Ted Wahl - President and Chief Executive Officer Matt McKee - Vice President of Strategy.

A.J. Rice - Credit Suisse Michael Gallo - CL King Andrew Wittman - Baird Sean Dodge - Jefferies Chad Vanacore - Stifel Nicolaus Ryan Daniels - William Blair.

Good day, ladies and gentlemen. And welcome to the Healthcare Services Group 2017 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time [Operator Instructions].

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, go, 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 assumption that we have made 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'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. I would now like to turn the call over to Mr. Ted Wahl, President and CEO. Sir, you may begin..

Thank you, Chaise, and good morning, everyone. Matt McKee and I appreciate all of you joining us for today's conference call. We released our fourth quarter and year end results yesterday after the close and plan on filing our 10-K the week of the February 19th.

2017 was a very special year for us as we began a companywide journey to realize the set of words that make up our purpose vision and values.

We're very excited to continue this journey in the year ahead, as every member of the HCSG family from our associate level right on through senior leadership aligns around our company vision to be the choice for our customers.

As we enter 2018, the demand for our services is as strong as ever and the year ahead selective expansion along with the relentless focus on customer service and experience will ensure that our management capacity, operational execution and financial performance are in line with both client and company commitments.

With the top administration’s agenda now in full swing, the business friendly tone and tenure of the campaign has turned into reality of a shifting regulatory landscape and corporate tax cuts.

Although, we’ve managed to thrive in all sorts of political environments, this administration has created an opportunity for us to refocus our best and brightest, as well as our financial resources towards growing the company, recognizing and engaging with our employees in a different type of way and investing in the future.

So with those opening remarks, I’ll turn the call over to Matt for a more detailed conversation on our Q4 and year end results..

Thanks, Ted and good morning, everyone. Revenues for the quarter were up 25% to $499 million. Housekeeping and laundry increased year-over-year 2%, dining and nutrition grew at over 60% for the quarter. Annual revenues increased 19% to over $1.8 billion.

Net income came in at $20 million or $0.27 per share for the quarter and $8 million or $1.19 per share for the year. Now that’s both inclusive of $4.5 million increase in our tax provision due to the Tax Cut and Jobs Act.

Direct cost of services for the quarter and year came in at around 86.5%, about 0.5% or so above that target of 86% that we’ve talked about previously, and that was largely driven by the inefficiencies that we inherited as part of the new business adds that we brought on in the latter part of the year.

That was balanced though by ongoing improvements in the performance of our base business and also increased efficiencies that ran through our captive base property and casualty programs.

Going forward, our near-term goal remains to manage the direct costs back under 86% on a consistent basis and then ultimately to work our way closer to 85% direct cost of services.

SG&A was reported at about 6.75% for the quarter and the year, but after adjusting for the changes in deferred comp, which was about $1.2 million for the quarter and $4.5 million for the year respectively, our actual SG&A was about 6.5%.

And we expect SG&A to continue to be below that 7% range going forward and there are some ongoing opportunities to go on our additional efficiencies in SG&A.

Our effective tax rate was 42% for Q4 and 34% for the year, which as we mentioned earlier, includes that $4.5 million impact from the change in our deferred tax balances due to the new tax law, as well as the ongoing share-based payment accounting impact.

And with the tax change taking effect in 2018, we expect our effective tax rate over the next year to be in the low 20s, now that excludes any share-based payment accounting impact. Over to the balance sheet. We ended the year with over $80 million of cash and marketable securities, current ratio of 3:1 and DSO right around 70 days.

As we announced last week, the Board of Directors approved an increase in the dividend to $0.19125 per share payable on March 23rd. Cash balances for the quarter support it.

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 the value and free cash flow back to our shareholders. This will be the 59th consecutive cash dividend payment since the program was instituted in 2003 after the change in tax law.

And it's now the 58th consecutive quarter that we’ve increased the dividend payment over the previous quarter, which is now 15-year period that’s included four 3-for-2 stock splits. So with those opening remarks, we'd now like to open up the call for questions..

