Healthcare Services Group Inc (HCSG) 2020 Q2 法說會逐字稿

The matters discussed on today's conference call include forward-looking statements about the business prospects of Healthcare Services Group, Inc. within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often preceded by words such as believes, expects, anticipates, plans, will, goal, 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. 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.'s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, and forward-looking statements are not guarantees of performance. Some of the factors that could cause future results to materially differ from recent results or those projected in forward-looking statements are included in our earnings press release issued prior to this call and in our filings with the Securities and Exchange Commission, including the SEC's ongoing investigation.

There can be no assurance that the SEC or another regulatory body will 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 distraction to management. The ongoing 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.

Ladies and gentlemen, thank you for standing by, and welcome to the Healthcare Services Group, Inc. 2020 Second Quarter Results Conference Call. (Operator Instructions) I would now like to turn the call over to your host, Mr. Ted Wahl, President and CEO. Please go ahead.

Thank you, Sharon, and good morning, everyone. Matt McKee and I appreciate all of you joining us for today's conference call. Yesterday, we released our second quarter results and plan on filing our 10-Q by the end of the week.

First and foremost, and on behalf of all of us at Healthcare Services Group, I want to extend our deepest sympathies to those whose health and well-being have been affected by COVID-19. In the face of these unprecedented challenges, it's been beyond inspiring to witness our 8 CSC heroes as they, alongside our clients' employees, positively and profoundly impact the lives of America's most vulnerable each and every day.

As we continue our intensive focus on mitigating the operational impacts of the virus, we remain steadfast in our commitment to support our customers in the care of their patients and residents while simultaneously ensuring the health and safety of our most valued resource, our employees.

We are pleased with our strong operating results and service execution during the quarter. Today, our value proposition is more compelling than ever before. By prioritizing systems implementation and adherence, increasing customer payment frequency and management recruitment and development over the past couple of years, along with investments we've made in technology and programmatic enhancements to our workers' comp and GL program, we are well positioned to thrive in the current environment and in the new norm to come.

As we continue to navigate this crisis, we will continue to assess the impact of COVID-19 on our business and our industry, including the trends we're seeing with regard to lower census and increased cost. It's important to recall that prior to the onset of the pandemic, sector fundamentals were improving on the heels of positive trends around occupancy, reimbursement and lease costs. And while COVID-19 has presented the industry with its share of near-term challenges, we've been very encouraged by the swift and decisive federal and state agency actions to financially support providers in combating this crisis, and we continue to see that support be put to good use on the front lines.

We believe that due to its needs-based nature and multi-decade demographic tailwind, the industry's pre-pandemic state of more favorable operating trends will return postpandemic. Looking ahead, we will continue innovating and managing our business, coordinating with nursing departments to do our part in the infection prevention and control continuum and remaining flexible in responding to our client partners' evolving service level, staffing and supply chain needs. At this time, we will continue with our cautious view on growth as we make our way into a new norm and above all, remain deeply committed to making decisions that best position us to deliver shareholder value over the long term. So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Thanks, Ted. Good morning, everyone. Revenue for the quarter was $452 million with housekeeping & laundry and dining & nutrition segment revenues of $227.6 million and $224.4 million, respectively. Revenue included $17.2 million of COVID-19-related supplemental billings, primarily related to employee pay premiums, which were initiated by and passed through to customers. This was offset by temporary decreases in recurring billings resulting from census-driven cost reductions in staffing and purchasing, most of which were initiated in the latter part of the quarter.

Looking ahead to the relative impact. We entered the third quarter with a recurring billing run rate of approximately $430 million and would expect these temporary reductions in costs and recurring billings to remain in place until census recovers and our staffing and purchasing levels increase accordingly, which is very much appreciated by our customers.

Net income for the quarter came in at $24.3 million, and earnings per share was $0.31 per share. Direct cost of services was $387.5 million or 85.7% as the majority of account managers who had transitioned out of a facility we're no longer servicing are now assigned to new facilities at which they are budgeted. Overall, our near-term goal remains to manage direct costs at or below 86%.

