信達思 (CTAS) 2020 Q1 法說會逐字稿

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

Today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Mike Hansen, Executive Vice President and Chief Financial Officer.

Sir, please go ahead.

Thank you, and good evening.

Thanks for joining us.

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

We will discuss our first quarter results for fiscal 2020.

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

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements.

This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance.

These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we may discuss.

I refer you to the discussion on these points contained in our most recent filings with the SEC.

Revenue for the first quarter of fiscal '20 was a record $1.81 billion, an increase of 6.7% over last year's first quarter.

The organic growth rate which adjusts for the impact of acquisitions, foreign currency exchange rate fluctuations and differences in the number of workdays, was 8.3%.

In the first quarter of fiscal '20, the organic growth rate for the Uniform Rental and Facility Services operating segment was 7.5%, and the organic growth rate for the First Aid and Safety Services operating segment was 13.8%.

Gross margin for the first quarter of fiscal '20 of $849.1 million increased 9.6%.

Gross margin as a percentage of revenue was 46.9% for the first quarter of fiscal '20 compared to 45.6% in the first quarter of fiscal '19.

Uniform Rental and Facility Services operating segment gross margin as a percent of revenue improved 150 basis points from last year's first quarter to 47.2%, and the First Aid and Safety Services operating segment gross margin percentage improved 110 basis points to 49%.

Reported operating income for the first quarter of fiscal '20 of $306.1 million increased 15.4%.

Operating margin was 16.9% in the first quarter of fiscal '20 compared to 15.6% in fiscal '19.

Operating income in the first quarter of fiscal '19 was negatively impacted by integration expenses related to the G&K acquisition by $4.9 million or 30 basis points.

Reported net income for the first quarter of fiscal '20 was $250.8 million, and reported earnings per diluted share for the first quarter of fiscal '20 were $2.32.

Excluding the G&K acquisition integration expenses in fiscal '19, EPS increased 20.2%.

As our Chairman and CEO, Scott Farmer, was quoted in today's press release, we are pleased with our start to our fiscal year.

We thank our employee partners for continuing to execute well on our important initiatives.

Before turning the call over to Paul for more details, I'll provide an update of our fiscal '20 expectations.

We expect revenue to be in the range of $7.28 billion to $7.32 billion.

We expect EPS to be in the range of $8.47 to $8.57.

Note the following regarding the guidance.

The growth rate at the revenue guidance range is 5.6% to 6.2%.

However, our fiscal '20 contains 1 less work day than our fiscal '19.

Adjusting for this one day difference, on a constant work day basis, the revenue growth rate at guidance is 6% to 6.6%.

One less workday also has a negative impact on EPS, reducing it about $0.06 which is a 90 basis point drag on the EPS growth rate for the year.

The guidance assumes an effective tax rate for fiscal '20 of 20.3% compared to a rate of 19.7% for fiscal '19.

The higher effective tax rate in fiscal '20 negatively impacts EPS growth about 80 basis points and total EPS by about $0.06.

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

The guidance assumes a share count for computing EPS of 109 million shares.

This consists of diluted weighted average shares outstanding plus participating securities in the form of restricted stock.

And it does not assume any future share buybacks, any potential deterioration in the U.S. economy or any additional G&K integration expenses.

I'll now turn the call over to Paul.

Thank you, Mike.

Please note that our fiscal '20 contains 1 less work day than fiscal '19.

One less day will negatively impact fiscal '20 total revenue growth by 40 basis points.

To illustrate the magnitude of the headwind, using fiscal '19's annual revenue, 1 less workday equates to about $27 million.

One less workday also has a negative impact on operating margin and EPS.

Fiscal '20 operating income margin will be reduced by about 12.5 basis points in comparison to fiscal '19 due to 1 less day of revenue.

The negative impact on the margin occurs because certain expenses like amortization of uniforms and entrance mats are expensed on a monthly basis as opposed to on a daily basis.

And we will have one less day of revenue to cover the expenses.

As Mike stated, one less workday is a headwind of about 90 basis points on EPS growth and about a $0.06 drag on total EPS in comparison to fiscal '19.