[Operator Instructions] Thank you. And our first question comes from the line of A.J. Rice with Credit Suisse. Your line is open..

Just a couple of questions, if I may. First of all, on the benefits of tax reform. Your payout ratio you’ve given has been creeping down even as you continue to increase it every quarter, and now with tax reform, it dips down significantly further.

Any contemplations being given and is there a timeframe on when you guys might think about increasing the pace of the dividend increases, is that on the table..

A. J., you mentioned tax reform. Certainly, the company, we’ve been rooting for that since the mid 80's let alone this past year. So as a U.S. based fully tax Service Company, we're certainly going to benefit from the new corporate tax rate, as well as the [Watsi] program continuation, which continues to run through 2018.

But as far our capital allocation strategy in the year ahead, we most certainly expect to continue the cash dividend program, which we still continue to be the highest and best use of free cash flow.

And I know we’ve talked about this before, but more than a formal policy or payout ratio per se, our Board of Directors really prioritizes consistency and sustainability on top of what is now 59 consecutive quarters and counting. And we believe that approach has certainly benefited the company and shareholders alike.

So it’s certainly an ongoing consideration that we’ll evaluate as the year progresses, but that continuation of the dividend program. And also I think in an additive type of way with tax reform, we are prioritizing differently than maybe in past year, certainly more formally the recognition and engagement of our employees.

And in a way that truly aligns with the company vision moving forward. And just to give you a little more color, now again on top of that dividend what we’re thinking of in terms of employee recognition and engagement.

Our version of the $1000 bonus check, if you will, but difference is this really aligns with our facility level philosophy of recognizing the conditions of employment, not to mention has same power and we believe a greater ROI than any type of one-time bonus.

So we’ve recently partnered with the third party people and change practice to really better understand at the facility level and with all the state-by-state and local variances what exactly is motivating and touching our employees, how they relate and interact with the company so we can improve their employment experience.

And ultimately they’ll be more fulfilled and better equipped to handle the customer experience.

So as we build out this program, we're going to continue to reward in a different type of way as I said and recognize our employees contributions at all levels and we believe that’s going to positively impact their satisfaction and retention and again, ultimately the customer experience and the customer retention.

So we're pretty excited these programs are going to go live during the second half of '18. And addition to the dividend program, in addition to ongoing investments in training and development as well as technology, we're investing in the future and providing a powerful platform for that future..

Some of the companies are now are talking about we got ex-amount of benefit from the tax reform. This March we're flying back to shareholders in various ways, at least driving you through the bottom line, this much we’re reinvesting in the business.

And that sort of sounds like the things we talked about the investments in technology et cetera plus which you're doing for the worker base.

Are you at a point, at this point, where you could comment on what that -- how much money -- how much of the tax benefit you're going to designate for those reinvestments in the business type of projects?.

Not yet A. J. really.

We're still sorting through that, but the way you framed at a higher level, the way that most companies or many companies are thinking about the benefits of tax reform is exactly how we are; number one, to continue to invest in the growth of the company which is not an insignificant investment and one that we continue to look toward.

And then really a means to achieve that growth is by investing in our employees and the employee experience and overall employee engagement. As Ted just outlined and of course we strongly believe that just as in past, none of that precludes us from continuing the dividend program. We’re evaluating the opportunity for share buybacks, et cetera.

So I would say at this point, really everything is on the table.

Although, as Ted said, really, most likely our Board of Directors will look to see how things progress through 2018 and then if there is a change in either a buyback or a change to the dividend program, that would be something that would happen at the end of the year or into the beginning of 2019.

But we’re really not prepared at this point to quantify any of those allocations A. J..

In the last several years, you picked up significant marks of business relating to the national chains. I am wondering is that I guess -- because you don’t just take it all, you stage it. Is that probably has pushed off some mom and pop and regional business you would have otherwise done.

Is that had any impact on the backlog from those places or would you still say that it’s robust as it’s been?.