Housekeeping & laundry and dining & nutrition segment margins were 11.1% and 8.3%, respectively. SG&A was reported at $41.5 million or 9.2%. After adjusting for the $6.5 million increase in deferred compensation, actual SG&A was $35 million or 7.7%. And we expect SG&A to remain in the 7.5% to 8% range in the near term as those costs are largely fixed but continue to ultimately target SG&A of 7.5%, excluding any COVID-19 or SEC-related costs, with the primary pathway to leverage that existing and top line growth.

Investment and other income for the quarter was reported at $7.4 million. After adjusting for the $6.5 million change in deferred compensation, actual investment income was around $900,000. We reported an effective tax rate of 24% for the quarter and expect our tax rate for 2020 to be in the 24% to 26% range, including WOTC.

To the balance sheet. At the end of the second quarter, we had cash and marketable securities of over $170 million and a current ratio better than 3:1. Cash flow from operations was $79.7 million, inclusive of the $20.7 million increase in accrued payroll, $15.4 million of which was related to the deferral of payroll taxes under the CARES Act.

And because we had previously called out the quarter-to-quarter impact of 2020 payroll accruals, for the rest of the year, we're expecting payroll accruals of 4 days in the third quarter and 12 days in the fourth quarter. Ultimately, the payroll accrual only relates to timing and the impact washes out through the full year. Additionally, we expect an incremental $15 million or so in payroll accrual in both Q3 and Q4, resulting from that payroll tax deferral under the CARES Act, to be paid at the end of 2021 and 2022. DSO for the quarter was 60 days, down 2 days from the previous quarter.

We're pleased with the ongoing strength of our balance sheet and the ability to support the business while continuing to return capital to HCSG shareholders. We announced yesterday that the Board of Directors approved an increase in the dividend to $0.20375 per share, payable on September 25, 2020. The cash flows and cash balance is supported, and with the dividend tax rate in place for the foreseeable future, the tax dividend program continues to be the most tax-efficient way to get free cash flow and ultimately, maximize return to the shareholders.

This will mark the 69th consecutive cash dividend payment since the program was instituted in 2003 and the 68th consecutive quarterly increase, that's now a 17-year period that's included four 3:2 stock splits. We recognize the dividend is important to our shareholders, and we've increased it in line with our performance track record. So with those opening remarks, we'd like to now open up the call for questions.

(Operator Instructions) And the first question comes from Sean Dodge with RBC Capital Markets.

Maybe on the -- starting on the sales front. Ted, you mentioned a cautious view on growth. Can you talk a little bit about the demand you're seeing for new outsourcing, new facility as you deployed effectively all the spare managers into existing facilities? So it looks like, at least for the time being, there isn't anything significant you expect. But any color on how long you think this could last when you might start adding new facilities again?

Yes. It's a great question, Sean. It's good to talk to you. We had hoped to have had greater clarity by midyear with -- especially coming into the year with the transition from PDPM. That would have been completed. And even in the COVID environment, we would have had 4 months or so of operating in a COVID world. We're better informed today. It's how COVID impacted the industry and our client facilities.

But I think to your point, the determination as to onboarding new facilities, especially in the current environment, remains cautious. It's difficult to put an exact time frame on it, Sean. But the reality is our value proposition is enhanced. The demand, you asked about the demand, it's stronger than it's ever been. So I think it is more of a timing consideration at this point, really looking more towards 2021 as a time frame for what I would describe as consistent top line growth like we've seen in years past.

That's not to say that we're not going to look selectively to add new business over the third and fourth quarters, and conditions on the ground could change where we have a higher degree of confidence to do that. But sitting here today, really looking more towards 2021, thinking of the back half of the year more as selectively growing.

Okay. Great. And then your cash collections in the quarter were really strong, even after adjusting for the tax deferral and the payroll. Can you just walk us through -- you saw there? And then as we look ahead to the back half of the year, maybe the cadence cash-wise you expect to collect going forward.

Yes. I think from a cash flow perspective, that's been a high priority for us over the past couple of years. And if we were sitting here a couple of years ago and we were having a conversation about how many of our customers were paying us at a frequency of greater than monthly, we would have talked about it being about a handful. Here we are today, and over 60% of our customer base is paying us at a frequency greater than monthly, with the vast majority paying us weekly.

