Healthcare Services Group (HCSG) Q3 2026 earnings call transcript

Good morning, everyone, and welcome to HCSG's third-quarter 2026 earnings call. With me today are Matt McKee, our Chief Communications Officer, and Bacas Singh, our Chief Financial Officer. Earlier this morning, we released our third-quarter results and plan on filing our 10Q by the end of the week. Today, in my opening remarks, I'll discuss our Q3 highlights, share our perspective on the general business environment, and discuss our outlook for Q4 and 2027. Matt will then provide a more detailed discussion on our Q3 results, and then Bacas will provide an update on our liquidity position and capital allocation progression.

We will then open up the call for Q&A. So with that overview, I'd like to now discuss our Q3 highlights. Our strong third-quarter results reflect the underlying strength of our business fundamentals and disciplined operational execution. New client wins and high retention rates drove our Q3 top-line growth, our ninth sequential revenue increase over the past 10 quarters, and our field-based team's operational excellence led to high-quality service outcomes and consistent margins. The acquisition of Nextine Hospitality on October 6th represents a significant milestone as it expands our footprint in the senior living and hospitality-driven markets, and deepens our service capabilities across our family of brands. Nextine is expected to contribute over 150 million in annual revenue at comparable margins and be immediately accretive to earnings.

We are thrilled to partner with our Nextine colleagues in their next phase of growth and innovation. On October 14th, the bankruptcy accord approved the sale of Genesis to 101 West State Street. The outcome of the Genesis restructuring creates stronger, healthier HCSG client facilities, provides balance-y clarity for our stakeholders, and enables future expansion opportunities with a growth-oriented client partner. Our current estimated recovery of pre-petition claims is 6.1 million. There remains a substantially higher potential upper-range recovery subject to certain variables and contingencies, the resolutions of which are not known and cannot be reasonably estimated at this time. I'd like to now share our perspective on the general business environment. Overall industry fundamentals continue to gain strength, highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the broader senior care environments.

In 2026, the first of the baby boomers are turning 80, and by the year 2030, all 70 million plus boomers will be over the age of 65, with the oldest being in their mid-80s. We expect the demand and opportunities for senior care service providers in the health and hospitality space, especially for those with compelling value propositions, durable business models, and market-leading positions to only increase in the months and years ahead. Beyond our core industry trends, we continue to monitor the broader macro landscape, including sustained volatility in energy and supply markets.

Our role as financial stewards for our clients remains our highest priority in this environment, and the depth of our longstanding vendor partnerships provides the critical visibility to pivot sourcing and mitigate direct exposure. Ultimately, our enhanced contractual frameworks allow us to pass through unavoidable cost increases, ensuring we are preserving our margins while continuing to deliver market-leading service.

Looking ahead to Q4 in 2027, the organic growth inflection we plan for and are now delivering sets the stage for fourth quarter revenue in the range of 535 to 545 million. We expect to carry that positive momentum into 2027 and are raising our 2027 revenue growth outlook from the mid-single digits to low-double digits. The strong demand for our services, our expanded operational expertise, and extraordinary team members give us great confidence in our growth trajectory across health care, senior living, and campus environments. And with the industry at the beginning of a multi-decade demographic tailwind, our unified health and hospitality platform strategically positions us to fulfill our vision and drive sustained long-term value creation for our shareholders.

So, with those introductory comments, I'll turn the call over to Matt.

Thanks, Ted, and good morning, everyone. Revenue was reported at $479.6 million. Segment revenues and margins for environmental services were reported at $217.2 million and 13.3%.

Segment revenues and margins for dietary services were reported at $262.4 million and 8.7%. As Ted mentioned in his remarks, we are expecting Q4 revenue in the 535 to $545 million range and low-double-digit revenue growth in 2027. Cost of services was reported at $399.2 million or 83.2%.

Cost of services benefited from strong service execution and lower bad debt expense. Our goal is to manage the cost of services in the 86% range. SGNA was reported at $48.5 million after adjusting for the $600,000 decrease in deferred compensation, SGNA was $49.1 million or 10.2%. Our goal is to manage SGNA in the 9.5 to 10.5% range with the longer-term goal of managing these costs into the 8.5 to 9.5% range. Our effective tax rate was reported at 26.2% and we expect our 2026 effective tax rate to be approximately 25%. Net income and diluted earnings per share were reported at $24.9 million and $0.36 per share. I'd now like to turn the call over to Vikas.