It’s more robust than it’s ever been and greater than what we would be capable of either implementing, integrating or managing in any given 12 month or two year period for that matter. So it’s a matter of timing and management capacity, which has always been the case.

And you look at the efforts this past year adding over 500 new accounts that our team worked their collective tails off to not only prepare for but ultimately onboard. And at the company we’re very proud of those efforts. And as we’ve talked about before, going forward as we enter ‘18, it does come down to management capacity.

And each and every district, each and every region is at a different stage when it comes to management pipeline development, both quality and quantity and those decisions are made and really driven locally, where then they are on in the topside boardroom type fashion.

So that will continue to be the approach, not just into ‘18 but when we look out over the next three to five years. Our outlook continues to be double-digit type growth. We think of housekeeping and laundry as a mid single-digit type growth opportunity quarter-to-quarter or year-to-year fluctuations aside.

And dining and nutrition again year-to-year variations aside, should continue to be in that low to mid teens, which on a blended basis would get us in and around that double-digit revenue growth..

And my last question related just to the DSOs, I think you’re running about 70 days at this point. And I know you said some of that’s being impacted by the amount of new business you’ve taken on.

Can you just update or remind us where you think you’ll settle out on DSOs long-term and is there anything beyond just the new business impact that’s worth highlighting?.

I would say overall A.J. it’s remained relatively stable, not really much movement in DSO over the past couple of quarters. And as you alluded to the fluctuations between years or between quarters, primarily driven by customer mix.

And obviously this is an industry that ebbs and flows between consolidation fragmentation, we’re obviously seeing continued acquisition and divestitures out in the market place as you see some of the larger multi state operators divest their facilities and really the proliferation of really the more regionally based chains in the marketplace.

And in many cases, we're the only the constant at the facility level. So as we work with those new operators, the terms and conditions change, the pricing, the service levels, the credit terms, et cetera.

So overall really not much to report by way of changes in DSO other than the fact that number one, it continues to be really not a great standalone metric as to how we are as far the success that we’re seeing in executing our credit and collection strategy.

And number two then more specifically on the overall credit and collection strategy, we remain laser focused and really micro managing each nickel and dime down to the facility level, never mind the customer levels much less even a robust overall DSO data point..

Thank you. And our next question comes from the line of Michael Gallo with CL King. Your line is open..

Just to follow up on A. J.’s question. Ted it seems that the business today has probably been as chunky as I can ever remember, and used to be scaled in few facilities incrementally where now you're taking on large chucks of business at a time.

Obviously, it requires a lot of strain to the organization when you do take it on but obviously, it’s growing the top line and accelerated rate to what you certainly done historically. So I guess my question is two-fold.

Number one, do you expect to continue to see this chunky business where you will bring it in or chunks, or just some large customers that impacted that over the last few years.

Number two, do you feel you’ve absorbed the latest chuck of business to the point where margins have improved sequentially enough where you’ll start holding additional business into those districts. And three, historically this company has spoken to low double-digit overall growth rate and what you were comfortable managing.

And obviously it’s been greater than that. I was wondering if perhaps you see that level being perhaps a little bit higher overtime. Thanks..

I guess just to start off, Mike, the govern on our growth going forward continues to be our ability to develop management people. And chunkiness or momentum in one year as opposed to another year, quarter-to-quarter fluctuations as I mentioned during the earlier Q&A with A. J., that’s just variability that’s going to continue to exist for us.

So the sustainability come from having a national fully developed management team with managers and training that are we're building for the future and prepare to execute on the next wave of growth. So that has not changed.

When you talk about lumpiness, you could really go back to 2010, 2011 with both in housekeeping and dining but that’s driven more by dining than it is in housekeeping, and its attributable to the nature of the cross sell.

Where as in housekeeping and laundry, it’s a different type of integration to sell a standalone facility even if it’s part of larger group with dining and nutrition, there is different considerations, we’re the provider or given operator, may be the clinical dietitian organization and the fact that it’s one step closer to patient care and related to patient care as they’re liaising with the medical directors at each of the facilities.