So that more than anything has been transformational to the consistency, the predictability of our cash flow. And I think that's what I would point to as being the driver of that strong underlying cash flow. In terms of the rest of the year, it's -- we have a couple of moving parts between the payroll accrual that Matt described in his opening remarks as well as the deferral of payroll taxes, but the way we're thinking about Q3 and Q4 would be Q3 because there's a negative impact or an adverse impact from the traditional HCSG payroll accrual.

So thinking in the $15 million to $20 million range. That's inclusive of both payroll tax accrual as well as deferral payroll taxes and for the fourth quarter, somewhere in the $45 million to $50 million range. So back half of the year, really looking at $60 million to $70 million, and that is, again, inclusive of the impact of the payroll tax deferral as well as the payroll accrual.

Next question comes from Andrew Wittmann with Baird.

I just wanted to make sure that the revenue trends in the quarter were really clear. So I've got a couple of parts on this one that I just wanted to go through here. So basically, you said $17 million in supplemental billings. Those are basically -- I don't know what you want to call it, kind of extra payments to the employees for COVID. There's basically no margin on that. Basically, your clients -- your customers said, "We want to pay everybody a little bit more." You said, "Great, that's revenue for us, but that all goes to the employees." Is that the right way to think about how that mechanism works there, Matt?

That's right. That's exactly right, Andy, that the customer initiates Hero Pay with premiums, attendance bonuses, however they prefer to classify it. That then gets accordingly passed along to our employees and then the billing gets passed along to our customer with no margin associated with it.

Okay. Got it. But then there's this offsetting factor here where it looks like basically low -- lower occupancy or census has driven need for less labor to clean, do the laundry, serve the food as well as, I guess, what, probably lower pass-through costs on food costs, I guess. And so those all have negative implications on your revenues, and you gave us kind of the run rate, which is helpful. But I guess my question is underneath that, do your profit dollars per site change? Or is this really more of a top line phenomenon rather than a profit phenomenon?

It's more the former than the latter, Andy, in that this is cost-driven. First and foremost, in that as there are facilities that have been especially hard hit in census, we've talked about this dynamic previously, where if there's a facility that's down 3% or even 5% from a census perspective, there's not a whole lot that we can do to adjust our costs downward.

Obviously you think about something like serving meals, and you're only going to serve meals to the folks that are in the facility so there's an adjustment that's made there very specifically for even modest census movements in either direction. But it takes a larger dip in census and we're seeing those. Sadly, in some geographies, we're seeing dips in census in the 15% to 20% range. When that happens, you're working in concert with the customer to typically make an adjustment, whether they're closing off a unit or sealing off a second floor and moving residents into one -- a specific part of the facility, which allows us to then not have to clean the full facility.

We can sort of quarantine and close off a portion of the facility. And as much as we're able to more significantly alter our staffing and supply costs in this environment, we've been pleased to pass that corresponding billing benefit along to the customer. So the intention is, of course, to retain kind of the -- what we would call the profit or the management fee dollars at that facility, and simply pass along the cost benefit by way of reduced billings to the customer associated with either that staffing reduction or the supply, food or purchasing reductions.

Okay. Great. That's really helpful. And then I guess kind of just third part of this kind of revenue question here is, okay, so you kind of mentioned that those factors are giving us a run rate here, but you didn't mention if hazard pay or the supplemental payment for Hero Pay has continued here into 3Q. What are your expectations for that? And is that given in that run rate that you're looking at that you previously said in your prepared remarks? Is that included in there?

It continues, Andy. It does continue, albeit at a reduced level. Obviously that's a tricky decision for any customer to make, right? What is the appropriate timing to begin to step down some of those premiums or bonuses. So our customers are working through that. That will be, again, a decision that they make and we are a party, too, as it relates to our employees and then that corresponding pass-through and billing to the customer. So it's in the hands of the customer.

So we will likely see some ongoing continuation of that pay premium in the Hero Pay but likely at a level that's fairly well reduced as compared to Q2. So it's a really -- it's a bit tricky to project, but our best estimate may be that we'd be looking at a Q3 impact somewhere around 1/3 of what we saw in the second quarter. But again, that's wholly in the hands of the customer. So we'll continue to monitor that, and we'll report on that after the Q3 results.

Super helpful but my last question, I promise, is for Ted. And Ted, you mentioned in your prepared remarks the kind of numerous federal as well as Medicaid enhancements that have supported your customers through this.

