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 believe, expects, anticipates, plans, will, goal, may, intend, 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 information are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate under the circumstances.

As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Healthcare Services Group's actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors and the forward-looking information.

The forward-looking statements are not guarantees of performance.

Some of the factors that could cause future results to materially differ from recent results or those projected in forward-looking statements are included in our earnings press release issued prior to this call and in our filings with the Securities and Exchange Commission including the SEC's ongoing investigation.

There can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries or pursue further action that could cause result in significant costs and expenses, including potential sanctions or penalties as well as distraction to management.

The ongoing SEC investigation and/or any related litigation could adversely affect or cause variability in our financial results. We are under no obligation and expressly disclaim any obligation to update or alter the forward-looking statements whether as a result of such changes, new information, subsequent events, or otherwise.

Ladies and gentlemen, thank you for standing by and welcome to the Healthcare Services Group's Q3 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference call over to your speaker today, Ted Wahl President and CEO. Please go ahead..

Thank you, Sharon and good morning everyone. Matt McKee and I appreciate all of you joining us for today's conference call. We released our third quarter results yesterday along with announcing the Board-approved increase in our dividend after market close. We plan on filing our 10-Q by the end of the week.

As the industry works towards stabilization, we continue to take actions that position the company for long-term growth. We entered the third quarter with management capacity which facilitated the new business additions we saw earlier in the quarter.

Some of our momentum was tempered by our recent exit from around 90 facilities affiliated with the New York-based ownership group. Exiting this particular group of facilities was the right decision. As it's critical we maintain discipline in credit-related decisions, especially in what remains a challenging environment for the industry.

During the quarter, we continued our solid service execution in the base business. Our Q3 direct cost of services were temporarily higher from start-up related costs, particularly early in the quarter as we inherited the inefficiencies within our new business adds which are now on budget.

We also had temporarily higher payroll costs during the quarter as we still have management capacity from the strong recruiting and training efforts over the previous 12 months along with the recent facility exits.

We aim to be efficient in our service execution including management development and feel confident in our management recruiting and training plan. As investing in managers is the most crucial element in our ability to operate and grow the company over the long-term.

For the remainder of the year, we will be laser-focused on managing the base business and selectively assigning our managers to new opportunities. We will also continue with a cautious view on growth as the industry works its way through the latter stages of this challenging cycle and manages the transition to the patient-driven payment model.

In the meantime, we remain committed to making decisions that best position us to take advantage of the growth opportunity that lies ahead and deliver shareholder value over the long-term. With that abbreviated overview, I'll turn the call over to Matt for a more detailed discussion on the quarter..

Thanks Ted, good morning everyone. Revenue for the quarter was $455 million with Dining & Nutrition at $230 million and Housekeeping & Laundry segment revenues reported at $225 million.

The incremental revenue impact in Q4, related to the facility exits that Ted mentioned earlier, is about $15 million and about $10 million of that will be in Dining and $5 million or so in Housekeeping & Laundry. Net income for the quarter came in at $18.3 million and earnings per share was $0.25 per share.

Direct cost of services is reported at 87.4% with Housekeeping and Dining segment margins reported at 9.6% and 3.8%, respectively.

The temporary cost increase of about $4 million relates to payroll for account managers who've either recently completed the management training program or transitioned out of the facility that the company is no longer servicing.

Additional costs of around $2 million were related to start-up costs and inefficiencies for new business added during the quarter. The company expects a decreasing impact from each as account managers continue to be assigned to new facilities at which they're budgeted and then the new business additions operate on budget.

Overall, our goal is to manage direct costs below 86% excluding the temporary investments in management capacity and any new business start-up efficiencies that may occur. Selling, general and administrative was reported at $33 million or 7.3%.

And there was a minimal impact from the change in deferred compensation and likewise not much of an impact from legal or professional fees related to the SEC matter. And we expect SG&A to be in and around 7.5% excluding any SEC-related costs until revenue growth accelerates.

