信達思 (CTAS) 2019 Q2 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 call over to Mr. Mike Hansen, Executive Vice President and Chief Financial Officer.

Please go ahead, sir.

Thank you, and good evening.

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

We will discuss our second quarter results for fiscal 2019.

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 second quarter, which ended November 30, was $1,718,000,000, an increase of 7% over last year's second quarter.

The organic revenue growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was also 7%.

The organic revenue growth rate for the Uniform Rental and Facility Services segment was 6.6%.

And the organic growth rate of the First Aid and Safety Services segment was 10.2%.

Since the announcement of the G&K Services acquisition nearly 2 years ago, we communicated our expected trajectory of the acquired revenue and its impact on Uniform Rental and Facility Services growth rates.

We've discussed that the organic revenue growth rate would reach bottom in the first quarter of this fiscal year due to the lapping of the G&K acquisition and that we expected the organic growth rate to accelerate during the remainder of fiscal '19.

Our second quarter rental organic growth rate of 6.6% rebounded as expected from the first quarter's rate of 4.9%.

In fact, this organic growth rate of 6.6% exceeded our internal expectations.

We have seen our sales rep productivity reach preacquisition levels, and we've seen good performance in penetrating legacy G&K customers, particularly in the hygiene space.

Gross margin for the second quarter of fiscal '19 of $775 million increased 8.2% from last year's second quarter.

Gross margin as a percentage of revenue was 45.1% for the second quarter of fiscal '19 compared to 44.6% in the second quarter of last fiscal year.

Uniform Rental and Facility Services gross margin as a percentage of revenue improved to 45.3% from 44.7% in the second quarter of last fiscal year.

Gross margin improved in the quarter and year to date, despite some cost headwinds we cited on last quarter's earnings call, including wage inflation and higher cost for certain commodities.

Reported operating income for the second quarter was $275 million compared to $235 million in last year's second quarter.

Operating income was negatively impacted by integration expenses related to the G&K acquisition by $7.8 million in the second quarter of fiscal '19 and $13.1 million in the second quarter of fiscal '18.

Excluding integration expenses, our second quarter operating income grew 14.2%, resulting in an operating margin of 16.5% compared to 15.5% last year.

Net interest expense was $4 million lower in the second quarter of fiscal '19 compared to last year due to debt reduction.

Net income from continuing operations for the second quarter of fiscal '19 of $243 million increased 76% from last year's second quarter net income from continuing operations of $138 million.

Diluted EPS from continuing operations for the second quarter of fiscal '19 were $2.18, an increase of about 76% from the EPS from continuing operations for the second quarter of fiscal '18 of $1.24.

Net income and EPS from continuing operations were positively impacted by a lower effective tax rate in this fiscal year's second quarter compared to last year's second quarter, primarily from the enactment of the Tax Cuts and Jobs Act.

Net income and EPS from continuing operations for the second quarter of fiscal '19 benefited $0.47 from a gain on the sale of a cost method investment.

Also, net income and EPS from continuing operations were negatively impacted in second quarter of fiscal '19 and '18 by $0.05 and $0.07, respectively from integration expenses related to the G&K acquisition.

Excluding these special items, our second quarter EPS from continuing operations were $1.76 compared to last year's EPS from continuing operations of $1.31.

We provided these figures in a table in today's press release.

As a result of our second quarter results and forecast for the remainder of the fiscal year, we're increasing our annual guidance.

We are raising our revenue guidance from a range of $6.8 billion to $6.855 billion to a range of $6.87 billion to $6.91 billion and EPS from continuing operations from a range of $7.19 to $7.29 to a new range of $7.30 to $7.38.

Note the following regarding the EPS guidance.

It assumes an additional $2.5 million to $3 million of interest expense from last quarter's guidance due to having some commercial paper.

It still assumes an effective rate of 21.7% for the year.

This is the same rate guidance as last quarter.

It assumes a total diluted share count for computing EPS of 112 million shares.

It does not assume any additional G&K integration expenses.

However, we do expect to incur these in the range of $18 million to $22 million for the full fiscal year.

