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Healthcare Services Group, inc (NASDAQ:HCSG)
Q2 2021 Earnings Call
Jul 21, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. 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, including the SEC's ongoing investigation.

There can be no assurance that the SEC or another regulatory body will make no 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.

I would now like to hand the conference over to Mr. Ted Wahl, President and CEO. Sir, you may begin.

Ted Wahl -- President and Chief Executive Officer

Okay. Thank you, Phyllis, 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. We remain encouraged by the stabilizing industry landscape, in particular, some of the recent and more positive trends for census and new COVID cases in long-term and post-acute care facilities. Having said that, we're also cognizant of the significant uncertainty related to COVID that remains. We'll continue to closely monitor the various interrelated factors that will play a crucial role in industry recovery, including immunization rates, occupancy trends, staffing levels and government funding. And although we don't know exactly what the pace and pathway of recovery will be, we've learned an awful lot over the past 18 months and are confident that we are well positioned for long-term growth.

Looking ahead, we are incredibly excited about the return to growth in Q3 and expect over $15 million of annualized revenue growth to be reflected in next quarter's results. Our HCSG heroes have continued their tireless efforts to protect those most vulnerable, and this significant expansion primarily with existing customers not only underscores the strength of our core client partnerships, but also serves as recognition of our team's extraordinary dedication and commitment to going beyond.

While Q2 reported results were impacted by several temporary or non-recurring items, our underlying operational and financial performance was very strong and in line with recent quarters, as we continue to execute on our operational imperative and manage the elements of our business that are within our control.

During Q2, we agreed to temporarily modify certain pricing and payment terms of our agreements with Genesis, as it continues to work through its restructuring plan. We believe that these temporary adjustments in conjunction with concessions made by other stakeholders are in our best interest as Genesis facilities provide a broad platform for strategic opportunities in the future. Additionally, we were pleased with the significant progress made during the quarter toward a resolution in the SEC matter. We also anticipate resolving through mediated settlements, California labor and employment matters. Together, the temporary or one-time adjustments related to Genesis, the SEC and California L&E matters accounted for the majority of our sequential decreases in reported revenue, net income and adjusted cash flow from operations.

So with those introductory comments, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Matt McKee -- Chief Communications Officer

Thanks, Ted, and good morning everyone.

Revenue for the quarter was $398.2 million, with housekeeping & laundry and dining & nutrition segment revenues of $202.9 million and $195.3 million respectively. The majority of the sequential decrease in revenue relates to the temporary Genesis adjustments that Ted described in his opening remarks. The full run rate impact of the temporary adjustments to revenue is reflected in Q2 and expected to remain in place through December of 2021. The remainder of the sequential decrease in revenue relates to the decrease in supplemental billings for COVID-related employee pay premiums, which were initiated by and passed through to customers. These supplemental billings were down $3.1 million quarter-to-quarter from $3.9 million in Q1 to $800,000 in Q2.

Direct cost of services was reported at $336.4 million or 84.5%, which is below our historical target of 86%. Housekeeping & laundry and dining & nutrition segment margins were 11.2% and 7% respectively. SG&A was reported at $50.1 million, but after adjusting for the $2.9 million increase in deferred compensation, actual SG&A was $47.1 million. SG&A was also impacted by the non-recurring legal related charges that Ted mentioned earlier, including $6 million related to the potential settlement of the SEC matter, $700,000 of SEC related legal and professional fees, and $3 million related to the expected mediated settlement of California labor and employment matters.

Investment and other income for the quarter was reported at $3.4 million but again, after adjusting for the $2.9 million change in deferred compensation, actual investment income was about $0.5 million. Our Q2 tax rate of 36.5% was impacted by the non-deductibility of the $6 million charge related to the potential settlement of the SEC matter. For Q3 and Q4, we expect our tax effective tax rate to be in the 24% to 26% range.

