信達思 (CTAS) 2017 Q1 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead sir.

Thank you for joining us tonight.

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

We will discuss our first quarter results for FY17.

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

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation from 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.

We are pleased to report first-quarter revenue of $1.294 billion, an increase of 7.9% from the prior year first quarter.

Organic revenue growth, which adjusts for the impact of acquisitions and foreign currency exchange rate fluctuations, was 5.7%.

First quarter operating income was $207 million, an increase of 11.6% over last year's first quarter.

Operating margin improved to 16% of revenue compared to an operating margin of 15.5% in the prior fiscal year.

Uniform Rental and Facility Services segment led the way with an operating margin of 18.5%, a 90 basis point expansion from the prior year.

Net income from continuing operations for the first quarter of FY17 was $138 million compared to $106 million in the prior year, an increase of 30%.

Net income from continuing operations as a percent of revenue was 10.7% compared to 8.9% of revenue in last fiscal year's first quarter.

Earnings per diluted share or EPS from continuing operations for the first quarter were $1.26 versus $0.93 for the first quarter of last year.

First quarter EPS from continuing operations increased 35.5% over the prior year.

During the first quarter of FY17, Accounting Standards Update 2016-09 entitled Improvements To Employee Share-Based Payment Accounting was adopted.

Under ASU 2016-09, excess tax benefits and efficiencies associated with employee share-based payments are no longer recognized as additional paid in capital on a balance sheet, but instead recognized directly to income tax expense or benefit in the income statement in the reporting period in which they occur.

Other financial statement items impacted include share-based compensation expense and the computation of fully diluted shares outstanding.

The first quarter of FY17 net benefit to EPS from the adoption of ASU 2016-09 was $0.14, consisting of a reduction of income tax expense of $0.16, partially offset by a $0.01 negative impact from additional employee share-based compensation expense, reducing operating income.

And a $0.01 negative impact from an increase in the number of diluted shares outstanding.

Also note that our first quarter of FY17 operating income includes almost $3 million of transaction expenses related to our recently announced agreement to acquire G&K Services.

The impacts of adopting ASU 2016-09 and the G&K transaction expenses make year over year comparison somewhat challenging, so I want to provide some figures to help you better understand first quarter performance.

Excluding these impacts, operating margin for the first quarter of FY17 was 16.3%, an increase of 80 basis points from the prior year period.

Net income from continuing operations was $125 million and EPS was $1.14.

The increase in net income and EPS over prior year periods, excluding the impacts of ASU 2016-09 and G&K transaction costs, was 17.7% and 22.6%, respectively.

As our CEO Scott Farmer stated in today's earnings release, this strong start to the fiscal year positions us for another year of record-breaking results.

As a result of our first quarter results, we're updating our annual guidance.

We expect FY17 revenue to be in the range of $5.160 billion to $5.225 billion, and FY17 EPS from continuing operations to be in the range of $4.55 to $4.63.

This guidance does not include any potential deterioration in the US economy, future share buybacks or any future financial impact from our acquisition of G&K, including any transaction expenses.

It does include the impact of one less workday in FY17 compared to FY16.

It also assumes a negative impact in the remaining quarters of FY17 from the adoption of ASU 2016-09 such that we expect to end FY17 with an estimated net benefit to EPS of $0.07.

Again, please note that the net benefit to EPS from ASU 2016-09 in the first quarter of $0.14 is expected to be only a $0.07 benefit for the full year as the impacts are negative in the second, third and fourth quarters of the year.

Before I turn the call over to Paul, I'd like to provide a brief update on our acquisition of G&K.

We remain excited about this opportunity and a long-term value creation for Cintas, its employee partners and its shareholders.

When we announced the transaction in August, we indicated that the merger was subject to approval by G&K shareholders, regulatory clearances in both the US and Canada, and other customary closing conditions.

We and G&K have begun the process for satisfying these closing conditions, and at this stage we don't expect the closing timeline to change materially from what we previously disclosed.

In order to avoid creating speculation, we will not be providing any additional commentary on the process.

We will, however, update the market as appropriate.

I will now turn the call over to Paul for additional information.

Thank you, Mike.

