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

Sean Dodge - Jefferies Andy Wittman - Baird Chad Vanacore - Stifel Ryan Daniels - William Blair.

Good day, ladies and gentlemen. And welcome to the Healthcare Services Group Incorporated 2018 First 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 follow 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 Incorporated 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 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'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 forward-looking statements, whether as a result of such changes, new information, subsequent events or otherwise. I would now like to introduce your host for today's conference Mr. Ted Wahl, President and CEO. Sir, you may begin..

Great. Thank you, Bruce, and good morning, everyone. Matt McKee and I appreciate all of you joining us for today's conference call. We released our first quarter results yesterday after the close and plan on filing our 10-Q the week of the April 23rd.

On Monday morning, we provided an update on first quarter results that highlighted two client group restructurings, those restructurings and the related $35 million charge impacted Q1 earnings by about $0.36 to $0.38 a share. About half of the charge relates to a multi-state operator that filed for Chapter 11 in March.

Although this is a relatively new matter, over the past few weeks we actively pursued all sources of potential recovery, as a critical vendor, member of the creditors committee, as well as outside of the re-org with other stakeholders.

Last week after CMS filed papers with the court indicating they had claims in the case, our assessment changed as this introduced the likelihood of an unknown claim that could dilute the pool of available funds for creditors, which is why we decided to reserve but not write off the amount served.

We realize that Friday's withdraw of the CMS objection has gotten some attention, but the reality is that withdrawal is only the withdrawal of the objection not a withdrawal of the claims that are now believed to exist, with still no visibility into the potential size of the claims, who they may be against and how or when they may be resolved.

Obviously we're disappointed with the situation and we will continue to pursue all avenues of recovery. The balance of the $35 million is primarily related to a customer that initiated out-of-court restructuring during Q1.

Over the past couple of weeks, the landlord's, other creditors began reaching agreements in principle and very reluctantly we did as well. For both groups were requiring accelerated payments and expect to continue to provide services during and after the restructuring. As a result, we don't expect any impact on future revenue, net income or EPS.

Before I passed the call over to Matt, I did want to review a few areas that will be familiar to those that know the company, but may be less familiar to others. First, the state of the industry. Over the past five years, the U.S. healthcare model shifted from fee-for-service to value-based purchasing.

That shift added increased complexity to what was already a challenging landscape for some long-term and post-acute care operators. The regulatory incentives pressures, as well as wage inflation are being felt in a very real way by some providers, as they simultaneously attempt to right size their capital structures and rent rates.

None of these are new issues for the industry, but it does make for uncertain times for some providers, and also create opportunities for many others. Now there have been other challenging times during various industry cycles over the years.

Like in the late 90s through the early 2000s with the Balanced Budget Act or the mid to late 2000s as the opco/propco model began to gain momentum. And more recently in 2012 and 2013 following the 11% Medicare cut.

During each of these periods not only did our company persevere, but we ultimately thrived, as we identified breakdowns and opportunities, innovated and always delivered a brighter future.

So when and if there is an issue like this past quarter, accounts receivable related or otherwise, whether it's related to industry times and underperforming operator or client that's acting in bad faith or our own lack of execution, we own the result.

Still over our four decade history of the company, we've been successful far more than not and overall even in the so-called - even in so-called stable industry times, as if there ever really was such a thing, right on through the present day and specific to accounts receivable we've written less than one half of 1% of revenue off and we own that result as well.

Next I'd like to touch on cash flow, which in our business is no different than management development, top line growth and as I just highlighted at times bad debt expense, which can be lumpy and vary year-to-year. We try to be clear about our targets and what we're trying to do.

Knowing that no matter how much we'd like it to be, this is not a quarter-to-quarter or even year-over-year business. That's not how we manage the company. And I would never use the word linear to describe any of the above, which is why when we share how we think about cash flow, I often said, the best proxy for cash flow for us is net income.

Certainly not quarter-to-quarter or even year-over-year, but over a set of years. To further that point, between 1997 and 2016 our cash flow from operations was $520 million. And our net income during that time was $510 million. In more recent history between 2012 and 2016, cash flow from operations was $255 million and net income was $250 million.

And in the next five years, we expect to be able to look back between 2017 and 2021 and have similar results. Finally on our market potential. Since the company's inception in 1976, our niche has been long-term and post-acute care.

