信達思 (CTAS) 2016 Q1 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 call 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 tonight.

With me is Paul Adler, Cintas' Vice President and Treasurer.

We will discuss our first-quarter results for FY16.

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

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from 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 today in the press release, please note that a change in our reportable segments -- US Generally Accepted Accounting Principles require companies to evaluate their reportable operating segments when certain events occur.

As a result of the recent evaluation, effective June 1, 2015 we will report the following operating segments.

Uniform Rental and Facility Services, First Aid and Safety Services, and All Other.

All Other primarily consists of Fire Protection Services and our direct sale business division.

We are pleased to report first quarter revenue of $1.199 billion, an increase of 8.8% from the prior-year first quarter.

Organic revenue growth, which adjusts for the impact of acquisitions, workday differences and foreign currency exchange rate fluctuations, was 6.8%.

Organic revenue growth for our Uniform Rental and Facility Services segment was 6.8%.

And the First Aid and Safety Services segment organic growth was 10.5%.

The performance of our salesforce in both segments was strong.

We continue to add new customers and provide existing customers with additional products and services from our broad line.

First-quarter operating income was $185.5 million, which was 15.5% of revenue compared to an operating margin of 14.8% in the prior-year period.

This represents a 70 basis point improvement from last year's operating margin.

Net income from continuing operations for the first quarter of FY16 was $106.2 million.

And earnings per diluted share, or EPS, from continuing operations for the first quarter were $0.93.

Note that the first quarter of last fiscal year's net income and EPS from continuing operations were positively impacted by a gain from the sale of stock in an equity method investment.

Excluding this gain, first-quarter net income and EPS from continuing operations increased 15.1% and 19.2%, respectively, compared to the prior year.

Net income from continuing operation as a percent of revenue improved 50 basis points to 8.9% from 8.4% of revenue in last fiscal year's first quarter, excluding the prior-year period gain.

We also demonstrated our continuing commitment to providing shareholder value through our stock buyback program.

During August and into September through the close of business yesterday, Cintas purchased 2.9 million shares of common stock.

This share buyback had no impact on first-quarter EPS but is expected to benefit full fiscal year EPS by $0.05.

Since the beginning of FY16 approximately 4.5 million shares of common stock have been purchased at an aggregate cost of $381.2 million.

As of September 23, 2015, Cintas had $381.8 million available under the current Board of Directors' stock repurchase authorization.

As Cintas CEO Scott Farmer stated in today's press release, we are off to a good start to our FY16 year.

We thank our employees, whom we call partners, for their strong performance.

On August 1, 2015 the Company closed on the acquisition of ZEE Medical for consideration of approximately $134 million in cash.

About $121 million were paid at the closing of the transaction and an additional $13 million may be paid in future fiscal years, subject to holdback provisions.

We are in the very early stages of the integration of the ZEE business.

We are excited about the benefits and opportunities this acquisition provides, including expanding our footprint and enabling us to serve an even greater number of customers in North America.

As a result of our first-quarter results and the recent acquisition of ZEE Medical, we are updating our annual guidance.

We expect FY16 revenue to be in the range of $4.8 billion to $4.880 billion and FY16 EPS from continuing operations to be in the range of $3.79 to $3.88.

This guidance does not include any EPS impact from the announced agreement to sell our investment in Shred-It, which has not yet closed.

This guidance does not include any potential deterioration in the US economy or additional share buybacks.

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

I'll now turn the call over to Paul for more details on Company financial performance.

Thanks, Mike.

First, please note that there were 66 workdays in this year's first quarter compared to 65 in last year's first quarter.

The second and third quarters of this fiscal year will have the same number of workdays as last year of 65.

This year's fourth quarter will have 66 workdays compared to 65 in last year's fourth quarter.

Thus, FY16 will have 262 workdays, 2 more than in FY15.

As Mike stated, total revenue increased organically by 6.8% in the first quarter.

New business wins, penetration of existing customers with more products and services, retention, and price increases all contributed to the strong growth rate.

Total Company gross margin was 43.7% for the first quarter of this year compared to 43.4% last year.

Total Company energy-related expenses for this year's first quarter were 2.2%.

Last year's first-quarter energy-related expenses were 2.8%.

As Mike previously stated, effective June 1, 2015 we have three reportable operating segments: Uniform Rental and Facility Services, First Aid and Safety Services, and All Other.

All Other consists primarily of Fire Protection Services and our direct sale business division.