Each quarter of fiscal '20 will contain 65 workdays.

In comparison to fiscal '19, our upcoming Q2 of fiscal '20 will have the same number of days.

Q3 will have 1 additional day and Q4 will have 1 less day.

Please keep the quarterly day differences in mind when modeling our fiscal '20 results.

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.

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

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

Uniform Rental and Facility Services revenue was $1.45 billion, an increase of 5.8%.

Excluding the impact of acquisitions, foreign currency exchange rate changes and differences in the number of work days, the organic growth rate was 7.5%.

Our Uniform Rental and Facility Services segment gross margin was 47.2% for the first quarter compared to 45.7% in last year's first quarter, an improvement of 150 basis points.

Energy expense as a percentage of revenue was 2.20% compared to 2.45% in the prior year quarter.

The gross margin expansion was driven in large part by the strong revenue increase covering certain fixed production and service department costs.

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

This segment's revenue for the first quarter was $172.1 million.

The organic growth rate for this segment was 13.8%.

The first aid segment gross margin was 49.0% in the first quarter compared to 47.9% in last year's first quarter, an increase of 110 basis points.

First aid segment gross margins continue to increase with a strong top line growth.

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.

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

Uniform Direct Sales, however, is a key business for us.

And customers are often a significant opportunity to cross sell and provide products and services from our other business units.

All Other revenue was $184.5 million, an increase of 8.8%.

The organic growth rate was 9.7%.

The fire business organic growth rate came in at 12.5%.

The Uniform Direct Sales business had a good quarter, too, posting an organic growth rate of 5.8%.

All other gross margin was 42.8% for the first quarter of this fiscal year compared to 42.9% for last year's first quarter.

Selling and administrative expenses as a percentage of revenue were 30.0% in the first quarter of fiscal '20 and 29.7% in the first quarter of '19.

Lower labor expense as a percent of revenue was offset by increases in other expenses, particularly an 80 basis point increase in medical expense.

We are self-insured and therefore, subject to some volatility in medical expense from quarter-to-quarter.

Our effective tax rate on continuing operations for the first quarter of fiscal '20 was 10.1%.

Stock-based compensation positively impacted the tax rate.

As Mike stated earlier, the tax rate can move from period to period based on discrete events, including the amount of stock compensation expense.

Please note 3 new line items on our balance sheet, resulting in an increase in assets and liabilities by about $165 million.

These relate to our adoption in the quarter of the Accounting Standards Update 2016 that I showed, too, and titled leases.

The adoption does not have a material impact on net income or cash flow.

Our cash and equivalents balance as of August 31 was $102.1 million.

Operating cash flow in the first quarter of fiscal '20 increased about 70% from the amount of operating cash flow in the first quarter of fiscal '19 and benefited from strong earnings growth and improvements in working capital.

Capital expenditures in the first quarter were $64.7 million.

Our CapEx by operating segment was as follows: $53.0 million in Uniform Rental and Facility Services; $8.1 million in First Aid and Safety; and $3.6 million in All Other.

We expect fiscal '20 CapEx to be in the range of $280 million to $310 million.

As of August 31, total debt was $2,876.9 billion.

$2,538.1 billion was fixed interest rate debt and $338.8 million was variable rate debt in the form of a term loan and commercial paper.

At August 31, our leverage of 1.9x debt-to-EBITDA was slightly lower than our target of 2x.

That concludes our prepared remarks.

We are happy to answer your questions.

(Operator Instructions) And our first question will come from Toni Kaplan with Morgan Stanley.

The uniform gross rental margins were really strong this quarter, extending by about 144 basis points.

Is there anything onetime in there?

Or I guess how much could be attributable to synergies?

And how should we think about the pacing of synergies this year?

Nothing really onetime.

We did -- as Paul mentioned, we got a little bit of a benefit, 25 basis points from energy.

So we got a little bit of benefit there.

The synergies, our expectation is that they will be generally consistent from quarter-to-quarter, so call it roughly $35 million.

That would -- if that happens, that will get us right to that $140 million for the year which we -- as we talked about a few months ago, we're going to be right around that range, $135 million to $140 million.

