信達思 (CTAS) 2018 Q4 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, Executive Vice President and Chief Financial Officer.

Sir, please go ahead.

Good evening.

Thank you for joining us tonight.

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

We will discuss our fourth quarter results for fiscal 2018.

After our commentary, we'll 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.

Our revenue for the fourth quarter, which ended May 31, was $1,670,000,000, an increase of 9.1% over last year's fourth quarter.

The organic revenue growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 5.1%.

The organic revenue growth rate for the Uniform Rental and Facility Services segment was 5.3%, and the organic growth rate for the First Aid and Safety Services segment was 9.4%.

Note that the lower rate of organic revenue growth for the Uniform Rental and Facility Services segment was expected and as we have previously communicated, was due to the inclusion for the first time of the acquired G&K Services business and organic as opposed to inorganic revenue.

Reported operating income for the fourth quarter was $265 million compared to $177 million in last year's fourth quarter.

Operating income was reduced $15 million in the fourth quarter of fiscal '18 and $63 million in the fourth quarter of fiscal '17 by transaction and integration expenses related to the G&K acquisition.

Excluding these items, our fourth quarter operating income grew 16.4%, resulting in an operating margin of 16.8% compared to 15.8% last year.

In March, we gave fourth quarter EPS guidance in the range of $1.64 to $1.69.

That excluded G&K integration expenses, and it assumed an effective tax rate of 24%.

Against this guidance, fourth quarter EPS was $1.77.

Our tax rate was slightly better than the guided 24%, and this resulted in a benefit of $0.04.

The remaining beat of guidance was primarily due to higher revenue than expected.

We're pleased with these fourth quarter results and our full year performance.

Our fiscal '18 results extended our record of success.

We have now grown revenue and profit 47 of the past 49 years with the only exception being the 2 years of the Great Recession.

For the eighth consecutive year, organic growth was in the mid- to high single-digit range, and we continue to grow revenue by multiples greater than both gross domestic product and employment.

Strong execution on the fundamentals is a hallmark of Cintas, but fiscal '18's achievement was especially noteworthy given that it occurred in a period of extreme change management.

While delivering solid returns to shareholders in 2018, we also made significant progress on 2 important investments: G&K and SAP.

The first year of the integration of the largest acquisition in Cintas history required the expertise of every part of the organization, including sales, production, service, global supply chain, IT, engineering, HR and finance.

Very important tasks included winning the hearts and minds of acquired employees whom we call partners and earning the trust of acquired customers through our outstanding service.

Our partners ran our acquisition playbook and effectively adjusted where necessary.

We have now closed nearly all operations necessary to eliminate redundancies, which is 63 operations to date.

All G&K locations, 148 in total, have been converted to Cintas operating systems.

About 1,500 G&K trucks have been painted and rebranded as Cintas.

Important integration work still remains for fiscal 2019, but after our first year of integration efforts, we are still on track for the achievement of our synergy commitments.

When we acquired G&K less than 18 months ago, our debt-to-EBITDA ratio rose to about 3.1x.

Our commitment was to return our leverage to a target of about 2x in 3 years.

We are now there and are thrilled to have delivered on this commitment well ahead of expectations.

Fiscal '18 was also a year of tremendous technological change.

In addition to moving G&K locations to Cintas systems, we continue to convert our operating system from a homegrown system to that of SAP.

An information system conversion is like an acquisition integration in that it requires the involvement of experts from all departments of the company, including operations, sales and corporate support.

The conversion of each operation to SAP is an 8-month process.

Our employees are coached on change management.

Data standardization activities are performed.

Garments are scanned and inventoried, and employees are trained and certified.

Customers are notified of changes to invoice appearance and introduced to improvements in doing business with us because of the technology enhancements.

Training and care continue for 2 months following the go-live date of the new system.

A total of 108 operations have now been converted to date, which is about 34% of the total planned.

Looking ahead to -- looking ahead, fiscal 2019 will share some similarities with fiscal '18.

We will continue to integrate G&K and realize more of the $130 million to $140 million in anticipated annual synergies.

We expect to realize $90 million to $95 million in synergies in fiscal 2019 or $32 million to $37 million in incremental synergies.

In addition, efforts will continue to convert more operations to the new SAP ERP system.

Like fiscal '18, inefficiencies will exist as our partners make further progress on acquisition integration and system implementations while executing on the day-to-day for our customers.

However, we expect to extend our streak of profitable growth to 48 out of the past 50 years.

We will accomplish that via the solid execution of our -- our shareholders have come to expect.

