信達思 (CTAS) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to the Cintas quarterly earnings results conference call.

Today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Mike Hansen, Vice President of Finance and Chief Financial Officer.

Please go ahead, sir.

Good evening and thank you for joining us this evening as we report our third-quarter results for FY15.

With me is Paul Adler, Cintas' Corporate Controller.

After our commentary, we will be happy to answer questions.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor's for civil litigation for forward-looking statements.

This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance.

These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss.

I refer you to the discussion on these points contained in our most recent filings with the SEC.

As we reported in today's press release, our results for continuing operations adjusted to exclude all impacts of the document management businesses are more representative of our ongoing performance.

Therefore, our discussion of the Company's performance will be based on the exclusion of document management.

We are pleased to report third-quarter revenue of $1.109 billion.

Organic revenue growth, which adjusts for the impact of acquisitions, foreign currency, and the Shred-it transaction, was 7.5% for the fourth quarter.

Each of our businesses' organic growth was positive for the third quarter, with Rental organic growth being 7.8%, Uniform Direct Sales being 4.8%, and First Aid, Safety & Fire Protection services organic growth being 7.5%.

The third-quarter revenue impact from severe winter weather and oil- and gas-related customers was relatively minor.

Paul will touch on this when discussing the individual business results.

We are also pleased to show continued improvements in income as adjusted compared to last year's third quarter as adjusted, as operating income increased 17.1%, net income from continuing operations increased 20.2%, and earnings per diluted share increased 25%.

Certainly, lower energy-related costs help the comparison to last year, but we also feel good about our ability to leverage our infrastructure and manage our cost structure.

Paul will discuss the energy-related costs in more detail.

We want to recognize our employees, whom we call partners, for their dedication and competitive urgency in serving our customers.

They continue to do a great job.

Let me make a few comments about the Shred-it investment.

First, regarding the presentation on the income statement, we have pulled the results out of SG&A and included in a line under income taxes entitled loss on investment in Shred-it net of tax.

This is in accordance with generally accepted accounting principles and provides a clear indication of the performance of the business.

Second, regarding the third-quarter impact, we recognized a $6.8 million net loss for our third quarter, or negative $0.06 per share.

This negative impact was primarily due to integration costs, such as IT, system conversion costs, and rebranding costs.

In addition, Shred-it has a fairly large presence in Canada, and the weakening of the Canadian dollar compared to the US dollar also had a negative impact.

The conversion, in general though, continues to progress as planned, and we are pleased with the performance of the business.

We indicated in today's press release that we acquired 3.2 million shares of our common stock during the third quarter.

The total cost was $251 million and the average cost per share was $78.84.

This buyback had a $0.01 positive impact on our third-quarter EPS and we expect it to benefit the fourth quarter by $0.02.

As we announced on this past January 13, the Cintas Board authorized a new buyback program of $500 million and that entire program remains available as of today.

We also announced in today's press release that we have updated our guidance.

We now expect our FY15 revenue to be in the range of $4.46 billion to $4.49 billion.

We have tightened the revenue range slightly to reflect continued weakening of the Canadian dollar, and for potential oil- and gas-related customer impact.

While we did not see any noticeable revenue impact in the third quarter from our oil and gas related customers, we did begin to hear from them that a negative impact is coming.

On the EPS side, we now expect our FY15 earnings per diluted share guidance to be in the range of $3.55 to $3.58.

When excluding the special items of the impact of the document shredding business, and the additional gain on the Shred-it transaction, the impact of the sale of stock and an equity investment, and the impact of discontinued operations, including the sale of the document storage and imaging business, we expect FY15 earnings per diluted share to be in the range of $3.31 to $3.34.

This EPS guidance is detailed in a table within today's press release.

I will now turn the call over to Paul for more details on the third-quarter performance.

Thank you, Mike.

Before moving into the third-quarter results, let me remind you that there were 65 workdays in this year's third quarter, which is the same as last year's third quarter.