So we feel pretty good about our ability to capture those synergies.

I would say the rest of it is nice execution, getting through a little bit more of the integration activities and seeing some efficiencies at play.

The environment for pricing was similar to the fourth quarter where we sat a bit incrementally better than we had seen.

So we got a little bit of revenue help from that standpoint as well, but not really any onetime items.

Perfect.

And now that you've reached your target leverage, can you talk a little bit more about what you would look for in an acquisition?

Would you prefer sort of domestic or international for uniform versus ancillary services?

And lastly, would you expect any regulatory issues just given your size at this point?

So from an M&A perspective, we love M&A in our -- in the businesses that we're currently in, certainly.

Anything from a tuck-in in our fire, first-aid and uniform rental businesses to something larger.

We certainly -- if there were any M&A opportunities in our space, we certainly want to be involved and would have a great interest in pursuing that at the right value.

We certainly like -- from a geographic standpoint, it's easier to capture synergies, for example, with acquisitions in the U.S. and Canada because we have a presence here and it allows us to get density in markets to combine capacity if there's -- opportunities present themselves.

So would prefer acquisitions where we can capture better synergies.

Your last question of do we expect any regulatory issues.

It certainly depends on what type of acquisition and the size of that acquisition.

But let's assume a large acquisition in the workwear space, for example.

If one came available, we love to take a look at it.

And when -- I would say something that you may not be considering, others may not be considering is we have so many people that look at our business from a serve market perspective.

And we view the market as so much bigger than that.

So for example, we compete in the workwear space.

There's a lot of competition in the workwear space.

Some of our competitors in workwear are from retail standpoint.

So in other words, they simply sell workwear.

Walmart and Amazon each sell over $5 billion annually of workwear.

They are large competitors in the space.

We have other competitors that provide workwear and design and ship -- they have shipping capabilities.

They manage programs to a certain extent.

So there are those kind of competitors.

And we happen to provide workwear through manage programs.

We source, we deliver, we maintain, we launder for our customers.

And so there's a lot of competition in this space.

We've kind of told you for many years, over 60% of our new business comes from no programmers.

And who are those no programmers?

They're retail space, they're direct sellers, they're people who do it themselves.

But we've shown year-after-year that we -- that is part of our market space.

We can also lose business to those kinds of, let's call it nontraditional competitors.

My point in telling you all of this is the opportunity is really large and much larger than our served market.

And so look, if there's an opportunity that's large in our space, we certainly would have interest.

We want to understand it.

It would have to be at the right value.

And we have to articulate that competitive set which we think is quite large.

Our next question comes from Manav Patnaik with Barclays Capital.

My first question is obviously, the first quarter growth was pretty impressive and well above your full year guidance ranges, I guess.

Could you just help us maybe walk through if there's any quarterly cadences that we should be looking at?

Well, sure.

So maybe we'll start with the first quarter.

We did have a really nice first quarter.

Our nonrental businesses performed really well.

Paul maybe -- Paul gave a little bit of comment on those, but maybe you can give a little bit more color on those businesses.

Yes.

Sure, Manav.

So let's start like with first aid.

We mentioned the organic growth at 13.8%.

That's a business that has executed very well.

We typically expect organic growth to be in the high-single digits.

Maybe 10% is what we've talked about for that business.

So they came in a little bit stronger.

Of course, there's a lot of blocking and tackling, a lot of variables that go into the performance in the quarter.

But of note, we did have a new item that we rolled out in the quarter, a new item in the cabinet.

And it's kind of like a rollout of a direct sale program.

For example, in the Uniform Direct Sales business where you're putting that into the cabinets.

You get a lot of revenue, and then you're counting on some smaller trail of that revenue going on in the lapping quarters.

So a little bit of a boost because of that new product rollout.

And so our outlook for first aid is going to be continuing to have a great year.

But probably the latter quarters, more in the high-single digits where we historically have been.

Fire.

That business, impressive organic growth rate of 12.5%.

Again, a lot of pieces to that with execution on the sales force and great quality service.

But they did have a little bit of an easier comp, Manav.

I think their growth rates a year ago was about 8%, so a little bit higher than 8%.