It could be regarding purchasing power and procurement processes, which would they be reluctant to change on a facility-by-facility basis rather than a wholesale transition.

So there are clear and present operational reasons why the preference for an existing housekeeping and laundry customer is to transition in a truncated period of time rather than area-by-area or facility-by-facility, which admittedly would line up better with our management growth and management development objectives.

But having said that, other than the fact that it appears chunky financially, it doesn’t change our operational approach significantly.

It’s still each and every district developing the requisite number of management candidates to be able to fund their districts’ growth objectives over the following one to two years, and that has been the case and that will be the case going forward.

And I mentioned earlier, but when we look out over the next three to five years, again, continue to see the type of growth we’ve experienced historically, that double-digit type growth, mid single-digits in housekeeping and laundry maybe at the higher end or lower end depending on the quarter or year and management capacity ultimately, and dining continuing to chug along this past year notwithstanding in that mid teens type, low to mid teens type range.

So that’s not a different outlook than really what we’ve had the past few years and that’s what we would expect to continue as we look out to the future..

And just how you feel about the latest chunk of business, where it is relative to expectations and how the performance of that business progressed as you went through the quarter?.

Yes, I guess as Ted talked about earlier, Mike, we added 500 new accounts in 2017. So tremendous efforts in not only the sales process but obviously more importantly operationally to integrate our systems and further develop the customer relationships there. But there’s still a heck of a lot of work to be done like we’ve talked about.

We have to integrate the synergies that we identified in the second quarter expansion specifically. But outside of that, we certainly added more than $70 million in annualized new business in the back half of the year, which was not insignificant.

So you have to implement our systems into all of the new facilities that we added throughout the back half of the year as well. And then basically, Mike to your earlier question, it’s rinse and repeat, getting back into the recruiting hiring and trading and development of management people so we can continue to grow in 2018 and beyond.

As Ted said, that’s the crucial part of the mix is identifying, developing management folks so that we can absorb new business, whether it comes with the mom and pops that you mentioned earlier in your question or whether it’s building out towards a certain for more significant expansion with either regional or a multi-state chain.

So that is always the case that we’ll be adding new business and there will be corresponding pressure on margin as we tend to inherit the inefficiencies of those new facilities. But we’re absolutely comfortable with the profile of business and facilities that we brought on in 2017.

Now it’s incumbent upon us to implement the systems and get them budget, and we’ve certainly demonstrated a consistent ability to do that over the past four decades..

Thank you. And our next question comes from the line of Andrew Wittman with Baird. Your line is open..

Matt, I just I’d build on the last response a little bit.

What’s your line of sight to get into that 86% level on your top services? I mean in terms of -- how do you think it’s going to play out in ’18? Is ‘18 the year where you get there the halfway through the year by the end of the year? How should be we thinking about that goal?.

I would say the goal itself Andy in and itself is a relatively moving target, if you will, in the sense that as I just outlined. When we’re adding new business, that’s when we’re going to have the corresponding pressure on margin as we absorb those inefficiencies of the in-house operations.

So I guess the way to think about it is, if we were to hit pause on growth overall, then you’d need to see the nice clean linear improvement in the dining margins, specifically with the new business that we brought on board in the 2017 year.

So we will continue to grow that will be a localized decision and efforts throughout the company and throughout the country. So certainly from a trend prospective, we would expect to continue to see the business that we brought on board in '17 continue to move in the right direction.

If you think about the second quarter expansion, that should largely be on budget, if not in the first quarter here certainly by the half way point of 2018. And likewise the rather inefficient business that we brought on in the third and fourth quarters, although it was excessively inefficient as we brought it on board in the back half of the year.

The expectation from a timing perspective is that that business should be on budget in the first half of 2018 as well. So I guess absent any additional growth considerations, absolutely expect the trend and track that new business back toward on budget performance by the mid part of the year.

Now does that bring the overall cost to services down below 86% unlikely given the overall continued growth strategy. So I think throughout the balance of '18, you will see continued improvement but most likely, it would be toward the end of '18 that we would see, I guess, more of what you could consider a normalization of the margin..