One important area in which fiscal '19 will differ from fiscal '18 is in capital allocation.

With $600 million of acquisition debt repaid and our leverage target achieved, we returned to our historical priorities for deployment of cash, which are CapEx, acquisitions, dividend payments and share repurchases.

We are honored to have been recently included in the Fortune 500 as #500.

As our CEO, Scott Farmer, has stated, this accomplishment is built on our strong sense of culture, principles and values and reflects our strong financial growth, expanding line of products and services and innovative technologies.

It's a testament to the hard work and dedication of our employee partners.

We're not satisfied with being #500, though, and our continued progression higher into that ranking starts in fiscal '19.

Our expectations for fiscal '19 are for annual revenue to be in the range of $6,750,000,000 to $6,820,000,000.

I stated earlier that in our fourth quarter of fiscal '18, we lap the 1-year anniversary of the acquisition of G&K.

For the first time, G&K's revenue was organic as opposed to inorganic.

This resulted in a lower organic growth rate due to the combination of a strongly growing Cintas legacy business and a significantly sized G&K business that historically grew slower than Cintas.

We expect this lower organic growth rate to be temporary just as it was for our First Aid and Safety segment after it acquired ZEE Medical.

With continued investment in selling resources, we expect the total Uniform Rental and Facility Services organic growth rate to hit bottom in the first quarter and then strengthen as we move through fiscal '19.

We expect fiscal '19 EPS from continuing operations to be in the range of $7 to $7.15.

Let me make a few comments about this EPS guidance.

It assumes an effective tax rate of 21.7%.

Keep in mind that this tax rate can move up or down from quarter-to-quarter based on discrete events, including the amount of stock compensation benefits.

The guidance assumes a diluted share count for computing EPS of 114 million shares.

It does not assume any G&K integration expenses.

However, we do expect to incur these in the range of $15 million to $20 million in fiscal '19.

The guidance does include the impact of a change to our Cintas partner retirement policy in which the retirement age and tenure requirements were reduced.

This change results in a shorter time period over which future stock-based compensation grants will be amortized.

It is a non-cash impact, and it is expected to increase stock-based compensation expense by roughly $20 million in fiscal '19.

And lastly, the guidance also includes the impact of adoption of the Accounting Standard Update 2014-09, revenue from contracts with customers.

With the adoption, we expect the following.

Fiscal '19 revenue will be negatively affected by roughly $8 million along with the loss of the incremental operating margin associated with that revenue.

SG&A, however, will benefit from the capitalization of sales rep commission payments and the subsequent amortization of those commissions over the expected service period of our contracts.

This is also a non-cash impact, and we expect the net benefit to be roughly $16 million to $19 million.

Overall, these last 2 non-cash items included in guidance will both be recorded in SG&A and generally will offset each other to have only a minor negative impact.

Before I turn the call over to Paul, I'd like to say thank you to Phillip Holloman, who is retiring from Cintas this month.

Phillip has been with Cintas for 22 years and has been our President and Chief Operating Officer for the past 10 years.

In our press release last month in which Scott Farmer thanked Phillip for his many contributions, Scott said, "Those of us who have had the privilege of working with Phillip know that Cintas is a better company because of him, and he will be missed." Thanks again, Phillip.

Phillip's retirement has led to several other leadership changes at Cintas.

Scott Farmer announced the promotion of Todd Schneider to the position of Executive Vice President and Chief Operating Officer with the responsibility of leading all of our business divisions.

Todd has been with Cintas for 29 years and has been our Rental division President and Chief Operating Officer for the last 5 years, leading our largest business through a very successful period and most notably, leading us through the integration of G&K.

Scott also announced the promotion of Mike Thompson to the position of Executive Vice President and Chief Administration Officer.

Mike has been with Cintas for 24 years and has been Cintas' Chief Information Officer for the last 5 years, most notably leading us through our SAP conversion.

Mike will continue to lead our IT efforts and will also be responsible for our global supply chain and our safety and engineering groups.

These changes are part of our normal succession planning process, and as we move into our fiscal '19 year, we remain as excited as ever about the future of Cintas.

I'll now turn the call over to Paul.

Thank you, Mike.

First, please note that our fiscal fourth quarter contained the same number of workdays as the prior year fourth quarter.

Looking ahead, there will be no workday differences next year as each quarter of fiscal '19 contains the same number of workdays as the comparable quarter of fiscal '18.

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.

The Uniform Rental and Facility Services operating segments 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 en route.

