Earnings Call Transcript - HCSG Q3 2021

Operator, Operator

The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. Forward-looking statements are often preceded by words such as believes, expects, anticipates, plans, will, may, intends, assumes, or 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, 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 these 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 are included in our earnings press release issued prior to this call and in our filings with the Securities and Exchange Commission. There can be no assurance that the SEC or another regulatory body would 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 distractions to management. The concluded 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, whether as a result of such changes, new information, subsequent events, or otherwise. I would now like to hand the conference over to Mr. Ted Wahl, President and CEO. You may begin.

Theodore Wahl, President and CEO

Thank you, Tamia, and good morning, everyone. Matt McKee and I appreciate you joining us today. We released our third quarter results this morning and plan on filing our 10-Q by the end of the week. Our third quarter results reflect the impact of supply chain disruption, labor availability, and significant inflation in the cost of goods that many industries have experienced. Q3 events like the Delta variant surge, vaccine mandates, and a record number of people leaving the workforce had a disproportionately adverse impact on nursing homes, contributing to the rapid and significant inflation we experienced during the quarter. Despite these unprecedented challenges, we remain steadfast in our commitment to supporting our customers in caring for their patients and residents. During the quarter and in the face of great uncertainty, we made a real-time but very intentional, purposeful longer-term-view decision to do whatever it takes to staff and supply our client facilities to get the job done, and our entire team rallied together in this effort. If that meant incurring overtime hours, introducing special employee bonuses, or increasing wage rates and premium pay, that's what we did. And that certainly had an impact on our financial results, but we hold a high level of conviction that especially in this unprecedented environment, doing right by the resident is the right thing to do and doing the right thing is always good business. While we expect these market conditions to persist in the near term, ultimately, we expect our clients to rightsize facility wage rates, and we will then pass along billing increases reflecting those adjustments. The rightsizing of the facility wage scale should reduce or eliminate the need for further overtime, premium pay, or special attendance, retention, or referral bonuses. As a reminder, while it is certainly a conversation with the client, our contracts typically do not allow for pass-through billing increases based on costs like those that we have initiated. This compares to increases that are initiated by the client, whether that's wage increases or the recent hero pay bonuses for which we do have contractual pass-through rights. Again, we ultimately expect our clients to rightsize facility wage rates, and we will then pass along billing increases reflecting those adjustments. Food is another area we experienced unprecedented availability and inflationary pressures in during the quarter. Our total menu costs were up over 4% during Q3, with high-volume items like meat, poultry, fish, and eggs up substantially more. We are working closely with our supply chain partners to mitigate food supply challenges and are collaborating with our customers to maintain quality and limit their financial exposure through creative menu design and product substitutions. Inflationary increases in food costs are also passed through to our clients but those are typically automatic adjustments that occur on a quarterly basis. For example, Q3 CPI-related adjustments will be reflected in Q1 customer billings, Q4 adjustments will be reflected in Q2, and so on. Looking ahead, we will continue to closely monitor industry recovery, occupancy trends, and further government funding. While the unprecedented environment is a headwind on revenue growth and profitability, we remain confident in the longer-term growth outlook for the company given our market leadership, efficient operating model, and attractive demographics. So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Matthew McKee, CFO

