Earnings Call Transcript - HCSG Q1 2026

Operator, Operator

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the HCSG 2026 First Quarter Earnings 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 statements notice. 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. I would now like to turn the call over to Ted Wahl, CEO. Please go ahead.

Theodore Wahl, CEO

Good morning, everyone, and welcome to HCSG's First Quarter 2026 Earnings Call. With me today are Matt McKee, our Chief Communications Officer; and Vikas Singh, our Chief Financial Officer. Earlier this morning, we released our first quarter results and plan on filing our 10-Q by the end of the week. Today, in my opening remarks, I'll discuss our Q1 highlights, share our perspective on the general business environment and discuss our strategic priorities for Q2. Matt will then provide a more detailed discussion on our Q1 results, and then Vikas 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 Q1 highlights. We delivered strong first quarter results across revenue, earnings and cash flow, and we have carried that positive momentum into the second quarter. New client wins and high retention rates drove our year-over-year top line growth and our field-based team's operational excellence led to quality service outcomes and consistent margins. We also returned $24 million of capital through our share repurchase program and ended the quarter with a strong balance sheet and ROIC profile, underscoring our focus on value-creating capital deployment. I'd like to now share our perspective on the general business environment. Industry fundamentals continue to gain strength, highlighted by the multi-decade demographic tailwind that is now beginning to work its way into the long-term and post-acute care system. In 2026, the first baby boomers will turn 80 years old. 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, the primary age cohort for long-term and post-acute care utilization. We expect that the demand and opportunities for service providers in this space, especially for those with compelling value propositions, durable business models and market-leading positions, will only increase in the months and years ahead. The most recent industry operating trends remain positive as well, highlighted by steady occupancy, increasing workforce availability and a stable reimbursement environment. We remain optimistic that the administration will continue to prioritize the rationalization of regulations and policy to better align with the changing and expanding needs of our nation's most vulnerable and the provider communities we service. Beyond our core industry trends, we are closely monitoring the broader macro landscape, including the volatility in global energy and supply markets resulting from ongoing geopolitical conflicts. Our role as financial stewards for our clients remains a nonnegotiable priority and serves as our North Star as we navigate this environment. To that end, while we have not observed direct on-invoice impact from these global events, our purchasing and procurement teams are actively monitoring the landscape and surveying our supply chain to stay ahead of any developing trends. Fundamental to these efforts is the depth of our long-standing vendor partnerships, which provide critical visibility and stability necessary to navigate market volatility with confidence. In the event that specific supplies or food items experience outsized inflationary or cost pressure, we are prepared to pivot our sourcing strategies to mitigate direct exposure. Ultimately, the rigorous work we have done to enhance our contractual frameworks allows us to pass through unavoidable cost increases, ensuring we preserve our margins while continuing to deliver market-leading service. Looking ahead to Q2, our top three strategic priorities remain driving growth by developing management candidates, converting sales pipeline opportunities and retaining our existing facility business; managing cost through field-based operational execution and prudent spend management at the enterprise level; and optimizing cash flow with increased customer payment frequency, enhanced contract terms and disciplined working capital management. We are confident that continuing to execute on our strategic priorities, supported by our robust business fundamentals, will enable us to drive growth while delivering sustainable, profitable results. So with those introductory comments, I'll turn the call over to Matt.

Matthew McKee, Chief Communications Officer

Thanks, Ted, and good morning, everyone. Revenue was reported at $462.8 million, a 3.4% increase over the prior year. Segment revenues and margins for Environmental Services were reported at $208.3 million and 12.1%. Segment revenues and margins for dietary services were reported at $254.5 million and 9%. Our 2026 growth plans are oriented around mid-single-digit revenue growth with Q2 revenue in the $465 million to $475 million range and sequential revenue growth in the second half of the year compared to the first half of the year. Cost of services was reported at $386.9 million or 83.6%. Cost of services benefited from strong service execution, workers' comp and general liability efficiencies and lower bad debt expense. Our goal is to manage cost of services in the 86% range. SG&A was reported at $42 million. After adjusting for the $1.6 million decrease in deferred compensation, SG&A was $43.6 million or 9.4%. Our goal is to manage SG&A in the 9.5% to 10.5% range based on investments that we've made and spoken about in previous quarters with the longer-term goal of managing those costs into the 8.5% to 9.5% range. Our effective tax rate was reported at 24.6%. We expect our 2026 effective tax rate to be approximately 25%. Net income and diluted earnings per share were reported at $26.1 million and $0.37 per share. I'd now like to turn the call over to Vikas.

