Ladies and gentlemen, thank you for standing by, and welcome to the HCSG Q1 Earnings Call. The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often preceded by the words such as believes, expects, anticipates, plans, will, goal, may, intends, assumes or other 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, and 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. actual results could differ materially from those anticipated in the 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 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 potential sanctions or penalties as well as distraction 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 forward-looking statements, whereas as a result of such changes, new information, subsequent events, or otherwise. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to hand the conference over to your speaker today, Ted Wahl, President and CEO. Please go ahead, sir.

Okay, thank you, Jacqueline and good morning, everyone. Matt McKee and I appreciate all of you joining us for today's conference call. Yesterday, we released our first quarter results and plan on filing our 10-Q by the end of the week. COVID-19 quickly became the dominant theme during the quarter. The pace at which the virus presented and altered operational protocol for our customers was unlike anything we've experienced. The industry responded with innovation and resolve, even if predictively the worst outcomes or scenarios made the headlines, and there certainly have been some heart wrenching stories. Overall, we've been extremely impressed and proud at the level of planning, preparation, and execution that we've seen and been part of sector-wide. The countless behind the scenes examples of customers and their employees going above and beyond during these times is certainly far underreported, if not underappreciated all together. The vast majority of long-term and post-acute care operators are providing exceptional care. And we've been right there with them at our absolute best delivering in the most extraordinary way. Our subject matter expertise in infection control and supply chain management has been rivaled only by the incredible dedication and commitment of our employees at every level. But especially our heroes working in the facilities, their passion, perseverance, and courage in the face of great adversity is nothing short of inspirational. And although it doesn't come close to approaching the level of gratitude that's appropriate, I once again like to thank our dedicated field-based employees for all that they're doing and tirelessly supporting our customers, and most importantly, helping to preserve the well-being of America's most vulnerable. Our highest priority remains ensuring the health and overall well-being of those employees. To that end, since the outset of the virus, we implemented enhanced compliance protocols…

Thanks, Ted, and good morning everyone. Before I review the first quarter results, I wanted to emphasize that in addition to our intensive operational focus on COVID-19 that Ted spoke about; we have and will continue to prioritize our strategic priorities. To that end, we will remain vigilant in ensuring contract integrity between us and our customers whether it relates to increased labor and supply costs for spending that falls outside typical scope of services or timely payments for services rendered, our customers commitment to both the operational and financial aspects of the partnership is necessary for the sustainability of our business relationships. Further, we'll continue to prudently manage a strong balance sheet with no near-term maturities that appropriately complements our cash position. We believe these priorities not only best position the company for long-term growth, but are more relevant than ever in a COVID-19 environment. As far as the first quarter results, revenue for the quarter was $449.2 million with Dining & Nutrition and Housekeeping & Laundry segment revenues of $224.9 million and $224.3 million respectively. Net income for the quarter came in at $20.2 million, and earnings per share was $0.27 per share. Direct cost of services was reported at $387.2 million, or 86.2%. The temporary cost increase primarily relates to approximately $2 million of payroll for account managers who have transitioned out of a facility that we are no longer servicing, as well as costs related to starting up new business during the quarter. We expect this cost impact to decrease as account managers continue to be assigned to new facilities at which they're budgeted and the new business additions operate on budget. Overall, our goal remains to manage direct costs at 86% by the end of the year, excluding any COVID-19 related costs, temporary investment in…

[Operator Instructions]. Your first question comes from Andrew Wittmann from Baird. Your line is open.

Great. Good morning, guys. I guess the first question is just a technical question. Given that we just have partial balance sheet, it looks like something on the liability side is up. Did you guys draw on your revolver in the quarter like a lot of companies did? Can you just maybe talk about how you handle balance sheet?

Yes, we didn't specifically draw at quarter-end per se during any quarter, Andy, we're carrying some level of debt, just a short -- cover short-term working capital needs in light of the timing of what is our largest outflow payroll and the timing of cash collections from our customers at any point in time. This quarter, we ended with $50 million whereas the most recent quarter we ended with $10 million. So we did, for two reasons. One, as you suggested to have some additional liquidity in light of COVID-19 and some of the uncertainty around financial institutions and how it would impact the banking system, at least in the short-term. Also, what Matt alluded to in his opening comments, just as an additional -- to have some additional liquidity on hand to pre-fund payroll for the employees.

Ted, that's helpful. And then I just want to talk a little bit more about the numerous kind of funding provisions that have been put in for the benefit of your customer. Even some things like the payroll tax holiday that will benefit you. Then could you just talk a little about -- a little bit about some of the things that maybe talked about how your customers are being compensated through this challenging time for them to keep the liquidity in place so that they can get paid and serve you to do your services? I think just understanding the myriad of things going on right now would be helpful for everybody to hear.

