信達思 (CTAS) 2018 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'd like to turn the conference over to Mr. Mike Hansen, Senior Vice President of Finance and Chief Financial Officer.

Please go ahead.

Good evening, and thank you for joining us.

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

We will discuss our first quarter results for fiscal 2018.

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 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.

Before getting into our financial results, I want to take this opportunity to recognize our employees, whom we call partners, impacted by the major hurricanes striking Texas, Florida, Puerto Rico and surrounding areas.

Many of our partners suffered significant losses in these natural disasters.

Our thoughts and prayers go out to them.

In addition, we thank them for their dedication to the company as they continue to tend to the business and needs of our customers despite the impact to their personal lives.

Finally, we are grateful to the many Cintas partners who have helped their fellow partners in need via donations of money, clothing, personal care and time.

In true Cintas spirit, you were ready and eager to help.

We are pleased to report that revenue for the first quarter, which ended August 31, was $1,611,000,000, an increase of 27.2% over last year's first quarter.

The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 8.3%.

New business wins, penetration of existing customers with more products and services and customer retention remains strong.

The organic growth rate for the Uniform Rental and Facility Services segment was 8.1%, and the organic growth rate of the First Aid and Safety Services segment was 11.9%.

First quarter gross margin improved 40 basis points to 45.9% from 45.5% last year.

This is our 16th consecutive quarter of year-over-year gross margin improvement.

We believe that this quarter's increase in gross margin over prior year is particularly noteworthy because it was realized despite the headwind of adding the G&K business at a considerably lower gross margin.

The Cintas legacy gross margins continue to expand, and the G&K gross margins will, too, as we realize the acquisition synergies.

Operating income for the first quarter of $249 million increased 22.1% from last year's first quarter.

Fiscal '18 first quarter operating income was negatively impacted by $4 million of transaction and integration expenses related to the G&K Services acquisition compared to about $3 million of such expenses in the first quarter of last year.

Excluding G&K transaction and integration expenses, operating income increased 22.4% to a margin of 15.7% versus 16.3% last year.

The 60 basis point decrease in the operating margin is due to an increase in selling and administrative expenses as a percent of revenue.

Intangible asset amortization expense increased about 75 basis points over last year's first quarter due to the G&K acquisition.

Another year-over-year impact is a 20 basis point increase in depreciation expense because of SAP.

Net income and earnings per diluted share or EPS from continuing operations for the first quarter of fiscal '18 were $161 million and $1.45, respectively.

EPS was negatively impacted by transaction and integration expenses related to the G&K acquisition of $0.03 and $0.02 in the first quarters of fiscal '18 and fiscal '17, respectively.

Excluding these expenses, EPS was $1.48 versus $1.26, a 17.5% increase.

As a result of our first quarter results, we are increasing our annual guidance for fiscal 2018.

We now expect revenue to be in the range of $6,325,000,000 to $6,400,000,000, and fiscal '18 EPS from continuing operations to be in the range of $5.30 to $5.38.

Our guidance excludes any future G&K transaction and integration expenses.

The guidance does, however, include our preliminary estimates of the negative impact from the hurricanes.

Based on our early assessment, we estimate fiscal '18 revenue to be reduced by approximately $10 million to $15 million, and EPS to be reduced by about $0.05 to $0.08.

These estimates are subject to change as more information becomes available.

Again, this EPS guidance does not include any future G&K transaction and integration expenses.

However, we do expect that these expenses will be incurred in the remainder of fiscal '18 as we continue to integrate this significant acquisition.

We estimate that these expenses will range from $50 million to $65 million for the full fiscal year.

As our Chairman and CEO, Scott Farmer, was quoted in today's earnings press release, the integration of G&K continues to proceed as expected.

We are pleased with our performance.

We remain on track to meet the acquisition's financial and nonfinancial objectives.

Our guidance includes the following assumptions related to the acquired G&K business: revenue to be in the range of $885 million to $905 million compared to a prior year amount run rate of about $965 million; synergies of approximately $50 million to $55 million; and an EPS contribution of $0.15 to $0.17.

I'll now turn the call over to Paul for additional details.

Thank you, Mike.

