Healthcare Services Group Inc. (NASDAQ:HCSG) has maintained its 2024 cash flow projections despite reporting a net loss in the second quarter of 2024. The company's revenue matched expectations at $426.3 million, but they faced a net loss of $1.8 million and a diluted loss per share of $0.02, including client restructuring charges.
HCSG is addressing delays in cash collections linked to the Change Healthcare (NASDAQ:CHNG) cyberattack and anticipates a stronger second half of the year with projected revenues of $425 million to $435 million in Q3 and $430 million to $440 million in Q4.
Key Takeaways
- Revenue for Q2 2024 met expectations at $426.3 million.
- Net loss reported at $1.8 million with a diluted loss per share of $0.02.
- Cash flow from operations stood at $16.3 million, with adjusted cash flow used in operations at $2.4 million.
- Delays in cash collections due to the Change Healthcare cyberattack, expected to recover in H2.
- Positive industry trends observed, with a focus on growth and managing costs.
- The company is fully staffed with managers and comfortable with the anticipated revenue range for the upcoming quarters.
Company Outlook
- HCSG reaffirms its 2024 adjusted cash flow forecast of $40 million to $55 million.
- Revenue estimates for Q3 and Q4 are set between $425 million to $435 million and $430 million to $440 million, respectively.
- The company aims to manage the cost of services within the 86% range.
- Targeted SG&A range is expected to be between 8.5% to 9.5%.
Bearish Highlights
- The company experienced a net loss this quarter and delays in cash receipts due to external factors.
Bullish Highlights
- HCSG sees workforce availability, rising occupancy, and stable reimbursement as positive industry trends.
- Investments in employee engagement, marketing, branding, and technology are expected to drive growth.
- Client retention remains strong, and the company is optimistic about growth opportunities in the education sector.
Misses
- Adjusted cash flow used in operations was $2.4 million.
- Delays in cash collections impacted the financials, although this is expected to improve.
Q&A Highlights
- Executives expressed confidence in achieving targeted revenue leverage and SG&A range.
- The company plans to enhance payment frequency and use repayment plans to recover funds.
- Investments have been made to expand the company's footprint and improve operations.
Healthcare Services Group (HCSG) has faced some challenges in the second quarter of 2024, including a net loss and delays in cash collections due to a cyberattack affecting their clients. However, the company remains optimistic, underpinned by strong industry trends and strategic investments aimed at fostering growth.
With a full managerial staff and a focus on maintaining cost efficiencies, HCSG is poised to meet its revenue and adjusted cash flow targets for the year. The company's emphasis on client retention and expansion into the education sector further supports its positive outlook for the future.
InvestingPro Insights
Healthcare Services Group Inc. (HCSG) has demonstrated resilience and strategic focus in the face of recent challenges. To provide investors with a deeper understanding of the company's financial health and market position, let's delve into some key InvestingPro Data and InvestingPro Tips.
InvestingPro Data highlights include a Market Cap of approximately $831.47 million and a P/E Ratio that stands at 19.38, which is fairly reasonable when considering the near-term earnings growth potential. The company's Price to Book ratio is at 1.72, indicating that the stock might be reasonably valued in terms of its assets.
An InvestingPro Tip worth noting is that HCSG holds more cash than debt on its balance sheet, which is a positive sign for financial stability and operational flexibility. Additionally, the company has a history of dividend reliability, having raised its dividend for 20 consecutive years. This track record may appeal to income-focused investors looking for consistent returns.
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Full transcript - Healthcare Service (HCSG) Q2 2024:
Operator: Good morning and welcome to HCSG Inc's Second Quarter 2024 Earnings Call. All participants are now in a listen-only mode. After the speakers' remarks, we will have a question-and-answer session. [Operator Instructions] 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 statement 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. At this time I would like to turn the call over to Ted Wahl, President and Chief Executive Officer. Please go ahead.
