Mike Hansen - SVP of Finance and CFO Paul Adler - Vice President and Treasurer

Manav Patnaik - Barclays Andrew Wittmann - Robert W. Baird Gary Bisbee - RBC Capital Markets Mario Cortellacci - Macquarie Scott Schneeberger - Oppenheimer Joe Box - KeyBanc Capital Markets John Healy - Northcoast Research Toni Kaplan - Morgan Stanley Dan Dolev - Nomura Tim Mulrooney - William Blair Shlomo Rosenbaum - Stifel Judah Sokel - JPMorgan

Good day everyone, and welcome to the Cintas Quarterly Earnings Results Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Mike Hansen, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Thank you and good evening. With me tonight is Paul Adler, Cintas' Vice President and Treasurer. We will discuss our fourth quarter results for fiscal 2017. After our commentary, we will be happy to answer any questions. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC. We are pleased to report that revenue for the fourth quarter, which ended May 31st was $1.530 billion, an increase of 23.1% over last year's fourth quarter. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations was 8.1%. New business wins; penetration of existing customers with more products and services and customer retention remains strong. The organic growth for the uniform rental and facility services segment 8%. And the organic growth rate of the first aid and safety services segment was 9.2%. Fourth quarter gross margin improved to 44.4% from 43.9% last year. This is our 15th consecutive quarter of year-over-year gross margin improvement. Operating income for the fourth quarter of $177.3 million decreased 11.2% from last year's fourth quarter. Fiscal 2017 fourth quarter operating income was negatively impacted by $63.7 million of transaction and integration expenses related to the G&K Services acquisition. Excluding G&K results and acquisition charges as well as a benefit from a change in the accounting for equity compensation as required by a recent accounting standard, our operating income margin was 16.4% versus 16.1% last year, an improvement of 30 basis points. Net income and earnings per diluted share or EPS from continuing operations for the fourth quarter of fiscal '17 were $82.2 million and $0.75 respectively. Fiscal '17 fourth quarter EPS included a positive impact of $0.02 from the change in the accounting for equity compensation and $0.05 from the G&K business. Fiscal '17 fourth quarter EPS included a negative impact of $0.50 from transaction and integration expenses and certain incremental nonrecurring bank fees included in the interest expense related to the G&K acquaint. Excluding these items, EPS was $1.18 versus $1.06 last year and 11% increase over last year's fourth quarter. Our fiscal 2017 results added to our record of success. We have now grown revenue and profit 46 of the past 48 years, with the only exception being the great recession years. For the seventh consecutive year, organic growth was in the mid-to-high single digits. We continue to grow by multiples in excess of both gross domestic product and employment. For the seventh consecutive year, we grew EPS double digits excluding the G&K results and acquisition related items as well as the benefit from ASU 2016-09. And we increased the annual dividend for the 33rd consecutive year. For Cintas the past is indicative of the future because of the constant we share, which is our culture. Our culture is part of our strategy and drives our meaningful performance. We value honesty and integrity, competitive urgency, and challenging the status quo in a positive manner. Profitable growth is in our DNA. The opportunities for us to seize are significant. Retail inspired garments, health care scrub rental, and branded rental garments like Carhartt, our recent investments in the product line which have a long runway. Our first aid and safety business has a run rate of more than $500 million and yet we just recently completed our national footprint. National account opportunities also remain. And despite acquiring a significant competitor, new business wins were up significantly over last year. Also our fire services business is only about 70 of the top 100 largest markets in North America. We continue to evolve as a business services company helping over a million customers get ready for the workday. With an array of products and services including dust mask, hygiene products, first aid products and services, and fire protection services, we have a product or service for every business in North America. Our opportunity for continued growth is the 16 million businesses we currently don't do business with. Not only the opportunity is significant to expand market share, but we have huge potential to grow revenue and profit by penetrating our existing customer base. Within our uniform wearing customer base, our penetration rates of other products and services with the exception of entrance mats are less than 20% and less than 10% of our customers do business with two or more of our business units. We've added sales reps specifically focused on penetrating existing customers. They're supported by a national branding campaign whose purpose is to educate on all that we can do for businesses so they can concentrate on their core competencies. Cintas is a business that was built to last and that building doesn't stop. Our focus on the long term means that we make the needed investments. Our investment in an enterprise resource planning system is a significant one. The implementation of SAP will continue into fiscal year 2020 due to the additional operations from the G&K acquisition. Once completed, SAP will produce cost savings and will better equip us to cross sell. We will be a stronger company with this new technology. And finally, we are excited about our recent acquisition of G&K. Preliminary results are very encouraging. We are on track to meet our financial and nonfinancial objectives and look forward to the many opportunities G&K provides. The synergies are compelling and result from the significant overlap in operations. Route density will also improve. We can spend more time helping customers solve their problems. We will have more time to sell into the accounts. The cost synergies alone will improve G&K operating margins to about 25% in four years. So in sum, our record of success is a lengthy one. The past has been great, but the future too is very bright. So looking ahead to 2018, we expect revenue to be in the range of $6.27 billion to $6.36 billion and fiscal '18 EPS from continuing operations to be in the range of $5.15 to $5.25. Our guidance includes the following assumptions related to the acquired G&K business. No transaction and integration expenses. Revenue of $870 million to $900 million compared to a prior year run rate of $965 million. Synergies of approximately $50 million to $55 million. Purchase price amortization expense related to intangible assets of $50 million. Interest expense on G&K acquisition debt of about $65 million and an EPS contribution of $0.15 to $0.17. Again this EPS guidance does not include any G&K transaction and integration expenses. However, we do expect to incur these expenses in fiscal '18 as we continue to integrate the acquisition. We estimate that these expenses will range from $50 million to $65 million. Before I turn the call over to Paul, I want to discuss the G&K revenue guidance, we've discussed this over the course of the last year, but want to be clear. Obviously the two most significant components of revenue growth rate are new business and lost business. The legacy G&K operations just like Cintas operations will continue to have loss business in the normal course as contracts come up for renewal. The G&K loss business may be slightly higher than normal due to the disruption of the integration, but not significantly so. The new business component from the legacy G&K sales reps though will significantly decrease for a temporary period. We are in a process of filling open positions and training all new reps on how to sell using the Cintas processes, how to sell Cintas products and services and to use the Cintas systems. As a result, the new business typically generated to offset the normal loss business will temporarily be reduced until the sales reps get back to their territories and begin to ramp productivity to normal levels. The result is that legacy G&K revenue will decline in fiscal '18. This was expected and we modeled the deal based upon this reality. So now I'll turn the call over to Paul.