Uniform Rental and Facility Services revenue was $1,342,000,000, an increase of 10.1% compared to last year's fourth quarter.

Excluding the impact of acquisitions and foreign currency exchange rate changes, the organic growth rate was 5.3%.

As Mike stated, the organic growth rate was negatively impacted by the inclusion of G&K in organic as opposed to inorganic revenue for the first time.

We expect the organic growth rate to hit bottom in the first quarter of fiscal '19 and strengthen as we move through the fiscal year.

Our Uniform Rental and Facility Services segment gross margin was 45.0% for the fourth quarter compared to 44.6% in last year's fourth quarter, an increase of 40 basis points.

While we continue to experience the inefficiencies that are customary with an acquisition integration and an ERP system implementation, we are realizing the expected cost synergies, which are benefiting our margins.

These synergies plus better-than-expected revenue also enabled us to overcome an almost 20 basis point increase in energy expenses.

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 fourth quarter was $147 million, which was 9.9% higher than last year's fourth quarter.

On an organic basis, the growth rate for the segment was 9.4%.

This segment's gross margin was 47.0% in the fourth quarter compared to 44.5% in last year's fourth quarter, an increase of 250 basis points.

The significant amount of margin expansion was fueled in large part due to the realization of synergies from the ZEE Medical acquisition.

With the synergies now realized in full, we expect margin expansion to continue in fiscal '19 but at a normalized rate.

The fourth quarter was another outstanding quarter for this segment.

Organic growth continued to be strong and was benefited by penetration of existing customers and national account wins.

The solid revenue growth plus expanding gross margins are evidence of the value businesses place on having Cintas manage their first aid safety and training programs to help keep their employees healthy and safe.

The future of the first aid business segment remains bright.

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

The Uniform Direct Sale business long-term growth rates are generally low single digits and are subject to volatility, such as when we install a multi-million-dollar account.

Our fire business, however, continues to grow each year at a strong pace.

All Other revenue was $179 million, an increase of 1.8% compared to last year's fourth quarter.

The organic growth rate was 0.2%.

The fire business organic revenue growth rate was double digits.

However, this strong performance was offset by a difficult revenue comparison for the Uniform Direct Sale business.

In last year's fourth quarter, Uniform Direct Sale revenue included the rollouts of new uniform styles for the pilots and flight attendants of Southwest Airlines.

Large rollouts such as these do not repeat each year as businesses typically rebrand every 3 to 5 years.

The benefit from Southwest last year was a headwind of about $13 million to this year's fourth quarter revenue.

All Other gross margin was 43.6% for the fourth quarter of this fiscal year compared to 42.8% for last year's fourth quarter, an increase of 80 basis points.

All Other gross margin expansion was driven by the fire business.

Selling and administrative expenses as a percentage of revenue were 28.3% in the fourth quarter compared to 28.6% in last year's fourth quarter.

SG&A benefited from favorable workers' compensation claims experience.

In addition, we are getting leverage from increased revenue covering fixed costs.

Our effective tax rate on continuing operations for the fourth quarter benefited from the new U.S. tax legislation.

The effective tax rate, excluding G&K integration expenses, was 22.1%.

Our EPS guidance for fiscal 2019 assumes an effective tax rate of 21.7%.

Note that the effective tax rate will fluctuate from quarter-to-quarter based on tax reserve builds and releases relating to discrete items, including the amount of stock compensation benefits in each period.

Our cash and equivalents balance as of May 31 was $138 million.

Free cash flow in fiscal '18 was $692 million, an increase of $201 million or 41% from the prior year period.

Capital expenditures for fiscal '18 were $271 million.

Our CapEx by operating segment for the year was as follows: $225 million in Uniform Rental and Facility Services, $28 million in First Aid and Safety, and $18 million in All Other.

We expect fiscal '19 CapEx to be in the range of $290 million to $320 million.

In the fourth quarter of fiscal '18, we repatriated about $110 million of international cash.

We used the funds to pay down debts and to buy back stock.

In the quarter, we purchased about $90 million in Cintas stock, and $410 million remain on the share buyback authorization approved by the Board of Directors.

As of May 31, total debt was $2,535,000,000.

At May 31, our leverage was 2.1x debt to EBITDA.

As Mike stated earlier, when we acquired G&K less than 18 months ago, we committed to return our leverage to a target of about 2x in 3 years.

We are pleased to have delivered on this commitment well ahead of expectations.

We are excited to have returned to our historical priorities for deployment of cash, which are CapEx, acquisitions, dividend payments and share repurchases.