Ted Wahl: Thank you and good morning everyone. Matt McKee and I appreciate you joining us today. We released our second quarter results this morning and plan on filing our 10-Q by the end of the week. Today, in my opening remarks, I'll first discuss our Q2 financial highlights and key accomplishments. I'll then share our perspective on the latest industry trends and developments, and then lastly I'll provide an update on our second half of the year priorities and outlook for the rest of the year. I'll then turn the call over to Matt to provide a more detailed discussion on the quarter. So with that overview, I'd like to now discuss our Q2 financial highlights and key accomplishments. For the three months ended June 30, 2024, we reported revenue of $426.3 million in line with expectations, net loss and diluted loss per share of $1.8 million and $0.02, which includes the $0.22 impact of client restructuring charges and reported cash flow from operations of $16.3 million and adjusted cash flow used in operations of $2.4 million. Our field-based team delivered strong service execution leading to another successful quarter of managing cost of services, excluding CECL within our targeted range. Additionally, we achieved over 96% cash collections during the quarter, which fell short of our Q2 target but showed improvement compared to last quarter and the same period last year, and importantly keeps us on track to meet our 2024 adjusted cash flow objectives. We highlighted this issue last quarter, but the majority of our customers affected by the February Change Healthcare cyberattack applied for CMS' accelerated and advanced payments program and expected that supplemental funding in late April to early May. Unfortunately, many of those affected clients encountered delays in receiving that supplemental funding. As of today, we are confident that all of our affected customers that applied have received their supplemental funding, and we expect to make up the $12 million to $15 million change healthcare related delay in cash collection in the back half of the year, which is why we're reaffirming our 2024 adjusted cash flow range of $40 million to $55 million. Our second quarter results also include the impact of the previously announced LaVie Care Centers' Chapter 11 filing. The recent restructuring activity we've seen, including LaVie’s, is the result of conditions and events that occurred over the course of the past few years, as opposed to a reflection of the sector's current state. And while this restructuring impacts our second quarter results, longer term, it only further strengthens the financial health of our customer base. I'd now like to share our perspective on the latest industry trends and developments. Industry fundamentals continue to trend positively, highlighted by a slow but steady increase in workforce availability, with the industry adding over 100,000 jobs since the beginning of 2023 rising occupancy, which now sits at 79.3%, 12 points higher than the January 2021 low, and just 1% under pre-pandemic levels and a stable reimbursement environment, which includes CMS' proposed 4.1% increase in Medicare rates for fiscal year 2025, as well as continued, positive reimbursement trends at the state level. On the regulatory front, we continue to believe CMS' final minimum staffing rule will either undergo significant revision during the extended phase in period or will not be implemented, especially given the pending litigation and the potential for legislation or administration change. Specifically as it relates to the pending litigation, the American Health Care Association, the Texas Healthcare association and three Texas SNFs, filed a lawsuit in the Northern District of Texas on May 23. They are represented by a former U.S. solicitor general, Paul Clement, arguably today's top constitutional and Supreme Court lawyer. ACCA and the other lead plaintiffs believe the arguments of their case are very strong on the merits and even further bolstered by, SCOTUS’ recent ruling that overturned the Chevron (NYSE:CVX) doctrine. As we head into the second half of the year, our three strategic priorities remain unchanged. First is continuing to manage cost of services within our 86% targeted range, building on the operational momentum achieved in the second quarter. Second, is driving growth. We are raising our Q3 and Q4 revenue estimates to $425 million to $435 million and $430 million to $440 million, respectively, to reflect our second half of year top line expectations. Third is collecting what we bill. We expect cash collections to continue to gain strength over the next six months and further still into 2025 and reaffirm our 2024 adjusted cash flow forecast of $40 million to $55 million. I would like to elaborate on our second priority, driving growth. The past five years have presented unprecedented challenges to our industry, including a record number of ownership changes, the operational and clinical disruptions of COVID-19, a significant workforce exodus, depressed occupancy levels and rapid wage inflation. Clearly, these were not ideal conditions to expand our footprint. However, our dedicated team members have persevered and the industry is steadily rebounding. Sector occupancy is approaching pre-pandemic levels and we have growing confidence in our ability to assess the financial stability of potential customers. Most importantly, our value proposition for both existing and new clients has never been stronger, which positions us perfectly to capitalize on the multi-decade secular tailwind that will benefit the sector for years to come. This is truly an exciting time for our organization as we shift our focus back to growth. We are confident that by leveraging our talent, reputation and value proposition, we will deliver on our commitment to our existing customers while capitalizing on the abundant new opportunities we've identified to achieve top line growth. We are eager to share our progress with you in the coming quarters and years. So in closing, our strong business fundamentals and strategic priorities position us to boost profitability, growth and cash flow in the second half of the year, and we remain confident in our ability to deliver meaningful long-term shareholder value. So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.