So I think some of the 12.5% was a little bit of that easier comp.

And in that business, the fire business, there's really 2 types of revenue streams.

There is a more reoccurring revenue stream that we call test and inspection, testing and inspecting fire extinguishers and sprinkler systems, et cetera.

It tends to repeat more often.

But we also have another revenue stream.

When things break, when alarms don't work, you have to perform repair and maintenance.

And we had some national account repair and maintenance-type revenue in the first quarter that was a little bit larger than we expected, and we don't expect that to repeat.

So I think the 12.5% was a little bit higher than we typically expect.

And then finally, kind of rounding out the other business units.

You'll note -- well, you can't -- we might have mentioned in the prepared remarks that direct sale business had a good growth rate of 5.8%.

A year ago, the growth rate was rather weak.

In fact, it actually had some shrinkage of about 1.8%.

So that's a business that I think benefited from that easier comp in the first quarter.

And as we've talked about previously and in our prepared remarks that direct sale business is typically more of a 3% grower long term.

Yes.

So Manav, when you look at the performance, I would say, the nonrental businesses had great quarters, maybe outperformed our expectations a little bit and probably don't expect that going forward.

From a rental perspective, again, had a really nice quarter.

We had some really good execution by our rental partners.

I mentioned a little bit of the pricing was similar to the fourth quarter which was incrementally good.

So got a little bit of benefit there.

Probably got a little bit of a year-over-year benefit.

Keep in mind, last year, in the first quarter, that was our lowest organic growth.

So we were -- our volumes were still kind of finding the bottom, so probably got a little bit of benefit in that regard, too.

So as we look out over the next 3 quarters, we don't look at -- we don't -- there shouldn't be a lot of inconsistency in terms of the growth, but things can happen from quarter-to-quarter.

But don't see a lot of movement from one quarter to the next for the rest of the year.

Got it.

And then if I could just ask, in terms of the G&K revenue synergy, I know -- I don't think you're looking to quantify anything, but any anecdotal color on if you're starting to see that -- the needle mover in terms of your results?

Well, we started talking about this a little bit.

We saw signs of benefit in the first quarter of last year and saw some nice execution throughout last fiscal year.

And so we did see some benefits throughout last year, and saw a little bit of that in the first quarter.

As we move forward, from a lapping perspective, I don't know that I would expect anything that is significant.

But we're -- it's something that we're constantly -- every week that we visit those customers.

We're talking with them, we're educating them on what we do.

And sometimes, these take time.

And we're going to continue to cultivate those relationships as we go.

I wouldn't expect any significant amounts in any one particular quarter, but it certainly is a nice benefit for us.

Our next question will come from Kevin McVeigh with Credit Suisse.

Really, really nice job.

At this point, given the gross margins, is it fair to say -- and I know we're not just interviewing G&K, but is G&K up to the corporate average at this point?

Or would you expect that to get continue to kind of narrow relative to where Cintas is relative to GK?

Well, as you referred to, it's really hard to say.

So for example, a lot of that G&K volume resides in legacy Cintas locations.

So when you think about that volume, it certainly has helped us in those kinds of locations create more capacity utilization, create a little more density.

And so there certainly is a benefit.

From stand-alone locations, many of them have inherited some legacy Cintas volumes, but they're not quite to where we would see the rest of the Cintas legacy locations, but they're making nice progress.

So we hope to continue to see improvements as we move forward.

Got it.

And then just with the benefit from energy, was that a organic growth headwind, i.e., would there have been maybe benefit last year from surcharges and you don't have those surcharges?

Or would it have all been on the expense side?

We started to see a little bit of softening towards the end of the first quarter in the energy space.

You got to keep in mind, it's not a big part of our revenue base.

But we start to see a little bit of softness.

I would say no headwind in the quarter from a revenue perspective.

We're keeping our eyes on it though as we move into the second quarter and beyond.

Got it.

I guess -- I'm sorry, I was thinking more in terms of fuel.

You don't get to fuel surcharges.

I know -- it sounded like you saw some relief from energy cost.

I just wondered if that was a headwind on the revenue line.

Yes.

