Healthcare Services Group, Inc. (NASDAQ:) announced strong financial results for the third quarter of 2024, with CEO Ted Wahl emphasizing significant growth in revenue, earnings, and cash flow. The company experienced an uptick in occupancy rates and workforce expansion, with a positive outlook for the upcoming quarters and into 2025. Strategic initiatives in cost management, collections optimization, and business growth were instrumental in driving the company’s robust performance. HCSG is poised for further expansion in the environmental services and education sectors, with a strategic focus on capital deployment, including share repurchases and targeted acquisitions.
Key Takeaways
- Q3 revenue reached $428.1 million, with net income at $14 million and diluted EPS of $0.19.
- Year-over-year and sequential growth observed in revenue, earnings, and cash flow.
- Occupancy rates climbed to 79.8%, nearing pre-pandemic levels.
- Workforce expanded by over 100,000 jobs since early 2023.
- Anticipated 4.2% increase in Medicare rates effective October 1, 2024.
- Q4 revenue projected between $430 million and $440 million.
- 2024 adjusted cash flow from operations target reaffirmed at $40 million to $55 million.
- Over 350,000 shares repurchased in 2024, with authorization for an additional 6.1 million shares.
- Opportunities identified in high acuity assisted living and behavioral health centers.
Company Outlook
- Optimism for top-line growth in the second half of the year and further growth in 2025.
- Strategic focus on enhancing collections and capitalizing on new business opportunities.
- Revenue split by 2025 projected at 45% environmental services and 55% dining services.
Bearish Highlights
- CECL accounting transition introduces variability in bad debt reporting.
- Ongoing challenges in rural markets despite improvements in labor market conditions.
- Food inflation reported at 40 basis points for the quarter.
Bullish Highlights
- Strong market position with over 80% outsourced market share.
- No significant disruptions from recent hurricanes, demonstrating preparedness.
- Expansion plans in environmental services and education sectors.
Misses
- No specific financial misses were mentioned in the earnings call summary.
Q&A highlights
- Management discussed post-COVID recovery and client relationship strategies.
- Focus on expanding dining services in assisted living and behavioral health centers.
- SG&A expenses being managed effectively, targeting 8.5% to 9.5% of revenue.
- Education segment shows seasonal trends but is less than 5% of total revenue.
- Company to pass through food inflation in first-quarter billings.
In conclusion, HCSG’s recent earnings call reflects a company on a positive trajectory, with strategic measures in place to foster continued growth and value creation. The management’s confidence in the company’s fundamentals and its ability to leverage favorable demographic trends suggests a bright outlook for HCSG’s future.
InvestingPro Insights
Building on Healthcare Services Group’s (HCSG) robust Q3 2024 results and optimistic outlook, recent data from InvestingPro provides additional context to the company’s financial position and market performance.
As of the last twelve months ending Q2 2024, HCSG reported revenue of $1.68 billion, with a modest year-over-year growth of 0.61%. This aligns with the company’s reported Q3 revenue of $428.1 million and their projection of $430-$440 million for Q4, indicating a steady revenue trajectory.
An InvestingPro Tip highlights that HCSG holds more cash than debt on its balance sheet. This strong liquidity position supports the company’s strategic initiatives, including share repurchases and potential acquisitions mentioned in the earnings call. Additionally, another InvestingPro Tip notes that liquid assets exceed short-term obligations, further reinforcing HCSG’s financial stability.
The company’s P/E ratio stands at 23.77, suggesting investors are willing to pay a premium for HCSG’s earnings, possibly due to its market leadership and growth prospects in environmental and dining services. However, an InvestingPro Tip cautions that HCSG suffers from weak gross profit margins. This is reflected in the reported gross profit margin of 12.77% for the last twelve months, which may explain the company’s focus on cost management and collections optimization strategies discussed in the earnings call.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and metrics. Currently, there are 6 more InvestingPro Tips available for HCSG, providing deeper insights into the company’s financial health and market position.
Full transcript – Healthcare Services Group Inc (HCSG) Q3 2024:
Operator: Thank you, for standing by. My name is Jeanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the HCSG 2024 Third Quarter Conference Call. The matters discussed on today’s conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. For Healthcare Services Group Inc.’s most recent forward-looking statement notice, please refer to the press release issued this morning which can be found on our website, www.hcsg.com. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A and other sections of the annual report on Form 10-K and Healthcare Services Group Inc.’s other – SEC filings and as indicated in our most recent forward-looking statement. Additionally, management will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning’s press release. 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. [Operator Instructions] Thank you. I would now like to turn the conference over to Ted Wahl. You may begin, your conference.
Ted Wahl: Thank you, and good morning everyone. Matt McKee and I appreciate you joining us today. We released our third quarter results this morning, and plan on filing our 10-Q by the end of the week. We’re very pleased with our third quarter results, which underscore the positive momentum, we’re carrying into the fourth quarter. Executing on our three strategic priorities of driving growth, managing costs and optimizing collections, is clearly paying off, resulting in sequential and year-over-year growth in revenue, earnings and cash flow. For the three months ended September 30, 2024, we reported revenue of $428.1 million in line with expectations, net income and diluted EPS of $14 million and $0.19 per share and reported and adjusted cash flow from operations of $4.3 million and $19 million. I’d like to now share our perspective, on the latest industry trends and developments. Industry fundamentals continue to trend positively, highlighted by rising occupancy, which now sits at 79.8% just under the low 80s pre-pandemic levels. A continued increase in workforce availability, with the industry adding over 100,000 jobs since the beginning of 2023.