Matt McKee: Thank you, Ted, and good morning, everyone. Revenue was reported at $426.3 million, in line with the company's expectations of $420 million to $430 million. Housekeeping & laundry segment revenues and margins were $191 million and 8.9%. Dining & nutrition segment revenues and margins were $235.3 million and 6.4%. And we're raising our Q3 revenue estimate to $425 million to $435 million and our Q4 revenue estimate to $430 million to $440 million to reflect our second half of year top line expectations. Cost of services was reported at $384.7 million or 90.2%. Cost of services includes $31.7 million or 7.4% of bad debt expense. Of the bad debt expense, $21.9 million or 5.1% related to client restructuring activity and $9.8 million or 2.3% related to CECL aging-related expense. Cost of services also included a $5.2 million or 1.2% benefit related to favorable workers' compensation and general liability loss development trends. Our goal is to continue to manage cost of services in the 86% range. SG&A was reported at $44.4 million or 10.4%. SG&A includes a $1.3 million or 0.3% increase in deferred compensation, and our goal continues to be achieving SG&A in the 8.5% to 9.5% range. Other income was reported at $0.9 million or 0.2% and other income includes a $1.3 million or 0.3% increase in deferred compensation. Net loss and diluted loss per share were reported at $1.8 million and $0.02 per share, which includes the $0.22 per share impact of client restructuring charges that Ted mentioned in his opening remarks. Adjusted EBITDA was $4 million or 0.9%, and the company is no longer including bad debt adjustments or self-insurance actuarial adjustments in adjusted EBITDA. Instead, we will be providing disclosure for those items as part of our quarter analytics and supplementary financial information. Accordingly, the calculation of adjusted EBITDA for the three and six month periods ended June 30, 2024, will be different from the calculation of adjusted EBITDA used in prior periods. Cash flow from operations and adjusted cash flow used in operations were $16.3 million and $2.4 million, respectively, and DSO for the quarter was 85 days. So with those opening remarks, we’d now like to open up the call for questions.
Operator: Thank you. [Operator Instructions] Our first question comes from Sean Dodge from RBC (TSX:RY). Please go ahead. Your line is open.
Sean Dodge: Yes. Thanks. Hi, good morning. Ted, you reaffirmed the full year cash collections target the $40 million to $55 million, and talked about the supplemental payments coming through in the improving backdrop. Just as we try to understand kind of the pacing toward this, is there anything you can share more explicitly around what you expect Q3 to look like?
Ted Wahl: Yes. Sean, how are you today? I know we noted in the opening remarks the 90 – over 96% cash collections during the quarter, and as you highlighted, it did fall short of our $5 million to $15 million targeted range that we had for the quarter. But I do think it’s important to note that it showed significant improvement when you compare it to last quarter’s 95% and really the same period last year of 92%, which certainly speaks to the trajectory of the industry recovery. I know we’ve talked about cash collections as being a lagging indicator, especially compared to the recovery and the consistency we’ve seen in cost of services and now the re-ramping of our growth, so that we continue to hold that view. I think, importantly, it keeps us on track where we’ve performed in Q1 and Q2 first half of the year to deliver on those 2024 cash flow objectives that we’ve shared and we reaffirmed that this quarter. At the end of the day, what ended up being – what ended up happening was that some of our clients who applied for CMS has accelerated and advance payments in late – as an expected payment in late April, early May, ended up having delays to those receipts. So for us, there’s a cascading effect when they were delayed on their cash receipts that in turn delayed the repayment plans that we had scheduled. I think on a positive note, as of today, we believe all of those affected customers have received their supplemental funding, and we expect to make up that shortfall in the back half of the year, which, again is why we reaffirmed the $40 million to $55 million. I think big picture, Sean, heading into the second half of the year and certainly into 2025, we continue, our goal continues to be to collect what we bill in the quarters ahead. And we’re going to focus on increasing that payment frequency from monthly to a higher frequency, weekly, ideally, if not weekly, biweekly. And we have over 60% of our customers that are now on a higher frequency payment schedule. We’re going to continue to proactively utilize repayment plans like I just referenced, but certainly promissory notes ideally in recovering some of the monies from the first half of the year and prior shortfalls. And then I think, especially as we look to this next period of growth, remaining disciplined in our decision making for both new and existing business. So again, very excited to be able to reiterate that $40 million to $55 million target. And in terms of the Q2 cash flow delays, it truly was just timing related.