Our fourth quarter will have 65 workdays, which is the same as last year's fourth quarter, for a total of 260 workdays for the fiscal year.

Looking ahead to next fiscal year, FY16 will have 262 workdays, so two more than this year.

By quarter, the workdays will be 66 in the first quarter, 65 in the second and third quarters, and 66 in the fourth quarter.

As Mike mentioned, total revenue in the quarter increased 7%, excluding last year's impact of document shredding.

Total revenue increased organically by 7.5%.

Total Company gross margin was 42.9% for the third quarter this year compared to 42.3% in last year's third quarter.

The current quarter gross margin of 42.9% expanded 80 basis points from last year's third-quarter gross margin of 42.1%, adjusted to exclude document shredding.

Total Company energy-related expenses for this year's third quarter were 2.4%.

Last year's third-quarter energy-related expenses were 3.2%, but excluding document management, they were 3%.

I will discuss gross margin and energy-related expenses by business in just a moment.

Before doing so, let me remind you that we have three reportable operating segments: Rental Uniforms and Ancillary Products, Uniform Direct Sales, and First Aid, Safety & Fire Protection Services.

Uniform Direct Sales and First Aid, Safety & Fire Protection Services are combined and presented as other services on the income statement.

The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms, mats, towels and other related items.

The segment also includes restroom supplies and other facility products and services.

Rental Uniforms and Ancillary Products revenue was $859.5 million, which is up 7.2% compared to last year's third quarter.

Organic growth, which excludes the impact of acquisitions and foreign currency changes, 7.8%.

Organic growth was higher than total growth because of the continued weakening of the Canadian dollar.

We did not see any noticeable third-quarter revenue effect from oil- and gas-related customers, but as Mike mentioned, these customers businesses did begin to feel the impact of the low oil prices in the latter part of the quarter.

Aside from the oil- and gas-related customers, we saw no marketable change to net add stops in the third quarter.

Our Rental segment gross margin was 44.6% for the third quarter, an increase from 43.9% in last year's third quarter.

Most of this improvement came from energy-related costs, which were 70 basis points lower than in last year's third quarter.

The third quarter Rental segment gross margin of 44.6% was a slight decrease from this fiscal year's second-quarter gross margin of 44.8%.

Energy-related costs in the third quarter were 20 basis points lower than in this fiscal year's second quarter.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms, and other related products to national and regional customers.

Uniforms and other related products are also sold to local customers, including products sold to rental customers through our direct sale catalog.

Uniform Direct Sales revenue for the third quarter was $112.2 million, an increase of 4.2% compared to last year's third quarter.

When adjusting for foreign currency changes, organic growth was 4.8%.

Uniform Direct Sales gross margin was 27.7% for the third quarter, a slight improvement from last year's third-quarter gross margin of 27.5% and this year's second-quarter gross margin of 27.6%.

Both of these improvements are mostly due to lower energy-related expenses.

Our First Aid, Safety & Fire Protection Services operating segments includes revenue from the sale and servicing of first aid products, safety products and training, and fire protection products.

First Aid, Safety & Fire Protection revenue for the third quarter was $137.1 million, which was 8.2% higher than last year's third quarter.

Organic growth was 7.5%.

We continue to be very pleased with this business.

Third-quarter organic growth came down some from previous quarters due to fewer repair jobs on the fire protection side of the business and due to the severe winter weather in the Northeast.

This segment's gross margin was 44.3% in the third quarter, an improvement of 80 basis points compared to last year's third-quarter gross margin of 43.5%.

Energy-related costs were 60 basis points lower than last year's third quarter.

The third-quarter gross margin of 44.3% was also an improvement over this fiscal year's second-quarter gross margin of 43.8%.

Energy-related costs accounted for 40 basis points of the improvement.

Switching to selling and administrative expenses, total Company SG&A was 27.2% as a percentage of third-quarter revenue compared to a total Company SG&A in last year's third quarter of 28.6%.