Thank you, Mike. First, please note that our fiscal year 2017 continued one less work day than in fiscal year 2016. It was the third quarter that had one less day than the prior year quarter. One less workday negatively impacted fiscal 2017 total revenue growth by about 40 basis points and operating margin by approximately 10 to 15 basis points in comparison to fiscal 2016. Looking ahead to fiscal '18, there will be no differences in workdays as fiscal '18 contains the same number of work days per quarter as fiscal '17. We have two reportable operating segments, uniform rental and facility services, and first date and safety services. The remainder of our business is included in all other. All other consist of fire protection services and our direct sale business. First aid and safety services and all other are combined and presented as other services on the income statement. The uniform rental and facility services operating 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 catalogues to our customers on route. Uniform rental and facility services revenue was $1.220 billion, an increase of 27.1% compared to last year's fourth quarter. Excluding the impact of acquisitions and foreign currency exchange rate changes, the organic growth rate was 8%. Our uniform rental and facility services segment gross margin was 44.6% for the fourth quarter, an increase of 20 basis points from 44.4% in last year's fourth quarter. Current year fourth quarter gross margin of course included the margin on the acquired G&K business, which was 40.2% for the fourth quarter. Excluding the acquired G&K business, the Cintas legacy uniform rental and facility services business gross margin improved 100 basis points from 44.4% to 45.4%. The G&K gross margin will improve to Cintas legacy levels as we realize the synergies from the acquisition. For instance, one of the factors resulting in a currently lower G&K gross margin is that energy expense as a percent of revenue is 80 basis points higher than the Cintas legacy business. This is the result of the smaller G&K business lacking the route density that the larger Cintas legacy business possesses. The fuel savings from route density along with the benefit of reducing redundant capacity will drive significant improvements in G&K gross margin. Our first aid and safety services operating segment includes revenue from the sale and servicing of first aid products, safety products and training. This segment's revenue for the fourth quarter was $134 million, which was 9.4% higher than last year's fourth quarter. On an organic basis, the growth rate for the segment was 9.2%. I want to take some time to revisit the impact of the ZEE Medical business on this segment's organic growth rate. We acquired ZEE in our first quarter of fiscal 2016. ZEE was a significant acquisition, increasing the total first aid business by about one-third. In our fiscal 2017 second quarter, 15 months after the acquisition, this segment's organic growth rate was less than the typical high-single digits. This lower organic growth rate was due to two main reasons. First, not only was the acquired ZEE business significant in size, but it was also not growing. The ZEE Medical pre-acquisition had no sales force. Second, our focus in the first year of an acquisition is to secure the customer base and earn the trust of the acquired customers through outstanding service. On our second quarter earnings call of this fiscal year, we disclosed that we believe that the first aid segment's organic growth rate hit the bottom and the segment was positioned for improving organic growth rates. We added sales reps to grow the ZEE customer base with our broad range of products and services. And meanwhile, the legacy Cintas first aid and safety business continued to grow at a strong pace. As we expected, our organic growth rate did climb from the bottom, increasing from 3.3% in the second quarter to 5.5% in the third quarter and now 9.2% in the fourth quarter. Thus the decline in the organic growth rate was expected due to the weight of the acquired business and it was temporary. The segment has returned to its customary organic growth rates in the high single digits and on a significantly larger revenue base. This segment's gross margin was 44.5% in the fourth quarter compared to 42.9% in last year's fourth quarter, an increase of 160 basis points. Our margins continue to