Vext Science, Inc. (OTCQX:VEXTF) Q1 2022 Earnings Conference Call April 20, 2022 8:30 AM ET
Ted Wahl - President and CEO
Matt McKee - Head of Corporate Communications
Conference Call Participants
Andy Wittmann - Baird
Tao Qiu - Stifel
Thomas Conlin - RBC Capital Markets
Mitra Ramgopal - Sidoti
Nick Spiekhout - William Blair
Bill Sutherland - Benchmark Company
Brian Tanquilut - Jeffries
Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Healthcare Services Group 2022 First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be 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. 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.
The forward-looking statements are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Healthcare Services Group Inc.'s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors and the forward-looking statements are not guarantees of performance.
Some of the factors that could cause future results to materially differ from recent results 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.
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.
Thank you. Ted Wahl, President and Chief Executive Officer, you may begin.
Thank you, Chris, and good morning, everyone. Matt McKee and I appreciate you joining us today. We released our first quarter results this morning and plan on filing our 10-Q by the end of the week.
Overall, I'm very pleased with our start to the year. More efficient labor management, specifically related to premium pay programs and overtime, along with the catch-up of food inflation pass-through increases and continued progress on our service agreement modification efforts, all contributed to improved financial outcomes in the quarter.
We remain actively engaged with our customers to modify our service agreements to adjust for the extraordinary inflation experienced over the past year, as well as account for future inflation on a more real time basis. We expect these service agreement modifications to be completed by the end of Q2, with the goal of exiting the year with cost of services in line with our historical target of 86%.
Looking ahead while the industry continues to face workforce availability, inflation and supply chain challenges, we are encouraged by the most recent positive facility census trends. We remain confident in our ability to execute on our near-term objectives and the long-term growth outlook for the company remains as strong as ever, given the increasing resonance of our value proposition and the attractive demographics.
So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.
Thanks Ted and good morning, everyone. Revenue for the quarter was $426.8 million with housekeeping and laundry and dining and nutrition segment revenues of $201.7 million and $225.1 million respectively. Direct cost of services was reported at $373.3 million or 87.5% as the company continue to be impacted by increases in labor and supply costs. Again, we expect the service agreement modifications that Ted alluded to in his opening remarks to be completed throughout the first half of 2022, with the goal of exiting the year with cost of services in line with our historical target of 86%.
Housekeeping and laundry and dining and nutrition segment margins were 10.1% and 4.2% respectively. Selling, general and administrative was reported at $35.7 million, but after adjusting for the $3.8 million decrease in deferred compensation, actual SG&A was $39.5 million and the company expects 2022 SG&A to approximate 8.5% to 9.5%.
Investment and other income for the quarter was reported as a $2 million expense after adjusting though for that $3.8 million decrease in deferred compensation, actual investment income was $1.8 million and that includes a onetime $1.6 million mark-to-market adjustment of a previously recorded long-term liability and it's normalized investment income was $200,000.
Company reported an effective tax rate of 28.2% due to discreet items that impacted the Q1 rate and expect a 2022 tax rate of 24% to 26%. Net income for the quarter came in at $11.3 million and earnings was $0.15 per share. Cash outflow from operations for the quarter was $30.2 million and was impacted by a $27.2 million increase in accounts receipt, primarily related to the timing of cash collections and a $24.9 million increase in accrued payroll and DSO for the quarter was 68 days.
And also we point out that the Q2 of 2022 payroll accrual will be 12 days and that compares to 11 days that we had in the prior year period of Q2 2021 that being 11 days and just for additional reference in Q1 of '22, the payroll accrual was five days and in Q1 of 2021, it was four days. But again, that payroll accrual only relates to timing and the impact ultimately washes out throughout the full year.
We're pleased with the ongoing strength of the balance sheet and the ability to support the business while continuing to return capital to our HCSG shareholders. We announced that the board of directors approved an increase in the dividend to $0.2125 [ph] per share payable on June 24, 2022. The cash balance is supported and with the dividend tax rate in place for the foreseeable future, the cash dividend program continues to be the most tax efficient way to get free cash flow and ultimately maximize return to shareholders.