Other income and expense for the quarter was reported as a $7,000 expense, again minimal impact from deferred compensation and was impacted by timing of certain captive-related expenses as well as interest income on our notes receivable and interest expense in the line of credit.

Going forward, we expect our investment income to be around $0.5 million excluding the impact of to our comp or any other timing-related items.

Our effective tax rate for the third quarter was 23% and we expect our tax rate for the rest of the year to be in the 21% to 23% range including WOTC, but excluding other discrete items that impacted the 2018 tax rate. Over to the balance sheet.

At the end of the third quarter, we had over $120 million of cash and marketable securities and a current ratio of better than 3:1.

Cash flow from operations for the quarter came in at $60 million primarily due to the cash collections exceeding billings and favorably impacted by the $24 million increase in accrued payroll and -- because we called out the timing of payroll and the impact of the payroll accrual previously, we wanted to remind you that the fourth quarter payroll approval will be lower and more comparable to the second quarter payroll accrual.

But of course that only relates to timing and ultimately that washes out through the full year. DSO was reported at 70 days up from Q2 due to the decrease in notes receivable that were previously classified as long-term now due in less than 12 months and included as part of current accounts and notes receivable.

As announced yesterday, the Board of Directors approved an increase in the dividend of $0.20 per share payable on December 27. The cash flows and account cash balance is supported.

And with the dividend tax rate in place for the foreseeable future, the cash dividend program continues to be the most tax-efficient way to get free cash flow and ultimately maximize return to the shareholders.

This will mark the 66th consecutive dividend payment since the program was instituted in 2003 and we're proud that this is now the 65th consecutive quarter that we've increased the dividend payment over the previous quarter which is now a 16-year period that's included four, three for two stock splits.

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

[Operator Instructions] And your first question comes from A.J. Rice with Credit Suisse..

Hey, guys. This is Caleb Harris on for A.J..

Good morning..

Good morning. I'd just like to start on PDPM a little bit.

Do you have any early read from your customers on how that's going -- understanding that you're only less than a month into it? Have they talked about any unexpected challenges, or how's it going so far?.

I think you made the key point in that we're only a few weeks into it. But at this point in the lead up to the implementation and then three weeks into the implementation we continue to hear positive experiences. And so far for the most part the implementation is going as expected..

Okay.

And I guess just in your -- and the way you're looking at your customer base with respect to PDPM are there -- have you segmented your customer base in some way internally? And are you keeping a closer eye on some of those facilities that may have higher exposure to therapy and maybe more impacted by the reimbursement change?.

Like everything else, it's part of our holistic evaluation of any customer. I mean, we're looking at everything from the reimbursement environment in the state, in which they're operating in, their management team capability wherewithal. And, of course, any other reimbursement considerations like PDPM that could impact their go-forward prospects.

So that's part of our evaluation along with many other considerations..

Okay. And it was good to see some new business adds in Q3. And I understand the commentary on the cautious view towards growth at this point.

How do you think The Street should be thinking about revenue growth over the next year? Is it -- should we be baking in something very minimal or take a wait-and-see approach to what happens in Q4 and Q1? How would you think about the cadence of getting back to some reaccelerated -- accelerated revenue growth?.

The latter. Waiting -- more cautious view as we work our way through Q4 and Q1. And you mentioned it in your question but we continue to have a cautious view on the industry and specifically growth as the industry works towards stabilization and manage this transition to the PDPM. So for us we -- overall industry fundamentals are improving.

We do believe we're in the latter stages of this difficult cycle. Longer term demographic trends aside, which all of us know are extraordinarily favorable, the data we are seeing today are encouraging.

I mean the occupancy trends, stronger reimbursement, programs and trends whether it's at the federal level with the 2.5% increase we saw kick in October 1st PDPM, which has been cautiously optimistic we received within the provider community and so far so good as far as implementation.

Even at the state level from a reimbursement perspective exit few outliers, there seems to be positive trends. And we're also seeing some of these improvements within our own customer base and certainly more positive sentiment firsthand within that customer base. But as I mentioned or alluded to we're not out of the woods just yet.