First, please note that our fiscal year 2018 contains the same number of workdays per quarter as fiscal year 2017.

The number of workdays by quarter within the fiscal year 2018 do differ, however, and are as follows: 66 in Q1, 65 in Q2, 64 in Q3, and 66 in Q4.

One less workday in a quarter has a negative impact of approximately 50 basis points on operating margin due to many large expenses, including rental material cost, depreciation expense and amortization expense being determined on a monthly basis instead of a workday basis.

We have 2 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 of Fire Protection Services and our uniform 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.

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

Uniform Rental and Facility Services revenue was $1,311,000,000, an increase of 31.9% compared to last year's first quarter.

Excluding the impact of acquisitions and foreign currency exchange rate changes, the organic growth rate was 8.1%.

Our Uniform Rental and Facility Services segment gross margin was 46.1% for the first quarter, an increase of 10 basis points from 46.0% in last year's first quarter.

As Mike touched upon earlier, there was more to the performance here than meets the eye.

Last quarter, when we were still able to separate the performance of the G&K business from the legacy Cintas business, we noted that the G&K gross margin was 40.2%.

Also, when excluding the G&K business, last quarter's legacy Cintas Uniform Rental and Facility Services business gross margin improved 100 basis points.

Considering the fact that we have only just begun to recognize synergies from the acquisition and those synergies realized to date are mostly general and administrative in nature as opposed to benefiting gross margin, gross margin performance is similar in this first quarter as it was in the previous quarter, meaning, excluding the G&K business, there was healthy improvement year-over-year in the gross margin of the legacy Cintas Uniform Rental and Facility Services business.

As previously stated, the G&K gross margin will improve to Cintas legacy levels as we realize the synergies from the acquisition.

For instance, one of the factors resulting in a currently lower G&K gross margin is that energy expense as a percent of revenue is much higher than the Cintas legacy business.

This is the result of the smaller G&K business lacking the route density that the larger Cintas legacy business possesses.

The fuel savings from route density, along with the benefits of reducing redundant capacity, will drive significant improvements in G&K gross margin over time.

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 $140 million, which was 12.6% higher than last year's first quarter.

On an organic basis, the growth rate for the segment was 11.9%.

This segment's gross margin was 47.5% in the first quarter compared to 45.8% in last year's first quarter, an increase of 170 basis points.

Our margins continue to benefit from the realization of ZEE acquisition synergies, including improved sourcing and the leveraging of existing warehouses.

In addition to the strong year-over-year performance, it is exciting to see the improvements to the gross margin percentage from pre-ZEE acquisition levels.

In the quarter before the ZEE acquisition, the fourth quarter of fiscal years 2015, the segment's gross margin was 46.8%.

In the first quarter of fiscal 2018, the margin is 70 basis points higher.

This is due not only to the realization of the ZEE acquisition synergies but also to continued strong execution in both sales and operations that ensures growth in both the top and bottom line.

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

All Other revenue was $159 million, an increase of 7.9% compared to last year's first quarter.

The organic growth rate was 6.3%.

All Other gross margin was 42.5% for the first quarter of this fiscal year compared to 42.1% for last year's first quarter, an increase of 40 basis points.

Uniform Direct Sale business, by its nature, is not the recurring revenue stream that our other businesses are such as Uniform Rental and Facility Services and First Aid.

Therefore, the growth rates are generally low single digit and are subject to volatility such as when we install a multimillion dollar account.

Our Fire business, however, continues to grow at a rapid pace.

The Fire business organic growth rate was just shy of 10%, and operating margins expanded.

Selling and administrative expenses as a percentage of revenue were 30.2% in the first quarter compared to 29.2% in last year's first quarter.

About 75 of the 100 basis point increase is attributable to the amortization expense of the intangible assets established in the purchase price accounting of the G&K acquisition.

Also, SAP expense was up 20 basis points year-over-year.

The prior year first quarter did not include any depreciation expense from SAP because the project was still in the pilot phase.

Our effective tax rate on continuing operations for the first quarter was 26.5% compared to 28.2% for last year's first quarter.

The effective tax rate can fluctuate from quarter-to-quarter based on tax reserve billed and releases relating to discrete items.