I'm sorry.

We don't have a fuel surcharge.

So the energy, the gas prices, we don't flex our pricing or surcharges based on the price of the pump.

I'm sorry.

What I was referring to was our customers in the oil, gas, mining areas that generally, when you see the prices of the gas at the pump come down in the past, when we've seen those prices really come down, it kind of hurts that business here in the U.S. And so the -- we saw some benefit in that price at the pump, as we said, 25 basis points in rental.

But we also saw a little bit of softening in the business side of it from a customer perspective.

And so that's what we're keeping our eyes on.

But we don't have a fuel surcharge, so no impact relative to that.

Our next question comes from Gary Bisbee with Bank of America Merrill Lynch.

I guess, you sort of alluded to this earlier in the commentary about some of the places where you saw strength this quarter.

But clearly, in the rentals business, you had a much easier comp on both organic revenue and margins in the year-ago.

And so I guess I just wanted to ask, is it right to think that, that -- is a portion of the rentals business improvement -- and it may be more significant than any sort of sequential improvement in momentum relative to what you were seeing this past spring?

Is that fair?

So in other words, yes, Gary.

I think your comment on did we get some year-over-year benefit, yes, I think there was probably some of that, as you alluded.

And I mentioned a minute ago, our organic growth was still finding the bottom in terms of our volumes in rental.

And so there certainly is a little bit of year-over-year benefit there.

And so I think that's -- I think your commentary is reasonable.

Okay.

And then just thinking sequentially as we moved over the last few months, are you hearing anything different from your clients in the U.S. and Canada around the macro backdrop?

Some of the forecasts for GDP growth in the U.S. are moderating.

Some of the industrial activity is moderated a bit so, employment, it continues to be good.

But any change in dialogue?

Or is it really steady as she goes?

Yes.

We haven't heard much of a change from our customers, and our first quarter results would kind of show that.

When we think about the economic picture, though, as we move in -- the last 2 quarters of our fiscal year are going into the mid-calendar '20.

We do think about the noises around interest rates, the noises, the continued noises around trade and tariffs.

We're going to be entering an election year where there's going to be a lot of noise.

And I would say, we look today with a little bit more cautiousness than maybe earlier in the summer.

And while we haven't seen much change from our customers yet, we're keeping our eyes on it because there's just so much noise in the environment today.

Great.

And then just lastly, can you give us a sense how much of the All Other segment is fire versus uniform sales?

And really, the reason I ask is I think a lot of people have always just plugged in low single-digit growth because uniforms was always bigger.

But it sounds like fire keeps growing.

Is that -- understanding there's volatility quarter-to-quarter, is it possible actually more should be a mid-single-digit type grower all in given that fire's growing quickly and uniform fairly moderately?

Is that a fair assumption?

And if you could give us a mix, that would be great.

Gary, it's Paul.

I think that even in our 10-K, we actually have to break revenue recognition adoption of that has caused us to provide more detail.

So you can take a look at the last 10-K and you'll see it.

But my recollection is, and doing a little math, the last time that fire's kind of like about 55% of the mix at this point in time.

45% then is the direct sale business.

And then to your point, we've tried to add some color that the fire business is high-single digits, 10% organic.

Whereas that direct sale business is typically around 3%.

Fire, the fire business, had a very good quarter.

It improved gross margins, it improved operating margins.

But to your point because of the fact that we lump those together per the accounting guidance and we call it All Other, it blends this particular quarter to a little bit of a shrink in the gross margin by, I think, 10 basis points it was.

But if that's more due to the mix shift and the fact that DS -- the direct sale business grew 5.8%.

It shifts that mix and can cause that to move.

But if you parse those 2 businesses out, fire business actually improved their margins, as I said.

Our next question comes from Seth Weber with RBC Capital Markets.

I wanted to ask about working capital.

It came down nicely relative to first quarter of last year.

Do you think you can kind of flip the negative?

I think it was $260 million or $275 million or so for 2019.

Do you think you can flip that all the way back to par this year?

Or can you just talk to how you're thinking about working capital for 2020?

Yes.

We -- our thoughts on working capital are when we are growing, we're going to use some working capital.