benefit from the realization of ZEE acquisition synergies, including improved sourcing and the leveraging of the existing warehouses. Our fire protection services and direct sale businesses are reported in the all other category. All other revenue was $175 million, an increase of 9.2% compared to last year's fourth quarter. The organic growth rate was 8.3%. All other gross margin was 42.8% for the fourth quarter of this fiscal year compared to 42% for last year's four quarter. The direct sale business by its nature is not the recurring revenue stream that our other businesses are. Therefore the growth rates are generally low-single digits and are subject to volatility such as when we install a multi-million dollar account. We installed some large accounts in the fourth quarter of fiscal 2017 driving double-digit organic growth in this business. One of these accounts was Southwest Airlines. Majority of the product was shipped and recognized as revenue at the end of fiscal 2017 as opposed to early fiscal 2018 as originally expected. On July 11 2017, we sold a business that was not a good strategic fit. The business was reported as discontinued operations for the periods ended May 31st 2017 and 2016. Revenue and EPS for the sold business were about $26 million and $0.01 respectively in Q4 of fiscal 2017 and $28 million and $0.02 respectively in Q4 of fiscal 2016. Revenue and EPS for the business were about $105 million and $0.07 respectively for the full fiscal year of 2017 and $110 million and $0.07 respectively for the full fiscal year of 2016. These amounts are important to remember as you consider our fiscal 2018 guidance. Proceeds from the sale, net of taxes paid will be approximately $85 million. Selling and administrative expenses as a percentage of revenue were 28.6% in the fourth quarter compared to 27.9% in last year's fourth quarter. 60 of the 70 basis points is attributable to the amortization expense of the intangible assets established in the purchase price accounting of the G&K acquisition. Our effective tax rate on continuing operations for the fourth quarter was 37.8% compared to 37.2% for last year's fourth quarter. The effective tax rate can fluctuate from quarter to quarter based on tax reserve build and releases relating to discrete items. We expect the effective tax rate for fiscal 2018 to be about 34%. Our cash equivalents balance as of May 31 was $169 million and we had $22 million of marketable securities as of quarter end. Cash flow from operating activities on the fiscal 2017 fourth quarter was $280 million dollars and free cash flow was $225 million. Capital expenditures for the fourth quarter were approximately $55 million. Our CapEx by operating segment was as follows; $45 million in uniform rental and facility services, $7 million in first aid and safety, and $3 million in all other. We expect fiscal year 2018 CapEx be in the range of $280 million to $320 million. As of May 31st total debt was about $3.133 billion consisting of $363 million in short-term debt and $2.770 billion of long-term debt. Our leverage at May 31st was 2.8 times debt to EBITDA. Subsequent to May 31, we repaid $50 million of the term loan. We expect our leverage ratio to decrease to approximately 2.3 debt to EBITDA at May 31st 2018. With $300 million of senior notes maturing in December that we will not refinance, $200 million of term loan and commercial paper, we have structured our debt to help us achieve our goal of reducing leverage to 2.0 times debt to EBITDA. Regarding SAP, since last quarter's earnings call, more locations have been converted to the system. As of the end of this month, we will have converted about 30 locations. We continue to be pleased with the conversion efforts and the capabilities of the new system. Due to the acquisition of G&K, we are adjusting our SAP implementation plan as necessary. Certain G&K acquisition locations will also be converted to SAP. And therefore because of this additional work we expect the implementation to extend through fiscal 2020. The good news is that we can leverage the system over an even larger organization because the SAP hardware and software costs will not increase. They are sunk costs. We expect that fiscal 2018 SAP expenses will amount to approximately $30 million. This compares to about $12 million in fiscal 2017. That concludes our prepared remarks, we are happy to answer your questions.