As our Chairman of the Board and CEO, Scott Farmer, was quoted in today's press release, we are pleased with our progress on the integration of the G&K acquisition and the implementation of our enterprise resource planning system.

We are on track to achieve another year of solid revenue and earnings growth.

And additionally, we continue to generate strong cash flow and commit to effectively deploying cash to increase shareholder value.

As a reminder, on December 7, we paid an annual dividend of $2.05 per share, an increase of 26.5% over last year's annual dividend.

And through the end of our second quarter, we purchased $447 million of Cintas stock under our buyback authorizations.

I'll now turn the call over to Paul.

Thank you, Mike.

Please note that our fiscal second quarter contained the same number of workdays as the prior year second quarter.

Additionally, there will be no workday differences the remainder of the fiscal 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 Sales 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 en route.

Uniform Rental and Facility Services revenue was $1,390,000,000, an increase of 6.3% compared to last year's second quarter.

Excluding the impact of acquisitions and foreign currency exchange rate changes, the organic growth rate was 6.6%.

Our Uniform Rental and Facility Services segment gross margin was 45.3% for the second quarter compared to 44.7% in last year's second quarter, an improvement of 60 basis points.

Energy expense as a percentage of revenue was 2.4%, equal to last year's second quarter.

We are pleased with the gross margin expansion this quarter and year to date and our ability to overcome wage inflation; increased commodity costs, such as for hangers, which are sourced mostly from China; and the inefficiencies that are customary with an acquisition integration and an ERP system implementation.

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 second quarter was $153 million, which was 10.3% higher than last year's second quarter.

On an organic basis, the growth rate for the segment was 10.2%.

This segment's gross margin was 48% in the second quarter compared to 46.9% in last year's second quarter, an increase of 110 basis points.

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

Solid revenue growth and expanding gross margins are confirmation of the value that businesses in all sectors of the economy place on outsourcing to Cintas the management of their first aid, safety and training programs to help keep their employees healthy, safe and productive.

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

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

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

Uniform Direct Sale, however, is a key business for us, and its customers are often significant opportunities to cross-sell and provide products and services from our other business units.

All Other revenue was $174 million, an increase of 9.3% compared to last year's second quarter.

The organic growth rate was 6.9% and was driven by 14% organic growth in the fire business.

All Other gross margin was 41.2% for the second quarter of this fiscal year compared to 42.1% for last year's second quarter.

Improvement in the fire business gross margin year-over-year was more than offset by lower gross margins and Uniform Direct Sale business.

Selling and administrative expenses as a percentage of revenue were 28.6% in the second quarter compared to 29.1% in last year's second quarter.

In the second quarter of fiscal '19, there was a benefit of $6.1 million from lower commission expense resulting from the adoption of the Accounting Standards Update 2014-09 revenue from contracts with customers.

We discussed this on our July earnings call when we provided our initial fiscal '19 guidance.

In addition to this benefit, we are getting good leverage from increased revenue covering fixed costs.

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

Our EPS guidance for fiscal '19 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 November 30 was $88 million.

Capital expenditures in the second quarter were $73 million.

Our CapEx by operating segment was as follows, $58 million in Uniform Rental and Facility Services, $10 million in First Aid and Safety and $5 million in All Other.

We expect fiscal '19 CapEx to be in the range of $270 million to $285 million.

As of November 30, total debt was $2,710,000,000.

$2,536,000,000 is fixed interest rate debt and $173 million is variable rates commercial paper.

At November 30, our leverage was 2.1x debt-to-EBITDA.

That concludes our prepared remarks.

We are happy to answer your questions.

(Operator Instructions) Our first question comes from Manav Patnaik with Barclays.

First broader question, obviously, is -- just curious, obviously, you've seen the market reacting in a fearful manner.

Just curious, from what you're hearing from your customers, any signs of things slowing down or any signs of worry based on what you are hearing and seeing there?

No, Manav.

We -- I think from -- based on our results, which we believe are pretty good, we've seen a pretty good economic environment for the last quarter and we're not hearing signs of slowdown right now.

And I would suggest that our guidance is pretty strong as well and reflects confidence that we're going to finish the year pretty strong, so no.

Okay.