Thanks, Ted, and good morning, everyone. Revenue for the quarter was $415.6 million, with housekeeping & laundry and dining & nutrition segment revenues of $203.4 million and $212.2 million, respectively. The majority of the sequential increase in revenue relates to the addition of new dining & nutrition service agreements with existing housekeeping & laundry customers. There was also a modest portion of the revenue uptick related to increases in billings for wage increases that some clients implemented at their facilities throughout the quarter in an effort to address staffing challenges. Direct cost of services was reported at $364.8 million or 87.8% and included $2.3 million of new business start-up costs incurred during the quarter, $7.7 million of increased labor costs sequentially from Q2, and that was driven by higher premium pay and employee bonuses, and $2.5 million of increased food cost, again sequentially from Q2, driven by a 4.1% increase in menu item costs. Housekeeping & laundry and dining & nutrition segment margins were 8.5% and 3.4%, respectively. Selling, general and administrative was reported at $38.8 million after adjusting for the $200,000 decrease in deferred compensation; actual SG&A was $39 million. SG&A was impacted by about $1 million of new business start-up costs and $600,000 of SEC-related legal costs. Investment and other income for the quarter was reported at $133,000 after adjusting for that $216,000 change in deferred compensation; actual investment income was about $339,000 for the quarter. Our Q3 tax rate was 21.3%. Net income for the quarter came in at $9.5 million, and EPS was $0.13 per share. Cash outflow from operations for the quarter was $23.1 million and was impacted by a $16 million increase in accrued payroll, a $12 million increase in accounts receivable related to the recent addition of new dining & nutrition service agreements, and a $6 million SEC settlement. DSO for the quarter was 64 days. Also, we would point out that the Q4 payroll accrual will be 13 days. That compares to the 5 days that we had in the third quarter and 12 days that we had in 2020 during the corresponding period. But the payroll accrual only relates to timing, and the impact ultimately washes out through the full year. Now Q4 will also be impacted by 1/2 or about $24 million of CARES Act deferred payroll tax repayments. We're pleased with the ongoing strength of the balance sheet and the ability to support the business while continuing to return capital to HCSG shareholders. We announced that the Board of Directors approved an increase in the dividend to $0.21 per share, payable on December 23, 2020. The cash balance is supported, and with the dividend tax rate in place for the foreseeable future, the cash dividend program continues to be the most tax-efficient way to get free cash flow and ultimately maximize return to shareholders. This will mark the 74th consecutive cash dividend payment since the program was instituted in 2003 and the 73rd consecutive quarterly increase. That's now an 18-year period that has included 4 3-for-2 stock splits. We recognize the dividend is important to our shareholders, and we've increased it in line with our performance track record. Additionally, the company repurchased $3.6 million of its common stock pursuant to its previous authorization during the quarter, and the company remains authorized to repurchase 1.4 million shares of our common stock pursuant to the Board of Directors' authorization. So with those opening remarks, we'd now like to open up the call for questions.

Operator, Operator

Your first question comes from the line of Tao Qiu with Stifel.

Tao Qiu, Analyst

Just a quick question on the dining side. When you guys are bidding and talking to new clients, have you adjusted your contract rate and your hiring accordingly, given the cost inflation you're seeing? And also, does it make sense if you can really increase the contract rate right now? Does it make sense to maybe pause some dining & nutrition contract additions?

Matthew McKee, CFO

Yes. So I would say, Tao, most of the new business that we started at the tail end of Q2. And as we've discussed, there's been significant increases in labor-related costs since that time. The good news is that we've been able to implement our systems and staffing models at those facilities, which means we've made a very favorable operational impression on those clients, and the foundation of the go-forward structure is in place. But those facilities are not immune to the cost pressures that we've talked about seeing throughout our portfolio, no matter how long a facility has been a partner of ours. Whether that's 2 months or 2 decades, we're committed to upholding our operational responsibility. From a positive perspective, these are nearly all existing housekeeping clients with whom we've had strong preexisting relationships. So that certainly aids in the ease and effectiveness of cost and billing-related conversations. Ultimately, we've established a strong operational and systems-based foundation at these facilities, and we remain highly engaged with the clients at the facility level to monitor the labor and food costs to ensure that we are aligned in rightsizing our wage scales going forward, not unlike the other facilities in our portfolio. As to the go-forward perspective, absolutely, the dislocation of the labor market relative to what had been a more stable environment is yet another assessment we need to make in analyzing go-forward prospects with whom we might partner. That relates to the occupancy and the facility, the payer mix that they have, and certainly, the stability of the labor environment within the four walls of that facility. Do we believe that they have the appropriate starting wages? Do we believe that they are compensating the existing employees appropriately such that we'll be able to get employees in the front door and keep them from exiting out the back door? That's yet another component of the financial assessment of a partnership with the prospective clients. So 100% accurate, Tao, your instinct that we would absolutely want to make sure that we're closely assessing the conditions of the facility before we think about engaging and establishing a go-forward partnership via contract.