Thank you, Matt, and good morning, everyone. Starting with our liquidity and cash flows, our primary sources of liquidity are cash flows from operating activities, cash and cash equivalents, and our revolving credit facility. Cash flow from operations was reported at $30.2 million. After adjusting for the $9.5 million decrease in the payroll accrual, cash flow from operations was $20.7 million. As of the end of the third quarter, we had cash and marketable securities of $204.3 million and an unutilized $300 million credit facility. We continue to execute on our capital allocation priorities across organic growth, M&A, and share repurchases. Our approach continues to be grounded in discipline, and our balance sheet provides us the flexibility to pursue all of these priorities in tandem.

With regards to share repurchases, we announced plans in February 2026 to further 12 months. In the third quarter, we repurchase $11.7 million of our common stock, bringing our year to date total to $56.6 million. We now have $7.7 million shares remaining under our share repurchase authorization.

With that, we will conclude our opening remarks and open up the call for Q&A.

James, you're right in that our outlook of low-double digits is inclusive of that mid-single-digit growth target organically as well as next 9. That organic growth outlook is grounded in the positive top line momentum we expect to carry into the new year along with the strength of our new business pipeline and then our assessment of the timing considerations related to management capacity and client start date preference. And we continue to successfully execute on the organic growth strategy by developing management candidates to support new business opportunities while retaining greater than 90% of our base business. So the momentum is very strong and as far as additional updates on 2027 pipeline developments as the pipeline matures we will most certainly share those updates but very strong momentum heading into the new year.

Yeah, the $6.1 million is flowing through the P&L like any other bad debt expense. In this case it's a bad debt offset. It's a benefit to our cost of sales. So it is flowing through the P&L and falling down to the net income line on a post tax basis. In terms of the higher end the number you've quoted is closer to our total exposure and we do not expect like just about every of the bankruptcy to have a hundred percent recovery here. Our expectation is what we recognize at $6.1 million basically takes our right off from 100 percent down to a level that's in excess of 90 percent. If we look back at our history of bankruptcies it's fairly consistent in terms of what that percentage and number implies but based on recent events there is a possibility based on a number of contingencies that the number could go higher and our recoveries could improve but we don't see us in audio where we will end up with 100 percent of governments.

Yeah, good morning Chris. Just at a high level as we previously stated the primary driver as you note is the overall service execution. From our perspective the recent positive trends in customer experience systems adherence which is critical both operationally and from a budgetary compliance perspective. That regulatory adherence and compliance and ultimately yielding budget discipline. All of those components are near-term margin drivers and that carried into Q3. The expectation is that that carries through the balance of 2026 and beyond so that's why we remain confident in our ability to continue to manage cost of services in that 86 percent range. And we want to recognize the field-based management teams for executing to deliver on those expectations and they certainly deserve a lot of credit for that execution.

There's no guarantee and it is you know a daily grind to deliver on all of those marks relative to the systems adherence, the compliance, the budgetary discipline, all of that yielding the great customer experience. So that said you know this has always been the case that there's going to be some movement month to month quarter to quarter and the timing of certain items can have an impact in any given quarter. Yeah and Chris to add you know on topics like bad debt expense so if you think about this quarter the bad debt benefit it was not an expense this quarter was 3.6 million and that was driven by our genesis assessment but even if you include the genesis assessment the benefit of 6.1 million our bad debt expense for the quarter was only about two and a half million or you know less than half a percent of revenue.

That is much lower than what we've been doing in the recent past that number by itself would have been our lowest bad debt number in the last six quarters. So I think combined with the operational execution that Matt talked about all the attempts and efforts we've been putting into managing bad debt have been yielding results. Now obviously with bad debt I constantly like to remind everyone that while we are very pleased with what we've achieved in the last few quarters performance in any given quarter does not protect what will happen in the next one and bad debt by its very nature can be a little more you know lumpy in terms of when we come across bad debt expenses but keep in mind our historical average in the pre-seasal era was between one to one and a half percent of revenue so the fact that without genesis we would have been sitting at half a percent of revenue in bad debt expense does provide a nice uplift to our cost of sales story in addition to the operational excellence.

