Healthcare Services Group (NASDAQ:HCSG) Q3 2026 Earnings Call

0:00 I appreciate the commentary on the comparable margins, but how should we think about the growth trajectory of this business or its cash conversion? And then do the contracts here, do they have similar pass-through protections? I would start with 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 end market. Our businesses are highly complementary of one another, starting with our deeply aligned cultures in 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. Next9 promotes an environment for an entrepreneurial spirit and promotion from within pathways very similar to HCSG.

0:55 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

1:05 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 family of brands, including Campus Services Group and Murray-Weather-Gozzi on the campus side, Nexstein with a focus more on the senior living and hospitality-driven markets, and then Healthcare Services, HCSG, is that core healthcare offering. So we're very well positioned for future growth and we're excited about the possibilities.

1:52 In terms of the contracts 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 there have been periods and pockets of elevated price movement with respect to food purchases. Great. Thank you. Your next question from the line of Ryan Daniels with William Blair.

2:40 Your line is open. Please go ahead. Yeah, hello, this is Matthew Mardula. I'm for Ryan. Thank you for taking all the questions. So I want to talk about the Q4 revenue guidance. So when I'm taking the midpoint of the Q4 revenue guidance, it implies roughly a 60 million sequential increase from Q3 compared with quarterly increases of about eight to nine million over the past two quarters. So how much of the Q4 increase is coming from the acquisition versus the organic segment? and then within the organic segment, it still seems like an increase compared to previous quarters. And of course, timing is going to be a big factor for revenue. But with that accelerated growth for the organic segment, what's giving you that confidence for Q4?

3:30 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. Got it. And then with SC&A as a percentage of revenue coming within the short-term guidance range this quarter. As you look forward, what are the key drivers that could create maybe some additional operating leverage and the timing of that for SG&A?

4:19 And then how should we think about the company reaching the maybe low end of that short-term guidance as a realistic 2027 opportunity, or is this kind of more of a longer term goal? So on the SG&A front, from our perspective, As we think about the composition of how SG&A is built up for us, I would approximate it as something that's called a half-fixed, half-variable. We have the growth momentum and we have the discipline around how we manage our costs with respect to vendors, employees, and other programs that go within SG&A. So we see a natural cadence driven by organic growth, inorganic growth such that comes down over time as a percentage of revenue.

5:09 So that's the story to an improving profile. That said, we'll always have situations and quarters 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 SG&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 SG&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.

6:04 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

6:26 be present as well, but we do think over a period of time without committing to a timeframe, We will look to bring SG&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 we'll try and create the balance between the two objectives there. Great. Thank you so much for taking my questions. And nice job on the quarter. Your next question from the line of Ryan Halstead with RBC Capital Markets. Your line is open. Please go ahead. Morning. Thanks for taking my questions. Maybe just to come back to the NextDyn acquisition, just to clarify the first point, are there specific integration milestones that we should be looking out for, or is the assumption that it's fully integrated effective the October 6th close date?

7:31 Yeah, so from our perspective, obviously, we do have a very comprehensive integration plan in place that applies at the broader 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 an external and reporting perspective, I think you should take the integration as a done deal the moment we announce. Again, I think we say that not because we don't and many others. We also want to be cognizant of the fact that we're talking about a transaction

8:09 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, 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 strategic rationale, you know, just in terms of potential synergies, I mean, I think you called out that you're looking at it as having a next time having a double digit growth opportunity.

9:11 Are there, you know, revenue synergy opportunities contemplated in that goal? Is that also inclusive of some of the commentary that you made about continuing to pursue inorganic growth opportunities. Is that sort of assuming you're going to continue to kind of grow around the senior housing opportunity and the NextDine platform? Appreciate it. Yeah, nothing planned on the M&A or inorganic side presently with NextDine, but certainly, and it gets back to my thoughts and comments around team play. We are going to proactively, 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, CSG, Meriwether-Gozzi on the campus side, and then Nexstein to share ideas and create possibilities and opportunities for the future.

10:14 So in terms of the day-to-day that's happening in the field with our clients, 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 ideas, share best practices, and

10:42 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 a final resolution? How should we think about the remainder? That's TBD. You know, Vikas 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 are one part of it and how they're determined, the ultimate amount of claims filed, and then the amount of assets available for distribution. So the resolutions of those variables, Ryan, are just not known.

11:30 and that's why we aren't able to specify a time period or 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 maybe kind of the model here. So first one here, Vikas,

12:07 the 6.1 benefit that you took, can you talk about the split by segment so we can just understand kind of underlying with those segments reported in gross 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 86. And I don't know, are you just, is that, and this isn't new, but are you protecting in case bad debt steps up again? Is that the swing factor?

12:53 Is there something else that we should think about that would take you to that 86 level? Again, just wondering if there's anything else there in 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. No, that's a very fair question, Andy. Look, we've been fortunate to deliver the kind of performance we've delivered year-to-date on a LTM basis, but the way we look at these metrics and goalposts 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

13:38 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 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%. And if you were to look at the data

14:03 in an alternative fashion, strip out bad debt expense, strip out the workers' comp benefit from cost of sales, and then look 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' comp 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.

14:49 How much time we spend with clients, how we interact with them. But that will not guarantee that there could be clients who could intentionally or unintentionally face challenges. And 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 taper that number off, but again,

15:20 when you talk about an organization with close to 40,000 employees and workers' comp being a metric that's driven by number of incidents and the severity, All the efforts we've put into managing that expense down through education, through safety procedures are valid, but you could always find yourself in a situation where there is an unpredicted spike in incidence and severity, which reverses the course for us on cost of sales. So if your question is completely valid, it's just that we just don't have the right data points to go back and say 86% should be something else. Yeah. Okay. That's a totally fair answer. I appreciate you running me through that.

16:07 Next, I wanted to ask a little bit more on Nextdyne here and just maybe the cost. I know you've only owned this thing for a couple of weeks here, but to the extent you can help us, it could kind of help you to get kind of the 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 SG&A 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 add an amort number, obviously non-cash, but has an effect there.

16:54 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 earn out.

17:05 I think you mentioned that there was an earn out 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 can think about it like you're thinking about it would be some of the questions as it relates to NextDyn Accounting. Thanks. Yeah, fair enough. So again, as we think about the, you know, P&L

17:27 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&Ls for us, you can keep using the existing company-wide margin profile. Am I saying that their SG&A percentage is identical to ours? No, we are not. But that said, even if the SG&A for Nextline 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.

18:44 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're working through those numbers right now. I think it will be appropriate perhaps to touch upon that topic in

19:05 our next earnings call when next time we'll get picked up in our reported numbers, but we don't have much to share on that topic right now. To give you an example, the intangible assessment typically takes a few weeks after transaction close. 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 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'll 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

19:56 and EPS numbers, but there is also the offset. We've basically used 90 million plus of our own cash that was earning interest in money market mutual funds and the likes. which will no longer be at our disposal. So there will be an offset to net income from basically losing interest income on close to $90 to $100 million 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 profile. But to be clear, you expect it to be accretive to EPS even after even including the penalty of not having interest income.

20:43 Is that correct? Like you're just going to earn more than the out guy. Just want to make sure. Okay. Yep. Okay. And then, Matt, just on the accrual days, can you just remind us how many days accrual is in 4Q? And then I think all of us are going to be flipping to look more closely at 2017. and so maybe people are going to want to try to get the seasonality for cash flows dialed

21:10 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, 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 negative impact on the reported cash flow. I'm looking ahead to 2027 Q1.

21:45 It'll be about a $19 million positive effect. It's a six-day increase from five days in Q4 to 11 days in Q1. Q2 should have about a negative $9 million effect on reported cash flow. So that's a two-day decrease from 11 days Thank you very much. in Q4. And obviously, Andy, as we continue to grow the business and grow payroll, there'll be modest impact as to the effect of a particular day of payroll.

22:39 But directionally, hopefully this is helpful for you from a modeling perspective. Yeah, I wanted to make sure I captured that correctly with the next Dynacquisition contributing more revenue now. 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.

23:33 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 Matt, Vikas and all of us at Healthcare Services Group, Ben, thank you for hosting the call today and thank you again to everyone for joining us.

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