Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Daniel McCartney - CEO & Chairman

Ted Wahl - President & COO

Analysts

Ryan Daniels - William Blair

Michael Gallo - CL King & Associates

A.J. Rice - UBS

Sean Hakimi - RBC Capital Markets

Sean Dodge - Jefferies

Rob Mains - Stifel, Nicolaus & Co

James Terwilliger - Wunderlich Securities

Healthcare Services Group, Inc. (HCSG) Q4 2013 Earnings Conference Call February 5, 2014 9:14 AM ET

Operator

Good day ladies and gentlemen and welcome to the Healthcare Services Group Incorporated 2013 Fourth Quarter Conference Call. (Operator Instructions). I would now like to read the cautionary statement regarding forward-looking statements. The discussion to be held in any schedules incorporated by reference into it will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, the Exchange Act, as amended, which are not historical facts, but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions.

Words such as believes, anticipates, plans, expects, will, goal and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Such forward-looking statements is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, preliminary providers of long-term care; credit and collection risks associated with this industry from having several significant clients who each individually contribute at least 3% with highest 5% of our total consolidated revenues for the 12 months ended December 31, 2013; risks associated with our acquisition of Platinum Health Services, LLC; our claims experience related to workers compensation and goal liability insurance; the effect of changes in our interpretations of laws and regulations governing the industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services; and the risk factors described in our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2012, in Part 1 thereof under Government Regulation of Clients, Competition and Service Agreements/Collections, and under Item IA Risk Factors.

Many of our clients' revenues are highly contingent on Medicare and Medicaid reimbursement funding rates, which Congress and related agencies have affected through the enactment of a number of major laws and regulations during the past decade, including the March 2010 enactment of the Patient Protection Act and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. On July 29, 2011, the United States Center for Medicare Services issued final rulings which, among other things, reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries.

In January 2013, the U.S. Congress enacted the American Taxpayer Relief Act of 2012 which delayed automatic spending cuts of $1.2 trillion, including reduced Medicare payments to plans and providers of up to 2%. These discretionary spending caps were originally enacted under provisions in the Budget Control Act of 2011, an initiative to reduce the federal deficit through the year 2021, also known as sequestration. The sequestration went into effect starting March 2013.

In December 2013 the U.S. Congress enacted a Bipartisan Budget Act of 2013 which reduced the impact of the sequestration over the next two years beginning in fiscal year 2014 by Bipartisan Budget Act of 2013 extended the reduction in Medicare payments through plans and providers for two years through the year of 2023.

Currently the U.S. Congress is considering further changes revising legislation relating to health care in the United States which, among other initiatives, may impose cost containment measures impacting our clients. These laws and proposed laws and forthcoming regulations have significantly altered, or threaten to significantly alter, overall government reimbursement funding rates and mechanisms.

The overall effect of these laws and trends in the long-term care industry has affected and could adversely affect the liquidity of our clients, resulting in the ability to make payments to us on agreed-upon payment terms. These factors, in addition to delays in payments for clients have resulted in and could continue to result in significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in costs and labor and labor-related costs, material, supplies and equipment used in performing services could not be passed on to our clients.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, provide new services to existing clients, achieve modest price increases on current services agreements with existing clients and maintain internal cost-reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor and impacting future operating results and successfully executing projected growth strategies.

I would now like to introduce your host for this conference Mr. Daniel McCartney, CEO and Chairman. You may begin.

Daniel McCartney

Okay. Thank you Kevin and thank you everybody for joining us this morning. We released our fourth quarter and year end results yesterday. After the close I will be filing our 10-K, the week of the 17th. As we discussed on our earnings calls the past few quarters the relationship modifications with two corporate clients during the first and second quarter 2013 impacted our reported revenue growth for the year which was below our historical targets of double digits. Although the two clients remained customers, we modified the services we provided and, therefore, the revenue from those clients was reduced.

With the surplus capacity of management people those modifications created, we’re able to successfully integrate an acquisition and accelerate our organic growth efforts especially in the divisions that were more directly affected by those modifications during the third and fourth quarter.