That concludes our prepared remarks.

We are happy to answer your questions.

(Operator Instructions) Our first question will come from Hamzah Mazari with Macquarie Capital.

The first question is just on consolidation in the space broadly.

I know you've sort of outlined cost synergies.

Maybe if you could touch on -- there's been another uniform deal in the space.

Could you maybe touch on the revenue side?

Do you expect pricing to get better in the space post-consolidation?

I realize it's a local business, so there may be some nuances there.

So maybe if you could touch on that and then how to think about G&K revenue synergies.

Sure.

So from the standpoint of pricing, the pricing environment, I would say, hasn't changed much in the last 90 days since we spoke last.

And quite honestly, I don't expect that the consolidation that has happened will have much of an impact on the pricing environment.

It's still a very competitive environment.

We face legacy like competition as well as other catalog type competitors, and so that's not going away.

So I don't think that's going to have much of an impact on the pricing environment.

From the standpoint of the revenue synergies, we're moving cautiously as we have -- as we've talked about in the past.

But we have begun to introduce some of the products where we can, where we have converted systems or where we have integrated routes into Cintas locations.

And while it's early, and we haven't seen any notable impact, it's anecdotally positive so far.

So I would say, as we continue to move through this year, we've got a lot of integration activity left, and we're going to continue to introduce Cintas products and services to those customers.

But I would not expect much of an impact at this point in time.

Okay.

And then just on the SAP, I know you sort of gave color on the integration of the SAP and time line.

But maybe you're not ready quantitatively, but qualitatively, should -- once SAP is implemented, should we expect the 28% of sales SG&A run rate to come down materially?

Or how are you thinking about sort of benefits of SAP maybe just qualitatively if you want to address that?

Yes.

I think we'll see once we get through that implementation effort, which we expect to be by the end of fiscal '20.

We do expect some expenses to roll off, certainly, those that are part of the integration and implementation effort.

So we will certainly see some benefit from that in fiscal '21.

But more than anything from that system, we like the information and the power of that information.

And we're not necessarily looking for a significant cost reduction.

What we are looking for is more opportunity to make our selling team more productive.

So how can we create warmer leads with better information?

How can we use that information to be more directive in the way we approach our customers with our various products and services?

So we're not looking necessarily for a significant SG&A reduction.

We really want to help our selling partners become more efficient.

Okay.

And just a follow-up.

I'll turn it over.

Any updated thoughts on the tariffs and how that impacts you either directly or indirectly through customer demand?

From a direct standpoint, we have -- certainly had some impact like hangers, but overall, it has not been significant.

From an indirect standpoint, and when I say indirect, I mean from the vendors -- from our vendors, it remains to be seen how they will be impacted and how that might in turn impact us.

We're certainly keeping our eyes on that, but we need a little bit more time for that to play out.

From a customer perspective, too early to see much of an impact.

Our

next question will come from Toni Kaplan with Morgan Stanley.

So you mentioned a couple of times now you've hit your gross leverage target in this quarter.

Your capital priorities are returning to historical ones.

How should we think about the level of share repurchases this year or if you want to just talk directionally as sort of what the algorithm would be in that?

Or -- and then also just with tax reform, how should we -- should we expect 5x to be above the historical average that you've been running at?

Well, we -- as Paul mentioned, CapEx is very important to us, and we will make sure we spend and invest in the business.

We also will likely be more aggressive than we were in the last 2 fiscal years in acquisition activity.

From the standpoint of share repurchases, we have a $410 -- we have a $500,000 authorization, where $410 million is remaining.

And I would say that we're going to continue to do what we have done in the past, and that is be opportunistic about the way we use that.

And so that -- I'm not ready to say whether that will increase where we have historically been.

But I would say our expectation is to get back to something of that historical type of environment.

Terrific.

And I know it might be difficult to parse this out.

But could you give us some color on what kind of G&K growth is incorporated into the '19 guidance?

That is very difficult to parse out.

And you may have noticed when we gave guidance, we didn't include any specific G&K information because it's pretty difficult to take the business that is so co-mingled into our legacy business.

But if you kind of think about the revenue guidance and you just make an assumption that it's flattish, that opening guidance is pretty much in the range of that 5 to 6.5 where we've been in the last few years.

So we think that's right where we want to be.

That -- we believe that's our -- that's kind of our sweet spot as we open the year and feel good about it moving into this first quarter.

That's helpful.

And just lastly, historically in the fourth quarter, you've given revenue growth by product within the uniform business.