[Operator Instructions] We'll take our first question from Manav Patnaik with Barclays. Please go ahead.

Thank you good evening gentlemen. First question for you is just on the divestiture, maybe just a little bit more color on which part of the old business that was in and just why that was done?

Manav, this is Paul. That business as you can tell from the numbers that we quoted was small in the scheme of things. It was really the combination of a couple of acquisitions that we had made years ago. It was an emergency services type business that provided emergency like plumbing and electrical work security door work, commercial cleaning, services of that nature. The difference was that that work though was performed by sub-contractors and so it's a model we kind of experimented with, but ultimately we decided that we wanted to self-perform service as part of our differentiation from our competition. And so therefore it was not a good strategic fit for us.

And would that revenue fall into the all other line, is that where that would have fit?

Yes. Primarily in the previous periods, it was in the all other bucket.

There was a small piece in the rental segment, but mostly in all other.

And then just on the synergy side, you've laid out the cost synergies for the year and you've given us the guidance on this before, maybe just on the revenue synergies, any sense on when we should start expecting more color on that and any examples of how we should think of the revenue opportunity here?

Our first goal is to, as Paul talked about kind of on board our new customers, make sure that they understand our services and we expect that the primary integration activities will happen in the first two years. I think once we are then on the same systems and they are all of those locations, those new locations are trained on our products and services, I think will then start to see the opportunities. So my expectation would be that's a 2020 type of a conversation.

Sorry, just last one, just to clarify. You said most of these synergies in the first two years, is that different from what you said before in terms of getting 130 to 140 over three to four years?

Manav, I said the most of the integration activities would occur in the first two years, that is different from the recognition of the synergies. So let me maybe talk a little bit about the synergies real quickly. We spent the fourth quarter really confirming our assumptions with our integration plan. And the good news is we did not see anything that changed our mind about our opportunity. No unforeseen issues, we still expect that it we'll achieve $130 million to $140 million in synergies. So that's I think that was one step and that's a good start for us. We didn't do many integration activities in the fourth quarter because of the confirming and really spending time communicating with our new partners and our new customers. However we've gotten pretty busy in June and July. And in June, we did convert the G&K payroll to our payroll system that's a big first step and that went very well. We have converted to the Cintas financial system that's another big step that went well and we've gone through the first few waves of branch consolidations and those have gone well. And so I think we're off to a good start. No surprises as of yet and we really like what we've seen so far. We mentioned that the year one synergies are $50 million to $55 million and let me step back and say, we did announce that we were closing the corporate headquarters and that closure is proceeding. And so certainly the year one synergies are certainly coming some from the corporate closure and other G&A activities, probably more than half of those first year synergies. And the rest are from the integration activities of the integration of locations. Again, we think that most of those integration activities are going to happen in the first two years. The synergy recognition though generally will happen in the 12 months following that integration activity. So in year one we're going to see 50 to 55, in year two, I think we'll see another meaningful increase in synergies, and in year three, we'll see the annualizing of the year two synergy. I'm sorry the year two integration activities. We'll also start to see some sourcing benefits in that third year and we expect to fully realize the 130 to 140 in year four. So that's a little bit of the cadence of the synergy recognition and let's just - it's a little bit of a nuance but the integration activities are a little bit different than the synergy recognition.

