G&K Services (GK) CEO Doug Milroy on Q4 2014 Results - Earnings Call Transcript

Aug.14.14 | About: G&K Services, (GK)

G&K Services, Inc. (NASDAQ:GK)

Q4 2014 Earnings Conference Call

August 14, 2014 11:00 AM ET

Executives

Jeff Huebschen – Director, Investor Relations

Doug Milroy – Chief Executive Officer

Tracy Jokinen – Chief Financial Officer

Analysts

Joe Box – KeyBanc Capital Markets

John M. Healy – Northcoast Research

Andy Wittmann – Robert W. Baird

Christopher McGinnis – Sidoti & Company

Andrew Steinerman – JP Morgan Chase

Kevin Steinke – Barrington Research Associates

Operator

Good morning, my name is Hope and I will be your conference operator today. At this time, I would like to welcome, everyone to the fourth quarter earnings call. (Operator Instructions). Thank you. I would now like to turn the conference over to Mr. Jeff Huebschen, Director of Investor Relations. Please go ahead, sir.

Jeff Huebschen

Good morning, and thank you for joining us to discuss G&K Services' fourth quarter and year end fiscal year 2014 results. With me today are Doug Milroy, G&K's Chief Executive Officer; and Tracy Jokinen, 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 our company issued this morning and is available on our website. A replay of this call will be available later today and will be available through September 14 and 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.

Doug Milroy

Good morning, everyone and thanks for calling in today. Presumably, you have had a chance to see our results and so you know that, we have been looking very forward to having a chance to talk with you. We turned in another very strong quarter that caps for us a terrific year. So we're glad to have the chance to talk about it.

To that end, I would like to do three things today. I would like to look back at the year a little bit. I also thought, it was appropriate time. We have been driving this game plan for five years now and it felt like a good time to kind of step back and look at the five year view and then thirdly, talk about FY 2015 and beyond, but before I jump into that.

I would like to briefly introduce and welcome our new CFO, Tracy Jokinen. We announced earlier that she'd be joining our company, we are very excited to have her as part of our leadership team. She's been in the chair now for about six weeks. Happy to have her on this call and I look forward to the chance to get out with her and introduce you to many of you, in the quarters ahead.

So she'll take it through the financials in a little more detail and then we'll be happy to answer any questions, you might have. So welcome, Tracy.

Tracy Jokinen

Thank you.

Doug Milroy

So I want to start with the year. We again made strong progress across the board. Especially each element of our 12 plus plan advanced nicely this year. We have full year revenue growth of 4%, we had full year organic rental growth of nearly 5%. Adjusted operating income rose to $100 million that's 17% year-over-year dollar growth and a new record for our company. We had full year adjusted operating margins of 11.1%, that's a 120 basis points up over prior year and it doesn't just illustrate progress with the game plan in the last five years.

It's the highest full year operating margin we've had since 2000. Similarly, we advance our return on invested capital 10.2% this year, 150 basis points up over prior year and again the highest number we have seen in this company, since 2000. Not surprisingly those kind of financial results drill very solid earnings growth, adjusted earnings per share.

We are up 10% year-over-year to $2.90 that's another record for our company and it was a very strong year for cash flow as well. Cash from operations this year was around $75 million positioned us to continue to allocate capital the way we said, wanted to, it allowed us to return $150 million in cash to our shareholders, this year that's nearly $8 a share in dividends and buyback.

So we look back at financials very strong in FY 2014. Again this year, not surprisingly strong financials well, the result of a clear and well executed game plan. So let me flip a little of the operating side. You'll recall last year we talked about having set multiple operating records. This year, we beat most of them.

Customer satisfaction, customer retention, plant productivity levels and very importantly our safety performance all advanced to new highs this year. The one that perhaps is most significant is we set this year an all-time new account sales record. We grew our newest sales 14% on a year-over-year basis.

Now we've talked in the past about, yes we made some modest expansions to our sales force. So the 14% is partly from increasing the size of the sales force, but partly it's the result of continuing the multiyear focus that we've had on seller productivity. And I really highlighted that one as particularly significant because that strong profitable top line growth is the life blood of a company and I think it demonstrates our game plan, is really working on all four of its element, it’s one way you can walk through and look at.