Vikas Singh, Chief Financial Officer

Thank you, Matt, and good morning, everyone. Starting with our liquidity and cash flows. Our primary sources of liquidity are cash flow from operating activities, cash and cash equivalents and our revolving credit facility. Cash flow from operations was reported at $43.7 million. After adjusting for the $20.3 million increase in the payroll accrual, cash flow from operations was $23.4 million. We wrapped up the first quarter with cash and marketable securities of $214.6 million, and our credit facility of $300 million was undrawn with utilization limited to letters of credit only. On April 7, we amended our existing credit agreement to extend the maturity of our $300 million revolving credit facility to 2031. In tandem, the SOFR-based pricing grid has been favorably modified and covenant flexibility has been enhanced. Our capital allocation plans remain unchanged from what we outlined last year, and we are on track to execute. Our capital allocation across organic growth, M&A and share repurchases continues to be grounded in discipline and consistency. Our enhanced liquidity provides us the flexibility to pursue all of these priorities without trade-offs. In February 2026, we announced plans to further accelerate the pace of our share buybacks and repurchase $75 million of our common stock over 12 months. In the first quarter, we repurchased $24 million of our common stock. We now have 9.2 million shares remaining under our current share repurchase authorization. With that, we will conclude our opening remarks and open up the call for Q&A.

Operator, Operator

And your first question comes from the line of Ryan Daniels with William Blair.

Matthew Mardula, Analyst, William Blair

This is Matthew Mardula on for Ryan. So in your prepared remarks, you touched up on this, but I want to dive deeper into it. So we saw strong results in cost of services as a percentage of revenue being at 83.6% this quarter, better than the guidance. Was there any one-time benefits this quarter? And what exactly drove that strong performance in the first quarter? Also, as we look for the rest of the year, with you reiterating the 86% cost of services as a percentage of revenue, how should we think about the rest of the quarter given the strong Q1 performance?

Matthew McKee, Chief Communications Officer

Matt, this is Matt McKee. As we've previously discussed, the primary driver of managing cost of services within that targeted range and overall margin consistency for us is really service execution. The recent positive service execution trends in customer experience, systems adherence, regulatory compliance and budget discipline, all of which are near-term margin drivers, carried over into Q1. And the expectation is that that carries forward throughout 2026 as well. So that's why we remain confident in our ability to continue to manage costs in that 86% range. And it's worth noting, Matt, that service execution is not something that happens on autopilot—there are no elements of it that are given. Our field-based management teams are working very diligently to deliver on our expectations, and they deserve a lot of credit for that execution. That said, there are always going to be some movement month-to-month, quarter-to-quarter, and the timing of certain items can have a positive impact, and that was the case in Q1 results as well in that workers' comp and general liability efficiencies continue to be driven by our focus and commitment to training and safety protocol that we've implemented in the facilities, and lower bad debt expense that's been favorably impacted by our strong cash collection efforts and the scarcity of bankruptcies or reorganizations during Q1.