I was just wondering if you could discuss in a little bit more detail the significance of those and if any of those programs that have been maybe more helpful come to an end soon, and require incremental funding in the near term, to keep things operating like we're seeing today, which is it seems like obviously it's a difficult environment, but it seems like you, customers are managing through it.

But I was just wondering like what's the horizon that you have on some of this governmental support? Is there enough to get you through the short-term before we can get to the other side of this? And just kind of your thoughts on that.

Yes. Well, I think the general sentiment would be more is going to need to be done. I do believe, based on all of our contacts, connections and directly and indirectly with industry lobbying groups and customers alike, that the government is fully committed to seeing this through until there is a recovery. But in terms of what is here to stay and what's going away obviously there would be initial $30 billion grant that was part of the CARES Act.

And then the subsequent $5 billion that came through, that was more of a per facility allocation. I think the only 2 temporaries that really had -- are having a meaningful impact would be the Medicare accelerated payment program and the ability to withhold payroll taxes that I referenced earlier for us. But the reality is not as many providers took advantage of the former. And I think even with the payroll taxes, you have a pretty long time period to repay them.

And then what's been done so far that's really been impactful with PPP has been significantly impactful and that many of our customers were able to derive benefit from that program. Obviously the sequestration holiday, which does expire and run through the end of the year, and I think probably the most underreported but maybe beneficial of the, let's say, regulatory relief, aside from the elimination of the 3-day bed hold would be the -- 3-day wait period would be the new payment rule, keeping PDPM in place as is essentially for a year.

Now there's not a hell of a lot of group and concurrent therapy happening in COVID-impacted facilities at the moment. But once things begin to at least enter the new norm and group and concurrent therapy can reemerge, that would be -- that will be beneficial.

In terms of what's on the horizon. I'd say there's a couple -- there's probably 3 very significant opportunities, I think, that would really add to the sustainability of kind of the positive -- certainly trends that we're starting to -- that we're seeing in terms of the industry's response to this. One would be clarity around testing, and that's been a recent development over the past couple of weeks with point-of-care testing coming out.

So that will be significant, both from an operational as well as a financial perspective. The other, at the federal level, would be some form of COVID-related immunity. More than half the states have moved in that direction, some through executive order, others through legislation. But that, I know is being contemplated in stimulus 2. And then the most significant one will be stimulus 2 and what type of relief is provided within that, which is still yet to be determined.

The only other thing I would add to that, Andy, is I do believe there's a significant need for more targeted stimulus or reimbursement regulatory relief for those providers that have been most impacted. So rather than the Michetti approach, which I think has been positive for the industry, but maybe has left some of those most impacted providers behind to really target those that are dealing with -- that are at the tip of the spear or at an epicenter. And I do know there's a desire to get something along those lines done. And I think that's important for that to happen as well.

Next question comes from Ryan Daniels with William Blair.

Ted, one for you. In regards to the somewhat cautious growth outlook, is that more due to difficulty kind of starting new facilities up in this environment? Or due to the census pressures that, that will place on the existing book of business as we look in the back half of the year?

Yes. It's -- number one, it's probably self-driven. There's a few different components to them. There is a self-driven component, an HCSG decision to taking a more cautious view just with the uncertainty that we have over the next 3 to 6 months. In particular, in a pre-vaccine world knowing that until or unless there is a vaccine, we're going to be operating as a world, as a country and certainly as an industry with a higher degree of uncertainty.

But otherwise, the 2 trends you pointed out or the 2 considerations you pointed out are absolutely part of the equation as well. It's what you have. Like 2 extremes, you have -- you could have 2 providers that are in demand of Healthcare Services Group, one of which couldn't get us in fast enough, the other one who just wants to wait until the pandemic is over because they'd be reluctant to make a change in the midst of the current situation. The other one wants to make a change because of the situation. So I think they would be the 2 biggest drivers as to why the overall outlook is cautious.

Okay. Great. And do you worry about any longer-term behavior changes in regards to referrals? My colleague who covers SNFs and home health has done some survey work. And it seems like there's a preference more for home health care versus SNFs that could have a kind of longer-term effect on occupancy. So just want to get your thoughts on that.