As we head into 2014 we have a run-rate of new Housekeeping and Laundry business under contract that will restore the company’s growth rate to our historical double digit pace. We expect to continue to methodically expand our client base in Housekeeping and Laundry as well as food service during 2014 and sustain our controlled expansion. As we have previously announced in our dividend release net income and earnings per share were unfavorably impacted by about $0.13 a share due to the mediated settlement of some labor related matters in several states. Although we deny any violations we felt very reluctantly and this regulatory litigious environment with so many positive things going on in the company that needed our full focus to manage going into the New Year.

It was better to agree to this settlements but the investment we made, our Biometric Time Clock payroll system company-wide finalized in 2011. The expansion of our Human Resource department and the recent expansion of our Legal Support department announced in December our divisional and regional people in the field will now have more resources and more support to utilize and assist in their decision making especially in this current business environment. And with that I will turn over the call to Ted Wahl to more specifically go over the results.

Ted Wahl

Thank you Dan. Revenues for the quarter increased 10% to 303.8 million. For the year revenues were up 7% to 1.15 billion both quarterly and annual revenue totaled for company records. Housekeeping and Laundry grew 4% over the prior year’s corresponding quarter to 194.2 million. Dining and Nutrition was up over 21% to 109.7 million. Going into 2014 we have very good momentum and expect double digit top-line growth with Housekeeping and Laundry at the lower end of our 10% to 15% targeted range and Dining and Nutrition at the higher end of that range.

As the Dining segment continues to have an underutilized district and regional organization as well as a smaller base from which they grow. Including settlement related cost net income was 5.5 million or $0.08 a share for the quarter and 47.1 million or $0.67 per share for the year. Excluding settlement related cost earnings per share for the year would have increased over 20% or approximately $0.80 per share.

Direct cost of services for the quarter came in at 88.6% which includes over 2.5% of settlement related cost. The districts and regions have done a good job of implementing our systems and procedures in the new business we brought on including the acquisition related facilities which helped minimize inefficiencies.

As that new business matures we would expect ongoing margin improvement while at the same time we’re continuing to get proper attention and service levels to our existing customers. Going forward our goals to manage direct cost under 86% on a consistent basis and work our way closer to 85% direct cost of services.

Selling, general and administrative expense was reported at 9.6% for the quarter, but after adjusting for 2% of settlement related legal and administrative cost and the $1.2 million gain in the deferred compensation and investment accounts help for and by our management people, our actual SG&A was 7.2%.

We would expect our SG&A to continue to be in that 7% to 7.25% range with the ongoing opportunity to garner some modest efficiencies. As we discussed in past quarters SG&A also includes gross receipt taxes paid to states like Ohio, Michigan and Texas along with investments in our Biometric Time Attendance system and other electronic record keeping initiatives.

In December we announced the expansion of our legal department which in conjunction with the personal and technology investments made in our human resource function will allow the divisional organizations to comply with the new higher and personnel record keeping requirements demanded by both the regulatory environment and job tax credit programs like WOTC.

We also announced in December the formation of a wholly owned captive insurance subsidiary as well as enhancements to our credit facility that will provide flexibility in addressing our various insurance needs of the upcoming years.

Investment income for the quarter was reported at 1.3 million but again after removing the impact of the $1.2 million gain in the differed compensation investment accounts our actual investment income was about a $100,000 and depending on the timing of the WOTC reauthorization we expect our effective tax rate for 2014 to be between 35% and 38%. We continue to manage the balance sheet conservatively and at the end of the fourth quarter had over $75 million of cash and marketable securities, no debt and a current ratio is better than 3 to 1. Our accounts receivable remained in good shape below our DSO target of 60 days even with the accelerated organic growth in the second half of 2013 and transition of the credit collection function for the new clients that were part of the acquisition.

As we announced last week the Board of Directors approved an increase in the dividend to $0.17125 per common share, split-adjusted and payable on March 28th. The cash flow and cash balances for the quarter more than 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 the value and free cash flow back to the shareholders.

It will be the 43rd consecutive cash dividend payment since the program was instituted in 2003 after the change in tax law. It's the 42nd consecutive quarter we increased the dividend payment over the previous quarter. That’s in our 11 year period that includes 4 3-for-2 stock splits.

And with those opening remarks Dan and I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Ryan Daniels with William Blair.