First Aid and Safety Services and All Other are combined and presented as Other Services on the income statement.

The Uniform Rental and Facility Services operating segment includes the rental and servicing of uniforms, mats and towels and the provision of restroom supplies and other facility products and services.

The segment also includes the sale of items from our catalogs to our customers on route.

Uniform rental and facility services revenue was $938 million, an increase of 7.4% compared to last year's first quarter.

Organic growth, which excludes the impact of acquisitions, workday differences and foreign currency exchange rate changes, was 6.8%.

For comparative purposes, this segment's organic growth for the previous quarter, our FY15 fourth quarter, was 6.2%.

Our Uniform Rental and Facility Services segment gross margin was 44.7% for the first quarter, an increase of 90 basis points from 43.8% in last year's first quarter.

Energy-related costs were 70 basis points lower than last year's first quarter.

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

This segment's revenue for the first quarter was $99 million, which was 24.5% higher than last year's first quarter.

Total growth benefited from the ZEE Medical acquisition.

On an organic basis growth was 10.5%.

This was a good sequential increase in the growth rate from 8.2% in our fourth quarter.

This segment's gross margin was 42.3% in the first quarter compared to 45.9% in the prior year period.

Energy-related costs were 40 basis points lower than in last year's first quarter.

As Mike stated earlier, we are in the very beginning stages of the integration of the ZEE business.

As expected, our First Aid and Safety Services results were negatively impacted by conversion costs, the amortization of intangible assets resulting from the purchase price accounting, and other charges.

This impact will continue in the short term as we assimilate the acquired business and begin to realize the synergies.

We are excited about the benefits and opportunities that this acquisition provides.

Regarding selling and general and administrative expenses, total Company SG&A was 28.2% as a percentage of first-quarter revenue compared to a total Company SG&A in last year's first quarter of 28.5%.

The 30 basis point improvement in SG&A was realized despite a 40 basis point increase in medical expenses this quarter compared to last year.

On July 15, 2015 Cintas announced that it entered into a definitive agreement to sell its investment in Shred-It for approximately $550 million to $600 million before taxes.

The transaction is still expected to close in the fourth quarter of calendar year 2015.

As a result of the announced sale of the investment, the related income or loss is now reported in discontinued operations.

The investment in Shred-It on the balance sheet is recorded as assets held for sale, and the related tax liability is recorded as liabilities held for sale.

Our effective tax rate for the first quarter was 37.2%, the same rate as in the prior-year period.

We expect the full-year 2016 effective tax rate to be 37.3%.

Our cash and marketable securities were $200 million at August 31, a decrease of $233 million from the $433 million at May 31.

Cash provided by operating activities was $143 million in our first quarter.

Uses of cash included $121 million net of cash acquired for acquisitions and about $222 million for repurchases of Cintas common stock.

Capital expenditures for the first quarter were approximately $63 million.

Our CapEx by reportable operating segment was as follows.

$55 million in Uniform Rental, $4 million in First Aid and Safety, and $4 million in All Other.

We expect CapEx for FY16 to be in the range of $250 million to $300 million.

That concludes our prepared remarks.

We are happy to answer your questions.

Thank you.

(Operator Instructions)

We will take Manav Patnaik with Barclays.

Hi, this is actually Greg calling on for Manav.

Just wanted to ask about the guidance.

It looks like excluding ZEE Medical and the buybacks, the guidance is essentially unchanged, even with the pretty solid numbers.

Just wondering if there's been a change to your view versus when you first gave guidance, or if there's -- if it's kind of a conservatism so early in the year?

You're correct.

Without ZEE and without the share buyback impact, the guidance is generally the same.

Our first-quarter results were generally in line, and we still feel good about the year.

There's no change in the way we feel about that, with maybe the only possible exception of the Canadian dollar continues to weaken.

Today it was somewhere in the CAD1.33, CAD1.34 range, which is a little bit weaker than we guided at CAD1.25.

So we may see a little bit of top-line impact as we go through the rest of the year.

But you aside from that we still feel good about the year, and not really any change to our thinking.

Fair enough.

And then on the M&A environment, should we think of ZEE Medical as kind of a one-off opportunity that you've had, or are you seeing comparatively larger companies coming available recently?

Well, certainly ZEE is a great opportunity for us and one that we feel very excited about.

It certainly does demonstrate that we want to put our cash to work and we really do like the opportunities for M&A, particularly in a case like ZEE where there's a lot of tuck-in opportunity.