We'll now take our next question from Andrew Wittmann with Robert W. Baird.

I wanted to build on that last one and to see if I could drill in a little bit more. So that you've got the synergy plan and integration plan pretty well mapped out for this year. I was wondering Mike, if you just give us a little bit of inside as what do you think you'll be ending the fiscal year at for like a run rate, just given the visibility that you have so far?

And are you saying a synergy run rate?

Yeah. You're going to recognize a 50 here and I was just wondering at the end of the year what do you think the annualized run rate will be at the end of the fiscal year?

I would - I'm hesitate to provide that because I want to see a little bit more, but I think it will probably be a run rate to about half of our total synergy number. And we'll start to see as we then get more integration activities, we'll start to get pretty close on a run rate perspective by the end of that second year. But I'm a little hesitant to give you a specific number because I want to see a little bit more of the waves happen.

Yeah that's fair. I want to drill into the guidance a little bit and just make sure that my understanding matches your understanding of it. In particular on the organic growth implication there, obviously you've got some moving pieces with not only G&K, but this disposition as well. I calculate something at seven or a little bit north of seven kind of being the organic growth rate implied in your guidance. Do you get to the math and can you help us understand maybe how that breaks down by segment?

Andy, I get a little bit less than that. Our last few years we've been in the kind of the 5% to 6.5% range and that's about where we are this year as well. I'm not going to get into that by segment, but I would say, we're in the same range we've been the last few years in terms of our opening guidance.

Maybe my final question was been on the margins. And I think if you did - if you give the numbers for rental segments, gross margins like-for-like or legacy Cintas, up 100 basis points. I was wondering if you could just give us a little bit of help on breaking that down, where you got that and how those puts and takes are trending now as we move forward here into the new year.

I think that revenue, I'm sorry, the gross margin improvement is building on the same thing that we've seen over the course of the last few years. And that is continued leveraging of our infrastructure, penetrating existing customers, selling revenue that is not processed in our laundry facilities such that we get more revenue dollars out of our existing capacity. I would say those are the keys to that gross margin improvement. And we think that with the improving G&K gross margins over the course of certainly the next couple years, we think we still have some good run rate there.

We'll take our next question from Mario Cortellacci with Macquarie.

Could you give us a sense of how much of your business is levered to employment trends or job figures versus history? It appears the business is a little more diverse, both within the uniform and also first aid and fire safety. Wondered if you could give us a little color?

Maybe I'll say that this way. Our revenue is roughly half uniform and then I'll move maybe into our rental segment, about half of the rental segment is non-uniform, so facility services made up of entrance mats, hygiene products, chemical cleaning solutions et cetera. So, today compared to let's call it ten years ago, the percentage of uniform revenue is certainly lower than then, it was probably closer to the 60%, 70% range back then. The other thing I would say is, is we have worked hard not just to create solutions that are non-uniform, but also within our uniform programs we worked hard to create innovative products retail and inspire products, garments solution based products that can reach new and different customers even in a time when there is not employment growth. So in other words we think there is a large unserved opportunity out there and we have products and services I would say today that are better able to capture that unserved market than maybe ten years ago. And so when we look back over the last seven years or so, and I think we talked about our revenue growth being multiples of GDP and employment. A lot of it is because of the innovative garments that people want to wear. As well as then the non-garment solutions that we've created that really can create value for every type of business in America. So we feel good about that little bit of that decoupling from the employment that may be ride us a little bit closer ten years ago.

Thank you. We'll now take our next question from Gary Bisbee with RBC Capital Markets.

Hi guys, congratulations on closing the deal and it sounds like you're off to a real good start. I guess the first question I have you showed another quarter of sequential acceleration in the rental's organic revenue growth. What do you attribute that to - last quarter, you said that one of the factors that's been changing is you're doing great job on retention. Is that still it and I wanted to ask directly, how much business have you taken from G&K in this interim period from when you announced the deal to closing it, because it seems no one else in the industry is seeing acceleration, you are and there's a falling off. So I wonder if it's just the transfer from acquired to organic a piece of that?