Ryan Daniels - William Blair

Dan let me start with a quick one on the new large account that is going to ramp up in 2014, I guess a couple of questions in that regard number one, how should we think about the impact on Q1 versus the second quarter knowing that you probably will not get the full run-rate of that in Q1. Is it going to be kind of most of the quarter or just a little bit of impact in Q1 and then most of it Q2?

Daniel McCartney

I think it will be evenly distributed. I would say it will be more during the first quarter than the second quarter. In fact we started really towards the end of the fourth quarter and last week in December facing the property stand [ph]. It will be completed by the second quarter but I would say certainly within the first three months we will have the lion share of the (indiscernible). We just won't have their full impact of the properties we add in March in the revenue numbers for the first quarter but I think the phase in will almost all have taken place by the end of the first quarter.

Ryan Daniels - William Blair

And then I know sometimes when you do bigger contracts there is actually some startup cost both from supplies and also as you get these contracts and the budget that might take a month or a little bit more. Should we think of this having actually kind of neutral to maybe even slightly negative EPS impact in Q1 or is this something that could have a little bit to earnings?

Daniel McCartney

We think it should be accretive. A lot of it's all execution getting more management people to get the startups and operating on budget quickly. There is modest upfront cost and since primarily the new business we’re discussing disproportionally today Housekeeping and Laundry it doesn’t have the same upfront cost as food service contracts to where we’re replacing the food inventory and some of the consumables. So we expect it to be accretive right away and where business is usual fashion be able to have to contribute more timely than it would otherwise. Although the first 30 days is where we’re most inefficient. If we execute properly we don’t think it will be significantly put pressure on margins.

Ryan Daniels - William Blair

And then two questions on the captive insurance sub, number one I guess you guys anticipate any material savings from that and number two I know you took up the credit line I think the 125 million and I assume there is some kind of balance but you’ve to pay to keep that open is there going to be any increased interest expense going forward that we should think about for our models?

Daniel McCartney

I think in the near term Ryan the way to think about the captive would be for the first 12 to 18 months we’re really going to get off to a running start. There may be an opportunity with general liability and some selective health and welfare programs but we’re not anticipating any significant savings over the first again year and year and half and as far as the credit facility that has that in place it is going to provide us with the flexibility around pursuing and funding the captive if we decide to be more ambitious and transition additional property in causality or health and welfare programs into that more in the mid-term. We’re going to face it in a very safe and methodical way with some voluntary programs initially in the general liability but it gives us the flexibility to adjust in this insurance environment as it changes to really most efficiently adhere to the requirements and the employee benefit functions within the human resources but we will keep everybody informed as we change and modify the captive as we go along quarter-to-quarter but we’re going to start out as Ted said very specialized and only two very modest starting points.

Ryan Daniels - William Blair

And then final and I will then hop off, just on the tax rate. I think Ted you mentioned 35% to 38% depending on what happens with the WOTC. I thought that was extended in ’14 I should probably know this but is there still some debate about if that’s going to take place that could impact your tax rate?

Ted Wahl

Yeah it hasn’t been formerly reauthorized yet. We’re somewhat comforted by the fact that the program has been in place for 17 years and the four times it was delayed during the 17 year history it was not only reauthorized but it was reauthorized retroactively to the previous expiration date. So there would be no break in continuity or availability of the credit. So we’re treating it as if it will be reauthorized whether it's point of tax extenders bill or some separate piece of legislation and that’s the counsel we’re getting from our service provider but as of today it hasn’t been reauthorized.

Operator

Our next question comes from Michael Gallo with CL King.

Michael Gallo - CL King & Associates

Ted and Dan couple of questions as a result of these labor settlement what do you expect to save in this ongoing legal expense?

Daniel McCartney

What do we expect to save?

Michael Gallo - CL King & Associates

Yeah on ongoing legal expense kind of that you were spending as you litigated that.

Daniel McCartney

Well it will be difficult to quantify but I mean it's had an impact in the SG&A of almost 2% between the accounting professional and legal expenses. So we expect it to be back to our normal SG&A levels but the legal expense we’re certainly a big part of the consideration as we were going through the process and decision making on whether to try to resolve this or not.

