Healthcare Services Group, Inc.

Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Healthcare Services Group 2022 First Quarter 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'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please 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. 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 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 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 Securities and Exchange Commission. We are under no obligation and expressly disclaim any obligation to update or alter the forward looking statements, whether as a result of such changes, new information Thank you, Ted Wahl, President and Chief Executive Officer. You may begin.

Thank you, Chris, and good morning, everyone. Matt McKee and I appreciate you joining us today. We released our first quarter results this morning and plan on filing our 10Q by the end of the week. Overall, I'm very pleased with our start to the year. More efficient labor management, specifically related to premium pay programs and overtime, along with the catch-up of food inflation pass-through increases and continued progress on our service agreement modification efforts all contributed to improved financial outcomes in the quarter. We remain actively engaged with our customers to modify our service agreements to adjust for the extraordinary inflation experienced over the past year as well as account for future inflation on a more real-time basis. We expect these service agreement modifications to be completed by the end of Q2 with the goal of exiting the year with cost of services in line with our historical target of 86%. Looking ahead, while the industry continues to face workforce availability, inflation, and supply chain challenges, we are encouraged by the most recent positive facility census trends. We remain confident in our ability to execute on our near-term objectives, and the long-term growth outlook for the company remains as strong as ever, given the increasing resonance of our value proposition and the attractive demographics. 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 $426.8 million, with housekeeping and laundry and dining and nutrition segment revenues of $201.7 million and $225.1 million, respectively. Direct cost of services was reported at $373.3 million, or 87.5%, as the company continued to be impacted by increases in labor and supply costs. Again, we expect the service agreement modification that Ted alluded to in his opening remarks to be completed throughout the first half of 2022 with the goal of exiting the year with cost of services in line with our historical target of 86%. Housekeeping and laundry and dining and nutrition segment margins were 10.1% and 4.2% respectively. Selling general and administrative was reported at $35.7 million. But after adjusting for the $3.8 million decrease in deferred compensation, actual SG&A was $39.5 million. And the company expects 2022 SG&A to approximate 8.5% to 9.5%. Investment and other income for the quarter was reported as a $2 million expense. After adjusting, though, for that $3.8 million decrease in deferred compensation, actual investment income was $1.8 million. and that includes a one-time $1.6 million mark-to-market adjustment of a previously recorded long-term liability. So normalized investment income was $200,000. Company reported an effective tax rate of 28.2% due to discrete items that impacted the Q1 rate and expect a 2022 tax rate of 24 to 26%. Net income for the quarter came in at $11.3 million and earnings was 15 cents per share. Cash outflow from operations for the quarter was $30.2 million and was impacted by a $27.2 million increase in accounts receivable primarily related to the timing of cash collections and a $24.9 million increase in accrued payroll. And DSO for the quarter was 68 days. And also we point out that the Q2 of 2022 payroll accrual will be 12 days and that compares to 11 days that we had in the prior year period of Q2 2021, that being 11 days. And just for additional reference, in Q1 of 22, the payroll accrual was five days and in Q1 of 2021, it was four days. But again, that payroll accrual only relates to timing and the impact ultimately washes out throughout the full year. We're pleased with the ongoing strength of the balance sheet and the ability to support the business while continuing to return capital to our HCSG shareholders. We announced that the Board of Directors approved an increase in the dividend to 21.25 cents per share, payable on June 24th of 2022. The cash balance is supported 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 76th consecutive cash dividend payment since the program was instituted in 2003 and the 75th consecutive quarterly increase. That's now a 19-year period that's included four three-for-two stock splits. So with those opening remarks, we'd now like to open up the call for questions.