And then on the G&K side, you talked about making some progress, I guess, on the revenue synergy side, especially in the hygiene area.

I was just hoping you could help maybe quantify or give some color there and how we should think about what the future opportunities there are.

Well, we haven't quantified that specifically other than to say certainly that Cintas percentage of hygiene revenue is greater than G&K's was prior to us acquiring them.

We're making some nice progress on that.

I don't have a specific number to share with you, because many of the accounts are kind of blended in.

But we certainly know that we're getting some traction there.

And we like that restroom product opportunity.

We like substituting our entrance mats for theirs.

We think there is still an opportunity in the future for Carhartt garments and other things.

But making some progress so far, and we like what we've seen.

All right.

Got it.

And then just last question.

Just moving pieces on the energy side with, obviously, the oil prices down.

Any color on how we should think of that or if you factored that -- some of that in your increased guidance today?

We've assumed that we may still have just a slight touch of pressure for the rest of the year, even though we didn't have any in the second quarter.

It's hard to predict what that's going to look like for the second half.

But right now, we haven't really changed our outlook, and that was to be up slightly in the second half of the year.

And next will be Toni Kaplan with Morgan Stanley.

Just looking at the guidance, this quarter, you bought back just under $370 million of stock.

And in the back half of the year, that should be a pretty nice help to you, just given the lower share count from that.

I'm calculating somewhere around, call it, $0.08.

You beat consensus this quarter.

I know that's not necessarily your internal target.

But let's just say you beat by at least a couple of cents there.

And then obviously, you mentioned the higher interest, so maybe $0.02 from that as an offset.

But basically, a $0.10 guidance raise sort of implies to me that either maybe there is some conservativism there or just trying to get a sense of -- I know you just mentioned that you're expecting a good back half of the year.

But like basically, why not raise by more?

Sorry for the long-winded question.

No problem.

Toni, the low end of our guidance now is higher than the high end of our guidance last quarter.

You're right on it in terms of the second half of the year buyback impact.

But Toni, the second half of the year, last year, we did operating margins of 16.3%.

The guidance that we've provided would suggest the high -- mid to high 16%.

So there's still going to be some nice margin improvement in the second half of the year.

The revenue is looking very good.

That was a pretty good increase as well where the low end of the range is higher than our previous -- I'm sorry, the low end of the range is higher than our previous high end of the range.

We think it's a pretty nice second half of the year.

And if we can achieve that guidance, that's a pretty darn good year with margin expansion, continued G&K integration, SAP integration and increasing organic growth.

Okay, great.

And then just one more on buybacks.

Just given you have $744 million authorization remaining in your program, just given where the stock has been trading recently and you just did a lot of buybacks in this past quarter, like how should we be thinking about sort of your views on timing of repurchases or your -- going forward?

Well, our remaining authorization is a little bit over $800 million, it's about $860 million.

We did run out of previous authorization during the quarter.

We expect it to continue to have pretty good cash flow.

We obviously think that the stock price today is an opportunity.

But we also like our leverage level.

We're at 2.1x.

That's right at our target.

And I would suggest that we're going to continue to be right around that level unless we see something different change, something new come about.

We certainly have seen it to be a buying opportunity, though, and think that there's been certainly an overreaction to our stock in the last 90 days.

And our next question will come from Gary Bisbee with Bank of America Merrill Lynch.

I guess, the first question, just last quarter, you talked about the second half of the year getting back to 5.5%, 6% organic revenue in rentals.

Obviously, you blew right through that, and you're taking the guidance up.

But as we look at it, it appears like the comps get easier on a year-over-year basis.

Is there anything that would lead to any deceleration from that?

Or was there anything that was a benefit this quarter?

Just trying to think if this is a good run rate in the near term.

Well, when we think about this quarter, we think about the impact of better sales rep productivity than we initially expected.

So I don't see that changing much.

We also talked about the penetration opportunities with all of our customers remains pretty strong.

So that guidance range that we gave is something in the way of 6% to the low 7%, and we think that's a pretty good range for us to be in.

That's right in our sweet spot.

You -- on the last couple of calls, you've mentioned the National Accounts opportunity of First Aid and Safety.