Michael Gallo - CL King & Associates

Second question I’ve is just on Platinum, you’ve had it now for six months or so. I was wondering what opportunities do you see there as we started to look at food service business into Platinum or is it still kind in the integration phase or where do you feel you’re now in the equation?

Daniel McCartney

Really as of mid-January the acquisition was fully folded into our existing infrastructure and in terms of cross selling Dining and Nutrition services it's really the ideas no different than we view organic growth or existing customers, PHS customers are going to be a process and it's not like we’re separating them in terms of whether or not they would be attractive Dining and Nutrition candidates and what our existing customers would have been or prior to the acquisition.

But right now the Platinum customers were still providing almost completely only Housekeeping and Laundry services so the expansion as Ted described to see a more dramatic with a potential expansion in the food service because right now we’re only doing Housekeeping and Laundry for the bulk of their clients.

Michael Gallo - CL King & Associates

And then a final question with the new customer business you added here in Q1 combined with Platinum does that completely absorb some of the inefficiencies and manager utilization that you had back to from the loss of the customers a couple of I guess a year ago or is there still some areas or just geographically didn’t quite fit in were you still do have some excess management personnel.

Ted Wahl

Between the first quarter expansion and the Platinum acquisition all the resources have been utilized. There is no excess from a Housekeeping and Laundry standpoint there is no additional excess capacity, it's all normal course of business growth from this point forward.

Daniel McCartney

And in the organic expansion and that’s why the expansion was so attractive, thus as we’re negotiating because we have really filled in a lot of the gaps and divisions that were negatively impacted by those modifications the first and second quarter. So even with the Platinum integration the organic growth really fell in and filled in those gaps and Housekeeping and Laundry in particular.

Operator

Our next question comes from A.J. Rice with UBS.

A.J. Rice – UBS

First of all just to make sure on the new business wins and the roll-in in the first two quarters of this year is that, am I right to think about that is about $50 million when it's all said and done up and running revenues and if you talked about how many facilities we’re talking about there?

Ted Wahl

Yeah it should be about $50 million A.J. I think that’s a fair number and then in terms of the facilities when you couple what we planned for Q1 with the additional normal course of business throughout the rest of the country and the other organizations. We should now hit above our targets which we have always said is about a 100 per quarter.

A.J. Rice - UBS

Okay and as you’re rolling this out and it's mainly it sounds like initially at least housekeeping, do you expect it to have any spillover effect on the growth trajectory and dietary [ph], do you have to slow that down for any reason or does that anything we should think about there?

Ted Wahl

No spillover effect. We continue to have the underutilized district and regional organization in dining from a number of facilities that the district manages in dining which is 7 to 8 compared to our Housekeeping and Laundry average which is 10 to 12 and that’s a regional in dining we’re still averaging 3 to 4 districts per region compared to Housekeeping and Laundry where we’re averaging 4 to 6 districts per region.

Daniel McCartney

And a lot of the Housekeeping and Laundry and food service regions all report at the same divisional offices. They really have a separate network for this operational capacity and marketing and sales as well so the Housekeeping and Laundry expansion really doesn’t limit it how fast the food service expands, food service is still predicated on the development of the district managers and how we assess how many properties they generally consistently operate at that face of this development.

A.J. Rice - UBS

Sure. Any commentary on the fourth quarter cost trends or margin trends between the two divisions?

Daniel McCartney

Well I’m sorry A.J.

A.J. Rice - UBS

Just thinking about I don’t think you said it in your prepared remarks I know you said the growth rates but is there anything on the margin trends between the two division housekeeping and dietary or cost trends that’s worth highlighting or calling out?

Daniel McCartney

No that will be in the K and we plan on filing at the week of the 17th. And food service margins have a start, they have continued to improve quarter-to-quarter and we expect that to continue over the next year or two as Ted described the underutilized district and regional management cost that we’re eating now as they get closer to our model their margins should continue to improve and it will be reflected and the direct cost stay in below 86% and hopefully if we execute properly working our way back down to 85% to where food service margins ultimately will near our Housekeeping and Laundry’s.