First element, our focus on customers, our ability to deliver that kind of sales performance is further validation that our value proposition meets the needs of the market and is winning out there or if you look at the second element of our game plan targeting customers that's clearly showing up and that kind of new sales performance.

We've talked at some length in the past about regrettably our sales effort was in area, that we just have to completely rebuild over the last several years. So you see that reflecting the third element of our game plan, good operational excellence as we've rebuilt that area and then fourth not surprisingly at the end of the day, it's about the team and the strength of our sales team and the rest of the G&K team that stands behind them.

So I wanted to go through that one in some detail because I think it's a really good illustration of all elements of our game plan and the net of that is, by almost any measure you choose, it was a very nice year for us and one we were excited to share with you.

Similarly, if you step back as I said I would and you look at this is basically the five-year anniversary of our game plan. For those of you, who follow the company you know that this is the latest in the series of really terrific years and that five years ago, we set out to fundamentally transform our company and we've clearly done that.

I'll candidly tell you, I think it's truly remarkable what our team here has accomplished. We've more than doubled our operating margin, more than doubled our return on invested capital and a gain, that's not cherry picking numbers to highlight, but rather reminding you of what we said from the inception would be our focus. Margins and returns and our belief that was what needed to be the near term focus and what would drive shareholder returns.

That's resulted in good earnings per share growth 25% compounded over the period. We've generated over $400 million in cash from operations and the net [indiscernible] adds been a 235% cumulative total shareholder return.

So you can't imagine the pride we have in our team here and what they've done and that's where the credit belongs. Clearly, it's been because of a strong and clear game plan and you know our focus, our focus in on keeping our customer promised and improving how we target customers and really driving our operational excellence and I'm continuing to strengthen our high performing team.

So clearly it's the strong game plan, but it's the last element that makes it happen. Any game plan is only as good as the team that executes it and ours is terrific. So when you look back over five years. I think you can make a very compelling case that we've made lasting improvements, we've delivered good results and we've created a lot of value for our shareholder.

So we are pretty pleased with whether you want to look at the year or the five-year, we are pretty pleased with both. Transitioning then to FY 2015, I would guess, I'd say not surprisingly. We are going to stick with it. Our game plan continues to work for us, why would we change it. We will use our game plan and its focus to continue to drive the near term performance that you've seen. We will continue driving the game plan every day and we will build on the progress we've made over the last five years and all of that will center around, relentless focus on our 12 plus plan.

12% operating margin, 12% return on invested capital and a continuing shift, not to see change but a continuing shift towards growth that will clearly be the focus in the year ahead. At the same time, we have and we will continue to take the right steps that position the company for the long-term. Things like continuing to ramp up our capital spending, we talked about that little last quarter, Tracy will fill you in today on a little more of the details, but we will continue to keep that as our first overwhelming priority for the use of our cash is to thoughtfully reinvest in our own business and projects that enable growth, on projects that drive profitability, on investments and technology that we believe will advance our business.

At the same time, we will remain committed to acquisitions and continue to evaluate and look for acquisition opportunity. So relentlessly driving near term business performance, but making sure that we are doing the right things that set the company up for an even stronger long term performance. When we step back and look at that, I can assure you, our best days are still ahead of us.

So my summary, FY 2014 was another terrific year for the company and which this team should take a great deal of pride. It's on top of five years of steadily improving performance and we are absolutely confident, we'll continue that trend into FY 2015 and with that, Tracy I will turn it over to you for more details.

Tracy Jokinen

Okay, thanks Doug and good morning, everyone. I'm happy to be here, this morning as part of G&K team and I look forward to meeting many of you in the coming quarters. I'm especially excited to be able to report the strong earnings results, this morning. What I'll do is provide with details on our fourth quarter's results. I'll discuss the balance sheet and cash flow and comment on our outlook for fiscal year 2015. So let's start with the results.