Is that -- I don't remember hearing you mention that a lot over the last few years.

Is that a newer opportunity or just something that you're calling out now?

And I guess, I've always thought that is much -- mostly a local business.

What are you doing on the National Accounts front?

It's not necessarily a new opportunity.

It is one that we have started to talk about and we love the opportunity.

And it is same as you might think in rental where we have the ability to provide large multi-location customers with a consistent safety -- First Aid and Safety program, and that's important to these large customers.

It allows them to track their locations a little bit better, to understand their compliance on a more consistent basis.

And so we've got an offering that not many others can provide, and that has become a real nice growth opportunity for us in the business and one that we've started to call out a little bit more.

Great.

And then just on the tax rate, can you help us flesh out what's sort of the statutory rate or the normalized rate post tax reform now that we're almost a year into that?

And how much is the tax rate benefiting from that equity comp accounting change of 1.5 years ago or so?

And I guess, I'm just trying to think over the next few years, what could the tax rate go up to if that accounting change benefit around equity comp were to flatten out?

Yes, it's a real good question, Gary.

We certainly -- with the new accounting guidance, we're going to see a little bit more fluctuation in our tax rate.

I -- we expect it to be in a 24-ish type of a percent range, and again, that can move.

Now not all of that difference from 24% to 21.7% is the equity comp, but it certainly is a good chunk of that.

If that turns around, we could see it get closer to 24% and in some cases may even get higher than 24%.

But that's kind of where we see a steady range.

And what you saw in the second quarter of 24.2% roughly is a quarter without a big stock compensation benefit, like you saw in the first quarter.

Great.

And then if I could just sneak one other.

Is there any update on that accounting change benefit for this year?

I think you said 16% to 19%, the higher end of 16% to 19%.

Is that still a good run rate?

The benefit -- I think Paul called that out.

It was $6.1 million in the quarter.

For the year?

Yes, that range...

I think given that it's been, what, 11% in the first half of the year, it's probably going to be closer to that type of 20% to 22% type of range.

And moving on, our next question comes from Hamzah Mazari with Macquarie.

My first question is just on cross-selling as well.

Maybe if you could just frame for us how many customers are buying multiple services from you today versus sort of historically.

And where does that number go to or what can it go to?

Any thoughts on penetration there?

Yes, we don't have those numbers to share with you, Hamzah.

But we think there certainly is a big opportunity there.

As we've talked in the past.

the biggest penetration is with our uniform rental and entrance mat products.

But all of our other products would then be under 20% penetrated.

And we certainly think that we can get above 20% with many of those.

So we still have a lot of run rate, and we -- that certainly has been beneficial to the growth over the last few years.

Got it.

And then just on first aid, one of your competitors said recently they're going to get into that market.

Just maybe frame for us how sustainable is that 10% organic growth number and sort of the competitive dynamic you see in first aid today, just sort of update us there.

Sure.

We -- when we think about that business, we like the high singles and low doubles -- digits in terms of organic growth run rate.

And do we think it's sustainable?

We do, certainly in the next -- for the next several years, absent a big change in the macro environment.

In this business, the biggest competition is what we might call in the rental business the no programmer or the customer that's doing it themselves.

There are still many of them out there, and we believe we've got a great value to provide to them.

So we do think there are many opportunities out there for our service, and we think there is a great value in our ability to deliver that compared to the do it yourself-ers and the catalog purchasers and that kind of thing.

So we like the -- we love the business, we like the organic growth rate.

We think that can continue.

Great.

And then just last question.

You talked about buybacks.

Your debt is pretty low on leverage sort of 2.1.

How are you guys thinking about M&A?

Do you have too much on your plate with the synergies and ERP?

Or are you sort of ready to look at M&A maybe in a different vertical.

Any thoughts on M&A?

We are looking at M&A.

We are ready.

And if -- the thing about M&A is we can't always predict when those opportunities come along.

And so we want to make sure that we are ready.

And we're looking at -- we're looking in our -- certainly in our rental business, in our First Aid and Safety business, in our fire business.

If we can find tuck-ins or even larger than tuck-in opportunities, we will certainly take a look at them.