A.J. Rice - UBS

Okay and then just a last question on Platinum, I know previously you said that that was little bit of a drag on the receivables and cash flow because of the little different terms and they offer historically from what you’ve offered. Do we still have receivables that are tied up in Platinum contracts are those yet reworked or do you pretty much see that all come out at this point?

Daniel McCartney

No. They are still about $5 million or $6 million opportunity and that’s going to be a process not an event to have them conform with our credit expectations and over the next six months that’s an opportunity for us.

Operator

Our next question comes from Sean Hakimi with RBC Capital Markets.

Sean Hakimi - RBC Capital Markets

My first question is kind of a follow-up to your commentary on dining services margins, you said your goal is to for margins the dining (indiscernible) approach housekeeping over the next, is that sort of kind of a three year timeline?

Daniel McCartney

Yeah we think over the next 2 to 3 years Sean as the districts and the regions in Dining and Nutrition manage the right compliment of facilities that there is an opportunity for the Dining and Nutrition margins to really gear those of housekeeping. Again that’s not going to happen overnight by one group of customers being added in a particular area but we have the national infrastructure built in dining where we can service any facility from Washington State to Florida and I’m not saying it's easy but the easier part is layering the new business on to this existing district in regional network.

Sean Hakimi - RBC Capital Markets

I think the margin differential between dining and housekeeping right now it's around 350 basis points, that means on average over the next three years or so on average per year you’re going to see about 120 basis point improvement, 110 or 120 basis point improvement in dining margins, is that, but we haven't seen that and I understand the object utilized operational structure in dining but do you think we will at least 120 basis points this year, next year, when can we see sort of that acceleration in the margin improvement in dining?

Daniel McCartney

I think it will happen incrementally and if you look back from 2010 to where we’re 2013 the margins have improved over 200 basis points in that segment alone and really in an over simplified way Sean I think the best way to think about it is if our middle management structure the district and regional network and housekeeping eats up 2% - 2.5% of our facility level margin and dining and nutrition it's 5% to 6%. So again over the next 2 to 3 years as we layer in the new business that middle management structure is going to be absorbed across a large compliment of facilities and the margin should reflect that.

Sean Hakimi - RBC Capital Markets

Do you guys have a facility count figure for dining and housekeeping at the end of the year, end of ’13?

Daniel McCartney

It's going to be over 3700 in housekeeping and over 800 in dining.

Sean Hakimi - RBC Capital Markets

And that does not include the new service agreements?

Daniel McCartney

Correct.

Operator

Our next question comes from Sean Dodge with Jefferies.

Sean Dodge - Jefferies

Dan or Ted without specifically quantifying this in Housekeeping and Laundry, can you give me a sense of how much of your growth over the last several quarters comes through these kind of current client expansion agreements versus signing them or adding new operators?

Daniel McCartney

Well even if it's part of a corporate chain we really still look at them as separate client, some of the service agreements and they are really negotiated separately as well. But I would say our client makeup is probably 35% to 40% of our clients are part of the national change that people on the investment community maybe more familiar with and another 30% - 35% are privately owned chains and the individual operators religious [ph] facilities makeup maybe the other 15% or 20%.

That has changed over the years to include more of the national chain expansion that it had in years passed as a privately owned chains have stayed relatively proportionate but I think the more accelerated expansion has been with the national change although our approach to survey each of them individually, price them individually and not have corporate contracts even if the decision making process is more corporately driven than it had been in the past.

Sean Dodge - Jefferies

Okay and then with the SNF being a focus in the recent OIG Work Plan in the outlook for the next rate updated not being so great. I’m curious from where you said, are the SNF’s somewhat frustrated or concerned about the future than they have been historically and you found that [ph], are they closer to making decision to outsource these functions?

Daniel McCartney

For us really demand for this service has never been an issue from the company’s inception. There has always been more demand than we can do and the constraint that quickly we expand this. As always been dependent on our ability to develop a pipeline of management people at each level and certainly as we have grown that that has become even more the case. But the tighter in general that the operators feel pressure and get squeezed the better opportunities there are for outsourcing companies of all kinds including ours on a cost efficient way can take a piece of their business, give them a fixed price and resources they wouldn’t have otherwise and that’s certainly the case now. In the 37 years we have been doing this they have never been reimbursed generously enough to where they didn’t have to be cost efficient than have those considerations but in this environment the 4 or 5 years it's even been more so and I think that’s why even in a lot of national change they have looked at outsourcing even more aggressively than they had in the past.