Sean Dodge: Okay. Great. And then the revenue growth that you’re guiding to, is that coming mostly from the dining cross-sell, or is education contributing any of that? And then where are you from a manager training standpoint? Are you fully staffed at this point with enough managers to fill the facilities you need to drive the growth that you’re guiding to in Q3 and Q4? You still need to do some more hiring and training to meet that.
Matt McKee: Yes. This is Matt. Good morning, Sean. I would address the last portion of your question first, and you’re exactly right. Your intuition is spot on, Sean, in the sense that management development is first and foremost. None of the growth is possible without having the requisite number of managers and specific management capacity in any geography in which we're looking to expand our footprint, adds to the complexion of growth in the near-term. It will be largely driven by cross sell of dining from a dollars and cents perspective. But we do remain committed to driving new environmental services opportunities within the core market. And then I would say, sort of secondary to all of the above would be education opportunities. So we're comfortable, obviously, offering the anticipated range for both Q3 and Q4. We've onboarded a modest amount of new business in Q2, and on the or in the midst of prospect discussions that will amount to more meaningful adds, obviously, in the coming quarters, some of which are already signed and started. Some are signed, but not yet started, and then others are simply further along in the contracting stage. So we've talked about previously, while having improved visibility into the pipeline of new business, timing is always a bit of a question mark. But back to your question, Sean, as far as the drivers of that top line growth, it would likely be, in this order, dining cross-sell, environmental services, new business opportunities, and then education.
Sean Dodge: Okay, great. Thanks. Thanks for the time.
Operator: Our next question comes from Bill Sutherland from Benchmark. Please go ahead. Your line is open.
Bill Sutherland: Thank you, Lily. Good morning, guys. I assume the guidance is – I guess it's assuming that the LaVie facilities are all continuing with you guys.
Ted Wahl: That's correct. I know, we – obviously, we made the announcement previously regarding the impact that restructuring would have on our quarterly results. But I do think it's important to note, as you mentioned, that we absolutely expect, we are continuing services, and we expect to continue to provide services and do not expect any impact on go forward revenues, earnings or collections. And I know we mentioned it in that previous release, but really ultimately think that, this action that they took makes them stronger and really better positions the partnership moving forward, Bill.
Bill Sutherland: Got it. And I know that they're pretty heavily weighted in Florida, at least the ones that you're with. And Florida Medicaid has been slow to update rates, and I think something's coming soon. Maybe you could give us some color on that. Maybe what's happening with a couple of your other key states in terms of the Medicaid rate picture?
Ted Wahl: Yes. I know we had talked about just overall from an industry perspective, the stabilizing, if not positive reimbursement environment, certainly at the federal level. I think there's been some recent positive news with CMS's proposed 4.1%. We talked about that a bit last quarter. That'll get commented on through the process, the engagement process with the provider community, and they'll come out with a final rule we expect to see that in the coming weeks, if not, by the end of the summer. So that's, I think, been well received by the industry and there's potential upside there. And then beyond that Medicare payment rule, there's been a clear shift in the provider community's focus and really efforts from the federal level to the state level. And you mentioned Florida, they are due for a nearly double-digit type of increase in their Medicaid rate. And I'd say another notable state, Kentucky, is going – we're going to see some ongoing and improved reimbursement there. That's going to be north of 10% in terms of the impact that's going to have on the provider community. And then we’ve talked about some of these others before, whether it be North Carolina, Illinois, Pennsylvania continues to work towards stabilization. Texas has had some positive reimbursement news. So we track and trend this information on a consistent basis, Bill. So, not that it determines a decision on whether or not we would work with or continue to work with a provider, but it does feed into that whole holistic picture that we like to paint when we’re making our assessments on a given relationship. So, we continue to monitor that closely, but overall, favorable trends at the reimbursement level.
Bill Sutherland: All right. Okay. Thanks, Ted.
Ted Wahl: Thank you, Bill.
Operator: Our next question comes from Andrew Wittmann from Baird. Please go ahead. Your line is open.
Andrew Wittmann: Great. Good morning. Thanks for taking my question, guys. I just thought I would ask first here on a little bit more detail on the $9.8 million of aged receivables that you guys called out in the quarter. I was just wondering if that is one customer or a couple of larger customers or if this is just kind of broad based and lots of little things that added up to that. I think some context on that would be helpful. And also if you could just comment on if those write downs are going to continue as existing customers or if those are reflective of something other than that.