We think there's a lot of long-term value in that kind of investment.

And our next question comes from Andrew Steinerman with JP Morgan.

When you mentioned what was driving the strength in rental organic revenue growth, you mentioned penetration of existing accounts and some National Account wins.

I was wondering if you'd just give us directionally the other typical drivers of revenue growth.

How was retention year-over-year?

Is net realized pricing accelerating at all?

And of course, just a quick comment on add-stops.

It was led by our new business, as it usually is, but we've seen some real nice productivity out of our sales team.

That sales team -- also as we've talked about over the last several years, that sales team also sells into existing customers, and that's been going very well also.

And so that has helped the historical net add-stop metric that we talk about in our industry.

It certainly has been positive from the standpoint of getting some benefit from our sales team.

Retention is right where we want it to be and it's as good as it's been.

It's in the mid-90% range and has not changed a bunch over the last couple of quarters.

And pricing -- remains a favorable pricing environment.

I wouldn't say it's changed much in the last several quarters, but still a pretty good environment nonetheless.

Okay.

And just as a quick follow-up.

Just clarify what you meant before when sales productivity is back to premerger levels.

Did you mean that both the Cintas legacy sales force and now your inherited G&K sales force were back to Cintas levels of sales productivity?

I didn't quite understand if you meant both.

Well, let's be clear, it's one sales team now.

It is.

And so we measure it all together and it is higher combined than it was preacquisition.

So in other words, our new partners and recently hired partners from that deal, they have made some real nice progress and are certainly being productive in a way that we want them to be productive.

And the next question will come from George Tong with Goldman Sachs.

You've indicated that you're assuming a touch of pressure for the rest of the year from energy.

Can you elaborate on whether you're internally planning for oil prices to stay at current levels as you think about the demand impact and how you expect gross margins to be impacted by energy?

Well, let's talk about the pressures -- the cost pressures that we've cited.

From an energy perspective, it was flat in the quarter year-over-year and we're expecting it to be just up slightly.

We don't get specific enough to provide you an oil price.

But we think it'll be up slightly for the back half of the year.

We have talked a little bit about the labor.

We're seeing that in pockets, as we've said over the last several quarters, and that certainly is within our numbers for the first half of the year and it is contemplated in our guidance for the second half of the year.

So the great news is we've been able to increase gross margins in this quarter and for the year and expect that to continue despite some pressure from labor.

We also talked a little bit about some commodities.

You can kind of think of this as the trade impact, right?

And last -- if you think about China, for example, we've seen a bucket announced in July of tariff increases on a certain set of products and services.

We were not impacted by that.

A second bucket team in September, we were slightly impacted by that, and we touched on that last quarter.

Again, it's a pretty small amount, but that may continue.

And certainly then, it's too early to tell on anything else that may change with China.

We also -- we didn't touch on it last time, but certainly, NAFTA has been in the news quite a bit.

And if we can continue to see the structure to replace NAFTA or continue NAFTA, but if we can see the structure to replace NAFTA in the U.S. MCA, not much of a change there either.

So the really good news is, while we do see a little bit of an impact, it hasn't been significant and it is certainly within our guided numbers.

And really while we're on trade, if we think about our supply chain, we've got a really good global supply chain.

And we've talked about how we control much of what we purchase.

And when I say control, we either have owned manufacturing to a lesser extent, but we also control then fabric purchases and the shipment of those fabrics around the world to different sewing suppliers.

We have the ability to be flexible with that.

And as trade and -- as trade changes, we have the ability to be flexible where many of our competitors do not.

They are either tied to their own manufacturing or tied to third-party suppliers.

We have the flexibility to be much more flexible than that.

And so as we think about all of these different pressures, we like the way we are able to perform.

We like the way we are able to leverage our infrastructure to find efficiencies.

And that's what you're seeing in this guidance and in our current results.

We're able to increase our gross and operating margins despite some of these pressures.

Now that could change if the macro environment or trade significantly changes, and we'll certainly let you know about that.

But as we stand today, we like the way we're able to adapt to some changes in the environment and still improve margins.

Got it.

That's very helpful.