First, please note that our FY17 contains one less work day than in FY16.

It is the third quarter of FY17 that has one less day than the prior year quarter.

We estimate that this will negatively impact FY17 total revenue growth by about 40 to 50 basis points and operating margin by approximately 10 to 15 basis points in comparison to FY16.

As Mike stated, total revenue increased organically by 5.7% in the first quarter.

This solid growth rate continues to be driven largely by new business wins, penetration of existing customers with more products and services, and strong customer retention.

Total company gross margin was 45.1% for the first quarter of this fiscal year compared to 43.7% last year.

We have two reportable operating segments, Uniform Rental and Facility Services and First Aid and Safety Services.

The remainder of our business is included in All Other.

All Other consists primarily of fire protection services and our direct sale business.

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

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 $1 billion, an increase of 6.5% compared to last year's first quarter.

Excluding the impact of foreign currency exchange rate changes, and acquisitions, organic growth was 5.9%.

We continue to see the impact of headcount reductions in the oil, gas and coal industries.

We estimate that the resulting decrease in revenue from affected customers lowered our organic growth rate by about 110 basis points in the first quarter.

Our Uniform Rental and Facility Services segment gross margin was 45.9% for the first quarter, an increase of 120 basis points from 44.7% in last year's first quarter.

Energy-related costs were 30 basis points lower than in last year's first quarter.

However, job losses previously mentioned in oil, gas and coal negatively impacted this segment's current year first quarter operating margin by about 55 basis points.

So on a net basis, the low price of oil had a negative impact on our Uniform Rental and Facility Services operating margin of 25 basis points, because the benefit of lower prices at the pump for our fleet of trucks was more than offset by the negative impact to operating margin resulting from headcount reductions in our oil, gas and coal customers.

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

This segment's revenue for the first quarter was $125 million, which was 25% higher than last year's first quarter.

Total growth benefited from the ZEE Medical acquisition.

On an organic basis, growth for the segment was 5.4%.

Our legacy first aid business continues to grow strongly.

The reduction in overall segment organic growth is due to the continued assimilation of the ZEE Medical business.

Route consolidation and optimization continued in the first quarter as expected.

These efforts have a short term impact to growth rates as we onboard and goodwill the acquired customers and train the SSRs on our products, services and processes.

Our integration game plan remains on track and we expect to end this fiscal year with stronger growth rates.

This segment's gross margin was 45.8% in the first quarter compared to 42.3% in the prior year period, an increase of 350 basis points.

Also, we're pleased to note that gross margin improved on a sequential basis by 290 basis points.

Our margins are benefiting from improved sourcing and from the leveraging of existing warehouses which are among the synergies we anticipated realizing.

Finally, now that we are nearing completion of consolidation and route optimization, we have added sales routes.

ZEE Medical do not have a dedicated sales force, as the business previously relied only upon SSRs to grow the business.

The added sales reps will help us grow the acquired customer base by penetrating with our broad range of products and services.

Our Fire Protection Services and Direct Sale businesses are reported in the All Other category.

All other revenue was $170 million, an increase of 5.4% compared to last year's first quarter.

Organic growth was 5.2%.

All Other gross margin was 40.1% for the first quarter, an increase of 150 basis points from 38.6% in last year's first quarter.

Regarding selling and general and administrative expenses, total Company SG&A was 28.9% as a percentage of first quarter revenue compared to a total Company SG&A in last year's first quarter of 28.2%.

Of the 70 basis point increase in SG&A year-over-year, about 10 basis points is due to additional employee share-based compensation expense resulting from the adoption of ASU 2016-09.

Another 10 basis points consists of SAP costs related to the piloted operations.

In addition, medical expenses as a percentage of revenue were 20 basis points higher in this year's first quarter.

Finally, SG&A was impacted by the investment in first aid sales reps previously mentioned.

On June 1, $250 million of debt with a coupon of 2.85% matured.

We refinanced this debt in the form of commercial paper.

By staying short in commercial paper we were able to reduce interest expense in the first quarter of FY17 by about $2 million and avoid a headwind that would result from financing with long term debt.