Net income for the quarter came in at $9.6 million and earnings were $0.13 per share. Together, the temporary or non-recurrent items related to Genesis, the SEC and the California L&E matters unfavorably impacted reported earnings by $0.15 per share. Cash flow from operations for the quarter was $25.3 million and was impacted by a $20.7 million increase in accrued payroll. DSO for the quarter was 62 days. And the majority of the sequential decrease in adjusted cash flow from operations, and increase in DSO relates to the temporary Genesis adjustments. The full run rate impact of the temporary adjustments to payment terms is reflected in Q2 and expected to remain in place through December of 2022.

Also we would point out that the 2021 payroll accruals should have a similar cadence to what we saw last year. So Q3 will have five days and Q4 will have 13 days and that compares to four days and 12 days that we had in 2020 during those corresponding periods. And the payroll accrual relates only to timing and the impact ultimately washes out through the full year. Q4 will also be impacted by one half [Phonetic] or about $24 million of the CARES Act deferral -- deferred payroll tax repayment.

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 that the Board of Directors approved an increase in the dividend to $0.20875 per share payable on September 24. The cash flows and cash balances 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 the shareholders. This will mark the 73rd consecutive cash dividend payment, since the program was instituted in 2003 and the 72nd consecutive quarterly increase, that's now an 18-year period that included four 3-for-2 stock splits. We recognize the dividend is important to our shareholders and we've increased it in line with our performance track record.

Additionally, the Company repurchased $1.8 million of its common stock pursuant to its previous authorization during the quarter. The company remains authorized to repurchase 1.6 million shares of our common stock pursuant to the previous Board of Directors' authorization. And with those opening remarks, we'd now like to open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of A.J. Rice with Credit Suisse.

Nat Putnam -- Credit Suisse -- Analyst

Good morning. This is Nat Putnam on behalf of A.J. Rice. We just had a quick question on the $50 million of annualized revenue that you're expecting from new dining services contracts. We were just wondering how soon you expect these new contracts to be profitable?

Ted Wahl -- President and Chief Executive Officer

Yeah. That's kept in line with our typical start-up timeline, we really earmarked EVS openings in that 30 to 60-day window and dining in the 60 to 90. We don't see these dining contracts having any different makeup or composition than ones in the past. So we would expect certainly within ideally the first two months, if not by the end of the quarter that they would be within budget.

Nat Putnam -- Credit Suisse -- Analyst

Thank you.

Operator

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

Thomas Keller -- RBC Capital Markets -- Analyst

Hey, good morning. This is Thomas Keller on for Sean. Just start off on revenue. This group of clients, you guys have adjusted with service previously. So can you guys give any update on the status of those? Has there been any sort of reopening or restaffing that have taken place there?

Ted Wahl -- President and Chief Executive Officer

Yes. I'm sorry, there was a bit of a muffle there in the connection. I'm not sure if -- could you kindly repeat that question?

Thomas Keller -- RBC Capital Markets -- Analyst

Yes, sure. No problem. So you guys talked about adjusting the service levels for some of the clients previously. Just want to see if you can give any update on the status of those. Have there been any sort of reopening or restaffing that have taken place?

Ted Wahl -- President and Chief Executive Officer

Sure, I think just to clarify, I suspect you're referring to sort of the impact that census declines have had on our staffing levels and the fact that we've worked arm and arm with our customers that in as much as their census has declined as a result of the events that have unfolded over the course of the past 18 months. We've correspondingly been able to reduce our staffing levels and purchasing, whether that relates to supplies or to food and food-related items.

So in as much as census begins to increase in any particular facility in a way that requires sort of an add back, if you will, to staffing levels and/or purchasing, that's something that we'll do with any particular client. So there weren't sort of sweeping adjustments to contractual relationships per se, but really more just that flexibility in working with customers as their census declined and have every expectation that as we've begun to see census, albeit modestly, but as we've begun to see census increase that we would make those corresponding adjustments very much in concert with the customers as well.

Thomas Keller -- RBC Capital Markets -- Analyst

Okay. And you're starting to see that a little bit already?

Ted Wahl -- President and Chief Executive Officer

Very modestly. Certainly, the census has begun -- begun rather to rebound. And it's been somewhat consistent -- modest but consistent. Nothing really to the point where we've seen any significant sort of uptick in our staffing levels relative to sort of the bottom that we talked about at the tail end of Q1.