I would say I can't comment on any other items because I wouldn't want to speculate.

But we're certainly continuing to be active and looking for opportunities to add value through M&A.

Okay.

Thanks, Mike.

Okay.

We'll go next to Andrew Steinerman with JPMorgan.

Hi.

Could you review which driver of revenue growth caused the acceleration in the quarter to 6.8% growth year over year?

You outlined 60 basis points of acceleration.

Which segment did that come from?

And what's the organic revenue growth implied for the full year in the revenue guidance?

Well, a number of things.

As Paul mentioned, we had a very good new business quarter.

One of the things in the last call that we talked about was a little bit of preparing in the fourth quarter to get off to a good start.

So we hired -- we probably hired some reps early.

We added some routes earlier, and we got some good momentum going into the year and that continued through the quarter.

New business was very strong.

Penetration -- I'm sorry, customer retention was a little bit better than last year.

So another benefit, not as significant as the new business.

Pricing was, I would say the environment didn't change much but it was still a fairly positive environment with the exception of our energy-related customers.

Sure.

So those three areas all contributed.

I would say that there was a little bit of an offset from those energy-related customers, as we've talked the last several quarters.

Our oil-and-gas customers are certainly operating under difficult environments, as well as our mining customers.

And we saw our uniform rental net add-stops being negative for the quarter.

So there was a bit of a drag from that.

But certainly --

Did you say add-stops were negative overall because of oil-and-gas, or add-stops were negative in oil-and-gas?

Because of oil, gas and mining.

Okay.

Perfect.

And then the other part of the question was, what was the organic growth, what is the organic growth implied in the revenue guidance for the year?

Well, we haven't provided that, and I am -- I'd rather not get into that number.

I don't have it calculated.

We are really focused on the top line.

But I would say that we don't expect many significant changes to that, to the first quarter performance.

We still feel good about the year.

Right.

So in the same vicinity that we've been thinking about for a while now?

Yes.

Okay.

Good.

Thank you.

We'll go next to George Tong with Piper Jaffray.

Hi.

Good afternoon.

Can you talk a bit about how much of your growth is being fueled by organic customer growth versus penetration of the nonprogrammer market, and you how that's evolved in recent quarters?

I can't give you any specific numbers, George, but I will tell you that the penetration opportunities still exist and they are -- we're taking advantage of them.

Our ability to sell, particularly into good uniform rental anchor accounts with our signature series hygiene products, our chemicals, our microfiber mops, et cetera, it's still going very well.

I would say that new business has been a strength over the last five years or so.

But penetration has continued to be very, very solid for us.

And so while I can't give you a number, both are continuing to drive organic growth.

Got it.

And then going back to add-stops, can you describe how add-stops have evolved over the course of the quarter and how add-stops are evolving now into this current quarter so far?

I would say that for the quarter we experienced a little bit of continued deterioration from our oil, gas and mining.

Aside from that, I would say it was a pretty constant and consistent quarter.

So not a lot of change as we went through the quarter, and not much change since August 31.

We're only a couple weeks in, but nothing marketable to speak of.

Got it.

Thank you.

We'll go next to Joe Box with KeyBanc Capital Markets.

Hey, Mike.

Hey, Paul.

Hi, Joe.

So it's been a few years now since, I think, your last big addition with respect to route capacity.

How are you guys thinking about route capacity going forward?

Is it going to be added on really an as-needed basis, or do you think potentially we could be seeing maybe a broad-based addition like we had few years ago?

Generally, Joe, we want to continue to add routes throughout each year and we have continued to do that.

So I wouldn't expect that we'll have a big influx of routes any time soon.

But a little bit depends on the nature of the economy and what we are seeing with our customers.

But I would say I wouldn't expect to have an influx of new routes in the rental business.

In the First Aid business, we have continued to add routes.

We have -- in that business, our SSRs really do drive a lot of growth, and we want to make sure that they have the capacity, the time to spend selling.

And so we're fairly aggressive in adding routes to that business.

But I will tell you, with the ZEE acquisition, there's a lot of integration to be doing and we're going to have to take that quarter by quarter.

I appreciate that.

Thank you.

And then maybe just as a follow-up on the macro point that you made earlier, I think we all have a pretty good sense of what's going on in the oil-and-gas and mining, but I'm curious if you're maybe seeing a bifurcation between industrial-oriented customers outside of oil-and-gas and mining versus maybe what you're seeing from consumer-driven businesses?