I guess just looking back to the new dining win that you had this year. You guys have talked about trying to get those margins coming through. It seems like it’s just obviously little bit harder than you expected.

I guess what was the surprise in the ability to get the cost out here and how do you convey to investors your ability to -- that the problem is under control and how is the glide path to getting there?.

Andy, I would just word choice but for us, I think the difference is we don’t consider it to be a problem. I mean we went in specifically into the second quarter expansion with the large multi-state operator.

We view that as an organization as an incredible opportunity, financial and non-financial, to transform the size, scale as well as the synergy that were available to us of our dining operation, and are exceedingly pleased with the results to-date.

Now, that may not be reflected in the way the P&L looks from a margin prospective but for us, it’s really inline for the most part of what we expected, albeit more methodical and more deliberate than maybe we had originally anticipated.

But aside from that, that would be the only shift is, is if we would have ideally been in and around budget, it's not by the end of the year, by the first quarter because of some of the considerations that we had during the start up, union and otherwise, we did take that more methodical approach.

And I think that will bode well for the future, though. The facility level relationships and the customer experience, are trending in a very positive direction. And again as Matt said and as I eluded earlier, 500 plus new facility that is no small undertaking.

So it’s keeping both our management development, our growth objectives and in this situation, our customer experience and satisfaction levels in balance with one another.

But there is an absolute clear pathway that Matt touched on that delivers these facilities to be right in line with our typical 12% to 15% margin targets that we have for all accounts, and that’s the direction this would continue to move..

I have two other ones that I wanted to touch on. In your opening remarks, Ted, you mentioned that you’re taking -- I think you said, the word was selective expansion, as you move through ‘18, you didn’t just say expansion.

What does that mean in terms of the selective approach to your growth?.

For us it really is driven as much by the idea that there is a greater demand for the services than what we’re capable of managing. So number one, it’s in line with what has been govern on our growth from the inception, which is management capacity.

But number two, when you think about this unprecedented demand for the services, we do have the ability to be selective. You could argue, overly selective, in not only who we’re doing business with but the timing in which we’re transitioning that business.

And given the priorities in the year ahead of implementing our systems and procedures at the over 500 facilities we’ve added during the past nine months, being able to select -- being in a position to selectively expand and at the same time have that focus on service experience vis-à-vis systems implementation, is really a theme for us in the year ahead.

But we’ve used that term at different times over the years. I think for the year ahead, it certainly resonates in a different type of way given our accomplishments this past year and really what our areas of focus are in the year ahead..

And my last question has to do with the labor environment. Obviously, you guys are well known for historically basically putting the labor cost and labor cost inflation risk on your customer under the terms of your contracts with them.

I guess just given that labor inflation is more of a risk today and your customers’ ability to pay that may or may not be there.

Are your customer -- one, are you finding it harder to hire people because your customers are unwilling or unable raise the wage at which they can pay? Or two, are your customers trying to put more of that wage inflation risk on in new contract negotiation?.

Andy, again I guess back to choice of words. I wouldn’t characterize the labor market or wage increases as a risk, either increase or otherwise. And really on a macro level, we’re not really seeing significant impact on wages nor on our ability to hire employees.

We certainly see varying degrees of wage increases or tightening of labor in selected markets for sure and respond accordingly.

And we do have the benefit, as you called out, we have the structure of our contracts and the pass through nature of the wage and benefit increases to remain relatively agnostic, either wage or food inflation given the structure of those contracts.

So the benefit that we have is that the client needs to respond to the same labor market pressures that we do to remain competitive in that marketplace.

So if they need to increase the starting wages from $10 an hour to $10.50 an hour in order to hire similarly situated blue collar employees to the type that we’re hiring, then that’s an adjustment that they’ll need to make. So we do remain in constant dialogue with our clients again in specific marketplaces especially.

But overall, we’re not seeing nor to do we anticipate negative experience with respect to our ability to hire folks nor pass wage increases along through the contracts..

