Good afternoon, ladies and gentlemen, and welcome to the Healthcare Services Group Inc. First Quarter 2012 Financial Results Conference Call. I will now read the Healthcare Services Group Inc. cautionary statement regarding forward-looking statements. The discussion to be held and 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 information is also subject to various risks and uncertainties. Thus, such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; several significant clients who each individually account for 3% or more of revenues in the 3-month period ended March 31, 2012; our claims experience related to workers' compensation and general liability insurance; the effects of changes in or 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, 2011,…

Okay, thank you, and thank everybody for joining us. Good morning. We released our first quarter results yesterday after the close and we'll be filing our 10-Q in the week of the 23rd, but the first quarter, the revenues were up 25% to $260 million. Housekeeping and Laundry grew at about 16% and Food service better than 50% for the quarter. As we discussed in the fourth quarter call, we expect to continue to accelerate the expansion of Food service really due to the past investment we made in regional and district management people the past few years. Their progress has allowed us to begin more food service clients within the existing operational structure. In addition, Housekeeping and Laundry services continued to grow really slightly better than our traditional target of 10% to 15% top line. All quarterly revenue numbers were company records. Net income increased by 10% for the quarter to $8,545,000 or $0.13 a share compared to $0.12 a share in 2011. Our direct costs were above 87% for the quarter due to the amount of new business we started in the fourth quarter and, really, the first quarter of this year. And with the expansion, we just did not implement the operational changes and get the jobs running on budget as quickly as we should have. We expect the operating improvements to be in line, and March's results demonstrated that. It just took us longer than it should have. We'll continue to work to get the direct costs down to 86% and below and expect to do that, and like I said, March's results indicated the changes have been made. It just took longer than we expected or it really should have. Our SG&A costs were reported at 8.1% for the quarter. But due to the expense…

[Operator Instructions] And our first question will come from Ryan Daniels with William Blair.

It's Kristina for Ryan today. You commented in your prepared remarks that direct expenses should revert back below the 86% level going forward. Is it safe to assume that you met this targeted level during the month of March when the facility level budgets were back on track?

Yes. And that's why, really, not only January and February, but December, when we started up the accounts, our anticipation is to get the accounts on budget within a 30-, 60-day period. And it just took us longer than it should have. But March's results substantially improved and confirm that the majority of the reductions at the facility level were made, and that's what gives us the confidence. And I guess in retrospect, whether we should have done the phase-ins differently or more incrementally, if we've demonstrated anything at 35 years, we know how to manage the accounts and get them on budget quickly. It just took us longer than it should have, and March confirmed that we were there. So we're confident going into the remainder of the year we'll be in good shape.

Okay, that's helpful color. And I guess can you provide a rough breakdown of what regions you added new clients in the Food Services segment during the first quarter? Just trying to get a sense for which regions you have more capacity for right now.

They were really spread out evenly. I'd say the area that's probably closest to full capacity has been the Northeast, but that's because they've been allowed to grow more rapidly for over a year, where some of the newer areas, we just allowed them to start expanding more rapidly in the fourth quarter and first quarter this year. But they're going to continue to grow, but their growth may be in the 10% to 15% range, where the others still will be able to have a more accelerated pace to them, because they're still as utilized as our model will call for with the district managing 10 to 12 properties and a region managing 4 to 6 districts. The other areas, particularly the Midwest, Far West and Southeast and West aren't there yet. But the Northeast is the area and mid-Atlantic are the areas that are closest to that model.

Okay, great, that's helpful. And then one last one, if I may. As it relates to the new business wins, any change in the portfolio, meaning mix of large, small, or medium-sized operators?

I'd say modestly, it's been more the national chains that have had enough pent-up interest in Food Service over the past years that have been long-term clients, and then, as we were in a position to be able to operate them more effectively and felt confident we could expand, that's where I'd say the bulk of a lot of new business opportunities came from. It's more low-hanging fruit, and we have relationship with them already, and they were really anxious for us to expand with them in that area than before. So I'd say our client base, I usually describe it maybe 30%, 35% of the large national chains. It's probably over 40% now. And I guess 35% are privately owned chains, and the other 25% or so were individual operators, religious facilities. So I'd say the change in our client mix is really in more in the national chain expansion than some of the other areas.

