Healthcare Services Group Inc
NASDAQ:HCSG
Earnings Call Analysis
Q4-2023 Analysis
Healthcare Services Group Inc
In the final quarter of 2023, the company reported a satisfying performance, with revenue hitting $423.8 million and adjusted revenue notching slightly higher at $425 million. This figure sat comfortably within the anticipated range of $420 million to $430 million. Net income was nice at $22.6 million with diluted earnings per share (EPS) at $0.31. More impressively, adjusted EBITDA saw a 14.2% increase from Q4 2022, suggesting that the company's financial health is on a steady climb.
The industry landscape appears to be regaining its former vitality, underscored by a labor market that added over 60,000 jobs in 2023. However, the workforce still counts 140,000 fewer jobs than before the pandemic, hinting at potential for further recovery. Occupancy rates sit just 1% shy of pre-pandemic figures, flirting with the 80% mark, and Medicare increases along with positive state-level trends bode well for the sector.
A cloud of uncertainty lingers as the CMS has proposed a minimum staffing rule. Over 46,000 comments poured in during the 60-day commentary period, and while the final rule's timing is up in the air, CMS aims to have it out by year's end. The first quarter of 2024 holds promises of consistent performance with adjusted revenue expected to float between $420 million and $430 million.
Breaking down revenues by segment, Housekeeping & Laundry and Dining & Nutrition brought in $191.4 million and $232.4 million respectively. The company has managed to keep costs in check with adjusted cost of services at 85.3% against a goal of 86%. They also hinted at an ambition to slim down adjusted Selling, General and Administrative expenses (SG&A) to hover between 8.5% and 9.5%, currently at 9.9%.
The company is energizing its growth engines by fueling its manager-in-training program and its new business pipeline, with a prediction that the action will hit a higher gear in the second half of 2024. Opportunities seem ripe for cross-selling dining services to existing Housekeeping & Laundry clients, and venturing into new environmental services relationships, offering a fertile ground for organic growth.
Following up on past quarters' client restructurings, the curtain has been drawn on this episode with the matters fully resolved and no anticipated impact on the financial narratives of 2024.
Eyes are peeled for potential acquisitions with executives reviewing opportunities that may complement the existing business. They will continue to share updates as plans materialize. Not to forget, shareholders witnessed the company buying back over 1 million shares in 2023, a move that may be employed opportunistically moving forward, evidencing a commitment to bolstering shareholder value.
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Thanks for standing by, and welcome to the HCSG 2023 Fourth Quarter Earnings Call.
I would now like to welcome Ted Wahl, President and CEO, to begin the call. Ted, over to you.
Thank you, and good morning, everyone. Matt McKee and I appreciate you joining us today. We released our fourth quarter results this morning and plan on filing our 10-K by the end of the week.
Today, in my opening remarks, I'll first discuss our Q4 financial highlights and key accomplishments. I'll then share our perspective on the latest industry trends and developments. And then lastly, I'll discuss our 2024 outlook. I'll then turn the call over to Matt to provide a more detailed discussion on the quarter.
So with that overview, I'd now like to discuss our Q4 financial highlights and key accomplishments. For the 3 months ended December 31, 2023, we reported revenue of $423.8 million and adjusted revenue of $425 million, which was in line with expectations; net income and diluted EPS of $22.6 million and $0.31 and adjusted net income and adjusted diluted EPS of $14.6 million and $0.20; adjusted EBITDA of $26.5 million, a 14.2% increase over Q4 2022; and cash flow from operations of $49.5 million; and adjusted cash flow from operations of $27.9 million, a 7.1% increase over Q4 2022. Our team delivered strong fourth quarter results, building on our momentum throughout 2023. Against the backdrop of an ongoing industry recovery, we achieved 98% cash collections, managed adjusted cost of services under 86% and exceeded cash flow projections for the quarter and second half of 2023. We also continued to grow our new business and manager-in-training pipelines and remain confident that we will deliver on our goal of year-over-year growth in 2024.
I'd now like to share our perspective on the latest industry trends and developments. Industry operating metrics continued to improve, highlighted by: A stabilizing labor market with the sector adding over 60,000 jobs in 2023, bringing the total workforce to 1.45 million, 100,000 jobs higher than the April 2022 low, but still 140,000 jobs below pre-pandemic levels; a solid reimbursement environment with the October Medicare increase of 4% and continued positive trends at the state level; and rising occupancy, which now sits at 79.2%, only 100 basis points below pre-pandemic levels.
On the regulatory front, on September 1, 2023, CMS proposed a minimum staffing rule which triggered a 60-day comment period that remained open through November 6. Over 46,000 comments were submitted, and although the timing of a final rule remains uncertain, CMS has indicated it hopes to publish a final rule by the end of the year.