Vikas Singh, Chief Financial Officer

Yes. And Matt, this is Vikas. If you want to unpack the outperformance in different buckets, what we would say is, look, we've outperformed the 86% by, call it, 2%. Out of that, 1% is coming from workers' comp and general liability. Those efficiencies contributed about $4.7 million to the favorable cost of sales outcome for the quarter. Now while that reflects the ongoing efforts that Matt just talked about, what I would remind you is that this impact can be lumpy. The fact that we got that number in one quarter may not necessarily lead to similar benefits in subsequent quarters because that benefit is based on the frequency and the size of claims. It's based on the insurance and actuarial model. And while it's indicative of how we've been performing, it does not guarantee similar repeat performances in subsequent quarters. So that's about 1% of that 2% outperformance. I would say the remaining outperformance this quarter, as Matt has already alluded to, came from bad debt and service execution. On the bad debt front, you'll see this number in the 10-Q that we'll file later this week, but that number for the quarter is $3.8 million. That's less than 1% of revenue. If you look at where we've been in the recent past, we've been at 2% plus. If you look at a more normalized historical average, we are between 1% to 1.5%. So it's really those two factors plus the operational excellence that's driving the number this quarter. But that said, we still feel that 86% is the right way to go because these events, while favorable, can be lumpy and are not guaranteed to be repeated in subsequent quarters, although we'll try our best to do what we can. I think it takes us back to 86% being the goal and the target for us.

Matthew Mardula, Analyst, William Blair

Great. That's extremely helpful. Now how has the development of managerial candidates trended recently? And with the continued addition of new clients this quarter and with expectations of that continuing in the upcoming quarters, how are you planning to be able to keep pace with having enough managerial candidates? I know it probably varies by region, but any updates on growth and ensuring you have enough manager candidates would be great to hear about.

Matthew McKee, Chief Communications Officer

Yes, that's exactly right, Matt. The benefit that we have is that our expectations relative to management development are all grounded in the localized efforts within not only our regions, but more specifically down to the district level, where we have our 12 facility districts and the expectation is that each district will be executing their own management development efforts through their certified training facilities. So the expectation is that the recruiting efforts, the hiring, the training, the development and ultimately the retention and placement of those management candidates is very much an exercise that's executed within that district structure. It is those bottom-up, ground-up efforts that aggregate to total company top-line growth opportunities. It is that marriage of management development with business development, but again executed locally, that when it's rolled up and executed properly yields that mid-single-digit growth for the company. As you noted, of course, there are regional variabilities—whether that's a market dynamic or it's simply a management issue. Some teams are further ahead of that curve; others will struggle because, of course, we don't compromise our standards relative to service execution and performance. Per our previous comments relative to cost of services, if there is a local team that's not executing on client satisfaction, delivering that customer experience, adhering to our operational systems, delivering regulatory compliance and executing with budget discipline as financial stewards for our clients, we won't let them grow the business in their area. They have to demonstrate that they're capable of appropriately managing their business in their current portfolio before we'll allow them to grow. So there will always be problem children, and that's the benefit of having invested in that middle management structure: we can quickly identify areas of concern and folks who may need extra attention and then quickly be able to insert those management resources, appropriately reskill and train those managers such that they can get back on track and then reengage into that critical focus for us, which is management development very much tied to business development efforts. When we roll it all up and look at that landscape right now, Matt, we're very pleased with where we are, and we don't have any limitations or obstacles relative to achieving total company growth objectives in light of the strong environment relative to management development.

Operator, Operator

Your next question comes from the line of A.J. Rice with UBS.

James Kurek, Analyst, UBS

This is James on for A.J. First of all, congrats on the strong start to the year. Could you potentially give us an update on how the campus segment did in terms of year-over-year growth? And then I think you've also expressed interest around potentially exploring more M&A opportunities, particularly potentially in campus. Maybe just an update on the capital deployment as it relates to M&A.

Matthew McKee, Chief Communications Officer

Yes. James, as we discussed last quarter, the campus business represents over $100 million of annualized revenue in 2025 and is still a relatively small base at less than 10% of total company revenues, but we do see continued growth of that base. We're not going to report or call out specific growth in that segment at this point. We've mentioned the synergies that exist between the environmental offering and our dining brand and those offerings. As we sit here, if you think about the academic calendar, many, if not most, of our campus clients right now are schools; we're in the selling season as administrators begin to plot out their plans for the end of this academic year, the summer and then thinking ahead to next year's academic year. So from a business development and a pipeline development perspective, those folks are very much in the thick of orienting towards growth objectives from an organic perspective. Perhaps Vikas would make a comment or two just as far as how the inorganic opportunities could potentially supplement that in the campus opportunity.