Is that something that you'd be able to provide for us today?

Yes, Toni.

We do have that, and this is the mix of the Uniform Rental and Facility Services segment.

Uniform rental was 50%.

Dust control is 17%.

Hygiene is 14%.

Shop towels are 5%.

Linen is 10%, and then catalog revenue was 4%.

Our next question will come from George Tong with Piper Jaffray.

You've indicated that, over time, G&K's revenue growth can approach Cintas' historical revenue growth in the uniform rentals business.

Can you think of any potential structural barriers that might prevent G&K organic growth from reaching your historical levels?

And maybe talk a little bit about the initiatives you have in place to improve G&K's growth outlook over the near to intermediate term.

I don't see any roadblocks.

And George, as we move in to this year, you -- it's hard to think about that business as being separate at all.

It's -- so many of the locations have been absorbed into legacy Cintas locations or have traded volume.

So it's really hard to look at it separately.

However, as we were working through the integration of last year, one of the biggest pieces was coming out of the closing of that deal.

We had a sales team at G&K that had been -- had a tough environment, and we wanted to pull them out of their positions so that we could train them, get them to understand our systems, our products and services.

There certainly were open positions that we had to fill, and that has gone very well.

But as we've talked about in the last several quarters in our business, when you lose that new business momentum for a number of quarters, it takes a little bit of time to reverse that trend.

We have done a very good job of training our new salespeople.

We have seen the productivity tick up slightly each quarter throughout fiscal '18.

And so the thing that will get us back to the Cintas-like levels of growth will be a combination of those sales partners being more and more productive and our ability to penetrate the G&K customers like we do with all of our other Cintas customers.

So as we mentioned, we expect our first quarter organic growth to be somewhat similar, maybe slightly lower than what we reported here in this fourth quarter for our rental business, but we expect to see some improvement as we then go through the year to the point where fiscal '20, I would expect, we'd be back to our historical like levels, barring any change in the macro environment.

Got it.

That's very helpful.

And then on the topic of revenue synergies and cross-selling, I know it's still very early days.

But can you provide a progress report on how cross-selling initiatives are progressing?

And what, in your view, is the longer-term revenue opportunity from bundling?

Well, we are -- and I'll speak to our total business now, not just G&K.

But we have opportunities.

When we first sell a new account, we don't normally sell everything.

And so we continue to look for ways and opportunities for our drivers, who we call SSRs or service sales reps.

Our SSRs and our salespeople, we look for opportunities for them to penetrate existing customers.

And we're getting better at that, but we can always improve and especially when it comes to getting First Aid and Safety and fire into our uniform and facility services customers.

So we're continuing to work on ways to improve the efficiency there in the -- or while we are waiting for SAP to come.

And once we get SAP, we do believe that, that will make the visibility for all of our people better, and this should allow us to improve that penetration even more.

Our next question will come from Manav Patnaik with Barclays Capital.

This is actually Greg dialing in.

First, just wanted to hit on the G&K guided synergies.

Can you talk to the buckets that are showing up in the $35 million or so synergies you expect to realize in '19?

And then what are the other buckets that are going to be seen in year 3 and year 4?

Sure.

I think we've talked a lot about the 4 buckets in the past.

And as we move into year 2 of that integration, I would expect that we will get more production synergies.

We did a lot of that heavy work in fiscal '18, and we're still not quite as efficient as we want to be in our plants, but we're moving through that.

And I would expect that production is a big component.

We will do a lot of route optimization.

And while we have only just begun that, that's going to be the largest activity that we have going on in fiscal '19.

So we'll start to see some of those routing benefits.

And when I talk about routing benefits, what I really mean is improved fuel utilization.

We are not looking to eliminate routes.

What we're really looking to do is make all of our routes more efficient and give them -- give our SSRs more time with our customers.

But that's going to be a big project, and there will be -- we will start to see some of that benefit.

We have already gotten a lot of G&A benefits, and we still have some more to go.

But that will be a lesser component in year 2 than the production impact.

And then we'll start to see some sourcing synergies, but I would expect more of those to be in that year 3 and 4. So thinking about that prioritization, I would expect production to be the largest piece followed then by those other 3 where we're touching now on the routing and the sourcing and also getting a little bit more incremental G&A.

Okay.

That's helpful.

And then I just wanted to quickly ask how you guys are thinking about inflation pressures and what's embedded in guidance.

And how you're thinking a rising labor and raw material cost backdrop, how you think about your ability to pass on that pricing to customers?

