Good day, ladies and gentlemen and welcome to the Healthcare Services Group, Inc. 2019 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. 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, goal, 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 risk 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 the 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, including the SEC's ongoing investigation. There can be no assurance that the SEC or other regulatory body will not make further regulatory inquiries or pursue further actions that could result in significant costs and expenses, including potential sanctions or penalties as well as distraction to management. The ongoing SEC investigation and/or any related litigation could adversely affect or cause variability in our financial results. We are under no obligation and expressly disclaim any obligation to update or alter the forward-looking statements; whether as a result of such changes, new information, subsequent events, or otherwise. I would now like to introduce your host for today's conference. Mr. Ted Wahl, President and CEO. Mr. Wahl, you may begin.

Hey, great. Thank you, Josh, and good morning, everyone. Matt McKee and I appreciate all of you for joining today's conference call. We released our first quarter results yesterday after the close and plan on filing our 10-Q by the end of the week. Before I get started, I did want to recognize that over the past year or so, the industry cycle along with other events has certainly led to a few interesting quarters and less consistent external results than what those that know the company well have become accustomed to over the years. But at its core, beyond some of the recent noise is a consistent maybe even boring business, a word that many of our shareholders have used to describe the company over the years with, and a compelling growth story that's simple -- that has simple and time tested goals, to hire good people that we can train and develop, to stick to our facility level operating systems, to provide our customers with a great experience, to grow the company from a satisfied client base, and to promote from within the very same people we hired, trained, and developed to support our continuous growth. That is the virtuous cycle that we're creating, that is our business, and that is our future. This past quarter was eventful yet very productive. Eventful in that the industry continued to work through a challenging cycle that has negatively impacted some of our customers, leading in some cases to restructurings or payment issues that required us to increase AR reserves, which impacts reported earnings or reduce services, which creates a temporary step-down in revenue growth. We saw some of these dynamics play out in Q1 and Q4 of last year as well. The quarter was productive in that our management team…

Thanks, Ted. Good morning, everyone. Before I get into the detail, I wanted to mention some of the ongoing benefits of our new ERP platform. The capabilities of the ERP now allow us to assign certain facility related cost to the facility specifically. So, those costs that were previously included as part of SG&A are now included in cost of services. Some examples are pre-employment screening, hiring and on-boarding costs, and hardware and software costs, and then certain field-based costs that are outside of the facilities like district manager costs that were previously included in cost of service are now in SG&A. The net impact of this adjustment is negligible from a reporting perspective, but it does provide us with a clearer sight line on the true operating performance at the facility level. Another change worth noting is that the Company through our captive subsidiary offers discounted voluntary benefits; including limited medical, short-term disability, and term life insurance to our employees. Historically, the premiums were recorded as revenue and the related expenses as cost of services, but are now included as part of other income and other expenses. So, revenues for the first quarter were down about $19 million sequentially to $476 million. Housekeeping and laundry revenues were down about $5 million to $233 million. Dining & Nutrition revenues decreased $14 million and came in at around $243 million. The decrease in the housekeeping and laundry revenues was primarily related to us canceling service agreements with a privately held California-based operator over payment related concerns, and the majority of that revenue step down is reflected in the current quarter. The decrease in the Dining & Nutrition revenue was primarily related to the previously announced fourth quarter contract modifications with Genesis Healthcare. The contract changes decreased Dining & -- Dining &…

Thank you. [Operator Instructions] Our first question comes from A.J. Rice of Credit Suisse. You may proceed with your question. Q – Caleb Harris: Hey, guys. This is Caleb Harris on for A.J. A – Ted Wahl: Hey, good morning, Caleb. Q – Caleb Harris: Hey. Let me first just ask, we've had a few surprises over the past five quarters, are there any other specific discussions you're having with customers that might result in a restructuring or termination in the near term? A – Ted Wahl: No, none that we're aware of now, but as you know being familiar with the company and anyone familiar with the industry knows, and this isn't unique to just the current industry cycle, there's times where things go well until they don't. And we do have visibility into our customers. A big part of increasing that visibility, as Matt described in detail with the weekly payment initiative, is getting forward looks at a customer's commitment to the partnership and it's like a four to one increase over the monthly payment. So that will provide further visibility to get out in front of issues prior to them arising. But when you mention the surprising quarters or a few of the surprises, much of them, Caleb, when you talk about Q1 of last year and even this current quarter, they're legacy matters. It's what happened oftentimes years ago with customers that we worked with in some cases for decades, with AR balances that we've carried for years. So, we believe we're absolutely on the right track in increasing that visibility and reconfirming that customer's commitment by increasing payment frequency. But again, getting back to your original question, sitting here today there is no dialog we're having with customers or no -- nothing above and beyond what would normally take place that we would expect to arise next quarter or at any other point in time this year.

Okay. I appreciate that. And just thinking back to the first quarter last year where there was the $35 million write-off and then the situation in the fourth quarter of last year. When you're trying to collect on some of that, how long does that typically take? And on some of these recent issues, have you collected some of those amounts that you've written-off or is that still an ongoing process?

It's very customer and very situation specific. So if you have an in court restructuring, right, that's relatively perfunctory relative to whatever that specific case has for all the unsecured creditors and depending on how we're being treated with payroll and payroll related costs specifically, but that's administered by a U.S. trustee and overseen by the court, right. So, that's one type of situation. Out of court restructurings, typically are resolved sooner, since it's a collaborative and cooperative process generally, and then litigation or litigious situations oftentimes end in some form of settlement before, not necessarily at the courtroom steps, but prior to. And then there's just the normal course out of court and out of court workouts where you're working with the customer in a somewhat cooperative way to try to maximize an outcome for everybody; for the company, but also maybe there's a way to maintain and grow the relationship. So, it just depends on the situations. I think relative to the first quarter, which is what you asked about, one was, an out of court restructuring so that is there's no additional monies coming in from that. About half of it was the multi-state operator that we have worked with for years, and agreed to an out of court restructuring and we're continuing to service that provider. The other one well publicized Orianna is in the process of being finalized, if not finalized at the courts, within the bankruptcy court now. So, there will be a payout, a modest payout to the unsecureds, but timing is still uncertain relative to that.

Okay. And just one more quick one on the cash flow. Obviously, it was -- I think it was about $2 million or so excluding the payroll. What do you think you'll be at by the end of the year on cash flow? Do you think it's going to look pretty similar to the profile last year?

Yes. That's what we would expect. Again, I think this quarter was atypical, because we did have that the weekly payment conversions that impacted DSO. We had about three days or four days that were March payments -- payments that were due at the end of March, which were received in early April. All the more reason, why we're working with our customers to convert them to a higher frequency payment design, because when someone is paying monthly, it just takes a missed day or two and then you end up having some DSO variability. And more importantly, for the company temporary cash flow variability, which we obviously have the balance sheet to support, but that's not -- that's not the idea. But yes, we would expect cash flow moving forward to look like it did from the following three -- the Q2, Q3, and Q4 of last year. I think we ended up with over $80 million of cash flow last year. So, that would be a fair number to have out there.

Okay. Thanks a lot guys.

Hey, take care. Thank you, Caleb.

Thank you. And our next question comes from Andrew Wittmann of Baird. You may proceed with your question.

Great. Thank you. Good morning, guys. Yes, I'm just going to -- I'm going to ask some more questions on the cash flow as well. I guess, just to get a little context here. The $18 million in total that you talked about that was reserved in the quarter, were these uncovered as a result of these presumably more detailed conversations you're having with all of your customers, as a result of the cash payment terms? Or is this kind of normal course of business? And I guess the reason why I asked that question is, because you went from 40% last year -- 40% at the end of last year, 55% here today, clearly there's 45% more to go. And I got to think that, by the time you're done with all these more detailed discussions about how and when your customers will pay you, you'll probably have an even better level of confidence with the status of those outstanding receivables. So, I guess my question is -- we heard you before, you said, you're not expecting any more and, obviously, that's the case, otherwise you would have had to reflect that in the -- in your numbers. But as you go through the remaining 45%, won't you have more confidence at the end of all that than even -- you do even today?

Yes. I'd say, just to unpack your question a little bit, Andy. If you think about the makeup of the kind of $18 million from this quarter; the majority of it, right, I mean, two-thirds of it was with that -- the Northeast customer, more specifically, New England and that's a 13-year client for whom we're providing both housekeeping and dining services. So we're really looking at legacy AR balance, which represents about 90 days AR. And mid-year last year we did move them to the weekly payments, but then just a few weeks ago they came to us and told us of their intention to restructure and asked us to play a part in that process. So, we're still very early days there. Can't handicap how long that will take or ultimately what our recovery will look like. But we feel like we reserved appropriately and unless our view of the situation or their intentions change, we'll continue providing services and billing them weekly. The California situation is a little bit different. They're a housekeeping-only customer for a number of years. And we did start to have concerns about their intention to pay us and we started to do that dance that we've talked about previously, with some payments being a couple of days late and then payments being a little bit late. And we did initiate the conversation with them about moving to weekly payments and about building out a more secured structure on the payment commitment. And we weren't able to come to an agreement and felt that it was best to sever the relationship altogether rather than face the possibility of further exposure. So in that situation, it was, to a degree, precipitated by that conversation regarding weekly payments and really that uncovering our view of…

I just want to underscore one more point here, because we are a customer-centric company, and all of our strategy is oriented around how we are providing an extraordinary service and experience to that customer. And the weekly payment design, once it's folded in and implemented as part of the routine moving forward, it actually increases and enhances the customer experience. And I say that for a couple reasons. One, it's -- and Matt mentioned this in his opening remarks, but it does align much more favorably and -- with their reimbursement receipts which are intra-month. It also is consistent with how they're funding and then ultimately paying their payroll expenses. And I think maybe most importantly, and you can imagine this from a relationship perspective, there's not a scramble the last two or three days of a month, and then the unpleasant conversations the following two or three days about collecting money or why you pay it or why you miss. Because, there's just -- it's just part of what happens every week, and there's not there's not that slipping and sliding or that debate or that discussion. So, really this was in some respects born out of the customer experience and the focus on customer experience, and obviously there's a lot of other benefits to the organization financially and otherwise. I just want to emphasize that, so it doesn't get lost on everyone as to who's the real beneficiary here. We view it as a long-term solution that enhances the customer experience as well as the Company's experience.

Got it. That's helpful. Thank you for that. I just wanted to go through some of the mechanics as well here on the cash flow. Ted, you kind of endorsed this year's free cash flow looking like last year's in the $80 million range. Your underlying net income is above that somewhere in the $115 million, $120 million run rate, if you look at kind of the income statement. So, there's a delta there. So I guess the expectation then is that the DSOs -- because of the timing and the methodology that you described earlier, the reported DSOs will be the drain on cash or the delta between free cash flow and net income. Is that what an investor should be expecting as this year unfolds? Is that the way we calculate? We understand that the weighted average DSOs are unchanged, but the way most people calculate it that will actually increase as the year goes on as you move to more frequent payments. And will that be the delta between the free cash flow of around $80 million versus the underlying earnings power on the income statement of $115 million, $120 million, $125 million; somewhere in there?

Yeah. So, a couple different parts of your question. One is that the delta between earnings and cash flow for the year is going to be more of a function of the Q1 outcome, right. For the rest of the year and just to be clear, converting customers to weekly payments is not necessarily a drag on DSO. It's only in a specific situation like, Matt described, when it's a customer that is in good standing, we're reaching a collaborative outcome, to your point weighted average DSO is consistent, but it does result in a drag for that customer specifically on DSO. But as Matt mentioned, all of our Top 10 -- most of our largest customer groups are now on a payment frequency greater than monthly, weekly, tri-monthly, something along those lines. So, the likelihood of a particular customer or multiple customers impacting DSO unfavorably where it rises to the level of this call, and it's something that's over -- that's noteworthy is unlikely. So as we continue to work through the weekly payment initiative, we would not envision that being a prominent conversation in terms of why DSO increased. It's possible, but we don't envision that having an impact -- a meaningful impact on DSO in the coming months. So I think getting back to your question about what investors should expect. They should expect us to collect what we bill in Q2, Q3, and Q4, and that would result in free cash flow from operations resembling for the year what last year did.

Okay. Super helpful. Last question for me. And you mentioned on the script, Ted, about potentially even buyback I think, is what you said or something to that effect. What would it take -- what do you need to see for that to become a new arrow in your quiver?

Yeah. I mentioned that, and I appreciate you bringing that up. And I wanted to go through capital allocation and really on the heels of yesterday's Board meeting, and it's an active conversation we're always having that after organic growth, the priority remains the dividend. We've gotten -- we've gotten over the years many questions about what about buybacks? What about other capital allocations? What are your strategies? Why aren't you more acquisitive? And I wanted to make sure that everyone that's on this call understood the company's position, the Board's position as far as capital allocation. That deeply committed to organic growth and then after that, it's the dividend. And over the near term that is going to continue to be based on where we are today, the primary means by which we return excess cash to shareholders. Now at some point in the future, right, with growth in earnings, which we fully expect and growth in cash flow, which we fully expect; that's going to create additional capital allocation opportunities. That could be additional internal investment. And I mentioned the captive, Andy, because let's not forget we invested -- we have $80 million committed to the captive insurance subsidiary that has provided all sorts of benefits from the Company current and we expect future and perhaps increases to the dividend, which would be the next logical place for us to look for additional capital allocation opportunities beyond internal investment and organic growth. I mentioned buybacks because we do have still a million -- 1.5 million shares authorized on the last authorization, but it has not just been -- it just hasn't been historically a focus area for the Board over the past decade or so. So, I can't tell you here what it would take to have that be a focus area. But I can tell you as a priority in the near term deeply committed to organic growth with the next priority being continued dividend payments and continued dividend increases with consistency of payment and sustainability over the long term being the guidepost.

Thank you.

Thank you, Andy.

Thank you. And our next question comes from Jacob Johnson of Stephens. You may proceed with your question.

Hey, good morning. I guess first question on revenue growth, looks like -- it's going to be flattish in 2Q sequentially and then picking up in the third and fourth quarter. Is that just because muted additions as you build out the management pipeline or could we see sort of you add accelerating new business, but perhaps offset by some additional customer exits or contractual adjustments?

Yes. I would say more the former, Jacob. For us it really is, when we look at our sales pipeline, it's literally more robust than it's ever been. The most significant component of our growth outlook remains management capacity and more specifically that management development function. And since mid-year of last year, we've invested heavily in replenishing that training and development pipeline. We've deployed some of those new managers into new facility starts here in Q1. We'll continue to do that through the balance of the year. That will likely result in sequentially increasing the number of new facility adds, but we'll obviously need to replace that reduced revenue that we've talked about before we begin to show net revenue growth. So just as you sort of outlined realistically looking at flattish Q1 to Q2 from a revenue perspective. But then it's really as those managers in training fully develop having graduated the program, ideally getting some degree of an assignment working as an assistant manager in a facility and then ultimately being placed into their own facility to manage really more in the back half of the year. So I would say that the limitations in growth -- the rate limiting factor on growth continue to be that management development. Fully expect to see a more significant ramp of available managers for us in the back half of the year and then very much positioning ourselves, as Ted mentioned with heading into 2020 getting back to kind of normal growth cadence.

And maybe following up on that. You've been calling out some of these expenses related to the management pipeline. Can you just talk about why these are -- you're calling these out right now? What's different about them versus historical management pipeline development? And then why should that normalize in 2020?

Yes. And I'm glad you asked that question because it is important for folks to understand that management development; that recruiting, the training, the developing of managers through our internally executed training and development program. Those costs are typically baked into the cake, right. I mean that is typically an ongoing and continuous effort that's executed throughout the Company, throughout the country with each of those respective areas being at a different part of that virtuous cycle at any given time. The reason we're seeing a more pronounced increase now is because of frankly the more pronounced slowdown, if not total stop in those recruiting and training efforts as we on-boarded the significant business that we did in 2017 with a continued focus on implementing operational systems and ultimately getting that business on budget through the first half of 2018. So while it wasn't a complete stop and start, there was very much a grinding slowdown in our recruiting, training, and hiring efforts through that operational start-up and transitional phase that was essentially re-ramped in mid-year of last year. So, that's why we're calling it out that relative to what would be those normal levels that are baked into the cake; we did see elevated training levels in fourth quarter, continued elevated levels here in Q1 that will likely taper through the balance of this year and then get back into the normal cadence in 2020 really as a function of just, as I said that continuation of that continuously operating and continuously flowing virtuous cycle that's executed locally down to the district level and that being management development, assessment of management capacity, and then ultimately that feeding business development.

Great, I'll leave it there. Thanks for taking the questions.

Thanks, Jacob.

Thank you. Our next question comes from Ryan Daniels of William Blair. You may proceed with your question.

Hey, guys. This is Nick Spiekhout in for Ryan. Thanks for taking my questions. Just to start off, I guess how much visibility do you have into the operational issues at your clients I guess outside of simply them not paying promptly? In other words, do your local site managers have the ability to flag clients as a risk in advance of collection issues given that they're on the ground at the actual facility?

Yes, and in fact the design of the Company allows that to happen very fluidly between the financial services leadership and team that we have out of our home office and that are in constant communication with all of our field-based leaders as well as some of the local leaders to garner all of the intelligence that the boots on the ground are able to get whether or not there's pressures with other vendors at the facility level, high administrator turnover, low -- low census that's growing lower, regulatory issues. So, you can imagine all the information we're able to get from our local teams and that's absolutely part of the evaluation we're making.

Got you. And then so did the fact that the one client kind of restructured out of court, does that have anything to do with maybe catching you off guard and if clients kind of do that in the future, is that a little bit hard to see them because they're kind of doing it out of court or is that kind of irrelevant to that?

Yes, it just depends on the customer and the situation. Sometimes it happens quickly, sometimes it's more of a death by a thousand cuts for a provider. They're all different. Sometimes it's a -- the catalyst could be a change in not Medicare, but Medicaid reimbursement or reimbursement issues that they're having, a regulatory matter at a facility that results in a different type of settlement or exposure than what the provider was thinking. So again, there is no -- I wish I could tell you that hey, here's the standard situation that we're faced with and here's the playbook. It really is situational and that's why the communication that we have between the office, our local folks, as well as the customer are so important.

Got you, okay. And then I guess the last one on the new Workday solution. I know you talked about a couple of the main operational benefits you'll see internally. Is there any financial benefits you kind of hope to achieve with the new Workday solution or is it more kind of like an internal operations base?

It's more the latter although we do have greater visibility into certainly purchasing and procurement and a true facility level sight line into performance. So, that will help with decision making as any level of enhanced visibility does. But nothing tangible or nothing specific that we would call out in terms of financial upside from what we have. It was really an investment that the Company made to set us up for many, many years of growth to come.

Got you. Okay. Great. Thanks, guys. I'm going to hop off.

Thank you. Take care.

Thank you. And our next question comes from Chad Banneker of Stifel. You may proceed with your question.

Thanks and good morning.

Hey, good morning, Chad.

All right. So, you transitioned 55% of your clients to an accelerated payment program. What's the ultimate target for the percent of client base that you'd like to transition to more accelerated payments by the end of the year? And then assuming you do transition to your targets and DSOs stabilize, are there other levers you can pull to improve DSOs through the year or is it more an expectation of a reversion to the mean?

Yeah. I think probably the answer to the last part, I would say, if anything would be more of a reversion to the mean, although I will say new business that we're bringing onboard are all coming onboard with some form of higher frequency payments typically weekly and that creates – as we layer on new business, that will have a natural effect of bringing down the DSO, because you won't see that quarter-to-quarter variability with one full month rolling over. The other part of your question Chad in terms of what's the ultimate goal, or expectations for the rest of the year, I think Matt touched on this. But all of our largest customer groups have more or less been converted. So now we're – we've said the ones that were triggered – the customers that were triggered by a catalyst, an event that resulted in us approaching them with the conversation about weekly payments. There's another subset of customers that was more of a collaboration, long-term customers, great relationships. We're able to have those types of conversations and come with a mutually agreeable out – come up with a mutually agreeable outcome. And then now we're moving more to some of the state-based groups, some of the local independent operators, which will be probably a slower step up. So, there will be a slower step up to the actual percentage in terms of penetration. But again, as we layer on new customers with the weekly payment frequency as well as ongoing efforts around existing customers, you'll see that continue to rise throughout the year. But I don't have – we don't have a hard fast number that we're striving for. It's more about the quality of the conversions and the rationale behind the conversions more than it is trying to get to a certain number or percentage.

All right. So, more of an evolution than revolution from here?

From this point forward, I think that's a good word to describe it as it will be – it'll be evolving from here. But it is our policy moving forward. So it's just with existing customers, some long-term relationships where everything's working. They're obviously de-prioritized in terms of candidates for a weekly payment conversation.

Okay. And just moving on. Direct costs, they've been running consistently above 86% since second quarter 2017. Prior to that, you were actually running much better than that. What do you have to do to get back below that 86%? And I've recognized that this quarter there's a bunch of unusual items and you can add back some of that and get close to that 86%. But what do you have to do to get back below there?

Well, we think – we think we are there from a core operating performance perspective, Chad. I would say, this was our strongest underlying performance from a results perspective. We've had many strong underlying performances. But as far as it being reflected in the results since the second quarter of 2017, when we were for the year for the – certainly, I think 10 consecutive quarters or a couple of years leading up to that, we were consistently below that 86% cost of services. So we have 11.6% housekeeping, 6.3% dining margins, which from a segment perspective were as strong as we've had together in quite some time. So, I think we continue to stay the course and implement and stick to our systems, provide the customer with a great experience, and when you look at where we're at as of this quarter from an underlying performance perspective, we were below 86%. So yeah, of course, with the increase in the AR reserves and some of the training costs Matt referenced, that pressure the reported number. But again, underlying performance, we believe we're back in that pre-Q2 of 2017 space from an operating perspective.

All right. And then just one more for me. So, what does the pipeline for growth look like near-term as far as what's the -- what's the demand that's built up in your pipeline? And then what's the excess capacity that you currently have given that you're exiting some facilities and you've increased the management pipeline? So, how many facilities could you rollout to today if you needed to?

Yeah. I'd say, Chad, we typically don't talk about number of facility additions or even numbers of managers in the training pipeline. It's such a localized effort, right? I mean, you talk about exiting facilities and of the kind of meaningful exits in Q1, they were pretty well contained within that California marketplace. So, you can be sure the operators in California in conjunction with our sales team there actually -- are absolutely exploring, how to best and when to most efficiently deploy those folks into new business opportunities to bring that up to a larger level of the complexion of the current pipeline, without a doubt, there remains a significant slant toward dining opportunities, right? I mean, you're talking about still having less than 40% penetration in providing dining services to our existing and current housekeeping customer base. We continue to develop, expand, and evolve our reputation as a culinary provider that we can not only better contain their costs and typically save them money versus their current spend from a dining perspective. But to enhance the culinary offering, to increase the overall service offering at the facility, which in the current competitive landscape is absolutely meaningful to our current customers. Now, obviously, as Ted alluded to, the controlled component of growth relates to the current operating landscape for our customers, right, in making sure that we appropriately and realistically assess where they are before we make that determination to significantly expand the partnership and adding dining services to the mix, because as you're aware on a same-store basis generally speaking, the value of a dining contract is double that of housekeeping. So, we've got to do the work. We have to make sure that we're appropriately validating and vetting the customers with whom we'd like to expand and…

All right. If I were to come to you today with a couple hundred facilities that I wanted services for, could you do that today?

I'd have to validate Chad, whether you're a good payer and you're open to that weekly payment structure, right?

But if it would -- it would depend on where the facilities were and how they fit into the management development capacity that -- the management capacity that we have in a particular area. Because some areas would be able to handle that type of transition if not turnkey, certainly over a three, six month type of rollout. Others would have to -- we'd have to have an outlook that's beyond that, but it would just depend on the area. Overall, the company, if we were able to pick and choose where those couple hundred facilities were, Chad, then yes, we'd be able to accommodate it, but it would depend on where they were located.

Okay. Appreciate it. Thanks.

Hey, thank you, Chad.

Yeah.

Thank you. And our next question comes from Sean Dodge of Jefferies. You may proceed with your question.

Good afternoon. Maybe staying on revenue for a moment, Ted. It feels like your broader commentary around growth that you're pushing out the timeline a bit on when you expect to return to a more normal cadence. I guess, is it simply because of the incremental service cancellation you had in California this quarter and you had to do a little bit more backfilling now to get back to growth, or do you have situations where you have line of sight on some opportunities, but timing is shifted on you?

I think it's more -- it's a common -- well, it's not the latter, I think primarily it's -- and hopefully it's not -- we're not trying to shift it necessarily. But if anything now that we're -- now that the quarter's in the books and we have a clear sight line on what the run rate would be heading into Q2, we want to come out and be clear about what our expectations are for the second quarter. But back half of the year, we're still expecting sequential growth, Sean, and to the extent the -- maybe the tone and tenor is a little more tempered, it's only because as you alluded to we had some of the recent revenue step downs certainly with the California customer. But also wanted to make sure everyone understood as far as the contract restructurings as that folds into the new year, we're replacing at least the revenue. In some cases, obviously, it didn't impact the profitability or the margins, but certainly the revenue. So it was more to try to create clarity around what we're thinking for the second quarter, how the opportunities that are being considered would be folded in during the second half of the year, of course, without the precision of the week or the month that they may hit. And then as you mentioned second, moving into 2020, fully expect to be returning to our historical growth profile when you're comparing Q1 of 2020 to Q1 of 2019.

Okay. And then I just want to understand a little bit better when you guys talk about the $3 million of elevated payroll costs related to the training of new managers, is there -- is there any portion of that that is non-recurring or is this just payroll costs of carrying an elevated number of managers that haven't been deployed yet; but as they're put in their own facilities, the costs don't go away necessarily, it just gets absorbed with the incremental revenue it generates?

That's exactly right, Sean. So, this is basically elevated payroll, additional overhead that's not yet -- that's not budgeted for in, sort of, a typical model, right. So these folks, to your point, would be -- those costs would continue. But as you're adding new business and adding a new facility, in which that individual's compensation would be budgeted, it just slides into the mix.

Okay, got it. And then a quick last one for me, Ted you said you can't really comment on the SEC matter. But I know you guys were working to be proactive and get a chance to present the findings of your internal review to them. Can you tell us if that's happened or is that still expected to happen?

Yeah. I think to your point, we can't really get into much detail other than to say, which we talked about in the past, we are fully cooperating and obviously we're hopeful for a swift and successful outcome. And yes, we did successfully complete the internal investigation in mid-March, but the conversations, the dialog with the SEC is active and ongoing and will continue to be. But it's one of those things when we're asked about a timetable or potential evolutions of the matter, it's really -- there's not a straight line, right. There are stops and starts and we're ready, willing, and able to continue to move as quickly or as slowly as the staff would like us to and again continuing to fully cooperate.

Okay, understood. Thanks again.

Hey, thank you, Sean.

Thank you. And our next question comes from Mitra Ramgopal of Sidoti. You may proceed with your question.

Yes, hi. Good morning. Just wondering -- just on the industry outlook if given the tight labor market, obviously some wage inflation, et cetera; if you're seeing more calls in terms of operators looking to outsource their business to you?

Yeah. I think, Mitra, if you kind of bundle up the previous commentary with respect to that pipeline, that pipeline is absolutely been fed more by incoming prospective customer inquiries than us sitting around or having sales folks make cold calls and try to attend industry functions or blanket the countryside with direct mailing sales brochures, right. So, that is absolutely a component right. When you think about the value proposition that we can generally deliver a better qualitative outcomes from an operational perspective, from a regulatory perspective, certainly from a financial perspective; we're at a minimum better containing their costs if not reducing them relative to what they would otherwise be able to do on their own. So in the current operating environment, in which you have kind of reimbursement uncertainty, although, there is increased clarity on that front, the challenges that operators have faced in filling beds from an occupancy perspective, and some of the capital structure and financial pressures that they faced. The value proposition that we offer is increasingly compelling. So, the short answer to your question. Absolutely, given all of the above, the demand for the services continues to grow. A – Ted Wahl: Yeah. And I would just add, Mitra, that just from an industry wide perspective, when you look -- and I mentioned earlier that fundamentals are clearly improving, and the data are clear that the fundamentals are improving. You think about industry wide occupancy trends, the demo -- the demo change between the baby bust, giving way to the baby boom every month, every year that goes by, that's a favorable tailwind for the industry. They have more experience now in managing Medicare Advantage, and the nuances with that program and the impact on occupancy. You have lease cost pressures that I…

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Ted Wahl for any further remarks.

Well, thank you, Josh. And as we look ahead to the rest of the year and what is our 43rd year of business, the Company's underlying fundamentals are as strong as ever. Our leadership and management team, our business model and the visibility. We have into that business performance, learning platforms, key operating trends around systems implementation, customer experience, employee engagement and margins, our rock-solid balance sheet, the strong demand for our services. And the significant growth opportunity that lies ahead for the company, our employees and all of our stakeholders. It's exciting to imagine all of the future possibilities and know that our future begins with our great people going beyond and living out our purpose, exemplifying our values, and fulfilling our vision. Our purpose, vision and values are the Company's touchstone. And it's our pathway to live -- to delivering sustainable and profitable growth over the long-term. So, on behalf of Matt, and all of us at Healthcare Services Group, I wanted to thank you, Josh, for hosting the call today. And thank everyone again for participating.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.