CTAS
#As you probably have seen, we have talked about $130 million to $140 million in annual synergies fully realized in year four.
We have also talked about this being fully accretive, or accretive, in our second full year.
That would be our fiscal 2019.
As we move forward, we certainly have had a lot of assumptions about those synergies, but I will tell you, over the course of the last seven months, one thing that I need to make sure is clear is we've been operating as two separate companies, and that was a requirement so that we were not jumping ahead of the regulatory process.
And I tell you that because we are just now ---+ we just closed yesterday; we are just now getting into the confirming of our assumptions.
And we need to do that before we can provide more timing, more specific timing, on the synergies.
But we do feel like we will be accretive in year two.
And in year one, we are going to have some one-time expenses that are nonrecurring in nature, things like rebranding, asset impairments, severance, lease breakage type things, and we are going to be going to work over the course of the next several months really confirming what those amounts will be.
Once we do that, once we confirm our assumptions for the integration plan, we will have a better idea of what fiscal 2018 will look like, and our expectation would be we certainly share that in July.
But having said all of that, we certainly do think that there will be synergies in year one.
We're just not ready to provide any specific numbers.
I would say that we would likely have either left them the same or possibly narrowed by bringing the bottoms up a little bit.
So we ---+ third quarter, we are very pleased with the third quarter.
I think we've got some nice momentum and execution going on in the business, and we are poised to have a good fourth quarter.
Yes, <UNK>, it's <UNK>.
You are right.
The 15 basis point is part of the math.
I would say, in addition to that, we had a very good, strong quarter from a new business perspective, especially as it related to garments.
And so not only do you benefit from the new business in terms of that additional recurring revenue that you will receive from the garments going forward over those five-year agreements, but when you have new business installed related to garments, you also have some good revenue in terms of peripheral charges, set-up fees and emblem costs, so that definitely helped as well.
But really outside of that, <UNK>, there was nothing extraordinary.
It's just the continuation of execution of the game plan, you know, quality service.
Retention remains strong, a very strong organic revenue growth quarter, something we are proud of, given all the excitement of the pending acquisition, but just continuation of what we've done the last six years of growing that topline in that 5% to 7% organically, and, again, proud of those growth rates compared to the competition, which has been posting much, much smaller organic growth rates.
As it relates to why not provide some sort of guidance, whether it's cash or something else, you know, <UNK>, we're going to get busy right away, and we're going to get busy on the integration items.
And as we do that, the business is blur.
It's not like we're going to go through the next two, slightly over two months, and have two distinct businesses still by the end.
They are going to get blurred because we are bringing them together, and we are going to be doing quite a bit of integration work.
And it's just ---+ it becomes very, very difficult to keep those pieces separate.
And because of that, we are not ---+ I don't like the idea of trying to dissect that.
If we do come up with the purchase accounting results during the quarter, and we feel that we are in a position to provide them, you may see us do that, but our first goal is to really understand it and get it right, and then provide.
As we've talked about, yes.
We think that's fair, and it probably ---+ we would probably have narrowed it by bringing the bottom-up.
We feel good about the fourth quarter, and the third quarter I think is very indicative of the second half of the year that we expect it to have.
So, yes, the answer to your question is yes.
The amortization period will be 10 years most likely.
We expect that to be in the range of about 3% to 4% of the deal value.
And would it be accretive without that.
I think yes.
I think the answer, <UNK>, is yes, that you can kind of think about that as, what, a $66 million to $88 million annual number.
It will be a fairly large non-cash number.
That will be our goal, yes.
We will likely provide GAAP guidance, but we will ---+ our goal will be to give you some of these large items to give you a sense of what the performance detail will look like.
Yes.
Definitely, new businesses continues to be the strongest driver of the growth.
As we said, it's new business in terms of new customers.
We are still selling that 60/40 split of 60% of the new business wins are new programmers versus the 40% taking market share.
So, that's been very consistent through this year and really in the near past as well.
New business also includes the penetration of our existing customers.
That is certainly part of our vision, and that continues at a very good pace.
A lot of the hygiene products that we've talked about in the past, our Sanis signature series, a new offering in the last couple of years, that's really helped us with penetration.
Retention has been roughly 95%, so still strong, no significant change in that.
So, really no significant movement in any of the key components of organic growth drivers.
No, it's a broad mix of wins versus small, medium, large competitors.
We have not included any revenue synergies in that $130 million to $140 million.
Those are cost synergies, and they come in four primary buckets, and in no particular order.
We think of them in terms of material costs, so a sourcing benefit.
We think of them in terms of production improvements, so the more efficient use of capacity.
We think of them in terms of the route density allowing us to use less fuel because of more dense routes.
And then we think about it in terms of overhead and the reduction of duplicate overhead.
Did not include any revenue synergies in that amount.
And one of the reasons we didn't is because we need to get through the integration work.
We need to get them on to our systems.
We need to optimize the routes.
And we need to have our new G&K partners really trained and comfortable in selling our product line.
And that takes a little bit of time.
We do expect the benefit to be bigger.
We are ---+ first of all, the additional revenue certainly provides better leverage of the system, but certainly operating on one system in total certainly will create additional benefits for us, and better visibility into all of our new customers will certainly help us in terms of identifying cross-sell or penetration opportunities, identifying where certain industries ---+ we have customers in certain industries where we believe we've got a good product mix to provide value, but certain customers in that industry don't have some of those.
We think there's a lot of opportunity, and certainly, by adding the G&K volume, that certainly helps it out.
I want to add too that the more benefits and then really not a lot of significant additional costs.
That's the beauty of the acquisition.
Just another positive is that we get to leverage G&K over that existing $140 million spend.
So, we will have some additional licensing costs, nominal amounts, but the capital investment is not going to increase.
We think there's a lot of runway there.