Well, when we think about the economy as we stand today and looking forward from today, we feel like it's a positive environment.

The activities are good.

Our team has been fairly successful in both selling new business and in penetrating.

And so it's a positive environment.

There are certainly those things that you mentioned that we're keeping our eyes on.

Certainly, the tariff uncertainty is a wildcard, and as we -- as I was mentioning a little bit earlier, the indirect pieces of those, we're keeping our eyes on, but again, it's a wildcard about how that'll impact us.

From an energy perspective and fuel perspective, we have modeled that we will see about a 20 basis point increase in fuel in fiscal '19, and we're seeing that already in June in our prices at the pump.

And from a labor perspective, we certainly are starting to see the tightening of labor.

It's not affecting us widespread, but it certainly is an impact.

And we're keeping our eyes on how do we manage the best we can and be as efficient as we can.

And one way to do that is to really work on our partner retention.

That is very important for us, and it certainly makes this tighter labor market easier to deal with if we can retain our current partners.

That's very important to us.

But those things are certainly starting to creep in.

They are included in our guidance, but we're -- those are things to keep our eyes on.

Our next question will come from Scott Schneeberger with Oppenheimer.

Just following up on that last question, it looks like cotton's gotten expensive again.

Could you remind us -- you considered synthetics last time.

You weathered the storm pretty well, though, when those prices increased a few years ago.

Could you just remind us how maybe this time compares to last time and how you think about that?

Yes.

I don't think we've seen the spikes that we saw last time quite yet, but in any event, cotton is something that just takes a long time to get into our P&L.

When you think about the standard garment that we have, certainly, the fabric is a component of that.

A bigger component is the labor.

And you also have things like trim and freight into our distribution centers.

But certainly, the fabric is a component of that, and cotton is a component of that fabric.

So when you break it all down, it's not a significant amount of the cost, but there is an impact.

But when we see these spikes, in order for it to impact our P&L, it's got to be a long time of that spike.

In other words, it has to last through the production of our garments, the shipping of those into our distribution center, sitting in our DC for return, then getting out into our rental locations where it begins to amortize generally over 18 months.

So in that first month of shipping into the rental location, we see 1/18 of the impact.

So as you can imagine, that cotton has to spike and stay elevated for quite a while before it has a real meaningful impact, and we haven't seen any of it yet.

You guys have referenced that the low watermark for the organic growth progression is going to be in the first quarter.

I don't know if you're comfortable getting into more detail, but just curious how it might compare to fourth quarter and kind of the cadence of next year.

Yes.

I think it's going to be slightly -- from a -- I'm speaking from a rental perspective now.

I think it's going to be lower than this fourth quarter, but then in the second quarter, should see a move upward and followed by the second half of the year that it's getting closer to the 5.5 to 6 level.

But we're a ways from there.

I would expect, if the economy continues to perform like it is, I would expect that we should be near that top of that guidance that we gave, and that should play out quarter-by-quarter in the way I mentioned.

Appreciate that.

One more similar question, kind of housekeeping.

You talked about the full year tax rate guidance and that it would fluctuate quarter-to-quarter.

Any rules of thumb on any particular quarters that we should follow being above or below that just for the modeling purposes?

Yes.

I think that's a good question, Scott.

I would expect from an EPS quarter-to-quarter perspective, we're going to have -- I mentioned the change to our retirement policy and an increase in our stock-based compensation.

We're going to see a good chunk of that in our first quarter, and so it's going to pressure our first quarter margins.

Because of that, we also get a benefit, a greater benefit on the tax side of things.

So I expect that our first quarter tax rate will be quite lower than the remaining 3 quarters, all of which will probably be closer to that 24% like range.

Our next question comes from Andrew Wittmann with RW Baird.

I was just looking at the guidance, and it looks like bridging between EPS and revenue that somewhere in the low 16s is the EBIT margin assumption that you have implicit in your guidance.

I guess, with the moving pieces of roughly $35 million of cost synergies that you're expecting this year, it does look like you're putting up some incremental margins.

But I was just wondering how you expect this year to play out versus your normal expectation for around 30% incremental EBIT margins.

Is that what's implied here, Mike?

Implied from the low end to the high end is certainly margin improvement, operating margin improvement, and I would say, I think of it in -- a little bit higher than you had said.

I think you had said in the low 16s, I would put it more in the mid-16s and at the high end, maybe even a little bit higher than that.

So ex synergy, still some nice margin improvement at the top.

Now Andrew, we talk about 20% to 30% incremental margin, and clearly, with all of the integration and implementation work that we have, this is not a normal year.