Yes, there's certainly a lot of moving parts here. I think it's worth noting and I tried to cover some of this at a high-level in my opening remarks that since the beginning, I think the administration has certainly asked operators to continue to prioritize providing care to the residents and every understanding we have is that the intention of both the federal and state governments is that operators will be kept whole, they're not whole in real time, the intention should be and will be, as we understand it, that they'll be made whole relative to any loss revenues or spend that they may incur as a result of COVID. So obviously, ordinary reimbursement and funding sources remain in place, but certainly to deal with COVID-19 related costs, there's been a number of programs as you suggested to mitigate the financial impact. I think from a short-term cash flow perspective, certainly the $30 billion in grants that was part of the CARES Act, which was the 6.2% prior year Medicare fee-for-service billings had a beneficial impact immediate impact to the industry and was tilted towards the heavier Medicare providers along with the Accelerated Payment Program and the ability to withhold payroll taxes, both of them are loans, not grants. But again, what the industry needs is more grants and less loans. I think for the remainder of 2020 and into 2021 grants like the 2% sequestration holiday, which begins in May, through the end of the year, is going to be impactful the 6.2% increase in the federal medical assistance percentage match. Now that's still 50:50 in terms of which states are or are not participating, but that could change at any given moment. And then I think the underreported benefit for the industry is the new payment rule which proposes a 2.3% increase and leaves PDPM in place, which I think has been a solid reimbursement or responsible reimbursement design for the industry. All of those are have been and are positive immediate steps more certainly needs to be done. I think the one that we're most interested and anxiously awaiting is on the Medicaid side. And that as far as we can understand is going to be more in the second tranche of funding that's going to come out. And that'll leave -- that'll further fortify some of the providers that were maybe left out, some of the more Medicaid centric providers that were left out of the first 6.2% Medicare CMS grant.

And Andy, just the final component of your question related to Healthcare Services Group and our ability to defer payroll taxes, we do have that opportunity and we will be taking advantage of that. So that'll result in a deferral of approximately $40 million in payroll taxes, so half of that would be repaid by the end of 2021 and the other half at the end of 2022. So that'll have a positive cash flow impact this year with the offsets in 2021 and 2022. And as we sit here, there are no other government programs that we anticipate participating in or benefiting from directly most relevant for us, as Ted said, will be the programs grants and opportunities that are made available to our clients.

Super helpful, I had just one last question that I wanted to ask. It has to do with the fact that usually your businesses are very steady and predictable on your contract is X and you do X, but certainly with operations being affected in so many ways, there's probably times where your customers are going to ask you to go outside of that contract, and Ted I know you alluded to some of this. Can you just talk about the processes you have in place in the relationship and how it works with your customers when you have to go outside the written contract and how you get kind of compensated and if you get compensated for those things?

Yes, overall, I guess in this environment but really in any environment overall, our expectation is that for any additional spending related to staffing, wages, supplies that falls out to typical scope of services. And again in this environment COVID-19 related or otherwise is tracked and communicated to the customer as part of our standard supplemental billing process. The internal acronym for that is our BCR, which is outlined in all of our service agreements and very familiar to our customers. So we would expect inside or outside the COVID-19 environment that process to be followed.

Your next question comes from Sean Dodge from RBC Capital Markets. Your line is open.

Good morning, thanks. Can you maybe give us a little bit more color on what is happening at the facility level? Ted and Matt you both alluded to in your prepared remarks, it sounds like workers are still showing up and doing their jobs for the most part, have you seen any pickup in turnover in those positions? Are job applications trending up, given the higher unemployment or people maybe avoiding SNFs because of the risk? Are you seeing things like -- are managers having to pitch in more to help out with anything kind of how things are functioning at the facility level?

Yes, it's a great question, Sean, and obviously is specifically related to our ability to fully staff the facilities that was something that we were exceptionally mindful of and have been monitoring very closely. To-date, staffing thankfully has not been an issue. I think there's really a few reasons for that. First off, our people deal with communicable illnesses all the time, it's just a part of the job whether it's MERS, C-DIF, Influenza, Scabies, and that's not to minimize the impact of Coronavirus, but there's confidence among our employees in our training and how well prepared and protected they are. So that's definitely been a significant component in the education and the confidence that they bring to work each and every day. The reality is that there's likely a part of them that sees the unemployment data, and a lot of people out of work and appreciate the reality of the current labor market and environment. And this, a cynic may question the validity of this. But among many of our employees, there's a significant emotional commitment to the patients and residents that they see on a daily basis and they want to be there to provide care and to help in any way. So, thankfully staffing has not been an issue and I guess more specifically, Sean, is kind of to our operational protocol, the fortunate part from where we sit is that all of the recommendations whether from CDC or CMS as to preventing and containing the spread of Coronavirus fall within the guidelines related to Influenza. So from a true operational perspective, we're very well equipped. The only real additional requirement would be additional personal protective equipment requirements, which in coordination with our clients, we're obviously providing to our employees to make sure that they're fully not only educated but protected as well.

