G&K Services Management Discusses Q2 2014 Results - Earnings Call Transcript

Jan.28.14 | About: G&K Services, (GK)

G&K Services (NASDAQ:GK)

Q2 2014 Earnings Call

January 28, 2014 11:00 am ET

Executives

Jeff Huebschen - Director of Investor Relations

Douglas A. Milroy - Chief Executive Officer and Director

Jeffrey L. Wright - Chief Financial Officer, Executive Vice President and Director

Analysts

Joe Box - KeyBanc Capital Markets Inc., Research Division

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Christopher McGinnis - Sidoti & Company, LLC

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Dan Dolev - Jefferies LLC, Research Division

Barbara Noverini - Morningstar Inc., Research Division

Operator

Good morning, and welcome to the second quarter earnings call. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Jeff Huebschen. You may begin.

Jeff Huebschen

Thank you. Good morning, and thank you for joining us to discuss G&K Services' Second Quarter Fiscal Year 2014 Results. With me today are Doug Milroy, G&K's Chief Executive Officer; and Jeff Wright, Chief Financial Officer.

Before we begin the call, I'd like to remind everyone that statements made today concerning our intentions, expectations or predictions about future results or events are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations. You are cautioned not to place undue reliance on these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Information concerning potential factors that could affect G&K and our future financial results is included in our most recent annual report on Form 10-K and subsequent SEC filings.

During this call, we will reference certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the nearest GAAP measures is provided in the earnings release the company issued this morning, which is available on our website. A replay of this call will be available later today and will be available through February 28. You may access the replay by visiting the Investor Relations section of G&K's website.

And with that said, I'd like to turn the call over to you, Doug.

Douglas A. Milroy

Good morning, everyone. Thank you for joining us today. Presumably, you have seen our press release. You know we had another real wow quarter, a really remarkable quarter for our company, so we're glad to have the chance to discuss it with you.

As usual, I'd like to talk about results a little bit and the trends we see, reiterate our game plan that's driving these results, and then I'd like to give you a few examples. I think it adds credibility and some meat to the discussion of the game plan. So those are the 3 things we'll go through this morning.

First, as you've seen, another record-setting quarter for our company. Adjusted operating income from continuing operations was nearly $26 million this quarter. That's the best quarter that we've ever had in our company. That's up 16% over prior year.

Adjusted EPS from continuing operations, also a new all-time record for G&K, $0.75. That's 14% up on prior year.

Let me step back for just a second. You'll recall it was at the beginning of this fiscal year that we first introduced our 12+ Plan. That's 12% operating income, 12% return on invested capital, and we added the little + sign to denote an increased emphasis, a slight shift toward more growth. We did that because we thought it better represented the opportunity we saw in front of the company and better communicated that opportunity than did the 10/10 goals at that point in time.

However, not surprisingly to those who follow the company, we have continued to hold ourselves accountable to achieving both of those 10/10 goals. That was the commitment that we made to our investors in 2010 and the commitment we made to ourselves. So you can imagine we are very proud today to report that we did. We did. We have now fully achieved our 10/10 goals.

On the OI side, we hit an adjusted operating margin from continuing operations with 11.5%. That's 130 basis points up on prior year. Again, the best quarter we've had since we launched the game plan. And in fact, it's the highest OI we've posted in our company since 2000. And then the new hurdle we got over, the 10% ROIC. On a 3-month annualized basis, our ROIC for the quarter was 10.2%. That's the first time, obviously, that we've had ROIC above 10% since we initiated the game plan. And it's kind of fun to say that's the highest ROIC we've seen this century. So any way you slice it, a truly remarkable accomplishment for the G&K team, and one so noteworthy I just -- I don't want to blow past. I want to just slow down for a minute. When you think about where we were when we set those goals and communicated those goals, just imagine, if you will, setting that kind of time-bound, ambitious bottom line goals. Imagine coming in every day and holding yourselves accountable to them and then what it must feel like to nail something that you said so publicly you were going to do. I can assure you the champagne will be flowing around here. So congratulations to the entire G&K team.

So with that as a recap on the numbers, how do we do it? You already know the answer. We have a very solid game plan, we got a great team and we got a great day-to-day execution. We stayed really focused throughout, we stayed focused on our game plan, the current iteration of it, you know well, improved -- continue to improve, daily, our capability to keep our customer promise, improve how we target our customers, drive good day-to-day operational excellence and continue to look for opportunities to strengthen our already high-performing team. And it's every element of that game plan that continues to contribute to our success.