And a stable reimbursement environment, including CMS’s 4.2% increase in Medicare rates for fiscal year 2025 effective October 1, as well as ongoing positive reimbursement trends at the state level, are key factors driving our growth. On the regulatory front, we believe that CMS’s final minimum staffing rule may undergo significant revision during the extended phase-in period or may not be implemented due to pending litigation and the potential for legislation or administration change. As we approach the end of the year, our strategic priorities remain unchanged. With a focus on these priorities and supported by our strong business fundamentals, we are confident in our ability to accelerate growth, enhance profitability, and maximize cash flow through 2025 and beyond. Now, I’ll pass the call over to Matt for a more detailed discussion on the quarter.
Matt McKee: Thank you, Ted. Revenue for the quarter was reported at $428.1 million, in line with the company’s expectations. Housekeeping and laundry revenue was $191.1 million with a 6.4% margin, while dining and nutrition revenue was $237 million with a 5.3% margin. The company expects Q4 revenue to be in the range of $430 million to $440 million. Cost of services was reported at $364.7 million, or 85.2%, with the goal of managing it in the 86% range excluding CECL. SG&A was reported at $46.9 million, but adjusted for deferred compensation, it was $44.5 million, or 10.4%. The company aims to achieve SG&A in the 8.5% to 9.5% range. Other income was $2.3 million, with a 0.5% margin. Net income and diluted earnings per share were $14 million and $0.19, respectively. Adjusted EBITDA for the quarter was $24.8 million, or 5.8%. Cash flow and adjusted cash flow from operations were $4.3 million and $19 million, respectively. The company reaffirmed its 2024 adjusted cash flow from operations range of $40 million to $55 million. The company has also repurchased over 350,000 shares of its common stock so far in 2024, including over 90,000 shares during the third quarter. With over 6.1 million shares remaining under the authorization, we are optimistic about our future growth. Now, we are ready to take questions.
Operator: Thank you. [Operator Instructions] Your first question comes from Sean Dodge from RBC Capital Markets. Please go ahead.
Sean Dodge: Good morning. Ted, on cash flow, can you provide more insight into the visibility you have for achieving the full-year target, especially with the improving macro backdrop and the seasonally strong Q4 ahead?
Ted Wahl: Thank you for the question, Sean. We achieved over 98.5% collections for the quarter, contributing to the $19 million adjusted cash flow. We have positive momentum heading into Q4, and historically, Q4 has been our strongest collections quarter. We expect continued collections on delayed payments and anticipate year-end cash basis taxpayers. Our focus is on optimizing cash collections, increasing payment frequency, and remaining disciplined in decision-making for both existing and new business. We are confident in our ability to achieve our targets and expect collections to strengthen into 2025 with the improving macro backdrop.
Sean Dodge: Thank you. And Matt, can you share the payroll accrual days for Q3 and Q4, and provide insight into revenue pacing and growth heading into next year?
Matt McKee: The payroll accrual days were nine for Q3 and will be three for Q4. As for revenue pacing, we are optimistic about heading into 2025, with positive indicators in demand for our services. We are seeing positive trends in the pipeline and anticipate continued growth.
Sean, I believe that as we reflect on our revenue growth expectations for the year, we are on track to meet the goals we set at the beginning of the year. Our focus was on increasing revenue in the second half of the year compared to the first half, and we are confident in our ability to achieve that. Looking ahead to Q4 and 2025, we have been adding new business steadily throughout the quarter and have promising prospects for future growth. We are also mindful of the importance of retaining existing clients while pursuing new opportunities. As we move forward, we anticipate a year of growth in 2025 and are optimistic about our future prospects. Thank you for your question, Andy. I believe that when considering the big picture, the 2030 challenge is a real concern. With the ongoing demographic tailwind, companies like ours operating in the senior living and long-term care sector have significant opportunities. As macro trends continue to improve, there are growth opportunities across the entire continuum of care, from independent living to hospice. While historically our focus has been on long-term care facilities, we see potential in expanding into assisted living, behavioral health, substance abuse centers, and more. We are well-positioned to take advantage of these opportunities and continue to grow. We also have our eye open for potential acquisitions that could complement our existing brand. In terms of SG&A, we are focused on managing it within a targeted range as a percentage of revenue, and we are making investments in employee engagement, marketing, and technology to drive efficiency and growth. So, as mentioned earlier, we anticipate being able to grow the top line while leveraging the fixed portion of SG&A. In terms of the Education segment, there is seasonality in the business, but it has not yet had a significant impact on the total company results. Regarding the recent weather events in Florida and North Carolina, our teams were well-prepared and executed plans effectively to mitigate potential disruptions. The demand for both environmental services and education opportunities is strong, and we expect growth in these areas to continue into 2025. We are in a good position in terms of manager training and staffing levels to drive growth in Q4 and beyond. Rice: Yes, food inflation was back up sequentially, A.J. We are seeing some increases in food costs, which is a common trend in the industry. It’s something we are keeping an eye on and managing as best as we can. But overall, we are staying on top of it and making adjustments as necessary to ensure we are providing quality dining services to our clients. During the quarter, we experienced a five basis points increase in inflation, compared to a one basis point deflation in the previous quarter. In August, inflation reached four basis points, the highest monthly rate since January. Food inflation accounted for 40 bps, which is in line with recent quarters and will be reflected in our first quarter billings.
Regarding capital deployment, we remain open to inorganic growth opportunities, although we are selective due to our strong market position. We continue to consider share repurchases as part of our capital allocation strategy, focusing on opportunistic timing and factors such as liquidity, cash flow, share price, dilution rates, and potential returns.
Overall, we are optimistic about the future opportunities in the industry, given our strong fundamentals and the demographic tailwind. We are confident in our ability to create long-term shareholder value. Thank you for joining us on the call.
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