We expect the effective tax rate for fiscal 2018 to be about 34%.

Our cash and equivalents balance as of August 31 was $191 million, and we had $21 million of marketable securities as of quarter end.

Cash flow from operating activities in the fiscal 2018 first quarter was $254 million, and free cash flow was $191 million.

Capital expenditures for the first quarter were approximately $62 million.

Our CapEx by operating segment was as follows: $51 million in Uniform Rental and Facility Services, $7 million in First Aid and Safety, and $4 million in All Other.

We expect fiscal year 2018 CapEx to be in the range of $280 million to $320 million.

As of August 31, total debt was $2,841,000,000, consisting of $307 million in short-term debt and $2,534,000,000 of long-term debt.

In the first quarter of fiscal 2018, $293 million of debt was repaid.

At August 31, our leverage was 2.5x debt-to-EBITDA.

We expect our leverage ratio to decrease to approximately 2.0 to 2.2x debt-to-EBITDA at May 31, 2018.

That concludes our prepared remarks.

We are happy to answer your questions.

(Operator Instructions) And we'll take our first question from Gary Bisbee with RBC Capital Markets.

This is actually Jay Hanna on for Gary today.

Just a quick question with regard to the G&K integration costs.

Should we expect these to fall at the low end of the range given the $4 million seen this previous quarter?

And could you give a little more color on what the cadence should be for the remainder of the year?

I'm not ready to say that we should be at the low end of the range.

I think we will be in that range.

The smaller amount in the first quarter is just simply because there's still a lot of heavy lifting to do as it relates to the integration, and I'll give you an example.

While we've made some really good progress on reducing the former corporate headquarters, we're not fully out of that headquarter building yet and we're not able to impair that lease until we're fully out of it.

So that's an example of while we've made quite a bit of progress, there will likely be an impairment charge coming, still, and there -- we have a number of similar examples.

So I would say, we're still going to be somewhere in that range, certainly, given that it was only about $4 million in the first quarter.

It's going to pick up, and I would say that the back half of the year is going to see the bulk of that.

And we'll take our next question from Manav Patnaik from Barclays.

The amount, the dis-synergy assumptions for G&K revenues, it sounds like you lowered that assumption.

Is that correct?

And maybe why?

Well, we changed -- if you're talking about the revenue expectation for the year, we increased that slightly from a range previous of $870 million to $900 million to $885 million to $905 million.

So we did slightly increase the revenue expectation.

And I would say, for the first quarter, we are pretty much right in line where we expected, maybe slightly ahead.

The first quarter revenue was about $236 million.

That was about a 3% decrease from the prior year for that block of business.

As you know, we've talked a lot about that continuing to decrease through this year such that it will probably bottom out in the fourth quarter or the first quarter of fiscal '19.

And so while we are seeing the revenue that we expected, we still believe that it's going to continue to decrease as we start to recover from the absence of new business.

And that will -- again, that decreasing revenue will continue through this fiscal year as evidenced by the guidance that we're giving, $885 million to $905 million.

Got it.

And then just maybe anecdotally, like could you give us some stats in terms of the number of overlapping client facilities and/or routes and such you guys have, and how many of those you've consolidated thus far, et cetera?

Are those fair things to ask for?

Well, let me talk a little bit about first quarter integration activities and that will give you some color.

Our first quarter synergies were about $7 million.

So that's $7 million out of the $50 million to $55 million.

The activities that happened in that first quarter, and I'm not going to give you every single one, but generally speaking, we converted the payroll system as we talked about on our last call.

We converted to the Cintas financial system.

We have made progress on reducing the functions located at the former headquarters, and we have also converted or consolidated a few dozen branches into Cintas locations and 1 processing plant in 2 Cintas locations.

So we have had some -- we've had a lot of activity, much of that coming towards the end of the first quarter where we'll start to see the synergies from those in the last 3 quarters of the year.

I'm not ready to give you any number on how many we expect to eventually consolidate, but maybe I will give you a little bit of color on the integration activities.

This is a -- it's a fairly complex process for us, and our partners are doing a great job of executing so far.