Tao Qiu, Analyst

Yes. That makes sense. And also wanted to kind of unpack a little bit of the challenges we saw this quarter. Obviously, the latest surge in COVID has somewhat peaked in August, so things are getting better, and also the provider relief fund looks like the nursing home operators are going to get some additional government help, possibly in the fourth quarter. There are certainly some positive news coming down the pipe. But just to understand the labor challenges, how are the conversations with your operator partners going right now? Is it more of a labor availability issue right now? Or is it a cost issue? It sounds like probably both. I just wanted to understand how long you think this pressure will last? And how fast do you think you can pass through some of these costs to your clients?

Theodore Wahl, President and CEO

Yes, it’s a challenge related to both the availability of labor and costs. We are currently discussing with our clients about adjusting wage scales. Typically, these discussions are straightforward; we present our findings on labor, and our clients are usually facing similar cost pressures, whether from wages or other areas. They ultimately have the authority to modify wage scales, which leads to corresponding increases in our billing. In this current climate, their initial concern is whether the situation is temporary or a permanent change. If it is indeed a new normal, they want to know how much wages need to be adjusted and if increasing the rates will attract candidates to fill positions. Additionally, they are concerned about how they will be reimbursed for any extra costs incurred. There are many questions being addressed in real-time as we navigate this challenge. While there is variability in the market, this is a common struggle across the industry, impacting occupancy rates directly. Labor issues in patient care affect providers' ability to fill beds. For example, the Delta Variant surge in August had significant effects, and its decline is a positive sign. Providers must ensure they have sufficient staff for patient care to welcome new admissions. The industry has been stuck around 72% occupancy for the past few months, which is disappointing. Since the industry's lowest point in January at roughly 67%, we've seen a steady increase of about 0.2% to 0.3% per week, building momentum as we approached the latter part of the year. However, the Delta Variant surge and ongoing labor shortages have hampered our occupancy recovery. We haven't received strong indications of a meaningful recovery in October yet, but if the trend continues at 0.2% per week, we could return to the pre-pandemic occupancy level of 80% by June 2022. That 80% mark is significant as it represents a sustainable occupancy level we achieved before the pandemic. If the recovery is only 0.1% per week, we won't reach that level until early 2023. We will closely monitor this recovery. On a brighter note, the demographic trends are very favorable. For instance, the 80 to 84-year-old age group, which currently numbers around 6.4 million, is projected to exceed 8 million by 2025 and approach 11 million by 2030. In a few years, the conversation will shift more from supply constraints to the demand for services from providers.

Tao Qiu, Analyst

Yes. If I may ask one last question. How does the board and management think about the dividend, continue hiking the dividend given that some of the recent challenges might lag a few quarters? How do you feel about the dividend increases going forward?

Theodore Wahl, President and CEO

Well, I think after growth and internal investment, from a capital allocation perspective, the dividend is certainly one of the highest priorities the Board has as a company. There's no payout ratio per se, but it's the consistency and the sustainability of the dividend that has always been attractive to our shareholder base as well as the Board of Directors. The fact that rain or shine, good times and bad times, we've always been able to consistently and sustainably pay out the dividend certainly underscores the confidence that we have and that the Board of Directors has in the future of the company. We've always managed the balance sheet conservatively from a cash perspective. The Board's expectation is that we'll continue to pay and increase the dividend in a way that's been consistent with our past, now going on 74 quarters, soon to be 75.

Operator, Operator

Your next question comes from the line of Mitra Ramgopal with Sidoti.

Mitra Ramgopal, Analyst

Yes. Can you hear me?

