UniFirst Corporation (UNF) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Steven Sintros, UniFirst’s President and Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning. I'm Steven Sintros, UniFirst's President and Chief Executive Officer. I'd like to welcome you all to UniFirst Corporation's conference call to review our fourth quarter and full year results for fiscal 2017 and to discuss our expectations going forward. [Operator Instructions] As many of you may know, this is my first earnings call since accepting my new executive leadership position at UniFirst. And I'd like to say I'm both humbled and honored to have been so recognized by our Board of Directors, and I'm very excited about the growth opportunities that lie ahead for our company and for our 14,000 employee team partners. Before I go further, I'd like to give a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend and similar expressions that indicate future events and trends identify forward-looking statements. Actual future results may differ materially from those anticipated depending on a variety of risk factors. I refer you to our discussion of these risk factors in our most recent 10-Q and 10-K filings with the Securities and Exchange Commission. And now I will provide an overview of our quarterly and full year results. I'm pleased to report that our full year fiscal 2017 revenues set a new record for UniFirst at $1.591 billion, up 8.4% from the prior year. All of our operating segments contributed to this strong growth, which included the positive effect of our September 2016 acquisition of Arrow Uniform. On the profit side, our fourth quarter and full year results included our previously announced $55.8 impairment charge related to our ongoing CRM systems project, which I will discuss in some more detail shortly. Excluding this impairment as well as the acceleration of stock compensation expense related to the passing of our former Chief Executive Officer, which we disclosed last quarter, our full year diluted earnings per share was $5.28, exceeding both our original and subsequently revised guidance. We are pleased with our overall results, given the challenging year of transition we experienced as a company while mourning the loss of our longtime CEO, Ron Croatti. I want to sincerely thank our thousands of team partners throughout North America throughout North America, Central America and Europe for contributing to and supporting a smooth leadership shift while continuing to expertly service our customers and for all their hard work that helped produce solid financial results for the full fiscal year. I also want to thank our team partners company-wide for stepping up with donations and assistance for many of our staff members who were impacted by the devastating hurricanes in both Texas and Florida, many of whom continue to deal with loss and reconstruction. As a company, we're always encouraged by the loyalty of our team partners, who always step up and answer the call during difficult times, not only making sure our customers continue to receive their products and services but also helping others in the times of need. Revenues for our fourth quarter were $403.6 million up 10.9% from the $363.8 million reported in the same period in fiscal 2016. Net loss for the quarter was $4.9 million or $0.24 per share, down from $35.5 million of net income or $1.74 per share reported in last year's fourth quarter. Excluding the effect of the impairment charge, adjusted net income for the quarter was $29.2 million or $1.44 per diluted share, up 13.4% from adjusted net income of $25.8 million or $1.27 per diluted share in the prior fiscal year fourth quarter. When comparing our fourth quarter results to the prior year, we are adjusting the prior year results to exclude the impact of the $15.9 million gain recognized in that period for the settlement of environmental litigation that we disclosed a year ago. Our Core Laundry Operations, which make up approximately 90% of our total business, reported revenues for the quarter at $364.8 million, up 10% from revenues achieved during last year's fourth quarter. The impact of acquisitions on growth was estimated to be 5.4% and was primarily related to our acquisition of Arrow. Adjusting for the estimated effect of acquisitions, Core Laundry revenues grew 4.6%. During the quarter we continued to benefit from improved adds over reductions compared to a year ago as well as a positive price – as well as positive price adjustments and improved collections on merchandise recovery charges. In addition, overall new sales as well as customer retention trended positively when compared to fiscal 2016's results. Core Laundry operating income, when adjusted to exclude the effect of the impairment charge mentioned earlier, was $41.9 million for the quarter, a 9.4% increase from the adjusted operating income in the prior year. Core Laundry adjusted operating margin was 11.5%, down slightly from an operating margin of 11.6% in the fourth quarter of 2016 after adjusting for the settlement of the environmental litigation. The comparison of adjusted operating income and margins was positively impacted by lower expense due to a $3.58 million charge taken in the prior year to increase the Company's environmental reserves. In addition, the margins benefited from lower stock compensation expense as well as lower merchandise costs as a percentage of revenues. These positive comparisons were offset by higher levels of claims for health care, workers' compensation and auto liability as well as the impact of the Arrow Uniform acquisition. Energy costs from our Core Laundry Operations also increased slightly to 4.1% of revenues in the fourth quarter from 4% of revenues in the same quarter a year ago. Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased 20.4% to $24 million in the fourth quarter compared to the same period a year ago. And operating income was $1.6 million, an improvement over the $1.2 million reported for last year's fourth quarter. As we've mentioned in past quarters, this segment's results can vary significantly from period to period due to the seasonality and timing of nuclear reactor outages and projects that require our specialized services. The solid improvement in results compared to a year ago was driven primarily by scheduled increases in the number of reactor outages as well as other projects in the segment's U.S. and Canadian nuclear-related operations. Our First Aid segment reported revenues and operating income of $14.7 million and $1.9 million, respectively, for the quarter compared to $12.1 million and $1.4 million for the same period in fiscal 2016. These improvements were aided by the strong performance of the segment's wholesale distribution business and a business acquisition in the third quarter that strengthens our market and service presence in the Atlanta, Georgia area. Our fourth quarter profit comparison to the prior year also benefited from other income, which was $2.2 million higher than the same quarter a year ago, primarily the result of higher interest income and foreign exchange gains. UniFirst continues to maintain a solid balance sheet and financial position. cash provided by operating activities was $218.3 million, an increase of $10.6 million from the comparable period in the prior year when cash provided by operating activities was $207.6 million. This increase is partially the result of the receipt of $12.5 million in our first quarter related to the settlement of environmental litigation referred to earlier. Several changes in different categories within working capital also impacted our cash flows from operations compared to the prior year. Benefits in accounts payable and accrued expenses were offset by increases in accounts receivable due to revenue growth by all our operating segments and an increase in our overall days sales outstanding. Cash and cash equivalents and short-term investments at the end of fiscal 2017 totaled $349.8 million down from the $363.8 million reported at the end of fiscal 2016. This decline in cash was primarily the result of the Arrow Uniform acquisition during the first quarter. Excluding the cash outflow expended for the closing of Arrow, cash balances would have increased by $104.7 million. Of our cash on hand, $59.5 million has been accumulated by our foreign subsidiaries and intended for future investments outside the United States. For the full fiscal year, capital expenditures totaled $108.6 million as we continue to invest in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives. As always, I'd like to take this opportunity to provide our outlook for the next fiscal year. We anticipate our full year revenues for fiscal 2018 will be between $1.625 billion and $1.645 billion and we expect full year diluted earnings per share to come in between $5 and $5.30. Additionally, we expect capital expenditures for fiscal 2018 to come in at approximately $100 million. The top line guidance also assumes an organic growth rate of between 2% and 3% for our Core Laundry Operations. It also assumes 2% to 3% top line growth for our Specialty Garments and First Aid segments. On the profit side, at the midpoint, this guidance assumes a Core Laundry operating margin of just over 10%. We do want to note that this guidance does include the estimated impact of the hurricanes on our business in Texas and Florida. We estimate that fiscal 2018 revenues, will be reduced by approximately $5 million and fully diluted earnings per share will be reduced by approximately $0.08 to $0.10 per share as a result of these hurricanes. As we move into fiscal 2018, we see an overall market environment that should allow for solid growth rates for our company. Low overall unemployment and some rebounds in our energy-dependent markets should both be factors in allowing for positive top line results. We are also excited to continue the integration of the Arrow Uniform business, which we expect will be a larger contributor to our profits in fiscal 2018. On the expense side, we do expect some items to impact our margin as we move through next year. Payroll costs in our laundry plants continue to increase, partially the result of increasing minimum wages in many markets as well as the impact of a low unemployment environment. Based on the current energy prices, we are also modeling an overall increase in energy costs as a percentage of revenues. We also continue to deal with increasing health care costs. As we have discussed through the second half of fiscal 2017, health care costs. As we have discussed through the second half of fiscal 2017, health care costs were a significant headwind in large part due to our large claim experience. Although projecting costs in this area can be difficult, our projections currently assume a 30 basis point headwind from health care claims in fiscal 2018. Better results in this area could result in upside to our earnings expectations. Our Specialty Garment segment is projected to show modest operating income increases in fiscal 2018, while First Aid is projected to produce a modest decrease in operating income. In addition, our effective income tax rate for fiscal 2018 is expected to be between 38.5% and 38.8%. Based on these projections, we continue to expect to generate significant free cash flows in fiscal 2018, which we project will exceed $90 million. Combined with our existing available cash, we are well positioned to make additional investments in our business, including business acquisitions as well as explore additional capital allocation strategies. At this time I would like to provide further elaboration and expectations for our company-wide CRM systems project in light of the impairment charge I spoke about earlier. As we've previously communicated, we've been working on significant CRM systems project to modernize and improve our company's overall capabilities. Over the past few years, the project has experienced repeated delays, primarily due to quality concerns with the stability and performance of the underlying code. As mentioned, based on the analysis of our – this project, coupled with the input from outside consultants that include the lead third-party contractor, we determined that it's no longer probable that the CRM system we were developing will be completed and implemented. As a result, we are now evaluating options that will allow us to move forward with the ultimate goal of developing a high-quality robust system in the most efficient manner. I want to make it clear, we continue to be committed toward investing in technology for the benefit of our customers and our employee team partners, but we simply will not settle for a system that does not provide the functionality necessary to meet our customers' expectations nor the elements designed to improve our overall service. I also want to be clear that UniFirst's current systems are functional, useful and reliable and continue to serve us and our customers well. That said, as we move through fiscal 2018, we'll continue to expend resources to help ensure the success of this and other technology-based initiatives. In addition, we will continue to make investments in not only technology, but our people and processes, which will help us achieve our primary objective of being recognized as the top service provider in the industry. This completes my prepared remarks, and we will now be happy to answer any questions that you might have.