And I -- inclusive of all of that, that incremental is going to be a little bit different this year than we would normally think of.

When you think about incremental -- when you think about the inefficiencies of the implementation and the integration, when you think about a little bit of a higher energy number, it's not your normal incremental year certainly.

Got it.

So just in terms of like the in-specific integration costs, if you will, like the things that you weren't able to back out, now that you're more than a year into owning G&K, does that become a slight tailwind as well because you're like not relabeling garments?

Or is there still or maybe more of those types of costs that are in your guidance?

More of those types of costs are in the guidance.

So when you -- I mentioned earlier that we're -- one of the heavy projects is the route optimization.

So I'll give you an example of a market route optimization.

In a market where we've got Cintas facilities and G&K facilities that will remain open, we're going to take a look at all of the customers in that marketplace, and we are going to then take those customers in that marketplace and effectively reroute them to make all of our routes in that marketplace more efficient.

Now we are certainly cautious because the -- our goal through this process is to minimize the disruption to the customer.

And so we always have to keep that in mind, but we will make those routes more efficient.

And sometimes, that means moving the processing of certain customers from one location to the other.

And when we do that, that means we have to pull garments out of one location and transport them to the other location.

That receiving location then has to re-barcode all of those garments, enter them into the system, and they have to do a little bit of that production integration all over again.

That's an important part of what we're doing.

And we're going to be cautious about it because, again, we're not -- we want to make sure that we don't disrupt the customer or minimize that.

And again, we're not looking at a route reduction.

We're looking at a route efficiency opportunity.

But as you can imagine, moving those garments in between those facilities creates, again, the same kind of inefficiency that we talked about last year.

That's really helpful.

I wanted to ask one final question here, and that's just regarding kind of the revenue trends in the core rental segment, specifically, just getting some subjective comments from you on the level of sales force productivity, particularly those G&K folks who stayed with you that are now more accustomed to the suite of products and services that you're selling as well as get some sense from you about the level of retention that you're experiencing in your customer base today.

Any comments on add-stop?

Or the level of [no] programs would also be welcome.

Let's see.

That was a lot, Andrew.

From the retention standpoint, look, we've talked about it all year long and it's been better than we expected.

And we are very, very pleased with that.

Again, the legacy G&K business was a very good business.

They took care of their customers well.

We've continued to do that, and we try to make that disruption of the integration as minimal as -- of a disruption as we can.

And that has -- that's led to some real nice retention.

From the legacy salespeople standpoint, look, we -- they have some very good selling skills.

It's just more a matter of making sure they understand our environment, our systems, our products and services and our expectations.

And that can take a while to retrain and ramp up.

But we like -- as I mentioned, we like the trend that we've seen in each quarter in fiscal '18, and we're encouraged by what we've seen and encouraged by the opportunity that we have moving forward.

Our next question comes from Shlomo Rosenbaum with Stifel Nicolaus.

I don't usually ask questions about M&A.

But given some of the commentary you made about being more selective or opportunistic in share repurchases together with the significant capacity that you now have on the EBITDA side, I was just wondering if -- when you are looking, and I'm sure you're paying more attention to deals that are coming your way, should we expect more of the same in terms of companies more in the uniform rental business?

Doesn't seem like there's a ton at least in the first aid side.

Or is there an adjacency or something that you guys are entertaining as well?

We would love to continue to be acquisitive in our rental business, in our First Aid and Safety and in our fire businesses.

We like all of those opportunities, and we will have an opportunity to be more aggressive in fiscal '19 than we have been in the last few years.

And those acquisitions are important to us.

Would we look for a different type of opportunity?

It depends on the characteristics of the business.

And it can -- can it help us continue to grow?

And can our current customers take advantage of that new offering?

A lot of things that we would have to take into account and the value would have to be at the right place.

Having said that, if those things do happen, we'll absolutely be aggressive in looking at it if we feel like it is the right opportunity.

So is there anything like particular out of the wheelhouse that you think would surprise us?

Or really, hey, you feel like this is a company that wants to stick to its knitting and that's what we should expect?

Well, Shlomo, we -- when we think about our business, we think about the opportunity to create value to over 1 million businesses that we currently serve and many more that we don't currently serve.

And that value can come in the way of image, safety, compliance.

And so there are a lot of different ways that we can provide benefits to businesses, and that also then allows us to kind of expand what we currently do, both in our current businesses and maybe then in some type of new offering.

In the past, we have moved from the rental business to a first aid to a fire to a document management to deep cleaning.