When excluding the impact that document shredding had on last year's third-quarter SG&A and revenue, last year's adjusted total Company SG&A was 27.8% as a percentage of the adjusted revenue.

On our second-quarter call, we indicated that our risk management claims experience was better than the previous year and that better experience continued into our third quarter.

Keep in mind, however, that we are self-insured.

In addition to risk management, a number of other minor improvements were realized in other expense categories.

The third-quarter SG&A of 27.2% was a 50-basis point increase compared to the 26.7% in this fiscal year's second quarter.

As we mentioned on the second quarter call, payroll taxes reset in our third quarter.

This expected increase was partially offset by a number of minor improvements in other expenses.

Our effective tax rate was 36.2% for the quarter compared to 36.7% last year.

The effective tax rate can fluctuate from quarter-to-quarter based on tax reserves builds and releases relating to specific discrete items.

We expect the FY15 effective tax rate to be 37.3%.

Our cash and marketable securities were $490 million at February 28, a decrease of $337 million from the $827 million at November 30.

This decrease is due to paying the $202 million dividend in early December and the execution of the $251 million share buyback during the third quarter, partially offset by cash generated from our operating cash flows.

Accounts receivable decreased $12 million since November 30 due to the timing of collections.

[Due] goods inventory and in-service inventory levels at February 28 were relatively consistent with November 30 balances.

Accounts payable increased roughly $27 million since November 30 due to the timing of vendor payment due dates.

Current accrued liabilities decreased by $221 million since November 30, due largely to the payment of the accrued dividend, which was paid in December.

Long-term debt remained at $1.3 billion, representing 1.6 times EBITDA.

Finally, CapEx for the third quarter was about $50 million.

Our CapEx by operating segment was as follows: $43 million in Rental, $2 million in Uniform Direct Sales, and $5 million in First Aid, Safety & Fire Protection.

We expect CapEx for FY15 to be in the range of $220 million to $250 million.

That concludes our prepared remarks.

We will now be glad to answer any of your questions.

(Operator Instructions)

Andrew Steinerman, JPMorgan.

I definitely appreciate you talking about oil clients upfront because you would be asked it anyhow, but my question is, when you look at your percentage exposure to oil clients, has it changed since you talked about this in late December?

And when you say that you have allowed for some room for easing with the oil clients in the fourth quarter, how much is this going to move the fourth-quarter organic number?

Is this a big deal or are you just trying to communicate one small piece of business?

Andrew, we knew that we would get asked this question, so we were trying to anticipate a little bit.

The magnitude of those oil and gas customers has not changed since the second quarter, so it's still in the lower single-digits.

When we think about the fourth quarter, more of the impact, based on our guidance movement, is due to Canadian dollar, but there will be a little bit of an impact from the oil and gas customers.

We have started to hear from them that they are reducing workforce to some extent, but like I said, the impact is within our guidance, and the amount of those customers has not really changed.

Right.

And the business -- even if they reduce people, the Uniform Rental business doesn't move quickly, so again maybe I will try one more time, do you think that the oil/gas clients pulling back might move your organic Rental number 10, 20 basis points or is that higher given their low single-digit exposure overall?

It will be a relatively small move.

While we -- I hesitate to give too many specifics, but it certainly is going to be less than a percentage point of impact in the fourth quarter.

The other thing I would say, Andrew, is we are in the midst of this impact, and we are hearing from customers making moves on a daily basis, if you will.

So it's a little bit hard to peg it exactly.

We do think certainly that it's within our guidance.

As we get into FY16, we will certainly have to continue to evaluate how this moves, and speak to that in July, but again, it is a relatively small portion of our overall revenue.

I appreciate it.

Mike, let me try one more time.

95%-plus of your business continues to be strong, right?

Yes.

Okay, thank you.

Gary Bisbee, RBC.

This is Gunner Hansen in for Gary.

Not to continue along the oil and gas exposure, but you guys mentioned last quarter some of the pricing push back potentially from customers regarding lower fuel prices.