[Operator Instructions] The first question is from the line of Joe Box with KeyBanc Capital Markets. Please proceed.

Yeah, hi Steve.

How are you Joe.

So you noted that the ad quit was positive in the quarter, and obviously, we're rolling forward and looking at easy comps for at least the first half of FY 2018. So curious if maybe you could just put some more color around why the organic growth rate is only going to be about 2% to 3%, especially in the uniform side. Does that factor in the headwind from hurricanes? Or does that not?

So it does factor in the headwind from the hurricanes. I think you'll see as the year progresses that the first half of the year, at least as we're projecting, will show higher organic growth in the 2% to 3% overall growth for the year. And based on the strength of the second half of our year, there'll be some trailing of the organic growth toward the second half of the year. So I think you're right, the comps are easier in the first half of the year than the second half of the year, and that will show through. I think that, combined with some of the hurricane impact, is putting us where we're landing on the forecast. And just to be clear on the adds versus reductions, we said the comparisons were positive compared to the prior year. They were slightly negative net during the quarter, but the performance was quite a bit better than the fourth quarter of the prior year. So I just wanted to clarify that.

Is it normally sequentially softer on an ad quit basis in 4Q?

In the fourth quarter does have a little bit of a tick-up usually in the reductions to the negative side. And first quarter tends to be a little bit stronger in that regard. But the comment was meant to put in light year-over-year that there was improvement.

Right, okay and if we could just go to the claims side, I was just looking for a clarification here. So are claims running at the level that you're actually baking in the 30 basis point headwind? Or when you think about that headwind for next year, are you getting overly conservative to maybe where there's a little bit of a safety net here on that expense?

I think the wildcard there, Joe, is through the first two quarters of fiscal 2017, the claims, on the health side anyway, really weren't too bad. And they increased dramatically during the third and fourth quarter. So we're coming in with overall higher expenses for next year, not quite at the run rate of the third and fourth quarter but higher on an overall year basis. Said another way, if we ran a little bit lower than our third and fourth quarter for the full year next year, it would result in a full year increase because our first and second quarters of this year weren't that bad. If there is moderation back to a lower first and second quarter, then that's where there could be some upside. But obviously, it's a really difficult item to peg, and that's what we've built in right now.

Of course, so switching gears, the cash balance is now 19% of assets. And it does seem like the uniform space is kind of moving through a more rapid period of consolidation. Obviously, you guys did Arrow, but with G&K and AmeriPride getting taken out by competitors, I'm curious where you guys stand within the M&A backdrop. Are you inclined to be buyers here? Is there a pipeline now that the ball started rolling? Or were these the only two kind of big names left out there? Just an update on that will be helpful.

Sure, I mean those were certainly the biggest names left out there. I think there's still some companies out there in the Arrow side and larger but not certainly to the level of AmeriPride. Certainly, we're still buyers. And I think we still look at and think that there is a pipeline of smaller to midsize targets available, and we're certainly interested in making the right deals for us. I think it does change the landscape of the industry somewhat. And the other targets that are available, as always, will depend on sort of the desire of those families and what makes sense for them to divest at what point in time. But we will be looking as we always have at those opportunities. So I don't think this changes that, but it certainly takes a large player off the list.