Thomas Keller -- RBC Capital Markets -- Analyst

Okay. Sounds good. Thank you. And then anything you can share -- I know it's [Technical Issues] on the SEC matter that obviously you given nearly $6 million [Phonetic]. So do you feel like you guys have enough visibility or certainty around that. Is that going to be the entirety of it? Or anything you can share there?

Ted Wahl -- President and Chief Executive Officer

Well, I think we continue to be limited in what we can share, and I think out of respect for the process, we're not going to be commenting further, especially while the discussions are ongoing. But what I can tell you is that we continue to cooperate as we have throughout the process. And as we indicated earlier, we're pleased with the dialogue and hopeful that we're going to be able to reach a final resolution sooner rather than later.

Thomas Keller -- RBC Capital Markets -- Analyst

Okay, thank you. And then -- I know you guys talked about some of the pilots you're working on, just more kind of school campuses and stuff like that being a little bit of a longer-term opportunity. Is there any sort of progress or updates you can share with that?

Ted Wahl -- President and Chief Executive Officer

Nothing substantive. As you can imagine, over the course of the last 18 months or so, we've sort of been up to our eyeballs in trying to effectively manage the operations within our core segment that, of course, being long term in post-acute care, which really since the early stages of the pandemic have been in the eye of the storm. So I would say, our primary operational focus and likewise, from a business development perspective, the conversations that we're having that have led to the new business that we're talking about onboarding to be effectively impacting the top line in Q3 and other opportunities reside more within that core niche market, that long-term and post-acute care end market.

Having said that, obviously, the value proposition that we bring by way of our environmental services offering continues to resonate in a variety of adjacent end markets, not the least of which is the private and independent schools. So we continue to view that in sort of the very early embryonic stages. I'd hesitate to even call it a pilot at this point, but there remains a significant opportunity there. We're having conversations, we're pursuing and exploring the opportunities, but doing so in a very sort of methodical, mindful and strategic manner.

So nothing noteworthy as yet other than it continues to be of interest to us. And we'll continue to explore and pursue that as appropriate, but very much mindful in a way so as not to detract or distract from that core end market that obviously has significant runway of opportunity yet ahead for us.

Thomas Keller -- RBC Capital Markets -- Analyst

All right. Appreciate it. Thanks for the comments there.

Operator

Your next question comes from the line of Andrew Wittmann with Baird.

Andrew Wittmann -- Baird -- Analyst

Good morning, guys. Thanks for taking my questions. Just trying to understand the quarter a little bit more and specifically the $0.03 that you called out related to Genesis. Any time you make adjustments to contracts or sometimes are onetime items with accounting or other things that might occur in the quarter. And I was just wondering, is the $0.03 hit -- are there any onetime items that make that $0.03? And was the actual run rate hit something different than $0.03? In other words, is it appropriate to think of it or maybe the other way to ask the question is, is it appropriate to think of 3Q and 4Q also containing $0.03 hits or something less than that?

Ted Wahl -- President and Chief Executive Officer

No, that -- you're thinking about it and described it the right way.

Andrew Wittmann -- Baird -- Analyst

Okay. And then just in terms of your commentary, Ted, on the December 31, 2021, is kind of, I guess, what you've agreed to in terms of the modification. Do you have an agreement in place for January 1 that tells you that it's something other than that? Or are you just basically giving them this temporary relief and planning to get back at the table sometime in late '21 to talk about what the '22 rate is. I just want to try to understand what's kind of been agreed to with -- between you and Genesis and a little bit more than that?

Ted Wahl -- President and Chief Executive Officer

No. We've reached an agreement in principle, and we called out December of 2021 for the pricing-related modifications and then December '22 -- for the 2022 for the payment modifications because that's consistent with the agreement in principle we reached.

Andrew Wittmann -- Baird -- Analyst

Okay. Great. And then just kind of a bigger question -- a bigger picture question that I thought would be helpful to understand is that, basically just looking at the competitive landscape and your customer landscape, there's obviously been a lot of facilities that are changing hands. Some are obviously Genesis. There are other franchises, regionals, local, everybody, there's been so many facilities changing hands here in 2020 and 2021. And I was just wondering if you could give us a sense of how many facilities of yours are operators or owners that are changing hands?