This will mark the 76th consecutive cash dividend payment since the program was instituted in 2003 and the 75th consecutive quarterly increase. That's now a 19-year period that's included four, three for two stock splits.
So with those opening remarks, we'd now like to open up the call for questions.
[Operator instructions] Our first question is from Andy Wittmann with Baird. Your line is open.
Oh, great. Good morning. Thanks for taking my question guys. I guess I just have -- first question is on the service contract discussions that you're having, maybe Ted, can you talk about the progress that you realized in terms of maybe describing the percentage of contracts that you've modified maybe as of the first quarter end, maybe where you are today?
Just so we could get clear [ph] path in terms of how that's going and how much more is left to do. Obviously there's tangible results on your margins. So this would be helpful in us trying to see to where your margins might be at the end of all of this. Obviously you gave your guidance, but I'm just trying to see how it's factoring it.
Right. And just, for some context, Steven, Andy, before that update, because I think it'll help kind of add some perspective to the answer, to your question. I think from a margin improvement perspective, we were about 2% better in Q1 than we were in Q4 only about a third of that related to the service agreement modification efforts. The balance of that was really the sun setting of the Genesis pricing adjustments, as well as more efficient labor management on the base business over time and premium pay and we can talk about that a bit more.
But just for some perspective, only about a third of the improvement quarter-to-quarter actually related to the service agreement efforts, but I think overall, I guess to answer your question, we continue to make very good progress and some of what I alluded to was reflected in the Q1 results. As far as quantifying, I think we've touched and remain actively engaged with all of our customers around the inflation related issues.
And I think the overwhelming majority of clients, certainly recognize that the cost of doing business has increased and they very much appreciate the value of the partnership. So as we've talked about before now, it's a matter of working collaboratively to arrive at, to the extent there's a contract modification, the right contract for the partnership, and agree to a fair price for the services, but there's still more work to be done.
There is one -- no one size fits all solution. It continues to be a bottoms up client by client exercise and rather than quantifying progress this quarter, in terms of percentages, I would point to our goal of exiting the year 86% cost of services and update the contracts by the middle of the year and Andy, I can say we are on pace to meet both of those goals.
Got it. Okay. And then just maybe a couple more technical questions, I guess, for Matt. Was there anything in the quarter that was more one timeish in nature in terms of being able to get reimbursed for maybe some of the overtime or other things that improved the gross margin in the quarter?
Also, could you just talk about the revenue contribution from your acquisition and the education food services for the quarter? So maybe we could back into an organic growth rate and was there any stock we purchased in the quarter? Thanks.
There was no stock repurchase, Andy, just to start with the last question first and then as to sort of one time impacts on margin for the quarter, I would say the answer to that is no. Really as Ted alluded to, there was a sort of a confluence of operational benefits that came by way of more efficiently managing the labor and being able to have a positive impact on the utilization of overtime dollars and drive down some of the incremental spend related to some of those other premium pay type programs.
We wouldn't sort of call those out as one time in nature per se, but I would say outside of that, it really comes down on a go-forward basis to continuing to effectively manage our costs, namely and primarily that the labor management and the associated costs via payroll related expenses. And then likewise, continuing to manage our purchasing and supply programs and capturing those increases adequately via the path through mechanism in the contract. As to the revenue contribution of the small food service company that we acquired in the fourth quarter, it was about $3 million Andy that from a revenue perspective in Q1.
Great. Thanks guys for your answers. Have a good day.
Thanks, you too.
Our next question is from Tao Qiu with Stifel. Your line is open
Good morning, guys. So just to expand on the earlier question about onetime items, if you look at the dining margin, certainly snapshot pretty quickly and we look at the direct cost of services, you achieve 87% this quarter, which is kind of above the end of the year target of 86%.
Just trying to see if you guys can quantify the impact of showing up a food cost from prior quarters this quarter. And are there any benefits from supplemental billing revenue at this quarter?
Would you repeat the last part of your question, Tao?