Ted Wahl: Yes. I guess specifically, Andy, as it relates to the aged portion, we thought that was valuable disclosure and information to be able to provide. As we talked about before, CECL is calculated using a historic loss rate formula that’s based on aged accounts and notes receivable, and then it’s cut off as of the balance sheet date. So essentially what that in plain English is suggesting is it’s really timing related. The reason, because we were below our cash flow targets and I highlighted the primary reasons why really related to the delays in our customers receiving some of their CMS advance payment receipts. And then in turn, our repayment plans getting pushed out further into the second half of the year. As those accounts aged further, they rolled over into a bucket that had a higher loss rate assigned to them. So it’s non-cash, we believe it’s temporary. And the reason we thought, aside from providing context for this quarter, moving forward we will likely see some quarters as our cash collections accelerate. Certainly where that if CECL aged bucket normalizes, we could see it where it’s actually reverses in total and becomes income in a quarter. So we think whether it’s regardless of what way it cuts, we think it’s important to share.
Andrew Wittmann: Yes. That’s super helpful context. I appreciate that, Ted. Excuse me. I guess kind of related, but not related to that is just your definitional changes here on adjusted EBITDA, not adjusting for CECL. And you guys didn’t provide the adjusted EPS guidance this quarter. I was just wondering, was that a result of – is that just a philosophical change? Did you have a conversation with the SEC? Or what was the impetus, I guess, for the change in approach on these adjusted metrics that we’ve been using the last few quarters?
Ted Wahl: Yes. And it’s a great question, Andy. We’re always open to feedback from key stakeholders on how to maximize transparency and disclosure. We have had some engagement, even with shareholders about their perspectives on how to best present the information. We did have some recent engagement with the staff as well regarding non-GAAP reporting. And we concluded ultimately that items like bad debt and even actuarial adjustments to self-insurance, whether they’re related to prior periods or not are most appropriately excluded from non-GAAP, at least in the context of HCSG and the type of business that we’re in and the type of industry that we’re in. So, all of that said, I did want to reiterate, we're going to continue providing similar, I would argue, even more enhanced disclosure for items like bad debt expense and insurance adjustments that may impact comparability and to provide a would be investor or existing stakeholder and shareholder perspective on, in making their decisions. So again, we think all the more information the better and we thought it was valuable to break it out the way we did.
Andrew Wittmann: Okay, that's helpful. And then last question for me just on the SG&A comment and the 9.5% target that you guys have talked about for some time, I don't know if you wanted to just talk a little bit about what your outlook could be there. Obviously with the second half growth ramping, I think leverage has always been the key to that SG&A target achievability. I assume that that's unchanged, that revenue leverage is still the key thing here. Ted, Matt, do you have a view as to when you think that that range is realistic?
Matt McKee: Yes, harder to quanta to sort of specify date range necessarily Andy, or even sort of a top-line trigger that would see us at that level. But you're exactly right in your logic that the leverage exists as we grow the top-line. Certainly in advance or in the lead up to on-boarding some of this new business. There's been investments that we've made, to be ready to onboard new facilities and expand our footprint. We've continued to make investments in employee engagement and experience that we've talked about previously, ongoing investments in marketing and branding and positioning for the company and then technology investments, leveraging technology as appropriate to further enhance and optimize our operations. So, all of the above, certainly has led us to those elevated levels and the leverage does exist in the top-line growth. So apologies for not being able to offer any specifics on either timing or sort of a top-line threshold at which we'll see that pivot. But I guess the plainest way to say it would be to reiterate our confidence that with growth, we do anticipate getting back to that 8.5% to 9.5% targeted range.
Ted Wahl: Andy, I would only add a little color to our stubbornness of committing to 86% in that 8.5% to 9.5% range, even though we're overperforming on the cost of services side and we're underperforming relative to the financial metric and range on the SG&A side. I would propose, and without being able to draw a straight line between the investments we've made in areas like employee engagement and experience, marketing and brand positioning, even some of the tech investments we've made, there's absolutely some efficiencies within the four walls of the communities we service that we're garnering. Again, we're measuring that and we're gathering data. But we do continue, as Matt said, to believe the top-line is the shortest distance between point A and point B in terms of leveraging SG&A, both as a percentage of, if not an absolute dollars. But those investments we believe are wise and are paying off in terms of not just the bottom line, but also areas like customer satisfaction, employee retention and alike. So I just wanted to highlight that for you and for the benefit of everyone that's on the call.