Yeah I would start with you know the the premise of the opportunity as a natural extension of our dining offering that favorably positions us in a compelling way within senior living health care and the campus and market. Our businesses are highly complimentary of one another starting with our deeply aligned cultures and that we share a common belief system that's grounded in a greater purpose and serving which are foundational to behaviors and expectations so that's foundational to the partnership and to the acquisition. Next time promotes an environment for an entrepreneurial spirit and promotion from within pathways very similar to HCSG which then allows our differences in size scale and end market focus to be a strength and a massive opportunity to learn from one another to share ideas and create even more possibilities for the future so we are thrilled to have them as a partner in their future growth journey and as part of our unified health and hospitality platform.

I think specifically to the growth opportunities that lie ahead we do see them as a double-digit growth opportunity as we evaluate it currently so that'll add to our you know our our our family of brands including campus services group and Murray Weather Gatsy on the campus side next time with a focus more on the senior living and hospitality driven markets and then health care services HCSG is that core health care offering so we're we're very well positioned for future growth and you know we're excited about the possibilities. In terms of the contract on the on the contract and the ability to pass along costs next time is similar to how we've modified and upgraded our contracts over the last few years they have contracts in place that allow them to pass along any price increase they encounter and that system has been working fairly well for them if we look back over the last few years when they're having beaters in pockets of elevated price movement with respect to food purchases.

Yeah to your point Matthew as far as the Q4 breakdown our revenue range 435 to 445 with next time contributing annual revenues in excess of 150 million to that total so the remainder of that growth in Q4 is organic business momentum and as I mentioned earlier in the call we have very strong momentum heading into Q4 and expect to carry that into the new year.

So on the sc&a front from our perspective as we think about the composition of how sc&a is built up for us I would approximate it as something that's called it half fixed half variable. We have the growth momentum and we have the discipline around how we manage our costs with respect to you know vendors employees and other programs that go within sc&a. So we see a natural guidance driven by organic growth inorganic growth such that sc&a comes down over time as a percentage of revenue. So that's the story to an improving profile that said we will always have situations and waters where the requisite investments in the business. So in the past we've talked about investments with respect to people training technology.

Anytime we decide to make those decisions it does put upward pressure on sc&a. So that's one counter to the improvement story. The other could be what we encountered this quarter for example which is we did see our sc&a number go up in the third quarter and the key reason for that was an increase in professional fees such as legal fees and M&A related expenses. We do intend to continue down the path of inorganic growth driven by M&A. We don't have a fixed number of deals we want to do each year or each quarter but we will remain active in evaluating those situations and moving ahead with situations that seem like the best fit. That obviously adds to some expenses with respect to advisors and legal and other M&A related fees.

So you will see that element be present as well but we do think over a period of time without committing to a time frame we will look to bring sc&a down but that said we will not let that objective come in the way of appropriate investments be it people be it technology be it M&A and you know we'll try and create the balance between the two objectives there.