So I'm just trying to assess the impact of food costs adjustment from prior quarters. Are there any -- what's the amount during this quarter, and did you guys see any benefit from the supplemental billing revenue this quarter?
Got it. So with respect to supplemental billing revenue, no benefit in terms of kind of historical what we've seen during COVID with specific premium pay related programs, being funded by the client. So our employees were arm in arm with the client's employees. So those programs had really be ran off in full by the end of last year.
Specifically to the food inflation question, I'd say the benefit that we saw this quarter was the Q3 inflation, if you recall the third quarter CPI increases are processed administratively and reflected in Q1. So Q3 and Q1 more closely mirrored one another than say Q2 and Q4 did. So we didn't have as much of a delta. Now, what we have seen is continued acceleration of inflation, both in labor, as well as food.
I think this past quarter, we saw nearly 3% on the labor side of the business and upwards of 4% on the food side. So that she should create, or will create another delta next quarter between actual food inflation and what we're being reimbursed for. But again, over time that will catch up and ultimately when inflation stabilizes, it'll turn into a temporary benefit, but the idea is not to have intra-quarter variances with respect to the timing of inflation and the reimbursement or the payment through the CPI mechanism is to have those two more closely mirror one another going forward.
Got you. Just to clarify, so you're saying because of the two quarter leg, right? So for the next quarter, you'll probably see a positive delta because of the higher food inflation during the fourth quarter versus yeah.
Yeah and I'm glad you clarified, we'll actually see a negative delta because if you, yes, exactly, exactly because we would anticipate that Q2 inflation will be greater than what we experienced in Q4, which is what we'd be being reimbursed or paid for vis-à-vis the CPI food at home mechanism.
Got you. That's helpful. Regarding the DSO it's 68 days, it's what is up from the prior quarter? And you mentioned that it's mostly due to timing of collection, just wondering, are you guys seeing on the ground in terms of operators ability to pay and maybe their financial health, any comment regarding the status of the industry, particularly when you consider the revenue hit, they're going to see coming over with PDPM adjustments sounds like they're not getting, additional Medicare increases while expenses still growing pretty fast. Any comment or color on that would be much appreciated. Thank you.
Yeah. Specifically to your question, Tao, we haven't seen anything, I'd say systematic at this point. We're always -- there's always facilities or specific client groups that were in repayment or workout discussions with, but in light of the -- some of the potential reimbursement pressures that are on the com and the regulatory environment that has turned into a political football again, we haven't seen that manifest itself in client payments.
I know when you look at the first quarter, there certainly was a shortfall relative to our goal of collecting what we bill. That continues to be our expectation to meet that goal for Q2 and the rest of the year. We did, as you pointed out, highlight that Q1 was primarily related to timing. You have this seasonal element of collections in Q1 as well, where you have the tension of Q4 and compared to Q1, you're the end of the year where we tend to have higher cash collections and some clients make up for shortfalls that they had earlier in the year.
So to the extent we haven't already caught up on payment, we're going to continue working with those clients, which the vast majority of which we collaborated with and were aware coming into those final weekly payments or biweekly payments. In some cases, they were still monthly payers that there was going to be a shortfall for the month. But again, assuming we meet our cash collection goals, we'd expect Q2 cash flow to return back to a favorable, say, $30 million to $35 million type range and expect to continue to meet those, collecting what we build goals for the rest of the year.
Got you. Thank you.
Our next question is from Sean Dodge with RBC Capital Markets. You line is open.
Hey, good morning. This is Thomas Conlin on for Sean. Thanks for taking the questions. So starting off on the Genesis contract, the pricing modifications that were kind of sunsetted at the end of the year, can you confirm how much of that contributed to Q1 revenue and EPS, I guess, relative to Q4 and was there any upside to the previous pricing or did it kind of revert back to the previous rate?
Yeah, so as to Genesis Thomas the sunsetting of those pricing adjustments contributed about $2.5 million in Q1. And then as to sort of the balance of the adjustments with respect to the AR we're still on track to be able to have those modifications reduced throughout this year and they ultimately sunset at the end of 2022. And, just on the topic of Genesis, it's worth noting that when we talk about the bucket of all of our customers with whom we're having conversations about having the right contract structure and fair pricing moving forward, Genesis is included in that as well.