And if you are seeing any sort of a change, how might that impact you?

I wouldn't say that we're seeing a marketable change from the other customers, but the environment's been pretty good.

They are, when we can show them value, they will take additional products and services that do add that value.

But I wouldn't say that we've seen a marketable change to that, but certainly a different operating environment than our oil, gas and mining customers.

And then one last one from me.

Paul, what was the margin tailwind in the uniform rental business, just from the extra day?

Joe, typically that extra day in the quarter gives us about a 40 to 50 basis point improvement.

Okay.

So if I were to strip out the 40 to 50 basis points, and I think you said there's was 90 basis points of tailwind from energy within the uniform rental business, net/net we're looking at a gross margin that's down in the uniform rental business?

Can you maybe put some color around why it would have been down ex those items?

So, yes.

We had a 70 basis -- in the rental business we had a 70 basis point tailwind from energy, roughly a 40 -- when we say 40 to 50 basis points of workday, probably 40 of that is in gross margin, 10 of that is in SG&A.

So let's call it about a 40 basis point benefit from the workday.

We have talked about the energy-related customers creating a bit of a drag.

Keep in mind when those customers stop or eliminate positions, that is lost revenue, but we still have the amortization of the garments and we still are driving the truck to that customer.

So we still have a lot of the costs without the revenue.

That is basically an offset to that workday benefit during our first quarter.

Now I will tell you also, when you compare our first quarter gross margin in the rental business to the fourth quarter, in a quarter that had the same level of energy, our gross margin was 190 basis points better.

And let's take off 40 basis points from the workday.

We still had a very nice sequential improvement, and we feel very, very good about that.

We're getting a lot of good leverage.

And then the last comment I'll make is, one thing to keep in mind about last year was that our first quarter gross margin in rental was the strongest of the year.

It was 50 basis points better than any other quarter.

We did have a very good quarter.

There was a one-time customer buyout within the quarter that helped that gross margin.

And so I think we had a very good gross margin quarter, and I would expect that we're going to continue to see good leveraging within that business, knowing that we do have a little bit -- we're expecting a little bit of the tailwind, or all of the tailwind of the energy costs to go away in the latter part of the year.

Does that help with that gross margin?

Yes, that's a perfect clarification.

Thank you for that.

Have a good night, guys.

We'll go next to Andy Wittmann with Robert W. Baird.

Hey, Mike.

What was the size of that buyout last year that you just mentioned?

We had --

You can quantify it in terms of margin or dollars.

We had commented that it was about 50 basis points worth of growth, which would effectively mean the same kind of thing on margin.

Yes, it's basically almost 100% flow-through when have you to do that.

Yes.

Just on ZEE Medical, so I thought maybe you guys might kind of call out the integration costs, closing costs, what have you, separately.

But it looks like you're expensing that and just running that through the P&L, and as a result you're not showing EPS accretion.

But can you give us an idea of, if you take out some of those one-timers of the integration cost, can you give us what those would have been for the quarter as well as your outlook for the year so we can get a sense of what the normalized or introductory accretion is from ZEE?

Well, as you can probably tell from our guidance, we expect no impact on EPS this fiscal year.

So this acquisition's about one-third the size of our existing First Aid business.

It's a large acquisition for us, and there are a lot of integration steps to be done.

We need to rebrand the trucks.

We're putting people into Cintas uniforms.

We have to convert the systems, and we're going to be doing that over the course of the year.

I would say the other thing about the ZEE business, the routes were not as efficient as the Cintas routes.

The revenue per route, the revenue per customer is not nearly as high as Cintas'.

So it's a bit of a -- a little bit more of an inefficient business.

And we've got some work to do to integrate and get that to the levels where we want them to be.

Having said that, the integration is going very well, and we're excited about that business and its opportunity that it creates for our First Aid business.

I'm hesitant to get into any more specific integration costs in the first quarter.

We really just got it in the month of May -- I'm sorry, in the month of August, and had a lot of meetings, training, et cetera.

And we're really just now getting started on that.

And so again, I'll reiterate.

The current year we're not expecting any accretion, but we certainly do expect to get that next fiscal year.

Once we see how the integration develops as the year goes on, we'll be more in a position to provide guidance at that point.

Okay.

That's fair.

We'll look forward to maybe an update on that the next quarter.

Maybe, just can you give a view or a broad strokes view of what you think the cost synergies of the businesses are, recognizing that there is route overlap and maybe some route underutilization that you inherited?