Yes. I'd be reluctant to forecast. I mentioned it in my opening remarks that the realities of the industry, long term and post-acute care, is that it is largely a needs-based type industry. And when you look at that, coupled with the powerful demographic tailwind, Ryan, again, I'd be hard-pressed to say that there's not going to be an increasing demand, maybe with some peaks and valleys. And obviously the political football that wants to leverage the entire health care continuum, which I believe we'll need.

The one thing I would say about home health care is the majority of patients and residents, especially the non -- you have the acute -- the post-acute care resident. But in the long-term care segment, in particular, the majority of those residents require 24/7 care, and the home health environment is not conducive to that. So that's a difference that I don't know -- I don't believe that makes the headlines but certainly should be considered when one is having those types of conversations so.

And Ryan, I would only add to that, and I think this is a tricky one because without having seen the exact survey, this is, I think, a perception that is a bit misplaced because if you think about asking someone, "Geez, if you could have your loved one, mom and dad, age at home gracefully under the care of a nurse." Of course, who wouldn't want that, right? But the reality is, as Ted alluded to, from a financial perspective and certainly from a nursing capacity perspective, it's not realistic to think that the provision of home care is going to be possible given the demographics alone, right?

So it gets a bit tricky, I think, when you think about consumer preferences in a survey like that, where you're really sort of touching on emotional heartstrings. But when you contrast that with the availability of nursing, that 24-hour nursing care and the corresponding costs, it's generally a very different conversation.

The next question comes from A.J. Rice with Credit Suisse.

So first of all, so just to put a point on that comment about the relief and all. I mean you would assume, based on what you're hearing from the customers, I don't see any filings for bankruptcy. It doesn't sound like there was a lot of restructuring of contracts still ongoing.

Do you think we're sort of clear through the end of the year on that, at least? And then it's sort of we'll see how things shake out in terms of incremental relief and rebound in the census next year? Is that a fair way to characterize the situation from your perspective?

What I would say, A.J., is we've seen no indications that would suggest there's troubled waters ahead over the next 3 to 6 months with respect specifically to payment. But I -- again, I'm always reluctant to point to the industry as a favorable or unfavorable tailwind with payment.

That's on us. That's a contract integrity issue. We are an essential service that really largely is payroll-related. And if we're not #1 on the list, right, shoulder-to-shoulder with the customers' employees, then that's a Healthcare Services Group matter that we have to deal with, not an industry-related matter, so irrespective of the environment.

And I'm not saying we're rooting for one type of environment or the other. Obviously we want the most stable environment as possible because that's good for society. That's good for those that are being cared for. That's good for our customers. But again, to the heart of your question, that's ultimately Healthcare Services Group and us making sure there's mutual commitment to the contract integrity around payment.

Okay. Another one just to drill down a little further relative to what you said. So you said you're sort of reluctant or being very cautious about adding new business as you progress in the back half of the year. Is that because you've got your hands full with your existing business?

There's a lot of -- you want to just make sure you got that right? Or are you -- do you feel like the customers themselves are not yet ready to take on a shift to dining or housekeeping or whatever?

And can you say anything about the pipeline relative to whether you open now or whether you open a new account in the first half of next year? Is the pipeline as you perceive it still about the same?

Yes. I would just clarify that -- the initial way you framed the question, A.J. It's not a reluctance to onboard new business but just a cautious approach, right? And we're not dismissive of new business opportunities and we're not suggesting that there's not a possibility to perhaps fully vet and onboard some new facilities in the upcoming quarters.

The reality is that we would likely have a well-established comfort level with any facilities that we would onboard. So that would be an expansion to add additional facilities with existing customers of ours or to initiate new relationships with operators with whom we've worked previously. There does need to be that comfort because we do -- and even the best, most stable environment enact a very comprehensive assessment of any new business partner to determine the appropriateness and viability of a contractual relationship with them. So that carries through and that does continue.

You raised the point about sort of minding the shop, and we are absolutely committed to and focused on delivering operational outcomes within the existing customer base. So we certainly do not want to distract our operators from delivering on that task. But there is opportunity.