So I said I'd also share a few examples. If you look at the first one that -- the relentless focus on delivering our customer promise. Is that making a difference for us? Absolutely. We continue to drive our customer satisfaction to ever-higher levels. This is now our fifth straight quarter of posting a new high. And importantly, it shows up in our customer retention. We've seen a nice improvement in the first half of the year over last year.

You also see the customer focus showing up in new account sales and translating into what we offer people who don't currently do business with us. Thereto, Q2 was the best quarter we've had since FY '11 for new account sales. Through 6 months, our new account sales are up 20% compared with prior year. Now part of that, as you know, reflects the increases in the size of our sales force that we've made. But I think it's really important to note that it also reflects our continuing relentless focus on driving sales productivity, which, again, was up this quarter. So I think, in total, a pretty remarkable feat to be able to expand your sales force and still raise your productivity per seller. And importantly, all that shows up in very solid organic revenue growth, just a little over 4%.

Another example driving operational excellence. Frankly, it's happening across the business and up and down the P&L. I wanted to highlight -- because it affects so many people, I wanted to highlight, today, our continuing improvements in our safety performance. In the second quarter, we posted the lowest recordable injury rate in G&K's history. We've reduced injuries by 2/3, by 2/3 from where we were 4 years ago. And I think that there's a high correlation between a safe workplace and a well-run workplace. And clearly, that kind of improvement is a real win for everybody.

I think the last example we'll highlight today is, again, in operational excellence, we had said that we'd maintain our focus there on underperforming businesses. We continue to make the tough decisions we need to, to position this company properly for the long term. So you'll recall a couple of quarters ago, we had closed one of our rental plants, when we saw an opportunity to integrate a post-in [ph] acquisition we've done. You'll recall we talked a couple of quarters ago about some restructuring we'd done on our direct sale catalog business. And more recently, you read, in the last quarter, we divested our direct sale program business, and the small, clean-room operation in Ireland that was a holdover from our exit broadly of the clean-room business a few years ago.

So these recent actions we see as entirely consistent with our actions since the inception of the game plan. We have been focused on underperforming locations. We're not accepting businesses that can't adequately return for the company or that don't fit with our long-term strategy. We feel now -- I think the important message to communicate is not just that we're taking those tough actions, but we feel we've now essentially completed that multiyear effort to restructure our portfolio. And you can see the very positive impact that it's having on our performance. And you can imagine how much that sets us up more strongly for the long haul.

So in summary, a fun quarter to walk you through. Another record quarter for our company. We've had several record quarters. This is an especially memorable one because we nailed our 10/10 goals. And I would tell you it's our sincere hope that, that leaves absolutely no doubt in anybody's mind that this is a team that can and will do exactly what it says it'll do. And now that means delivering our 12+ Plan next.

So with that, I'll turn it over to Jeff. A lot of moving pieces this quarter that Jeff will illuminate. And then he and I would be happy to take any questions you might have.

Jeffrey L. Wright

Good. Thanks, Doug. This was another exciting quarter for G&K. I echo Doug's comments on achieving the 10/10 goals. These were bold targets when we set them in 2010, and it's very gratifying for all of us at G&K to complete this achievement.

As Doug mentioned, there were a lot of moving pieces this quarter. I'm going to start by taking you through the results from our continuing operations. And then after that, I'll discuss the businesses we divested and the results for the discontinued operations. And then, finally, I'll comment on our outlook for the remainder of the fiscal year.

So let's start with the results from continuing operations. Revenue from continuing operations grew 3.5% to $226 million. Rental organic growth was 4.2%, but this solid organic growth was partially offset by a lower Canadian exchange rate, which decreased revenue growth by 1%.

Looking at the drivers of organic growth, new account sales were very strong during the quarter, and customer retention also improved compared to last year. Additionally, we continue to increase revenue related to merchandise recovery billings and uniform preparation services.

Our add-quit metric, which measures employment levels within our customer base, was essentially flat this quarter. Adjusted operating income from continuing operations grew 16% to $25.9 million, which is the highest quarterly operating profit in G&K's history.

Adjusted operating margin from continuing operations improved to 11.5%, up 130 basis points compared to the second quarter last year. As a reminder, our adjusted operating income and margin excluded a $1.8 million pretax benefit from the previously announced change to certain merchandise amortization lives. If you included that benefit, operating margin from continuing operations was 12.3%.

Most of the margin gains came from better gross margins in our rental operations, as we continued to benefit from operating leverage and productivity improvements. Rental merchandise, production and delivery costs were all lower as a percentage of revenue, compared to the second quarter last year. The biggest gains came in rental production, which are the costs of operating our network of laundry plants. On a dollar basis, production costs were essentially flat year-over-year despite rental organic growth of 4.2%.