Thank you. And our next question comes from the line of Sean Dodge with Jefferies. Your line is open..

I guess to start, I’ll congratulate you on the win on data, it was also no small undertaking..

I was waiting for someone to congratulate. Thanks Sean..

It took all of our self control to not start off with our best version fly eagle fly, I can assure you that, Sean..

So may be the deal you all did in the second quarter is a little unusual and that there were some assets you took on in addition to just taking over the dining function. Now that we’re a couple of quarters beyond that. Can you give us a little bit of [post-mortem] there on how that integration is going.

Is there any change in your view there and how close are we to being able to leverage that across the rest of the business?.

I think that as far as the integration and it fits in to the conversations we've had earlier on the call are really in line with expectations. And again that -- you're eluding more to the non financial integration of people, systems, process, its more selectively leveraging where their best practices complemented ours.

And I think related to all of the above it’s in line and continuing to gain momentum as we head into the New Year.

I think there is an opportunity over the next six months to further integrate from a cultural perspective, which we had a good starting point because they’re both groups, both companies this year in many respect similar cultural foundations, but there is always opportunity for that.

And then certainly from a culinary perspective and some of the areas of focus and expertise that they had direct complements to ours, we're beginning the New Year by now integrating that element into our existing base business and again that all bode well for our current customers as well as prospective customers well into the future..

And then Matt you made the comment earlier that the second half of the year, you added $70 million in new business outside of what you end the second quarter. Can you give us a little sense of the makeup of that, was that multiple clients, was there any particular geographic concentration to that.

And then how much of the associated revenue run rate was reflected in the fourth quarter number?.

So Sean that was really, I guess, you could say growth in every part of the country other than the mid-Atlantic and the North East divisions, which as you recall, were disproportionally impacted by the second quarter expansion.

So the North East and the mid-Atlantic divisions really through the breaks on growth throughout the back half of 2017, and the reality is that they’re more than likely not yet ready to take on any additional business at this point either.

So the business that we brought on in the back half of the year was really very diverse with respect to geographical distribution and even customer make up.

So there was no significant concentration of any large groups really just more the mom and pop type facilities that Mike Gallo referred to earlier in addition to some of the smaller regional type operators that I called out previously, so nothing specifically by way of major concentration of customers in those expansions.

And really we did see the business come on board throughout the quarter really consistently, so it’s not like it was especially heavy in the early part of the quarter and have the full run rate reflected in that quarter nor tagged into the back half, it was really a nice blend of staring new business throughout the fourth quarter.

So not quite able to quantify Sean how much of the full run rate was reflected, but it was a distribution not waved heavily toward the start nor the back end of that quarter..

Thank you. And our next question comes from the line of Chad Vanacore with Stifel. Your line is open..

So you had mentioned that there is a shifting nature in your client mix toward more regional based client.

Can you guess how your retention rates held up as operators are influx and changing?.

They continue to hold pretty steady greater than 90% and closer to 95% than they are to 90%.

And for us when you really dissect the reasons behind that, there’s certainly a renewed focus, a heightened focus internally as I said earlier on customer service and experience, providing that extraordinary service and experience to our customers, a focus on systems implementation and adherence at the local level, which certainly adds to the consistency of the service we’re able to provide.

But the reality is as the dining and nutrition cross-sale strategy continues to take hold, we just become stickier when we’re providing both services. So housekeeping and laundry, as a standalone, in and around 90%, greater than 90% like it’s been historically, but we’re providing both services greater than 95%. So that’s we’re on a blended basis.

We continue to improve our retention rate and always the opportunity going forward to do even better than that, but that cross-sell and the derivative benefit that we see as a result of that cross-sell as it relates to retention certainly bodes well for the future.

But I will say Chad, where we’re still most at risk and you’ve mentioned the transitions, it’s not necessarily at that ownership level, it’s more at the facility level when there is a change in administrator or even director of nursing who doesn’t have the benefit of seeing the before and after picture.