So we feel comfortable about the sun setting, if you will, of the adjustments that we made with Genesis that were agreed upon in 2021, but all the same, we need to make sure that on a go-forward basis, we have the right contract structure and fair pricing in place as well.
Okay. That's helpful. Thanks. And then I guess, I guess with the plan in place for getting the cost of sales back in order where are you now on new manager development? Are you back out recruiting and training again? And I guess, what are your thoughts around when you might start adding new facilityes again?
I would say that without a doubt that that priority, and this is, really companywide for Q2 is to make sure that we're doing all of the work necessary to make sure that we're adjusting those service agreements and contracts with each and every one of our customers to be able to adequately capture costs as we've discussed, and to make sure that the contract structure on a go-forward basis is favorable and durable as well.
Outside of that though, certainly pushed down to a regional and local level, there is a significant focus on management development efforts and, as we've discussed in prior quarters, we are still in the midst of a pandemic or at a minimum, the sort of consequences that have come as a result of the pandemic and COVID in the facility.
So, making sure that we have adequate management capacity to appropriately manage the business from an operational perspective from a systems and a compliance perspective is first and foremost and then of course beyond that, the recruiting, the management training and development efforts are certainly in service of business development efforts.
So I would say that we're at varying places from a development perspective geographically and based upon the local conditions. But when we look at the pipeline of new business opportunities and as we've mentioned previously, our value proposition resonates today greater than it ever has. And the queue of opportunities is significant. So, we're excited about that ongoing management development and very optimistic that before long we'll have the opportunity to translate that into business development opportunities.
Okay, great. That's all for me. Thanks guys.
And the next question is from Mitra Ramgopal with Sidoti. Your line is open.
Yes. Good morning. Thanks for taking the questions, actually just wanted to follow up on the previous question in terms of with management and if you're having greater challenge in terms of retaining especially the senior level, given the tight labor market and opportunities out there.
I would say, Mitra, I wouldn't want to sort of deflect and suggest that it's ever easy. Right. We always have to work hard and actively engage with our employees throughout the continuum from the line staff levels up through senior management to make sure that we're actively engaged with them, that they buy into the company's purpose and vision, and that the values that we've established as an organization continue to resonate.
But I would say that in spite of the challenges of the labor market, we've had tremendous success in retaining our managers and that applies not only in the senior management ranks, but likewise down through the facility levels. And we definitely credit the significant dependence upon and referral to our company values, right and the purpose and the vision that we've established and very much in support of all of those would be the employee engagement programs that we've implemented and those touch again, throughout the continuum of employees from senior management, all the way down to the line staff level.
So retention thankfully has not been as significant a challenge as has been really, filling new vacancies specifically down at the line staff levels. And that's just based upon the availability of bodies in the labor force. And obviously like we've discussed previously, those challenges are more acute in certain markets as compared to others. But generally speaking back to the crux of your question, Mitra, really pleased with the retention that we've had really throughout the organization.
Okay. Thanks. That's great. And then quickly on the -- obviously you've have -- you're having success in terms of with the nursing home operators and implementing some price increases. I was just wondering if you're getting any a lot of pushback as it relates to their occupancy or senses down. And obviously they have to make it up somewhere in terms of being able to pay you more?
Of course, Mitra, right? Of course, anyone's going to push back when they're facing rising costs and they have a vendor partner who's asking for an increase in billing, and they're not seeing a corresponding increase in their revenue streams right. And that primarily in this environment relates to the reimbursement.
So, without a doubt, that's an element of the conversation, but the reality is, as Ted alluded to in one of his earlier comments, our customers recognize that the cost of running our business has increased. And they certainly, from the overwhelming majority of them at least appreciate the value of our partnership and what it is that we bring to the table operationally and you have a conversation where it's very much cards on the table and we can speak to true data and experience that we're seeing by way of those rising costs at the facility level with our customers and remind them of the components of the value proposition and the benefits of the partnership, and really a significant way to do that is to paint the picture of what life looks like without healthcare services group right.
