarter in five years: Revenue $447.7M (+5.7% YoY), Diluted EPS $0.23, and cash flow from operations (CFO) ex payroll accrual $32.1M; management raised 2025 CFO (ex payroll accrual) guidance to $60–$75M from $45–$60M on strong collections and receipt of $12.2M in ERC funds.
• Q1 results beat S&P Global consensus: Revenue $447.7M vs $443.9M consensus*, EPS $0.23 vs $0.188 consensus*, driven by new client wins, service execution, and cost discipline; adjusted EBITDA margin rose to 6.8%.
• Outlook: Q2 revenue guided to $445–$455M and 2025 mid‑single‑digit growth reiterated; cost of services targeted at ~86% and SG&A at 9.5–10.5% near term (longer‑term 8.5–9.5%).
• Liquidity and capital deployment: $143.9M cash and marketable securities; $500M undrawn revolver; Q1 buybacks of ~$7M; first tuck‑in acquisition since 2021 to add ~1% to 2025 revenue.

Consensus estimates marked with * are from S&P Global.

What Went Well and What Went Wrong

• What Went Well

  • “Best results in five years”: revenue and cash flow momentum carried into Q2; new client wins drove organic growth; collections exceeded revenue.
  • Margin execution: EVS margin at 10.8% and Dining at 7.6%; EBITDA and adjusted EBITDA improved, with adjusted EBITDA margin at 6.8% on service execution and field discipline.
  • Working capital and collections: DSO improved to 78 days (vs 88 days in Q1’24); collections strength underpinned raised 2025 CFO guidance (ex payroll accrual) to $60–$75M.

• What Went Wrong

  • Inflation watchpoints: food‑at‑home inflation accelerated to ~1.0% QoQ; management will pass through per contracts but is working with clients to manage costs and menus.
  • Cash flow quality mix: Q1 CFO included a $12.2M ERC receipt; while not in income statement, it supported the guidance raise, making part of the CFO uplift non‑recurring.
  • Sequential revenue cadence sensitive to new business timing; excluding the ~1% M&A contribution, Q2 midpoint implies flattish sequential revenue, hinging on pipeline conversion and retention.

Transcript

Operator (participant)

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 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. 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 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&A, and other sections of the annual report on Form 10-K and Healthcare Services Group Inc's 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. I would now like to turn the conference over to Ted Wahl, President and CEO. Please go ahead.

Ted Wahl (President and CEO)

Good morning, everyone, and welcome to HCSG's First Quarter 2025 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. We will then open up the call for Q&A. 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. For the three months ended March 31st, we reported revenue of $447.7 million, an increase of 5.7% over the prior year, net income and diluted EPS of $17.223 million, and cash flow from operations, excluding the change in payroll accrual, of $32.1 million, an increase of $41.3 million 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. The reimbursement environment is stable. 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 Q2 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 costs 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. With those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Matt McKee (Chief Communications Officer)

Thank you, Ted, and good morning, everyone. Revenue was reported at $447.7 million, an increase of 5.7% over the prior year's corresponding quarter. Environmental services revenue and margin were $196.3 million and 10.8%. Dietary services revenue and margin were $251.3 million and 7.6%. We estimate Q2 revenue in the range of $445 million-$455 million and expect second half of the year revenue to grow sequentially compared to the first half of the year revenue. Cost of services was reported at $379.7 million, or 84.8%. Our 2025 goal is to manage cost of services in the 86% range. Reported SG&A was $45 million. After adjusting for the $1.4 million decrease in deferred compensation, actual SG&A was $46.4 million, or 10.4%.

The company expects to manage SG&A in the 9.5-10.5% 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%-9.5% range. Net income and diluted earnings per share were reported at $17.2 million and $0.23 per share. Cash flow from operations was reported at $27.5 million. After adjusting for the $4.6 million decrease in the payroll accrual, actual cash flow from operations was $32.1 million. These numbers include a $12.2 million 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 million-$60 million to a range of $60 million-$75 million. I'd now like to turn the call over to Vikas for a discussion on our balance sheet and capital allocation progression.

Vikas Singh (CFO)

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 $143.9 million and a $500 million credit facility, inclusive of a $200 million 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 current facility, which has further reduced our interest expense. DSO at the end of first quarter was reported at 78 days versus 88 days at the end of Q1 2024. Across the same period, our revenues have increased each quarter, and our gross receivables have declined consecutively.

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. 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 2021.

We also opportunistically repurchased approximately $7 million of common stock during the first quarter to capitalize on our strong liquidity position. This takes our total buyback to about $23 million since our February 2023 share repurchase authorization. We have another 5.4 million 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. With that, we will conclude our opening remarks and open up the call for Q&A.

Operator (participant)

At this time, I'd like to remind everyone, in order to ask a question, press star, followed by the number one on your telephone keypad. Our first question will come from the line of Andy Wittman with Baird. Please go ahead.

Andy Wittmann (Senior Research Analyst)

Yeah, great. I guess I wanted to start at high level, Ted. Just on the regulatory environment, I heard the comments in the prepared remarks. Maybe I just give you a little platform here to 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.