And I think it's really important Caleb that we remain disciplined in our decision making, especially when it comes to credit related matters.

And we'll continue to apply that discipline in evaluating not only existing customers as well as -- but also new business adds, which again that's why we continue to take that more cautious view over the next couple of quarters..

Okay. And then just one more minor thing. You mentioned the timing of the captive-related expenses impacting other income. I think you mentioned that in a previous quarter as being a headwind on that timing.

Was this similarly a headwind, or did this go the other direction as a positive? And can you quantify that?.

This was similar to last quarter. But moving forward certainly in Q4 and then beyond, we would expect it to be in and around that. I think Matt mentioned $1.5 million or so from a net benefit in terms of that line item..

Okay. Thanks a lot guys..

Next question comes from Ryan Daniels with William Blair..

Hey guys, thanks for taking the questions. Had a quick one in regards to the credit quality of your customers. I'm curious what kind of early warning systems you have in place to analyze that risk.

And I know payment terms or delays and collecting cash would be one, but I'm more curious about anything of the site level with your facility managers that they're monitoring occupancy.

If they have the ability to report that to you get even other leading indicators on what that may look like going forward?.

It's a great question Ryan. And it is truly an all-of-the-above strategy. As, you know, most important to us is the payment coming on time and in full. And certainly as we've now migrated close to 60% of our customer base to that weekly payment model, we're getting a more frequent view into the payments.

And we've talked about the multiple benefits that come both psychologically and just from a cash flow perspective for both the customers and for ourselves with that weekly payment model where there's not that larger end of month decision point that we're artificially creating for the customer, geez do I cut this large check to Healthcare Services Group at the end of the month, which could be four times a year obviously, end of quarter.

Maybe I short pay them this month and I'll make it up to them next month or I'll sit on it for a couple of days and send it in later.

Once we get into that weekly payment frequency and cadence, they think about cutting that check to Healthcare Services Group just like they think about cutting their payroll checks, which is exactly how we want them to think about us. So migrating to the weekly payment model has certainly been a significant move for us.

And that is the most significant and loudest indicator as to the credit worthiness or credit position of a customer. Secondary to that of course, exactly as you alluded to, we are gathering boatloads of intel and data from the field some of which is gathered in the facility directly.

As you mentioned, we're typically attending the stand-up meetings in the morning at the facility in which we're getting a view as to not only the current census but generally some insight into the current payer mix, in addition to expected admits and discharges.

So at the facility level we're getting a very real glimpse as to not only the current complexion of the facility resident population but also what they're anticipating in the near-term going forward. So that gives us greater visibility as well.

And then really outside of that it's connecting a lot of dots within the larger broader vendor community, right? I mean, we're out there, we're dealing with paper and plastic vendors, chemical vendors. We're watching the chemical vendors, food vendors. It's -- we're taking some cues from them as well.

And we've had instances and we may have shared this before but we've had instances in which customer pays us on time in full no issue. But our district manager picks up the phone and calls our office here in a panic, saying that there's four vendors in the lobby of the facility saying they didn't get paid that month.

That in and of itself is enough for us to trigger a conversation with that customer. And really require that they make us feel comfort even in spite of maybe a pristine track record of paying us. So it really is Ryan an aggregation of different data points and sources that we utilize not the least of which is the payments, obviously.

And that it is really that kind of multi-pronged effort with our financial services team here in the corporate office really being the champion of contract integrity, the formal credit assessment process but very much supplemented by our field based organization and operators..

Okay. That's very helpful color. And then just as a follow up, I want to talk a little bit more about the revenue profile going forward.

Can you speak to how much -- and you may have mentioned this but how much new business was signed in the third quarter? And how much of that was actually recognized during the period? So trying to get a feel for take the run rate, take out $15 million.

How much do we want to add back in that wasn't recognize this quarter to get kind of a run rate entering Q4?.