Lastly, just as a follow-up to that, I mean, obviously, the multiples are what they are. Is it a deal breaker for you guys to pay above your current multiple? Or are there much more important kind of factors when you nail down like what the most important criteria are?

I think there are other factors, but I don't think we would be so stringent to hold to our traditional multiples that if the right deal came along and was presented to us or that we came upon, that we would stretch for it. And so I think that goes without saying.

Got it. Thank you Steve.

Thank you.

The next questions comes from the line of Andy Wittmann with Robert W. Baird. Please proceed.

Great, thanks. Good morning Steve.

Good morning.

I guess, maybe just building on the last question a little bit. Now that Cintas and G&K have been together for a while, can you talk about the change to the competitive landscape that, that may or may not be having? I guess you mentioned in the prepared remarks that you're getting some price. Can you attribute more pricing rationality, I guess, to the combination of those two players? Or is it something else that's affecting your ability to get pricing today? I'd also be curious as to your thoughts as to any disruption that you're seeing out of this deal or the expected deal with AmeriPride in terms of the ability to go after new customers that might shake loose from integration of those deals.

Sure, so a lot of pieces to that question I think. Certainly we are seeing the activity of Cintas and G&K work through their integration across the country in different markets that's being approached in different ways and at different speeds and with different levels of disruption, I would probably say. And so we are seeing opportunities come out of that. The dynamic certainly has changed. I think all of the companies in the industry experience – have experiences with customers and customers go to other vendors. And in some cases, when those vendors now combined with the vendor they were previously with, they are left looking for options. And we're trying to position ourselves to take advantage of that, and I think we've been able to do that to some extent. And we'd expect the same with the Aramark and AmeriPride deal. I think the consolidation goes without saying that it will leave less options, particularly for the larger national and regional players, and I think we're well positioned to take advantage of that. In terms of the pricing environment, I think the pricing environment may be impacted by these transactions and probably has been to some extent. But I also think that simply the economic environment being more of a positive environment tends to allow for a little bit better pricing. Some of these cost challenges in terms of minimum wage increases across the country are areas that certainly people can appreciate, and I think, overall, with these payroll increases, that you will see prices in a lot of areas come up. So I think all of those items are impacting what we consider a reasonably positive price environment.

That is really helpful. Thank you. I guess follow-up question here is, I guess, maybe if you could discuss your initial review of the company. Well, it's been a long time with one leader and now it's your turn. I'd like to kind of hear about what you see as your see as your key assets that you have, the good things and really more maybe even about the opportunities that the UniFirst platform could offer you through maybe a fresh eyes look. Clearly, some of your competitors have really diversified over the years. Their service offerings afforded new growth avenues to them, whether it's end markets or services that they're offering. I'd be curious as to your desire or approach to potentially putting a different level of innovation of the company in the future than maybe it had in the past and what you've seen so far.

I think what we have seen so far, Andy, obviously, is a lot of change in the industry, and I think some of this consolidation may shape the way we do start to think about those other opportunities. I think the view had been in the past that there is still plenty of opportunity within our industry and in our core competencies to grow and to deploy that capital. And although, as I answered in the prior question, I still think that's the case, that game has changed to some extent in terms of the mid-to longer term when you look at the cash we continue to generate and the larger opportunities, which may not be there anymore. And so I think that will likely shape our strategy in thinking as we move along. I can't say here in the near term that we have started to turn a corner into a different direction, but I think it is an area that the board and myself and the management team will continue to challenge in terms of the right opportunities to diversify what we're doing, whether it be more into the health care area or even the linen area or other areas that certainly are ancillary to what we do today that could still provide opportunities. I mean, when we talk about acquisitions, we historically haven't focused on some of those other areas because the focus had been more on our true industrial core competency. But I think, naturally, we may start to migrate more and look closer at some of those other opportunities. I still think our strength lies in our execution and our tenure and our overall reputation in the marketplace as being a solid to strong service provider. In terms of where I think we need to migrate to and change, in the near term, it's going to be a lot more of pushing the execution of things that were always on the docket in terms of improving our sales, turnover and stability, improving our retention, for sure. I mean, we still think there's opportunities, which speaks back to the investment we're making in technology and continue to make that – there are execution improvements that still need to be looked at to get us where we'd really like to be. So I think it's early in the game, but all of those things will be part of our new strategy going forward.