But maybe I'll give you a couple of details of what goes on in one of these integration activities.

It's about a 16-week process, and maybe I'll touch on a couple of areas starting with data.

We need to -- for that location's information, we need to map every item and every product and service from a former product number in the legacy G&K system to the Cintas system.

We need to set up every single G&K legacy customer into the Cintas system.

That means everywhere, everywhere's garments sizes, the number and type of masks that they might have, all other items that they are getting serviced, the pricing related to each customer, wearer, mat, et cetera, any recent activity we need to bring over to know if we have new hires at a customer, if there are recent terminations or any other changes in the services.

And then we've got to run parallel on invoicing data and other data to make sure that it has been loaded properly.

So there's a lot of data work that needs to be done with each and every one of these.

Next area is inventory.

For example, we need to take every garment that we have from the G&K product line and map it or determine what we're going to do with that garment.

Are we going to replace it with a Cintas product or are we going to continue to source that G&K product?

So we've got to map all of those different products and services.

We have to re-barcode every garment that is in service.

So every garment that we have today has a barcode on it that indicates customer route number or wearer number.

So the re-barcoding of that, I'll just give you a couple of numbers.

170,000 customer locations for legacy G&K, with an average of about 10 wearers, with 11 shirts and 11 pants, that's about 37.4 million garments that need to be re-barcoded.

So it is quite the effort.

And again, our team is doing a super job.

And there are other areas that I could go through as well, but I just want to give you a little bit of a sense of the amount of detail as well as the amount of work that's included in each and every one of these consolidations.

And I think we've been doing a great job at that.

And I'll finish with -- one of the other things that we spent quite a bit of time on in this first quarter is doing a lot of mapping and creating a bridge from the legacy G&K system to our SAP system, and that is a big project.

And in fact, we converted our first location to SAP yesterday, and we're certainly excited to see that happen.

And as long as that continues to go well, we'll be ready to add or convert more and more of those locations that are going to remain open.

So we're off to a really good start.

We're right in line with where we expected.

Our partners have done a super job of executing, and we'll provide more detail quarter-to-quarter as we move forward.

And we'll take our next question from Toni Kaplan with Morgan Stanley.

Could you give a little bit more color on the drivers of the First Aid acceleration, and also just the profitability drivers within that segment this quarter as well?

Yes, Toni, this is Paul.

We talked previously about that organic growth rate kind of bottoming out, and that was kind of math associated with that ZEE acquisition.

ZEE being 1/3 of the legacy business not growing, and yet, that legacy business was growing strongly.

That kind of blended out at the bottom to about 3.3% organic growth rate, and we expected it to climb out to historic levels, and we're very pleased that it has.

11.9% is probably a little bit higher than we typically run.

There's probably some easier comps benefiting us, but that's a business that we expect year in and year out to be growing high single digits.

So in terms of the drivers, there's really no silver bullet, no one particular initiative.

It's just a continued execution of the sales force and continuing to sell new programs, penetrating the existing accounts.

Some of the ZEE customers as well will be part of that effort.

And it's a very scalable business.

There's a lot of capacity.

So as we continue to grow that topline, if we can grow it organically at a high single digit rate, it is going to continue to push those margins forward.

And as I mentioned in the script, 170 basis points year-over-year, that's outstanding.

That is the benefit of those ZEE synergies kicking in, but at the same time, growing 11.9%.

There's a lot of incremental profit falling to the bottom line pushing those margins.

And Toni, just one last comment.

The -- we added quite a few salespeople in the first quarter of last fiscal year to really help that business kind of kickstart that growth as we then completed the ZEE system conversions, et cetera, and we're starting to see that -- we've seen that productivity improve, and as we expected, that -- kind of that percent of scale is kind of coming back down to where it should be.

Okay, great.

And then we saw an increase in gasoline prices at the end of August.

Can you talk about if you are expecting to see just a headwind from that as you go through the next couple of quarters?

Well, we saw it come up to about 2.1% of revenue in the first quarter, and our expectations is that it will come up just a little bit as we move through the rest of the year.

Yes, I'll add to that because we have been talking a lot about the impact of oil and gas on the topline, that being a headwind.

And finally, that impact has become negligible.