Operator

Our next question comes from Rob Mains of Stifel.

Rob Mains - Stifel, Nicolaus & Co

I want a clarify just a couple of things that came up earlier in the call, in response to A.J’s questions about notes receivable and (indiscernible) am I correct to say that increase we saw Q3 to Q4 was largely due to Platinum customers?

Daniel McCartney

Yeah it was both related to Platinum as well as the organic expansion we had in the second half of 2013, in June and July.

Rob Mains - Stifel, Nicolaus & Co

With Platinum that came in July what were the incremental receivables be from, is that from growth in the business or from just the terms being on the books for full quarter?

Daniel McCartney

It would have been just like any acquisition or new customer for that matter outside of an acquisition that there is a process involvement, developing a relationship and it's like any other situation they like to test and make sure that you’re going to work with them in a manner that they work with previously so that’s the process rather developing a relationship, making sure that we have a goal of having them conform with what our credit and collection expectations would be over the next 6 to 9 months.

Rob Mains - Stifel, Nicolaus & Co

Okay and then I guess for a lack of better terms for reversing that as where you see that $5 million to $6 million opportunity?

Daniel McCartney

Yeah that’s the opportunity to bring in whatever what we would describe as a (indiscernible) relative to what our credit and payment expectations would be. But they are clients Rob that we inherited that had 90 day, 100 day terms and we’re out when we absorb them it's up to us now and our credit collection efforts to whittle them down to the levels that historically we have and that’s going to be a process rather than have been instantaneously.

Rob Mains - Stifel, Nicolaus & Co

Got it, okay. And then do I understand correctly from what you’re saying that the new customers that you’re going add that you talked about through these contract and added them in this current quarter are going to be spread all over the country, they will be mostly in certain region which gives you room to grow kind of like a normal clip outside of those regions?

Daniel McCartney

That’s exactly right. The majority of the contracts that we’re adding at least for the first 90 days of this year it is going to be in the Mid-Atlantic and Northeast. They were the areas most impacted by the modifications. The first two quarters so it gave us more confidence to be more ambitious in facing them in.

Ted Wahl

But in addition to that the Far West, the Midwest, the South West and the South East it will be able to grow in a normal course of business fashion.

Rob Mains - Stifel, Nicolaus & Co

Okay, fair enough. And then finally as far as your dietary division cost go, do you’ve any -- I know this is still guide growth rate (indiscernible) thoughts on the Sysco-US Foods proposed merger.

Daniel McCartney

No for us we have had long term relationships with both so we’re more agnostic towards what the outcome would be but we’re keeping in close contact with the leadership of both groups just to make sure if there is any impact we’re aware of it, we’re out in front of it.

Operator

Our next question comes from James Terwilliger with Wunderlich Securities.

James Terwilliger - Wunderlich Securities

I have got three real quick ones, first one on the balance sheet the other current liabilities spiked up this quarter, is that due to the legal settlement?

Daniel McCartney

Yes it's really legal settlement related than normal Dining and Nutrition growth. That’s really when accounts payable grows it's typically tied to increases or step ups in the dining business. You’re looking at quarter-to-quarter sequentially was in there significant of an increases as it was from the end of the year to where it is for the fourth quarter.

James Terwilliger - Wunderlich Securities

Yes my second question is really on the Platinum acquisition and see where the integration is going well but two quick questions have you started cross selling the food services to those 200 facilities and then the second question is I know you didn’t do the acquisition in terms of cost savings initiatives but how should we think of any type of cost savings coming from that acquisition as we move into 2014?

Daniel McCartney

Well we have been started selling food services to Platinum’s or former Platinum’s clients. Yeah we’re still primarily doing Housekeeping and Laundry. There may have been one or two that we added in regionally or locally that the district or regional guys might have sold them independently but overall our strategy has been is get to know them, make sure the transition goes well which it has.

James Terwilliger - Wunderlich Securities

And then is there any significant cost savings with that Dan or just more of a kind of a tailwind over time to be more efficient in 2014?