Helpful, really helpful. I'm going to ask one more follow-up here on these types of things and maybe jump back in queue. But just an update on the search for your CFO replacement. You've got a lot on your table right now, and I'm sure you'd like it as much as your investors would like the certainty around that one. How's that going? And what do you think the timing is shaping up to be there?

Yes. It's not something I have an announcement to make right now on, but we're working through the process, and I would certainly expect by the next time we talk that there'll be something in place.

Great. Thanks a lot.

Thank you.

Next question from the line of John Healy with Northcoast. Please proceed.

Thank you. Steve, I want to kind of just revisit the organic growth commentary for 2018. When I look at it, I mean, I hear you guys talking positive maybe about the competitive environment, some positive things you're seeing on the add stop side of things. The backdrop for small to midsize businesses seems fairly healthy. I'm just trying to understand what component of the organic growth rate do you see is kind of softening or leveling out that would cause the rate of growth to kind of decelerate this year?

And this is maybe slightly contradictory to what I said about the pricing environment, but we had done well in the price area in 2017 as well as improving our merchandise recovery charges, which, over the years in the industry, has become a larger component of price and our billings. And some of that is better comps from the trail-off of the oil impact and some of those amounts really being reduced. So we built some of that back up and had a pretty strong year in that regard. And there may be some more difficult comps in the pricing extra charge area as we move into next year. I think on the other areas, it's just about continuing the execution. We really would like to drive that retention number even better. This year was a slight improvement over 2017, and we'd really like to continue to drive that. So I don't think there's any areas where we're particularly concerned about, but looking at the trajectory and how the revenues came in over the course of the year and the comps, that's really where we're coming out right now.

Okay, fair enough. And then I just wanted to ask, I know there were some comments made about maybe how you're looking at the business maybe with a fresh set of eyes, but I just wanted to ask just how you view the capital structure of the company. And now you're in a new role, but – being the former CFO and now the CEO, how do you think this company should deploy capital? Do you look at the leverage of the company and say, hey, maybe it's not optimal for driving shareholder returns? Do you think that returning capital to shareholders might be something that you maybe make a higher priority than in the past? I'm just trying to think about how you're planning on putting your mark on the company from a capital allocation standpoint.

Yes. I think that's something that we'll certainly take a closer look at than has been in the past. I know that's been a common question and commentary over the years with Ron at the helm, and Ron deployed a pretty conservative approach probably for a number of reasons. I think that's something that certainly will be more of a strategic discussion at the board level, including myself, and I think we can likely expect some change or a more well-defined strategy in that area. I think the commentary around acquisitions also factors in there in terms of the strong cash we continue to generate as well as at least the larger opportunities coming off the table. So without getting into any specifics here because these are ongoing discussions at the board level, I think it is something that will likely migrate over time here under the new regime.

Great. And a one final question for me. I think you mentioned $0.08 to $1.10 of expense associated with the storms. Is it reasonable to expect that all of that will be in the first quarter here? Or does it linger into the second quarter as well?

Well, it lingers because, really, the $5 million of revenues that I referenced, there's certainly a fair amount in the first quarter, but there is a lingering effect due to the fact that there are portions of the customer base in those markets in both the coastal Texas area as well as Southern Florida, in particular, that some customers just aren't going to make it back, certainly not anytime soon. So that assumes sort of a little bit of a longer term drag from some customers that right now don't – we don't see coming back.

Got you. Thank you.

Thank you.

Our next question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead.

Hi, Steve, it's actually Judah and on for Andrew. I wanted to start off by wishing you congratulations on the new role.

Thank you.

My first question is could you remind us who the vendor you're using for the CRM system is?

IBM was the primary vendor that we've used over the years.

Got it. Then I was hoping that we could dive maybe a little bit into the quarter's organic growth. You've definitely given us some commentary on the ad quit and pricing. To whatever extent you're able and willing, could you quantify how much of that organic growth in rental was driven by ad quits versus pricing, new business, retention, et cetera?

Yes. At this point, we're going to continue our tradition of not delving into the individual components on a quarter-to-quarter basis of that growth, I think, for a number of reasons. It can be difficult to get those items into the right buckets in a way that accurately portrays the story. I think this is the second quarter in a row we've been in the 4.6% to 4.8% range. I think there's been some strong element of pricing over the second part of the year, including the merchandise recovery charges that have helped that. But really, all of the items trended positively. And so I think it was really an uptick in all of the areas that contributed, but we're not going to go into the breaking down of the pieces.