Andrew Wittmann: Yep, that's a point taken. And I appreciate all the color, guys. Hope you have a good day.
Matt McKee: Thanks, Andy.
Operator: Our next question comes from A.J. Rice from UBS. Please go ahead, your line is open.
A.J. Rice: Hi, everybody. Maybe just a couple questions here. First, to go back to the cash flow comment, so the target’s $40 million to $55 million, which you need to make all of that in the back half of the year. I wonder, is there a way to quantify how much is still tied up and Change-related receivables that you expect to get as we move into the third quarter? How much is – where we ended the second quarter to year end due to a favorable payroll or unfavorable payroll swing, and then how much has really got to come from operations just to give us some perspective?
Ted Wahl: Yes. Specifically to the second part of your question, I will say at its base level, second quarter, in many respects, A.J., was just seasonality. We – from a targeting – from a cash collections target perspective, we had baked in a degree of seasonality in the sense that even though our business is not overly seasonal, you could go back year – many years in many different periods. And Q1 is typically our weakest quarter of cash collections. Q4 is typically our strongest. And then you can – you gain strength throughout the year. So Q2 just standing on its own was in line. What didn’t happen, though, was that anticipated carryover of a portion of the Change Healthcare delays. We estimated $12 million to $15 million as being the total impact of those Change Healthcare related delays, a portion of those we expect it to recapture in Q2. Again, the good news is we’re expecting that to carry over into the back half of the year. So I would just add as well, we are off to a very strong start in July and expect to continue those positive trends through the quarter and through the end of the year, which is why, as you highlighted, what we’re implicitly suggesting is $50 million to $65 million of adjusted cash flow in the back half of the year, which would offset the cash used in [ph] operations through the first half of the year.
A.J. Rice: Okay. Can you just give us an update on where things stand with respect to underlying hourly wage increases that you and your clients are seeing? And are you able to capture that fully from your clients as you are experiencing that? And then, is there anything on the food inflation as well worth calling out?
Matt McKee: Yes. A.J., we’re seeing the unemployment rate has climbed to 4.1%, which is the highest rate since November of 2021. And job postings continue to decline. We’re seeing that in the national data and for Healthcare Services Group. Wage growth appears to have more or less returned to its pre pandemic trends. So there’s definitely a mixed bag, but directionally, certainly stability. And from a Healthcare Services Group perspective, we do feel like we’re pretty darn close to operating at pre pandemic levels as it relates to employee retention, job postings, and our ability to hire and retain employees. And again, seeing a stabilization and a slowdown in wage growth. So all of that bodes well. I would note, and Ted mentioned this in his earlier comments, but the industry is still about 116,000 jobs short relative to pre pandemic levels. So we’re seeing definitely improvement. But from what was about a $0.25 million loss at its peak. So directional improvement there. More specifically, on the wage inflation, there’s a bit of a lag in the availability of those data. So we’re looking at Q1 wage inflation specifically in nursing and residential care facilities was around 1.2%, and that was up from 0.8% that we saw in Q4. Now, again, we’ve recalibrated our contracts to be able to capture that wage inflation, and there’s something close to real time, but absolutely have bolstered those agreements such that we can capture any and all of that wage inflation. So that certainly is favorable for us going forward. On the food side, you look at CPI for all items in the quarter, and it was 0.3%, which compared to 1.1% for Q1. Food at home, which is a more meaningful measure for us was down sequentially, actually showing 0.1% deflation that was aided by 0.2% deflation in the month of April, offset by 0.1% inflation in June. And then that compares again to the food at home at 0.4% in Q1. So just to remind you what we would have seen as the pass through in this quarter was 0.5% from the fourth quarter of 2023. That was ultimately passed-through customers in this quarter. And then that modest deflation that we saw in the second quarter of 2024 will ultimately be passed through by way of a modest reduction for clients in the fourth quarter of this year.
A.J. Rice: Okay, that's great. Maybe one last question. Obviously, a lot of focus on the back half of the year. If you are able to achieve your targets, any thoughts – early thoughts on 2025 and even long-term? What the sustainable growth might be? Do you have something you're sort of planning for thinking about at this point, or is it just too early to tell?