I'm not prepared to do that yet.

I want to see more develop within the integration.

We certainly have an integration plan, but I'd rather wait until we see a little bit more of the integration develop.

Okay.

That's fine.

Then I guess are you seeing anything different on the competitive environment in terms of pricing?

You mentioned that it was additive to your quarter.

It just seemed like the last 12, 18 months was, I'd say, pretty good for the overall industry.

I think you guys benefited, and others did too.

Do you have tougher comps, or are your competitors getting more competitive for new business pricing?

Is there any risk that we have to see in the future from the competitive environment?

Well, the pricing is always competitive, there's no question about that.

We are only able to raise prices when we are showing great value to our customers, and that's the -- as long as we can continue to show that we are providing great value, we don't necessarily see a change in the environment unless the economy changes.

I would say that based on that pricing environment being relatively similar to last -- the last several quarters, we haven't seen a lot of competitive changes in this first quarter.

And I can't say that, that won't happen in the future, but we haven't seen it yet.

Got it.

Okay.

Maybe just final question, just on the reclassification of the segments.

I'm curious as to why the fire protection got carved out and put into the Other segment whereas the other stuff now redefines the First Aid and Safety Business.

And maybe now that we have these new segments, how we should be thinking about the margins as we model forward on those.

Andy, this is Paul.

You probably know the accounting guidance is pretty descriptive about reportable operating segments, and the guidance requires that companies evaluate their segments periodically, and definitely when changes occur.

And we had such a change in our first quarter with the acquisition of ZEE, and therefore as a result of evaluating -- re-evaluating, that is, our reportable operating segments, looking at the guidance, we needed to make some changes.

And the most material of those changes obviously are the fact that First Aid and Safety is now a standalone segment separate from Fire.

And then we also made a change in terms of including the sale of items from our catalogs to customers on our routes, and including that in the Uniform Rental and Facility Services segment.

So those are the two major changes.

And then the guidance permits, and it's a acceptable then to, once you reach a certain threshold of segments and disclosures, that the other business units then are combined into an All Other segment.

And that's where Fire is and that's where the Direct Sale business, you're thinking about Direct Sale to national accounts, that type of business.

That's where those reside.

Thanks for --

(Multiple speakers) Andy, that Fire business, the Direct Sale business, they are still very important to us.

We believe that they are good businesses.

But we're giving visibility to 90% of our revenue going forward.

And certainly the focus is on those two largest businesses that we have.

As it relates to the margins of that All Other, we expect improvement just like we do in our other businesses.

And there certainly is leverage to be gained.

There are route density opportunities.

And so we certainly do expect continued improvement.

Because we have that Direct Sale business in there, it could be a little bit bumpy at times because of the ups and downs of that business.

But generally speaking we expect improvement.

That makes sense.

Given that Direct Sale now got split between two segments, there's a lot of moving parts.

Are you guys thinking about giving us maybe last year's numbers restated for the -- on a quarterly basis for the new classification of the segments, by any chance?

Should we be looking for that?

Yes.

Actually, in the earnings release income statements, there is a table of supplemental information.

And there we have recasted all the prior-year quarters by segment, revenue gross margin, income, assets.

So you'll have some good segment data under the new structure for FY15, and then obviously 2016 going forward.

Perfect.

Yes, I see that.

Thank you very much.

We'll go next to Sara Gubins with Bank of America Merrill Lynch.

Hi, thanks.

Good afternoon.

Could you talk about your manufacturing clients, and are you seeing any change in their behavior?

We have not seen much of a change in their behavior in this quarter compared to the last quarter.

I would say that's true for not only manufacturing but our other verticals, excluding that energy-related sector.

Okay.

And then share repurchases really accelerated in the last three quarters.

Could you talk about how we might think about share repurchase potential on a run rate basis over time?

So as we've talked about in previous calls, our goal is certainly to grow organically, and followed by M&A.

And we would love other opportunities like ZEE Medical.

But when we have additional cash, we certainly will take a look at an increasing dividend.

But then if there is cash remaining outside of those opportunities our Board likes to put it to work.

And so I say that, Sara, because a lot of it depends on how that cash balance looks and what the other opportunities for cash are.

I would say that, that buyback program has been quite a benefit, we believe, to our shareholders.

And if we have available cash, we've shown that we'll put it to work.