Theodore Wahl, President and CEO

Yes. Mitra, we've got you now.

Mitra Ramgopal, Analyst

Could you give me a sense in terms of the workforce exit you saw relative to your expectations? And going forward, how is it going to impact your ability to bring on new business? It seemed like you had a lot of momentum coming into this quarter after the recent $50 million new agreement. How much do you think things are going to be pushed out?

Theodore Wahl, President and CEO

I believe our expectations regarding workforce availability and the challenges we faced were significant. Last quarter, we mentioned that Q2 presented the toughest labor environment we had ever encountered, even during 2018 and 2019 when unemployment was below 4%. The labor shortage and wage inflation we saw in Q3 were unprecedented. We hinted at this in our opening remarks, recognizing that labor supply is a complicated issue. The surge of the Delta Variant, federal vaccine mandates, and the phenomenon known as the great resignation all had a major impact on the environment we operate in daily. There was a 2.9% exit rate from the workforce, which disproportionately affected the healthcare sector. These factors only intensified what was already a challenging situation. As we approached the quarter, these issues, especially evident in August and September, were not anticipated. We committed to doing whatever it takes to serve our clients and their residents, and we stand firm in our belief that this was the right course of action given the circumstances. Regarding growth expectations, we showed that even in a tough environment, we were able to open new business successfully. However, there are cost implications we are currently addressing with these new clients. Moving forward, I would describe our growth approach as opportunistic, responding to opportunities as they arise. Given the many variables at play, it is hard to say with certainty that we will execute a growth strategy in Q4, but that doesn't mean we won't grow or that there aren't opportunities ahead. The uncertainty makes it difficult to confidently project our growth strategy for Q4. As we gain more insight into the ongoing situation, hopefully with some improvement in labor availability, we will be able to speak more confidently about our near-term growth strategy.

Matthew McKee, CFO

And Mitra, I just want to add one distinction relative to the exits of employees from the workforce. The challenge that we faced wasn't as much a mass exit of our employees leaving. Thankfully, we had implemented a pretty substantial employee engagement initiative going back a few years now, and we've been able to engage with our employees. Obviously, when it comes to staffing issues within a facility, if we don't have sufficient bodies, that's where the challenges arise in order to get the job done. We've implemented some of the premium pay and the usage of overtime, retention bonuses, referral bonuses that Ted alluded to in his opening comments. The greater challenge for us as a result of the sort of exits of bodies from the workforce is just the availability and hiring of new employees. That's been the greater challenge. The fortunate situation is that we've developed a high level of engagement among our employee base, where we're not seeing substantial turnover as a result of vaccine mandates or otherwise. The challenge we face is in bringing new bodies in, and we're seeing increased levels of applications and investing more resources in our recruiting efforts, but that's been where the challenges are felt more.

Mitra Ramgopal, Analyst

Okay. No, that's great. And then quickly on the food side, how quickly do you think you'll be able to recoup the increased costs you're seeing in terms of being able to pass it on to your clients?

Theodore Wahl, President and CEO

Yes, it's pretty automatic. Generally speaking, the majority of our contracts have a quarterly CPI-related adjustment that has a 90-day lag, so Q3 CPI-related adjustments would be reflected in Q1 billings. So a 90-day lag, at which time they're implemented for the subsequent quarter.

Operator, Operator

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

Unknown Analyst, Analyst

This is Tom Stellar on for Sean. Ted, you mentioned the difference in wage rate increases initiated by you and those initiated by the clients and the impact that has on whether or not they can be passed through. Just to help better understand the third quarter, which are the items you may or may not have been able to pass along? Is it everything set to higher food cost?