After four decades of continuous growth and expansion, the demand for our services and opportunities for future growth are greater than ever. There are over 23,000 facilities we've identified as targets for our services, with only 18% of those facilities outsourcing housekeeping and laundry services and 8% outsourcing dining and nutrition.

We currently contract with over 95% of that outsource market in both segments. With enough pent-up demand and white space to more than support the next decade's worth of growth.

The 23,000 target facilities assumes housekeeping and laundry as the lead service offering, in line with our near term growth strategy of expanding housekeeping and laundry services with new customers, followed by the cross-sell of dining and nutrition services into our existing housekeeping and laundry client base.

Longer term as dining becomes a total lead [ph] or lead service offering it will open up another 25,000 plus potential opportunities of senior living facilities.

That fall right within our market niche and core competencies of personnel management and culinary experience, making those dining opportunities in the future as if not more compelling than our current target market. So with those opening remarks, I'll turn the call over to Matt for a more detailed discussion on our Q1 results..

Thank, Ted. And good morning, everyone. Revenues for the quarter were up 24% to $502 million, housekeeping and laundry increased around 1% to $246 million and dining and nutrition grew over 58% coming in at $255 million.

Net income for the quarter was around 72,000, but after adjusting for that $35 million reserve that Ted addressed in his opening comments, earnings per share would have been around $0.35 per share.

Direct cost of services reported at 93.6% inclusive of that $35 million reserve and adjusting for that impact quarterly cost of services is around 86.7%, which is still higher than our goal of 86%. The drag on cost of services continues to be related to the 400-plus facility that we on-boarded in the second quarter of 2017.

Now while the vast majority of those are now on-budget, there are some that are lagging and we do have a clear pathway toward having all of those on budget by July, and it's our expectation that direct costs will be back under 86% by the end of 2018 and after delivering that we'll continue to work our way closer to 85% direct of - direct cost of services, which is a realistic and achievable opportunity for us as a company.

SG&A expense was reported at 6.7% for the quarter, this quarter there was a negligible impact for the change in deferred compensation investment accounts that are held for and by our management people, so our reported and actual SG&A was right around 6.7%.

And we would expect SG&A to continue to be below 7% going forward with ongoing opportunities to garner some additional modest efficiencies.

Investment income for the quarter was reported around $0.5 million and again with no adjustment needed for a change in deferred comp, actual investment income was right around 500,000 and we expect our effective tax rate for the year to be in the low 20s, excluding a share based payment accounting impact.

Over to the balance sheet, at the end of the first quarter we had around $85 million of cash and marketable securities and a current ratio better than 3 to 1.

As part of Monday's pre-release, we also announced that we are converting $25 million of Genesis HealthCare accounts - Genesis HealthCare's accounts receivable to notes receivable and this aligns with our strategy of proactively negotiating notes, especially as part of the dining and nutrition cross-sell to further strengthen customer payment obligations and our position within their capital structures.

So coupled with the increased reserve DSO came in right around 60 days, and as we did announce yesterday, the Board of Directors approved an increase in the dividend to $0.19250 [ph] per share payable June 29.

Cash flow and 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 value and free cash flow back to our shareholders.

This is now the 60th consecutive cash dividend payment since the program was initiated in 2003 after the change in tax law. And now the 59 consecutive quarters in which we've increased the dividend payment over the previous quarter. Now a 15 year period that's included 4 3 [ph] for two stock splits.

So with those opening remarks, we'd now like to open up the call for questions..

[Operator Instructions] And our first question comes from the line of Sean Dodge from Jefferies. Your line is now open..

Thanks. Good morning..

Hey. Good morning, Sean..

How are you guys?.

Good..

In the 10-K it show there was about $30 million of accounts receivables that were related to clients and bankruptcies.

Ted the two situations you discussed for Monday, it sounds like those happened after year-end? So the $30 million discussed in the K, have those now been resolved are those bankruptcies or issues still outstanding?.

Yeah, they are reserved or they are reserved and are in the process of being worked through, so that no future exposure or significant future exposure would come from the groups that have been identified in past years. I mean, some of those balances again - some bankruptcies, some reorganizations can take. Some have been on an accelerated basis.