And what your experience has been to date on retaining those customers? And what's your outlook for any ongoing discussions that you're having with any of your new customers or new incumbent customers are regarding those transitions?

Matt McKee -- Chief Communications Officer

Yeah, as to the quantification, Andy, within our customer base, I don't have those data readily available other than speaking anecdotally that what you call out that dynamic of transactions occurring within the space, we're absolutely seeing. So I suspect much like many components of industrywide factors, the transaction that you're seeing within -- the transaction activity that you're seeing within our customer base is largely reflective of what's happening within the industry at large. So we are seeing those transactions occur.

Our sort of guidepost when those transactions are occurring within our customer base is that we have every expectation to retain greater than 90% of the new -- what we would consider new business opportunity in a facility that changes hands, either among ownership or operator control. So that's the guidepost. But we do treat those very much as a new business opportunity. Sometimes that offers us a chance to reassess pricing or service levels depending upon what it is the new customer would like, but it does offer us that opportunity to sort of reassess and almost repitch the services.

The benefit, of course, that we bring to the table is having absolute operational familiarity with the facility, inclusive of the employees, not only in our department, but in the other departments to have that comfort level, the working relationship and the familiarity with the other department heads in that facility, most of whom typically retain their roles through a transition of either ownership or operator, that definitely serves us well because if you think about a new owner or operator coming into a facility, generally speaking, they have their top 5 list of priorities. They otherwise want the operation to run smoothly and seamlessly, they don't typically have as their top couple of priorities to come in and disrupt environmental services or to completely recalibrate the service offering in dining services.

So sort of a long way of saying, we have every expectation to at least have a seat at the table. We know that our value proposition resonates with any customer, whether they're a complete prospect with whom we've never worked or somebody who's known us for decades and has worked with us previously. So we basically repitch those services, but feel that we have a significant advantage for knowing the facility and having a presence already established. So that 90% continues to be our expectation, but there's no reason why we can't outperform that as we look ahead to the transactions that are on the come.

Ted Wahl -- President and Chief Executive Officer

Yeah. And I would only emphasize too, when we use the word customer, first and foremost, that our customers, the resident and in terms of decision-making, the administrator in most cases. And that's really not only our greatest source of growth -- future growth in terms of references and networking, but oftentimes, as these transitions take place, we're able to not only retain that greater than 90% rate that Matt cited, but also use whatever the new owner-operator platform may be as an opportunity for future growth as well.

So look, extreme customer turnover is not great, right, because you're administratively spending too much time on contractual negotiations and other resets. But the levels that we're seeing right now are healthy from our perspective. And again, we look at through more of a positive prism than a negative one.

Andrew Wittmann -- Baird -- Analyst

That's helpful. I just wanted to ask one last question just regarding the labor market today. I think it's a lot different. It seems to me for everything that I'm seeing that it's a lot different today than even a few years ago, pre-COVID where there was some labor tightness as well. And I was just wondering, Ted, if you could talk about if your customers are signing up for paying the -- a competitive or a market rate to get a right amount of labor in the door, recognizing obviously that the way you set up your contract is really that your customer does set that labor rate.

Are you able to find the right number of people to do the work that you have to do and manage the labor force in the way you always have based on the labor rates that your customers are willing to pay in the labor market today?

Ted Wahl -- President and Chief Executive Officer

Yeah, look, and I know we've had these conversations before and acknowledging that the labor market today is different in a more -- and that it's more challenging than it's been really at any point in time since we've -- Matt and I have been in leading the company. But as with most aspects of our business, there's not a lot of topside answers. There is variability market-to-market. What we're -- the headlines and what we read about doesn't necessarily reflect what we're seeing in individual markets on a day-to-day basis.

The contract structure, as you said, Andy does place the onus for developing the conditions of employment at the facility to attract and retain employees on the contract. That has not changed. We certainly let them know that we're facing challenges in any given labor market and make recommendations. So ultimately, with many of our clients, we are successfully receiving those passthroughs. In some cases, it's an ongoing process to continue to find the right balance between managing the services at the facility, maintaining the proper wage rates and then ultimately delivering the service.