Yes, Ryan, as far as the business that we added in the third quarter, nearly all of it was added in the early parts of the quarter. It was about $50 million in annualized revenue. And we saw just about $12 million impact in Q3. So nearly all of that ran through the Q3 results. Now that's offset by obviously, the facilities that we exited.

The exited facilities amount to about $70 million or so in annualized business. And only about $3.5 million of those exits ran through the Q3 results. So that's where we end up with about $15 million remaining to run through Q4 results from a revenue perspective..

Okay. That's helpful. And then last question. Can you give us a proxy for kind of how many excess facility managers do you have? Just so we can see kind of the inherent capacity that's already on the system that you're not generating revenue for.

And maybe any color on your thoughts on how long that could take to deploy to get back to normal margins? Thanks..

Yes. It's challenging for us to really quantify explicitly Ryan, how many managers are currently out there throughout the 48 states in which we operate within our field-based organization. It's obviously very fluid.

I would say that if you think about the various buckets, really two buckets, one being managers who've recently made their way through the training program. That's a number that continues to decrease, especially in geographies in which there is either an opportunity to fill vacancies or to upgrade current management positions.

The other box would of course be managers who are freed up as a result of having service or been the manager assigned to a facilitate that we're no longer servicing and that's where there's much more fluidity, because certainly we freed up a number of managers, as a result of the facilities, we exited in the second quarter, which very much well positioned us to be able to onboard that new business in the third quarter.

So you're right out of the gates in Q3 with onboarding new business, absorbing some of that capacity from the second quarter. But then, unfortunately that offset with exiting facilities at the tail end of the quarter and early parts of Q4 here, which again frees up additional capacity. So it's very fluid Ryan.

And I would say, the benefit that we have currently is that – very well geographically dispersed. So it does become very much a localized effort down to the district level as to ultimately finding a home for those managers.

And that could take the form of either as I said filling a vacancy, upgrading an existing management vacancy – I'm sorry an existing manager, who is not performing up to snuff or ultimately assigning them to a new business opportunity..

And that's why Ryan even though we have a cautious view towards growth over certainly the next three to six months, as the industry as I mentioned continues to stabilize in conjunction with the PDPM implementation.

Over the next – over the coming year, you should see a direct correlation between new business adds and then direct cost of services coming down as we're deploying and assigning those freed up managers to specific facilities and to new opportunities..

Okay. Thanks guys..

Thank you, Ryan..

Next question comes from Jason Plagman with Jefferies..

The first question, so as – I imagine that PDPM is absorbing a lot of management attention at your clients currently. Do you think that could have any impact on client implementations of your services over the next two or three quarters? Just any thoughts there would be helpful..

We think of that as more of a Q4 dynamic. I think the short answer would be yes. Certainly, we talk about all hands on deck with certain things here in terms of a team-based effort. Matt mentioned it in the context of credit collections.

Certainly, on the – on our customer side right now that is, if not the sole focus the primary focus is the successful implementation of the patient-driven payment model. So in terms of some new business opportunities that we otherwise would have started in the fourth quarter, they would likely be pushed out into the first half of next year..

Okay. Thanks. That's helpful. And then just one clarification, I think you gave the number – the dollar impact of the excess managers you carried in Q3.

I didn't catch that number, if you could just repeat that that'd be helpful?.

That was around $4 million, Jason..

Okay. Thanks..

Next questions come from Mitra Ramgopal from Sidoti..

Yes. Hi. Good morning. I am sorry, if I missed this early.

As you look at the bench in terms of the managers you have from exiting the facilities and from the ones you've trained and developed how confident are you that you are going to be able to assign these managers to facilities over the next 6, 12 months? And again that's also leading into the optimism you have in terms of bringing on new business in this environment?.

Yeah. I would say Mitra, there's a 100% confidence that we will be able to place those managers. The timing is the question as is always the case and really kind of ties into Ted's comments about revenue and adding new business.

But the time frame that you outlined would be 6 months to 12 months, I'd say that we feel very confident that the managers that are currently sort of considered excess capacity if you will not specifically assigned to a facility at which they're budgeted, I think it's exceptionally reasonable to expect within a 6 month to 12 month period they would all be assigned to various facilities.

