Healthcare Services Group, Inc.

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. The 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 Groups, 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 Security 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 can result in significant costs and expenses including potential sanctions or penalties as well as distraction to a 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. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and an answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker today, Ted Wahl, President and CEO. Please go ahead, sir.

Okay. Thank you, Jacqueline, 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 10Q 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're doing, entireously 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 healthcare 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.

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 will 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 costs 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 and nutrition and housekeeping and 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 27 cents 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 startup inefficiencies that may occur. Dining and nutrition and housekeeping and 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 to 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 eight 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 pre-fund 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. and more. 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 of 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 one-time 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 20.25 cents 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 four three-for-two stock splits. We recognize the 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.