Operating margins also benefited from improvements in our direct sale catalog business, reflecting the restructuring of this business which we announced 2 quarters ago. Margin gains were partially offset by higher selling and administrative expenses due to increased sales force staffing and higher commission costs resulting from strong sales productivity.

Looking at the rest of the income statement. Interest expense increased to $1.6 million because of a higher effective interest rate, partially offset by lower total debt. Our tax rate related to continuing operations was 37.5% compared to 39.2% last year, primarily due to lower tax expense on our Canadian earnings.

Finally, diluted share count increased to 19.9 million shares as gains in our stock price have led to more option exercises and increased the dilutive effect of outstanding stock options. We now expect a full year diluted share count of approximately 20 million shares.

So putting it altogether, adjusted earnings per share from continuing operations grew 14% to $0.75, the highest quarterly earnings per share in G&K's history. With our strong profitability improvements this quarter, return on invested capital exceeded 10% for the first time since launching our game plan. On a 3-month annualized basis, adjusted ROIC was 10.2%, which was 140 basis points better than the second quarter last year.

So now let me shift to cash flow and the balance sheet. And I'll provide more details on the divestitures and discontinued operations in a moment. However, I'd like to note that the treatment of the divested assets and liabilities on our balance sheet has distorted some of the relationships between our cash flow statement and balance sheet. And this is because the historical balance sheet was not restated. So it may be somewhat difficult to clearly see how the changes in the various balance sheet accounts flow through to the cash flow statement, so let me see if I can shed some more light on the most significant cash flow drivers.

So cash flow from operations improved compared to our first quarter, but through 6 months, cash flow remains below last year's level. The decrease in cash flow was primarily due to increased in-service inventory to support revenue growth and also due to higher federal tax payments this year. While total year cash flow will be below last year's record levels, we expect strong cash flow from operations in the second half of this fiscal year.

Capital expenditures through the first 6 months were $15 million, down from $18 million in the prior year. For the full year, we now expect capital expenditures of $35 million to $40 million, somewhat lower than our previous projection due to the timing of projects.

Our balance sheet remains strong. We closed the quarter with $143 million of net debt and a ratio of net debt to trailing 12 months adjusted EBITDA of less than 1.2x rate.

So now I'd like to shift to discuss the divestitures and the results from discontinued operations. Earlier this month, we announced the divestiture of our direct sale program business and a noncore operation in Ireland. We've moved these business units to discontinued operations in our current and historical financial results. For your reference, we've posted an Excel file in the Investor Relations section of our website, with revised income statements for all of fiscal 2013 and the first 2 quarters of fiscal 2014, reflecting these businesses as discontinued operations.

As I mentioned earlier, consistent with accounting rules, historical balance sheets and cash flow statements have not been restated. Also, since our remaining direct sale business is a small portion of total revenue and is largely a complement to our rental business, we have combined rental and direct sale revenue on our income statement.

I'd like to point out that the sale of the Ireland business closed during the second quarter, while the sale of the program business closed subsequent to quarter end. However, as again permitted by the accounting rules, we recorded all of the charges related to the loss on the sale of these business units as a part of our second quarter results. These charges, combined with the operating results for those businesses, led to an $8.4 million after-tax loss from discontinued operations during the quarter, or $0.42 per diluted share.

As I mentioned earlier, the divestitures also impacted our balance sheet and cash flow statement. The remaining assets and liabilities related to the divested businesses are now categorized as Assets and Liabilities Held for Sale and are included in the Other Current Assets and Other Current Liabilities lines on our balance sheet.

Regarding cash flow. The $6 million of proceeds from the sale of the program business will be reflected on our third quarter cash flow statement. I'd also like to point out that the sale of these businesses will generate a sizable tax loss, which will reduce our cash tax payments in the second half of the fiscal year.

Now finally I'd like to provide an update on our outlook for the rest of the fiscal year. We are revising our full year guidance to reflect the divestitures and a lower exchange rate for the Canadian dollar. We now expect fiscal 2014 revenue from continuing operations in a range of $890 million to $900 million. This assumes no further deterioration in the Canadian dollar exchange rate from its current level. We now expect fiscal 2014 adjusted earnings from continuing operations between $2.80 and $2.90 per share, compared to our previous guidance of $2.80 to $3 per share. We continue to see solid improvements in the operating performance of our business. However, we expect these operating improvements will be largely offset by the relatively significant deterioration in the Canadian dollar and the loss of earnings from our divested operations. We estimate these 2 factors will reduce earnings by approximately $0.06 to $0.08 per share compared to our previous estimates.