So there'll be puts and takes as to the revenue and facility adds. But very confident that the current crop of sort of underutilized or unassigned managers will be placed within – certainly within a 6 month to 12 month period..

Okay. That's great.

And then as you – again in terms of the new business, if you can give some sense in terms of the conversations you're having? Are you finding potential customers taking more of a wait-and-see approach, or are they more willing to listen to your proposals versus say maybe six months ago?.

I think – yeah, there's always been a willingness and I think just building off of what Matt just spoke to I – we have significant visibility into the business. We have significant visibility into service execution, whether it's quality assurance at the facility level, customer satisfaction, budget versus actual.

And as we talked about before in a consistent way, we have significant visibility into the demand for the services, new business activity and certainly our pipeline. But it is an industry that continues to be in a state of transition.

And I think because of that we're going to assess these new opportunities and onboard facilities over the next couple of quarters. But we're going to do so in a more controlled pace until we decide it's the right time to reaccelerate..

Thanks guys for taking the questions..

Okay, great. Thank you, Mitra..

Next question comes from Bill Sutherland with The Benchmark Company..

Thanks. Good morning. The operating cash flow is awesome in the quarter.

You think you'll be about at the $80 million level for the year?.

I think that's a fair number. And I know that's in and around where we're at now. But when you think about cash collections and cash flow for the quarter, it'll be significantly impacted. Similar to Q2 of this year, by the change in the payroll accrual -- the timing of the payroll accrual. So that would be as good a number as any to use.

And if we over perform, we'd be able to point to specific reasons. But our goal remains the same, we want to collect what we bill quarter in and quarter out. We've done that three of the last four quarters.

And we would point to, certainly, among other things, the change in payment frequency and that initiative is being a significant catalyst for that type of success. If we were here a couple of years ago, Bill, we'd be talking about how very few, if any, of our customers were paying us at a frequency greater than monthly.

And Matt mentioned it earlier, but here we are today and I attribute it to proactive leadership to innovation from the ops team and the financial services team collaborating around ways to improve our experience to migrate towards this higher frequency payment model.

And here we are today with dam near 60% of our customers paying us at that type of frequency. So, again, that leads to more visibility into the customer's financial commitment, to the partnership, as well as more predictable and more consistent cash flow..

And then with the balance sheet improving and the stock where it is, any incremental thoughts by the Board on returning cash to shareholders potentially like a repurchase program?.

Yes. It's always a point of discussion. We haven't been shy about communicating to you and to others that the Board and the company's priorities in terms of capital allocation continue to be organic growth first and foremost, which we're deeply committed to, as well as the dividend, which consistency, sustainability of is really the guidepost.

But that does not preclude us from looking towards a share repurchase plan, if it makes sense at a point in time. So I would never take that off the table. But again, that's how we think about capital allocation in terms of priority, at least at the present time..

And then, Ted, I guess, the last one, as I think about this latest group of facilities that you've decided to exit from.

When you look across your portfolio at this point, how would you categorize facilities where you have to think about this potential loosely like a -- some sort of partnership, like you're dealing with here that, besides to centralized billing.

And you have to deal with them on a different basis at that point?.

Yes. Look, I think, just in terms of exit to a revenue step downs, I would answer it this way, Bill, we've done a lot of work over the past year, right? Going back to the third quarter of last year, with the housekeeping initiative, which was more margin-focused.

I know in the fourth quarter, with some of the food transition work we did on the dining side and then the second quarter of this year with the transitions largely in Texas but other transitions as well and exits that we had and then this quarter. I think we've done a great deal of the work. We do not foresee any.

But, look, if a partnership or client relationship is trending in the wrong direction or is no longer in the best interest of the company, we're prepared to make that decision that maybe somewhat painful in the short-term, but best positions the company for the long term.

So I know that's not a specific answer to your question, but I am sharing our thinking on it. But we've done a lot of the work. And we don't anticipate any as we look out over the next three to six months..