Theodore Wahl, President and CEO

Yes. Well, typically, when you think about our customers, our contract structure places the onus on that customer for developing the conditions of employment to attract and retain employees. Our general approach is to let them know what we're facing in any given labor market, make recommendations on the adjustments, and then ultimately pass along those increases. That really does remain our approach. To that end, we're working with our clients to update their wage scales. But in this unprecedented environment and the labor shortage, what is typically, as I mentioned earlier, a straightforward process is more complex, which is why in terms of what would typically be outside the scope of that contractual arrangement, things that are initiated by us, for instance, overtime uses, which in a normal environment would be considered an inefficiency. If we decided to institute special bonuses or referral or retention programs for our employees, they would be initiated by us almost outside of a typical contract structure, different than, say, a wage scale adjustment where the facility is adjusting its wage scale; our departments would be part of that adjustment. We're in the process of working with our clients on that now. Ultimately, we expect the rightsizing of those wage rates to be adjusted and then passed along to our clients. In the meantime, as we're working through that process, some of these costs I referenced earlier, such as special attendance bonuses, retention referral bonuses, premium pay, and overtime are going to be incurred like they were in the third quarter.

Unknown Analyst, Analyst

Okay. That's helpful. And then given the current labor markets, where do you all stand currently from a new manager development standpoint? Are you continuing to recruit and train new ones? Is it business as usual on that side? Or given the state of things, have you paused a lot of that activity for now?

Theodore Wahl, President and CEO

Yes. Again, Tom, I would say that, to a degree, it's business as usual. As recently as the second quarter, we were discussing having an eye on growth, right? An obvious first step in order for us to think about onboarding new facilities is having that managerial capacity at the local facility level to do so. That has been beneficial. At the local levels, our folks have been recruiting, hiring, and putting them through our management training and development program. There has been a little bit of approval, obviously, with the significant challenges in labor availability in the labor market that we've described. One tactic we employed throughout the quarter in order to get the job done at the facility was repurposing some personnel resources toward facilities that were especially in crisis or facing needs from a labor and personnel perspective. In some instances, an unexpected portion of a management training program may route them to a facility where they're going to be an extra set of hands, and they're going to learn firsthand how to deal with the challenges that can arise in scenarios like this. It's both a challenging and a great learning environment, but it will serve us well, especially as we attain market stability and begin to transition out toward growth mode with greater confidence.

Unknown Analyst, Analyst

Okay. And then one last quick one, if I can. If you think about the cost or margin trajectory in the next couple of quarters, are all those costs reflected in the third quarter? Should we expect some incremental step-up in Q4?

Theodore Wahl, President and CEO

Yes. At this point in time, we don't really have great visibility into that. I would say sitting here today, knowing what's in front of us and knowing that there's so many variables in the marketplace right now. We would venture to guess that Q4 could look more like Q3, and we'll continue to work through this process. Our expectation is that as we work through these conversations with the customers in rightsizing the wage scales, we would return back to our typical 86% cost of services or better operating model.

Operator, Operator

Your next question comes from the line of Ryan Daniels with William Blair.

Nicholas Spiekhout, Analyst

Nick Spiekhout in for Ryan. I guess, going on this cost inflation, how does this affect the sales process for incremental business? I would assume it's kind of a double-edged sword in that it makes the pitch a little bit easier and that these folks are seeing their costs in place and they're trying to find a potential operator to bring those down, but I could also see that going the other way. So I guess just your thoughts there.

Matthew McKee, CFO

No. Your intuition is exactly correct, Nick, in the sense that we certainly have more resources at our avail. We are able to better mitigate these challenges than the in-house managed operator. That serves us well. In times of greater industry duress or when the industry is especially challenged, the leanings towards outsourcing all types of services increases, right? That certainly applies to the services we provide as well. The challenge we face in surveying and putting proposals together and projecting new business opportunities is understanding the relative stability of that facility's financial profile. You can look at a facility at a point in time and see a certain occupancy level, perhaps a certain payer mix, or even a certain wage scale, and you have to determine whether each of those is scaled appropriately for that particular facility and not only for that moment in time, but going forward. We talked about the challenges we faced throughout parts of the pandemic where there were infusions of government funds that could create the opportunity for full gold in assessing new business opportunities. A customer calls you, the value proposition resonates, and they show you a balance sheet that's reflective of a healthier version of what exists perhaps behind the curtains on a go-forward basis relative to occupancy and some of the labor challenges we talked about. We need to assess not just at the moment but how sustainable and appropriately scaled the unit-level economics are going forward.

