Healthcare Services Group, Inc.

The matters discussed on today's conference call include forward-looking statements about the business process within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often preceded by words such as believes, expects, anticipates, plans, will, goal, may, intends, assumes, or similar expressions. Forward-looking statements reflect management's current expectations as of the date of this conference call, and it involves certain risks and uncertainties. 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, expected future developments, and other factors that we believe are appropriate under the circumstances. As with any projection or forecast, uncertainty and changes in circumstances. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors and forward-looking statements are not guarantees of performance. Some of the factors that could Thank you for joining us. 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 forelooking statements, whether as a result of such changes, new information, subsequent events, or otherwise. Ladies and gentlemen, thank you for standing by and welcome to the Healthcare Services Group, Inc. 2020 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your host, Mr. Ted Wahl, President and CEO. Please go ahead.

Thank you, Sharon, and good morning, everyone. Matt McKee and I appreciate all of you joining us for today's conference call. Yesterday, we released our second quarter results and plan on filing our 10Q by the end of the week. First and foremost, and on behalf of all of us at Healthcare Services Group, I want to extend our deepest sympathies to those whose health and well-being have been affected by COVID-19. In the face of these unprecedented challenges, It's been beyond inspiring to witness our HCSG heroes as they, alongside our clients' employees, positively and profoundly impact the lives of America's most vulnerable each and every day. As we continue our intensive focus on mitigating the operational impacts of the virus, we remain steadfast in our commitment to support our customers in the care of their patients and residents, while simultaneously ensuring the health and safety of our most valued resource, our employees. We are pleased with our strong operating results and service execution during the quarter. Today, our value proposition is more compelling than ever before. By prioritizing systems implementation and adherence, increasing customer payment frequency, and management recruitment and development over the past couple years, along with investments we've made in technology and programmatic enhancements to our workers' comp and GL program, we are well positioned to thrive in the current environment and in the new norm to come. As we continue to navigate this crisis, we will continue to assess the impact of COVID-19 on our business and our industry. including the trends we're seeing with regard to lower census and increased cost. It's important to recall that prior to the onset of the pandemic, sector fundamentals were improving on the heels of positive trends around occupancy, reimbursement, and lease costs. And while COVID-19 has presented the industry with its share of near-term challenges, we've been very encouraged by the swift and decisive federal and state agency actions to financially support providers in combating this crisis, and we continue to see that support be put to good use on the front lines. We believe that due to its needs-based nature and multi-decade demographic tailwind, the industry's pre-pandemic state of more favorable operating trends will return post-pandemic. Looking ahead, we will continue innovating and managing our business coordinating with nursing departments to do our part in the infection prevention and control continuum and remaining flexible in responding to our client partners' evolving service level, staffing, and supply chain needs. At this time, we will continue with our cautious view on growth as we make our way into a new norm, and above all, remain deeply committed to making decisions that best position us to deliver shareholder value over the long term. So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Thanks, Ted. Good morning, everyone. Revenue for the quarter was with housekeeping and laundry and dining and nutrition segment revenues of $227.6 million. and $224.4 million, respectively. Revenue included $17.2 million of COVID-19-related supplemental billings, primarily related to employee pay premiums, which were initiated by and passed through to customers. This was offset by temporary decreases in recurring billings resulting from census-driven cost reductions in staffing and purchasing, most of which were initiated in the latter part of the quarter. Looking ahead to the relative impact, we entered the third quarter with a recurring billing run rate of approximately $430 million and would expect these temporary reductions in costs and recurring billings to remain in place until census recovers and our staffing and purchasing levels increase accordingly, which is very much appreciated by our customers. Net income for the quarter came in at $24.3 million and earnings per share was 31 cents per share. Direct cost of services was $387.5 million, or 85.7%, as the majority of account managers who had transitioned out of a facility were no longer servicing are now assigned to new facilities at which they are budgeted. Overall, our near-term goal remains to manage direct cost at or below 86%. Housekeeping and laundry and dining and nutrition segment margins were 11.1% and 8.3% respectively. SG&A was reported at $41.5 million, or 9.2%. After adjusting for the $6.5 million increase in deferred compensation, actual SG&A was $35 million, or 7.7%. And we expect SG&A to remain in the 7.5% to 8% range in the near term, as those costs are largely fixed. but continue to ultimately target SG&A of 7.5%, excluding any COVID-19 or SEC-related costs, with the primary pathway to leverage that existing in top line growth. Investment and other income for the quarter was reported at $7.4 million. After adjusting for the $6.5 million change in deferred compensation, actual investment income was around $900,000. We reported an effective tax rate of 24% 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 second quarter, we had cash and marketable securities of over $170 million in a current ratio better than 3 to 1. Cash flow from operations was $79.7 million, inclusive of the $20.7 million increase in accrued payroll 15.4 million of which was related to the deferral of payroll taxes under the CARES Act. And because we had previously called out the quarter to quarter impact of 2020 payroll accruals, for the rest of the year we're expecting payroll accruals of four days in the third quarter and 12 days in the fourth quarter. Ultimately the payroll accrual only relates to timing and the impact washes out through the full year. Additionally, we expect an incremental $15 million or so in payroll accrual in both Q3 and Q4, resulting from that payroll tax deferral under the CARES Act to be paid at the end of 2021 and 2022. DSO for the quarter was 60 days, down two days from the previous quarter. We're pleased with the ongoing strength of our balance sheet and the ability to support the business while continuing to return capital to HCSG shareholders. We announced yesterday that the Board of Directors approved an increase in the dividend to 20.375 cents per share, payable on September 25, 2020. The cash flows and cash balances support it, and with the dividend tax rate in place for the foreseeable future, the tax 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 69th consecutive cash dividend payment since the program was instituted in 2003, and the 68th consecutive quarterly increase. 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 performance track record. So with those opening remarks, we'd like to now open up the call for questions.