And the fact that, if we exit the partnership, number one, we take the manager with us. So in what would, very obviously be described as a challenging labor environment, that customer is going to have to identify, recruit, hire, training and develop a manager to run the departments that we're exiting hope that they can operate them anywhere, nearly as efficiently as we do. Certainly they wouldn't have the additional company or managerial support and resources to be able to at the facility level.
So from a compliance perspective, and from an operational outcomes perspective, high likelihood that they would be facing deficiencies relative to what it is that healthcare services group was providing and, oh, by the way, all of the line staff employees are going to go back on their payroll and they're going to have to pay them market wages and increase their wages appropriately, whether that's inclusive of overtime hours, or simply increasing their wages.
So any cost increases that have been born by healthcare services group would ultimately flip back to the operator and the final sort of component would be that obviously any monies that are owed to healthcare services group would be due upon exit of the relationship. So, when you paint that picture without, using that in a threatening way and certainly not intending to be used as a stick but when you educate and you go through the process and talk through the value proposition, customers recognize that this is this date of the world that our costs are increasing, and it's only fair that we be kept told.
And Mitch, I, would just add, I think, so it doesn't get lost in kind of your question, your thinking on, hey, how are the clients reacting to this? Really the approach we took was I'd say, novel to what most companies or many other companies in the industry or in other industries would have done.
Admittedly it could, it could have been criticized. Like, why are you incurring costs that are not being reimbursed by the client on a real time basis? Why is it taking as long as it is to go through the process? Why can't you send a letter? Why can't you just, shut off the lights and walk out the door, but we decided early and often, that wouldn't be in Matt reference, purpose, vision and values. That's certainly not in line with what we've tried to establish as a company, as an organization, reputationally or otherwise. There is a different level responsibility. We have caring for this nation's most vulnerable population. So we believe we stepped up during the most difficult time, right?
That back half of last year, when inflation was rapidly increasing, there was no end in sight. And we continued to provide the services. We continued to step up and do what we believe was the right thing. And our belief was doing the right thing is always good for business. I don't think the two are mutually exclusive. So I believe from a client perspective, it just enriched their appreciation, I think of the conversations we're having now and I think that long term view as we've believed all along while, while it resulted in some short term pain perhaps that long term view, I think is in the best interest of the company and the organization and I think we'll see the fruits of that labor in the months and years to come.
Thanks. I really appreciate the color. Thanks taking the questions guys.
The next question is from Ryan Daniels with William Blair. Your line is open.
Hey guys, Nick Spiekhout for Ryan. Most of my questions have been asked, but I guess just a kind of follow up to that last line. Have you had a decent amount of contracts, like, and because of because of these renegotiations or because of these new service agreement conversations at all, when you are receiving some that like moderate pushback.
We haven't at this point in time. Our expectation is that the vast majority of our clients recognize, appreciate, and that we'll be success us full in delivering on our outcomes, that we've shot.
So, then when you are comments on your goal to reach your goal by Q2, that goal is a 100% of your outstanding contracts to have service agreements or negotiate without losing kind of any of them. That's kind of like your target.
Yeah. Our target is to be as successful as we possibly can if a 100%, but we're also not going to, in at all cost type of way, try to meet a 100%. There has to be willing participation from both parties and that word fair right needs to be the governing force of both whatever contract modifications need to be made as well as what the pricing adjustment is.
So we're confident in what we bring to the table. We have the utmost respect and appreciation for the position our clients are in and I think, we believe that it's in the best interest of everyone to be able to move forward in a collaborative way and reach the agreement. So a 100% is the goal, but not in an at-all cost type of way to sacrifice of the greater outcome that we're trying to achieve longer term, which is exiting the year at 86% but also to set the company up for success in the future. And we think we'll be able to achieve all those objectives.
Got you. Thanks. And then, I guess just on the positive facility, census trends, are those still tracking through April pre positively as well?