While I can't give you any specifics because it's a Board-level decision, I would just say that if we have available cash, we like to put it to work.

We have $381 million left on our current authorization.

And the Board will be looking at our positions over the rest of the fiscal year.

Okay.

Thank you.

We'll go next to Scott Schneeberger with Oppenheimer.

Thanks very much.

Guys, could you comment on specifically oil-and-gas customers and mining separately with regard to what inning you think you're in on add-stops on both as it's a headwind?

It has been certainly in oil-and-gas.

If you could speak to both on where you think you are in the cycle.

Thanks.

That's a tough question, Scott.

I would say that it felt like from an oil rig standpoint in the first quarter there was some stability towards the end of the quarter, but then you read an article like in today's Wall Street where there are fracking firms that are starting to close up shop.

That's a tough one to call.

I would love to say that we're in the late innings of that oil-and-gas, but I don't know that I can say that.

I would say that today -- that as of August 31 those oil-and-gas customers for us, the revenue is lower today than it was at May 31 because of continued net stops.

But I'm not exactly sure, Scott, where that's going to end up.

From a mining perspective, we see some pretty hard hits.

And I'm afraid I can't give you much future guidance in that either, other than to say that it's been a tough environment for the mining industries, at least for our customers.

And I would expect that that's not going to turn around overnight, nor will the oil-and-gas customer impact turn around overnight.

All right.

Thanks for that.

And then you've addressed some pricing questions earlier, but with regard to pricing across all your segments, all your markets, and I imagine it's kind of soft in those two areas we were just talking about, but it sounds like it's pretty firm elsewhere.

Is there anywhere else outside of rental, that -- good or bad, that bears attention or is everything fairly status quo?

I would say that everything is status quo.

Now, keep in mind that energy customer impact also does affect First Aid and Safety.

We have a lot of good energy customers.

But having said that, I would say that the pricing environment for most others is status quo.

Okay.

Great.

Thanks, Mike.

We'll go next to Denny Galindo with Morgan Stanley.

Good afternoon.

Just a quick one on ZEE Medical.

How much of the decline in margins in that First Aid and Safety segment was due to -- strictly due to ZEE Medical?

And could we expect a similar amount of impact for the rest of the year?

I think -- well, we would have had a somewhat of an increase without ZEE Medical in that gross margin.

I would say that if the integration continues to go well and we start the process of rebranding and putting the routes onto our systems, as the year goes on we would expect to see some improvement.

So I would expect that the drag that we saw in the first quarter is going to be the worst of the year and we should start to see a little bit of improvement.

I would say that for the year we don't expect it necessarily to turn positive for the cumulative year, but by the fourth quarter we could see a little bit of benefit if the integration goes well.

That's helpful.

And another quick one there.

Is there any seasonality at all to ZEE Medical, or is there any -- you added one month this quarter.

Is that a representative month or is it higher or lower than what the run rate would be?

I would say that from a seasonal standpoint it's probably very similar to our business where we have a lot of outdoor activity in the First Aid business in the summer, a lot of construction sites, et cetera.

You get into the winter, you see better margins because of the cold and flu season.

So I think it would track the same kind of performance of our First Aid business.

Now, because of the disruption that is happening because of the integration, I'm not ready to say that the month of August was representative of the year.

I'd certainly love to see us improve on that.

But we're going to need to let the dust clear a little bit on the integration before we can give you a good run rate number.

Okay.

That's helpful.

And then taking a step back, you talked a little bit earlier about route expansion.

Are there any particular cities or metro areas that you are thinking could be a good opportunity?

We had looked at your locations and it seemed like the big cities like New York, LA, Chicago had a very low amount of your facilities compared to the total market.

But any color there would be helpful.

We think all of those areas are very good opportunities for more route density, no doubt about it.

We do some comparisons internally, and from one location to another -- and we've got locations that are more mature where the route density is quite a bit higher than in some of the larger cities like New York and LA, even Philadelphia.

So we think there really are some good opportunities in a lot of big cities, not just a few, but a lot.

We're not nearly penetrated to the extent we think we can be.

Okay.

And another clean-up one.

Any update on the SAP implementation?

How's that going?

Are you still thinking the time line will be similar to what you thought in the past?

That project is going very well.

We are on the same schedule as we've talked about over the last few quarters.

We're on the same cost expectation as we've been over the last few quarters.

And so that means we would expect that we will come out of the realization mode at the end or towards the end of this fiscal year, and start to put that system to work a little bit in FY17 from the standpoint of the integration -- I'm sorry, the roll-out should start to happen.