Others can take years to work through. So our approach in the past with bankruptcies rather than write it off and take the tax deduction, which quite honestly would benefit us from a tax perspective is to reserve it and pursue any and all avenues inside and outside of the bankruptcy court.

Because again - because we're payroll and payroll related, now we do have additional aspects and additional avenues to be able to pursue collection, because in bankruptcy court the payroll gets a preference over you know, other - super priority over other claims.

So the art for us is to be able to work with the debtor in possession or you know, prior to that the operator to file in an event of a bankruptcy a critical vendor status and then be able to use that as leverage throughout the reorganization..

Okay. And then - so maybe following on to that. I know these things aren't all that unusual among your client base and is it not necessarily a bad thing all the time for you.

Do you have any data or statistics on you know when they do happen, what percentage of your AR or your claims you're typically able to collect?.

It's a great question. You know, when you look at it, as like so many other things in the business Sean, and you know, you think about everything and I reference management development and it applies even with you know, the question around a reorganization what's our historical collection rate.

It's not it's not a relevant statistic, because what happens is you know, we have and it's very case specific. We've had many situations over the years where you know, post-petition re-org work plans are paid out $0.100 [ph] on the dollar.

There's been situations where ultimately there's a liquidation and you walk away with something substantially less than that. So it really is a client-by-client assessment, as it's always been.

If there was a topside way of addressing it and saying hey we're going to make in the risk for the next three to five years and to the extent something happens you know, will be covered, it's just not - it wouldn't be an accurate representation of really what the results were or what our assessment is for that matter.

Otherwise we would have fully reserved for it, like we did in the first quarter..

Okay. Understood.

And then, last one from me, do you have any the numbers for cash flow, maybe cash from ops, CapEx and then what the balance on the revolver is now?.

Yes, Sean. So as the cash flow and all of those details will be in the Q obviously, but for the quarter cash flow came in around $23 million. And no we did had some step up in new dining business that came in toward the end of the quarter, so you're generating the AR there, but not the sale.

And then the kind of remaining impact really relates to timing of payrolls, payables, income taxes paid, et cetera..

Okay.

And that was the cash from ops?.

Yes..

Got it. Okay.

And what - do you have the revolver balance to your fingertips?.

Yeah, I think it's - you'll see it go down by about $10 million..

Okay. Perfect. Thanks, guys..

Hey. Thank you, Sean..

Thank you, Sean..

And our next question comes from the line of Andy Wittman from Baird. Your line is now open..

Great. I'm going to start on the income statement a little bit here guys.

Just, can you give us some directional guidance as to what the dining margins did maybe sequentially here, and comment on the housekeeping margins as well?.

Yes, sure. Andy. If you think about you know, kind of the overall cost of services right, I mean, you see relatively flat there and certainly in my opening comments addressed the drag that came from some of the continued efficient - inefficiencies that linger from the second quarter of 2017 expansion.

I don't think we can overstate how significant that expansion was. We've never on-boarded that much new business in the history of the company.

You know, we call that that we'd be taking a more deliberate approach in implementing our systems, rightsizing headcount ultimately, getting those facilities on budget and as we sit here now almost a year after that expansion, we've learned an awful lot. I mean, there are some things that we could have or would have done differently, sure.

But most importantly what we can point to is now very effective operational transitions to satisfy customer and ideally relationships that have now been further fortified in a way that will allow us to continue servicing those facilities for many, many years.

Acknowledging that, there is still work to do in getting all of those facilities on budget, whether it's a union continuing to drag their feet administratively, whether it's an administrator at the facility maybe dragging her heels and resisting the implementation of our systems, rightsizing headcount or a health care services group manager who is either unwilling or unable to deliver on budget.

We have charted a very direct pathway that allows us to stay with a high degree of confidence that the dining business that we added in 2017 will be on budget by July 1st and that will of course help us move total company gross margins back to the 14% or better by the end of the year.

So you know, we did see sequential improvement in the dining margins. And as I said, that is the continued expectation to drive those dining margins, specifically housekeeping really resides more at the kind of higher end of the historical range.

And that's really primarily driven by the fact that in '17 certainly had a high degree of operational and client focus from the operational management folks within housekeeping in enabling the dining and nutrition new business ads.