Nicholas Spiekhout, Analyst

I can understand that. As a follow-up, regarding the cross-selling opportunity with dining and nutrition, how advanced are you in exploring that? Are you still in the early stages, or have you progressed further in that process?

Matthew McKee, CFO

I'd describe it similarly to the dynamics that I described as it relates to management development. The management development function is executed and established locally based upon existing managerial needs and likewise the go-forward growth prospects. Business development is assessed executed and ultimately onboarded locally. We are at different stages throughout the country based on customer relationships, the stability in the labor market, and other factors. Some of those conversations about converting housekeeping & laundry customers to becoming dining customers are years in the making. If we're confident that the customer can tick all the boxes regarding stability, we feel confident to forge forward and convert those new opportunities in the near term. Generally speaking, there's variability based on local conditions and where they are with both the management capacity and that assessment of those financials.

Nicholas Spiekhout, Analyst

Got you. And if you're going to put like a number on that, like is that 1,000 clients, 2,000 clients? Is there kind of like a number you're tracking?

Matthew McKee, CFO

The one number that I would point out is that we continue to have less than 50% of our housekeeping and laundry customers for whom we're providing dining services. That is certainly the most obvious and immediate low-hanging fruit for us as a company. It's a tremendous opportunity and a runway that lies ahead in the near term. We wouldn't feel comfortable to put numbers associated with either the timing or the number of facilities we expect to convert within any sort of anticipated time frame.

Operator, Operator

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

Albert Rice, Analyst

I have a couple of questions. In the press release, I apologize for joining a few minutes late. Please let me know if this has already been discussed, and we can go over it later. You mentioned examining all aspects of the business and considering operational changes. Could you provide more details on where you see opportunities to respond to the current market conditions?

Theodore Wahl, President and CEO

In terms of actions that we're taking, A.J., specifically with respect to the labor market, we talked about some of the initiatives that we launched that we have been implementing but that we're continuing to innovate around. Certainly, repurposing and redeploying resources to high-need facilities, introducing employee incentive and referral programs, and streamlining onboarding processes, just to name a few. There are some of the recruiting among many other programs and innovations that we continue to implement throughout the organization. In terms of our customer base, we have the tried-and-true approach that has worked since the company inception around wage rate and wage scale pass-through provisions in the unprecedented environment we are in right now. Obviously, that's more of a process than an event. What would typically be a pretty straightforward conversation, where you have a client questioning the environment is transitory or permanent, triggers additional conversations. I can speak with great certainty on our prioritization, which is recruiting and retaining staff, updating employee wage scales, and remaining laser-focused on the elements of the business that are within our control.

Albert Rice, Analyst

Sure. I guess I didn't understand, and it sounds like the focus is on the recruiting side. I wondered if there was some way you were thinking about retooling the management infrastructure that you have in that model. But that doesn't sound like that's on the table or anything.

Theodore Wahl, President and CEO

No. No, definitely not.

Albert Rice, Analyst

Okay. I guess the pass-through elements of what you have on dining, the pass-through elements of the wages for the hourly labor has always been a great aspect of the company. It's given you protection. I guess when you're in an environment like now, nursing homes are in a position where they have trouble raising the wage; they have to deal with their own workers and with your workers, raising and dealing with the increase in dining food input costs that they can only go so far, putting themselves in financial distress. Are we at that point yet or not really?