And when they come in often times they’ll bring in their own team from the facility that they came from previously, whether it’d be nursing, activities and even environmental services related. That’s something that we have to focus on the resale of the services again at that local level.

But similar to the improved retention rates, our chances of that resale are greater again, where we’re providing both services. Because unwinding a housekeeping and laundry relationship is different than unwinding a dining and nutrition relationship, because of the clinical dietician and nutrition component, as well as the purchasing and procurement.

So all again considerations and elements of the relationship that bode well for the future..

Are there any differences between when a regional work requiring a contract versus a national provider?.

No, really the approach with respect to targeting sale of any contracting obviously even operations and execution is consistent regardless of ownership type. So whether it’s a mom and pop or regional chain or the larger national chain of multi-state operator, the approach in all of the above remain constant..

And just one more from me, you mentioned that DSOs had been elevated but you’re not worried about that.

What gives you confidence that that’s not an issue?.

Well, I think it just comes back to what Matt alluded to earlier.

And we’ve talked about this quite a bit over the years and that you do have the uncertainty within the industry and the general marketplace right on top of reimbursement and regulatory challenges on a state-by-state or operator-by-operator basis, you have census and patient mix considerations or the rent rate concerns regulatory as I mentioned earlier.

And I think for us tying it back to growth that creates a tremendous opportunity to not only grow the company but also further solidify all aspects of our relationship, including our balance sheet relationship.

And negative headlines aside, our focus and our attention whether it’s with respect to DSO, which is a metric but really the underlying receivable that drives that is really no different, if anything, it’s more intensive than it’s been in the past.

But certainly no different from a customer or at least facility by facility approach where we're leveraging all aspects of the relationship to manage the risks and exposures as best we can. And look that’s not to say that we're going to ban a thousand each and every time, we have embedded a thousand in the past.

And there is going to be times well into the future where we're surprised at some point and anything is possible we’ve seen it all over the past four decades.

But our best indicator for the customer and whether or not they are holding up there end, whether they are leaving up to the terms and conditions relative to not just the receivables and the payment terms but all aspects of the relationship that we agreed to at the outset.

So again, Chad, it’s still for us DSO fluctuations aside, customer-by-customer really facility-by-facility knowing good operators are going to thrive in the challenging times and no operators that are struggled or may be have difficulty operating, are going to have a challenge even in the stable reimbursement environment..

What's been you historic collection experience on receivables?.

We’ve collected near over 99.5% of what we built, so less than one half of 1% historically over all the different ebbs and flows of the industry is what our historical collection experience has been.

And again that’s not to say as there have been again in the past, where there is the time you’re surprised or the time that the operator presents news none of us would want to hear. But over the long-term, we’re confident in the strategy we put forth and again the relationships and the terms and conditions that we've agreed.

So DSO, which as Matt eluded to, has been driven over that past year at least as much by mix and you have high profile divestitures where one or two large groups are getting out of certain states or the space all together and then the group of new regional or mom and pops that come in, and that sets off the chin of various negotiations, which are impacting not in a good or bad way but they’re just impacting everything from service levels, pricing, credit terms and it also creates great opportunities to continue to grow because really when you look at the company and the mix of customers, about 35% are the large multi-state operators but the remaining 65% are still the state based groups and mom and pops, which really present the most significant growth opportunities when we look out over the next three to five years..

I can’t actually congratulate you on the win, but I could wish you all well..

We know the company has many, many great years ahead of it. But as far as from an eagle band perspective, we want to favor this moment as well as possible..

Thank you. And our next question comes from the line of Ryan Daniels with William Blair. Your line is open..

I guess just a few nuances at this point in the call. But number one, a balance sheet question. I noticed that your accrued insurance claims were up a couple million sequentially. I don’t think we’ve seen that happen. Is that anything specific in regards to a large claim that was paid or just some year-end true-ups.

Can you give any color there?.

Yes, I think, it’s more year end true-ups and we mentioned it before in fact, it’s something it’s easy to lose sight of. We launched the captive insurance subsidiary about three years ago and it’s already become business as usual.