Revenues from continuing operations grew by 4.7% to $230 million. With rental organic growth improving to 6%. This strong organic growth was partially offset by a lower Canadian exchange rate, which decreased total growth by 1.1%. By the lower Canadian exchange rate impacted our results throughout the fiscal year and just to provide a little contact for you on the full year.

The exchange rate differences reduced our revenue by $9.5 million on a full year basis and that's negatively impacted earnings per share by $0.06. Getting back to the quarter, our rental business had good performance across most of its key growth drivers. As Doug mentioned, we achieved record level of new account sales this year.

New accounts sales were up 10% in the quarter and up 14% for the full year, as we both increased the size of our sales force and improved seller productivity. We also continue to benefit from better customer retention. Improved pricing and increase revenue related to merchandise recovery billing in uniform preparation services.

Our add-quit metric, which measures changes in the number of wears within our customer base was positive this quarter. Adjusted operating income from continuing operations grew 13% this quarter to $26 million and adjusted operating margin improved 80 basis points to 11.3%.

We continue to benefit from operating leverage and productivity improvements in rental production and delivery, also selling and administrative cost as a percent of revenue or 40 basis points lower than last year. These margin improvements more than offset increased Group health insurance cost and higher rental merchandising expense, due to merchandising inputs to support our new account growth.

As a reminder, our fourth quarter was adjusted to exclude $790,000 of pretax benefit from the previously announced change in merchandise amortization lives. As been discussed on previous earnings call, this is a temporary benefit relating to extending these amortization lives for some freshly uniform and floor mat products to better reflect their actual useful life.

The impact of this temporary benefit has steady decreased through fiscal year 2014 and so this is the last quarter, we will be calling out the impact of this accounting change. Looking at the rest of the income statement. Interest expense was essentially flat at $1.6 million. The additional debt we took on, to fund our special dividend was added late in the quarter, so it had a minimal impact on Q4 results.

Going forward, this additional debt will increase interest expense by $1.5 million to $2 million in fiscal 2015. The fourth quarter effective tax rate was 37.5% compared to 36.9% last year and diluted share count increased to 20 million shares primarily due to stock option exercise earlier in the fiscal year.

Putting it altogether, adjusted earnings from continuing operations grew 12% to $0.76 per share which is the highest quarterly EPS in G&K's history. Return on invested capital also improved nicely. On a three-month annualized basis, ROIC this quarter was 10.6%, which was 120 basis points higher than the fourth quarter last year.

We also achieved a significant improvement in return on average equity, which increased 210 basis points to 13.9%. Benefiting from the additional leverage, we added to our balance sheet this quarter. With that, let me turn to the balance sheet and cash flow statement. As I mentioned, we paid the $6 dividend per share during the quarter, which was $120 million in aggregate. This was funded with a mix of cash on hand and borrowing using our existing credit facilities. With this additional borrowing, total debt increased $92 million to $267 million and needed with this additional debt our balance sheet remains very strong.

Our ratio of total debt to adjusted EBITDA stands at just over two times and we still retain approximately $200 million of borrowing capacity on our existing credit facility. G&K has a solid balance sheet, which is supported by consistent strong cash flow that our business generates.

FY 2014 was another solid year for cash flow, with cash from operations of $75 million. As expected capital expenditures did pick up in the fourth quarter to $10 million bringing full year CapEx to $33 million. As mentioned last quarter, capital spending for the year was lower than planned due to the timing of several projects.

These delayed projects will carry over into fiscal 2015 resulting in increased capital spending next year. That leaves to me to our outlook for next fiscal year and we're expecting another year of strong, top and bottom line growth. We forecast full year revenue in the range $930 million to $950 million and that growth will come from continued with single-digit organic growth.

Offset by continued pressure from the Canadian exchange rate especially in the first half of the fiscal year. The lower exchange rate will likely reduce first half growth by around 1% and of course the lower exchange rate will also have a negative impact on bottom line results.

We expect full year earnings per share in the range of $3.10 to $3.25. With continued margin gains from the execution of our game plan driving us closer to our 12% goals. Included in this guidance is our margin pressure from increased billing expenses, higher health insurance cost and merchandizing expense to support our new account growth.