There is a growing list of stakeholders opposed to the rule, including health care industry leaders; trade associations like ACA; MedPAC members; and a bipartisan group of legislators, including 30 senators and counting. The reasons for their opposition include the unfunded nature of the mandate; the one size fits all approach; the apparent disregard for the realities of present and future nursing availability; and the near certainty that, if implemented as proposed, the rule would lead to facility closures and ultimately reduce access to care, especially in rural areas.
In addition to the public comment period, any rule would have to survive inevitable litigation; potential legislation; political changes in administration; and at least on some level, be funded. From our perspective, there remains great uncertainty as to whether any final rule would ultimately be implemented, at least a rule that resembles the current proposal.
That said, we remain hopeful that CMS will fully consider the significant impact on operators before finalizing a rule. And if one is ultimately implemented, I have confidence in our customers' ability to manage it in a prudent manner.
As far as our outlook for 2024, our top 3 priorities continue to be as follows.
The first is managing adjusted cost of services in line with our target of 86%. We do not take operational execution for granted, but have full faith in the ability of our operators to deliver the services on budget. It took a considerable amount of work in 2022 to modify our contracts to better capture wage inflation and cost increases in our pricing on a closer to real-time basis. Those contract enhancements, along with recent positive trends in customer experience, systems adherence, regulatory compliance and budget discipline, provides strong operating momentum heading into 2024. We expect Q1 adjusted cost of services of 86%.
Our second priority is delivering year-over-year growth by executing on our organic growth strategy through hiring, training and developing future manager candidates; converting opportunities from our sales pipeline into new business adds; and retaining our existing facility business. We estimate a Q1 adjusted revenue range of $420 million to $430 million.
The third priority is collecting what we bill. We view cash collections as a lagging indicator of industry recovery. And while our recent trends have improved compared to 2022 and the first half of 2023, this remains an area of opportunity for the company in 2024. We expect some continued choppiness in the year ahead, but anticipate that our cash collections will continue gaining strength throughout 2024 and further still into 2025. We estimate Q1 and 2024 adjusted cash flow ranges of 0 to $10 million and $40 million to $55 million, respectively.
It's an incredibly exciting time for the company as we're rounding the turn of what has been a prolonged recovery for the industry. The challenges we navigated the past few years have further solidified our value proposition, the durability of our business model and our market-leading position. As we enter 2024, the company's underlying fundamentals are stronger than ever. And with the industry at the beginning of a multi-decade demographic tailwind, we are favorably positioned to capitalize on the opportunities ahead and deliver meaningful long-term shareholder value.
So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.
Thank you, Ted, and good morning, everyone. Revenue was $423.8 million. Adjusted revenue was $425 million, in line with the company's expectations of $420 million to $430 million. Housekeeping & Laundry and Dining & Nutrition segment revenues were $191.4 million and $232.4 million, respectively. Adjusted Housekeeping & Laundry and Dining & Nutrition segment revenues were $191.7 million and $233.3 million, respectively. Housekeeping & Laundry and Dining & Nutrition segment margins were 7.5% and 6.2%, respectively. Adjusted Housekeeping & Laundry and Dining & Nutrition segment margins were 7.7% and 6.5%, respectively.
Cost of services was $350.4 million. Adjusted cost of services was $362.6 million or 85.3%. The company's goal is to continue to manage adjusted cost of services in the 86% range. SG&A was $46.3 million, adjusted SG&A was $42.2 million or 9.9%, and the company's goal continues to be achieving adjusted SG&A in the 8.5% to 9.5% range.
Net income and diluted earnings per share were $22.6 million and $0.31, respectively. Adjusted net income and adjusted diluted earnings per share were $14.6 million and $0.20, respectively. Adjusted EBITDA was $26.5 million, a 14.2% increase over the fourth quarter of 2022. Fourth quarter cash flow and adjusted cash flow from operations were $49.5 million and $27.9 million, respectively. DSO for the quarter was 82 days.
Also, as part of our adjusted results, we adjust for the impact of the change in the payroll accrual. But since it will still be included in our reported cash flow from operations, we would point out that the Q1 payroll accrual is 8 days. That compares to the 15 days that we had in the fourth quarter of 2023 and 6 days that we had in the first quarter of 2023. But again, the payroll accrual only relates to quarter-to-quarter timing.
So with those opening remarks, we'd now like to open up the call for questions.
[Operator Instructions] Our first question comes from the line of Sean Dodge with RBC Capital Markets.
Yes. Congratulations on the strong finish to the year. Ted, you mentioned new business pipeline and manager-in-training recruiting, you're ramping both to continue to position for growth this year. Can you help quantify some of that? How many new managers have you hired? How many are you looking to hire for growth? And then will this start to flow through in the first half of the year? Or will this be more of a kind of a second half of '24 dynamic?