Right, fair enough. So maybe just in terms of the new business, and I guess this is also sort of a horseback to the question around the competitive landscape and the shifting from Cintas and G&K and now Aramark. Have you seen any sort of shift in the mix of new business that you're winning in terms of greenfield wins versus winning them away from competitors?

I'd say a slight shift a little bit more from competition but not dramatically from sort of our historical mix.

Got it. And perhaps my final question, could you give a comment on how the energy regions are doing?

I think some of the energy regions are starting to show signs of life. West Texas, in particular, has been positive from an adds reductions perspective, giving a little burst to that market. But it's slow. It's not a dramatic pushback to any prior levels. It's just – you've seen some of the rig counts coming back up, and there are wearers going back into work in that area. There are other areas in sort of the other side of Texas, in Corpus Christi and Oklahoma City that have been a little slower to come back, same thing with Western Canada. So I think it's stable. Certainly, they're not reducing wearers like they were. But in smaller pockets, we're seeing some pushback up to higher levels.

Got it. And just one last question, if I may. Do you have handy the organic growth – revenue growth rates for the – for Specialty and for First Aid?

I don't have that handy for the quarter, Judah, I apologize.

Okay, no problem.

For Specialty, it's very close to the reported growth. There is an impact from the small acquisition we did in First Aid, but I don't have that number handy.

Got it. Okay, thank you and congratulations again.

Thank you.

[Operator Instructions] Our next question comes from the line of Kevin Steinke with Barrington Research. Please proceed.

Good morning.

Good morning.

So now that you've taken the impairment on the CRM system investment, just kind of wondering if you can talk through maybe the lessons learned there, maybe what went a little off course and how that informs your approach, as you mentioned, moving forward on looking to still roll out a new CRM system.

Yes. I think there's probably some things I won't get into there, but I will say after being involved with the project for the period of time that we were, there certainly are lessons learned that we can take away. But at the end of the day, a lot of it is about execution. And as we move forward – and this is why we're going to take our time and make sure we end up on the right path to make sure that we give ourselves the best chance of success. I mean, I think you've probably seen as much as we have these larger projects, particularly ones that involve a fair amount of customized activity or customized code can be very challenging. And making sure that you're not trying to build the utopian system for your business is probably something we'll continue to look at and make sure we have the right balance of modifying our business practices and the system we're trying to build. But there are a lot of details probably further than that, that I probably just won't get into on this call as you can imagine.

Okay. No, that's helpful and fair enough. And then also, there's been a lot of discussion here about the disruption in the industry with the M&A activity going on and how that might present some opportunity. But how does that make you think about investments in the sales force? Are you going to ramp up investments there to kind of take advantage of the opportunity? Or what's the outlook for fiscal 2018, I guess, on investing in the sales force?

Right now, we're sort of projecting some modest increases in our sales count. But really, I think we need to focus on our own capabilities and making sure that the team we have we can make as effective as possible. I think it's more about the effectiveness than necessarily the numbers. Although we do continue to ramp our numbers as we grow, particularly, for example, we acquire Arrow Uniform and we have a new base of revenue that now needs to grow, we continue to make investments in those areas. But I think it's really the effectiveness of the team and making sure we make – have the right tools and training to make the team successful, and a successful team becomes a more tenured team and a more effective team. So I think it's really continuing to drive those initiatives to make sure we're being as effective as we can be as opposed to just ramping up the headcount.

Okay. That’s helpful. Thanks for taking the questions.

Thank you.

The next question is from the line of Scott Levine with Bloomberg Intelligence. Please proceed.

Hey, good morning and thanks for taking my question.

Sure.

Not to beat a dead horse with regard to the industry consolidation, but I guess I'd ask you, since the G&K-Cintas merger closed, has the change in the market been what you expected? Is it material? Is it not very material? Maybe a little bit more color on whether the market response has been in line with what you would have expected and maybe give us some more indication as to what changes may come here with the America – or the Aramark-AmeriPride deal. Just a little bit more detail there.