And next we'll hear from Michael Gallo with CL King.

A couple of questions. I just want to sort of dig in a little bit on just sort of the margins and the cadence of growth. I guess the question is do you need to slow down the pace of growth? Or is this something about the additions or just how you manage or maybe what you learned from managing that pace that it just, for whatever reason, took a little longer to get on budget? Or do you think you have to kind of slow it down a little bit in the second quarter? Can you handle that pace? Or how do you feel with the management realignment? Will that help you absorb that pace? Or just help us to think about the framing of kind of what you added and whether that was kind of outstripping your ability to manage it or if it was just, for whatever reason, took you a little longer to get stuff on budget.

If March's result weren't that much better I'd feel a lot more nervous than I did. But frankly, I think in retrospect that probably we probably could have or should have done it a little more incrementally. Or our approach should have been different and micromanaged it. When you create 35 new districts, for example, to absorb the new business, in retrospect, this is the first time a lot of those district managers have been in that position. And to have 8 facilities in the district and add 2 new pieces of business and expect them to get it on budget within this 30-, 60-day interval is one thing. To create new districts, and 8 of the facilities out of 10 need that kind of introduction, change and start-up and expect them to get them on budget, in retrospect, we probably could have done that more efficiently and better. But the fact it just took them an extra 30, 45 days to do it, and March's performance indicated they made a lot of the adjustments, it just took longer than it should have. Looking back on the changes, and I never make mistakes, but that gave us the confidence, it just took longer. And the newer district management people are growing into their job and performing the way we expected them to.

Would you expect to add a similar level of business in the second quarter? Or there's still...

Well, the execution, as far as the new business is concerned, of course, what we really have to do is make sure we maintain that, do that properly, and, most importantly, not take our eye off the ball from the older base business and the existing clients. So the balancing act is the key. If we do that, then our growth rate is going to be in this range for the next 3 and 4 quarters without adding that much more significant amount of new clients. We just have to maintain what we have. Growing at our normal growth rate doesn't put the pressure operationally that it did in the fourth quarter and first quarter this year. And we'll be the beneficiary of the longevity of our services with those clients we started to pass. So I don't think the same issues will be the case going forward. We just have to make sure, because they're still all at-will contracts, to keep all the clients happy, both the existing ones, the new ones and the ones that have been around for 20 years.

Right. Second question I have, Dan, I don't think I heard in the prepared remarks, maybe I missed it. But did you break out how much the management, sort of the onetime management realignment costs hit in the first quarter?

You have 35 new districts that were created, with a training manager and district manager at each, and in our model of 40, 50 facility regions, so you we created 10 new regions with the Regional Director and Regional Manager in theory according to our model. So it's a pretty extensive 70 new middle-management positions that were created that needed to be offset by the operational changes of the property. And we just didn't do that as quickly as we expected to.

All right. No, I meant more specifically to the management realignment and what might hit on the SG&A line.

Well, that was more modest for the divisions. We created, now, 10 new divisions instead of the 8 that we had before, and as they become more and more established, the expense are included. So that was just a couple of basis points higher, and that should be back to the 7%, 7.25% range going forward.

Okay, and then just on the -- I knew you said previously you expected 33% to 35% on the tax rate. Is that still the expectation today?

in the previous years, when the Congress has passed that job opportunity tax, they did it retroactively. So there's a good possibility that will still be the case. But it's not in place now, and that's why the tax rate went back up to 38%. Until they pass that, it will be our normal 38% tax rate. But we're getting at least some information that this was just in the interim, so we didn't make any recordkeeping changes and expect if Congress does pass it, they'll do it retroactively.

Right. Okay, great. And then just final question, and obviously we're coming in to the time of the year when the industry all kind of start to get prepared for the, I don't know, next round of cuts or not. Are you seeing, given what happened last year, are you seeing an accelerated interest in maybe wanting to get ahead of that? Obviously, there's a view that , one way or another, they're certainly not going to let the industry get fat and happy. So I was wondering just as kind of given what happened last year, you're about to get the preliminary stuff here in a few weeks. Do you see the industry kind of trying to get ahead of that? Or what do you see on this, Dan?