Got it. That's great. And then maybe a little more directly on how all the industry releases is flowing through to you. Can you talk a little more about from a cash collection standpoint, you've had a few weeks impact in March from this, I guess moving most everyone to a weekly payment basis. The timing on that, hopefully is working out really well. You've had several looks now on how cash collection payments have trended for at least 60% of your base thus far in April. Has there been any meaningful or noticeable change so far in April?

No, and that would be our expectation, Sean. Look we're working proactively with our customers to understand exactly where they're at financially. But our customers very much depend on the services we provide. And our expectation is that full payments will continue to flow to HCSG, especially in light of the fact that the vast majority of our costs that we're incurring are payroll and payroll related, critical to the care and continuity of the facility operations. So just like the final aspect of a business, any given business or in this case provider would not fund would be their payroll, and we have the same expectation as it relates to us. That's further aided by the fact that we have over 60% of our customers paying us on a weekly basis, we're at a frequency greater than monthly. So again, plenty of conversations ongoing related to payment terms, but our expectation is that we're going to continue to be paid for services in a normal course of business type way.

Your next question comes from Ryan Daniels from William Blair. Your line is open.

Hey guys, this is Nick Spiekhout in for Ryan. And I guess to start-off, if you can provide a little color on the sales outlook right now with some push [ph], I might imagine on one hand, it's a little bit difficult given the less travel and SNFs kind of preoccupied, but on the other hand, it kind of seems like the need for the expertise is up a little bit?

You're exactly right, Nick, that without a doubt and we certainly never wish for circumstances like this and want to be hypersensitive in how we sort of phrase things. But as it relates to the services that we provide as Ted just alluded to in the nursing home environment, you'd be hard pressed to find departments that are less directly affiliated with infection control, when you think about Housekeeping & Laundry departments and certainly dining services are always paramount within that environment. So a very important service and it gives us an opportunity to distinguish ourselves relative to would be competition or the in-house managed model. So this does without sounding opportunistic certainly offer us an opportunity to bolster our reputation. Now having said that, we’re clearly not focused on selling the business or onboarding new business right now. We certainly don't want to lead with our chin and overextend ourselves operationally. But there are conversations that are happening. Our sales folks are primarily supporting our existing customers right now and supplementing our operations team. But they are engaging in dialogue with prospective customers as well. And if anything, this offers us an opportunity to sort of further add to and refine our pipeline of new business opportunities for when we do reach that point at which it makes sense to reaccelerate into growth mode. We had talked previously about the expectation for really growth to kind of resume in the back half of the year. I think that timeframe still makes sense highly unlikely that we'll be prioritizing any new business additions here in the second quarter. More likely, they will be pushed out the back half of the year, but the hope is that, at least by mid-year, we'll have it -- by mid-year we'll have additional clarity as to the dust having settled from the transition to PDPM and obviously, much more of a priority if Coronavirus, not that the virus or the treatment of COVID-19 will be in the rear view, but at least to have a better sense for the industry landscape and what the go-forward proposition really looks like as it relates to growth.

Great, thanks. That's really helpful. And then I guess turning to margins. They look pretty close to kind of where you guys have been targeting. I was just wondering if the managers have been deployed actively this quarter and kind of what to expect going forward?

Well, I know, Matt, spoke to some of the margin profiles in his opening remarks. But from a direct cost of services perspective, we continue to carry some of the excess management capacity that we had coming into the year. Currently, we did make progress in assigning some of the managers that we were carrying into facilities where they're specifically budgeted at and obviously COVID-19 created an opportunity to further and more specifically deploy still other of the managers. So, we still have about $2 million of management costs that we're carrying and we're deeply committed to continuing to invest in those managers. That is our most -- that is truly the most difficult part of our business is the hiring and developing of management people. And often the gating factor or primarily the gating factor on our growth, especially in light of the demand for the services. And in this environment, that demand has only been further heightened. So we're going to continue to invest there and would expect direct costs to be our target is 86%. We're going to continue to -- we're going to continue to try to best to manage it in and around that range in light of COVID-19, especially. When you consider SG&A, Matt, mentioned in his opening remarks that in the current state, we're going to be in and around 8% or at least at the current levels, once we start to ramp-up the top-line, that's when you'll really see that leverage in SG&A because again the majority of those costs are fixed.