Yeah. From an occupancy perspective, I think, in just overall industry, you highlighted kind of one of the two components that I think over the next three to six months we're going to be watching closely and I think are aside from all the other dynamics within the industry are going to be critical to recovery, and that would be the interplay between occupancy or census recovery and then staffing.
But you reference, April, if you compare it to where we were in February, I think occupancy is up about 120 basis points from 72.5 to 73.6% 73.7%, which is about 15 basis points a week over that eight week period. So that would put the industry on a pace to recover back to that 80% threshold or benchmark that's been set by January of '23, which is admittedly slower than kind of the most desired pace.
But I think that would, if the trend were to continue, that would be something I think the industry would likely be able to work with. And I just, for context, before the Delta variant, the occupancy recovery rate was about 20 basis points a week between January and July of '21. So yeah the recent trends are favorable, but I think staffing levels, patient care staffing levels in particular need to be sufficient to take full advantage of this rising demand and that's TB day, but we're going to monitor both of those dynamics very closely.
Okay, great. Thanks guys. That's it for me,
The next question is from Bill Sutherland with The Benchmark Company. Your line is open
Matt, good morning. That census trend that you're seeing Ted as it applies to where you guys have more density, your key markets, is it better, is the same? Do you see any waitings that matter to you guys?
Nothing, I'd say it's still too early to tell Bill, nothing, noteworthy and I wouldn't want to broad brush it and say, well, on a relative basis, you see the same kind of trends between Texas and New York. Every state, every locality has its own story. I would say since we're only at, I'd say eight weeks, a couple months into these positive trends. I think though the trend is positive, I think overall it's still nothing, nothing that I would highlight on a local level or a state based level that would raise our eyebrows.
Okay. on the M&A front anything. is that sort of an opportunistic approach would you call it going forward? Are there other opportunities?
Very much so. I would say that we're not actively pursuing any opportunities, but as you can imagine, there are plenty that are floated in our direction. As to sort of the core market and the core services, the environmental services and dining and nutrition services within the long term and post-acute care space, there's really, very few of those kind of pure play opportunities that would be available Bill.
But when we think about the ancillary market and the adjacency that exists certainly in the education space, per the acquisition that we did in the fourth quarter of last year, there may be some additional opportunities there to explore. So I would say not actively pursuing, but, as is always the case open opportunistically.
I noticed in the 10-K you changed the language slightly in the competitive section to the national competitor having national competitors, I think, was there anything that sort of triggered that change in language?
Yeah, that was really Bill just prompted by the fact that Aramark had done an acquisition of an operator that predominantly plays in the long term and post-acute care space. So just a little bit of a shift given that Aramark had made that acquisition.
Oh, I see. Okay. And then last I got a little trying to figure out the leads and lags here in your inflation impacts Ted. So in the quarter just ended, labor was up about 3%, food for then, when do you feel just, if you wouldn't mind repeating the impact sort of flow through to HCSG?
Yeah. That's difficult to quantify because it's intra-quarter, there's different weights between states and depending on kind of the overall yes, the percentage increase, but depending on the timing of that and how it ultimately flows through, it's a dynamic type of number Bill. So I'd be reluctant to try to quantify that in dollars in any given quarter. It's more intended. It's more intended to provide -- it's more to provide some directional insight into the type of inflation we're relative to some of the national benchmarks, right.
When you look at CPI, when you look at, BLS data, when you look at the food at home metrics that we base the majority of our food related contract pricing adjustments off of it, it was to provide context.
And so just from a timing perspective, then you will you get a catch up a quarter later. Is that why you should understand on.
On the food side, on the food side in particular? Yes, we would get really two quarters later. So Q1 inflation would be reflected, would be passed through on the food side in the third quarter of 2022. So it's like a two quarter lag. And that's exactly what we're working on with the majority of our clients as well on the labor side to have a similar, similar type of mechanism.
So inflation is adjusted in the places where we have fixed price contracts. So it wage and labor related inflation is adjusted on a more real time basis as well. So that's the intention and part of the service agreement modification effort that we're undertaking.