And that led to just frankly fewer management trainees in the queue for housekeeping and laundry services which would otherwise create overhead. You know, in addition of course, we're continuing to focus on pursuing operational excellence and further refining our systems and utilizing technology in a supplemental type way to be more efficient..

And Andy, you know, it's interesting just because you bring up that Q2 expansion with Genesis HealthCare and when you take a step back for us, we learned quite a bit, right. This was novel to the company. So you know, we had to do it all over again. We would have planned out a 12 month integration program from the very beginning.

We would have been no less aggressive the way we initially anticipated it, it would be a three to - three to six months largely administratively focused transition, followed by you know, a three month operational integration.

What we've learned, as if we ever needed more validation to it is that the secret sauce we have as a company, which is really that culture of internal management development and these free decor [ph] among our management ranks, all of which is established at that entry level management training program that allows us one of the benefits of that you know, of many is that it also allows us to transition new business in a very consistent way over a two to three month period, where now just because of the sheer size and scale.

Obviously as Matt brought up, it was a different type of undertaking, but absolutely further validates how our training program, as we always say, may not be the only way, but for us it's certainly the best way. We're more committed to that than ever going forward.

Now we've also - when and if the next similar opportunity comes up and there will be other opportunities if not exactly the same in size and scale, many opportunities because there's an untapped market out there for us to grow with.

We'll be better prepared, we'll be able to give clear expectations as to the timing and that - around any transition of that scope and scale and we'll be able to I believe implement our systems and procedures in a more effective way then you know, what some of the stops and starts were over the past six months in particular..

Okay, great. Those are helpful perspective. Matt, I just want to follow up on a comment that you made in your response, talking about the reason the margins are so good right now in housekeeping, talking about management training pipeline there - that there's not quite as much in it.

What does that imply for your outlook for housekeeping growth for the balance of the year?.

Yeah.

Specifically from a housekeeping perspective, given how heavily involved our management team was in the 2017 dinning, nutrition operational start-ups, we have as we said, in light on the management development function and generally speaking housekeeping will be replenishing the management ranks and then should be back into business development mode really through the rest of the year.

So I think we're still in that kind of ramping phase of management development, which if you think about our virtuous cycle that we've talked about historically, management development, assessment of management capacity and then business development wins and repeat.

So we are for sure in the management development phase of that cycle right now with respect to housekeeping..

Okay. And then maybe my last question here, probably for Ted. It feels like the customer credit quality here is at more of a tipping point than it's been in a while.

And I guess, the question as you look at your accounts and the pay - and the receivables and all of that, do you need to make a change here and cut off customers soon or hand them back the payroll, maybe do the management forms that you still have the relationship intact, but do you need to pull the trigger a little bit earlier.

Are you planning on doing that? And could that have an impact on your growth rates here for the balance of the year and into '19?.

The answer would be yes, in the sense that when a customer specific situation arises that warrants that type of action Andy. That is - that has been what we've done and that will be what we continue to do.

Now what we're talking about two issues that arose you know, this past - for us arose over the past couple years, but we were in the process of working through actively negotiating. You know, we had commitments that unfortunately were not lived up to. But as we said earlier, we ultimately own the result.

But you know, one of the things when you go through something like this, clearly accelerated payments, lining up payments were in line with customers you know, governmental reimbursement and/or our payroll needs are - when I talk about innovations they're not new in the sense that we've never done them before.

But in a more kind of standard business practice type of way, that gives us more visibility into a client's behavior, right if we're getting paid weekly and they miss a check then we can react then instead of waiting to the end of the month.

So there are adjustments and adaptations we're making as we speak and have been making over the past 30 to 60 days really over the past year. And that's why you know, specifically related to the two matters in Q1, that's what happened. That is not indicative of what's happening.

And you know, I know nobody was more surprised and disappointed than we were in terms of how both of those matters ended up. But you know, we never do that ourselves and we never have. And I will tell you, I know I referenced it in my opening remarks Andy, we had many, many more success stories.

If you compared us against other you know, vendor providers in the long-term care space. They would be very envious of what we've done. What we're doing and what we're able to do from a credit perspective. And we do not tell many of our success stories.

And you know, because we don't run around talking about our customer list by name, for a whole host of customer lists by names and current specific situations for all the reasons that we believe are obvious. But you know, to others may say, well geez. I don't have as much clarity into their client base as I otherwise would have.