Matthew McKee, CFO

You're thinking about it exactly correctly, A.J., in that not only do they not necessarily have the financial wherewithal to increase those wages, they don't know where to take them. Once you let the toothpaste out of the tube, it's really hard to get back in. If you completely adopt the wage scale for what could be a moment in time, it's hard to walk that back. I mean once that starting wage gets from $9 an hour to $11.50, that's the new norm. Part of the challenge is that when there's a customer who's slow to respond to adjusting the wage scale, it can create operational challenges for us. It can make it harder to get people in the front door, creating challenges in keeping them from walking out the back door. If this pressure continues, we may need to utilize overtime. As you know, A.J., we joke about overtime being the dirtiest word in our business. It's a budget killer. The commitment that we make to the residents in these facilities and getting the job done for our clients means we will utilize whatever it takes to leverage the employees we have in the building.

Theodore Wahl, President and CEO

A.J., I would just add that what hasn't changed is that our approach is fair and beneficial to the client. It's fair to the client in the sense that if we were not there, they would be subject to the same wage pressures and have to make the same adjustments. It's beneficial because the adjustments they would otherwise have to make would likely be on a larger employee base due to the efficiency we have in operating the business. Those two components to any discussion in any contractual or otherwise, are omnipresent in the room. It's more of a process in this unprecedented situation as opposed to in past years.

Albert Rice, Analyst

Okay. I'm trying to understand this unique situation. When either you or the nursing home offers a referral, sign-on, or retention bonus, does that automatically factor into your rate structure? Or when you're paying that, does it get passed through to the other party, or do you have to absorb that cost? Do these bonuses affect the standard hourly rates?

Matthew McKee, CFO

The distinction relates to which party initiated the bonus program. If you think back to the pandemic, customers throughout the country were instituting attendance bonuses and hero bonuses for those folks that were coming in to do yeoman's work in these facilities. When a bonus is initiated by the customer, they typically ask us to pass that availability along to our employees, and we can get reimbursed by the customer for those types of bonuses. That's different from a bonus that we would implement that would ultimately serve to our benefit in our ability to staff the facility. If we're offering referral bonuses to span out the availability of labor in a particular market, that's a decision we would make and ultimately bear that cost. Obviously, those decisions are made in service of the client and the resident. There's nothing that stops us from going back to the client to discuss the possibility of getting reimbursed. We generally don't have the contractual availability to directly pass those through, but it's certainly a discussion we have with the client.

Operator, Operator

Your final question comes from the line of Brian Tanquilut with Jefferies.

Jack Slevin, Analyst

It's Jack Slevin on for Brian. Just a quick one to close out here. Just as it relates to genesis, any update you can give there? Or could you let us know kind of what your thoughts are given the current environment on whether or not there's a risk that rate and payment concessions would need to be extended past their current timelines?

Theodore Wahl, President and CEO

In terms of the relationship, it continues to be a strong partnership on the facilities right on through their C-suite. They're a great partner, and we have frequent communication. They continue to execute on their restructuring plans that they've outlined with us prior to them going private. Changes with new management and new leadership continue to innovate throughout the exercise of that plan. It's a strong relationship, and nothing risks that you outlined. That's no different than any customer in this environment. We're closely watching and monitoring all of our customers. The best way to judge any client's creditworthiness is by them living up to their financial commitments. To date, they've continued to do that.

Operator, Operator

I will now turn the call back over to Mr. Ted Wahl for some final remarks.

Theodore Wahl, President and CEO

Thank you, Tamia. While we are mindful of the near-term challenges, we will continue to use our longer-term view as our true north as we navigate these uncertain times with discipline, intention, and purpose to best position the company for when we emerge from this unprecedented period. In the quarter ahead, we will closely monitor industry recovery, occupancy trends, and further government funding as we prioritize recruiting and retaining staff, working with our clients on updating employee wage scales, and remaining laser-focused on managing the elements of our business within our control. We'll also keep an eye towards opportunistic growth and remain committed to internal investment and returning capital to shareholders. Looking out further, we remain confident in the longer-term growth outlook for the company given our market leadership, efficient operating model, and attractive demographics. On behalf of Matt and all of us at Healthcare Services Group, I wanted to thank Tamia for hosting the call today, and thank you again to everyone for joining.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.