As a reminder, our earnings guidance does not include the impact from the change in merchandise amortization lives, which we expect will result in a $6.3 million pretax benefit for the year or about $0.20 per share after tax. We expect our third quarter results will be affected by the annual reset of payroll taxes. Historically, this has negatively impacted our third quarter operating margin by approximately 100 basis points compared to the second quarter.

Also, merchandise expense, which has been a modest tailwind through the first half of the fiscal year, will likely shift to become a slight headwind in the second half as we continue to see robust new account sales growth. We will continue to monitor this closely and provide an update next quarter.

So to wrap up, this was another strong quarter for G&K. We are driving continued performance improvements by executing our game plan, and we expect to see further growth and profitability improvements in the second half of the fiscal year. With that, we'll be happy to take your questions.

Jeff Huebschen

Stephanie, we're ready to begin the question-and-answer period, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Joe Box.

Joe Box - KeyBanc Capital Markets Inc., Research Division

A question on the new account sales. Nice job driving it up about 20%. I understand that you guys have more feet on the street and you're certainly driving better productivity, and that's naturally going to move the number up, but can you maybe put so more color around some of the bigger areas that are paying off? I guess are you -- is it just the more targeted approach that you're taking in certain end markets and you're signing up more programmers? Or are you taking share from smaller operators? Just any color that kind of explains that 20% increase would be helpful.

Douglas A. Milroy

Sure. Joe, this as Doug. I would answer that question by pointing out first that consistent with the entire game plan, we've been pretty clear that there's no silver bullet in our business. So when you look at the improvements in sales, similarly, there's been no silver bullet, there's been no one thing. Certainly, the clear and unrelenting focus on customer satisfaction, the customer first, delivering on service excellence and our ability to communicate that to people and our ability to back it up through references and so forth is playing a role. Better targeting, as you mentioned, if you look at the second element of our game plan, better targeting of our customers. More and more are prospects. I mean, more and more fishing in the right pond, so to speak, is making a difference for us. If you look at the third element of our game plan, operational excellence, that applies to any element of a business. That sometimes gets heard as something you do in the plants or in your distribution system. There's such a thing as operational excellence in a sales force as well and how they do things day to day. And then even the last element of the game plan, strengthening our already high-performing team, raising the bar on how we hire, who we hire, how we bring them onboard, how we train them. So really, it's no silver bullet. It's been improvements across our sales effort. With respect to your detailed questions, the split programmer non [ph] tends to float still around that 50-50. It can be 40-60, it can be 60-40 but it tends to stay in that window, so there's no big story there. And the -- we and I believe the industry continues to see the shift in share from some of the smaller players in the industry to some of the larger ones like ourselves, so certainly a part of it is share gain. And I think it's -- it's again, that excellence that I tried to described earlier and the tools and capabilities that stand behind it, that it's harder and harder for the smaller companies in the industry to duplicate. So all of that rolls into the 20% year-over-year performance improvement you see.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Got it. That's helpful. And then maybe to ask you about your Canadian business. I get that the FX headwind is going to create a translational issue. But just kind of asking about the fundamentals there. If you look at the organic growth rates, is there any meaningful difference between what you're seeing in the U.S. versus what you're seeing in Canada? And can you maybe just put a little color around the fundamentals there?

Douglas A. Milroy

Sure. I guess, the short story is, as you know, that Canadian business has been a good business for G&K and a strong performer over the long haul. If you look more recently, there has been a little slowing in the organic growth, so it's a little less so in Canadian than the U.S. You mentioned exchange. That's factored out of the organic growth calculation. I think some of it is a reflection of the economy in Canada. If you look at where G&K is strongest, in Ontario and Québec, for example, you've seen the least strong employment pictures in Canada in those provinces where we're strongest. But at the end of the day, as I said, it's been a long, strong business for G&K. It's hit a bit of a soft spot, but we have every confidence it'll recover its own strong trend line.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay, understood. One last question and then I'll hop back in queue. I think, Jeff, last quarter, it sounded like there was maybe a little bit of cost creep that kind of came back within SG&A, specifically, within the administrative cost side. Just curious, was that be a factor again this quarter? And maybe how should we think about that in coming quarters?