But I think, as a tailwind for us, maybe different than what our clients are experiencing on the labor market and even the broader labor market, the types of employees we attract generally are different. These jobs have never been overly attractive when you compare it for many people to what an Amazon or a Walmart may offer. It really is more of a calling than a career for many of our employees. They're there because they feel deep ties to the resident. And we've really been able to tap into that over the past few years, going all in on employee incentive and recognition programs to motivate and reward our employees as well as pay them.

So I think from an HCSG perspective, we do an incrementally better job than I think would-be competition, whether that's the in-house model or our client may, or a competitor or would-be competitor may. But again, it's an ongoing issue. We're evaluating it and monitoring it closely, but it is a market-to-market solution that we seek, not a topside one.

Andrew Wittmann -- Baird -- Analyst

Thanks for that, Ted. I appreciate, and have a great day, guys.

Ted Wahl -- President and Chief Executive Officer

Hey, you too Andy.

Operator

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

Nick Spiekhout -- William Blair -- Analyst

Hey, guys. Nick Spiekhout in for Ryan. Thanks for taking my question. Just a quick clarification. That $50 million in incremental revenue, and I guess, of that $12.5 million per quarter, what's the base that you guys are considering for that growth?

Ted Wahl -- President and Chief Executive Officer

The current quarter's base.

Nick Spiekhout -- William Blair -- Analyst

Okay. Got you. So [Speech Overlap] from Q2 '21?

Ted Wahl -- President and Chief Executive Officer

That's exactly right.

Nick Spiekhout -- William Blair -- Analyst

Okay, great. All right, appreciate that. Thank you guys.

Operator

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

Jack Slevin -- Jefferies -- Analyst

Hey good morning, it's Jack Slevin on for Brian. Just wanted to ask a question on the margin cadence going forward. I think we saw a little bit more normalization, particularly on the gross margin numbers relative to what we had been expecting. Can you just provide any commentary on how we should be thinking about margin normalization going forward as occupancy trends normalize in your -- with your client base?

Matt McKee -- Chief Communications Officer

Yeah. We've talked a lot about managing the services we provide and our costs as efficiently as possible, especially in light of that census pressure that you just mentioned and that our clients continue to face. So -- what we can certainly call out is that we'll continue to manage the staffing, the purchasing and the production based on census and that includes census increases, having that mindful eye and making sure that we continue to manage -- to use sort of the crass phrase that I've used previously according to bodies and beds and maintain that focus as census recovers.

The top line growth that we talked to, specifically upcoming in Q3 and beyond though will bring some inefficiencies as districts and regions ramp up their management recruiting and training efforts to support that upcoming growth. And also as we onboard new facilities and inherit their inefficiencies, it does take us some time to implement our systems and get a new account on budget, as Ted mentioned earlier, and that does create a little bit of margin pressure. So for the moment, 86% remains our target, but we are very much committed to ongoing management of our labor and supply cost. And we believe that we may be in a position to talk about a new target for cost of services at some point in the near future going forward, but we're just not there yet.

So for us, getting back into growth mode and sustaining that gross margin -- or I'm sorry, the cost of services at or below 86% remains the target.

Jack Slevin -- Jefferies -- Analyst

Got it. That's helpful. And then a good segue there getting back into growth mode. As you think about ongoing conversations with new prospective clients, I think the COVID environment is waning a little bit, right? We're seeing some concerns around the Delta variant, but case facility ratios are down significantly based on the data we have from abroad right now.

What are those conversations like? And can you just give us an update on what the progress is in terms of getting to the table and having discussions around bringing on new facilities and bringing on new clients.

Matt McKee -- Chief Communications Officer

Yeah. I would say that there remains a focus from a clinical perspective among our customer base, right? I mean they're ensuring that they have measures in place to withstand the perhaps pending pressure that continues to come from the Delta variant. They're focused on staffing, right? I mean arm-and-arm with census is staffing, their facilities need to be able to appropriately staff the building to be able to bring new residents in and build back occupancy to the levels from pre-pandemic and beyond.