Vikas Singh, Chief Financial Officer

Yes. As we've talked about, we remain focused on building that M&A pipeline. We continue to evaluate incremental opportunities every quarter. As I said earlier, our approach will continue to be grounded in discipline and consistency. We are looking for deals that will be small—$20 million, $25 million, $30 million of purchase price—such that while they look and feel like inorganic growth on day one, they serve as an organic growth platform on day two, so more of a land-and-expand. We are busy looking at opportunities and evaluating the right fit that we will move forward with over the course of the year, but that continues to be an ongoing focus area for us.

James Kurek, Analyst, UBS

Got it. Appreciate the color there. Maybe just one more on adjusted EBITDA, it was a really strong quarter at almost $39 million. I know you don't guide to that, and I appreciate some of the comments around the benefits you saw in cost of services this quarter. But is there any directional color you can give us with the starting point of $39 million just on seasonality considerations or how to consider or view that from a quarter-to-quarter basis from here?

Vikas Singh, Chief Financial Officer

You're right. We've not been projecting EBITDA. But as we've mentioned in the past, the model remains consistent and, in some ways, easy to understand. From our perspective, 86% cost of sales, SG&A short-term target of 9.5% to 10.5%, call it 10% at the midpoint, and a 25% tax rate—that puts you in the ZIP code of about 4% pretax income. Our stock-based compensation and D&A typically runs at about 1.5%. I think that's the best we can do in terms of providing you a sense of where it will be. This quarter, EBITDA was strong as we talked about: cost of sales came out more favorable than the 86% and SG&A came out more favorable than the 10%. That said, that's not what we are projecting as the overall year outcome. There will be quarters where we do better and maybe some where we do not. If you look at how we look at the business on an annual or a 3- to 5-year growth trajectory basis, those are the metrics that we are holding ourselves accountable to.

Operator, Operator

Your next question comes from the line of Sean Dodge with BMO Capital Markets.

Sean Dodge, Analyst, BMO Capital Markets

Maybe just going back to the cost of services, Vikas, you mentioned the benefits in the quarter from workers' comp, general liability, bad debt. I know you've also been working on some initiatives aimed at improving engagement with employees at the hourly level and using that to improve retention and lower turnover. Maybe if you could just share some more on what specifically you're doing there? And then any impact you've seen from that yet on margins and maybe how much runway is left from initiatives like that, which have a bit more durability over the long term?

Matthew McKee, Chief Communications Officer

Sean, I would say, without a doubt, that continues to be an area of focus for us: engaging with our employees at every level within the organization. It's a newer area of focus for us to identify with and engage our line staff employees who historically we would have thought associated more with the facility rather than with Healthcare Services Group. As we've formalized and adopted as a North Star our company's purpose, vision and values, in order for us to achieve all of those, we have to have high levels of buy-in and engagement with employees throughout the continuum. Being a service-based, decentralized organization with the bulk of our employees executing line staff level positions—such as housekeepers, pot washers, dishwashers and food service employees—it's challenging to communicate with them. They're not users of email and we have limited opportunities to connect with them. So we have explored and identified creative ways to connect with them via the company intranet, establishing a proprietary app through which we can communicate with folks, leveraging our time clocks to be able to push messages to our employees and to better understand where they are in their company experience and journey such that we can really connect with them and drive improved connectivity and outcomes. Qualitatively, we are seeing improved connectivity and higher levels of employee satisfaction. From a quantitative perspective, it's harder to pinpoint that directly in cost of services, but we are seeing improvement in employee retention as a result of those engagement initiatives. That yields greater operational outcomes by way of the customer experience—having longer-term employees in the facility reduces the need for management to be out conducting interviews and replacing employees who are turning over. There's a cascade of benefits that come from that, some qualitative and some quantitative, and overall it's yielding improved employee retention data.

