HEALTHCARE SERVICES GROUP INC Q1 FY2025 earnings call

Q1 Highlights: - First quarter revenue and cash flows were the best in five years, with positive momentum carrying into Q2. - New client wins drove organic growth, collections exceeded revenue, and balance sheet was strengthened. ### Industry Environment: - Industry fundamentals gaining strength due to multi-decade demographic tailwind. - Operating trends positive: workforce availability, occupancy growth, stable reimbursement. - Texas federal court struck down key provisions of CMS's minimum staffing rule, applying nationwide. ### Strategic Priorities for Q2 and Year Ahead: - Driving growth by developing management candidates, converting sales pipeline, retaining existing facilities. - Managing costs through field-based operations and prudent spend. - Optimizing cash flow with increased payment frequency, enhanced contracts, and disciplined working capital management.

For the three months ended March 31st, Healthcare Services Group reported revenue of $447.7 million, a 5.7% increase over the prior year. Environmental services revenue was $196.3 million with a margin of 10.8%, and dietary services revenue was $251.3 million with a margin of 7.6%. Cost of services was $379.7 million (84.8%), and SG&A was $45 million, with adjusted SG&A at $46.4 million (10.4%).

• Raised 2025 cash flow from operations expectations, excluding change in payroll accrual, from $45-$60 million to $60-$75 million. - Q2 revenue guidance: $445 to $455 million. - First quarter included a $12.2 million benefit from CARES Act-related employee retention credits. - Made a small tuck-in acquisition in March, with 2025 revenue impact about 1% of total revenue. - Repurchased approximately $7 million of common stock in Q1, with $23 million total buyback since February 2023 authorization.

• Regulatory uncertainties: potential provider taxes and changes in Medicaid reimbursements are too early to determine impact. - Inflation impacts on costs, particularly food and labor, with monitoring needed despite pass-through provisions in contracts. - Labor market challenges in the skilled nursing industry, though industry adding jobs and showing recovery trends.

Q: Andrew Wittmann asked about regulatory environment changes, including potential provider taxes and Medicaid reimbursements.

A: Theodore Wahl noted industry fundamentals are strong, Texas court ruling removed staffing rule overhang, and provider taxes are too early to tell with varying impacts by provider type.

Q: A.J. Rice inquired about the court ruling's impact on staffing behavior and SG&A guidance.

A: Theodore Wahl said the ruling mainly removed overhang, not immediate staffing behavior impact; SG&A expected to be in 9.5%-10.5% range near term with long-term goal of 8.5%-9.5%.

Q: Tayo Key asked about Q2 revenue guide and cash flow raise.

A: Theodore Wahl explained Q2 guide considers acquisition and timing of new business; Vikas Singh said cash flow raise is from CARES Act benefit and strong Q1 collection momentum, with confidence in sustaining positive momentum.