Your next question comes from A.J. Rice from Credit Suisse. Your line is open.

Hi, everybody. Thanks. Maybe just to drill in that margin question a little bit more specifically, I mean, your dining margins is 6.4% or up 230 basis points sequentially and your housekeeping is 10.7% was up 120 basis points sequentially, so decent, big improvements. Actually, I know it bounces around a little bit from quarter-to-quarter, but was there anything unusual in there? I don't remember seasonality. But was there seasonality in there or anything that is particularly helping?

As I just building off of the last -- the last answer to the question, we did have some success this past quarter in assigning some of that excess management capacity. It was about $1 million of management that was -- is now assigned within a budget at a given facility and a significant portion of that direct benefitted dining margins. So that was certainly part of it. Even coming into the year, A.J., one of our strategic priorities, simply said was managing the base business. But that for us means a relentless focus on systems implementation and adherence, customer satisfaction, compliance and budget to actual, really taking care of the customer and the operations within the existing customer base. So, I think that focus certainly paid-off in some improved underlying performance. And you mentioned seasonality. We generally don't call that out because there are some, of course, there's some puts in takes every quarter that generally washes in any given quarter. But in Q4, you do have some higher food-related costs, specifically for Thanksgiving and Christmas celebrations and the timing of those supplemental billings or BCRs, at least a portion of them may fall into the subsequent quarter. Now that's hundreds of thousands of dollars. That's not millions. But I think it's the collective of those three things that that helped improve the dining margins specifically.

Yes. And thinking about the nursing home customer base, I do -- my understanding is there is pressure on the occupancy side of that because of a) some holes in some facilities b) you're not getting the throughput from the hospitals that downstream from orthopedic surgeries and other things like that. So, I guess there is some level of pressure on, is the message that you're conveying is that the government funding has been sufficient to offset that and therefore, you're seeing the customer base, be sort of even keel at this point in terms of credit quality and all, is that the way to think about it or, I mean I've seen various rate of six percentage point pressure on occupancy rates in nursing homes. Are you seeing something like that? It is I mean as if the government funding, I'm assuming that you might be a little more concerned about that. Is that right?

Right. And I would never use the word sufficient to describe or adequate to describe the government funding that's occurred. What I will say is that it did plug a short-term liquidity hope for the vast majority of providers, although more still needs to be done because to your point, A.J., and we're seeing the same type of data the 3% to 6% impact on census to-date, really less pronounced among the true long-term care resident population and felt more in the post-acute segment. As you suggested hospital elective procedures are down, the corresponding discharges have decreased. Most of our customers have a mix of both long-term residents as well as short-term or short stay rehab patients depending on the facility it's weighed more heavily in one direction or the other. So we're likely going to see additional near-term occupancy pressure as procedures remain -- as hospital procedures remain at a reduced level and facilities with confirmed COVID cases or even temporary close to a new admission, so continues to be uncertainty. We strongly believe more is going to need to be done especially as the impact of occupancy pressure is felt. As well as COVID -- ongoing COVID-19 pressures on the cost side because this, the reality is this -- this virus especially long-term and post-acute care is likely to be a major issue for the industry unless or until there's a vaccine. You think about the perfect storm for the type of environment it's highly contagious, and it poses the greatest threat to those with underlying conditions, which by the way is nearly the entire resident and patient population in a long-term of post-acute care settings. So we do believe that at least to-date, the government has certainly stepped up although much more needs to be done over in the coming months from our perspective.

Okay. And then last question, I understand about if there's extra demand for additional cleanings or whatever, that is going to get passed through to the underlying customer. What happens if your employee -- your hourly employee base either gets COVID and has to be set as at home for 14 days? Or I don't know whether you're seeing it, I know some are seeing this issue of workers not wanting to go in because of they're just afraid that they're going to get the virus. Are you experiencing anything on either of those fronts, and is the underlying clients responsible for picking up the extra labor costs associated with having someone stay at home in quarantine having to replace them with someone else?