Jeffrey L. Wright

Sure, Joe. I guess the short answer is no. It really wasn't a factor this quarter. I think we did a better job of keeping those G&A costs controlled and controlled well. The increase that you see in the SG&A line is selling costs. And specifically, part of that related to the increased headcount that we've got on the books now and also our -- just our new account sales results are up, sizably up, as we mentioned on the call, 20% year-over-year. And so the commissions that we pay related to that new level of increased sales also going up. So those are the 2 drivers, really, of that line. But the G&A cost, we did a better job this quarter.

Operator

The next question is from Andrew Steinerman.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Could you tell us, in the guidance, in the revenue guidance, the $890 million to $900 million, how much came out of the guidance based on the divestiture?

Jeffrey L. Wright

Sure, Andrew, this is Jeff. And maybe I can try to kind of bridge the guidance for everyone a little bit here. And I like to think of the guidance, I know we're offering a range, but I usually kind of move to the midpoint. And so previously we had guidance where the midpoint was $940 million. And we're now providing guidance where the midpoint is $895 million. And there's really 3 moving parts to that. One is that we divested businesses, 2 businesses, the largest one being the direct sale program business. But those 2 together represented about $40 million of revenue, so that's one moving part. The second moving part is that the Canadian exchange rate has weakened up significantly over the last few months, and in fact is down about 7% since we initially provided guidance. And so on our book of business, with the Canadian operation, that's about a $10 million reduction in revenue for the year related to just a weaker Canadian dollar. And then, of course, so those are 2 big items that move revenue down. And then the item that would move revenue back up is just our improving rental organic growth. And so that, again, at midpoint we're adding back about $5 million from improved organic growth. So those are kind of the 3 points that I'd make as you try to bridge from our previous guidance to our current guidance.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

That is helpful. And when you talk about improved organic growth being added back in, I assume what you're saying is organic growth should accelerate in the second half of the year from the 4.2% that we just saw.

Jeffrey L. Wright

Well, I think what I'm saying is that the organic growth is better than what we had originally put in our guidance at first. So we're clearly -- the organic growth has improved the last couple of quarters moving, I think, from 3.2% in Q4 last year, 3.7% in Q1, 4.2% here in Q2, and that pace of improvement is better than what we had originally put in the guidance.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Right. And a last clarification on that, has the way you calculated organic growth changed? Does it include your small direct sale business now? Or is that a pure rental organic growth number, the 4.2%?

Jeffrey L. Wright

Yes, Andrew, good question, and I know -- and we didn't make that clear. The rental organic growth that we've given everyone is the exact same as what we've been providing. And I might put a marker out there. We're anticipating that we'll continue to provide that rental organic growth, at least through this fiscal year. But then as we move into next fiscal year, we may, in fact, turn to giving you a total organic growth number. But at least for now, we'll continue to give you the rental organic growth number, and it is the exact same calculation as we've been giving for the last number of years.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Right. I would actually suggest giving both.

Jeffrey L. Wright

All right. Well, we'll -- thank you. We'll take that under advisement.

Operator

Your next question is from Andy Wittmann.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

So with the cash flows a little bit lower so far this year, and it sounds like the expectation is it's going to ramp, especially with the tax helping you for the balance of the year. But you guys previously talked about returning capital. Has the calculus or your opinion or thoughts about return of capital from when you initially talked about it, I guess, a quarter or 2 ago to today, has that changed either positively with maybe the strength in the business or negatively with maybe a little bit weaker cash flow than maybe what we previously thought?

Douglas A. Milroy

Andrew, this is Doug. I would say it hasn't changed materially. I think of capital allocation and the deployment of cash as a strategic issue. It's a longer-term issue. And for the most part, the decisions you make around that don't vary as a function of quarterly performance. So, in other words, our first priority for our cash is and will continue to be good, smart reinvestment in our business. We'll continue to look for good M&A opportunities. We will continue to use debt effectively and maintain a leveraged structure on our balance sheet. And beyond that, we continue to anticipate we'll have excess cash. To use that, we will -- you've seen us continue to increase our regular dividend. You've seen us step in with share buybacks to manage dilution, not largely for its own sake but to manage dilution. And nonetheless, after those actions, we still -- you will see the strong balance sheet and excess cash. It's a wonderful question. It's a wonderful problem for us to have. With such a strong business model, such good operating performance, how are you going to use all this cash? And as we've said very clearly, we see special dividend as an alternative. And in the time out in front of us, we will continue to evaluate that as an option.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Got it. That makes sense. Just as it relates to the M&A comments there, Doug, are you seeing bigger deals in the market today? It kind of feels like there might have been some commentary from others in the industry that maybe there was some. Are you seeing it? Are you hopeful that, that could materialize as large -- I mean, as something that you're contemplating more today than you were a while ago?