So there's definitely an interplay there and there's a focus among our customer base, not only in driving census recovery, but likewise, ensuring that they have the caregiving staff in the facilities able to support that census build back. So that's an important area of focus for them all the while very much a continued and kind of renewed focus on infection prevention and infection control. There will be, I think, at least forever in the near term, an ongoing focus on infection prevention and infection control practices not only within the four walls of the facility but not likelihood from a reporting perspective and from a reputational and a marketing perspective. So there's a lot that these operators are focusing on.

Certainly, the Healthcare Services Group value proposition resonates and continues to grow an importance as those other factors become more of a focus. The last thing that any operator wants to do is have to focus on some of these secondary services, non-generating services. So in as much as Healthcare Services Group is able to deliver better outcomes and that's sort of a broad category of improved outcomes related not only financially, but of course, from a regulatory perspective and a compliance perspective, operationally, that's definitely an enticing proposition for a would-be customer.

So I'd say, from our perspective, the easiest conversations from an access perspective continue to be advancing the conversation with existing customers, specifically environmental service customers about onboarding dining and nutrition services. But as access to facilities continues to expand, we are able to have to advance conversations more thoroughly as to true greenfield opportunities, perhaps utilizing environmental services as that initial service offering with prospective customers. So we don't have the exact clarity and visibility as yet beyond, let's say, the third quarter.

Directionally, we think things are moving where we'd like for them to move as far as industry recovery and the impact that that has on our ability to continue to add new facilities and grow the top line. But a cautious attitude, I would say, remains. So opening access opportunities await certainly in the mid-to longer term. But as to the nearest of near term, we'll continue to take that cautious view.

Jack Slevin -- Jefferies -- Analyst

Got it. That's helpful. And then last one for me, just a quick one on any call-outs for the quarter on workers' comp accrual or any kind of one-timer shifting numbers we should be thinking about?

Ted Wahl -- President and Chief Executive Officer

No, other than what we've identified.

Jack Slevin -- Jefferies -- Analyst

Awesome thanks --

Ted Wahl -- President and Chief Executive Officer

Nothing related to workers' comp. The only onetime type items were the ones that we've identified.

Jack Slevin -- Jefferies -- Analyst

Got it, thank you.

Operator

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

Mitra Ramgopal -- Sidoti -- Analyst

Yes, hi, good morning. Thanks for taking the question. Just wanted to follow up a little on the labor side, especially as we talk about growth mode and bringing up new business. One thing we've been hearing in some sectors of the economy in terms of demand being there, but just the labor supply unable to cope with that. I'm curious in terms of how comfortable you feel that you will be able to have the staff necessary to meet the additional demand, whether it's in food nutrition or laundry [Technical Issues] housekeeping?

Ted Wahl -- President and Chief Executive Officer

Yeah. I think just piggybacking off my answer to Andy Whitman's question regarding this. It's always been a challenge to some degree. And Mitra, you're right to call out. It's more challenging today than it's been certainly in recent history, but you could go back years and it'd be hard -- you'd be hard-pressed to find a more difficult labor environment than the one we're facing today. Having said that, and just to again reiterate what I said to Andy, we continue to have success and incrementally speaking, relative to what a would-be competitor or in-house operator would find because of our -- certainly our subject-matter experts and our focus we have at the home office, utilizing everything from metadata to recruiting and development programs all the way through the network -- the incredible network of grassroots efforts that we have with our concentrated facility base and the number of employees we have, we are still having success and certainly the capability to open up new business.

So staffing and the challenges around staffing, while they will be a heightened awareness from our perspective of making sure we're well prepared and we can execute on new business opportunities, that's not going to preclude us from taking on a new business opportunity. In fact, if anything, it's actually increased the demand for the potential customer or the prospective customer because they view us as being an asset and a great partner to help staff these departments that are so critical to their success.

Mitra Ramgopal -- Sidoti -- Analyst

Thanks. And then just following up a little on the new business add-ons. Just curious if you could give us a little more color in terms of maybe was this something you're working on for a while, or maybe the pandemic maybe sort of brings up a little in terms of the needs of that customer, and it might affect them being able to bring a new business going forward?