I think it had been as expected. I mean, I think the companies making these acquisitions, G&K – excuse me, Cintas and Aramark, obviously long tenured in the industry. And I think through our own experience, we know that any acquisition of size, you're going to take your time. You're going to focus on the customers and making sure the customers are comfortable with the transition. And so I think we've expected some disruption, and I think there has been some and inevitably there will be more, but it really depends on the pace and the quality and the success of that integration effort. So I think we do continue to see opportunities. We'll continue to position ourselves to take advantage of the opportunities. But as you can deduct from some of the commentary about the period of time over which synergies expect to be realized that these companies are going to take a balanced approach as you'd expect to that integration. So it's not like there's a huge event that all of a sudden all these customers are in play. They're under contracts. They're, I'm assuming, trying to be taken care of by their vendors, but that does add an element of uncertainty with the change, particularly if you were with the prior vendor previously. So those are areas we'll continue to focus on. But like I said earlier, I think if we focus on our goals of becoming the best service provider in the industry, the opportunities will take care of themselves.

Got it. One last follow-up on the M&A pipeline. Would you say today that it's more active, less active than it was, say, one, two, three years ago for you guys, these two large deals aside? And does the consolidation suggest you're like – more likely to focus on the core uniform or laundry business or you're still looking at potentially diversifying the service portfolio outside of those areas?

I think absent the larger deals, the acquisition pipeline and activity is probably more similar to a few years ago. I think these smaller independent companies certainly take notice when they see large deals happen at significant multiples. I think that does pique their interest. I think certainly, some of the potential tax law changes could have people excited about doing transactions where they may get more favorable tax treatment as individuals or companies. And so I think we continue to be on the lookout for those. As far as are we more likely to look into alternative paths of growth, I think that's something we're going to strategize on over time. I think some of this consolidation does probably change a little bit of the way we look about the future, not necessarily the next 12 months but maybe the next five years. And so I think that's probably the best way to characterize it.

Got it, great. Thank you.

The next question is from the line of Tim Mulrooney with William Blair. Please go ahead.

Good morning, Steve.

Good morning, Tim.

Hey, I jumped on a little bit late, so I apologize if some of these questions were answered. But the organic growth number of 4.6% in your core uniform business, is there any FX impact there or weekday impact to that organic growth number?

No. We just called out the acquisitions because, really, there wasn't any FX to speak of. It was a similar – obviously, Canada is our biggest impact there, and it was a very similar rate year-over-year. So there wasn't anything else to speak of. And from our perspective, we don't have a different number of workdays. Only every five years or so, we have an extra week that comes into play with our calendar so no other items, in short.

Okay. Okay, thanks. And what about energy end markets? Are they finally – I guess they started acting as a tailwind. Are they still continuing to act as a tailwind to growth? Or is that kind of a neutral or still a headwind?

I think it's a small positive right now. It's certainly the tailwinds – or the headwinds, excuse me, have subsided, and we are starting to get some pull from it, but it's not too dramatic.

Okay. And what about energy costs as a percentage of sales relative to last year? Are those up?

Energy costs in the current quarter were up just 1/10 as a percentage of revenues. I think it was 4% to 4.1%. We do have current energy prices, a 2/10, I believe, headwind baked into next year because gasoline prices have come up more recently. So depending on where those settle at, that could be an area of volatility. But right now we have baked in a little bit of an increase for next year as well.

Okay. Let me just step back to your EPS guidance. The midpoint of your EPS guidance suggests that you expect EPS to decline in 2018, I believe. With organic growth up, lapping the Arrow integration costs step back or this lapping the step-up in stock comp, I really would've expected EPS to grow year-over-year in fiscal 2018. Can you just talk about, I guess, the biggest factors that would lead you to expect EPS to decline in 2018? I think you did that last year for us when you were building up to 2017, and it was very helpful.

So we alluded to some of these items in the script. And we talked about increasing minimum wage in some markets. Overall, obviously, a low unemployment environment is helpful from our growth side in the stability of our customers. On the labor side, with increasing minimum wages and cost of labor, it is providing some headwind right now. So that is one of the areas we talked just a little bit about, the health – excuse me, about the energy costs that we baked in. And in the prepared remarks, we mentioned that we baked in a 30 basis increase in health care costs. That's certainly a wildcard. If there's some moderation in our health care costs from our performance this year, we'd certainly have some high costs, particularly in the second half of the year. That's an area of potential opportunity if we were to do better in that area. In addition, we've talked over the course of fiscal 2017 how we've ramped up some of our headcount in support of our CRM systems project. And my commentary in the script about continuing to evaluate our options going forward and trying to get on a path to success indicate that we will, for a time, continue to have those resources deployed toward getting to a solution. And we'll hope to have more commentary about that as we move forward and continue our evaluation of our path forward. But that ramp-up of headcount at the IT level and the corporate level, will – as it ramped up throughout fiscal 2017, will cause some year-over-year impact as well. So those are really the larger areas, and they're all subject to some volatility, particularly the energy costs and the health care.