Our operators are expert in sort of not only managing the base business but onboarding business as well. So that's less of a concern, assuming that we have the managerial wherewithal and capacity to onboard that new business. So that's really kind of the way that we're thinking about it, all of which feeds into the final component of your question, which is the pipeline.

And as you can imagine, Ted very emphatically noted in his opening comments that our value prop resonates far better today in this environment than it has in decades, if not ever. So we are fielding inbound calls, and we are continuing to cultivate that pipeline. This gives us the opportunity to sort of reorder and prioritize the order of those prospects that are out there. And while the timing may be a little bit of a moving target, that pipeline is as robust, if not more robust than it's ever been. So the point at which we do determine makes sense to kind of re-ramp into growth mode more aggressively. We are very well-situated with a significant pipeline of opportunities from which to choose.

Okay. Not to put words in your mouth, but I just want to make sure I'm understanding what you're saying. So you're -- so it sounds like it's more the industry is in sort of a state of flux with volatile census. We've got some CARES Act money helping people out, but you make sure that anybody you onboard is there for the long term. And do you have a good sense of what their financial profile looks like, and how they're positioned competitive coming out of that? Is that sort of the gating factor that you're highlighting there?

I think that's a very reasonable and fair way to frame it, A.J.

Okay. Just last thing I was going to ask about was -- it's great that people are getting this Hero pay and premium pay. I'm sure that's helping and recruiting hourly workers. But I think last call, we talked about this concept that some people might just say, "Hey, a nursing home environment is a tough environment to work in with these COVID cases flowing through the facility, and I just don't want to sign on for that."

Is that an issue at all? Are you finding people willing to work for the rates that are being paid? Or is there just sort of this reluctance to -- as a worker to go into a nursing home these days? What's happening with your turnover and your recruitment of (inaudible) workers?

It's a conversation at a minimum, right, A.J.? You couldn't have an interview with someone who's applying for a position and not speak very frankly about the reality of the nurse and home environment book historically, and in the present midst of a pandemic. So it is a very open and honest conversation.

The really encouraging dynamic that we're seeing is we continue to get applications and applications continue to flow for both our associate level, line staff positions and into our management training program. So while there is this sort of media coverage and negative headlines, there are a number of people who are really approaching the work that we do, much more as sort of a calling or a career, much more so than simply a job, right?

And that's not to dismiss the fact that looking around at the labor environment, people are looking for opportunities that are hiring, and our industry, and we specifically are hiring and have continued to hire throughout the pandemic, there's certainly an appeal associated with that. But much more so, A.J., I think the spotlight that's been shown on this industry has really opened up some additional opportunities for folks who certainly looking for gainful employment, but want to feel that they can contribute and want to feel that they can make an impact and a difference in this population, the most vulnerable portion of the U.S. population.

So we very much see that in our employees, the connections that they develop with the residents within the facilities, the camaraderie that exists between our employees in our departments and the other departments within the facility, and the role that these folks take very seriously and the responsibility that they feel to deliver the appropriate level of care and the performance that we can provide to deliver that added comfort to the residents in the midst of what, as you can imagine for somebody of that age population, a very confusing and challenging emotionally trying times.

Next question comes from Brian Tanquilut with Jefferies.

I guess the first question, on the census-driven adjustment to revenue, is there a contractual structure that's in place there? Or how does that -- I know you gave some explanation on what drives that. But how should we think about your visibility into that over the next few quarters, if census across the industry remains low?

The majority of it was outside the contract. So it was in collaboration with the customer. There are some contract designs where we have a fixed portion of labor in dining with a version of a variable portion in dining, food for food purchasing and procurement. As Matt highlighted, there's a much more direct correlation between meals served and HCSG spend. So majority of it was outside the contract in collaboration with.

Got it. And then just going back to A.J.'s question earlier. So as you think about the onetime nature of some of the CARES Act dollars, right, clearly, that helped the payment ability of your client base and being maybe your DSOs as well. So absent a big bill that funds the SNF industry again, do you worry that this was a onetime benefit on cash flow?

Yes. We don't design the company or any of our strategies around onetime windfalls. We're in this for the long-term for the annuity. So there's ebbs and flows quarter-to-quarter, year-to-year. Obviously we're in the midst of a pandemic, so there's maybe increased variability. But if you look over the past 18 months, prepandemic, we've collected what we built, and we were plus 10 this past quarter. So again, I think look out over the past 18 months, and I think you'd see that I don't think there's a onetime dynamic to this. So no, I'm not concerned.