Yeah. I would only add to that Bill. It's interesting the way that you asked the question asking about categorization, which for us is -- it doesn't apply necessarily to a lot of what we do because of the very specific nature of each contract and the facility relationship and the ownership structure and the payment structure.

So for us, we would more likely get ourselves into more trouble by attempting to categorize and sort of paint with broad strokes as it relates to our customer and payment and credit related concerns, which is why getting back to the earlier conversation we had in response to Ryan's question about the credit assessment.

It really does need to be a facility-by-facility ownership-group-by-ownership-group factoring in the REIT relationship and the property company and how that inter plays. So for us categorization of our customers and subsequent relationships would be a dangerous game to play.

So unfortunately, we do need to and we're very much committed to the assessment down to the facility-specific conditions and all the resulting outflows that I mentioned as it relates to contract ownership payment credit et cetera..

Okay. Thanks..

Next question comes from Brett Knoblauch with Berenberg Capital..

Hi, guys. Thanks for taking my question. I'm on for Sam. First question is really on the customer exits and I guess that headwind.

Is it fair to assume $50 million headwind for both Q1 and Q2 of next year I guess all else equal?.

No. The $50 million was the -- in and around the amount of new adds, new business during the earlier part of the quarter. I think you're probably referring to the 90 or so facilities, the $70 million or so that we exited later in the quarter into the current quarter.

And that would be on a net basis about a $15 million headwind if you will into next quarter..

And -- but that headwind won't persist into Q1 or -- and Q2, or it would?.

No. It'll just become -- it just becomes the new base revenue.

So no that would carry over until the revenue is replaced as we deploy, as we utilize some of the management capacity we had in new business opportunities, similar to what we did in the current quarter where we had freed up managers from some of the second quarter exits and we're -- as well as additional management capacity from a lot of the work we've done in building out the management pipeline over the last year.

We were able to deploy and utilize those talented management people and new facility opportunities. So that is -- we're not having a specific decision like we made in the -- at the end of the quarter this year where that is the virtuous cycle.

We're developing management people and we're utilizing them and they're having opportunities in new business that we're citing and that's a rinse and repeat effort in terms of our management development and new business add cycle..

Okay. Then maybe on just the new customer acquisition pipeline and how that is looking.

Could you maybe compare that to how the trend with I guess that pipeline looks with maybe your management pipeline? And how that hits historically trended? And has the management pipeline kind of always been more robust than a new customer acquisition pipeline and maybe just some color on that?.

It's interesting that the sort of just a position as you frame it, because we are in a position where we're really experiencing the complete inverse of what we've seen historically.

For those who've followed the company for a longer period of time, you would have heard us frequently and consistently about the gating factor on our growth being our ability to recruit hire train develop and ultimately retain our managers. And we've generally been able to grow as quickly as we were able to develop managers.

The point -- this point in time in the company's history for all of the reasons we've outlined some of which are within our control as to the sort of restart and reignition of the recruiting efforts, some of which were somewhat painful and not necessarily of our primary choosing that being exiting of facilities has created this management access.

And that overlays into a time period in which we're really -- and probably the second greatest challenging industry cycle that's been in place and we've been doing this going back to 1976.

So it's really having the management capacity is a -- really a luxury that we've never enjoyed to this great degree, that's of course tamped down a bit by the cautious view that we remain having as it relates to the industry and the prospects to layer in new customers or expand relationships with current customers.

So the norm is very much more so breadth that we would have excess demand as compared to management capacity. So we find ourselves in a very great position right now with that management capacity coupled with essentially record levels of demand.

It's just applying that caution and doing the diligence in assessing opportunities to expand the business that may from a timing perspective lag out a bit of the growth relative to what we might have seen in other times of having management capacity at our avail..

Okay. Thank you for taking my question..

Last question comes from Chad Banneker with Stifel..

Thanks. So Matt you mentioned that, it's a challenging point in the cycle. And you and Ted have been at the helm of -- for a couple of business cycles now.