Nonetheless, we'll work closely to manage these expenses and drive efficiencies in other parts of our cost structure as we've done in the past. As I mentioned earlier, we expect full year interest expense will arise by $1.5 million to $2 million due to the increased debt from funding the special dividend.

Our effective tax rate should be similar to 2014 which is around 38% and we expect the full year diluted share count of approximately 20.1 million shares. Finally as I mentioned before, we are planning to increase our capital expenditure as we catch up on projects that were delayed in 2014 and start other new projects that will enable growth and improve profitability.

We expect to spend around $50 million next year, as we told you last quarter. So to wrap up, this is an exciting quarter and another great year for G&K. we made great progress towards each element of our 12 plus plan and we expect continued solid progress in next fiscal year. With that, we are ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Joe Box

Joe Box – KeyBanc Capital Markets

Got to start with the positive add-quit, which you know if my model is right here, it seems like this is the first time, since 2Q, 2012. Maybe just from a high level, can you put some color around the add-quit and putting in the context of customer's willingness to hire here and if you think, this is the start of a trend or just maybe one time blip?

Tracy Jokinen

Yes, Joe. Thanks for question. Add-quit did term positive this quarter after being negative the three previous quarters. So it's encouraging that federal employment data is looking a bit more positive, but we believe that it’s way too early to call this a trend. If you look back over the past two years to three years, we've had some quarters that have been up, some quarters been down, but overall it's remained marginally neutral.

So we are going to continue to keep our eye on it and we'll provide update in the coming quarters.

Joe Box – KeyBanc Capital Markets

Great, thanks and question for you on the guidance. If some of my assumptions are right for next year, if we use the midpoint that puts you about 11.7% operating margin or about 70 basis points of expansion. Tracy, I think you mentioned the headwinds earlier, can you maybe just put some color around some of those headwinds specifically, so we can get a sense or what the actual operating efficiency might look like?

Tracy Jokinen

Yes, we expect to have continued headwind around merchandizing cost, as we are planning for continued new business growth. We also would expect that healthcare will continue to be headwind for us, going into next year, but we have a lot of initiatives in place to help continue to drive productivity through our production facilities and our delivery expense and we also intent to see some leverage on S&A not from selling expense per se because we intent to add some headcounts there, but in total as we drive sales growth, we will see some operating leverage come from that growth.

Joe Box – KeyBanc Capital Markets

Understood and can you just quantify the expected merchandise headwind?

Tracy Jokinen

No, we don't have that kind of detail right now. We can tell you that, going into the next – coming out of this fiscal year was up slightly as a percent of revenue and it will put some pressure on our results for next year, but not to any degree that we can offset in other areas.

Joe Box – KeyBanc Capital Markets

Perfect, thanks and on the working capital side, it was a pretty sizable drag in FY 2014 and you guys continue to do very well on the new account side ups, which would suggest more garment inventory. Can you maybe just help us understand directionally, where you're in the build out of garment inventory and maybe how we should be thinking about working capital in 2015?

Tracy Jokinen

Yes, sure. Our expectation is that working capital should be fairly flat in 2015 versus being a large use of cash in fiscal 2015. So the two things you should understand about working capital is, we do expect that inventory will likely increase to support new revenue growth, but our expectation is that we should be able to offset by improvements in DSO.

Partially tied to timing of collections in 2014, we left some money on the table there and then also just better management of our accounts receivable.

Joe Box – KeyBanc Capital Markets

Great, just one last one and then I'll turn it over. With respect to capital allocation, I think you guys have a had a fairly defined process over the last couple of years, in terms of debt pay down and then you know a good size, one-time dividend. Tracy, with a fresh set of eyes coming from you, I'm just curious, should we think about that typical process changing at all or is that going to be a consistent game plan?

Tracy Jokinen

Well, Joe it's still early days, well looking at what the company has done in the past, I think very successfully is number one, they've prioritized their capital by investing it in the business, which is really what provides the best returns for our shareholders and then secondly, they consistently return cash to shareholders through dividends and share repurchases.

So I think, as far as one and two, we have the right priorities there and we're still having internal dialog around that and more to come as we continue to think through our capital structure.