No, I think as it pertains to us, the demand for the services has never really been our issue. So in more flexible times, better times, steadier times or more difficult times, in reimbursement environment for our clients, they've never been reimbursed generously enough to where they don't have to be cost efficient. So the constraint on our growth has always been our ability to develop management people, to be able to execute in a low-margin business effectively, and that's still the case. I think a lot of the national chains that we've had good relationships with over the years weren't as aggressive in outsourcing our type of services in the past in this environment because of the confidence and the relationship we've been able to develop with them, and in the reimbursement environment, they've been much more aggressive in looking to outsource services, where before the decision-making was more property by property. But I don't -- we don't think that the reimbursement environment is much different than it has been in the 30, 35 years. Some days, or some years, it's more generous because the government didn't do a good job and, as they perceive it, created some loopholes for the industry to take advantage of. On the other hand, the industry says, "Our job is to take care of the patients, maximize the returns and maximize our reimbursement and reduce the costs." And so in that environment, it works well for outsourcing companies of all kinds, not just for our services. So I don't think it will be anything dramatic. Even last year, with all the horror stories for the Medicare reductions that were publicized in October, most of the industry adjusted and adapted to it, and we're performing okay. And from our vantage point, the receivables and the collection and credit is a barometer for us, and we've never been in better shape as far as the accounts receivable. So our guys have done a very good job in managing the credit and collection function, both in the field and in the corporate office. So we don't see any client stress any more than in previous years and don't expect it going forward.

[Operator Instructions] Next, we'll hear from James Terwilliger with Benchmark Company.

That's an outstanding Food service revenue number. You said the business was up over 50%. Is that correct?

Yes, yes.

When you pick up the Food service business, what are some of the startup costs when you pick up those new clients?

The 2 components are really the purchases. First, to get the inventory levels up to the level we feel to operate most effectively is the bulk of the startup. A lot of the cupboards are bare when we take over a Food service contract. Somehow the ordering isn't done the same way anticipating us coming in than it was if we were not. So that's one of the -- but then the other startup is the staffing. I mean, for us to save money at these customers and support the middle management people, we typically do it with less people. But the first 30, 45 days, optimally, we're paying more people than we budgeted the job for, and as we go through the training and evaluating the personnel, it usually takes us that 30, 45 days of absorbing the surplus payroll expense until we get it on budget. And in this case, it just took longer than it should have, both in Housekeeping and Laundry and Food, frankly. But that's the startup costs. The additional payroll and labor costs that we're absorbing at the startup and then whatever inventory investment and equipment to get, whether it's the linen and laundry inventory or in food, the food purchase inventories to get them up to the level that we need. And then any modest equipment that may be required to be able to run the job as efficiently as we budgeted it.

Okay. I think my next question was going to be the tax rate, but I think you've already discussed that, that should be about 37%, 38%.

And if they passed it, I mean, really, for us, we're so payroll-centric that job opportunities tax required some additional record-keeping and some resources, but the benefit more than offset it. So it if it gets passed again, in the past years, they did it retroactively back to the beginning of the fiscal year. If they do that, then it will go down. If they don't, then we'll modify what our SG&A expense will be. Of course, we won't have the same record-keeping and reporting requirements if we're not going to get the tax benefit.

Okay, and then in some of your comments, you mentioned while there may have been, looking backwards in January or December or February, kind of a hiccup or maybe a onetime blip on getting some of the businesses back up to where you're more comfortable with the margins. But you do believe you've got back to "your 14% gross margin" in the month of March or as you exited Q1. Is that correct? Am I reading that the right way?

Yes, the operating performance and how we measure each of the accounts and then divisions and districts demonstrated the improvement that we really expected to take place mid-January and, certainly, February. But it took us to March to show those operational profit improvements.

Then last question. When you look at the growth, the revenue growth that you've done here in Q1 and in Q4 of last year, is there any change or any catalyst with your customers that they are moving faster in accelerating this outsourcing trend? Or would you define just it's just stable, you're just getting more business? I mean, when you look back historically at your company and you average the last 4 or 5 years each quarter's growth rate, when you look at this 25%, this 24% for Q4, these are some of the best growth numbers that, in my model, that you've ever done. So is there anything -- and I know you built this infrastructure to support this, is there any change at the customer that is a catalyst where you're seeing more customers embrace this outsourcing?