As <UNK> said, about two-thirds of our new business comes from that no-programmer segment, and it's been that way for a long time.
We talked a little bit about what that no-programmer may look like.
It could be outdoor tradespeople that are now renting our Carhartt products.
It could be culinary people now renting our Chef Works product.
It could be healthcare workers now renting our scrub rental programs.
There are lots of opportunities there, and there will continue to be.
The margin profile is, I would say, is not significantly different from any other type of account.
But certainly we know that, with all of our customers, the more penetration that we can have, the more products and services that we can add to them, the more valuable those stops become, usually the lesser the probability that they leave us because we are more fully penetrated.
So once we sell any account, penetration becomes really important afterwards.
I would ---+ so, first of all, I don't know the penetration of G&K.
Again, we haven't had visibility and insight until really starting today, and we'll start to learn that more and more.
So it's hard for me to try to estimate what any revenue penetration might be.
You know, we have told ---+ we've talked a lot about that.
If you think about our Uniform Rental customers, for example, the highest penetrated item is our mats, entrance mats, and I would say about 60% of our Uniform Rental customers have entrance mats.
That doesn't mean they have as many as we believe that they should have, but it means they have at least some presence in the entrance mat.
In addition to that, all of our other products are less than 20% penetrated.
So we have a lot of runway on our own.
And I would suspect that G&K's profile is, from a Uniform Rental and mats, is probably not a lot different than ours, although that is purely a guess.
And I would say that the broader line for us, likely in the hygiene and the chemical cleaning, first aid and safety fire protection, those become nice opportunities.
I don't have any kind of information as far as quantifying that, because we just don't know enough about those customers.
And an example would be, you know, I'd want to see, or we would want to see, the profile of the G&K customers, and that's when we start to analyze or look for the opportunities in terms of what other products and services we can provide to them.
So we need some time to be able to do that.
As it relates to your second question of retention, again, I don't have specifics on that, but I would say that they are probably not too different from ours, although I would suggest that, because our growth rate is so much higher than the industry in general, that our retention is likely a little bit better.
So, your first question is, yes, I would say almost all of that revenue and operating income would fall into the rental segment.
As it relates to the second question, you know, we will give some thoughts on SAP when we provide our guidance in July, but I would suggest that it's going to be lower than $40 million to $45 million for ---+ probably because we've seen that we've been a little bit more efficient this year than we expected.
And you know, the additional ---+ any additional costs related to an integration of G&K will come in the way of a lengthened integration or implementation process.
So, I wouldn't expect that it drives up our costs in fiscal 2018.
I would just ---+ I think we've talked a little bit about it drives the implementation process into fiscal 2019.
So, we will see a little bit more expense in 2019 than we initially expected because of the duration with G&K.
But again, the process has been going well, and we've been spending less than we expected, and I would expect that results in lower numbers for 2018.
I would say from ---+ what are we seeing differently.
From an economic standpoint, I would say that our third-quarter, from an economy standpoint, didn't really feel any different than our first two quarters of this fiscal year other than there's a lot of ---+ there has been a lot of sentiment about maybe the new administration being a little bit more pro-business, etc.
But I would say I'm not sure that's translated much into what we've seen on the Street.
Having said that, it's been constructive environment.
And with the exception of the oil and gas vertical, which we have in fact seen get a little bit better, we haven't seen much of a change one way or the other.
And because of that, as you've seen, we've continued to execute well and continued at the organic growth levels of the first half of the year, and in fact even a little bit better.
And I think that is simply, as <UNK> mentioned, good execution, good new business productivity.
Our salespeople are doing a great job.
As it relates to your second question of are we seeing any irrational behavior, I would just say that it's always ---+ it's always very competitive.
Once we get in to talk more to our G&K partners, we may find that it was probably a little bit more aggressive on G&K customers.
But we certainly know, when an acquisition is announced, the competition gets very aggressive around the acquired customers and I would say that's kind of par for the course.
First Aid, we were pleased with the results overall.
As we talked about in the prepared remarks, we felt like, last ,quarter that we had hit a bottom, and that became reality, and then we expect those organic growth rates to continue to climb.
That business should grow in the high single digits.
That's what it grew coming into ZEE and that's what we expect going forward.
In terms of the margins, though, the gross margins continue to improve.
We mentioned in the prepared remarks how much the dollars are up over a couple of years, 50-some-odd%, 18% year-over-year increase in gross margin dollars.
The incremental gross margins have been very strong.
Last year, they were in the 30% range.
This year, the last two quarters, they were 100%.
So gross margins are moving along as we expected as we continue to realize those synergies.
SG&A, we do have a little bit of a heavier investment in the selling part of that component, as we mentioned in our first quarter.
We invested in the sales force to be able to grow that acquired big block of ZEE business.
And they've only been there, what, a quarter or two at most.
They will continue to become more productive.
They will grow that topline.
We'll get that leverage.
And so we are optimistic about not only the topline growth, but the margin improvement going forward.
Yes, I think, <UNK>, as <UNK> mentioned, we've made an investment in our sales team there.
ZEE did not have a sales team, and so we have ---+ as we came out of the system conversion, it was time to start really selling in a little bit more ---+ well, in higher volumes, and that's what we did.
We invested to be able to do that.
Do we have the confidence that those margins can get into those mid to high teens.
We certainly do.
And if you go back to our fiscal 2015 results, we were at about 13.8% for the year of fiscal 2015, but the last three quarters all exceeded 14%.
And with the addition of the ZEE business, that certainly is going to benefit us long-term.
And we really like the business.
It's doing exactly what we would expect that it should do, and those margins will continue to improve.
Thank you for joining us tonight.
We will issue our fourth-quarter earnings in mid July, and we look forward to speaking with you again at that time.
Good night.