Has that tended to materialize in the quarter and any comment on that?

Our pricing environment in the third quarter was relatively the same as the second quarter, so we didn't see much of the change.

What we had signaled last quarter was that, as we as those customers start to feel the impact of the lower oil prices, conversations about pricing may be a little bit more difficult, but we did not see a dramatic change in the pricing environment in the third quarter.

Fair enough.

Thanks.

Then in terms of the add-stop metric, any commentary around that and any more color, just regarding -- in the overall context of the job market here?

As Paul said, we didn't see a noticeable change in the net add-stops number.

That's, as you've probably heard from us, that's been relatively consistent over the last several years.

The impacts of net add-stops on a quarter-specific basis is just not that large and that's the way it has been for the last, gosh, five years and that's what we saw on the quarter, just not much of an impact.

We'd certainly love to see our customers begin to hire at a higher rate and feel the impact of that, but we didn't see that in the third quarter.

Fair enough.

Then just in terms of these Shred-it impact, are you guys going to disclose what potential impact that could be on FY16 estimates or any -- whether it's going to be material for you guys or expected impact from that?

I will tell you, a year ago, when we closed that transaction, we certainly, with Shred-it, put together a business plan, and that business plan included certain performance expectations, certain synergies, certain integration costs.

I would say that, that integration is going as expected and we continue to be happy with that business.

But because we're in the midst of that integration process, the results and the costs of those rebranding efforts and IT conversion efforts are a little bit unpredictable right now, so we are not prepared to give really much of a forecast for the fourth quarter and certainly not for our FY16.

As we get into FY16, that may change, but we need to see more of the integration be completed before we are going to be ready to give forecasts.

Great.

If I could just sneak one more in, could you guys comment on the M&A pipeline and the activity levels there and if the valuations are increasingly higher for you guys?

Context around that would be great?

Sure.

We do have an active pipeline.

We are constantly looking for opportunities in that area.

I would say that valuations are generally fairly high, but we are certainly willing and looking for opportunities in that area.

Even though nothing significant has closed, we are still -- that is a great use of our cash and we are still looking for those opportunities.

Great.

Thanks so much.

Manav Patnaik, Barclays.

This is actually [Greg] calling, on for Manav.

I was just hoping to get a little more color on the weather impact for this quarter.

I know the weather was pretty bad last year.

Just wanted to see how much of a tailwind that actually was for the quarter?

I would not say that it was a tailwind for the quarter.

Last year, you are correct, last year, the winter was fairly severe, and it really affected our document management business more than any other business.

It also tends to affect our First Aid and Safety & Fire business a little bit more.

So I wouldn't call it a tailwind for this quarter, because obviously we don't have the document management results, and we had some weather issues this quarter in First Aid, Safety & Fire, as well.

Okay.

Then on document sales here, you're lapping some of the tough comps.

Can be a little bit lumpy, but this mid-single-digit range that you had, is that a reasonable expectation for what you are thinking about that business and what it can do?

I'm sorry.

You're talking about the document management business?

Sorry.

Direct Sales?

Uniform Direct Sales?

Sorry about that?

Yes, we do -- that's a very good business for us, and we do believe that it can grow in the mid-single-digits.

We want to make sure that we are selling the right accounts and profitable accounts.

We aren't interested in selling commodity direct sale uniforms, but we do believe that, that can grow in the mid-single-digits, but as you say, it is a bumpy ride with that business.

Okay.

Just one more for me on the CapEx guidance, trending lower, is that being pushed out to FY16 or is that realizing that you don't need to do quite as much or how should we think about that?

I would say that the processing capacity that we spoke of in the first half of the year is getting pushed into next fiscal year.

We still have some SAP spending.

As you know, we're in the midst of the SAP project for Rental, and we will see a little bit of that get pushed into next year as well.

Okay.

Thank you.

George Tong, Piper Jaffray.

This is Adrian Paz on for George Tong.

I just wanted to touch on uniform rentals and see if you could give us a low more color on what's really driving growth there.