Our effective tax rate on continuing operations for the first quarter was 28.4% compared to 37.2% for last year's first quarter.

The decrease in the effective tax rate year-over-year is attributable to the adoption of ASU 2016-09.

However, as Mike stated earlier, we estimate a negative impact to EPS in the remaining quarters of FY17 from this accounting standard.

We expect the annual effective tax rate for FY17 to be about 34.7%.

Our cash and marketable securities were $163 million as of August 31, a decrease of $46 million from the balance as of May 31.

Cash flow from operating activities increased 10% from the prior year period, and when excluding last year's positive impact from document management transactions, it increased 13%.

Uses of cash in the quarter included CapEx and repayment of debt.

Capital expenditures for the first quarter were $78 million.

Our CapEx by operating segment was as follows.

$67 million in Uniform Rental and Facility Services, $8 million in First Aid and Safety, and $3 million in All Other.

We expect CapEx for FY17 to be in the range of $280 million to $320 million.

This range includes about $40 million of CapEx related to our SAP implementation.

Regarding SAP, we continue with our pilot process which has progressed as expected.

We believe that we will begin depreciating the project around December.

Our FY17 will include about a half a year of depreciation.

It will also include about a half a year of system maintenance costs.

The conversion of our hundreds of operations to SAP has begun, and will extend through FY18.

Training costs, which are expensed when incurred as opposed to amortized over time, will exist in both FY17 and FY18.

As is customary in such a conversion, we expect to have other additional costs in 2017 and 2018 as a result of inefficiencies until the old system is completely off line.

We are pleased with the conversion and based upon our experience to date, we're updating our SAP impact to guidance.

We now estimate that the investment in SAP will result in about $25 million to $30 million of expense in FY17 and $40 million to $45 million of expense in FY18.

The estimated FY17 expenses are included in our 2017 guidance.

That concludes our prepared remarks.

Before opening it up for questions, I'd like to reiterate Mike's earlier statements about the G&K acquisition process.

In order to avoid speculation, will not provide any additional commentary on that process.

We will update the market, however, as appropriate.

And with that, we're happy to answer your questions.

(Operator Instructions)

Toni Kaplan, Morgan Stanley.

Hello, good afternoon.

It looks like you are raising your guidance by about $0.19 at the midpoint, and you mentioned the $0.07 benefit from the tax change.

Could you just give a little bit of color on the main drivers behind the rest of the increase?

Is it more margin driven?

I saw uniform margins were extremely strong this quarter, so just wanted to get a little color on that -- the remainder of the increase in guidance?

Sure.

So the -- there are a couple of pieces.

First of all, as you indicated, the ASU 2016-09 is about $0.07.

That is, again, not simply a tax change, but as the guidance change it affects stock, comp, shares and taxes.

So about $0.07 is from there.

Our share count is a little bit lower than we anticipated, and Paul, maybe you can give the share count that we're going to model.

We're modeling $108 million diluted weighted average shares outstanding.

And so keeping in mind that you will have to take into account participating securities when you calculate EPS, but that's a little bit lower than we expected.

So that has some impact.

There's a little bit of an impact when we think about SAP, and then there is certainly -- margins got off to a good start and then we are very pleased with that first quarter performance.

So those are a little bit of the different pieces.

Okay, fantastic.

And then, I know you mentioned you don't want to talk about the G&K process, so if you don't want to answer this that's fine, but just wanted to ask in terms of -- assuming the deal were to close, how high would you expect retention of G&K's workforce in light of the integration?

Do you have specific retention targets for the workforce and/or for their revenue?

If that's a little too close to the process, I understand.

We certainly have some thoughts on synergy that we gave when we announced the transaction.

This is a fairly large merger for us, and we talked about a couple of the benefits being that in certain markets we need capacity.

And G&K has some capacity that we certainly can take advantage of that may allow us to defer some building of plants.

We also look forward to the -- when we incorporate their route structure into ours, we expect improved route density.

So improvements in terms of the fuel usage and certainly less time driving from customer to customer.

In order to do those things, we need a lot of people from G&K.

So while I don't have any specific numbers to share, we won't be able to get into that level of detail until we closed the transaction, we certainly anticipate that many of those employees of G&K will come over to become Cintas partners.