Got it. And then my last question. As we think about the resurgence in COVID in Florida and Texas that we've seen in the last few weeks, I know you gave your run rate exit in Q3, but have you seen any pickup in census-driven adjustments on the revenue side in those markets?

We've not, Brian. And the reality is that as closely as we're monitoring the occurrence and increased incidence of cases in the states that you mentioned, it's largely within a much younger portion of the population, right? I mean the nursing homes have fairly well-adapted their operations and restricted guests into the facilities.

The employees within the walls of a nursing home are very protective and understand the operational protocol that are in place to prevent further spreads. So it's not -- fortunately, to this point, it's -- those resurgences or the second wave that we're seeing in some of those markets that you referenced have not made their way into the nursing home space and we don't anticipate that they will.

Yes. And I would just add one additional point related to the census-driven temporary reductions in revenue. Now we're really agnostic to them in many respects, leaning towards favorably inclined to the extent we can make them because it's to the benefit of our customer and it's the right thing to do.

So we don't think of it as a positive or a negative per se, other than the fact that we're highly motivated to support and be great partners with our customers. So from that perspective, moving forward, we don't think there's a lot more on the comp. We do think we're -- if not trough, close to troughing. But I think from a census-driven adjustment perspective, since they're temporary over the coming months, over the coming quarters, without having a specific time line in place, as census recovers, we would expect that revenue to recover as well. That's related to those existing facilities.

Next question comes from Bill Sutherland with Benchmark Company.

Just 2 for me at this point. The dining margin in particular was up dramatically versus prior period. Is that just a leverage of not just the labor, but the food cost?

No. It's the majority of that, dining, the margin improvement in dining and I'd say just overall was related to having the success we did this past quarter of assigning the majority of the excess management capacity to new opportunities. So the majority of those managers we called out the past few quarters, inclusive of last quarter, have now been fully assigned and are operating within a facility budget.

The other, I think, factor that is more of a longer-term strategic initiative that we've been focused on over the past couple of years has been systems implementation and adherence. What we're calling our operational imperative, but it's a laser-like focus on systems, customer satisfaction, compliance and budget to actual performance. So I think those 2 combined, again, lead to not just a quick benefit over a short period of time.

I think longer-term play that ultimately increases service levels and outcomes for the services we're providing. And then lastly, yes, there was some benefit, which you called out, which was as a result of decreasing where we had the temporary decreases, the revenue and then decreasing on a dollar-for-dollar basis, the corresponding cost, in the event that we were making a census-driven adjustment.

Right. And on that score, Ted -- I just want to make sure I understand the math. So your recurring billings going into this quarter is around $430 million. And if the supplemental premium billings are less, let's just say, they're roughly 1/3 as Matt suggested, so you'd be doing something between $435 million and $440 million.

But as far as gross margin is concerned because we're talking pass-through, you could really just show the same gross margin in dollars that you had in Q2, even if your revenue was down towards $430 million in terms of recurring billings. Is that accurate?

Yes. I mean that sounds fairly accurate, yes. I just want to make sure. I guess maybe to play back, I wanted to make sure I fully understood what you were saying. I mean that the -- if we were looking into the fourth quarter, right, looking into Q3, at a $430 million run rate.

What our goal is, what our target is, is managed direct costs at or below 86%. And SG&A, the target would be 7.5%. But in the near term, especially with the lower revenue, we would expect it to be in absolute dollars, in line with where it was this past quarter, plus or minus, and then 8% or so of revenue. And obviously, any COVID-19-related Hero pay or pay premiums would be in addition to that $430 million, as would any new business adds.

And at this time, I will turn the call over to Mr. Wahl.

Okay. Great. Thank you. In the coming months, we will continue our efforts to mitigate the effects of COVID-19 while delivering the best possible outcomes for all of our stakeholders.

Thank you, everyone, again, for joining the call. And on behalf of Matt and all of us at Healthcare Services Group, we wanted to wish everyone a great next 3 months.

Thank you, Sharon, for hosting, and everyone, take care.

This concludes today's conference call. You may now disconnect.