So for example, if we're growing the way we want to grow, accounts receivable is going to grow.

Inventories are going to grow.

In-service inventory is going to grow because we're injecting new inventory into new customers and penetrated customers.

So generally speaking, we expect in a growth environment, we expect to use working capital.

Now last year in the first quarter, our use of working capital was quite larger than it was this year in the first quarter.

So we were in the midst of a lots of system integration activity, a lot of G&K integration activity.

And so we had some disruption in the accounts receivable environment.

We feel really good about where we are today.

And so you've seen a little bit of a less of a usage there.

From an inventory perspective last year and in in-service inventory last year, when we make an acquisition like G&K, there are points in time at which we are going through inventory a little bit more quickly because we're transitioning out of legacy G&K inventory into Cintas types of inventory.

Now that's -- that did happen all at once in the first quarter of last year but it certainly picked up.

It continues today but certainly at a lesser pace.

And so that's -- there was a little bit disruption last year in the first quarter.

A little bit more of a steady state this year in the first quarter, but we would expect continued use as long as we can continue to grow.

Okay.

So the balance of the year probably looks something like the balance of 2Q through the balance of last year then?

Is that a fair way to think about it?

I don't have the balance of last year right in front of me but I would -- generally speaking, yes.

We wouldn't expect anything of a disruptive nature in those areas.

Okay.

And then just follow up on the SG&A, appreciate you calling out there were some extra expenses there for the quarter.

So would you expect, assuming those don't recur, SG&A to be down then year-over-year for the rest of the year?

That certainly is our -- yes, that certainly is our expectation.

From a self-insurance standpoint, we've had quarters in the past where we'll see onetime claims pop up and it results in a little bit of a higher insurance medical expense than normal.

Those may continue to happen, but generally speaking, we expect to see some nice leverage in SG&A, particularly from the G&A side of things.

Paul mentioned that labor -- G&A labor was down a little bit, and we're very pleased with that.

So we'll have disruptions from quarter-to-quarter.

Generally speaking, we do expect leverage, no doubt.

Okay.

And just -- sorry, one last one for Paul.

Is tax rate kind of consistent here than for the balance of the year just spread evenly, 2Q to 4Q?

Yes.

That's reasonable, Seth.

It's just that Q1 that is so -- such an outlier because of the stock option exercises.

So I think that's good for modeling the remainder of the year.

Our next question comes from George Tong with Goldman Sachs.

Going back to organic revenue trends.

How much of the acceleration in the quarter would you say is due to traction with penetration of the no programmer market versus improving add-stops?

Or do you think competitive trends that you're seeing?

Yes.

George, not a lot of difference from a normal quarter from the standpoint of new business continues to be strong.

Productivity from our reps was really good.

And within that new business set was a good no programmer performance.

So new business continues to lead the growth effort.

From add-stops, nothing to call out really.

But as I mentioned earlier, pricing in the quarter did help similar to what we saw in the fourth quarter.

So a little bit certainly year-over-year help in that regard as well.

So real nice sales productivity, a little bit of pricing help.

Real nice execution from our partners.

Got it.

That's helpful.

Your gross margins are continuing to improve across your segments.

Can you elaborate on how your input costs are evolving, and what your latest thoughts are on the impact of trade negotiations on the business?

Yes.

So from a material costing standpoint, we haven't seen a lot of change right now.

It seems like the trade and tariff conversation is more conversation than impact at this point, but still creating a lot of noise and uncertainty for our customers and us to a certain extent.

But I haven't seen a -- much of an impact.

Keep in mind, from a material perspective, most of our material costs get amortized over some period of time, whether it's a life of a garment or the life of a mat.

And that amortization period really helps.

It's a bit of a natural hedge and it helps us smooth those kind of cost out.

But I would say, no costs to call out from that regard.

Labor, we talked over the course of the last year, we've seen it, some pressure in pockets.

I didn't see anything new or different in this quarter.

Our next question comes from Andrew Wittmann with R.W. Baird.

I just had a couple of maybe clarifying questions here.

First, just on the guidance.

I think you guys -- obviously, the tax rate was low.