I think there has been, really, over the 35 years we've been doing this, each year, outsourcing of all kinds has become more accepted in the industry. I remember at the beginning when we started the company, almost everything was done in-house, whether it was part of a national chain or an individual operator over 30, 35 years, outsourcing companies, whether it's medical records, whether it's pharmacy, whether it's therapy or even the most mundane services like ours, have become more and more accepted in the industry. So that is more so today than last year and, we expect, next year. I think our growth has been because of the relationship we developed with the customers, that we hold up our end, they see the financial benefit but the operating benefit as well. I know that after the initial savings, which is what clients, I believe, buy in the first place, we get no credit, we think we do a better job, more resources, we're certainly not perfect. But after the initial benefit, I think the more longer-term benefit they perceive is they know whatever departments they outsource are going to hit their budget with no unfavorable variance every month. So there's no negative surprises for them. And in this environment, that's critical for them because the risk is transferred to us, they have a fixed price. It allows them the comfort to concentrate on the nursing department, far and away their largest department, and the patient mix and managing the Medicare, Medicaid and private pay census, which is their lifeblood, without having to concern themselves with a fiscal surprise in Housekeeping and Laundry, for example, or Food. And as we performed operationally, I think a lot of the clients that have expanded have seen us as a more attractive alternative for all those reasons. And I think that's why there's been stepped-up expansion of the relationship. But the constraint for us has always been the development of management people. The expansion in Food, I've talked about it for 2 years that our districts and regions were really underutilized, but that's the investment we felt we had to make and that the new business would be there when we felt the management people were capable. And that's still the case today. So I think for the next year, year and half, we'll grow at a more accelerated pace because of the business we have booked. We'll grow effectively, keep the client retention where it should be. And then after 1.5 years, 2 years, we'll be able to say, okay, confidently now, with this organizational expansion, with this performance, now longer term, this could be our growth rate going forward. But we'll be on the higher end or really exceed our historical growth rate for the next year, 1.5 years, without doing anything exciting as long as we execute properly.

And at this time, that does conclude our question-and-answer session for today. I'd like to turn the call back over to Mr. Daniel McCartney for any additional or closing remarks.

Okay, thank you. I guess, going into the second quarter, we expect to continue to expand our client base in Housekeeping and Laundry. In this environment, I know we're a little above our rate in the first quarter, but 10% to 15% is still where we think the rate -- we can do a little bit better than that, but we can manage it effectively. In this environment, even in Housekeeping and Laundry, the demand for our services is as great as it's ever been. We'll continue to target the growth rate in Food Service more rapidly because of more surplus and middle-management people. But you know, if our execution has to be balanced with the client satisfaction measurements for the existing clients and making sure we get the new business not only operationally sound but on budget as quickly as we target. Since we're now more confident in the consistency of our district and regional management people, we should be able to utilize the investment we made and continue to grow at a more rapid rate over the next year, 1.5 years or so. All our divisions continue to perform better. And with the growth, we have to prove that we can operate consistently, both for our client satisfaction levels and our own financial performance, division by division. And not taking our eye off the ball for the long-term clients because we get enamored with the growth or expansion. That's always been our balancing act. We'll look to get the direct cost below 86% and work our way back down to 85%. Food service margins are the area that will most significantly contribute to that margin improvement, but we can always do better in Housekeeping and Laundry as well. With the SG&A being in the 7%, 7.25% range ideally, our tax provision, depending on Congress' actions, will be 35% to 38% with the worker opportunity tax credit still hanging in the balance. As far as investment income and interest rates, who knows for certain, but I think it will stay at the levels that it has been in the past few quarters with no deferred comp adjustments. Our business is still strong. The demand for the services is as great as it's ever been. But more important to us, we've never had better management people in the history of the company. But it still becomes a blocking-and-tackling execution story, and we have to watch the nickels and dimes in the field. We believe the recent growth has been operating on budget, we certainly demonstrated that in March, and expect the remainder of the year to be in good shape where we historically have been. So all in all, these are pretty good times for us. Thank you for joining us, and onward and upward.

Thank you. That does conclude today's teleconference. We do thank you all for your participation.