Daniel McCartney

No they have been folded and fully integrated into our districts and regions. We have really managed them the last 90, 120 days. No differently than any of our other customers, so whatever efficiencies we’re going to get other than execution we can always be more efficient everywhere it's more business as usual rather than a real significant change in our approach to profitability.

James Terwilliger - Wunderlich Securities

And my last question is going back to the legal issues in California and your settlement, is it true to say that you can have other litigations out there from different states but as of today those litigations are the potential settlement of the dollar value those litigations aren’t nearly as significant as California. How should we think about going forward quantifying this type of state litigating issue?

Daniel McCartney

We have had issues like that for 37 years the difference here was what seemed like it was gaining more momentum and we got the opportunity to look at them in the aggregate settle, an assortment of them and one fell sloop [ph] at least terms we could digest. I wouldn’t say favorable because I don’t feel like we are favorably treated but we put them to bed for business reasons because we think we did everything properly but we expect this as they come up as they come up in the past to handle them individually our settlement mediated discussions for these couple of states created unusual opportunity to wrap them all up and be done with it that was really the business decisions that we made. So we will deal with issues as they come up in this environment individually like we have for 37 years and try to stay out of trouble.

And even with the regulatory environment being more intense than it was maybe five years ago when you consider the investments we have made in the Biometric Time and Attendance System certainly the human resource function both corporately and divisionally and the more recent expansion of the legal department we really feel we’re in a good position to try and mitigate these types of risk going forward as we have been at any time.

James Terwilliger - Wunderlich Securities

I know with legal issues sometimes even if you’ve done nothing wrong sometimes the best course of action unfortunately is to settle even if you’re completely on the clear but thanks for taking my questions and I will jump back in queue. Thanks guys.

Operator

Our next question comes from (indiscernible).

Unidentified Analyst

My question has been answered. Thank you.

Operator

I’m not showing any further question at this time. I would like to turn the conference back over to Dan for closing remarks.

Daniel McCartney

Okay again guys thank you for joining us today but entering 2014 frankly our mission hasn’t changed very much. We expect to continue to expand our client base and Housekeeping and Laundry with the business that we have added will be within our historical targets. During the first quarter of the year we should increase our market penetration every quarter after that and with the right execution maintain our double digit growth rate and improve margins particularly in food service as food service continues to grow although at a faster pace than Housekeeping and Laundry due to the underutilized management structure and the pent-up demand within our existing client base and obviously a smaller operating base they will be at the higher end of our range when Housekeeping and Laundry will be in the lower end of the double digit range but certainly back to double digits. It really remains important for us to balance the client satisfaction measurements as we continue to grow and that’s no different than it's been in years pass.

As we digest the increased amount of new business and continue to operate the existing facilities on budget. All the divisions through our operating structure continue to perform better but with any expansion we need to assure that we’re consistent in our execution. We have to keep the attention on the new business startups, get them on budget timely while effectively managing the existing client base as we grow.

In recognition of today’s business environment we have expanded the Human Resource department provided them the tools and personnel to better support the divisions the Biometric Time Clock investment that’s used nationally has addressed and streamlined the personal record keeping requirements more efficiently than we had in the past when they were done manually at each of the properties by our facility managers.

The recently approved and announced captive insurance vehicle domiciled in New Jersey and financially supported through the Company’s existing credit facility will give us the flexibility to satisfy and improve the delivery of certain insurance related services in this changing environment during the course of the year. We will keep everybody informed as we add or delete or modify or providing those services through the captive.

And the appointment of Jason Bundick to fill in in the Company’s newly established General Counsel position and expansion of the legal department. He should provide more timely support advice to our management people and who are really the decision makers in the field to more effectively manage some of the issues that created an issue for us this year.

As we start the New Year we’re enthusiastic about our opportunities, demand for our services has never been greater and Housekeeping and Laundry as well as food service. Our management people in all the divisions continue to develop and get better at all levels. We believe we addressed the issues that we had to deal with this past year so we’re confident 2014 will be our 38th consecutive record year and our best phase lie ahead of us. Thank you everybody for joining us and onward and upward.

Operator

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Healthcare Services Group CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts