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Healthcare Services Group, Inc. (NASDAQ:HCSG)
Q3 2018 Earnings Conference Call
October 17, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 involves certain risks and uncertainties. The forward-looking statements are based on assumptions that we are made in light in our industry experience and our perceptions of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate under the circumstances.

As with any projection or forecast, they are inherently susceptible to uncertainty and changes of 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 are those projected in forward-looking statements are included in our earnings press release issued prior to this call and in our filings with the Securities and Exchange Commission. We are under no obligation and express 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, Ted Wahl, President and CEO. Sir, you may begin.

Theodore Wahl -- President and Chief Executive Officer 

Hey, thank you, Amani. Good morning, everyone. Matt McKee and I appreciate all of you joining us for today's conference call. We released our Q3 results yesterday after the close and plan on filing our 10-Q by the end of the week.

During the third quarter, we made significant progress on our 2018 priorities, some of which is not fully reflected in the Q3 results and toward meeting our end of year goals of adhering to our facility-level operating systems, which includes realizing the additional efficiencies in the now maturing 2017 business with the goal of exiting the year of exiting the margin and that run rate being fully reflected in Q1 of '19.

Strengthening customer payment terms and conditions, which includes increasing customer payment frequency from monthly to semi-monthly or semi-monthly to weekly payments, with the goal of collecting what we bill and having operating cash flows approximate net income, and replenishing the management pipeline with the goal of being prepared for the next wave of growth in 2019 and beyond.

In line with these priorities during the quarter, we adjusted our contractual relationships with two regional customers and a number of independent facilities as we worked toward our end of year goals. We expect these changes to impact housekeeping and laundry revenues by about $10 million a quarter with about half of that decrease being reflecting in the Q3 results and favorably impact go forward margins. Our priorities will remain the same over the next three months as we look to finish the year strong and lay the groundwork for a successful 2019 and beyond.

With that abbreviated overview, I'll turn the call over to Matt for a more detailed discussion on the quarter.

Matthew J. McKee -- Chief Communications Officer

Thanks, Ted and good morning, everyone. As we're lapping the second quarter of 2017 expansion, we obviously continue to face more challenging year over year comps this quarter and into the first half of next year. Having said that, revenues for the third quarter were up to 3% to $507 million. Housekeeping and laundry revenues were down about $3 million sequentially to $242 million as a result of those contract modifications that Ted Just described. Dining and nutrition grew at 9% coming in at $264 million.

Net income for the quarter was $26.1 million and earnings per share came in at $0.35 per share. Direct cost of services reported at 86.6% and that remains above our target of 86% with the housekeeping and laundry margins at 11.3%. And as we mentioned last quarter, we expected that decrease in housekeeping margin as we're ramping up our recruiting and training efforts around management development.

Dining and nutrition margins in at 6.2% -- and those margins continue to show improvement with the 2017 new business now on budget. There remains additional opportunity within the dining segment as we realize further efficiencies in the 2017 new business adds.

As Ted mentioned, our near-term goal remains to manage direct cost back to 86% by year's end and ultimately to continue working our way closer to 85% throughout cost of services. SG&A was reported at 7.2% for the quarter. There was about a $1.6 million impact from the change in deferred compensation, investment accounts that are held for and by our management people. So, our actual SG&A was right around 6.9%.

And SG&A was also impacted by about a $3 million sales tax settlement with one state related to the taxability of our client service billing dating back to 2011. Although we believe the merits were on our side, we ultimately decided to work with the state and reach a settlement that addressed past and future considerations.

We do believe that matter is one time in nature and don't expect any impact on future results. We would not expect SG&A to be in the 6.75% range going forward with remaining ongoing opportunities to garner some additional efficiencies.

Investment income for the quarter was reported at $2 million, but again, after adjusted for that $1.6 million change in deferred comp, actual investment income was around $400,000.00. So, our effective tax rate was 21%. We expect our rate to be in and around that range for the rest of 2018. That's excluding any share-based payment accounting impact.

Over to the balance sheet, at the end of the third quarter, we had $90 million of cash in marketable securities, current ration of 3:1. Cashflow from operations for the quarter came in at $47 million. That was favorably impacted by the $25 million increase in accrued payroll relative to last quarter.

DSO came in around 63 days. That's up about a day from last quarter. That was primarily due to the last two days of the quarter falling on a weekend, a Saturday and a Sunday, which delayed the receipt of about $10 million of monthly payer payments, the vast majority of which we received the first week of October.

Also, during Q3, we finalized the previously discussed the $10 million three-year promissory note that was a part of the March 2018 out of court restructuring that we discussed with the privately held multi-state operator. That amount is now reflected in notes receivable long-term. And as announced yesterday, the board of directors approved an increase in the dividend to $0.195 per share.

That will be payable on December 28th. Year to date cashflows and cash balances support it. With the dividend tax rate in place for this foreseeable future, the cash dividend portion tends to be the most tax efficient way to get the value in free cashflow back to our shareholders.

This will be the 62nd consecutive cash dividend payments since the program was instituted in 2003 after the change in tax law and it's now the 61st consecutive quarter that we increased the dividend payment over the previous quarter. That's now a 15-year period. That's included for 3-for-2 stock splits. So, with those opening remarks, we'd like to now open up the call for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * then the 1 key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated.

Our first question comes from Ryan Daniels with William Blair. Your line is now open.

Ryan Daniels -- William Blair -- Analyst

Yeah, guys. Thanks for taking the questions. First one on the recontracting that occurred during the quarter -- number one, can you remind us, is that just moving some of the labor cost back onto the provider in keeping management fees, number one, and then number two, is that something you anticipate more of going forward or was this quarter an opportunity to look at the portfolio and assess the credit risk of your different vendors, so it was more of a kind of one-time event. I know that's probably somewhat recurring in the business.

Matthew J. McKee -- Chief Communications Officer

It is, Ryan. I'd say it's a little bit of the former in the sense that in line with those company priorities that Ted outlined in his company remarks, we are prioritizing, putting the company in the best position possible as we close out the year and look to '19. And part of that included taking a hard look at the housekeeping and laundry business.

We've talked about the vast majority of our facilities falling in that 12% to 15% facility profit range that we target, but it's a bell-shaped curve, where 10% or so of that customer-based lands above the 12% to 15% profit level, which, as we talked about previously, isn't always a good thing for us. And another 10% or so fall below that 12% level.

When a customer falls to the bottom 10% for multiple periods, we obviously need to determine how to turn that relationship around and improve the company's position, whether that is a customer who's slow to react to labor market conditions or we need an increase in our billing rates or need to make adjustments in the staffing to appropriately reflect our staffing models. But ultimately, in these scenarios, it typically took the form that you described in the sense that the first step is to give the payroll back to the customer.

So, we left very few of these facilities. Ultimately, we moved from what we a full-service arrangement in which we provide the management. We purchase the supplies and the employees are on our payroll, to something less than that. That's typically taking the form of, as I said, putting the employees back on to the customer's payroll. So, it does reduce revenue, but it should have an impact of increasing margin.

And to the latter part of your question, Ryan, this is a fluid process. We went through and did a pretty robust examination of the current book of business, but this will be continuously evaluated. You sort of hinted at it with the credit risk, but we don't believe this move to be an indictment of the financial health of our customers, but really, it's just getting back to that focus and a priority of driving gross margins back to 14% plus.

We'll certainly keep an eye on all of our customers for any and all reasons related to financial performance, collections, credit risk, etc. But we would expect the heavy lifting with respect to customer modifications is done this quarter, but that's not to say there won't be additional modifications going forward.

Theodore Wahl -- President and Chief Executive Officer 

And Ryan, you hinted at it as well, but this is something we've done from time to time. It's something we're in a constant state of doing and evaluating. When it raises to the level where it's worth having a conversation, that's what leads to this type of discussion, but the last time we did something that was more meaningful, at least from a topline perspective along these lines was end of 2012, beginning of 2013.

Both ultimately became full-service customers again within the next 12-18 months. So, again, part of it's evaluation, part of it's negotiation, and then as Matt said, ultimately it's about putting the company in the best position as we set the table for 2019.

Ryan Daniels -- William Blair -- Analyst

Okay. Perfect. My follow-up question would be what's the visibility of exiting the year at your gross margin targets, given some of these contractual changes? I mean, that obviously increases margins pretty immediately, but I think more from an operational standpoint is kind of exiting the year at that run rate and going into 2019 with the gross margin target intact.

Theodore Wahl -- President and Chief Executive Officer 

Very good visibility. Less so into the human element of the business, it is a people business. We're managing thousands of employees, thousands of customers, and there's always an issue du jour in any sort of strategy we may determine that we're looking to execute upon, but I guess on the top side, when we look at our ability to deliver on the outcome that we've set internally of having this business be a 14% or better business in Q1 of '19, we have very good visibility into that, Ryan, and feel confident that we're on the successful pathway to meeting that outcome.

Ryan Daniels -- William Blair -- Analyst

Okay. Great. Thanks. I'll hop back in the queue.

Theodore Wahl -- President and Chief Executive Officer 

Thank you, Ryan.

Operator

Our next question comes from Bill Sutherland with Benchmark Company. Your line is now open.

Bill Sutherland -- Benchmark Company -- Analyst

Thanks. Good morning, guys. So, as you survey your customer base, particularly SNPs, and just hear what they're dealing with in this extraordinarily tight labor market, are you sensing any issues that might impact your growth model in particular as far as the hourly employee. Then as you look at your own pipeline is it having any impact on your management build up for housekeeping? Thanks.

Theodore Wahl -- President and Chief Executive Officer 

Yeah. I think specifically, just to the overall industry -- and you're right, Bill, certainly the labor market is one of the considerations and it is a tightening labor market for the end customer that we service specifically for their labor pool that they're drawing from. But that's one of what has been ongoing challenges for the industry for the five decades that it's really been an industry, being long-term as opposed to acute care.

But for us, when we take a step back, at least at the macro level, there's really the move, the evolution toward the patient-driven payment model, which is in line with the value-based purchasing efforts by the government. That goes into effect October of next year. So, the industry has greater clarity with respect to that move.

Now, there's a lot of work that needs to be done between now and then to be sure that the cautious optimism that's out there regarding the new reimbursement methodology is realized on day one and that there's not any transitory disruptions. But overall, PDPM is a net positive -- is certainly the general consensus of the industry at large. We have the 2.5% Medicare increase that goes into effect later this month, which will go a long way in offsetting some of those potential and/or real labor market pressures that you just highlighted.

Then there are the ongoing considerations around occupancy and rental rates. Occupancy, although it hasn't troughed just yet, at a macro level, again, you see the occupancy decline slowing. Year over year, at least prior year, corresponding quarter to quarter, within the industry, and I just mentioned the rental rates, but a lot of the hard work that needed to be done around rental rates and the dislocations that occurred over the years between what providers could afford to pay and what they were actually paying has happened.

There's still more work to be done on front, but we're in the back half of the game at this point. We're not at the top of the first inning anymore in terms of where the industry is at. So, I think there's a lot of different moving pieces and uncertainties within the industry. You certainly zeroed in on one of them being the labor market, but at the end of the day, our view on it, macro considerations aside is the micro view, that for us and how it relates to us, including the labor market question, it's facility by facility.

It's largely determined by local terms and conditions that we've agreed to with the customer, us having visibility into their performance, which is no different than before and then us controlling our own destiny and navigating through this cycle, whether it's labor market, changing reimbursement, tightening or reduced occupancy, all of that is within our own destiny to control and create the opportunities moving forward. That's how we're thinking about as confident as ever as we move forward into next year.

Matthew J. McKee -- Chief Communications Officer

The second part of your question, Bill, as far as the labor market impacting our ability to develop managers, you're exactly right in keying in that that management development function is the key to our growth. That's always been and continues the be the constraint on how quickly we can grow the business.

As you can imagine, we've been keeping a very close eye on turnover through the management training program and at the lower facility level management ranks and we're not seeing any negative impact or any increased degree of turnover because that would have an impact on our business and our ability to manage and ultimately grow the business. We're very mindful and we'll continue to analyze that, but we're seeing pretty consistent turnover levels in the facility management ranks in addition to the management training program.

As we discussed last quarter, Bill, folks who are attracted to healthcare services group are attracted to the opportunity, the opportunity for career development and that promotional pathway that we can offer by virtue of that commitment to promotion from within.

So, in this or any other labor market environment, for someone to be able to control their own destiny and if they perform, knowing that they're with the company that's committed to promotion from within and has grown every year since we started, they know that we can really outline a career path to match any level of ability or ambition. But to your point, a very key part of what we do and we'll be absolutely mindful of all of those data looking forward.

Bill Sutherland -- Benchmark Company -- Analyst

Great. Thanks for the color, guys.

Theodore Wahl -- President and Chief Executive Officer 

Thanks, Bill.

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * and 1. Our next question comes from A J. Rice with Credit Suisse. Your line is now open.

A J. Rice -- Credit Suisse -- Managing Director

Thanks. Hi, everybody. First of all, I know we're talking a lot about your management pipeline and how that's progressing as we move into next year and trying to get back to a normalized growth rate. [Audio cuts out] business you took on in the middle of last year, you've been focused more on integrating that and less on bringing on new accounts. Has that had any impact on your pipeline? As you get into next year and get to more normalized growth in both housekeeping and dining, can you size up for us now what you think you can do in terms of organic growth in those two segments in a normal year, like hopefully next year would be?

Theodore Wahl -- President and Chief Executive Officer 

Hey, A.J., I apologize. You broke up in the middle of the question. I think we got the gist of it. But I think in terms of at least replenishing the management pipeline, you're right. We did have a significant investment in terms of human capital and management resources in not just transitioning, but ultimately implementing the new business we brought on, the three times' worth of typical new business that we brought on during 2017.

That absolutely had an impact on our training center account managers as well as on the management in trainees that we would typically have both quarter and quantity throughout the country. So, we've been doubling down on those efforts to replenish that pipeline, really beginning at the end of the second quarter, but that's one of our key priorities heading into the end of this year and into the first half of next year and then we would expect more normal type of business growth as a result of having that management depth, but it will happen incrementally. It will happen quarter over quarter.

Ultimately, by the end of the year, we should be back to what you described as a more typical topline run rate.

A J. Rice -- Credit Suisse -- Managing Director

Yeah. I guess I could see that you working on the management pipeline. I was wondering whether because you've had this one-year transition and obviously, the industry has had its own set of issues, your customer base. Is the pipeline of customers looking to use your service, ahs that changed in any way? Or would you still describe it much as you have the last dozen or so years?

Theodore Wahl -- President and Chief Executive Officer 

It's actually grown. The pipeline of customers is as great as it's ever been. That is, of all of the priorities -- and growth is one of them, but it's as an offshoot or an output of management development, but the actual opportunity as reflected within our pipeline and even outside of the pipeline, the targets that we would have that we've engaged in some sort of dialogue or even beyond that with is as robust and enough to keep us busy for the next five years without meeting another customer.

The pipeline and the demand for the services is very strong. It's just a matter of having the management depth and then growing in a smart and strategic type of way, which has always been the focus of the company, but now as much as ever before -- selective expansion.

A J. Rice -- Credit Suisse -- Managing Director

Maybe the other question I'd ask is around the cashflows. Obviously, this quarter you had a very strong cashflow helped in part by the way the payroll cycle worked out for you. I think if we looked at Q4, that works against you a little bit. Do you think you'll be able to generate additional free cashflow in the fourth quarter or should we look at where you're at for the first nine months is probably an approximation of where you'll end up in the year for free cashflow?

Theodore Wahl -- President and Chief Executive Officer 

Yeah. I'd say without knowing exactly what -- the payroll accrual, at least, will look and feel more like Q2 than this past quarter just because of the quarter to quarter fluctuations there, but as long as we execute on our collections strategy, we would expect it to have positive cashflow, but be more in line with where we were in Q2.

A J. Rice -- Credit Suisse -- Managing Director

Okay. Then the idea for the full year is you'd end up still 80% to 90% of your net income would be free cashflow, probably?

Theodore Wahl -- President and Chief Executive Officer 

That's right. Again, still not where we'd like to be. Our goal, as I said at the outset of the call is to collect what we bill and to have net income as a result of that approximating operating cashflow, but that's -- we're on the right path in delivering on that objective.

A J. Rice -- Credit Suisse -- Managing Director

Okay. Thanks a lot.

Theodore Wahl -- President and Chief Executive Officer 

Thank you, A.J.

Operator

Thank you. Our next question comes from Michael Gallo from C.L. King. Your line is now open.

Michael Gallo -- C.L. King & Associates -- Managing Director

Hi, good morning. I just want to unwrap the combination of these factors a little bit more. Obviously, you're exiting some unprofitable business. On the other hand, I would think it would free up some of the management talent as you're getting further along in digesting the 2017 expansion. How should we think about when you'll start to really add in a more meaningful way and does the exiting of some unprofitable business actually allow you to potentially accelerate that as we head into 2019?

I know inevitably when you've done this in the past and the customers have come back, perhaps at pricing that makes more sense. How should we think about this longer-term? It seems like you have a pipeline that I think you said is at a record level. You're getting further along in the management development and then you're reducing management. You're freeing up management time by focusing the resources less on nominally profitable business.

Matthew J. McKee -- Chief Communications Officer

Yeah, Mike, just to clarify -- we exited very few of these facilities. So, certainly, to your point, in those facilities in which we completely severed the relationship and exited, that would free up a manager for us. The expectation is that we can place that manager ideally the very next day, of course depending upon the location and the pipeline of opportunities that fall geographically in that region. That is absolutely the expectation.

To your point, we've proven especially adept at doing that in the past. So, it doesn't really free up significant management capacity at the facility management level. It does certainly free up some additional capacity, though, Mike, in the middle management ranks, specifically the distract managers and the regional directors of operation in the sense that when they're managing a facility that is now maybe management only or management and supplies, it does require less of their time and attention.

That may free them up to be able to add or onboard an additional facility or to into their district, where they may have otherwise been at full capacity. But the lynchpin of all of that is having a management trainee through the program graduated, if you will, and ready to place into that new facility operation. So, we don't expect that this will significantly accelerate growth, Mike. The growth prospects still hinge almost in a one-to-one way with our management development program and we're in the full throes of that initiative right now.

So, there may be, depending on the turnover that I alluded to earlier and the throughput of the management training program, there may be some opportunities that we can pull forward from maybe a currently anticipated Q1 or Q2 start, maybe into Q4, but the flip of that can happen as well, where there may be some starts anticipated for Q4 that if we don't have the management capacity, we may have to push out another quarter or two -- all very fluid, Mike, and again, all those decisions will be made at the local level.

But all told, the restructuring from those customers shouldn't accelerate growth in the near-term, but absolutely, Mike, those customers will remain -- customers of ours will remain in close conversation with them and we'll dialogue with them because we do have every intention and hope that if they're able to come to seeing things our way and make the relationship whole again, we would be thrilled to be able to take a lot of these relationships back to a full service agreement just as we've done in the past, as you alluded to having seen us go through these exercises previously.

Michael Gallo -- C.L. King & Associates -- Managing Director

Just to follow-up to that, Matt, just to come back, I think you still said the target was to exit the year to kind of a 14% gross margin run rate. At that point, do you feel like the 17 business will be at a point where we'll be able to get back to the normal quarterly adds? Obviously, notwithstanding the headwind from this factor, particularly in the first half, but just to kind of understand, again, do you get to adding the normal pace of business or will you still be certain regions not out of the development of that management talent?

Matthew J. McKee -- Chief Communications Officer

Fundamentally, Mike, assuming we execute on our management development efforts, it will be first half of 19 back into growth mode, but it will be more incremental. You'll likely see more of that sequential build, where, as I said, we'll add some business in Q4, but I would really expect Q1 and then into Q2 as really being that build of placing managers who have just graduated through the management training program into new facility opportunities.

Michael Gallo -- C.L. King & Associates -- Managing Director

Thank you.

Operator

Thank you. Our next question comes from Sean Dodge with Jefferies. Your line is now open.

Sean Dodge -- Jefferies -- Analyst

Good morning. Thanks. Maybe going back to the contract adjustments, Ted, you had facilities where margins can fluctuate year to year, with the way you guys contract with payroll items and supplies pretty much all being passive, it seems like there shouldn't be all that much movement in margins. I think Matt touched on it a little bit, but what's primarily responsible for driving or causing those fluctuations that you're seeing?

Theodore Wahl -- President and Chief Executive Officer 

You're right. if that was the takeaway, just to clarify -- the vast majority of our facilities, the 80% that Matt alluded to, it's extraordinarily stable because it is payroll and payroll related. 85% of our costs are payroll-related in housekeeping, even in dining 60% are. So, the vast majority of our business week to week, month to month, quarter to quarter, but the fluctuations happen from some that are overperforming or even underperforming relative to that 12% to 15% margin target that depending on management, depending on customer experience, depending on service levels.

Typically, where we see underperforming facilities from a financial perspective. It's one of two. It's either a management issue, which is in our control to solve for. That would generally not lead for us transitioning services or reducing services or we're at a point where the customer wants something they're not willing to pay for. That's when we have a decision point to make.

We go through a series of conversations, negotiations, and ultimately, we're left with a decision to make. That's where we see many of the facilities if not most of the facilities that were in this pool of facilities that we transitioned, some level of services fell into that bucket.

Sean Dodge -- Jefferies -- Analyst

Okay. When you say underperformance, I guess if you can characterize the margin levels of those facilities that were adjusted in the quarter, does underperformance mean that they were negative or just sub that 12% threshold, then I guess on payment points, does that ultimately --

Theodore Wahl -- President and Chief Executive Officer 

Yeah, that they're below the 12% to 15% margin range. We don't have loss leaders, Sean. Sometimes you'll have an anomaly that shakes out where you have a small customer group. You have some facilities that have higher level margins than others.

Aside from those types of one-off, generally, every facility is a stand-alone -- manager, staff, each facility has its own budget and is accountable for adhering to those budgets as a result of a systems implementation that that manager, that district manager, that regional director, director of operations is responsible for implementing. It's just somewhere below that margin profile that we would generally target.

Then we evaluate -- we don't evaluate just the financials in a vacuum. It's what's the customer experience that we're having, what is the management, what's the level of management that we have at that facility, what is the financial performance, and then ultimately what's the opportunity that we have to move forward.

So, it's a variety of different criteria that we're evaluating but ultimately it could be somewhere in the zero to 12% range and depending on a variety of different circumstances and metrics, we're making that decision to ultimately transition back the payroll. That's the last decision we want to make and quite honestly, it's generally the last thing the customer wants to hear as well. Now, they're responsible for it.

That's why I talked about the last time something of this magnitude, for lack of a better word, happened was during the beginning of 2013 and ultimately, all of the customers -- it was two different groups, but both groups within the next 18 months ultimately became full-service customers again. So, it's just that it happened within a three-month, four-month period. That's what made it more atypical.

Sean Dodge -- Jefferies -- Analyst

So, it's safe to assume it's not only just lower margin, but slower and behind on payments as well?

Theodore Wahl -- President and Chief Executive Officer 

No. The payments really had nothing to do with it in the ones that we transitioned. That was not a factor in these groups, nor was it in 2013.

Sean Dodge -- Jefferies -- Analyst

All right. Thank you, guys.

Theodore Wahl -- President and Chief Executive Officer 

Thank you, Sean.

Operator

[Audio cuts out] Mitra Ramgopal with Sidoti. Your line is now open.

Mitra Ramgopal -- Sidoti & Company -- Analyst

Yes, hi. Good morning. Just a couple questions -- on the last call, I know you had said you had a few regions where you were under-utilizing the middle management positions. I was just wondering if you managed to make some progress on that front.

Matthew J. McKee -- Chief Communications Officer

That will really be pending dining growth, Mitra. Certainly, as we've discussed, if you think about geographically the Southeast, the Midwest, and the far west in the dining middle management structure remain underutilized. So, as we add facilities in those geographies, it will be more accretive. The challenge is you still need the facility level managers to be able to add new business. That's step one is for us to continue developing managers, specific to dining in those geographies.

Step two would be to layer in that new business. Once that business matures, gets on budget within the districts, that's when you're going to see the benefit there. So, absolutely, geographically opportunities to have a more significant impact on the dining margin by layering in facilities into those under-utilized geographies, but the hard work still remains to be done in developing the facility-level management candidates through the training program.

Mitra Ramgopal -- Sidoti & Company -- Analyst

Okay. Thanks. That's great. Then secondly, if you could give us an update in terms of obviously, you've been trying to advance or accelerate the payment terms for a lot of your customers. I'm just wondering the response you've been generally getting from them.

Matthew J. McKee -- Chief Communications Officer

Yeah. It's been positive overall, Mitra. This process for us, you could go back to the formative stages of the company when the original billing was done on a weekly or biweekly basis. Over the years, there was a migration to a monthly billing system and process rather than a weekly or biweekly. A couple years ago, we started the migration back for a couple reasons. One, and most importantly for us, it gives great visibility into the customer. Having four look-sees or two look-sees a month versus one at the end of the month provides us with a whole different level of visibility as well as a more constructive conversation if and when there's a shortfall.

From a customer perspective, it lines up better with either their own payroll cycle they had as well as their revenue stream, whether it be from the Medicare and Medicaid or insurance programs they may be part of. So, it's win-win. That's the way we think about it. That's the way we've approached it. It's been positively received. Here we are two years into this focus, this strategy, which is a migration.

It's a process, not an event, but more than a third of our customers are now paying us on something other than an end of month payment. We'll continue to have those conversations with our customers and where it makes sense for both of us, we'll have that change take place. But again, very well received and something we look forward to continuing into the future.

Mitra Ramgopal -- Sidoti & Company -- Analyst

Okay. Thanks for taking the questions.

Operator

Thank you. And our next question comes from Jacob Johnson of Stephens. Your line is now open.

Jacob Johnson -- Stephens -- Analyst

Good morning. I guess first question -- were these relationship adjustments, sort of the margin benefit from them contemplated in the goal to achieve the 14% gross margin run rate by the end of this year or should we think of them as additive to that goal?

Theodore Wahl -- President and Chief Executive Officer 

You're talking on the housekeeping margin, it's 20 basis points or so, total company, 10 basis points. So, if anything, it's additive. It wasn't contemplated as part of the effort to drive toward 14 percent. However, margins -- as we've talked about throughout this call, margins are one of the key priorities that we're focused on and looking to end the year with that 14% run rate.

So, we are viewing the business through three prisms, through various different prisms, but the key three prisms we're viewing it through is the margin prism, the increasing payment frequency with the goal of collecting what we bill prism as well as replenishing the management pipeline. So, when we're making these types of decisions or contemplating these types of decisions, obviously, we have leanings toward making those decisions line up with what our key priorities are.

Jacob Johnson -- Stephens -- Analyst

Got it. That's helpful. Then last question from me -- just within your customer base, how does the number of facilities that are being transitioned currently compare to what it was a year or two ago, that is being transitioned to new operators?

Matthew J. McKee -- Chief Communications Officer

Sorry, Jacob, could you clarify? Did you mean transition of ownership?

Jacob Johnson -- Stephens -- Analyst

Yeah, or who's actually operating the facility. We've seen [audio cuts off].

Theodore Wahl -- President and Chief Executive Officer 

Jacob, I think we lost you, but directly, I believe I know where you were going. We definitely see, if you think about our customer mix being about a third of the large multi-state operators, where we don't service all of their facilities but on a net basis, we're servicing more and more each and every year, the middle third would be that state-based group, not trying to be all things to all people, focused in a given state or geography, operating anywhere from 5 to 20 facilities within that area.

And then the bottom third or the last third being the independent owner-operated -- they may be nonprofit, religious affiliated. From a growth perspective, equal opportunities with all. but what we are seeing and we're seeing it intensify, which is a good thing for us because from both a growth and relationship perspective, it creates that much more opportunity for the company, but we are seeing a movement from those large multi-state operators into the state-based and/or smaller group chains.

We expect to continue that to see that over the next year to 18 months. We think that's a trend that's here to stay. We wouldn't be surprised if a year from now, we're talking about our largest multi-state operator groups comprising something closer to 25% than the current 35% or so. So, with that, I don't believe there's anyone else in the queue, so we can kick it back to the operator. Amani?

Operator

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Ted Wahl for closing remarks.

Theodore Wahl -- President and Chief Executive Officer 

Okay. Great. Thank you. Really, as we look to finish the year strong and prepare for 2019, the company's underlying fundamentals are as strong as ever -- our leadership and management team, our business model, and really the visibility we have into that business model and business performance, our learning platforms, the key operating trends and metrics around margins, payment frequency, employee engagement and training and development, a rock solid balance sheet and really, the growth opportunity that lies ahead for the company, our employees, and all of its stakeholders.

It's incredibly exciting to know that our future begins with our great people going beyond and living out our purpose, exemplifying our values, and fulfilling the company's vision. Purpose, vision, and values is the company touchstone and will continue to be the pathway to ensuring sustainable, profitable growth over the long-term. So, on behalf of Matt and really all of us at healthcare services group, we wanted to thank Amani for hosting the call today and thank you, again, to everyone for participating.

Operator

Ladies and gentlemen, thank you for participating in today's conference, this does conclude the program. You may all disconnect. Everyone have a great day.

Duration: 44 minutes

Call participants:

Theodore Wahl -- President and Chief Executive Officer 

Matthew J. McKee -- Chief Communications Officer

Ryan Daniels -- William Blair -- Analyst

Bill Sutherland -- Benchmark Company -- Analyst

A J. Rice -- Credit Suisse -- Managing Director

Michael Gallo -- C.L. King & Associates -- Managing Director

Sean Dodge -- Jefferies -- Analyst

Mitra Ramgopal -- Sidoti & Company -- Analyst

Jacob Johnson -- Stephens -- Analyst

More HCSG analysis

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