Sean Dodge, Analyst, BMO Capital Markets

Okay. Great. And then on the revenue outlook, your guidance for the first half of the year implies kind of low single-digit year-on-year growth. The mid-singles for the full year means you have to do something like high singles year-over-year for the back half. What's driving that? Is it simply implementing more facilities over the year and those ramping? Any more color on how much is coming from new clients on the housekeeping side versus dining cross-sells?

Theodore Wahl, CEO

Thank you for the question, Sean. I would start with the fact that the demand for our services is stronger than it's ever been. You look at our pipeline, it's robust and it's growing in terms of new business opportunities, each of which are at various stages of development, but we have a highly managed sales process from the beginning stages of cultivation all the way through closing. I think that bodes well for the future, not just over the next 6 to 12 months, but beyond. We continue in the current year to successfully execute on the organic growth strategy by developing management candidates, as Matt highlighted, that fund new business opportunities, all while retaining our base business. To the question you asked, the key drivers for us in delivering mid-single-digit growth at either the higher end of the range like we saw in 2025 or even the lower end of the range like we saw this past quarter is timing. It's the timing of HCSG management capacity and the timing of client start date preference. Timing can be fluid quarter-to-quarter, knowing there's always going to be a subset of intra-quarter opportunities that may be pushed out or pulled forward depending on those two key drivers. To help put that dynamic in perspective, the difference between us starting a new opportunity on April 1 as opposed to September 1 is insignificant in the context of the 3- to 5-year growth outlook we put forth, but could be impactful in a given quarter or even in a year depending on the size and scale of the opportunity. Our 2026 growth outlook is a range based on annual growth expectations, whereas the quarter-to-quarter estimates are intended to provide additional near-term visibility. In terms of the segment breakdown, our new business pipeline is split fairly evenly between Environmental Services and dietary, although from a revenue contribution perspective a dietary account is typically two times or so that of an EVS account on a same-store basis. So as we're onboarding a comparable number of facilities, dietary and EVS revenue will increase proportionately. And just as a reminder, we're still about 50% penetrated in dietary services relative to our EVS customer base, so the remainder is an opportunity for cross-selling dietary to our existing EVS customers.

Sean Dodge, Analyst, BMO Capital Markets

Okay. And then just last on Genesis. Any updates you can share there? Are you still providing services to them? And any better visibility at this point into where those facilities end up from an operator standpoint?

Theodore Wahl, CEO

Yes, we're continuing to provide services to the Genesis facilities without operational or payment disruption. We continue to expect that to be the case throughout the duration of the post-petition period. In January, the bankruptcy court approved the sale of Genesis to 101 West State Street, which is a group of well-organized, well-known operators in the space with whom we have relationships. From a timing perspective, the revised bid procedures called for a late April financing commitment letter and an early summer close, although practically speaking there's a strong belief that that will likely be pushed out. There is an option for either the buyer or the debtor to exercise timing options, so we're likely looking at a closing date later in the summer, assuming 101 West State Street can provide that financing commitment. In the meantime, our priority is providing high-quality services to Genesis, and we don't expect any disruption in operations or payment between now and the sale date.

Operator, Operator

Your next question comes from the line of Ryan Halsted with RBC Capital Markets.

Ryan Halsted, Analyst, RBC Capital Markets

I know you mentioned that the industry fundamentals remain strong, but have you seen any shift or change in occupancy trends with your skilled nursing facility customers, especially those with shorter-stay Medicare residents starting in 2026? One of the large managed care companies talked about increasing their clinical reviews on SNF admissions, so I'm wondering if you have any comments or visibility on those trends.

Theodore Wahl, CEO

Ryan, overall, the industry fundamentals continue to gain strength and that demographic tailwind is beginning to work into the long-term and post-acute care system. That is a huge positive for today and for the next few decades. The continued interplay we see at the local level between staffing availability and occupancy remains key for facility success. More than any other factor, labor availability is the key to occupancy growth and occupancy growth is the key to consistent financial outcomes. The most recent occupancy data are positive; they continue to be in and around 80%. What we're seeing is steady across geographies—urban, suburban, rural—and across facility types and populations, long-term and short-stay alike. From our perspective, relative to occupancy, we haven't seen anything other than stability and generally an upward trend.