We had many success stories of facilities that we've exited, that we no longer do business with, that now that they're on more solid footing after they've reorganized, which we weren't part of or after they've had issues which we were not part of that are now great opportunities with a new management team, with a stronger balance sheet and will fuel the next three to five years' worth of growth.

So again, we're talking about the shortfalls and you know, where there were issues which I guess and nobody's more critical of ourselves than we are, but you know lots of success stories happening throughout the company. And like I said, this is what happens, not what's happening..

Right. Thanks for those perspective, guys..

Hey. Thank you, Andy..

Thanks, Andy..

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

Hey. Good morning, all..

Hey. Good morning, Chad..

So recognizing that there some near term credit risk in the client base.

Can you share some details of how you're measuring collectability of cash receivable? And then what kind of actions you are taking to manage those credit risk?.

It's really - you know, you start with the idea, I know there's the underlying credit risk consideration and that's where you know, historically and this is part of again the invention that's come out of the past 18 to 24 months, which really over the past six months we began having success with - with groups outside of even the two customers we're talking about in the first quarter.

But the acceleration of payments because we've always judged a customer's credit worthiness by whether or not they lived up to the credit terms they committed to us, not by some topside metric of whether they are at 15 days, 30 days or 90 days.

But to your point Chad, knowing that certainly there's the overhang in the industry of uncertainty for all the things I talked about at the opening. That does impact some operators, but there are many, many operators that are thriving in this environment.

So by accelerating payments, having more visibility into those customers and more - on more real time basis. We talked about our promissory note strategy, which really we shifted from what historically, you know, I would say pre-2012 had been a workout tool into a proactive part of our collection strategy.

Part of that is because when we have a security - when we have a promissory note with a customer not only are we memorialising the indebtedness and adding additional features, like interest rates, as well as you know, that bankruptcy protections or restructuring provisions, as well there is cross guarantees, but also security interest and we're able to gain a different type of visibility into that customer's financial performance.

And again, that's why we initiated that strategy in conjunction with the dining and nutrition cross-sell to as we're increasing our investment and are related to the size of our relationship with that customer to enhance the visibility we have, so we can make more prompt and more effective decisions..

Just staying there for a second there. The - I guess, insight into what are financials of private businesses.

You know, what are you looking for in terms of credit and making sure you're getting paid on time, rather than just seeing this same day the check showed up at the end of the quarter?.

Right. Now that's - we're not waiting till the end of the quarter and that's when I reference - the best way Chad, aside from financial analysis and credit checks all of which we're doing and we have done.

The best indicator of - you know, the best indicators, whether they're paying us in a timely manner from our perspective and again, knowing that when we hear those issues with a specific customer, we're obviously proactively dealing with them in a variety of different ways.

But on a proactive basis, accelerating customer payments, so to your point, we're not waiting again not to the end of the quarter, but to the end of the month. We're getting indications early in the month, interim months as to whether or not you know, there are challenges that need to be addressed.

So you know, we have a variety of different approaches and it is all customer - custom crafted depending on the customer. But you know, that is what we're doing and again it's a strategy that we feel very good about moving forward. That's not to say there couldn't be an issue with a certain operator that we're unaware of at the time.

That's not - that won't be a new dynamic in the company, that would be something that we've dealt with even in stable times over the course of history. But in this environment there is stepped up scrutiny.

We do have a very - a much more proactive approach in terms of again earlier and more often intra month identifying where those issues are and addressing them or reacting to them as appropriate..

All right. And just one more question for me, typically margins drop after you had a large amount of new contracts, but they normalized within a few quarters after that business is integrated.

If that margins have been slowly normalized, so what actions are you taking to improve the cost side of the equation that ultimately get you back to run rate around 86% of direct cost by the year end?.

Yeah. In this situation Chad, and you're exactly right, in the sense that when we do add new business that's when there is a corresponding pressure on margin, as we inherit the inefficiencies of the in-house operator prior to us in putting our systems and ultimately rightsizing headcount.

So that is a dynamic that comes into play and very specifically think about the second quarter of 2017 the expansion of the Genesis relationship. There remain facilities that are not yet on budget for any number of reasons. Is that okay? No. Is that acceptable going forward? No.