Is it new customers?

Is it better pricing?

If you could give us a little more color on that?

Sure.

I would say that it's the same thing that's been driving for the last several quarters and that is good new business sales, so new customers.

It is penetration of existing customers with additional products and services, and certainly pricing has helped this fiscal year as well.

We've talked about the pricing environment being more positive this fiscal year than compared to last fiscal year, so that certainly it has helped as well.

So it's a combination of the three of those.

Great.

Touching back on CapEx, I know you were planning to build out new facilities to expand your processing facilities.

I just wanted to see there is any update on those plans?

We still are actively working on those plans.

As I have mentioned, the actual spending will get pushed into next fiscal year, but we still do need some capacity in certain areas and we will be moving forward with those plans next fiscal year.

Okay, great.

Thanks for the color.

Andy Wittmann, Robert W. Baird.

Good afternoon.

Mike, I just wanted to understand the some of the impacts on Shred-it here.

Maybe the first thing is a definitional question.

In your guidance, you mention that Shred-it -- your guidance assumes -- you said considers no contribution from Shred-it.

Is that saying that you expected to be EPS neutral or are you saying Shred-it is going to do what is going to do and you're not considering that in how you are guiding?

The reason why ask this is for the quarter obviously it had a negative $0.06 impact, and previously, my working assumption was that Shred-it was going to be EPS neutral.

I get that there is restructuring, but I thought that was contemplated.

Was what you saw in Shred-it unexpected for you or were you guiding exclusive of Shred-it from the get-go?

We have been guiding exclusive of Shred-it.

That integration, while it continues as expected, it can be a little bit unpredictable in terms of when the spend happens and so we're just not prepared to give good guidance on a quarter-by-quarter basis.

We do really believe that synergy opportunities are being achieved and will continue to be achieved, and we really do believe that it will be additive to us, but we are in a little bit of a period of unpredictability and hesitant to give any guidance as a result.

Okay, that's helpful.

Is it even meaningful to try to get the quarterly breakdown now that you've pulled the Shred-it contribution out of SG&A and put it on its own line.

Would you be comfortable giving that, and even if you did, can we make anything of it?

Sure.

The quarter itself was $6.8 million, and prior to this, in the second quarter, I believe it was roughly $300,000 of a net expense in the first quarter because in our first quarter we were so close to the transaction date that there weren't a lot of integration activities happening.

Yes.

Okay.

All that is helpful.

That's all I have for this time.

Thanks.

[Pitom Bijole], Merrill Lynch Bank of America.

This is [Fatom Bagole] calling in for Sara Gubins.

My first question is on the S&P implementation.

Could you update us on the rollout of it and what benefits you're seeing?

We're in the very early stages, and so the early stages mean we are still building the system.

We expect to be able to pilot that system probably something early FY17, and if all goes well, then we will start to see a rollout sometime in FY17 and continuing into FY18.

So we will start to see the depreciation of that system partially in 2017, probably, if all goes well, a full year in 2018, and really won't start to see the benefit until we get to that point, so we haven't seen any benefit of it yet, nor have we seen any real expense yet.

I see.

Okay.

Thank you.

You also mentioned no change in add-stops.

Are we at a point where you would expect growth there or what would it take to expect growth in that metric?

It certainly would take our customers hiring at a more accelerated pace.

When we think about the jobs, certainly the headlines are looking better, and that is good news, we just haven't seen that translate to net add-stops yet.

Keeping in mind that the last several months are seasonally adjusted and so it gets a little bit difficult to equate the BLS information to our net add-stops, but we just haven't seen it yet and we need to see our customers more rapidly hire.

I see.

Okay.

Switching gears to potential acquisitions, given your recent performance and your recent operating results, would you expand to countries outside of the US via acquisitions?

Is that in your plan?

I would say that our first priority and our first preference would be to acquire businesses that are in our existing businesses within the US and Canada.

Certainly, we will get the most value and synergies out of those acquisition opportunities.

