Healthcare Services Group, Inc.

The matters discussed on today's conference call include forward-looking statements about the business prospects of healthcare services groups, Inc., 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 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, 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 Group, Inc.'s actual results could differ materially from those anticipated in these 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 are those projected in the forward-looking statements are included in our earnings press release issued prior to this call and in our filings with the Securities and Exchange Commission, including the SEC's ongoing investigation. There can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries or pursue further action that could result in significant costs and expenses, including in potential sanctions or penalties, as well as distractions to 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 forelooking statement. Further, as a result of such changes, New information, subsequent events, or otherwise. Ladies and gentlemen, thank you for standing by. And welcome to the HCSG 2021 First Quarter 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 need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Mr. Ted Wahl, President and CEO. Please go ahead.

Great. Thank you, Sharon, and good morning, everyone. Matt McKee and I appreciate you joining us today. We released our Q1 results this morning and plan on filing our 10Q by the end of the week. Overall, the vaccine rollout has been a real game changer for the industry. and a significant first step towards recovery with new COVID cases among patients and residents dropping over 90% between Q4 and Q1. We've seen similarly positive new case trends among facility staff as well. The success of the vaccine has led to stabilizing occupancy and has been a huge morale boost for frontline workers. As positive an impact as the vaccine has had, The reality is the exact pace and even pathway of recovery is still uncertain, but we do feel good about the stabilization that's occurred and at least directionally where things appear to be trending. Our highest level view of recovery continues to be that it will happen, but we're looking at a 12 to 18 month process with fits and starts along the way. ongoing federal and state agency funding and actions in support of providers will be crucial in ensuring as timely and orderly a recovery as possible. Even with all of the pandemic-related variables, we again delivered outstanding operational and financial outcomes in Q1. Again, similar to the themes of the past four quarters, we did a great job of controlling the controllables around service execution, customer satisfaction and budget adherence. And we expect those positive trends to continue into Q2. As far as top line growth, with the revenue puts and takes that remain in play, namely depressed census levels and facility access challenges, coupled with our own more cautious approach during this most early stage of recovery, we continue to expect Q2 revenues to be flattish relative to Q1. So while COVID remains a near-term headwind on revenue, some of the recent more positive industry and customer data have provided us with improved top-line visibility for potential growth opportunities in the back half of the year, which is really exciting for us to start to think about and plan for. Before we move on to the discussions on Q1 results, I'd like to briefly touch on the SEC update we provided last quarter and again in this morning's release. As we previously highlighted, the company and the SEC have commenced discussions regarding a potential resolution to the investigation. We're pleased that the matter has moved into this phase and hope to continue to work with the SEC to reach a final resolution. As I'm sure all of you can appreciate, beyond what we've disclosed previously and in this morning's release, we continue to be limited in what we can say about this matter, especially while these resolution discussions are active and ongoing. 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. Revenue for the quarter was $407.8 million with housekeeping and laundry and dining and nutrition segment revenues of $215 million and $192.8 million, respectively. Revenue included $3.9 million of COVID-related supplemental billings, primarily related to employee pay premiums, which were initiated by and then passed through to our customers. Net income for the quarter came in at $24.7 million, and earnings per share was $0.33 per share. Direct cost of services was $336.6 million, or 82.6%, well below the company's historical target of 86%. Housekeeping and laundry and dining and nutrition segment margins were 13.1% and 10.4%, respectively. SG&A was reported at $40 million, or 9.8%, but after adjusting for the $1.3 million increase in deferred compensation, actual SG&A was $38.7 million, or 9.5%. During the quarter, SG&A was also impacted by about $2 million, of legal and professional fees related to the previously announced SEC matter. Longer term, excluding any COVID or SEC-related costs, the company's target remains 7.5%, with the primary leverage existing in top-line growth. Investment and other income for the quarter was reported at $1.8 million, but after adjusting for the $1.3 million change in deferred compensation, actual investment income was about a half a million dollars. The company reported an effective tax rate of 25.2% and expects a 2021 tax rate of 24 to 26%. Cash flow from operations for the quarter was $3.5 million. This includes a $30.7 million decrease in accrued payroll. And because we called out the timing of the payroll and the impact of the payroll accrual last year, we would point out that the 2021 payroll accruals should have a similar cadence to what we saw last year, Q1 had the lowest payroll accrual of four days. Q2 should be 11 days, Q3, five days, and then Q4, 13 days. And Q4 will also be impacted by one half or $24 million of the CARES Act deferred payroll tax repayment. That compares to, on the payroll accrual, three days, 10 days, four days, and 12 days that we had in 2020 during corresponding periods. But, of course, the payroll accrual only relates to timing, and the impact ultimately washes out through the full year. We are pleased with the ongoing strength of the balance sheet and the ability to support the business while continuing to return capital to HCSG shareholders. We announced that the Board of Directors approved an increase in the dividend to 20.75 cents per share, payable on June 25th. The cash flows and cash balances support 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 shareholders. This will mark the 72nd consecutive cash dividend payment since the program was instituted in 2003 and the 71st consecutive quarterly increase that's now an 18-year period that's included four three-for-two stock splits. We recognize that dividend is important to our shareholders, and we have increased it in line with our performance track record. Additionally, the company remains authorized to repurchase 1.7 million shares of our common stock pursuant to the previous Board of Directors authorization and expect to repurchase up to 1 million shares through February of 2022. And with those opening remarks, we'd like to now open up the call for questions.