Perfect, thank you.

Gary Bisbee, RBC Capital Markets.

Hi, this is Jay Hanna on the line for Gary today.

Regarding gross margins, they seemed to expand pretty dramatically across all the segments, particularly within first aid?

Could you just explain what some of the main contributors were to this expansion?

Yes.

First aid, Jay, as we noted in the script, we're excited to finally see some of the synergy that we banked on.

They come from many different areas.

For example, one is in sourcing.

Our ability to source the various products is much better with our scale then with ZEE.

We expected to be able to have better ability to purchase, and we are seeing those benefits and cost of goods which translates into that gross margin.

We're also seeing benefits from distribution.

They had five distribution centers, we've closed almost all of them.

So we are leveraging our fixed cost structure, our distribution supply chain for that.

And then another example is, we mentioned warehousing in the script, which is the locations, the physical operations that we run the routes of.

As we had talked about previously, with our scale, even though this is a sizable acquisition for the first aid segment, it's largely a tuck in.

And by tucking this business into those existing locations, we were starting to realize those synergies.

And that's really what's pushing those margins forward, as I said, we expected them.

Great.

And then lastly, G&K released a proxy couple of weeks ago which included some of their internal forecasts which included sales growth at 6% plus, and EBITDA growth in the low double-digits.

Would you be willing to comment on these?

Are they similar to your expectations going forward?

We don't have any comment on those.

Those are G&K numbers, and we will let their proxy speak for itself.

All right, thank you.

Manav Panaik, Barclays.

This is actually Greg calling on for Manav.

I just want to talk a little bit more about the part of the guidance change that isn't the tax change.

The SAP, and specifically what's driving there.

And also curious, if the fact that you're waiting on this G&K deal impacts how you're thinking about hiring for Cintas standalone and if there is any impact there in guidance?

So let me make sure I understand the question.

Your first question -- your first part of the question was, more color on the SAP?

No, the question is on the part of the guidance change that isn't related to SAP or the tax?

Okay.

When we think about the guidance that we provided, it excludes any impact from G&K, and that would be any benefits, any synergies, any transaction costs, et cetera.

So the guidance that we are providing is based on Cintas' performance.

Okay.

My question was more along the lines of, does that -- has it impacted how you think about hiring new sales force or what have you, because you know or you are thinking that G&K will come online?

Well, I would say, Greg, that we certainly have thoughts about how the integration will occur once the transaction closes, but we need to close the transaction first.

Okay.

Fair enough.

And then I was hoping for a little more color on the lower growth in first aid.

What are the moving pieces there?

Are you exiting less profitable parts of the medical, or any color to help us with what's going on there?

Greg, I don't think there's anything much else to add.

This is, in the scheme of things for that segment, again, is a significant chunk of the segment it added one-third of the volume.

Just think about the math.

With getting to the 5% organic growth rate, two-thirds of that business, the legacy business, is growing strongly.

The other, the acquired business, the focus has been on integration and goodwill and training those SSRs.

You have to get the stability and the customer base, establish that foundation.

It takes time to build those relationships before you can make the emphasis on growth.

And so, there hasn't been much growth in that acquired business, which is as expected.

But as we mentioned previously, we do intend to grow it, and we are implementing -- not implementing, but we have hired some sales reps, getting them trained, because we are at the end of the -- near the end of the consolidation, the integration and the optimization process.

So that these sales reps that will be able to hit the ground running and start penetrating with the other products and services that we have in first aid that ZEE did not previously have.

Greg, this is a bit of a unique opportunity for us in that, I think Paul mentioned in his opening remarks that their drivers, or SSRs, they were the sellers of that organization.

And while we're going through the system integration, it doesn't make a lot of sense to bring on salespeople to try to sell product on a different system and then retrain them on our system.

And so, this is a logical progression, and a logical investment for this particular acquisition.

That's very helpful, thank you.

Hamzah Mazari, Macquarie Capital.

Good afternoon, thank you.

Just had a question around adding dedicated sales reps that you highlighted on ZEE medical.

Should we expect other businesses aside from uniform to have direct sales reps too, as those businesses either gain critical mass, or is this more differentiated?