And so we'll see a little bit of the -- I shouldn't say a little bit.

We'll see some cost impact, and we'll quantify that more once we get to the point where we know we're rolling out.

But we'll see some cost impact next fiscal year.

Okay.

And then lastly, just a bigger picture question.

One thing we've been hearing about a little bit is automation and kind of new fields, like our auto analyst here talks about automation in terms of self-driving cars.

Also you hear a lot in the restaurant industry in terms of servers or various positions there.

Is that something that you're seeing at all in terms of your add-stops right now, any impact?

Or is it something that could emerge as a headwind in the future, if some of these uniform wearers are taken out of the stock through automation?

I can't tell you that we could -- we've seen a noticeable impact of that.

I'm sure it's happening here and there but we haven't seen a noticeable impact.

I would like to believe that we in North America are very entrepreneurial and we're going to continue to create jobs and replace certain jobs that get automated, and we're going to do our best to put those new jobs into uniform.

We certainly believe that we want to continue to put more and different types of job functions into uniforms, and we're going to continue to work on that.

I think we've been pretty successful over the last handful of years.

And we're going to continue to look for those opportunities.

And I like to bet on the North American entrepreneur to create more jobs, and we're going to put them in uniform.

Sounds good.

That's it for me.

Thanks.

We'll go next to Gary Bisbee with RBC Capital Markets.

Hey, guys.

Good afternoon.

I wondered if you could share with us to help us think about the trending, what the organic revenue growth was for the new segments over the four quarters of last year?

I believe that I can give you a little bit of that, yes.

Let me talk Uniform Rental and Facility Services.

In the first quarter last year it was 8.5%.

In the second quarter it was 8.1%.

In the third quarter it was 7.9%.

And as Paul mentioned, in the fourth quarter it was 6.2%.

Not a whole lot different from what we reported, especially directionally.

From a First Aid and Safety standpoint, 10% even in the first quarter, 13.7% in the second quarter, 10.6% in the third quarter, 8.2% in the fourth quarter.

From an All Other standpoint, it was 0.8% in the first quarter.

It was negative 0.5% in the second quarter.

3.6% in the third quarter, 3.8% in the fourth quarter.

And you can kind of see there a little bit of the bumpiness that we've talked about in that Direct Sale business.

And then I don't think you gave us that, any color on the Other in the segment commentary.

What was the organic growth this quarter for the (multiple speakers)

Oh I'm sorry.

It was 4.9%.

Okay.

Thank you.

And then is there any more clarity you can provide or directional commentary on what the after-tax proceeds from the Shred-It sale is going to be, or how we should think about taxes?

I would say that, so you can think about the -- let's go to the midpoint of the range that Paul gave of $575 million in proceeds.

Now, one thing to keep in mind is some of those proceeds will drag out a little bit with kind of the customary hold-backs.

But let's go to the midpoint of that number.

You will see on the balance sheet that there's an asset held for sale of $194,275.

That is our book value.

The difference between the proceeds and that book value is a gain on which we'll have a tax of 37.3%.

In addition to that, on the balance sheet there's a liability held for sale of $78,457, and that essentially is a deferred tax item because we did not pay any tax on last year's gain at the time of that transaction, nor did we pay tax on the dividend that occurred in May.

And so when we pay taxes, we'll have a little bit of a catch-up because of that deferred liability.

I would expect that as Paul said, we'll see -- we expect that to close in the fourth quarter of this calendar year.

I would expect that if that happens, we'll pay those taxes in the first calendar quarter of next year.

Great.

Okay.

And those taxes, I guess, would they flow through discontinued operations because that's where the gain is?

It's built into our tax rate.

And so you'll see essentially a net income that is the after-tax gain.

Got you.

Okay.

All right.

Great.

That's helpful.

And probably not, but any thoughts on plans for the proceeds?

I know last time you got the first -- there was a special dividend provided.

Any thought on doing that again?

We want to see that close first.

Our Board will certainly have that on their agenda and we'll be talking about it, but we need to see that close before we commit to spending it.

Okay.

And then one clean-up one.

What was the buyback number of shares in the quarter versus early in the second quarter?

I think you lumped them together.

Is that off-hand?

I don't -- Gary, I don't have that in my fingertips in terms of the -- we did buy some shares in September.

I don't have that at my fingertips in terms of the first quarter only.

That's fine.

