Healthcare Services Group Inc (HCSG) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Healthcare Services Group 2017 Fourth Quarter Conference Call. (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 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 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, Chelsea, 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 February 19.

2017 was a very special year for us as we began a company-wide 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. In the year ahead, selective expansion, along with a 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 Trump administration's agenda now in full swing, the business-friendly tone and tenor of the campaign has turned into the 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 at 2% and 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 $88 million or $1.19 per share for the year. Now that's both inclusive of a $4.5 million increase in our tax provision due to the Tax Cut and Jobs Act.

Direct cost of services for the quarter and the 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 garner additional efficiencies in the 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 the -- as we announced last week, the Board of Directors approved an increase in the dividend to $0.19125 per share, payable on March 23. 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 in 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 a 15-year period, that's included 4 3-for-2 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 A.J. Rice with Crédit Suisse.

Just a couple of questions, if I might. First of all on the benefits of tax reform. Your payout ratio and your dividend have been creeping down even as you've continued to increase it every quarter. And now with tax reform, it dips down significantly further. Any contemplation being given? And is there a timeframe on it when you guys want to think about increasing the pace of the dividend increases? Is that on the table?

Well, A.J., you mentioned tax reform. Certainly, as a company, we've been rooting for that since the mid-'80s, 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 WOTC program continuation, which continues to run through 2018. But as far as 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 -- the 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 years. 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, again, on top of the dividend, what we're thinking of in terms of employee recognition and engagement. Our version of the $1,000 bonus check, if you will, the difference is this really aligns with our facility level philosophy of recognizing the conditions of employment, not to mention has staying power, and we believe a greater ROI than any type of onetime bonus. So we've recently partnered with the third party people and changed practice to really better understand at the facility level and with all of 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 in 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 I know are talking about -- we got x amount of benefit from the tax reform. This much we're planning back to shareholders in various ways, at least driving it through the bottom line. This much we're reinvesting in the business, and that sort of sounds like the kind of things you're talking about, the investments in technology, et cetera, plus what you're doing for the worker base. Is there -- 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 sort of 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 or evaluating the opportunity for share buybacks, et cetera. So I'd say at this point, really, everything's 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 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.

Okay. With -- in the last several years, you've picked up significant blocks of business relating to the national chains. I'm wondering is that -- I guess, because you don't just take it all and you sort of stage it, is that -- that probably has pushed off some mom-and-pop and regional business you'd have otherwise done. Has that had any impact on the backlog from those places? Or would you still say that's as 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 2-year period for that matter. So it's a matter of timing and management capacity, which has always been the case. And I -- 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 as a 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 has had a different stage when it comes to management pipeline development, both quality and quantity, and those decisions are made and really driven locally more than they are in a topside boardroom-type fashion. So that will continue to be the approach not just into '18, but when we look out over the next 3 to 5 years. Now 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 in dining and nutrition. Again, year-to-year variances 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.

Okay. And my last question related just to the DSOs. I think you're running about 70 days at this point. Is -- and I know you've said that some of that's being impacted by the amount of new business you've taken on. Can you just sort of 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?

No. I'd say overall, A.J., it's remained relatively stable. Not really much movement in DSO over the past couple of quarters. And as you sort of alluded to, the fluctuations between years or between quarters, primarily driven by customer mix. And obviously, this an industry that ebbs and flows between consolidation, fragmentation. We're obviously seeing continued acquisition and divestitures out in the marketplace as you see some of the larger multistate operators, divested facilities and really, the proliferation of really the more regionally based chains in the marketplace. And in many cases, we're the only constant at the facility level. So as we work with those new operators, the terms and conditions change, the pricing, the service level, 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 as the success that we're seeing in executing our credit collection strategy; and number two, that more specifically on the overall credit and collection strategy, we remain laser focused and really micromanaging each nickel and dime down to the facility level, never mind the customer levels, much less even a rolled up overall DSO data point.

And our next question comes from the line of Michael Gallo with CL King.

Just a follow-up on A.J.'s question. Ted, it seems that the business today is probably been as chunky as I can ever remember. It used to be kind of scaled in a few facilities kind of incrementally whereas now you're taking on large chunks 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 at an accelerated rate to what you've certainly done historically. So I guess, my question is twofold. Number one, do you expect to continue to see kind of this chunky business where you'll kind of bring it in, in chunks? Or it's just some large customers that impacted that over the last few years? Number two, do you feel you've absorbed the latest chunk of business to the point where margins have improved sequentially enough where you'll start folding additional business into those districts? And three, I know historically, this company has spoken to a low double-digit overall growth rate in 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 over time?

Yes. I guess just to start off, Mike. The governor on our growth going forward continues to be our ability to develop management people. And chunkiness or momentum in 1 year as opposed to another year, quarter-to-quarter fluctuations as I mentioned during the earlier question -- Q&A with A.J., it's -- that's just variability that's going to continue to exist for us. So the sustainability comes from having a national, fully developed management team with managers and training that are -- we're building for the future and prepared to execute on the next wave of growth. So that has not changed. What -- 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 it's attributable to the nature of the cross sale. Whereas in housekeeping and laundry, it's a different type of integration to sell a standalone facility, even if it's part of a larger group. With dining and nutrition, there's different considerations for the provider or for a given operator. Maybe their 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 they'd 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 customers 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 district's growth objectives over the following 1 to 2 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 3 to 5 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. It may be 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 into the future.

[Compared to] just how you feel about the latest chunk of business, where it is relative to expectations and how the performance of that business kind of 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 we 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, training and development of management people so we can continue to grow in 2018 and beyond. As Ted said, that's -- that 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've mentioned earlier in your question or whether it's building out toward a date certain for more significant expansion with either a regional or a multistate chain. So that is always the case that we'll be adding new business, and there'll be corresponding pressure on margin as we tend to inherit the efficiencies 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 on budget. And we've certainly demonstrated a consistent ability to do that over the past 4 decades.

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

Matt, I just thought I'd build on the last response a little bit. What's your line of sight to get into that 86% level on your cost of services? I mean, what -- in terms of -- how do you think it's going to play out in '18? Is '18 the year where you get there? Is it halfway through the year? By the end of the year? How should we be thinking about that goal?

Yes. I'd say the goal itself, Andy, in and of 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 sort of hit pause on growth overall, then you'd see the nice, clean linear improvement in the dining margins, specifically with the new business that we brought onboard 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 perspective, we would expect to continue to see the business that we brought onboard 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 halfway 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 onboard 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 kind of on-budget performance by the mid part of the year. Now does that bring the overall cost of services down below 86%? No. Unlikely, given the overall continued growth strategy. So I think throughout the balance of '18, you'll 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.

That's helpful perspective. I guess, just looking back to the new dining wins that you had this year. You guys have talked about trying to get those margins coming through. It seems like it's just obviously proving a 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 has a glide path to getting there?

Andy, I would just -- just word choice, but for us, I think the difference is we don't consider to be a problem. I mean, we went in specifically into the second quarter expansion with a large multistate operator. We view that, as an organization, as an incredible opportunity, financial and nonfinancial, 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 that the P&L looks from a margin perspective. But for us, it's really in line 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 if we would have ideally been in and around budget if not by the end of the year, by the first quarter. Because of some of the considerations that we had during the startup, union and otherwise, we did take that more methodical approach. And I think that will bode well for the future. The facility level, relationships and the customer experience are trending in a very positive direction. And again, as Matt said and as I alluded to earlier, 500-plus new facilities, 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 we -- there is an absolute clear pathway that Matt touched on that delivers that -- 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.

That's helpful. I have 2 other ones that I wanted to touch on. In your opening remarks, Ted, you mentioned kind of -- that you're taking a -- I think you said -- the word was selective expansion. And as you move through '18, you didn't just say expansion. What does that mean in terms of the selective approach to your growth?

It's -- for us, it really is driven as much by the idea that there's a greater demand for the services than what we're capable of managing. So number one, it's in line with what has been a governor 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 9 months, being able to selective -- 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.

Okay. That's fair. 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 them may or may not be there, are your customers -- one, are you finding it harder to hire people because your customers are unwilling or unable to raise the wage at which they can pay? Or two, are your customers trying to put more of that -- the wage inflation risk on you in new contract negotiation?

Andy, again, I guess back to sort of choice of words, I wouldn't characterize the labor market or wage increases as a risk, either increased or otherwise. And really, on a macro level, we're not really seeing significant impact on wages nor on our ability to hire employees. So we certainly see varying degrees of wage increases or tightening of labor in selective markets for sure and respond accordingly. And we do have the benefit, as you've called out, via the structure of our contracts and the passthrough nature of the wage and benefit increases to remain relatively agnostic to 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 do we anticipate negative experience with respect to our ability to hire folks nor past wage increases along through the contract.

And our next question comes from the line of Sean Dodge with Jefferies.

I guess to start, I'll congratulate you on the win Sunday. That was also no small undertaking.

Was waiting for someone to congratulate us. Thanks, Sean.

It took all of our self control to not start off with our best version of [Fly Eagle Fly]. I can assure you that, Sean.

That's right. So maybe the deal you all did in the second quarter was a little unusual on that. There were some assets you took on in addition to just taking over the dining function. Not -- now that we're a couple of quarters beyond that, can you give us a little bit of a postmortem 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 into the conversations we've had earlier on the call, are really in line with expectations. And again, that -- if you're alluding more to the nonfinancial integration of people, systems, processes, it's more selectively leveraging where their best practices -- that 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's an opportunity over the next 6 months to further integrate from a cultural perspective, which we had a good base -- a good starting point because both groups, both companies share in many respects similar cultural foundations. But there's 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'll bode well for our current customers as well as prospective customers well into the future.

Okay. And then Matt, you made a comment earlier that in the second half of the year, you added 70 million in new business outside of what you added in 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?

Yes. So Sean, that was really, I guess, you could say growth in every part of the country other than the mid-Atlantic and the Northeast divisions which, as you recall, were disproportionately impacted by the second quarter expansion. So the Northeastern, the mid-Atlantic divisions really sort of threw the brakes 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 makeup. So there was no significant concentration of any large groups, really. Just more of the mom-and-pop-type facilities that Mike Gallo referred to earlier in addition to some of the smaller regional-type operators that I had called out previously. So nothing specific by way of major concentration of customers in those expansions. And really, we did see the business come onboard 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 kind of a nice blend of starting 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 weighed heavily toward the start nor the back end of that quarter.

And our next question comes from the line of Chad Vanacore with Stifel.

So you had mentioned that there's a shifting major in your client mix toward more regional-based clients. Can you tell us how your retention rates held up as operators are in flux and changing?

Yes. 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-sell 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 where 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, we're still at -- most at risk, and you mentioned the transitions. It's not necessarily at that ownership level. It's more at the facility level when there's a change in the Administrator or even Director of Nursing who doesn't have the benefit of seeing the before and after picture. And when they come in, oftentimes they'll bring in their own team from the facility that they came from previously, whether it be nursing activities and even environmental services-related, they -- 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 dietitian 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 what a regional would require in a contract versus a national provider?

No. Really, the approach with respect to targeting sales and even contracting, obviously, even operations and execution is consistent regardless of ownership types. So whether it's a mom-and-pop or regional chain or a larger national chain, a multistate operator, the approach in all of the above remains constant.

Okay. There's just one more for 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 talked about this quite a bit over the years. And 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, there's ramp 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 bat a thousand each and every time. We haven't batted a thousand in the past, and there's going to be times or well into the future where we're surprised at some point, and anything's possible. We've seen it all over the past 4 decades. But our best indicator for the customer and whether or not they're holding up their end is whether they're living 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 know operators that are struggled or maybe have difficulty operating are going to have a challenge even in a stable reimbursement environment.

What's been your historic collection experience on receivables?

We've collected damn near over 99.5% of what we build. So less than 0.5% 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's 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've put forth and again, the relationships and the terms and conditions that we've agreed to. So DSO, which, as Matt alluded to, is -- has been driven over the past year at least as much by mix. And you have high profile divestitures where 1 or 2 large groups are getting out of certain states or the space altogether, and then a group of new regional or mom-and-pops that come in. And that sets off a chain of various negotiations, which are impacting not in a good or a bad way, but they're just impacting everything from service levels, pricing, and -- 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, yes, about 35% are the large multistate 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 3 to 5 years.

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

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 dropped 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 us any color there?

Yes. I think it's more year-end true-ups. And I -- we mentioned it before. In fact, it's something -- it's easy to lose sight of. We launched the captive insurance subsidiary about 3 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 more recently, unbundling the programs. I know we talked about it before, Ryan, but we engaged a third-party PPA and are now leveraging their national physicians panel and medical bill repricing structure. And again, the underlying benefits that we're seeing is -- 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 1/3-2/3 indemnity medical-only split just 5 years ago to today what is a fast-approaching 85-5, where we had 85% medical-only claims and 15 per -- 85-15, 15% indemnity claims. And just to put that in context, there's a full -- on a fully developed basis, there's about a $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.

Okay. 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'm just curious, is that in response to the tighter labor market, more demand so you 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 where, as 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 sort of latent in the early stages of the company's existence were clear mission and clear direction. And what we tried to do is really put into words for our employees in this modern day and 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 sort of 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 sort of a common language and 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 concept 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 for the company, not necessarily financial in an ROI perspective, but certainly from a qualitative perspective as we've 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 benefits the company overall. So I wouldn't say that it was necessarily a result of tax reform, but certainly the investment that we were able to make in that formalized study for the employee recognition and engagement has been facilitated by the tax reform.

And I'm showing no further questions at this time. I would now like to turn the call back 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 constraint 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. 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 as fast 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 to 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.