Joe Box – KeyBanc Capital Markets

Great, thank you and welcome abroad, Tracy.

Operator

Your next question comes from the line of John M. Healy

John M. Healy – Northcoast Research

I was hoping to get a little bit of color about what you've seen maybe over the last six weeks or seven weeks, since how the fourth quarter ended organic growth from you was very impressive and wanted to get some color on, if that momentum has carried forward into the fiscal first quarter?

Doug Milroy

John, this is Doug. As you may recall, we generally don't comment within the quarter. so what I can tell you, is reiterate to what you already know, we saw nice success in through the year as we built our quarterly rate of rental organic growth, we saw nice succession through the year and it keeps us solidly in this mid-single-digit that we've been talking about for some time and any back of the envelope analysis illustrates that, as we can stay in this kind of mid-single digit growth rate and balance inputs and balance all the things about it, as we move toward the 12 OI and the 12 ROIC, that's a formula for a lot of value creation.

John M. Healy – Northcoast Research

Okay, just to follow on that, I mean the excitement around the add-quits turning positive, I mean can you talk to, if that trend has continued through the first quarter.

Doug Milroy

I can't again, we've set an approach of not commenting within the quarter. I would just reiterate, what Tracy said and you've heard me say, something similar a number of times, John. Which is, one quarter doesn't make a trend?

John M. Healy – Northcoast Research

Okay, fair enough.

Doug Milroy

We certainly, wish it dead and hope it dead. We read the same newspapers you do and foremost all our friends in North America, we hope that the positive trend, we've seen late will continue, but you know, John that we don't know on it, we work to run our business well and progress our business regardless of what's going on, in the macroeconomic environment and we'll continue to do that in the 2015.

John M. Healy – Northcoast Research

Very good, if I think about not just yourself as a public company, but your peers. I would say, from my experience the organic growth that all three of you have seen, always the three peers publics have seen, have been a little bit better than expected given the economic backdrop. I think it about, what you're all doing, you're all investing into routes, you're all investing into plans and productivity tools, all at different types of levels and I heard you mention acquisitions.

I'm curious to get your thought about what that pipeline looks like, are the independents out there. Do you feel like, they're struggling to survive, are they making investments into their businesses? How do you feel from a day-to-day combat standpoint with the part of the market that is private and are you seeing them more likely to sell than maybe it had been in the years past?

Doug Milroy

Well, if you step back and look not just at the view from today, but the longer view. There was a lot of ongoing sale and consolidation leading up to the recession. Post-recession, wherein what I begun to label kind of post-recession pause on consolidation within the industry. Which is to say, can point to no concrete reason, why we've hit some magical rebel of consolidation and we won't be able to go further.

So well M&A activity has been low as of late. I don't think that will be the way it is forever. As such we stay active and involved in that market place, but the bid ask continues to remain quite wide and when you say, are they struggling, I think there is a lot of well round companies out there, that aren't, that would be of interest to us.

There are some distressed properties that are struggling, which wouldn't be of interest to us in the first place. So yes, some of that goes on in the industry, but also importantly when you try to look at those small and mid-sized companies, I think many of them are benefiting from the low interest rates and that helps them stay in the game as well.

So eventually, microeconomics will come to play and that consolidation trend will restart, but in the meantime it's stalled by a pretty wide bid ask.

John M. Healy – Northcoast Research

Great and just one last question, I might have missed in the prepared remarks, but energy is a percentage of sales. Can you give us that for the quarter and maybe for what it was for the year?

Tracy Jokinen

Yes, sure. Energy in the quarter was about 4.1% of revenue and about the same for the full year, pretty consistent with where it's been.

John M. Healy – Northcoast Research

Perfect. Thanks, so much and congrats.

Operator

Your next question comes from the line of Andy Wittmann

Andy Wittmann – Robert W. Baird

I wanted to ask on the kind of ancillary revenues from merchandise repair, loss garment fees, it sounds like that was another driver this quarter for your revenues and I think if I'm not mistaken, that's been something that's been kind of recurring benefits to year-over-year performance.

I guess, I was just wondering for a little commentary on how long you can continue to increase that before this, either customer push back or what's going on there?