Having said that, if we were able to find the right acquisitions internationally, and in the right businesses, we certainly would take a look at those, but as you've probably seen from Cintas over the years, we would likely be a little bit more cautious about that, but our preferences acquisition opportunities in our existing businesses in the US and Canada.

Got it.

Thanks.

My last question is just a housekeeping question.

What do you expect for share count by the end of the year?

We are expecting something around 119 million.

Okay.

That's all I had.

Thank you.

Nate Brochmann, William Blair.

Good evening, everyone.

I wanted to follow up a little bit on the add-stop metric.

I know we haven't really seen an increase and I know that we have been fluctuating from neutral maybe to slightly positive, and even sometimes slightly negative, but if we were to assume that maybe at some point that starts getting moving, would there be anything in the cost structure or anything in terms of just utilization or capacity at a point that we would have to add so significantly that we could not, at least for a period of time, recognize maybe some historical relationships between the increase in the add-stop and then incremental gross margins that would get associated with that route density?

If we saw a rapid pick up in adds, keeping in mind, we would likely have some additional material cost -- when a customer adds a new employee, we will go to our stock room where we have existing garments and we will pull as many of those existing garments as we can.

Those are already in our cost structure.

However, there are times, due to size differences, et cetera, where we may have to orders some new garments, as well.

So there's a little bit of an incremental material cost impact.

We then have to wash those.

Instead of those garments sitting in our stock room, we have to watch those garments and sort them.

But then, from a service standpoint, we are already going to that customer, we are already delivering, and there really isn't any additional cost there.

So it is a very accretive kind of business, and it's great business and we'd love to see more of it.

Would we get enough a net add-stops to dramatically affect our capacity?

Boy, we would have to really see some significant hiring in order to do that.

So we would have to have a lot of net add-stops affecting one or two or a few locations and that's unlikely.

Okay.

That's helpful.

And then second, and I don't know if there's anything that you can really share, but obviously, you've been very successful over the last several years in terms of adding some new services.

Anything new in the pipeline that we can talk about or anything else in terms of that incremental, in terms of the extra cross-selling opportunity?

We're certainly always working on new products and services, no question about it.

We are still working hard to penetrate as many customers as possible with our Carhartt program.

We've talked about our scrub rental program and our chemicals, and those are still selling very, very well and the growth rates are still very good.

I'm not ready to talk about any new items, but the really nice thing about our businesses is we have got close to 1 million customers that we are seeing generally on a weekly or monthly basis, and that relationship, and that frequency creates some good opportunities for us.

So we're always looking, and we are currently working on ways to improve -- not improve, but increase the amount of products and services with each of them.

Sounds good.

I appreciate the time and I will turn it on over.

Scott Schneeberger, Oppenheimer.

Thanks.

Good afternoon.

I'm curious on new wins and penetration, just curious, any commentary on end market themes that your seeing there, where the strength is coming from for the most part?

The theme that we've talked about over the last year or maybe couple of years is that healthcare is becoming a more and more important vertical for us.

As we create more products for that vertical such as the scrub rental program, such as microfiber mops and wipes, it is becoming more important for us and that's been a nice vertical.

I would say that really no other verticals that really pop out as being a big change to us.

Thanks.

And this has been covered pretty well, but I'll just ask it one more time, just to drive it home, in the oil and gas end market, you are seeing low single-digit exposure, that's what it was last quarter, that's what it is this quarter.

Was that about the same going back a year or 18 months ago?

What I'm getting at is has that come on strong this year or has that been pretty stable over the past couple of years?

The oil and gas vertical requires a lot of fire-resistant clothing, and so I would say over really the last five years, it's been a very nice vertical for us.

We have had a lot of success and the industry has had a lot of success selling fire-resistant clothing to them.

I would say that it hasn't been a change to us, though.

It's been fairly consistent and a growth vertical for us for a number of years.

I would say, if you go back 10 years, Scott, probably less revenue in that area than today.

Excellent.

Thanks.