So, I'd like to hear from both you and Ted what is it about this point of cycle that differs from other cycles you've seen? And why is contract turnover higher compared to the past?.

Yes. I don't -- I would say over the past 15 years, we haven't seen a cycle like this Chad. And Matt referred to the balanced budget act which was in the late '90s as being maybe the other counterparts of this type of cycle. So I think this is different for a variety of reasons.

But certainly – its relative to the last, let's say a couple of decades, it was occupancy, right? The low between the demographic trends -- favorable demographic trends from the baby boom bring preceded by the lowest birth rates in U.S. history. And that demographic trend that age cohort working its way through the long-term care continuum.

So I think that created significant pressure in the industry at large and then you layer in some of the wage inflationary pressures, the uncertain reimbursement environment. Some of these have always been ebbs and flows. But I -- and then lease cost, right? Some of the lease cost pressures that were out there and had to be worked through.

So I think this was a confluence of different factors which made it somewhat unique again relative to the past couple of decades of our experiences. Having said all of that and I've mentioned it a couple of times throughout the morning, we see industry fundamentals improving. And that is clear to us.

The data are clear in terms of the -- rationally where we believe the spaces is going. And we're going to be prepared to execute on our long-term growth strategy -- when optimistically, over the coming quarters, but certainly longer term. We believe we're well positioned to do that..

What kind of signs are you looking for in your client base that's going to signal that recovery?.

It really gets back to that.

The granular sort of facility level assessment Chad, right? I mean are the beds full? Do they have a pipeline of new admits awaiting them? Do they have healthy relationships with their local hospitals and health systems to continue to see that pipeline? So it's really kind of that bottoms up assessment of are the beds full? Is there a plan in place to optimize their occupancy? And likewise to leverage the opportunity that PDPM presents to them.

So it's really more art than science. But ultimately, the greatest indicator for us as it relates to our current customers is with respect to payment, are the payments come on time? Are the payments coming in full? That is the greatest indicator for us.

And as to assessing the creditworthiness of the overall health of a prospective customer, unfortunately there's not a magic test that we can run or formula that we can apply.

It really is that, that rolling up the sleeves ground up, bottoms up effort to assess the local conditions and then do the homework as it relates to ownership structure, their behavior and reputation within the industry as it relates to the vendors and other providers within the community.

So not really trying to round out our assessment; both quantitative and qualitative as much as possible..

All right. And then just one for me, since you've talked about cash flow earlier. It was solid in third quarter, but do you expect to get some back in the fourth quarter due to use of working capital and lower revenues? Where really should we expect free cash flow shake up for fourth quarter and full year 2019.

And then how do get back that $80 million to $100 million in 2020 that you historically have done?.

Well, first Chad, I appreciate you saying record cash flow is the highest cash flow the company has ever experienced in a three-month period is being solid. Thank you for that..

Now you're putting words to my mouth..

No. But right around right where we're at because of the timing and the payroll accrual we'd expected to look more like Q2. I think we had $2 million or $3 million cash flow as reported in the second quarter, because the second quarter was impacted in the other direction by the timing of the payroll accrual.

Matt talked about how that strictly intra-quarter impact not a year-over-year impact. So we would expect -- we're at over $80 million sitting here today, Chad. So any additional cash flow for the fourth quarter would in fact put us in that $80 million to $100 million range..

Okay. I’ll leave it there. Thanks for the questions..

Great. Thank you..

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

Okay. Thank you, Sharon. We look forward to finishing the year strong and laying the groundwork for 2020, as industry fundamentals continue to improve.

For the remainder of the year, we will prioritize managing the base business, assigning our new managers, our managers to new opportunities and exercising discipline and evaluating both existing customer’s relationships as well as new business opportunities.

All the while making decisions that best position the company to take advantage of the growth opportunity that lies ahead and deliver shareholder value over the long-term. So on behalf of Matt and all of us at Healthcare Services Group, I wanted again to thank Sharon for hosting the call today and thank you again everyone for participating..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..