And as a follow-up, can you talk about what you're seeing in the manufacturing verticals and in the oil and gas verticals, given the recent movement in oil prices, if the pipeline looking out over the next several quarters has changed at all, especially when you compare it to earlier oil cycles with -- that have experienced similar levels of decline?

Yes, I can't say that we've seen much of a change at this point in time.

It may be a little early.

But we've seen at least our business be pretty healthy in those and many other verticals.

And next will be Andy Wittmann with Baird.

I just thought I would ask, maybe I missed it in the script.

But could you talk about the SAP implementation, Mike, and talk about maybe an update on where you are in terms of the number of locations or maybe the percentage of revenue that is now operating under that system and kind of what your outlook is here on the implementation in terms of timing of the endpoint of that has moved at all?

Andy, it's Paul.

We did not comment on SAP in particular in the script, but we are still making nice progress.

I think last quarter, we mentioned -- and I can't remember the number of locations, but we said that we had implemented about 42% of them, and we're now at about 48%.

So just about halfway through.

So again, like we've talked about previously, things are going very well because of the nature of the implementation and how our existing operating IT system is with a series of new AS400s boxes all over it.

It takes time to go from one to the other to the other.

But everything is going well, and we're still on track to complete the implementation in fiscal '20.

Great.

And maybe just kind of a similar question, given that a lot of this is concurrent.

But just on the G&K integration, this was the year with a lot of the rerouting, which is obviously a very tricky thing or can be.

Can you talk about where you are on that key thing, process in terms of how much has been rerouted and how that's going?

And then maybe just more broadly on G&K overall, as you get more intertwined here, how are you feeling about that synergy number and what was recognized in the run rate maybe that -- of synergies that you were -- recognized in the quarter in the run rate that you're on today?

Sure.

The route optimization continues.

But as we talked about, we remain cautious in doing that, because that really touches the customers.

It's movement of volume, it's affecting SSR relationships.

And so we're being very cautious.

I don't have a percentage or a dollar revenue number to share, Andy.

But we are continuing to move forward with that, and it's going well.

And I think the cautious approach is certainly helping us.

From an overall G&K standpoint, as you mentioned, it continues to get more and more intertwined.

And part of the rerouting and the route optimization is even more intertwining.

So I think I've talked a little bit about this where if we have multiple locations, legacy Cintas and legacy G&K, part of that route optimization results in volume possibly moving from one plant to another.

So even a legacy G&K facility today that has participated in route optimization may have some legacy Cintas volume in there.

So it gets more and more intertwined.

However, we certainly like the performance that we've seen out of the business, out of the integration activities, and we still feel very good about the synergy numbers that we've put out there.

We estimate that the current quarter is about $25 million in synergies that continues us very well on to our expectation for this fiscal '19 year.

And we still feel very good about hitting our targets for the full -- for the -- over time for the entire acquisition.

And the next question comes from Scott Schneeberger with Oppenheimer.

It's actually 3. Want to slip one here in front.

In Uniform Rental and Facility Services, I'm just -- I'm curious, you may have said it, I might have missed it.

The fiscal second half organic growth, because the 6.6% was loftier than you had expected, I'm just curious what is the expectation in the second half?

Are we talking high 6s or better or should we temper, because you said kind of -- I'm just kind of curious if there are any more clarification and if I missed it.

Yes, we don't give guidance by segment, Scott.

But the guidance range that we do have for the total company is about 6% to 7.2% I think?

Yes.

And that would certainly suggest that there is room for continued acceleration in that range.

Appreciate it.

That's helpful.

So yes, visibility is my question.

It's been asked a lot.

Obviously, you guys -- and you mentioned some new business wins lately that maybe trickles into the back half.

Sounds like you're very confident for the back half.

I'm curious if you could talk maybe to some of your end markets, what the visibility would be out?

You don't have to speak to your current business conditions.

But what visibility is typically -- can you see out more than 6 months?

And if so, how far?

Well, we try to see out as far as we can, and that's -- we -- from an external point of view, we generally keep our guidance to the current fiscal year.

Internally, we are certainly looking ahead in how we expect to perform in fiscal '20 and '21 and going forward.

I would say this, Scott, absent a significant change in the macro, we like the way we are performing right now.