Okay. That's very helpful. Maybe I'll end it on one more. Outside of the CRM system, can you talk about some of the areas where you're investing in tech or deploying tech into the company, either maybe with the sales reps or the plants, I'm not sure, but some examples, maybe?

Sure. On the sales rep side, we recently rolled out a new prospecting in sales – sales prospecting system to all of our reps, including new mobile technology. So our whole sales force is now converted over to newer technology that should help them be more effective on managing their prospects and their opportunities. So that is something we went live with actually at the beginning of this fiscal year. And so far, so good we're working through some of the transition, but that has been a successful project for us. There are items in the plants, and one of our bigger investments we made in the current year that we're going live with soon is new technology in automation in our distribution center in Kentucky. It was a large investment to help automate the picking and shipping of items coming out of the distribution center, and that will have a nice return and save some labor in that facility. And so we continue to work on other areas of the business, all focused around improving service and efficiency with our team partners. The unity initiative obviously had taken center stage based on what was being invested in it, but there are some other things going on we're having success with.

Okay. Thank you.

The next question is from Joe Box with KeyBanc Capital Markets. Please go ahead.

So just one quick follow-up on the labor side. Could you guys provide what total margin headwind could be for the higher labor expense next year? And then maybe can you help me just parse out, Steve, how much of that labor hike is a function of minimum wage going up versus just, say, general wage inflation?

We have about 40 to 50 basis points on the plant – what I'll call plant labor, which includes all of our local labor. I do not have a breakdown between minimum wage and other increases. In some cases, it's competition for labor in a low unemployment environment where companies are, I'll use the example of Amazon, putting large distribution centers and being aggressive on wages. So it's not always the minimum wage level in that market but just the demand for labor and what's driving labor rates up. And we have continued over the last couple of years, this is one of the items I mentioned last year as well, to try to move our wages to be as competitive as they can be to make sure we're getting the right people to have good stability and tenure and to be able to service our customers. So I don't have the breakdown of that, but that's a little more color on that area.

Got it. Thanks.

The next question is from Andy Wittmann with Robert W. Baird. Please go ahead.

Great, thanks. Steve, does the guidance include the new CFO that will be hired? Or are we going to continue to get a deal on executive costs here for the next couple of quarters?

That's baked in there, Andy. I figure I'd get some help eventually.

Got it. And just – can you remind us what the – I don't know. I guess, obviously, you adjusted out the acceleration of Ron's stock compensation plan, but can you remind us the timing and the headwind of the stock comp that will be a tailwind for at least the first part of fiscal 2018?

Yes, there’s a couple million dollars in the first two quarters – or excuse me, about $1 million in each quarter that related to Ron's deal. It was the third quarter where we had the acceleration that we pro forma-ed out. So that those items will not repeat at the same level that they did in fiscal 2017.

And then just on Arrow and integration. You guys expensed any of the onetime costs as you needed to take it over and integrate. Can you quantify those costs for us and maybe their timing as well, if you have it?

Yes. I probably don't have a great breakdown of that, Andy, to be honest with you. I mean, certainly, there was expense over the year in terms of travel and integration, working through the conversion of the systems with the different locations. It was certainly some money expended really over the first three or four – really most of the year in terms of investments that we needed to make in some of the facilities to facilitate what we wanted to do with the business. So there were some onetime costs. I really don't have those quantified in a way that would be meaningful to you right now. And some of those should subside. So that certainly should be some of the offset to some of these cost headwinds that we're expecting in 2017.

Yes, there's been a lot of focus on the call about some of these headwinds. I'm just trying to identify them. So we've got Arrow and stock comp. Anything else that you'd point to that we should be thinking about in terms of potential benefits on a year-over-year basis on the margin side?

Yes. I think those were the two that I've highlighted that should be positive comps, for sure.

All right, thanks a lot.

We have no further questions. I'll turn the call back to you.

Thank you. I'd like to thank everyone for joining us today to review UniFirst's fourth quarter and full year results. We look forward to speaking with you again in January when we expect to be reporting our first quarter performance for fiscal 2018. Thank you, and have a great day.

Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect your line.