That's fine, don't worry about it.

Then just one bigger picture question.

I think you've been asked this in a different way earlier, but FY15 was the second year in a row where you pushed out planned capacity additions that you'd talked about at the beginning of the year.

I guess I just wanted to understand, and once or twice you commented that permitting and things like that was part of the issue.

How is utilization across the entire network?

And do you have markets today that aren't growing because you're so short on capacity, or was that really, those additions you've talked about and delayed, is that more sort of giving you the capacity to grow for several more years?

Thanks.

There certainly are those logistical issues of finding the right land, getting the permitting done, and then actually building the building.

We have -- we certainly do have some markets that have capacity that's getting tight.

It's not preventing us from growing, but we're getting close in some of those markets and we do need to add some capacity.

And our expectation is that we'll do that towards the back end of this year.

But it's not preventing us from growing.

Okay.

Great.

Thank you very much.

Okay.

We'll go next to John Healy with Northcoast Research.

Thanks.

Mike, I wanted to see if you could give us a little bit more color about performance of the Texas and the Canadian regions.

You've been upfront about the oil-and-gas and the mining exposure.

If you just look at those geographies, beyond just the vertical they serve but think about the state of the country, how do the growth rates of those two markets look compared to what you guys are reporting for the rest of your business?

John, I honestly, I don't have that at my fingertips, and I don't think I'd like to give that level of detail out, just for competitive reasons.

But certainly in Texas and Canada, in West Virginia, there are a lot of oil, gas and mining customers, and those are the hardest hit areas.

We are not shrinking in any of those areas.

We're still growing.

And certainly not at the same pace as the rest of the country, but I don't have a number to share with you.

I can understand that.

But I guess what I was hoping to get at was just kind of the spillover effect from the oil-and-gas specific sectors into other areas of your business within those states.

I'm curious to get your thoughts on how much contagion did you see in those markets?

Was it worse than you thought?

Is it still to be felt?

I'm trying to understand the spillover factor.

We talked a lot last year about that oil-and-gas being 2% to 3% of our total revenue.

That sector has gotten hit pretty hard.

I would say that while that sector has been hit hard, and maybe a little harder than we would have expected, we haven't seen the spillover to be that much more significant.

And really not any more significant than we would have expected throughout the course of the last year.

I think it has been fairly connected to that energy sector, but we've been able to grow quite well despite that.

And so we don't see a lot of spillover.

Okay.

And then I wanted to ask on the M&A front, clearly after organic growth that's your biggest priority.

I think we're all pretty familiar with what's available to you in terms of asset potential on the uniform side.

Could you talk a little more about the First Aid and Safety?

I wasn't that familiar with ZEE Medical before the acquisition.

Are there a lot of kind of what I would say these mid-size operators out there that would make sense, or what's the environment like for those types of assets?

What's the landscape like there?

There are some.

There are some small independent opportunities that could be out there.

ZEE did have a franchise network, and so there are some opportunities there at the right value.

I would say there are not a lot of other large players.

When we think about that business, the competition is coming from those smaller players, but also the do-it-yourselfers, the Grangers, the people going down to Walmart or Sam's Club.

So I would say that the M&A, as the business exists today, is likely going to be smaller tuck-in opportunities.

Okay.

And then just lastly, I might have missed it so I apologize, but the Shred-It move, when do you expect that to close?

Have you guys put a month out there?

We've said in the fourth quarter of the calendar year.

Okay, great.

Thank you.

We'll go next to Jason Rogers with Great Lakes Review.

Yes.

I wondered if you could give the annual sales figure for ZEE Medical, as well as sales by geography and perhaps how their margins compare to your First Aid and Safety Business?

Thanks.

Well, the annual revenues, as we mentioned in our press release, are about -- we would expect $110 million to $120 million.

Because we'll own ZEE for 10 months this year, we are expecting $90 million to $100 million.

I don't have at my fingertips the revenue by geography.

I will tell you that our margins are -- in the Cintas legacy First Aid business are better than ZEE Medical, but we've got a lot of integration to do and we want to see those things improve.

I'm not ready to quantify a synergy opportunity yet because I want to see more of the integration happen.

(Technical difficulties) Okay thanks.

We have no more questions at this time.

Well, thank you again for joining us tonight.

And we look forward to speaking with you again at the end of our second quarter.

And we'll issue our second-quarter earnings in late December.

Thank you.

That does conclude today's conference.

We thank you for your participation.