Yeah so from our perspective obviously we do have a very comprehensive integration plan in place that applies at the product corporate level for next time but then goes down to each department and you know touches just about every individual in the organization but from a external and reporting perspective I think you should take the integration as a done deal the momentary announced again I think we say that not because we don't prioritize integration it is very important but we also want to be cognizant of the fact that we're talking about a transaction that is less than 10% of our top line so it is an important milestone but it is not a size and scale such that we will put out milestones for integration that said internally we are working through different departments in terms of speed of integration some departments will get integrated much faster you know accounting and finance and reporting that integration is well underway and then there will be other integrations which will be on a more spread out timeline but our expectation is those milestones internal milestones will all be hit by the end of the year got it great and then just on the the strategic rationale you know just in terms of potential synergies I mean I think you called out that you're you're looking at it as having a next on having a double-digit growth opportunity are there you know revenue synergy opportunities contemplated in that goal is that also inclusive of you know some of the the commentary that you made about continuing to pursue inorganic growth opportunities is that sort of assuming you know you're going to continue to kind of grow around the senior housing opportunity and the next dime platform appreciate yeah nothing planned on the M&A or inorganic side presently with next time but certainly and it gets back to my thoughts and comments around team play we are going to proactively in a in a collaborative way leverage existing client relationships to the extent they exist vendor partnerships even industry organizations and then certainly there's an opportunity among and between HCSG very whether or not see on the campus side and then next time to share ideas and you know create possibilities and opportunities for the future so in terms of the day-to-day that's happening in the field with our clients you know they'll remain you know they'll remain their brand they'll continue with their brand identity and people culture which is aligned with the broader health and hospitality platform we've created but beyond that the lines of communication are wide open and there's plenty of opportunity to leverage one another's best idea share best practices and you know continue on our growth journey great and then maybe just one last one for me good to see the update on the genesis case and the recovery is there a potential updated timing on on a final resolution how should we think about the remainder that's TBD you know because spoke to the key variables and contingencies that remain certainly for HCSG but really any general unsecured creditor as part of the distribution process so you know claim allowances or one part of it and how they're determined the ultimate amount of claims filed and then the amount of assets available for distributions so the resolutions of those variables Ryan are just not known and that's why we we aren't able to specify a time period or you know an amount that can be reasonably estimated beyond what we've recorded for the quarter got it congrats on the next nine acquisition and the quarter thanks thank you Ryan your next question from the line of Andy Whitman with Baird your line is open please go ahead great thanks good morning guys so I just wanted to ask some questions to help understand the quarter and and maybe kind of the model here so first one here the cost the the 6.1 benefit that you took can you talk about the split by segments so we can just understand kind of underlying with with those segments reported in in growth margins it's near about even that split did not fluctuate the segment margins in a significant fashion one way or the other Andy okay and just I mean even if you take that 6.1 and kind of add it back and you look at your underlying you kind of talked about this earlier but like you're still better than the 80s the 86 and I don't know are you just is that and this isn't new but are you protecting in case bad debts steps up again is that the swing factor is there something else that we should think about that would take you to that 86 level again just just wondering if there's anything else there and kind of the delta between the target and even the adjusted actual here that we should be considering as we think about the go forward yeah now that's a very fair question Andy look we've been fortunate to deliver the kind of performance we've delivered here to date on a or on a LCM basis but the way we look at these metrics and goal post is on a more longer term basis before we implement any change and just to put it in context if we look at the three-year average prior to 2026 for where cost of sales has been that number is closer to 87 so we are trending in the right direction and look with the passage of time if we keep delivering this kind of performance we will we will want to go back revisit that number but for now we don't have enough historical data to suggest that we need to move off the 86 percent and if you were to look at the data in an alternative fashion strip out bad debt expense strip out the workers come benefit from cost of sales and then look at at the cost of sales number exclusive of those two factors our LTM percentage for that metric is very much comparable to the three-year average so again we have improved operationally it is making a difference but then there is also the unpredictable and lumpy workers come and bad debt elements to it now we feel we are doing whatever we can to contain bad debt in terms of internal resources people technology how much time we spend with clients how we interact with them but that will not guarantee that you know there could be clients who could you know intentionally or unintentionally face challenges and you know performance in the first three quarters gives us no ability to predict what will happen in the next quarter so that remains a variable I know workers comp we've talked about extensively in the past with you on the last call as well we are trying our best to paper that number off but again when you talk about an organization with close to 40,000 employees and workers comp being a metric that's driven by you know number of incidents and the severity all the efforts we put into managing their expense down through education through safety procedures are valid but you could always find yourself in a situation where there is a un predicted spike in incidents and severity which reverses the force for us on cost of sales so your question is completely valid it's just that we just don't have the right data points to go back and say 86 percent should be something else yeah okay that's a totally