Ted Wahl -- President and Chief Executive Officer

Yeah. We've been having -- I mean, like a lot of our new business opportunities, they're typically -- some happen sooner or quicker than others, but these are primarily made up of existing clients that we've worked with for years, a nice combination -- a nice mix of regional players that have non overlapping geographies in addition to the fair number of independent facilities that also had a nice geographic distribution. So it was a cross-section of different types of clients. But in terms of how COVID impacted the courtship with these new business opportunities, it certainly has.

For us, it was a longer process than what it typically would have been. But the fact that we're expanding with existing clients. Obviously, we have a different level of comfort with the ones we've chosen to expand with. And again, I think that bodes well for the future. But for us, we're going to continue, as Matt said, to be -- taking advantage of opportunities as they present themselves. I think, cautious is an attitude that we have as we move forward through the rest of the year. And while there are a lot of positive signs out there regarding census recovery, at least at the early stages, as well as some of the new case rates within facilities, there's also new challenges that emerge, whether it's the variants that are certainly on everyone's radar as well as some of the staffing concerns on the provider side that Matt alluded to in some of his remarks.

So again, we continue to feel comfortable and confident that we are returning to growth mode, but we're going to continue to be selective about it.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, thanks for taking the questions.

Ted Wahl -- President and Chief Executive Officer

Great, thank you, Mitra.

Operator

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

Tao Qiu -- Stifel -- Analyst

Thank you. Good morning. Just to expand on an earlier question regarding the Delta variant and its impact. The long-term care facilities, I think, have generally done a good job immunizing residents and patients. So they have pretty much well protected there, but staff vaccination rate has stagnated. Given the rising cases, just wondering if you're keeping track of your staff immunization rate across your client base?

I imagine you can work with your clients on vaccine mandates for your line stuff. What percentage of your customer base are requiring staff to get the vaccine. Any trend you can call there?

Matt McKee -- Chief Communications Officer

Yeah, you're exactly right, Tao, in the sentiment that you expressed in that. We very much follow the lead of our customers on a facility-by-facility basis as to any and all of their COVID-related protocol, right? Whether that's temp screenings, entering through a certain entrance to the facility, exiting through another and likewise for mandated vaccination of employees. We've rhetorically heard some customers express an intention to do that. We're really not seeing that bear out yet in the facilities. And it will be a challenge.

As I said, we worked very much arm-and-arm with our customers to motivate and encourage and educate our employees about vaccination. But you have to keep in mind that, to a large degree, especially some of these lower level associate-type employees are drawing from demographics that are typically resistant to vaccination. So it's a challenge. It's one that we will very much work arm-and-arm with our customers and various departments of health to address. But we are supportive.

We will definitely promote, educate and support their endeavors in as much as we're in a position to, but we've not implemented nor instituted any company-specific mandates that would, in any way, interfere or perhaps run counter to what it is our customers are implementing at their specific facilities.

Ted Wahl -- President and Chief Executive Officer

And one of the reasons, Tao, when you think of the industry specifically long-term and post-acute care and the success they've had even with the spiking of the variants outside of the facility, the long-term care world. It's not just about vaccinations, it's also about timely testing as well as PPE, right? So these are environments that are Matt talked about infection prevention and control. Great learnings on that front over the past 18 months. So I think the industry today is much better prepared than it was when 18 months ago when the pandemic first broke.

Tao Qiu -- Stifel -- Analyst

Yeah, that's fair. And what we've seen on the senior housing side with some of the larger state operators have really jumped on the bandwagon and mandating their workers to get the vaccine, sounds like you haven't really seen that in your portfolio just yet.

Ted Wahl -- President and Chief Executive Officer

Yeah. We haven't. And as Matt said, it's something that's been talked about and is being considered or trialed in some cases, but it's not something that we've seen on a broad basis. And one of the challenges, again, I know we've talked about staffing throughout is that's a balance, right? Depending on where you're located or what the local labor environment as you're balancing, having adequate staff, can you mitigate the risk of infection with PPE and adequate testing, if you mandate it, what does that do in a challenging labor environment that in all likelihood will begin to normalize in September, October, when some of the federal programs subside, but that remains to be seen.