So I think it was 30 basis points of headwind last quarter in Q4, but in first quarter, it's 0. And so going forward, it shouldn't be something we're talking about in terms of impact on the topline.

We'll be talking about increased energy costs' impact on the bottom line.

And I would add, too, that we continue to watch the rig counts, but they've kind of stabilized.

At times, they're picking up, but they're still significantly below prior year levels.

And from our standpoint, where -- oil prices at this level, we're not starting to see growth accelerate again and pick up.

It doesn't seem to be a tailwind.

We expect it to be pretty stable and just flattish from here on out.

And we'll take our next question from Shlomo Rosenbaum with Stifel.

Mike and Paul, it seems like -- just in the guidance, the step up in guidance, it's a very minimal amount that's coming from less losses assumed from G&K, and I was wondering if you can just give us a little bit more detail on the things internally and the legacy Cintas that's making the business raise the guidance that much right in the beginning of the year.

Is it just -- maybe you could take some of the units and say, "Hey, this is having an outsized impact," or we're going to see uniform rentals segment see 8% growth for several quarters in a row or just give us a little bit more color on that.

Well, I think we got off to a really nice start, and the execution has been very good.

And so certainly, you can tell from the guidance increase that it exceeded our expectations by a bit.

And Shlomo, there's not really any one particular reason other than I think the economy is stable and conducive for us.

I haven't seen much of a change, and our execution remains pretty good.

I think as Paul mentioned, the last 2 quarters, we've seen a bit of an ease of the year-over-year oil and gas impact.

And as we move forward from here, you can probably see from our guidance that we don't necessarily expect the 8% to continue but we still expect some pretty healthy organic growth as we move forward.

Part of that reasoning is that oil and gas year-over-year, let's call it, easier comps, go away as we go into the back part of the year.

And the other thing is we've talked a little bit about the hurricane impact.

And while it could have been a lot worse, it's still going to be about an impact of a headwind of about 30 basis points for the remaining 9 months of the year.

So when we think about where we are today, yes, we did get off to a pretty good start a little better than we expected.

The oil and gas year-over-year comp was a little bit easier.

As we move into the final 3, a little bit tougher oil and gas comps as well as the hurricane impact.

And we'll take our next question from Andrew Steinerman with JPMorgan.

I did hear you mention something on M&A amortization in terms of a number, I think, but you just went too fast for me in the prepared remarks.

Could you just tell us what the G&K M&A amortization is in the first quarter, and what it is in the guide for fiscal year 2018?

It is -- to the total company, it's about 75 basis points.

To the rental segment, it's 95 basis points.

There -- Andrew, there is some part of that, that is Canadian that could be affected by the exchange rate, but generally speaking, we expect that to be consistent for the remaining 3 quarters of this year.

So those were the numbers for first quarter.

In basis points, you expect similar basis points for the rest of the year, right?

Well, let me restate that, Andrew.

I expect roughly a similar dollar amount for each of the 3 quarters.

We do have 1 less workday in the second quarter and 2 less in the third quarter compared to the first.

So the dollar amount, I don't expect to change at all, but the percent of sale may tweak a little bit because of same dollar amount, lower workday sales.

For the full year, it's roughly $50 million.

We'll take our next question from Scott Schneeberger with Oppenheimer.

With regard to the hurricane, could you speak a little bit to the cadence through the year?

Is that all going to be impacted in the fiscal second quarter or would you expect more of a steady through the end of the year?

And just a little discussion, too, as a follow on, is it all handled through insurance, just the way it works on the cost side?

Yes, we expect about half of that impact, revenue wise, to be in the second quarter, and then the remaining half to be in the third and the fourth.

So there are some customers that were out of service for some period -- short period of time.

We've been able to pick it back up.

There are others that we don't expect to come back at all, unfortunately.

So heavy in the second quarter, the remaining half in the third and the fourth.

We were fortunate that we did not have much in the way of property damage at all, and I don't expect that we will have much in the way of a business interruption insurance claim, but we may have a claim relative to our inability to see customers.

But we're still going through all of those details.

And then just shifting gears a little bit.

Could you provide an update with regard to SAP progression?