We -- our sales force is performing very well.

Our integration continues, and we -- as we get more and more of that behind us, we can get more and more efficient in the way we operate.

We like our products and services.

We think it's a broad opportunity.

We are not -- certainly not fully penetrated.

And so we continue to like the opportunity to sell to existing customers.

So we feel like the business is running very well.

And I don't see a change in our ability to execute unless something happens in the macro that throws a wrench in the works.

But what we all here at Cintas look forward to is getting more and more of the integration and the SAP implementation behind us so that we can even become a little bit more efficient in the way we operate.

Great, good answer.

And then lastly, the CapEx guidance went down this quarter from last quarter, which went down from the prior quarter.

Not huge, but it's trickling down.

I'm just curious, is that maybe SAP related or is it something else?

Just kind of curious on that development.

It's purely timing, Scott.

We are continuing certainly to invest where we need to.

Some of it is timing from the standpoint of when we may need to bring a new plant online.

That can move a little bit here and there depending on the situations in those local markets.

So more than anything, it's just timing.

And the next question will come from Shlomo Rosenbaum with Stifel.

Paul, just wanted to ask a little bit on the free cash flow.

It's down first half like $40 million.

AR DSO is up 3 days sequentially.

Is there a build in anticipation of future sales or something?

Is there a timing thing?

Or just kind of a build-up as you're expecting continued sales execution?

Can you give us some clarity on that?

Yes.

I mean, as you can see, it's in working capital and there's really 2 -- I guess, 2 larger categories that are driving it, and both are temporary.

So we don't think there's anything structural here that we're concerned with.

The one is accounts receivable, I mean, you can certainly see that on the balance sheet and on the cash flow statements.

And we don't have concerns about collectability.

Our customers really need and want what we provide, and they do pay.

But Mike has talked many times on prior calls about the inefficiencies that exist within the organization when you have 2 significant projects going on at the same time, the G&K integration, the SAP implementation.

We have a lot of system conversions, customers are impacted, billing changes, invoices looks different.

And because of that disruption, it is causing some slowdown in cash coming in, a little bit of a build of AR.

But again, we believe it's nothing but temporary, and we will collect.

And let's not forget, we've got some really nice growth, and that certainly increases the AR.

And there was about a -- close to a $20 million impact from the rev rec adoption.

Yes.

And to build on Mike's comment about the growth, the other bucket is inventory.

And we talked last quarter about the fact that to support our growth, we have a new distribution center, a facility services distribution center that came online.

We were building inventory to ramp that up and get ready to put that operation in place.

So we're still burning off that inventory.

It's a little bit elevated at this point in time.

And then finally, Shlomo, we have a little bit of inventory build, because what we're finding is we've had SKUs historically with just Cintas standalone that were not sufficient enough in the demand for us to inventory them and stock them in our distribution centers.

So what would happen is our operations would just order these items from various vendors directly, and they would ship back to those operations.

But now with the increased volume from G&K, it does make sense to put more SKUs into the distribution center, manage it centrally, negotiate better cost by doing that.

And so that is a little bit of an inventory build.

But ultimately, again that's a timing thing and that's a measure we're putting in place, because we believe that will help us manage costs and lower them in the...

Okay, great.

And then just -- it's been close to a year since Aramark or AmeriPride.

And I was just wondering if you're seeing any change in terms of their competitiveness.

They're kind of a year into their integration.

It was mentioned that they're planning to get into first aid and hygiene.

I was just wondering, from your guys on the ground, the ones that are actually talking to customers and noticing who else is driving around, are you seeing any changes from them that you're kind of monitoring?

Well, we always like to monitor what our competitors are doing and that's not just Aramark and AmeriPride, but all of our competitors.

I would say nothing significant that we would call out at this point.

And moving on to John Healy with Northcoast Research.

Mike, I wanted to ask a question just trying to look at legacy Cintas customers and what are Cintas customers now, but acquired through G&K.

If you looked at the revenue per stop or the revenue per wearer, however you'd kind of maybe boil that metric down, what would you say is the difference between the Cintas legacy customer and what you acquired from G&K?