Douglas A. Milroy

As we've said, you got to talk to a lot of folks and look at a lot of things. The bid-ask remains quite far apart, but Andrew and I reflect on those conversations over, say, the last 4 or 5 years. The size spectrum of companies that we are looking at has not changed materially.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Okay. That's helpful. Maybe just -- maybe more of a technical question here, though, with -- for Jeff. The -- natural gas prices have been spiking here recently. Is that also contemplated in your guidance? Is this a risk that you're seeing here, now that we're pushing almost $5. Obviously, it might be seasonally temporary, but just kind of your thoughts as to how that factors into guidance and what the potential impacts could be if that were to stick around up here?

Jeffrey L. Wright

Andrew, yes, natural gas costs, I guess maybe you'd describe it as a modest risk. We -- just as a reminder, we -- for natural gas, we target -- trying, and I'll use the word hedge, but trying to hedge about 50% of our usage. We do that by signing long-term -- longer-term purchase arrangements with the natural gas companies, so it's not technically a hedge for accounting purposes, but you're locking in those forward prices. So for the remainder of the year, we have a fair amount of our natural gas cost already locked in, and it was actually locked in before the spike in cost. So there, a modest, I guess, risk from natural gas. I would also note that motor fuel costs, probably have been really coming down slightly. So our energy costs as a whole for the quarter were actually -- well, that was [ph] about 4.0% here this past -- last year -- no, excuse me, 4.0% this year and 4.1% last year. So there's just a 10 basis point positive move year-over-year. And I'm not anticipating that energy costs are going to be a big swing factor for us as we complete the rest of this fiscal year.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Very helpful. And then maybe last question, back to Doug. Doug, just any update on the CFO position search and how that might be progressing?

Douglas A. Milroy

I would say it's progressing exactly how I expected it to. Big shoes on the gentleman sitting to my left here to be filled. And so as we said when we announced it, we're looking at internal candidates. We're looking outside of the company. That tends to be a lengthy process for me. My 2 favorite words when I'm hiring are: don't settle. And so we're taking this very seriously. We'll look at a wide number of candidates and make a good choice for the company. I think, importantly, though, to note, is we announced when we talked about Jeff's retirement, that he'd be with us through the end of the year, and so we're in good stead against that kind of a time frame.

Operator

Next question is from Chris McGinnis.

Christopher McGinnis - Sidoti & Company, LLC

Just quickly, obviously, you guys have had great margin expansion over the last number -- I'd say 4 years, I guess. I guess, just -- can you start to walk us through as you get to this new level, how do you -- how much room do you really have to go do you think? And I know, obviously it's a 12+ Plan. But it seems like it's a little bit quicker than I anticipated and I think most people have anticipated. Just what starts to get you past where you're at today? Is it just this -- little improvements that you're making in the business and the productivity gains? Or is it SG&A leverage that you see kind of going forward? What are the -- I guess when you look at the 2 components, what are the biggest drivers at this point?

Douglas A. Milroy

Chris, I think it's both. In the early stages in the game plan, we didn't talk a lot about SG&A leverage. In the latter stages, in this iteration, we are. That's the plus in the 12+, that's the slight shift toward growth, as we felt we had to earn our right to grow. And we did that by getting to our cost of capital, and we sealed that deal, so to speak, here with the 10.2% ROIC and maybe in our 10/10 target. But now we're into a stage where we can think a little more about that top line. And by doing that, we get the SG&A leverage to which you just referred. So that's clearly a key element of it. However, the other key element is we see opportunity across the income statement. Whether you're talking about merchandise, delivery, production or even the things we're doing in G&A, we see opportunities through a good discipline of continuous improvement. And we see opportunities through good, smart investments in new tools to drive margin expansion in every one of those categories. So I mentioned earlier, and I remain steadfast in my belief, there's not a silver bullet. And I think you'll see a balance as we continue to expand margin between good old blocking and tackling all up and down the income statement and good support from top line profitable growth.

Christopher McGinnis - Sidoti & Company, LLC

Great. And then, secondly, somewhat in the same ballpark, with the expansion in the organic growth, which is obviously great, does that make you reconsider maybe adding to your workforce or your sales force a little bit more aggressively? And what are the opportunities you see out there in the market to add versus what sounds like it's still a very tough acquisition environment?