Just thoughts on how that's going and anything financial on cadence that's worth calling out?

Well, the SAP is going very well.

We're very pleased with it.

We talked a lot over the course of the last, particularly 6 months that injecting G&K into this SAP roll out mix is going to be something that we'll be taking a heavy look at and figuring out how we want to do that.

And so we've spent a lot of time this summer creating that bridge, as I mentioned before, from the legacy G&K system to our SAP system.

And that's been an important step for us to be able to move forward.

So we have not converted quite as many Cintas legacy locations this summer as we originally planned because we want to be able to get G&K going -- the G&K legacy locations going and be able to do waves of both as we move forward.

And we feel really good about the ability to do that.

But as I've mentioned previously, we do expect that, that roll out will go into our fiscal '20 year.

We'll take our next question from Hamzah Mazari with Macquarie.

This is Mario filling in for Hamzah.

Just wanted to see if you can give us a sense of whether a slowdown in the employment trends can you offset by greater cross-selling?

Or how much of a factor are employment trends today to your business since it's much more diversified versus your historical model?

Said another way, can you sustain mid- to high-single digit growth in a slowing employment backdrop?

Well, we think, Mario, in the last 7 years or so, we've grown several multiples above employment growth and GDP.

And the reason is because we have been able to have a very good and healthy new business effort, where 2/3 of our new business comes from what we call no programmers, in other words, those businesses that don't have uniform rental programs.

And so in other words, we're able to get new businesses into our products and services even if they are not additive to employment.

And that's been an important factor for us over the last 7 years coming out of the Great Recession.

In addition to that new business effort, we've been able to penetrate existing customers as we have continued to come up with innovative products and services, and so that has been an important aspect.

So as we look ahead, we do believe that we can continue to grow even with lessening employment because that's what we've done for the last 7 years or so.

Now Mario, look, the more jobs that get added, the better.

We're certainly all for it and that will only have a positive impact on us.

But if we see employment trends pull back just a little bit, we have been in that environment during the last 7 years and we've been able to grow nicely.

So we are -- we like where we are, we like our product line and our services.

They can add value to almost every business in the U.S. We like our execution and our ability to reach those business opportunities, and so we're optimistic.

Perfect.

And just a quick follow up.

How big do you think the First Aid and Fire Protection could be over the long term?

And where are we in terms of extracting the ZEE Medical synergies?

Well, as far as what that addressable market is, we haven't really talked about that publicly, and don't -- quite honestly, don't spend a lot of time.

We just -- our goal is to reach more and more new business customers.

And with 1 million customers in total and 16 million businesses in the U.S. and Canada, we think there's a lot of opportunity to continue to provide value.

We look at that First Aid and Safety business, it's a great business because it's -- we sell it under the umbrellas of safety, compliance.

And those are 2 important umbrellas and add a lot of breadth to the offerings that we have, and we've been able to broaden our product offering.

So things like training are big opportunities for us, continued sales of AEDs, continued sales of safety protection equipment, real nice opportunities.

So we think we've got a lot of runway there.

As it relates to the ZEE synergies, we think we're getting them, and I think the gross margin is a great sign of that.

We are 1/3 larger than we were pre-ZEE, our gross margin has exceeded where we were prior to ZEE, and we think that as we continue to grow, that SG&A will likely come down some more to get that overall profit level back into the mid-teens.

So we are really excited about that business and the breadth of customer that, that can add value to.

And we'll take our next question from Dan Dolev with Nomura Securities.

Paul, you said GM grew nicely ex G&K.

Can you quantify it in the first quarter?

I may have missed it, sorry.

No, Dan, we haven't quantified it just because of the fact that as we've said, we're making some of these integrations now.

We've had a few dozen occur and so you're getting the blend of the 2 businesses.

We just know that given that we're so early in the integration and a lot of work to do that we feel comfortable that there is good expansion.

But to put a figure on it is not something we're really able to do definitively at this point and going forward.

Got it.

And if I remember, did you say $0.15 to $0.17 from GK?

Yes, for the fiscal...

So it's the same number as in the prior quarter.

Even though you're raising the revenues, it's just being conservative.