Doug Milroy

Andrew, this is Doug. I would say that, there is more room there. It starts with the core of our game plan is customer service and create value and the more value, you create then it's only a question of how we share in that value and so the more we're doing, a great job for our customer, the easier those conversations go and as I believe, there is room for us, always to continue to improve and build on the strength we have, I would therefore argue that there is room for us to continue to garner additional remuneration for what we do as time passes.

So I don't think that has run out at this stage.

Andy Wittmann – Robert W. Baird

That seems like your kind of stock answer to the pricing question, Doug. Is the environmental pricing given that it seems like all the competitors are growing at or above historical average levels, would you just generally consider the price environment, a little bit better than it was, maybe a one year or two year ago?

Doug Milroy

I certainly think it has improved from where it was, three years or four years ago. I don't think it's materially different than it was a one year or two years ago. And I'm sure that, you know my stock answer very well. Well, that's above much detail, as we're going to go into, but I'll remind you that, when we do talk about price, when we do think about. We always come back to the value equation, the value equation first.

I think the second element is, to understand that pricing is a process and therefore like any process, it's subject to continuous improvement and we will continue to build out our capabilities to do that in a way that works for us and our customers and then to some extent, you accept the pricing pressure and you say, gee [ph] that's probably why, G&K worked so hard in the first year, for two of its game plan to drive a real cost focus, cost mentality across every corner of the business.

So I think, all three of those things add a little color to the price, but you know well, we can't go any further than that.

Andy Wittmann – Robert W. Baird

Well, I didn't expect much more, actually that was helpful, just to thinking to that, it is a little bit better than few years ago. It's interesting, I appreciated the comments on the five-year kind of look back and then the look ahead, Doug. As we do that and we think back over those years, it's you kind of saw the first thing of getting the cost structure right and we saw some of the increase in return and then we saw you kind of tilt towards growth, a little bit more and now we're year into that.

Certainly all those elements still have a role, but with the underlying business operating more efficiently and just better, what do you think as the next strategic step? Are there other ancillary businesses that you're not in, that you're contemplating today? do you have the bandwidth and kind of the appetite to one; investigate other avenues of growth or do you still see that the core business that you have today as the go forward path for the next couple of years?

Doug Milroy

I guess, the short answer, Andrew is I'd say, yes to all the above. And by that I mean, I'll start where you ended. We absolutely see the core business as the path. We've been very core business focused and we continue to believe that there is a significant opportunity to grow and transform this company around nothing but our core business.

When you look at the value proposition in the marketplace and what we do to help people with their image, the safety, the security of the workplace. It's a very, very small investment at the end of the day that we are asking them to make and it improves a lot of things on their business and every month more and more people are coming to understand that, which I think explains a lot of where you started, which is the organic growth rate you're seeing across the industry, is speaks to the value proposition of what we do.

So the net of that is, there's a lot of room to continue to expand and build on our core business. Now having said that, in answering your question personally in my role, as Chief Executive, you don't spend any time thinking in those first couple of years about other than how to make the incremental nickel, but now that we've clearly moved to a point, where we are nicely earning our cost to capital and we've earned our right to grow, you do start shifting some of your mind share to other things.

I will tell you, there is absolutely nothing imminent, but I just wanted to reinforce that longer term. We will do anything that we think makes good strategic sense for and presents an opportunity to create value for our shareholders.

Andy Wittmann – Robert W. Baird

Okay, that's fair enough. Thank you very much. I'll leave it there.

Operator

Your next question comes from the line of Christopher McGinnis.

Christopher McGinnis – Sidoti & Company

Hi, Chris McGinnis. Thanks for taking my question. Just a quick question on maybe the on the 12-12 plan targeting the, you know the customers are little bit deeper. Can you, maybe just talk about where's that throughout the organization at this point?

Doug Milroy

Where, where what, Chris? I didn't quite catch the where and?

Christopher McGinnis – Sidoti & Company

Yes, just like where it's at throughout the network itself, is it in all the locations at this point or do you still have room to kind of increase that throughout the organization?