How should we think about that going forward?

Sure.

You should think about this first aid investment in salespeople as a unique example.

In our other businesses, and even in the first aid business, we are generally investing in the business every single quarter.

So in other words, we are adding routes for growth, we're adding salespeople, we're investing in all of our businesses, and it happens at generally a fairly steady pace.

This is a unique example, where now that we are on the system platform, it makes all kinds of sense to add the investment.

And we will start -- our expectation is that we will start to see productivity as we move throughout the year.

Great.

Just to follow up, if you could just update us pro forma on your capital structure post-G&K and then how to think about capital allocation post that deal closing?

Sure.

So we -- our expectation is to pay for that transaction in cash.

So in other words, we will be borrowing with part short-term, part long-term borrowings.

Our goal is to -- that will certainly get us to leverage levels that are not typical for us, and our goal over the next two to three years is to bring that leverage level back in line with where we have historically been and that is generally at about a 2 times EBITDA.

Great, thank you so much.

Sure.

Dan Dolev, Nomura Securities.

Hello, guys.

Thank you for taking my question.

If I go back to last year at the same time, you also raised your revenue guidance quite significantly.

I think by about 220 basis points?

What should we read into the no increase to the revenue guidance?

Thanks.

Last year's first quarter revenue guidance was increased quite a bit because of the ZEE acquisition.

We closed that deal on August 1 of last year, and that was the primary reason for the change.

Got it.

So there's nothing to be read into that this year?

I think our raising of the low end of the guidance today is a bit of a reflection that we feel better today than we did 60 days ago about the revenue performance.

Generally it's in line with where we expected to be, but maybe slightly better.

So I don't think there's anything to read into, but I would say this, Dan, we -- let me maybe talk a little bit about the economy and thinking in terms of -- it's been, it remains a challenging environment.

And I think I called it stable without momentum in July, and I would say the same thing today.

If you look at the last three quarters of GDP in the US, the average is slightly under 1%.

The three quarters preceding our first quarter last year, that average was 2.3%.

And so, we've certainly seen a bit more of a challenging environment.

But having said that, we are operating at a high level, we believe.

And that organic growth of 5.7% in total is a reflection that even in a bit of a more challenging environment today than a year ago, we're still growing at pretty good levels.

Understood, and how do you feel about this growth rate throughout the rest of the year?

Well, I think our guidance would suggest that we feel pretty good about it.

Thank you so much.

Nate Brochmann, William Blair.

Good evening, gentlemen.

So just to follow up on that a little bit, Mike.

If we kind of think about the add stop metric, I would assume that is still somewhat neutral if we exclude the oil and gas folks, in terms of that end market.

And wonder if you could comment on that?

And two, when you think about the oil and gas sector, are you starting to see the incremental negative decline plateau a little bit?

So as we think about over the next 12 months, that should be a little bit more of a stable impact rather than a drag?

Our hope is that we have seen the bottom.

I know we have hoped that would've been the case the last several quarters.

But I would suggest that topline impact, negative impact is somewhere in the 80 basis points to 100 basis points for the fiscal year.

That's a little higher than we talked about in July, but a little bit better than our first quarter experience.

That said, we also talked a little bit about the prices at the pump getting a little bit higher as the year goes on, and I would suggest that based on our first quarter experience, might not be as high as we thought it to be originally.

So let me talk two things, first of all - yes, the revenue we expect that the impact will lessen as we go through the year.

From a net standpoint, when you think about prices at the pump plus the negative impact of the revenue, I would suggest that it's about the same as we thought it to be in July.

One last point, if I go back to Dan's question about revenue for the rest of the year.

One thing to keep in mind is, in the first quarter we now have lapped that ZEE acquisition.

So now our future growth, our future revenue growth for the rest of the year will not have the revenue, the acquisition benefit going forward from that ZEE deal.

Nate, to answer your question specifically about add stops.

You are correct that in that metric outside of the FRC related to the energy customers, there's nothing really noteworthy.

The metric is slightly positive, but it typically is positive this time of the year.

We have some seasonal impacts with schools and other summer-type businesses coming on in June.