Is there a clear pathway toward getting every one of those facilities on budget? Absolutely.

And I outlined some of the reasons that that may be the case as we sit here today, whether it's union related, specific to customer pushback or whether it's either incompetence or unwillingness on the part of the Healthcare Services Group management team either at the facility level or even at the district level, none of which are acceptable go forward excuses.

So we do have very clear pathways prescribed for each and every one of those facilities. So there are plans in place. We will absolutely execute and we can say with the highest degree of confidence that each and every one of those facilities will be on budget by July..

And just to underscore that point Ted, it's an execution business. The issues here because of some of the dynamics I spoke to earlier with Andy. The issue here was it was more challenging for us to execute. We had very clear pathways to delivering by July.

The expectations that we had going into the relationship from a margin perspective and that's our outlook, specific to that group, but also then we'll have the net effect of raising company wide margins..

So do some of those clear pathways, does that involved changing managers in the facilities….

Yes….

Headcount and what type of pathway….

It's not about cutting headcount, it's about - it's really about systems implementation and then adherence. You know, it's a two-step process. It's one thing to implement the systems and that could mean we're actually adding headcount in some situations.

But typically you know, it results in people falling off because you know, they may or may not be interested less about our company or the go forward, it's more about you know, they're just working differently than they maybe had to before.

So that's - it's the systems implementation which is one milestone and then it's the adherence to those systems, because without the rigorous follow up of the middle management structure, the district organization on a weekly basis for QA, customer satisfaction, payroll management.

It's very easy for - very easy for facility to slip back or step back, which again is why you know, because of our organizational design it's not just because of the systems and procedures we had, there's nothing novel about our housekeeping or even dining policies and procedures.

It's about the middle management structure, the strict follow up and the consistency that we're able to deliver at the facility and that's as much an adherence issue as it is an implementation issue..

All right. Thanks for taking my questions..

Thank you, Chad..

And our next question comes from the line of A.J. Rice from Credit Suisse. Your line is now open..

Hey, guys. This is Calvin Harris for A.J..

Hey, Calvin.

How are you?.

Good.

So before you guys talked about some slowdown in payments, as facilities have been sold from larger companies to smaller operators, is there any component of that where you're still trying to collect on older items or is that really just longer payment cycles that are really on a standard cycle at this point?.

Yes, that has been a dynamic that has alluded to and really kind of related to two large national players who were you know, at one time operating north of 500 facilities you know, specifically Golden Living and Kindred.

And you know, as those folks have kind of exited the operations in the skilled nursing space, they've transferred ownership of those 500 plus facilities from what would have been two operators to literally dozens of new operators.

And you know, you start with the dynamic that each of those two operators were paying us quite aggressively even relative to what were aggressively negotiated payment terms.

So you look at that book of business and there was a kind of exceedingly low DSO for that portfolio relative to our kind of base business there that the balance of the book business. As they sold facilities, you know, highly unlikely that we'd be able to negotiate such favorable payment terms with the new operators.

And additionally when there is a transfer of license share will typically be flexible to work with the new operator because invariably there are delays in Medicaid reimbursement payments from the state, you know, typically at least a month, if not two months before the new license operator will be able to receive reimbursement monies from the state and will allow for that dynamic and work with those customers.

So if you couple that dynamic with the kind of general terms and payment of the two operators, as compared to the dozens of operators that's where you do have an impact on the book of business overall.

And just first some potentially - some additional clarity, if you think about our business, we've talked about kind of three different buckets of customers, right, a third being the largest chains, the multi-state operators, a third being those regional based chains.

And then a third being more independents mom and pops or non for profit type facilities. You know, those two chains that I mentioned Golden Living and Kindred and oh! By the way, the two customers that we've talked about in that release on Monday, all part of the one third that represents the largest of our chains.

And you know, as we sit here today that DSO for that portfolio's less than 50 days. And that's a result of both the Golden Living and Kindred transfers, in addition to clearly the event that we talked about on Monday. The next third those regional chains in and around 65 days and the final third around 65 days.

So there is some additional context and color as to kind of that distribution now, we do believe to your point ultimately there are opportunities within the regional chains and the independents to continue to work with those customers and opportunistically identify ways to improve our position with respect to payment and terms ultimately.