Ted Wahl: I think we'd like to finish the year, A.J. and we'll be in a position, I think, going into 2025 to be able to speak more specifically about that. But I guess at the highest of high levels, when we look out over the next three to five years, especially on the heels of the continued positive trends we're seeing in the industry, we'd still like to see a more even recovery. Matt, talking about even the, you have industry occupancy, which is nearly at pre-pandemic levels but yet you have 100,000 employee deficit within the industry. You wonder, how does A plus B equal C there, because the key to occupancy recovery is really having the available labor. The demand is there from a demographics perspective and from a need perspective, and the reason is because of the unevenness or the lack of an even recovery, meaning you still have winners, which are at or above pre-pandemic levels from an occupancy perspective. But then you have a group – a sub-group of facilities, namely the rural communities and certain select urban environments that are below pre-pandemic level still. So we'd like to see that even out a bit more to really have conviction, more specifically on like a year-to-year cadence. But again, at the highest level, we really see a mid-single-digits type top line type expansion which over the next three to five years, which we should be able to deliver on, and certainly being able to see some quarters or years where we're in the high – mid- to high-single digits if not touching something greater than that. So mid-single-digit range is where we certainly feel confident based off the data and the information we have today.
A.J. Rice: All right, great. Thanks a lot.
Operator: Our next question comes from Ryan Daniels from William Blair. Please go ahead. Your line is open.
Jack Senft: Hey, guys, this is Jack Senft for Ryan Daniels. Thanks for taking the questions. First, can you give us any insight into what client retention looked like in the quarter. I know there was the client bankruptcy that probably was overshadowing and probably some exits as well. So just kind of curious retention and even new ads looked like?
Ted Wahl: Yes. Good morning, Jack. I mentioned earlier that we did on-board a modest amount of new business, and the fortunate thing is that that was really offset by very modest customer exits. We did see north of our targeted level of retention, which historically had been 90%. So we did have a really strong quarter by way of client retention. Glad you bring that up, though because, circling back to the conversations that we've had with respect to revenue and top-line growth, we'd be remiss if we didn't remind everybody that, a component of that top-line growth is retaining our existing business. So, we don't foresee any significant exits up here in the near term, but always worth reiterating that, in the final stages of that ongoing industry recovery that Ted just mentioned, and with changes in facility, operation, or ownership that can alter our view on any piece of business or a portfolio. So we do have to remain nimble, and if we believe it's in our best interests in the near term and or long-term to exit a client group about whom we have concerns, then certainly we need to be able to do that. But overall, we do have confidence in our ability to retain that business net-net, ultimately deliver on those growth targets that we talked about not only in the back half of this year, but beyond that.
Jack Senft: Understood. Thanks. And just as a quick follow up too, last quarter, you mentioned that you were kind of at – sort of at the tail end of the selling season in the education space. So can you just talk about the puts and takes here, kind of how the selling season shaped up and maybe even visibility into possible growth opportunities in the space down the road? Thanks.
Matt McKee: Yes, we're not in a position to share specifics as yet, but directionally, I would share that, our campus services team, felt really strongly about how they pulled through that, “selling season”. I wouldn't want to be pinned down to be specifically defining any month or portion of the calendar as explicitly defined as selling season. But generally speaking, the proposals that they presented, the requests that they did receive for proposals, yielded fruit. And we feel directionally very positive. Would remind you that the total revenue for the education business is still less than 5% of total company revenue. So not meaningful enough yet for us to feel compelled to speak about it with any level of specificity, but directionally, we do feel like we had strong results in pulling through business opportunities. And as we get into the fall and ramping back into kind of the operational execution season for the education business, we'll be continuing to look at that portfolio and determine at what point it makes sense for us to be more specific in sharing some of those results.
Jack Senft: Understood. Thank you again.
Operator: We have no further questions. I would like to turn the call back over to Ted Wahl for closing remarks.
Ted Wahl: Okay, great Julianne. It's an incredibly exciting time for the company. The challenges we navigated the past few years have further solidified our value proposition, the durability of our business model and market leading position. The company's underlying fundamentals are as strong as ever. And with the industry at the beginning of a multi decade demographic tailwind, we are very favorably positioned to capitalize on the opportunities ahead and deliver meaningful long term shareholder value. So on behalf of Matt and all of us at HCSG, I wanted to thank Julianne for hosting the call today, and thank you to everyone for joining.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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