Yes. I think in terms of the cadence of the new business ramp up, we definitely see it being not so linear and more of a chunky aspect to it, depending on the timing of the new business. But second half of the year being heavier than the first half of the year, Sean, but we definitely anticipate new business adds coming online certainly towards the end of the first quarter. And then that -- again, that will ramp up throughout the year.
In terms of our manager-in-training pipeline, which is great to be able to speak about again because, prior to COVID, we talked about that as being the gating factor on our ability to grow, knowing the demand for the services was greater than what we were capable of managing at any point in time.
So we're really in a business-as-usual state. Obviously, if we're planning for new business adds in certain markets, we're going to weight that heavier, and the leaders -- the local leadership are going to be more focused on hiring and training and developing more candidates, disproportionate amount of candidates. But we're well positioned to be able to take advantage of the growth opportunity and really see the year ahead as a year of returning to growth.
And is this growth largely going to be coming from the dining cross-sell? Or is there going to be any contribution or scaling on the education side? And then maybe just a quick update on how the education pilots are going and when that could be a more meaningful contributor.
Yes. Sean, this is Matt. I'll address this one. There will be really a combination of drivers of organic growth, the first of which and most obvious of which you pointed out being the cross-sell of dining services into the existing Housekeeping & Laundry customer base.
Obviously, with the challenges that we have faced, and the industry more broadly has faced, through the course of the past 4 years or so, we've had an opportunity to really dig in and understand the operational intricacies of each and every facility where we're operating environmental services, but not dining services.
And perhaps more importantly, we have a front row seat to determine the financial health and wherewithal of those clients and the degree to which they hold our relationship and the contract with integrity, meaning are they paying us on time and in full? Are they a good partner with whom we would like to expand the relationship? So plenty of opportunity for us to continue to expand those environmental services partnerships to include dining services.
Outside of that, the one other growth engine that you didn't mention was organic opportunities, greenfield opportunities to start environmental services relationships. We still do view, within the skilled space, the long-term and post-acute care space, environmental services largely as the sell-in opportunity, the greenfield sales opportunity, and continue to view dining as the cross-sell for a lot of the reasons that I just outlined a moment ago. So that will be a contributor as well.
And then on education, really exciting opportunity. That's really progressed from what had been sort of an experiment to a pilot, and it's now a component of our business that we're very much committed to.
We're sort of in that selling season right now. We've talked about some of the seasonality and the cadence of new business opportunities that arise within the education space, so we'll likely have some more substantial or more detailed updates that we could offer, Sean, on the next call.
But definitely building some momentum internally. And as that brand presence begins to further grow in that marketplace, we remain very much committed and enthusiastic about the opportunity that it presents.
Our next question comes from the line of Ryan Daniels with William Blair.
This is Jack Senft on for Ryan Daniels. Congrats on the strong finish to 2023 as well. In terms of client restructuring, I know this was an event brought up last quarter as well. Curious if the client restructurings noted this quarter are tied to the same restructurings as the last quarter. And do you expect this to be finished by now? Or is there a possibility we see this surface can in 2024, in first quarter of 2024?
Yes. You're exactly right that it was really a carryover. It was just the completion of the 2 client restructurings we called out last quarter that were fully resolved in this quarter. And we're expecting no residual impact in 2024 from those 2 events.
Okay. Perfect. Makes sense. And then just a quick follow-up, too. Given that you're entering into this growth mode, phase in 2024, and it's now been about a year since the new capital allocation strategy, I guess, have you guys identified any investment areas and M&A areas to help kind of supplement and support this growth? Maybe besides the manager pipeline? And if so, can you maybe just discuss the areas of potential market opportunity ahead?
Yes. I think for us, it continues to be from a growth perspective, priority #1 is organic growth. That is the lowest-hanging fruit. That is what we're prepared for in 2024. We are continuing to evaluate numerous inorganic opportunities, and as they are either engaged in or completed, we would certainly share that with everyone. From a capital allocation perspective, we remain opportunistic with the buyback. We did buy back over 1 million shares over the course of 2023, and we'll continue to be opportunistic on that front. But 2024, certainly where we're prioritizing and where we're focused on is organic growth.
I would now like to turn the call over to Ted Wahl for closing remarks.
Fantastic. Well, thank you, Mandeep. We appreciate you hosting the call today.
I just wanted to reiterate what an incredibly exciting time it is for the company as we're rounding the turn of what has been a prolonged recovery for the industry. In the year ahead, we're going to remain focused on executing on our strategic priorities so as to capitalize on the opportunities ahead and deliver meaningful long-term shareholder value.
So on behalf of Matt and all of us at Healthcare Services Group, thank you for hosting the call Mandeep, and thank you to everyone for joining us today.
This concludes today's call. You may now disconnect.