Ryan Halsted, Analyst, RBC Capital Markets

Got it. That's helpful. You made comments about strong momentum carrying over into Q2, and looking at your guidance for the quarter, the midpoint to the low end are for low single-digit growth. Can you help to square those comments in terms of what momentum you're seeing and maybe how that could swing factors into your guide?

Theodore Wahl, CEO

From a momentum perspective, the most significant indicator we look at is pipeline and the stages of development of that pipeline. Our pipeline continues to grow; it's robust and shows strength across all segments and business lines, including the campus division. That's a real positive and makes us feel good about not just the next 6 months, but the next 3 to 5 years. Variability quarter-to-quarter, as I mentioned earlier, is really timing—the timing of HCSG management capacity and the timing of client start dates. Those can be fluid up until a scheduled start date, which makes it difficult to pinpoint a specific quarter with precision. That's always been the case. Our organization is built to be highly nimble and proactive in those situations, so timing is what puts us at the higher end or the lower end of that mid-single-digit range in any given quarter or year.

Ryan Halsted, Analyst, RBC Capital Markets

Got it. That's very clear. Maybe just last one on your capital allocation priorities. You've put forth a strong share repurchase authorization and have been aggressive so far. How should we think about how aggressive you expect to be on repurchases as your shares strengthen?

Vikas Singh, Chief Financial Officer

From our perspective, the approach is to maintain a more uniform cadence. Regarding the $24 million repurchases, not all of it this quarter falls under the new program. We announced the $75 million program in mid-February; only $15.3 million of these repurchases were made after the new program was announced. So if you think about what we spent under the program, it's $15 million. You do an annualization of that, and it is under the $75 million number. The additional repurchases within the $24 million were pertaining to the previous program and our regular open-market repurchases. We are not trying to front-load it or time the market; we want to be consistent. That's the approach we'll take over the entire duration of the 12-month program. If there are reasons to accelerate down the road, we will be open to that, but that's not the intent and that's not how we've structured the program at this point. We prefer consistency over lumpiness.

Operator, Operator

Your last and final question comes from the line of Rohan Vasudeva with Baird.

Rohan Vasudeva, Analyst, Baird

I think most of my questions have been asked, so I'll keep this brief. I just wanted to confirm that there was no Employee Retention Credit benefit to cost of sales in this quarter, correct?

Vikas Singh, Chief Financial Officer

That is correct. There were no ERC receipts and no ERC impact to our P&L and financial statements this quarter.

Rohan Vasudeva, Analyst, Baird

Okay. And then you briefly touched on keeping a consistent cadence for repurchases. It looks like you'll run through your authorization or finish your authorization in about two quarters. Can we expect that you'll re-up your authorization after that? Or would you consider another way of returning capital to shareholders?

Vikas Singh, Chief Financial Officer

As I mentioned earlier, of the $24 million repurchases in the quarter, $15.3 million were after the announcement of the new program, so the amount spent under the program so far is about $15 million. If you annualize that, it is under the $75 million authorization. The additional repurchases were from the previous program and regular open-market activity. We're not trying to rush through the program; we want to keep it uniform and present over the course of the year. If there are reasons to accelerate later, we'll consider that, but the current intent is to be consistent rather than lumpy.

Operator, Operator

I will now turn the call back over to Ted Wahl for closing remarks.

Theodore Wahl, CEO

Thank you. As we prepare for the remainder of 2026, the company's 50th anniversary, the underlying fundamentals are more robust than ever. Our leadership and management team, our enhanced value proposition, our business model and the visibility we have into that model, our training and learning platforms, our KPIs and key business trends, and our strong balance sheet and ROIC profile position us well. With the industry at the beginning stages of a multi-decade demographic tailwind, we are incredibly well positioned to capitalize on the abundance of opportunities that lie ahead and deliver meaningful long-term shareholder value. On behalf of Matt, Vikas and all of us at Healthcare Services Group, thank you, Rebecca, for hosting the call today, and thank you, everyone, for joining.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.