Douglas A. Milroy

Well, we like the actions we took this year. We were very purposeful in waiting to make additions to our sales force. We wanted to create a strong enough foundation in the operational excellence side of our sales organization, such that we believed we could add well, holding our own, if not expanding on productivity. And now that we've convinced ourselves we can do that, we will continue to look for careful and measured growth in the sales force in the quarters ahead. But right now, we like where we're at, but it's certainly not the end of the expansion of our sales team.

Operator

Your next question is from Kevin Steinke.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Just question about the 2- to 4-year time frame to get to the 12/12 goal that you laid out a couple quarters ago. With the divestiture of the direct sale program business, should we think about you being towards the lower end of that range now in terms of the 2- to 4-year time frame?

Douglas A. Milroy

Kevin, I'd say no, not necessarily. And the reason is, it's a planned and programmed approach. And what I mean by that is -- well, let me give you an example. Give me a little rounding there on this, but it'll be a useful example. We might have been -- we were at 11.5% this quarter. We might have got there already if we weren't thinking about growth and doing all kinds of good things for the long-term foundation of the company. So in other words, we like that 2- to 4-year window. It gives us not -- the game isn't how fast can we get there, but can we get there while we continue to strengthen the foundation of the company, can we get there while we continue to profitably grow the top line and improve the overall franchise, if you will, not just simply check the box on those 2 numbers. So at this stage, I would still communicate that you can look for us to get into that window in that 2- to 4-year time frame. And then, whenever we talk about the 12+ Plan, I think it's important to point out, it's very important point out, we view it as the next logical step in where we're taking the company, and the next logical set of stretch targets, but it certainly isn't the endgame. We continue to believe there's margin expansion and growth beyond the 2 12 numbers. And so, that's important to be clear about as well.

Jeffrey L. Wright

Maybe if I could, Kevin, I'll just tack on a little bit, but a couple of other thoughts. Because I know that the -- when you see an 11.5% margin out there, it's quick to easily say, well, it's getting pretty close to 12%. And maybe just a couple of things I'd call out. One is the -- this whole reset of payroll taxes that happens in our third quarter and impacts really third and fourth quarter. If you take our guidance for the year, I would -- I think it's coming in right at the upper 10s. So right around 11% would be the margin for the year, this year. So we'll have made a nice move, call it from 10% up to 11%, but not yet 12%. And then, the other thing I would say is that, for us, remember, we're going to hold ourselves accountable to both the margin and the ROIC. And I think everyone knows from looking at numbers, it's probably going to take a margin that's a little bit beyond 12% to get the ROIC up to 12%. So we're going to hold ourselves accountable to all that. And, I think, again, just a little bit of color to kind of illuminate why we would still say today that 2 to 4 years still seems appropriate at this time.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay, great. That's helpful. Also wanted to ask about the CapEx expectations coming down a little bit, due to the -- sounds like the push-forward of some projects. I'm was just curious about those projects. Are those investments in tools as you've talked about from time to time that are targeted to continue driving margins higher? And then is that also something that kind of balances out, where maybe the push-forward of those projects also pushes forward the 12% goal a little further out?

Jeffrey L. Wright

Sure, Kevin, this is Jeff. The -- I guess, I probably wouldn't read that much into it in terms of that -- a delay or a push of some of those projects would delay our thoughts on the longer-term 12+ Plan and the achievement of that. It's more of a -- I guess I'd call it a more of a shorter-term timing issue of just being able to complete the projects and complete them well. So we're just forecasting spending a little bit less, actually, this year than we had originally anticipated, but those dollars; likely would just probably roll over into Q1 and Q2 of next year. So it's more of a just a shorter-term operational and execution of those projects. But I don't think really affects our long-term view on achievement of the 12+ Plan.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. And lastly, if you could comment on pricing environment both industry-wide, how that feels now, and also your progress on gaining price by delivering better value for customers?

Douglas A. Milroy

I -- Kevin, this is Doug. I'm going to say broadly the pricing outlook hasn't changed materially. When I look at it, I think pricing is best looked at over a period of time, and as we've described before, in a really tough recession, pricing gets really ugly. As that economy improves, the pressure on pricing abates, at least a little bit. And that's what we've seen, is we haven't seen, as you know, a great economy. So we've seen some abatement, but certainly, it is still very competitive out there. It hasn't changed materially. We have continued from time to time to credit pricing with part of the gains that you're seeing in our income statement. And to your point, I think it does reflect the value creation. Our view here is first, second and third, you focus on creating value for your customer, and then pricing is only a conversation of how we're going to split that value up. And funny how the more value we've created, the better that conversation goes for us.