And one more for me, it is pretty clear, but just would love to get your perspective on the increase in the guidance.

How much of it was relative to the internal expectation for the fiscal third quarter?

How much was contribution from the share repurchase that's been done recently?

And just other puts and takes, an attribution or a bridge is essentially what I'm looking for?

Thanks.

The share buyback was $0.03, $0.01 in the third quarter and we expect $0.02 in the fourth quarter.

I would say, a lot of the guidance, and I'm speaking to EPS, was because of the good results in the third quarter, certainly.

It just reflects our expectation for the fourth quarter.

We have been at a pretty good operating margin for the year.

Bill and I talked a little bit about that being relatively consistent throughout the year and I wouldn't expect a change from that now.

Great.

Thanks for the color.

Joe Box, KeyBanc Capital Markets.

Good afternoon, guys.

Mike, you mentioned earlier in your prepared remarks that you do expect operating leverage from density gains.

I'm just curious, should we think about that statement as maybe being status quo versus what you had previously expected from density or are there maybe some bigger benefits out in front of us as you implement your SAP system, and maybe we could be looking at continued above-trend incremental margins?

Our guidance would start to suggest that when you think about our third and fourth quarter of last fiscal year, we had some very healthy incremental margins.

From a Rental standpoint, the operating margin was close to 50% in the second half of the year, the incremental operating margins.

It's hard to keep that rate going for long periods of time, but we do still believe that we can have very good incremental margins because we have got quite an infrastructure around the US and Canada and we can continue to add products and services to our customers.

Some of those are not -- some of the revenue that we are getting is not processed, so we are not really using any processing capacity.

So we think there still certainly are good incremental margin opportunities as we move forward.

Having said that, at the 50% clip, that's pretty hard to sustain over long periods of time.

Of course.

I appreciate that.

Thanks, Mike.

Just maybe one quick one on Shred-it.

I appreciate the commentary you have given us so far, but I do want to try to understand maybe where we're at from an integration standpoint, really just to help us with our model.

Can you just give us a sense of maybe what inning you think you are in as you're integrating these two companies.

Are you guys just scratching the surface on rebranding, on IT, on route consolidation, or do you think your maybe in mid- or late innings?

I would say that we have passed the 50% mark, and so we are probably in that third quarter of the integration.

Thank you.

That's helpful.

And then just one last oil and gas question.

I'm not really curious about the top-line impact, but I do wanted to ask on working capital.

If you do start to see some assets come back to you, could you possibly redeploy those in other markets like construction or petrochemical or are they all pretty industry-specific?

It certainly would be customer by customer, but we can use fire-resistant clothing in other industries besides oil and gas.

Anything that's got a flash fire opportunity will need fire-resistant clothing, and there are lots of opportunities for those.

So they are not quite as broad as our general workwear uniform, but there are other opportunities, except for certain customers who have very specific garments that we would have an inventory liability protection on.

And do you think we would notice it in the working capital line or is it too small?

I don't think it would be noticeable, no.

Okay.

Thanks guys.

Nice quarter.

Adam Cohen, Northcoast Research.

This is Adam on for John Healy.

Great job on the quarter.

I was wondering if you guys could help us out with the SG&A line.

It was impressive again this quarter.

I was hoping you could guide us about that line item moving forward into 2016 from a modeling standpoint?

I'm sorry, is it Adam?

Yes.

Adam, we are not prepared right now to give FY16 guidance.

I would tell you that we do believe that we can continue to get leverage in the SG&A area, but not prepared right now to give 2016 information.

Okay, great.

Thanks, guys.

Good quarter.

That concludes today's question-and-answer session.

Mr. Adler, Mr. Hansen, I'd like to turn the conference over to you for any additional closing remarks.

Thank you very much for joining us tonight.

As a reminder, we will be issuing our fourth-quarter earnings in mid-July, so we look forward to speaking with you at that time.

Good evening.

That does conclude today's conference.

Thank you for participation.

You may now disconnect.