It is less positive than a year ago, however.

Okay.

That's helpful, I appreciate that.

And then, in terms of the pricing environment, obviously I know it's always competitive out there and a little bit more competitive on renewals rather than new wins, but anything at all in terms of any changes that you have seen, particularly maybe after or since you've announced the acquisition?

No, Nate.

As you said, it's always very competitive.

Nothing remarkable in the environment that indicates any change one way or the other.

Okay.

And then just finally, just one technical question on the ASUs, and not to get too deep into accounting knowledge here, but why, just out of curiosity, why do you get such the big positive benefit in this quarter and then it turns negative the remaining quarters?

And then when we look at next year should the comps be about equal?

What kind of -- obviously I know the underlying number of employees and how well the bonus pulls do and whatever, I'm sure that would have an impact.

But how should we think about that dynamic and why that change?

I think that's a good question, Nate.

We will generally see a bigger impact in our first quarter because our restricted shares that we have generally vest in the first quarter.

We have more stock option exercises just for whatever reason, it's getting into the end of our fiscal year and into our new fiscal year.

So we have more stock option exercises.

In this quarter we also had a nice increase in our stock price.

So when the volatility is created by stock price movement, option exercises, vesting of restricted shares, and we generally have more of that in the first quarter.

As we move through the rest of the year, we generally don't see as many of those exercises and vestings, but we still carry the additional stock comp expense, and we still carry the additional shares created by this new guidance.

So essentially then, the expense outweighs the tax benefit in the upcoming quarters, versus the huge tax benefit in the first quarter?

Is that essentially the way to think about it?

It is.

That is our expectation.

Now as I said, we can't control the stock price and we can't control when options are exercised, necessarily.

And so, there can still be volatility.

But you are correct in the assumption that you just stated.

Okay.

And just one less cleanup thing just to ask, and I think it was something that you had mentioned before.

But now with the new rule that is going into place in terms of the overtime and where the thresholds are, I assume that you have thought about that at this point and are pretty comfortable that the impact from that will be fairly minimal, if anything?

We have thought about that, and yes, we don't see a significant impact to us.

Okay, great.

Thank you for the time.

Sure.

(Operator Instructions)

George Tong, Piper Jaffray.

Thank you for taking my questions.

Can you discuss any new findings from your due diligence of G&K that either confirm or change your expectations for total synergies that you previously guided to $130 million to $140 million?

And any incremental color on how this will split between revenue and cost synergies?

George, we don't have any new commentary to add on that process at all.

Okay.

And then, related to the -- your comment on adding to ZEE Medical's sales force.

Can you elaborate on how much you're adding to the sales force and how much of a lift to revenue performance these additions will drive?

George, we don't like to get into specifics about sales, expenses or accounts.

But we can tell you that our expectations are incorporated into our guidance.

Okay.

Got it.

And then lastly, can you discuss how you expect your route efficiency on a standalone Cintas basis to evolve over the next four quarters?

On a Cintas standalone basis, I would say, I think I mentioned a little bit ago that we are constantly investing in the business, and one of those investments is to add routes to allow for continued growth in all of our businesses, and we will continue to do that.

And when we add those routes, it creates more density and so that means we are having less windshield time.

And so there are certainly some incremental benefits every time we add new routes.

We also expect that the productivity of the -- of our drivers, our SSRs, will improve over time as we add those routes and have more time to spend with our customers.

Great, thank you.

You're welcome.

Sara Gubins, Bank of America.

Thank you.

You lowered the cost hit from SAP this year, but you mentioned that the pilot had been going as expected, so I'm wondering, is it that you expect lower cost related to SAP specifically, or are you finding cost savings elsewhere to help offset that what you were originally expecting?

I think I heard you properly.

If I am missing the question please let me know.

But to answer your question, we are finding that we are just simply spending less on the integration so far than initially expected.

It doesn't really have to do with offsets, it's more about the specific SAP integration.

Okay, great.

And then, hopefully you can hear me, could you comment on expected wage costs and any trends you might be seeing there?

We are seeing, in certain specific markets there are more pressures than in others.

We operate in many markets around the US and Canada, and I would say that we are not seeing specific themes nationally.