So we do believe that there's an opportunity there within those customer buckets that ultimately will continue to move the overall company DSO downward..

And just to put a finer point even on what Matt said about the - let's call it the last you know, 65% or 70%. If you ex out the Golden Living and Kindred transitions those two groups would be in the mid-50s, like they've been historically.

So specific to those two groups that has been and that was the driver of why those two groups are now have a higher DSO than what they've historically had, which as Matt said is an opportunity for us going forward and something we're going to be able to and continue to monitor very closely and evaluate you know, not quarterly, weekly, monthly and even on a day to day basis as we hope, as we always had..

Okay.

I mean, are there any blocks of receivables, larger blocks or receivables that you know, maybe you'd call them legacy receivables from those companies that divested that are still hanging out there that are - maybe you're chasing and are harder to collect?.

No nothing from what Matt referenced..

Okay. Okay. And on your free cash flow is that normalizes, is there any particular cushion that you target for free cash flow relative to the dividend payment.

And at what point would you consider something like share repurchases?.

Yeah. I mean, really with the new tax law taking effect this year everything's on the table. We had our board meeting yesterday and as typically as it was - it was an important topic of conversation.

But as far as the dividend policy, there is no stated policy, as we've talked about before, really the guidepost for the board of directors and for the company around the dividend is that - it be sustainable and that it be consistent.

So you know, going into this year with the still relatively new investment for us in the captive insurance subsidiary and all of the opportunity that's presented, as well as you know, looking forward over the next year having flexibility, we still have you know, nearly a million shares authorized under the buyback.

So that's a possibility and in play as well.

We have the employee engagement initiative that we've referenced, you know, on last quarter's call and we have some other opportunities to further the company's - to further the company's infrastructure that we'll be talking about more specifically over the next few months where we have more clarity into what we think the benefits of those will be.

So as far as capital allocation, again, highest and best use of free cash flow continues to be the dividend program.

You know, Matt talked about it in his opening remarks, about 60 consecutive quarters, it wasn't to preclude us from being able to buy back the stock, but it certainly was a program that our shareholder partners appreciated, and again from a consistency and sustainability perspective.

And that will continue to be our approach going forward knowing that there's going to be opportunity in the future to accelerate it, alongside accelerated cash flows which would be your net income..

Okay. Thanks, guys..

Great. Thanks..

And we have a follow up from the line of Ryan Daniels [William Blair]. Your line is now open..

Hey, guys. Thanks for taking the question. I guess most of the….

Hey. Good morning, Ryan..

Morning. Most of the bigger questions have been answered. So a follow up to what you just mentioned and something you highlighted more on the previous earnings call was the investment in engaging the workforce more.

Can you talk a little bit more about you know, what you've done year-to-date kind of 4.5 months in and I'm curious number one what that is? And number two, are there any incremental SG&A investments or headwinds we need to think about there or will be the benefit of that offset any of that, so we don't need to consider that for our model?.

Yeah, I'd say to your second question first, Ryan, as far as the investment we're making in studying and ultimately developing programs, it'll be negligible, it shouldn't move the needle on SG&A. But I'm glad that you did ask about that initiative because it's really exciting and potentially a transformational opportunity for us as a company.

We talked about last quarter you know, with tax reform, the headline grabs among other companies were one-time special bonuses or increasing wages, neither of which were available to us or would be especially effective given the compression of our contract structure with our customers vis-à-vis wage rates and the high degree of turnover that we currently have mitigating the potential benefit of a one-time special bonus.

So what we've done - what we're doing in this predates tax reform, but you know, certainly that the timing aligns nicely that, we're formally studying all of our employees frankly to understand how do they currently engage with Healthcare Services Group.

What motivates them to perform their job better? And we need to recognize that that's going to be different for our high degree of varying employee levels, right. We've got pot washers and dishwashers, ranging to Vice President of operations.

We've got our administrative staff here at the corporate office, all of whom are connected to the company differently, motivated differently and ultimately engage and perform for different levels.

So to really kind of formally study and establish personas if you will for each of those employee types and then build out some programs that align in ways that better motivate those folks, better engage them and align them with the company's purpose, our vision and ultimately in demonstrating our values, which we believe without a doubt will have a positive impact on the customer experience.