And real time would be, realistically a one quarter or so lag. Is that fair? Yeah.
Yeah. That's fair.
Okay. Thanks gentleman. Have a good day.
The next question is from Brian Tanquilut with Jeffries. Your line is open.
Hey, good morning guys. I guess my first question just on the cash flows, right? Negative $30 million operating cash for the quarter. I look at some of the moving parts, at least what you've given us accrued payroll up $25 million AR up $27 million and change. So as I think about this, what are the other factors that drove that negative $30 million operating cash number because obviously the two things I mentioned kind of offsetted each other.
Actually, no, actually they were actually both moved in the same direction. So it was a cash, a $27 million increase in AR, which would be a cash outflow. And then the $24 million decrease in accounts receivable would also be -- in payroll rather would be a cash.
All right. Got it. that makes sense. And then I guess as I think about that improvement in the DSOs that you're expecting, as we think about the PHE potentially sun setting here, and obviously the sniff industry has had a lot of tailwinds and contributions from the government. What are the conversations like with your clients in terms of their ability to pay and ability to take the increases in costs as we think about the government subsidies kind of dying down.
Yeah. Without a doubt, Brian, that challenge is exactly what Ted alluded to previously, right. Not to suggest that increasing census is a panacea, but certainly that ongoing census improvement is critical to the financial health and wellbeing of operators and, sort of working and providing a headwind to that in this current environment is the availability of stafffing right. And I think we talked about this last quarter, specifically with the caregiving staff, the professional caregiving staff.
So that's definitely been a challenge, but assuming that they are able to continue to find ways to provide appropriate staffing and to continue to foster that ongoing census improvement, that's going to be really beneficial. So with the new payment rule as currently proposed, which was not wholly unexpected, I think there's going to be certainly some greater visibility as that final rule comes out in early June.
And the hope is I think within the industry that there'll be some provisions or allow allowance for a phase in approach as far as kind of the PDPM pullback. But, operators are focused on staffing the facility and providing care and ultimately driving census. So, this is a challenging environment. There's no doubt about that, but I would say that the operators are, happy with the fact that we're still starting to see state by state Medicaid rate improvements.
The pullback on PDPM was expected. They're able to plan for that with the fiscal year going into effect on October 1, 2022. And ultimately assuming they can continue to drive census through these challenging times, the secular tailwind that awaits by way of the baby boomer demographics is really what has operators very optimistic about the go-forward prospects.
Got it. And then last question for me, as I think about dividend philosophy at the board level obviously cash balances down to third $33 million here, and your dividends north of $60 million a year. How are we thinking about that? You've obviously had good success raising the dividend pretty consistently. So just curious, what your thoughts are there?
Well, it's evaluated quarter to quarter, right? So that hasn't changed, and for the current quarter as we open this conversation with the cash balances, not the cash flow for the quarter, but the cash balances and the board's view still more than supported it. And I would say just philosophically organic growth, internal investment remained the number one priority in terms of capital allocation, followed by the dividend.
And we've talked about this before, but there's no payout ratio per se. It's always been consistency and sustainability of the dividend that have served as the board's guideposts. So again, we'll continue to evaluate a quarter to quarter just like we always have, but after organic growth and internal investment, Brian, it remains the board's next highest priority from a capital allocation perspective.
Got it. Appreciate it. Thank you so much, guys.
We have no further questions at this time. I'll turn the call over to Ted Wahl for any closing remarks.
Okay. Thank you, Chris. In the quarter ahead, we'll continue to prioritize, engaging with our customers to modify our service agreements, to adjust for the inflation experience over the past year, as well as account for future inflation on a more real time basis. We'll continue to expect -- we continue to the service agreements to be completed by the end of Q2, with the goal of exiting the year with cost of services in line with our historical target of 86%. We'll also continue to execute operationally with an eye towards opportunistic growth.
Above all, we remain committed to making decisions that best position, the company to deliver long term shareholder value. So on behalf of Matt and all of us at HCSG, I wanted to thank you, Chris, for hosting the call today and thank you again to everyone for participating.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.