There have been opportunities, and we've taken advantage of those.

And again, if those kind of opportunities exist, we would certainly love them.

I don't know if some of those kinds of services would be surprising to any of you.

That I can't answer.

But we're not satisfied with simply staying in our swim lanes and not being aggressive in terms of adding value to our customers and to other prospective customers.

Our next question comes from Andrew Steinerman with JPMorgan Securities.

Mike, looking back at the fourth quarter in terms of uniform rental organic revenue growth, could you tell us how G&K did versus the Cintas space?

And did the upside in rental revenue growth come from G&K better than expected or the Cintas space?

Andrew, it's really hard to pull it apart, but our expectation was that we certainly still did see shrinkage in that G&K base but likely a little better just based on the top line, likely a little bit better than we had expected.

I would say more of the beat of our guidance was our legacy business, and that's operating very, very well even in the midst of lots of moving parts within those locations because of the integration.

I can't give you a specific number though, Andrew.

So do you think that G&K declines narrowed from the third quarter declines?

Because you did give us third quarter declines of mid-single digits.

Yes, I would say if I had to -- I am guessing.

I would say it's fairly similar to that third quarter number.

Our next question will come from Tim Mulrooney with William Blair.

Can you guys hear me okay?

Yes, I can.

Just a couple of questions here.

So with non-pharma employment continuing to grow, I'm sure you guys are benefiting from that to a degree.

In thinking about new customer growth, are there any areas, other end markets or regions where you see particular strength?

Well, we -- first of all, I would say it's been broadly a positive environment.

But we talk a lot about health care in the last few years, and health care remains an exciting opportunity for us for many of our products and services.

And that industry vertical continues to grow at very good levels.

But I would say, generally, Tim, it's been a fairly broad performance, and we're real pleased with it.

Okay.

And then on a dollar basis, can you share with us how much acquisitions added to both the uniform rental and other segments in the quarter?

Let's see.

From a dollar perspective, in the quarter, it's, let's call it about $53 million for rental and a very small number for the others, less than $5 million, only really a couple million dollars.

Got it, okay.

And then with SAP, you've converted 34% of the base so far with plans to be complete in fiscal 2020.

Where do you guys expect to be by the end of 2019 if you're willing to share?

We've got a lot of moving pieces, and I would say we're going to make significant progress.

But I don't have a schedule in front of me, and I don't know that I'm -- I want to get to that level of specificity just simply because it changes quite often.

It changes based on what we've got going on in each market from an integration standpoint, from a customer perspective.

And as I mentioned a few times, our goal is to minimize customer disruption.

And so that might mean moving a little bit from one market to another.

So it's hard to pinpoint that, and I'd rather not.

But Tim, I guess, I would add from like a modeling perspective, like we don't anticipate that in fiscal '19, the SAP expenses, anything much different than fiscal '18, so we don't expect the expense to be a headwind.

Okay, that's essentially what I was looking for, Paul.

Two more quick housekeeping ones, guys, number one, the change to the retirement policy.

Did you say higher stock comp would impact by $15 million to $20 million in 2019?

I said $20 million roughly.

Roughly $20 million.

And you said that a big piece of that, Mike, might hit in the -- will hit in the first quarter.

How should I think about modeling that?

Is it most of it in the first quarter?

Half?

Any detail would be helpful?

I'm not -- I don't want to get into the very specific level.

I don't have it in front of me nor do I want to get into that level of detail.

But in our first quarter, we are generally wrapping up our fiscal -- our prior fiscal year compensation plans.

And so that's generally when we provide the grants.

And because of that, that is when a lot of the activity happens.

But I can't get into the level of detail, that level of detail that you want.

No, that's still helpful.

One last one.

Did you say shares outstanding of 114 million in 2019?

We did, yes.

So you were at 111 million at the end of the fourth quarter.

Is that increase related to the change in the retirement policy?

And then if you -- could you share the cadence of how should we think about that through the year?

We were over 111.5 million.

We're modeling a little bit higher.

Tim, when our stock performs as well as it does, the effect of diluted securities really starts to rise.

And while there aren't additional shares out there, the effect of those -- securities increases.

So that's why we're seeing that number at that 114 million level.

All right, gentlemen, there are currently no further questions in the queue.

Okay.

Thank you very much, and we will be with you at the -- near the end of September for our first quarter results.

But thank you for joining us, and have a great rest of your summer.

Thank you, ladies and gentlemen.

This concludes today's teleconference, and you may now disconnect.