Ted Wahl (President and CEO)

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 the strength of the industry in the months and years ahead. That is a real positive. I do think the key, aside from a lot of the noise you may hear out of D.C., the key you would hear from most of our customers and the provider community at large 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. 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. That is foundational when you think about industry stability. On the reimbursement side, CMS recently proposed the 2.8% increase for Medicare rates for fiscal year 2026. That has been generally well received. There continues to be positive reimbursement news at the state level as well.

From a regulatory perspective, I know I mentioned this as well, but I want to emphasize the clarity this provides for the provider community is that Texas ruling that came out, which is applied nationwide, that all but eliminates the 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 things coming out of D.C., I know, for instance, provider taxes are getting some attention recently, specifically for hospitals. I do want to differentiate between hospitals, SNFs, 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.

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. The effect on operators and facilities within those states is different depending on a variety of factors: occupancy, patient mix, etc. That is too early to tell. If there were changes, that is the one that you hear whispers about. I think if you poll the provider community, at least within the SNF market, they would still say it is more likely than not that that is not impacted. To the extent it is in any way impacted, it would likely be more modest. It would be phased in over a period of years and manageable.

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 services we offer when you think about the central theme of our value proposition, which is certainty, financial, regulatory, and otherwise.

Andy Wittmann (Senior Research Analyst)

It might be a little 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 papers 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 reimbursements, federal support for Medicaid. 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.

Ted Wahl (President and CEO)

Yeah, I would say there's a great confidence within the SNF community specifically that the Trump administration was incredibly supportive during its first term. They're hanging their hat 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 facilities specifically. The rhetoric out of D.C., I think, has been consistent with that.

Andy Wittmann (Senior Research Analyst)

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

Ted Wahl (President and CEO)

Fantastic.

Operator (participant)

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

A.J. Rice (Managing Director)

Thanks. Hi, everybody. Just to put a fine point on the comment about the court ruling and the minimum staffing rules, is that just to 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?

Ted Wahl (President and CEO)

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

A.J. Rice (Managing Director)

Right. In the first quarter, 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&A ratio guidance for the year.

Ted Wahl (President and CEO)

Yeah, 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. If you look back, A.J., over the past 12 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.

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

A.J. Rice (Managing Director)

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?

Matt McKee (Chief Communications Officer)

Yeah. CPI, AJ, for all items in the quarter was 60 basis points compared to 90 basis points in Q4. We actually saw 10 basis points of deflation in the month of March, which is encouraging. Food at home inflation continued to increase sequentially, showing 1% inflation, which compared to 90 bps in Q4 and 50 bps in Q3. 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 2022. We will 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.

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 will not be published until next week on the 30th. Really, from an overall labor market, as it relates to the industry and Healthcare Services Group, it has been a strong 18-month period. The healthcare sector added jobs at a higher pace than all other industries, which is a great reversal of what we've seen in prior periods. That is largely fueled by the demographic trends that Ted alluded to in his previous comments, and then increasing demand for healthcare.

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. We're now about 47,000 jobs short relative to pre-pandemic levels. That's as a reminder from a loss of nearly a quarter of a million jobs at its peak. At these current rates of recovery, we should be at pre-pandemic levels in less than six months. Definitely encouraging trends and dynamics for the industry.

Just to, again, bring it back to Healthcare Services Group, we remain in a good spot. We've seen ongoing improvement, stabilization. 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 (Managing Director)

Okay. Great. Thanks a lot.

Operator (participant)

Our next question comes from the line of Tao Qiu with Macquarie. Please go ahead.

Tao Qiu (Equity Research Analyst)

Thank you. Good morning. Just want to clarify on the revenue guide for the second quarter. If you look at the midpoint of that guidance, it suggests a small $3 million step up in revenue next quarter. I think Vikas mentioned that there's a tuck-in acquisition that will add 1% to revenue. If you back that out, it implies a relatively flat sequential movement next quarter. Is that the right way to think about it? If so, what does that say about the pace of growth for the balance of the year?

Ted Wahl (President and CEO)

Yeah, I think that's 445. If you think about our goal relative to that guidance you referenced, Tao, our goal is really to provide as accurate a range as possible given the variables. Aside from the acquisition you mentioned, the greatest variable for us is really the timing of new business ads, 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, etc. 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 and 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.

Again, the acquisition that Vikas described in his opening remarks, it'll represent about 1% of revenue or 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 $445-$455.

Tao Qiu (Equity Research Analyst)

Okay. Got you. In terms of the operating cash flow guidance raise, $15 million there. I think I heard a mention of $12 million CARES Act benefiting first quarter. How much of that raise is driven by this one-time item? What's your confidence of your cash collection momentum for the rest of the year? Thank you.

Vikas Singh (CFO)

Yeah. That raise is a combination of the two factors that you pointed to. Look, we've received these ERC funds of $12 million plus. That definitely did contribute to the upping of the guidance, but the fact that we had a standout Q1, as Ted mentioned, the best in five years, the collection momentum was strong. That contributed as well to us upping the range. I think it's a combination of the two factors. Look, I think what I'll say on the collection front is, while Q1 was strong, so was Q3 and Q4. 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. I think that contributes to the overall confidence around how we think about cash flows for the rest of the year.

Tao Qiu (Equity Research Analyst)

Great. Thank you.

Operator (participant)

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

Ted Wahl (President and CEO)

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. 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. On behalf of Matt, Vikas, and all of us at Healthcare Services Group, thank you, Regina, for hosting today's call. Thank you again to everyone for joining.

Operator (participant)

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