I mean, is that what we should understand?

We do think that the contribution is fairly flat for the year, and so yes.

To answer your question, yes.

It's a fairly flat contribution.

And the reason is, as we've talked about that revenue, we expect that revenue to continue to come down as we kind of get through the disruption of the new business effort.

And as we see that revenue come down, we're going to have some decremental margin because of that.

However, as we move through the year, we're going to create more synergies that will offset that -- more than offset that.

But the combination of that is a fairly flat contribution for the year.

As we mentioned, in fiscal '19, we do expect that, that revenue will start to come back.

The sales effort with that block of reps will come back.

And so then, as the incremental margins start to come as well as then the synergies, we'll see some nice benefit.

And just squeezing in a question on this one.

When you say bottom in F 1Q '19, is that $1.00 bottom or year-over-year decline to the rate that you were referring to on G&K?

That's both.

It's both.

It's $1.00 decline, and that will be the largest year-over-year decline percentage-wise as well.

Got it.

So that will be the smallest quarter, dollar-wise?

Yes.

Now, Dan, I say that without getting out the calculator for workday differential.

But generally speaking, yes.

And we'll take our next question from David Stratton with Great Lakes Review.

You previously mentioned your SAP integration on a previous question and how that relates to G&K.

I was just wondering what the pace is like for the rest of the year.

You had previously mentioned around a $30 million expense in fiscal '18 given that we've kind of changed the rollout due to the G&K facilities and your Cintas facilities.

How is that looking to shape up for the rest of the year?

And is it still that $30 million range?

Yes, your recollection is correct.

We had disclosed that for fiscal '18, our expectation is about $30 million expense for SAP.

It was $12 million in fiscal '17.

And the reason for the increased amount in '18 is because in what, maybe the fourth quarter of fiscal '17 is when we started depreciating the SAP asset.

We were out of the pilot, felt really good about it, we're using the system, started depreciating it.

So there's no change.

Even though, as you mentioned and as Mike mentioned, we put our first G&K operation in SAP, it's just maybe a little a shift of, is it a Cintas legacy operation versus a G&K operation?

But no matter which operation it is, so to speak, it's still going to be $30 million of expense in this fiscal year.

And a good half of that $30 million is depreciation expense, which is fixed.

Got you.

And then on the rental side, can you just kind of break out -- the impact that you've seen from your marketing campaign, Ready for the Workday, that's been in place for a while now, and I just -- with G&K, I'd like to hear a little bit more about how that's going.

And given the organic growth, which is impressive, how much of that is due to that program?

And where are you seeing the most cross-selling?

Is there a product line that you've really been seeing benefits from?

Well, I think as you probably understand, capturing the exact impact of a marketing program is pretty difficult and maybe a little bit more anecdotal.

We like what we're seeing.

I'm not ready to put an exact percentage or dollar amount on it, but we do like what we're seeing, and we do think that it has enhanced our organic growth to some extent.

As you can see, over the course of the last 3 quarters, we've had a nice organic growth in rental and an accelerating growth in first aid.

Again, some of that, we've talked about being some oil and gas lapping, some easier comps in first aid.

But we do believe in that campaign.

We do think that it has reached many prospects and customers.

We have a lot of anecdotal positive examples, and so we'll continue with it.

And we certainly love the tagline, Ready for the Workday.

And again, we'll continue with that.

We'll continue with our campaign.

We are working to reach and touch as many prospects as we can and as well as current customers.

And generally speaking, we think it has been a positive influence.

Not sure I can give you a number, though.

And we'll take our next question from Tim Mulrooney with William Blair.

So a couple of housekeeping questions.

The tax rate, you said you expected 34% for the full year, which kind of implies higher than 34% for the remaining 3 quarters given the lower tax rate in the first quarter.

I'm getting to about 36.5% for the remaining 3 quarters.

Is that what I was supposed to take away from your comment?

Or should I be modeling 34% for the remaining 3 quarters?

No, you're thinking about it correctly, Tim.

If you remember, going back prior to fiscal '17, so fiscal '16 and beyond, we generally ran with an effective rate of somewhere in the neighborhood of 37%.