But when you think about the enhancements we made to our P&C programs, even prior to going Captive, they’ve been driven by -- really driven the benefits we’re seeing today and year-over-year over year continue to see ongoing benefit from engaging the new broker, nurse case management and alongside that the return-to-work program that we have on a national level.

And we’re recently unbundling the programs. And I know we’ve talked about it before, Ryan, but we engaged the third-party PPA and are now leveraging their national physicians’ panel and medical bill re-pricing structure. And again, the underlying benefits that we’re seeing are not necessarily from reducing the number of claims.

Although, that is something we’re now endeavoring to really accomplish and focus on in the year ahead. But it was to shift the type of claim from what was a one-third, two-third indemnity medical-only spit just five years ago to today what is a fast approaching 85:5, where we have 85% medical-only claims and -- 85:15, 15% indemnity claims.

And just to put that in context, there’s a -- on a fully developed basis, there’s about $30,000 per claim difference again on a fully developed basis between a medical-only and indemnity claim.

So again, in addition, I know the operational day-to-day systems implementation and trend and top-line growth gets all the attention, but that’s another great accomplishment that many, many people in the company worked hard at and we expect to provide benefits for years to come..

And then I realized you’ve already spent a lot of time talking about this. But definitely, more of an emphasis on recognizing and engaging your employees in a different way, going forward. And I am just curious is that in response to the tighter labor market more demand just need more capacity and therefore want to up your retention.

Is it really due to the tax savings such that it gives you the flexibility to reinvest? Just what is driving that, and if the tax reform wasn’t there would this still be the case?.

Yes, interesting perspective, Ryan and that actually goes back even further than that whereas a management team really in the back half of 2016, we took a long hard look and assessed how it is that we’re relating to our employees and how our employees relate to the company.

And as Ted said, really latent in the early stages of the company’s existence, where clear mission and clear direction.

And what we’ve tried to do is really put into words for our employees in this modern age what is our company purpose, what is our vision, what are the values that we espouse, and really making them specifically spelled out in clear cut language that any employee can understand so that we can have that connectedness run throughout the company at every level, the associate level all the way through senior management.

So that was really the original emphasis was to create a common language and a shared themes and purpose vision and values. And then really the benefit from tax reform has allowed us to further invest into the employee engagement concepts.

And to really explore on a deeper and I guess more formal level, how it is that our employees relate to the company and how we can improve that overall experience.

And certainly as Ted alluded to earlier, we believe that the trickle down impact of that increased employee engagement will really benefit the company overall certainly and the customer experience, which will have certainly positive benefits where the company not necessary financial and an ROI perspective but certainly from a qualitative perspective, as we talked about increasing and improving the customer experience, should translate to improved satisfaction, which may have an impact on retention.

And certainly all of those factors interweave and connect to one another with respect to the employee engagement and how that impacts the customer experience and ultimately benefit the company overall.

So I wouldn’t say that it was necessarily a result of tax reform, but certainly the investments that we were able to make in that formalized study for the employee recognition and engagement, has been facilitated by the tax reform..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Ted Wahl for closing remarks..

Great. And thank you, Chelsea. 2018 marks our 42nd year of business, and the demand for our services has never been greater as the provider community continues to face regulatory challenges, as well as reimbursement uncertainties.

Even with this increased demand, the constrain on our growth continues to be our ability to develop management people, which is why people development at all levels remains our highest priority in the year ahead. As we look towards the future, we continue to operate in a recession proof market niche.

And the demographic trends have been and continue to be in our favor. Wherein an unprecedented cost containment environment, that’s increased the demand for outsourcing services of all kinds, including ours.

We have the most talented management team that we’ve had in the history of the organization and we have the financial wherewithal to grow the business as best as our ability to manage it.

It’s incredibly exciting to imagine all the possibilities that await, and know that our future begins with our great people, going beyond and living out our purpose, exemplifying our values and fulfilling the company vision. That’s our pathway to delivering extraordinary outcomes and ensuring sustainable profitable growth over the long-term.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day..