Doug Milroy

I think it's the ladder, I think there is still room. Its wide, it's a headline of our game plan, improving how we target customers because it's not one and done. It's not a thing, you do once and then, we are set. It's like, many things around which you can improve continuously. There are layers and layers of complexity that you can continue to peel back.

So as I've shared before the analytical intensity in the first iteration of what we should chose to target on or not, was staggering by my standards and you're seeing the quality of that analysis play out for us in the marketplace and in our growth rate, but there's always opportunities to find tune that, to take it a deeper understanding of a particular segment, to make sure we are setting up the programs, the product offering, the customer approach, and tailoring that to a particular segment that we've identified would be one example of how you can take it further and there are several others.

So we like what it's done for us so far, but it clearly has legs for the future.

Christopher McGinnis – Sidoti & Company

Great and then just, I guess just one question on the sales force increases. Is it newer regions or you're not in or you're just getting market share within regions you already are penetrating it?

Doug Milroy

It's some of both, it goes back to the targeting of customers, which is to say, all these points where we often talk about them as four discrete points, I use the one example that ticked all four boxes, so to speak and I wanted to do that to illustrate the interconnection between some of these. So when you decide to add to your sales force, you go back to the second element, the game plan and say, where are we trying to target and let's make sure that, that's what we are adding and so then that has both a market segment flavor, as well as a geographic flavor.

Christopher McGinnis – Sidoti & Company

Great, thank you very much.

Operator

Your next question comes from the line of Andrew Steinerman. Andrew, your line is open, if muted yourself. Please un-mute your line.

Andrew Steinerman – JP Morgan Chase

Oh! Sorry about that, could you hear me now?

Doug Milroy

Yes, good morning. Andrew.

Andrew Steinerman – JP Morgan Chase

Sorry, Doug. So I wasn't clear, maybe this question is for Tracy, I wasn't clear, if we're at a point of adding plans or if we still have plant capacity and we are not thinking about plans being added for 2015?

Tracy Jokinen

Yes, Andrew. We do have a remaining capacity at our existing facilities, but we are adding facilities as well, that's a combination of both.

Andrew Steinerman – JP Morgan Chase

And is that something new, is it that's the first time in the cycle, where you are at a point, of adding plans?

Tracy Jokinen

Yes.

Andrew Steinerman – JP Morgan Chase

Okay and then, Doug I can't hold back from asking, one question about add stops and I know one quarter doesn't make a trend. Which types of clients, in other words which verticals saw a positive add stops in the quarter?

Doug Milroy

It's interesting, Andrew the way you start, you can't hold off and you'd suggest that you probably recall that, I'm not going to answer that because we've got this problem of whatever we talk about, with you shows up in the marketplace the next day and I think it would be imprudent on behalf of my shareholders for me to sit here and say, here's the segments, where we having the best success.

So respectfully, I'm going to have to pass on that one.

Andrew Steinerman – JP Morgan Chase

Sure, then I'll ask a different question, if that's okay. On direct sales, I don't think it's been mentioned on the call here. Obviously there's a change there, we still have the catalog sales. I think it's about 3% of revenues and we were hoping that, would return to growth and so could you give us an update in the quarter, of how direct sales were doing. Is it about 3% of sales?

Doug Milroy

You're exactly, right. We were hoping that would return to growth and I believe, it will. I think the things that we did over the last year to restructure that business, were all very positive steps, it has certainly returned to growth in the bottom line, which is to say that business got significantly more profitable post all of the changes that we put in place and now it is time for us to deliver better and more on the top line, the promise of that business, the promise of that market opportunity that we have historically under delivered on.

So yes, regrettably it still sits kind of around that 3%, but I remain steadfast in my view that's a good long-term opportunity for our company.

Andrew Steinerman – JP Morgan Chase

Excellent. Thank you Doug.

Operator

(Operator Instructions) Your next question comes from the line of Kevin Steinke – Barrington Research Associates

Kevin Steinke – Barrington Research Associates

Yes, I wanted to ask in terms of your fiscal 2015 guidance, what sort of assumption has get you to the top or conversely to the bottom end of those ranges?