There was a change in accounting for equity compensation that allowed us to take a deduction for stock option exercises and restricted stock vestings that we were not able to take in the past.

That created a much lower effective tax rate in fiscal '17 and continues in fiscal '18.

And we -- based on the fiscal year of May 31, we have more vesting of equity compensation and more exercises of options during our first quarter than any other quarter.

That's just the way that our grants typically work.

And so we'll continue to see generally a low rate in the first quarter and something that's closer to that historical 36%, 37% rate in the subsequent 3 quarters.

Got it.

Also -- okay, so now that you've pulled G&K into the fold, you obviously have a larger and denser footprint than you did previously, which means better national coverage than you had previously.

Does this improve your ability to grow share with National Accounts?

Or was your coverage really sufficient enough previously that this isn't really a major growth opportunity associated with the acquisition?

Yes, the overlap with the G&K markets and our markets was significant, and that was a really good thing for the synergy opportunities.

But it didn't really give us many new markets, and so the footprint that we had prior gave us every ability to compete in the National Account space.

And I would say that hasn't changed because of this deal.

We still believe that we have the best service level to provide to National Accounts, but that hasn't changed with this deal.

Okay, I thought maybe that was the case.

Just had to ask.

Maybe one more.

On the -- now that you've had G&K for a couple more months since your last call, just curious if you have any better insight as to their penetration rates for their ancillary products.

Were their mats at 60% penetration like yours are?

What about hygiene?

Some of those other items?

Curious what the opportunity might be.

Yes, I think that Paul talked a little bit about this last quarter, where the penetration on mats is probably not a lot different, and that still provides an opportunity for us because we have a wider variety of mat opportunities.

And so while they may have 1 or 2 mats, we think that we have mats for even more situations.

So anti-fatigue mats, kitchen-type mats, a logo mat, et cetera.

So we've got a lot of opportunity with mats even if the penetration is not too far from ours.

But the big opportunity that we did talk about was in that restroom hygiene area where G&K was about 3% of -- about 3% of their revenue was there and ours is quite a bit higher than that.

So it provides a real nice penetration opportunity, and one that, as we continue to integrate and get on the same platforms, we will certainly be looking towards adding that kind of value to those legacy customers.

And we'll take our last question from John Healy with Northcoast Research.

Mike, I wanted to ask just a margin-related question.

I think you mentioned that 2Q will have 1 less billing day as well as 3Q has 2 less billing days.

Historically, I think that's been like a 30 basis point or so impact on op margins.

Should we expect similar in 2Q and 3Q this year?

Or does it change much with the acquisition?

So just to be clear, we talked -- that workday differential is sequential, not year-over-year.

And so sequentially, we have 1 less in Q2, and then down to 64, which is 2 less in Q3.

We have talked about a 50 basis point margin impact.

Let's call it 40 in gross margin, 10 in SG&A, but about a 50 basis point impact.

That's either year-over-year or sequential.

And I would expect that, that does not change because of bringing G&K on.

Now there are -- because of the synergy play and the SAP conversion going on and the pace during the second and third quarter, that could have some additional impact, but generally speaking, I would expect that we will still see that 50 basis point margin impact.

Fair enough.

And then I just wanted to ask just a follow-up question on the storm-related activity.

Is there any way to talk about just the Houston market itself or just the markets in Florida, maybe as you look out today versus a month ago or 2 weeks ago, relative to when the storms happened?

What the routes are doing in terms of kind of the normalized level of business?

Are they at a 40% throughput as compared to normal levels?

Or 60%?

Or just some color in terms of what the routes are doing today versus what they had been doing.

Well, yes, certainly, early on, it was fairly low.

But I would say today, we're back in the, gosh, probably 85% to 95% range in those -- I would say in those territories.

Without getting into each individual market, I would say those territories.

We're -- we've seen a kind of a remarkable recovery given the impact we could have seen, and so we're certainly thankful that we've seen the business come back to pretty decent levels.

And that's why you see only a $10 million to $15 million impact.

And that does conclude our question-and-answer session for today.

I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Well, thank you for joining us tonight.

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

And once again, that does conclude today's presentation.

We thank you all for your participation, and you may now disconnect.