Understood your question, A.J. There's couple things that I mentioned in previous comments that apply, thankfully, we've to-date not had trouble staffing the facilities. That's obviously always a primary area of focus for us and especially during this environment and times, but we have fortunately been able to continue staffing the facilities. The reality is that there has not been much of a need for additional staffing beyond what's typically required. As I mentioned earlier, really from October through April, each and every year, it's influenza season. And while that may not resonate as much in the general U.S. population, it's certainly very impactful within the skilled nursing environment. So all of the CMS and CDC recommendations for containing and controlling the spread of Coronavirus fall within what's currently recommended for Influenza. So, fortunately from an operational and a staffing perspective, as I say, nearly all of what's required from a Coronavirus containment perspective is already in place each and every year as it relates to containing Influenza. And the other component is that it runs a bit counterintuitive on the surface, but we've actually seen record numbers of applicants fully recognize that that's largely to do with the overall labor environment and unemployment scenario for the U.S. population. But that's further enabled us to keep the facilities fully staffed. That's imperative. So whether it's dealing with employees who are afraid to come to work or whether they or someone in their household ultimately becomes infected or if somebody needs to be home with children because of schools being closed, we're required to staff the facilities and fortunately, thus far we've been able to manage that with the existing employee population. And as I said, record numbers of applicants at both the line staff levels and also into the management training program.

Your next question comes from Mitra Ramgopal from Sidoti. Your line is open.

Yes. Hi, good morning. Pretty much of my questions have been answered. I just wanted to follow-up again in terms of some longer-term business opportunities as a result of the pandemic, my note focus been on the nursing homes and I was just wondering, some audit areas like assisted living et cetera. If you were also seeing some heightened interest in terms of customers, potential customers looking for you to maybe help them on that end?

That's not as you call out, Mitra, been a primary area of focus for us. But this is a pandemic that is certainly influencing all components of the healthcare continuum and certainly, senior living falls within that as well. So in certain markets, we've had more advanced conversation with prospective clients in senior living, but that really, as you would recall only relates to the dining opportunity for us. So where there's cross ownership, we may lend additional temporary operational hand from a disinfection perspective or to educate the employees in a senior living facility. So our long-term view as it relates to that opportunity remains unchanged, very appealing dining opportunity, but really from a Housekeeping & Laundry perspective which would be more relevant as far as COVID containment not exactly applicable.

Okay, that's great. And just circling back again, obviously, you pointed out in terms of the elevated payroll costs; you certainly have a number of managers you can deploy to facilities, et cetera. And I assume the game plan is obviously no one knows when how this all plays out and the timing but at least the plan right now is to continue to carry everyone is that fair?

Yes.

Your next question comes from Jason Plagman from Jefferies. Your line is open.

Hey, good morning. Just wondered if you could expand a little bit on your outlook for sequential revenue growth for the next few quarters, it sounded like you're thinking revenue is close to flat sequentially maybe for the next quarter or two, and then you might be more comfortable taking on new business towards the end of the year or into 2021. Is that a fair characterization? Or is how are you thinking about kind of the trajectory for the next two to four quarters?

Yes, I would not characterize it that way. I would characterize it as we are highly focused on mitigating the effects of COVID-19 and we'll continue to be through the quarter, while also focusing on our other strategic priorities that we called out at the beginning of the year around managing the base business, assigning our managers to new opportunities and maintaining a disciplined view on growth and credit decisions. I think what Matt tried to add some color to and I'll just reiterate that is that, we would expect by the end of the second quarter, certainly not for COVID-19 to be in the rearview mirror but expect to have some further visibility on our level of comfort or discomfort in ramping up to -- ramping up growth or being more selective with certain opportunities that are out there. So short answer would be we'll have more visibility, we believe in the coming couple of months than we do today because again the path of COVID-19 nationally, worldwide but certainly within the industry is still littered with uncertainties.

Okay, that makes sense. And then as far as just the vetting of your potential new clients, how any changes in how you go about that or how is -- any -- how that's complicated by just the disruption related to COVID with short-term potential disruption in occupancy or in expenses for your clients and just impacting their financial health?

It will continue to be a holistic evaluation of all the criteria you mentioned and obviously qualitatively, we would consider both. Quantitatively we would consider the impact of COVID-19 and then qualitatively we would impact the potential uncertainty in any given opportunity.

There are no further questions at this time. I will now turn the call back over to Ted Wahl, President and CEO.

Terrific. Thank you, Jacqueline. In the coming months, we will continue our efforts to mitigate the effects of COVID-19 while delivering the best possible outcomes for all of our stakeholders. We will continue to prioritize managing the base business, ensuring that our managers are assigned to exciting new opportunities and maintaining a disciplined view on growth and credit-related decisions. Above all, we're deeply committed to supporting our customers in the care of their patients and residents, while simultaneously prioritizing the health and safety of our employees and protecting company resources. So on behalf of all of us at HCSG, Matt and I would like to thank Jacqueline for hosting the call today. And thank you again, everyone for participating.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.