But there certainly are some markets here and there that are more -- that are tighter than others.

We deal with those all the time.

That's not something that is particularly new.

And it's our job to execute and to get the right people at the right places and times.

Okay, thank you.

(Operator Instructions)

John Healy, Northcoast Research.

Thank you.

Mike, I wanted to ask you a question, just from a topline perspective.

I think it's pretty impressive as you continue to put up this kind of organic growth this late into what could arguably be described as late into an economic cycle.

Is there anything, when you look at the business that maybe we don't get by just looking at the organic growth rate?

Do you see a segment of the marketplace, whether it's healthcare or hospitality or some sort of end market that is just doing something that's exceptional as well as just from a regional performance when you look at the Company today?

I believe the West Coast had always been a tougher region for all the uniform companies, but is there anything that's driving this growth rate that would surprise us or not be obvious to us?

I think it's the things that we've talked about in the past, John.

And the exciting thing to us is, it's not necessarily vertical driven, it's really about the innovative products and services that we've been able to create over the last several numbers of years, and it's about the great execution by our partners.

We believe that we can add value to any business in the US and Canada with our products and services.

And we're going about doing that, and that is vertical-agnostic.

We believe every kind of business is a potential customer, and we are targeting them as such.

So we want to continue to look for new opportunities to sell our, for example, our signature series hygiene products.

We want to look for new innovative solutions and ways to sell our Carhartt products, for our scrub rental programs, for our chemical cleaning solutions.

We've got a lot of innovative products and services that we've created, and they can really add value to lots of different kinds of businesses.

And I think it's that -- is the execution by our partners, and it's a great product line.

Got you, and I want ask on the acquisition of G&K.

You talked about the $130 million to $140 million in synergies, is that a big picture number?

And would you expect the synergies to be less than that post purchase accounting?

I would say that when we announced in August, we talked about the $130 million to another $140 million in annual synergies.

That is looking at their cost structure primarily, and there certainly are things that will, let's say, subtract from that.

Like the interest cost related to the financing, like the amortization of intangibles.

So that's a bit of a big picture -- what are the synergies, and we would not we did not include the interest expense and the intangible amortization as a net against those.

Was there an assumption for the inventory, the garments in the stock rooms and things like that?

We have thoughts on that.

We didn't share any in August and I'm not ready to do that today.

We need to get the deal closed, and that way we can dive into more the details and really get more specific.

Makes sense.

Thank you.

(Operator Instructions)

Scott Schneeberger, Oppenheimer.

Thanks, good afternoon.

A couple clarification questions first.

With regard to the SAP number down a little bit, this was asked earlier, but is it going to be pushed out, or is it just the less on integration spend?

Why I'm asking is I'm wondering if you're holding things up waiting for the closing of the G&K acquisition, or it's just pure integration savings?

I think it's just that we're spending less on the integration in the early periods that lead us to think we may be more efficient over the course of the integration.

All right, thanks.

And then a real quickie, on the accounting change you mentioned that fiscal first quarter is typically going to be the big one, and obviously its going to be a headwind in the coming three.

In our modeling, should we just equal weight the next three quarters, or is there any seasonality to that we should think about?

I think that's a reasonable assumption, to equal weight.

All right, thanks.

And then, obviously we have the election coming up, so I will be that guy and ask the question, but it sounds like infrastructure is probably going to be strong under either candidate.

Thoughts on that, and then trade maybe not so much.

I'm not sure that would have an impact, but if you could address those two if meaningful, or anything else you think are resulting from what you have heard thus far.

Thanks.

I think it's -- I would say that it's a little too unclear for us to get specific on any kind of future benefits.

We will certainly operate in whatever environment occurs after the election, and it's too early to tell and too early to try to build any kind of specific assumption.

Okay, thank you.

With no additional questions in the queue, I will turn things back over to our speakers for any additional or closing remarks.

Thank you very much for joining us tonight.

We appreciate it.

We will issue our second quarter earnings in the end of December, and we look forward to speaking with you again at that time.

Thank you.

Ladies and gentlemen, again, that does conclude today's conference.

Thank you all again for your participation.