Tracy Jokinen

Sure, Kevin this is Tracy. The biggest driver will be the pace of our internal initiatives. So how quickly are we able to execute and see the real benefits from our productivity initiatives and then as we begin to bring on new sales rep, how quickly will they be able to win new business and at what pace.

As always, there will be external forces both positive and negative that could take us to either end of that range, but we're going to focus on controlling, what we can control and our expectation is that, we will be able to deliver strong sales and earnings growth as we've laid out in our guidance irrespective of what external factors may impact our results.

Now having said that, we do anticipate that the Canadian exchange rate, as I mentioned earlier will be a headwind for us, both on the top and bottom line by at least 1%.

Kevin Steinke – Barrington Research Associates

Okay, that's helpful. So it sounds like perhaps you're just well, I'll just ask what are you assuming in terms of add stops or how the economy trends within your guidance.

Tracy Jokinen

We are not anticipating any measureable employment growth. We expect it will be similar to 2014. So add-quite won't be a meaningful driver for us in our guidance.

Kevin Steinke – Barrington Research Associates

Okay, great and if you're willing, could you give more color on the types of investments, you're making this year, now that you're ramping up the capital spend a little bit. I don't know, if you want to any, you're able to offer any more detail on that, but any comments would be helpful? Thanks.

Doug Milroy

This is Doug. Kevin, I'm just going to step back from that slightly and offer some detail and color maybe that as useful that transcends your questions, which is. At least, when I use the word investments and I think about investments. You asked about capital expenditure, some of them are that way, but some of them are almost pure P&L stuff.

So the continuing expansion of our sales force is a very thoughtful investment, we don't have to do that, but it sets ourselves to be a stronger business in the long haul. When we talk about the targeting of customers and I used the example earlier of making sure, you run the whole trap line and done very detailed work, on how do you support a particular kind of customer, particular kind of segment, well that's a marketing investment to be able to go do that.

So when I talk about investments, I'm often transcending capital and I thought, those would be a couple of examples, we're highlighting. When we do talk about capital, our commitment is first and foremost to keeping our wills turning capital at a level that's respectable, that ensures we maintain our plans well.

So there's a lot of capital, Kevin in the kind of ongoing safety maintenance of a plan. There is ongoing environmental capital and we will continue to do that. Tracy, spoke about capital that I put in the bucket called expansion in terms of building facilities and markets where we want to grow our presence and then in the last couple of years, we've talked about a number of IT related capital projects OptiPro, telematics we will continue to do those kinds of things that will have impact up and down the P&L or putting new technology based tools in the hand of our sales force, would be another example.

So just wanted to highlight a few examples to answer your questions, but also to highlight that I think about investments both ways and there are some days, when it would be a lot easier to not make any of them that hit the P&L, but we don't think that's the right way to create a long-term value for our shareholders. So we remain committed to both.

Kevin Steinke – Barrington Research Associates

Great, that's very helpful. And Tracy, I know you're not quantifying the outlook for merchandise amortization going forward, but are you able to quantify what the impact was in the fourth quarter?

Tracy Jokinen

Yes, in the fourth quarter merchandizing expense of the percent of sales was up slightly about 30 basis points.

Kevin Steinke – Barrington Research Associates

Okay and lastly, you calculated what that hit the EPS, it would be in your fiscal 2015 guidance from the Canadian Dollar.

Tracy Jokinen

Well going into the first half of the year, our expectation is that it will impact our revenue by 1% and that flows through the bottom line, we think about $0.01 to $0.02 a quarter, which is what we saw in fiscal 2014.

Kevin Steinke – Barrington Research Associates

Okay, thank you for taking my question.

Operator

There are no further questions at this time. I would now like to turn the floor back over to management for additional or closing remarks.

Doug Milroy

Okay, thank you, Hope. Well thank you, everybody again for calling in. as I said, at the outset, we were pretty excited to have the chance to talk about our results. We look already forward to call with you in late October, when I'm sure, we're going to have two things. Another good quarter to talk about and an incredible string of pack victories to talk about. So we'll talk with you, then. Have a great day, everybody. Thanks.

Operator

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

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