Tao Qiu -- Stifel -- Analyst

Yes, that makes sense. So my second question is also on Genesis. I think, Matt, you mentioned in your prepared remarks that DSO ticked up this quarter, and I think you attributed most of that to Genesis. Just wondering if you have modified the payment terms of frequency with Genesis in that agreement? Also, are there any changes to their notes payable to you?

Matt McKee -- Chief Communications Officer

There was no effect on the notes, Tao. But as to the sort of general bucket of payment terms/credit, there were adjustments to the contractual relationship in that regard, and those changes will remain in place through December of 2022.

Tao Qiu -- Stifel -- Analyst

So should we expect DSO to continue to tick up next quarter to reflect that? Or is this already in this quarter's number?

Matt McKee -- Chief Communications Officer

No, that's correct. The latter, Tao.

Tao Qiu -- Stifel -- Analyst

Okay. Yes. Also like on the new contract, I think the $50 million you guys mentioned adding in 3Q is very encouraging, but I didn't hear any remarks regarding how many new contracts did you add this quarter?

Matt McKee -- Chief Communications Officer

Meaning Q2?

Tao Qiu -- Stifel -- Analyst

Q2. Were there any meaningful revenue bumps from new contracts this quarter?

Matt McKee -- Chief Communications Officer

No. Very modest in the dining and nutrition and that only relates to contracts -- I'm sorry, facility starts that were undertaken at the tail end of this quarter. But those numbers would be reflected in that run rate that we called out effective Q3. So there were some operational starts at the tail end of this quarter, but the new business starts that we're referring to and that $50 million of annualized new business will largely be seen as essentially third quarter starts and that run rate effect reflected in Q3.

Tao Qiu -- Stifel -- Analyst

Got you. And one last question from me. Ted, I think you've said in the past the penetration of customers with your contract is less than 50%. Where do you think you can go to on that penetration rate longer term? Is there any internal timeline you could share with us in terms of ramping it up?

Ted Wahl -- President and Chief Executive Officer

Yeah. There's no internal timeline, but there's nothing that we would see as suggesting it could be the entirety of our existing housekeeping & laundry client base that -- when you think about a customer of ours on the EVS side or housekeeping & laundry side, they've already philosophically accepted outsourcing and is an option and us as a viable partner in that. So the dining cross-sell has proven to be a different type of sale. It's truly a relationship-based sale, performance-based type transition.

And we feel very optimistic that we're going to continue to execute on that strategy, not only green -- using EVS as the greenfield opportunity to continue to expand our footprint, but then followed by the dining and nutrition cross-sell ultimately. And we've mentioned this before, there's no reason why dining couldn't be a lead service or at least a co-lead service offering, which it is, in many cases, already today.

Tao Qiu -- Stifel -- Analyst

Okay. That's all. Thank you for taking my questions.

Ted Wahl -- President and Chief Executive Officer

Thank you.

Operator

And at this time, there are no further questions. I would like to turn the call back over to Ted Wahl, President and CEO.

Ted Wahl -- President and Chief Executive Officer

Okay. Thank you. We know the second half of the year will have its share of pandemic-related challenges, but with the success of the vaccine, positive census trends and our learnings and innovations from over the past 18 months, we are well positioned to succeed and grow whatever may come. As the industry continues its gradual shift from crisis mode to a state of recovery, our commitment to opportunistic growth, internal investment and returning capital to shareholders underscores our positive longer-term outlook and creates value for all stakeholders.

So on behalf of Matt and all of us at Healthcare Services Group, I wanted to thank Phyllis for hosting the call today, and thank you all again for joining us.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Ted Wahl -- President and Chief Executive Officer

Matt McKee -- Chief Communications Officer

Nat Putnam -- Credit Suisse -- Analyst

Thomas Keller -- RBC Capital Markets -- Analyst

Andrew Wittmann -- Baird -- Analyst

Nick Spiekhout -- William Blair -- Analyst

Jack Slevin -- Jefferies -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

Tao Qiu -- Stifel -- Analyst

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