We expected it to be low.

I don't think you guys expected it to be quite this low.

I'm just wondering how much of the tax rate was incremental or part of the guidance raise just to tease that element out of the total raise here versus your prior expectation?

Yes.

I would say in the quarter, it was about a $0.06 impact; for the year, probably about an $0.08 impact.

And look, the -- so much of that impact that we speak of is kind of out of our control.

You've heard us talk about the equity piece of that.

And that's what kind of played or that played the role in the first quarter here.

Okay.

And then just on SAP.

In the past, you've talked about how well rolled out or how thoroughly rolled out that is.

Can you just kind of update us as to where we were either at the end of the quarter or where we stand today, Mike?

Yes.

Andrew, it's -- we're about 75% of the way complete now.

And so we're still on track to finish that implementation by the end of the fiscal year.

Great, that's helpful.

And then just for other detail here.

You did some pretty good amount of buyback in the quarter.

Can you give the total number of shares that you bought in?

And how much is remaining on the authorization that you currently have in place?

Yes.

During the quarter, we -- well, we have $263 million left on the authorization.

We bought 837,000 shares for just under $200 million.

Keep in mind that all of that purchasing was done prior to our July call.

So it was it -- it did not have an impact on the guidance that we gave you today.

Got it.

Okay.

And then, I guess, just the only other question I had was specific around labor.

You talked about SG&A kind of labor savings.

But in the gross margin in the plant, this has been an area that's been cited maybe more by some of your competitors, but you guys have talked about it a little bit as well.

I was just wondering if there's any changes that you've seen in the marketplace for your plant level labor, and how you're dealing with that today, if there's something we don't run.

Well, we've -- you're right.

We've talked a little bit about pressures here and there, in pockets particularly in that production and plant environment.

And I would say, we didn't see much of a change.

It remains a competitive environment.

And we've got to do -- the best thing we can do is keep our turnover, or partner turnover, as low as possible.

And we've been pretty successful at that.

So not much of a change in this first quarter compared to what we've seen over the course of last year.

Our next question comes from Shlomo Rosenbaum with Stifel, Nicolaus.

When you were talking about M&A earlier in the call, have you guys ever purchased a company that had unionized labor force?

And is that something that would be a nonstarter for you?

Or is that something that you would still entertain if there's a lot of synergy potential?

Well, Shlomo, G&K had about a 20% union workforce when we acquired them.

A union environment, different culture.

It certainly creates a different type of environment, operating environment.

And those kind of things can tend to make synergy capture a little bit more challenging.

And so at the end of the day, we -- would we evaluate something with a heavy union component?

That's a value consideration more than anything else.

And we'd have to take a good hard look at it because it does complicate the synergy capture opportunity.

But there's a -- that's a part of the conversation around value and consideration.

Got it.

And then did I hear you right that you did not buy back any more stock after the last earnings call?

Correct.

Okay.

And then could you -- just is that usually -- and usually, when companies don't buy back stock and their leverage is below the level that the -- consider a target level, there's usually something that is a potential out there.

Is that an unfair assumption for us to make that there might be something in the near to intermediate term?

Well, Shlomo, we've always looked at that buyback as we've executed as an opportunistic program.

And if you go back over the course of the last 10 years, we are not consistent from quarter-to-quarter.

And that's by design.

We kind of look at a bunch of different things.

We look at the performance of the business, the investment needs of the business.

We look at M&A opportunities on the horizon.

We look at things like upcoming dividends.

And we have a consistent history of not being consistent in the way that we execute on that buyback program.

And I'm not sure I'd look into anything more than that.

Okay.

And then if you just look at kind of the margins of the business, the first aid and safety had really good growth.

Margin expansion was not -- not a whole lot there.

Is there a lot of investment going on in terms of building out routes or anything like that, that you're not seeing more leverage here?

Well, we had a real nice gross margin quarter with the gross margin being up 110 basis points.

And so we're -- with that growth, we are continuing to invest in routes and in capacity.

But really, you're right, Shlomo, from an investment standpoint, we did continue to invest in the SG&A space.

And so we do see a little bit of an elevated SG&A number compared to last year.