Ideally have an impact on customer retention and without a doubt, there's no doubt that it will improve the employee experience and ideally employee satisfaction and potentially have some impact with employee level turnover.

All of which would deliver significant benefits to the company not only financially, but clearly operationally and regarding customer metrics as well..

And Ryan, when you think about you know, I know that the context of when we brought this up before, we did mention this as part of you know, the dividend and even capital allocation. And as Matt highlighted, I mean, we're doing a formal very detailed bottoms up study, so that all options on the table.

And once the ROI is finalized and we had clear visibility into what that ROI looks like over the next six, 12, 18 months then we'll be able to better determine you know, how do - what's the ROI related to mitigating new higher costs. What about internal customer experience as Matt said, employee satisfaction, ultimately profitability.

So to be able to have a full view of how all of those considerations interrelate to one another is how we're thinking about it..

And Ryan, just on your question on maybe timing, we are - we're sort of in the - you know, we've moved beyond information gathering, data analysis, we're really now into the recommendation phase and starting to see a build out of some of the programmatic possibilities.

So we remain only on pace to develop an implementation strategy in the back half of the year and ultimately go live in 2019. And just for some additional color regarding what this could look and feel like. You know, it's definitely in our view going to lean more heavily toward recognition and celebrating success, much more so than rewards per se.

So it would be things like you know pizza parties.

You know, milestone recognition, whether that's an anniversary date, whether that's a birthday you know, maybe giving folks a gift card for a Domino's pizza or you know, even just operationally you know, if a facility makes it through a state survey deficiency free, let's celebrate that, maybe it's a T-shirt for all of the employees in the facility celebrating that fact.

So that's where we call out the fact that we think will absolutely move the needle qualitatively and they'll be clear ROI here, but there shouldn't be a significant investment that you'll see run through SG&A..

Okay. So that's all helpful comment. And then final one I'll hop off in the interest of time, just any discussion on the sales pipeline. I know you've talked about demand being as strong as ever. That's a comment you've made a number of times.

But I'm curious one, if you're still seeing that? Number two, you know, is it skewing more towards food or cross-selling dining solutions or maybe initial timing as the entry point and then any more skewing towards a larger chains or is it more of the one-off, just any color on the pipelines, so we get a feel for the future growth outlook? Thanks..

Yes. Thanks, Ryan. And we had talked about on our last call about having no shortage of opportunities in our pipeline and that absolutely remains the case as we sit here today.

The variability really relates to timing, regarding both client preferences and more importantly our local assessment of the management capacity and being ready to on-board new business that I alluded to earlier.

And you know, as is always the case, we need to remind our management development and make sure that that aligns with business development, that virtuous cycle that we referenced earlier.

So if you think about we're not going to put down specific markers as far as next quarter or even the quarter after with respect to top line growth expectations, but we absolutely expect the layer and additional new business throughout the balance of the year.

You know, we talked earlier about housekeeping and laundry and the potential there really ramping up the management development that will allow us to then layer an additional new business within that segment. But ultimately it comes down to that localized resource allocation determination.

In other words, it may still benefit the company overall in some geographies to have the housekeeping folks remain involved in cross-selling the dining and nutrition business. So that will be a localized assessment and decision.

As far as the dining and nutrition cross-sell, it is inherently lumpier, again, related to customer preferences regarding the benefits of scale that they apply to food purchasing and in addition to some of the transitional issues that inevitably arise within the dining and nutrition operations.

So again that needs to align with our management development capacity, but the opportunity is absolutely there to continue expanding the dining and nutrition segment, again dependent upon timing not only through the balance of the year, but beyond that as we look at our pipeline..

Okay. Great. Thank you, guys..

Thanks, Ryan..

Thank you. And at this time, I'm showing no further questions. I' will like to turn the call back over to Ted Wahl, President and CEO for closing remarks..

Thank you, Bruce. And 2018 marks our 40 second year of business and the demand for our services has never been greater. As we look towards the future, we continue to operate in a recession proof market niche. The demographic trends have been and continue to be in our favor.

We're in 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 and sustain any inconsistency along the way, as fast as our ability to manage it. It's for all of those reasons we know our best days lie ahead of us.

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

Ladies and gentlemen, thanks for your participation in today's conference. This does conclude the programme. And you may all disconnect. Everyone have a great day..