Operator

[Operator Instructions] Your next question is from Dan Dolev.

Dan Dolev - Jefferies LLC, Research Division

Question for Doug. When I asked you, I think it was at the end of October, about the macro, you mentioned, I believe, it was a national tragedy. Now November seems to have been a little bit better in terms of the -- BLS data in December may have been a fluke. Can you maybe comment? It looks like add/stops have flattened versus negative. So is there any -- are you seeing any green shoots? Or are we just fooling ourselves?

Douglas A. Milroy

Boy, I'm tempted to grab your last 2 words, or 3 words. And, Dan, I'll tell you why. It's -- I think, our -- I'm still in the national tragedy bucket. I think our country, and even a lot of the investment community, the press -- the business press has slipped into -- you talk about 100,000 jobs or 200,000 jobs. You post 200,000, we've slipped into, boy, so that was a good one. When, in fact, the numbers haven't changed. What I read still says we need to be up in the 300,000 to be absorbing the -- what's coming into the workforce, the net change. So we're a long ways from where we need to be as a country, and we do feel bad about it. Obviously, it impacts our business, but that's not where I'm focusing. So that would be my answer to you on our view. I haven't put that view out here, I always feel it's important to point out that the incredible expansions that we've made in operating margin and the improvements and return on invested capital has been without any material lift in employment. So tough economy. We continue to crunch through it, and we believe we will continue to crunch through it.

Operator

Your next question is from Barbara Noverini.

Barbara Noverini - Morningstar Inc., Research Division

So you've had strong new account sales for several quarters now. Can you give us a sense for whether the majority of these sales are filling in existing routes or establishing new routes in new markets? Will we have to see route density improve in some of these new routes in order for you to be able to achieve those 12+ operating margin goals?

Douglas A. Milroy

It's unusual -- it's more of the filling in, is the short answer. It'd be unusual to have a whole new set of new accounts in a place where we're not at all and therefore it creates a whole new route. So it tends to be much more the filling in and improving density on routes we already have. Now having said that, when you see enough growth and we continue to do that, then you sometimes have to add a route, but the route wouldn't be an entirely new route of entirely new customers. It would be a reconfiguration around existing. And from an economic point of view, it's one of the many attractive elements of this business model, is if you step back and look at the size of our company, a route is a relatively small increment of capacity that we're adding. So it's nice to be able to add that increment of capacity, fill it rapidly and not have it be a material hit to the P&L that, say, if it was -- and you're in the chemical industry and it's a whole new plant that's got to get filled overnight. So the economics work out pretty well for gradual improvement as we add new accounts.

Operator

Your next question is a follow-up from Chris McGinnis.

Christopher McGinnis - Sidoti & Company, LLC

Sorry, just one last follow-up. Just on the health care, and can you -- maybe just your comments about how you feel positioned since the changes take place?

Douglas A. Milroy

Chris, when it comes to health care, how do we feel positioned? I would say we're positioned pretty well. With anybody, there's some uncertainty about what their company faces in the future. But I would say we're positioned pretty well. We began, well -- -- 18 months, 2 years ago, to anticipate some of the changes. We made some changes to our health plans in 2013. We were focused on giving employees more choice, introduced some new plans around deductibles and HSAs, giving employees more choice and more opportunity to control their health care. So that, I think, has been a positive for the company and for our team. The changing and shifting legislation has brought some new costs to our business, that's clear, transitional reinsurance fee. And we've seen a small increase in our enrollment. Now whether that goes back to the individual mandate or not, I can't say for sure. But we have seen for the calendar year we're now in a small increase in our enrollment. But as far as it impacts this year, our best estimate of the impact is already factored into our guidance. As far as the long-term impact, there I would tell you, based on what I read, the emerging laws are still uncertain, and the sands shift from time to time. So the long term still has some uncertainty around it, but just as we've anticipated and acted on it here, we so too will do with other changes in health care. So net-net, we feel pretty well positioned.

Operator

There are no further questions.

Douglas A. Milroy

Okay. So I'll end where I started. Thank you very much for calling in. An exciting quarter for us, a memorable one, obviously, for the overall, the strong numbers that we posted, but it felt very good to check that second of our 10/10 goals. And it illustrates we're off to a strong start for delivering the 12+ Plan. We think that's a big accomplishment, so I can assure you the champagne will be flowing, and at least metaphorically we hope you'll join us. We hope you'll toast this scene. If you've been a long-term investor of ours, we know you can afford it. So we hope you'll join us in the party, so to speak. And we look forward to updating you next quarter. Thank you very much.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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