Keep in mind, they're also affected by the medical.

And that was about an 80 basis point headwind.

But you're right, we are continuing to invest in that business.

We do really like it.

Okay.

Great.

And do you mind just going over the days in each quarter year-over-year so we get that straight to the next 3 quarters?

Shlomo, it's 65 in each quarter of this fiscal year.

And then -- let's see, compared to '19, so we had 66 in Q1 last year then 65 in Q2, 64 in Q3 and 66 in Q4.

Our next question will come from Scott Schneeberger with Oppenheimer.

I just wanted to hone in a little bit more on pricing.

You've mentioned nice improvement from fourth quarter, or at least still solid which it improved from third quarter.

Could you delve in a little bit to the end markets where you're seeing that pricing improvement?

Is there any competitive dynamic that's changed to affect that?

And when I think of end markets, also if you could just specify across the segments, too, please.

So from a market by market -- from an end market perspective, nothing to call out of any significance.

You've heard us talk a little bit about the pricing environment over the years.

When businesses in the rental business are performing well, when they're growing, they have limited capacity.

And it generally tends to add a little bit of -- a little bit more readableness to the pricing environment.

And so we do see a little bit of that going on.

We're also -- we also, I think, do a pretty good job of articulating to our customers why at times pricing can be appropriate.

And so I think that execution has been pretty good as well.

So combination of the health of the marketplace, our ability to articulate, I think that has combined to a nice environment.

Appreciate that.

And just following up.

In response to Manav's question earlier in the Q&A, you were talking about a new item in the cabinet and how that could have a lumpy effect because the follow-on tapers a bit.

I was just curious, how are you doing with opportunities like that rolling out?

And if you want to share what that new item was, that'd great.

But how are you doing with deploying new offerings and servicing -- services?

And if you could tie that into G&K and if you're seeing any cross-sell benefits from there, that would be great.

We do.

We are seeing some cross-sell opportunities and benefits like we have over the course of the last year.

And -- but I would say, generally speaking, and we rather not call out that specific item, but generally speaking, we're always looking and investing for ancillary products, ways that we can add some value for our customers.

And so in this case, it was a nice benefit.

Sometimes, those happen in a particular quarter and didn't happen last year.

They can be lumpy in terms of when the rollouts occur.

But we like where we are in terms of our ability to create those ancillary products within our businesses.

That's what -- we've talked many times about the umbrellas of image, safety, cleanliness and compliance.

And when we think broadly like that with our customers, sometimes, we're able to come up with some pretty nice and unique ideas.

And we've been -- we've had some success over the course of the last year.

And that would go for legacy G&K customers as well as into legacy Cintas customers.

We've had some nice success.

Our next question comes from Andrew Steinerman with JPMorgan Securities.

It's Andrew.

Could you give a quick comment on merchandise amortization?

Was it a headwind or tailwind in the first quarter?

And given the strong new wins, do you feel like merchandise amortization will be more of a drag going forward to margins?

Yes.

Right.

No, it was -- nothing to call out in that regard during the quarter.

We're in an interesting time, as I was mentioning earlier, Andrew, where we've injected a decent amount of new Cintas product into legacy G&K customers, and that can create some rippling.

And we're going to see all little bit of that as we move forward but less of it today than a year ago, I would say.

As we move forward, we're going to continue to sell, hopefully, a lot of new business.

And so we'll continue to inject at pretty good rates.

But again, I would say, nothing to call out.

Our managers are managing the inventory and the in-service pretty well.

And can I ask, as you do inject Cintas uniforms into the G&K customer base, do they notice that there's a quality upgrade there?

We certainly would like to think so.

I mean, when we look at the inventory, Andrew, our people understand the features and the functionality of the inventory in the garments that we have.

And they are trained to point those features and functions out to our customers.

So as long as we are doing our job and introducing those garments and introducing those prominent features and functions of them, I'm expecting that the customers certainly notice.

And at this time, there are no further questions in the queue.

Well, thank you for joining us tonight.

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

Good night.

Thank you, ladies and gentlemen.

This concludes today's teleconference.

You may now disconnect.

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