And if you looked out over the next year or 2, how much of that gap do you think you still have the potential to close?

Well, we -- our revenue per stop certainly was greater than G&K's was prior to the acquisition.

And we think there certainly remains that opportunity.

We are -- I would say we're closing the gap, but that's going to be a very -- it's a slow creep, I guess, and it'll take some time.

And one thing to keep in mind is we're still adding many new customers every year.

And those customers, we want to continue -- we have the opportunity to continue to penetrate as well.

So I don't have a very specific metric that I'm -- that I can share.

But certainly, our revenue per stop was greater, and there still is more opportunity, both in our existing -- our legacy customers and the legacy G&K customers.

We like that penetration opportunity.

Okay, fair enough.

And then I wanted to ask --- with the movement in oil, and doesn't sound you guys have seen great change in the business.

Was there much difference between how the U.S. and the Canadian operations performed in the quarter?

Just kind of curious if you're seeing much deviation there.

No.

I mean, there's a lot going on in both countries in terms of implementations and integrations.

And I would say, no, nothing to call out.

Okay, great.

And then just kind of one big picture question for you, Mike.

I feel like every business leader, their comments are extremely scrutinized right now in terms of how they feel about the economy and pace of investments and things along those lines.

When I hear your call and look at your numbers, there really isn't much to be negative about, I mean, quite strong across the board and you guys are buying a ton of stock back.

Beneath the surface, though, are you doing anything different versus 3 months ago than you thought you would be in terms of hiring people, making any sort of internal investment, whether it's in the technology or logistics or operations?

I'm just curious from a CFO's perspective, are you doing anything different versus what you thought maybe 3 months ago.

The only thing we're doing is the revenue and the growth has been better than we thought 90 days ago.

Certainly, you can tell from our guidance raise.

And we continue to invest for the future.

We like the way that the economy is operating right now.

It creates and provides a lot of opportunity for our products and services and all of our businesses, and we are continuing to move forward.

We -- the last thing we want to do is start pulling back on our growth levers simply to try to predict a change in the economy.

We're continuing to invest and grow, like we set out to do at the beginning of this fiscal year.

And the next question will come from Tim Mulrooney with William Blair.

So now that you've basically got half your branches converted to the new SAP system, do you have any early takeaways you can share with us with respect to the new system?

Have you been positively surprised by anything, finding new opportunities?

And how are these branches responding to change management, which I know can be difficult sometimes?

Any extra color here would be great.

Yes.

I think the farther we get into the integration -- or the implementation of SAP, I would say the easier it gets, because we are getting better and better at it.

As Paul said, we've got a lot of locations in a lot of different markets, and we learn from every one, and each one becomes a little bit more efficient.

So it certainly is still a big change management project.

And like I said, we're learning with each market that converts.

And that means we are getting ahead of the conversion.

We do a lot of communication.

We do a lot of training.

We do a lot of not just training in terms of looking at documents and understanding, but actually doing and working in the system.

So we've gotten, we believe, to be pretty efficient and pretty good at getting our locations prepared.

Having said that, certainly is still a disruption and it takes time to get through.

It takes time to get our customers used to seeing that different kind of invoice, et cetera.

So disruption will continue until we're finished with it, but we get better and better with each one.

From a standpoint of what have we seen out of the system, we really do like the efficiency that it brings to our SSRs.

Our SSRs are our drivers.

They have handheld computers.

They are much better and much more efficient than they used to be.

And so we like how those are working.

Our First Aid and Safety business has been on SAP for a few years, and we like the knowledge and the information it gives to that business.

We're starting to see a little bit of that in the rental business.

And as you can tell from the First Aid and Safety business, we like how our growth is going there.

So we -- I wouldn't say that we have seen a lot surprises from the standpoint of things that we didn't expect, but we like what we see.

And that does conclude the question-and-answer session.

I'll now turn the conference back over to you for any additional or closing remarks.

Well, thank you again for joining us tonight.

We will issue our third quarter financial results in mid to late March, and we look forward to speaking with you again at that time.

And happy holidays to all.

Well, thank you.

That does conclude today's conference.

We do thank you for your participation.

Have a wonderful day.