fair answer I appreciate appreciate you running me through that next I wanted to ask a little bit more on next time here and just maybe the cost I know you've only owned this thing for you know a couple weeks here but to the extent you can help us I think it kind of helped you to get kind of street numbers right here so a couple of the questions that come up is how much you said comparable margins so we can kind of do that math but just in terms of where it falls what do you think the s-gna impact could be in terms of maybe like a quarterly run rate because obviously there's going to be some of the costs that are going to fall there I'd be also curious an initial view that you might have on the increase in intangible amortization you did say that you expect the deal to be immediately accretive and and that amort number obviously non-cash but has an effect there so just wanted to kind of get a first view from you on that one keeping going on this kind of trend here you're going to have to put a liability on your balance sheet for your expected payment of an urnout I think you'd mentioned that there was an urnout associated with this so maybe if you give us kind of ballpark what that liability on the balance sheet is going to be so we could think about it like you're thinking about it would be some of the questions as it relates to next time accounting thanks yeah fair enough so again as we think about the you know P&L margin impact I think the best way to model this out would be again if this was a company with revenues of 500 million or a billion the assessment and analysis would be a little different but given the size and scale I think from a modeling perspective looking at the revenue guidance we've given that this is a 150 million odd revenue company and the margin profile is similar I think as you decide to model out the future P&L's for us you can keep using the existing company wide margin profile am I saying that their SGNA percentage is identical to ours no we are not but that said even if the SGNA for next time is different from our percentage on a blended basis it cannot move the needle given its limited size and we feel comfortable that our current guidance around margins and the aggregate will continue to hold the story with next time will be more about how we can combine with them give them the infrastructure resources to grow faster than what they've done it will not be a story about how our margin profile got altered because of next time so I think that's the best way to think about the margin profile for now in terms of elements such as the contingent payment or the intangible we working through those numbers right now I think it will be appropriate perhaps to touch upon that topic in our next earnings call when next time will get picked up in our reported numbers but we don't have much to share on that topic right now and you know to give you an example I mean the intangible assessment typically takes a few weeks after transaction close so we are working through that it's not a number that is available yet but again if you think about what the company does it's a services company and you know at the end of the day it's not asset heavy so you can use some ball box if you want to but we are still working through those numbers and we will share those the one caveat I will add as you model out the P&L and look at the accretion impact would be yes their margin profile is similar to ours does uplift our net income and EPS numbers but there is also the offset we've basically used 90 million plus of our own cash that was earning interest you know in money market mutual funds and the likes which will no longer be at our disposal so it will be an offset to net income from basically losing interest income on those to 90 to 100 million dollars of cash that was providing interest income but other than that we don't have much other color to add on the margin profile beyond saying very similar very consistent to the overall company worldwide but to be clear here you expect it to be a creative to EPS even even including the the penalty of not having the interest income is that correct like you're just going to earn more than the outcome just want to make sure okay yeah okay and then Matt just on the on the accrual days I just we're going to can just remind us how many days accrual is it for queue and then I think all of us are going to be flipping to look more closely at 27 and so maybe people are going to want to try to get the seasonality for cash flows you know dialed in for 27 maybe a little bit closer here can you just take us through 27 and the days accruals and maybe remind for everyone's benefit what each day is currently worth at this new run rate of revenue at the stepped up level here yes sir and if we look at the fourth quarter it's going to be a six-day increase from 11 days in the third quarter to five days in the fourth quarter so rough numbers the change in the accrual will have about an 18 million dollar negative impact on the reported cash flow I'm looking ahead to 2027 Q1 it'll be about a 19 million dollar positive effect it's a six-day increase from five days in Q4 to 11 days in Q1 Q2 should have about a negative a negative nine million dollar effect on reported cash flow so that's a two-day decrease from 11 days in Q1 to nine days in Q2 Q3 will be about a 13 million dollar positive effect on reported cash flow that's a two-day increase from nine days in Q2 to 11 days in Q3 and then in Q4 of 2027 it should have an 18 million dollar or so negative effect on reported cash flow that's a five-day decrease from 11 days in Q3 to six days in Q4 and obviously Andy as we continue to grow the business and grow payroll they'll be you know modest impact as to the effect of a particular day of payroll but directionally hopefully this is helpful for you from a modeling perspective yeah I wanted to make sure I capture that correctly with the with the next dine acquisition contributing more revenue now so so I wanted to refresh there I knew you'd be ready for us on that one too so I definitely appreciate that have a great day guys there are no further questions at this time I will now turn the call back to Ted Wall for closing okay great thank you Ben as we enter the fourth quarter of our 50th anniversary year the company's underlying fundamentals are more robust than ever our leadership and team members our enhanced value proposition our business model and the visibility we have into that business model our positive KPI and key business trends and our strong balance sheet and ROIC profile and with the industry at the beginning of a multi-decade demographic tailwind our unified health and hospitality services platform strategically positions us to fulfill our vision and drive sustained long-term value creation for our shareholders so on behalf of MAT the cost and all of us at health care services group Ben thank you for hosting the call today and thank you again to everyone for joining us this concludes today's call thank you for attending you may now disconnect