It is not a piece of that, so we would not - when we convert revenue from, let's call it, that legacy system to our system, that certainly is not organic growth to us. So why the acceleration in organic growth? I think it is because we continue to execute at very high levels, I think we got a little bit of benefit in this fourth quarter, not I think - I know we got a little bit of benefit in the fourth quarter from a bit of a bounce back in - or a lessening of the negative in the oil and gas area. Last year, when we talked about fourth quarter performance, we had said that the headwind in oil and gas was about 100 basis points. This year, we would have said, I think in the third quarter, we said 60 basis point headwind. We would say it's probably more like 30. And so the year-over-year comps in the oil and gas are starting to be beneficial. That won't last forever, but starting to be beneficial. So I think we got a little bit of bounce from that. But most of it is, you know, we continue to execute well. Our reps are very productive and customer retention remains good.

Yeah. And I did mean to imply, you were doing something funky with the accounting. I just wondered if your sales people were targeting G&K customers and if you have a sense for if you won business, where people switched to you rather than dealing with whatever happened there, maybe you just don't have a sense for it, but?

Well, I mean, if you're talking post acquisition, we certainly wouldn't go and -

I am talking from when you announced the deal in August until you closed, right, there is this period we said their sales productivity fell off, your revenue accelerated. And so I just wondered if you had any sense if your reps were going to those customers and saying, “Hey, you're going to be with us sooner or later, do you want to switch now and have some certainty around pricing coverage, you know, et cetera?”

I apologize, I didn't catch that you had mentioned since the signing. I don't think that's - I don't think that's any part of the organic growth.

Okay. Fair enough. And then just is there any of their revenue going into the other line, did they have some uniform sales or is it pretty much all in rental?

Correct. It's all in the rental segment. Yes. But there was a very, very small piece in the first aid business, I mean we're talking about 1 million - a couple of million dollars annualized, but aside from that, it's all rental.

And then just one last one for me, you have historically, in the fourth quarter, given a sense of the mix by product categories. Is that something you're willing to share this year? Thank you.

Yes. Gary, we have that for you. I can give you Cintas legacy business and the G&K business separately, just so you all for the first time, have a little bit of an idea of that mix. Going forward, it'll be very difficult, if near impossible, to separate the two as we continue to integrate. But for now, I can tell you that the Cintas legacy uniform rental business, about 49% of the revenue and I'm referring to the segment, not to the consolidated entity. So in looking at the uniform segment, 49% is garments. Dust control is 18%. Hygiene, which is restrooms, cleaning services, chemical services, that was 17% of revenue. Shop towels were 4%. Linen was 8% and catalog sales were 4%. And then in comparison, for G&K, their uniform rental mix. The garments are 55% of total revenue. Dust is 15%. Hygiene is 3%. Shop towels are 9%, and let's see, linen is 14% and catalog sales were 4%. So it really highlights what we had talked about previously that this is a business that doesn't have as broad of an offering as we do and so some good opportunities for us. In the future, you can see that hygiene line is much smaller as a percent of the total than it is for us.

Thank you. We'll now take our next question from Scott Schneeberger with Oppenheimer. Please go ahead.

Following up on Gary's question with regard to recent trends in organic, you guys were talking about Southwest and some other large, a large new business that came through, the way I interpreted it was in the fiscal fourth quarter that you thought might have come in the first half of fiscal '18. Could you just elaborate what type of impact that will have near term, you've given the full year guide, so I think we have that understood, but maybe some near term consideration for that, if impactful.

Yes, Scott. We did roll the bulk of that program out in the fourth quarter. There is a very minimal roll out amount in the first quarter and then it - then it - as with these kind of programs, you get into a maintenance mode after that and so we would expect probably a little bit of benefit, a couple of million dollars in the first quarter and then tailing off into a maintenance mode after that. This was one that was - it was scheduled for right around the end of our fiscal year and so for the - for fiscal '17, as we were thinking about this a year ago and even six months ago, it was just - it was so close as to where it would fall and it happened to fall into the fourth quarter and our team did a real nice job of getting that to the customer.

You mentioned SAP, 30 million impact in fiscal '18, but that it would persist on to '20, you may not want to give further guidance on '19 and '20, but just trying to get a feel or if you could refresh how you're thinking about a total spend over the period, the long term period.

We - as Paul said, about $30 million in fiscal '18, about half of that is recurring and half non-recurring. And we would expect that that will go into fiscal '19 and then - and that will certainly be reduced - the non-recurring will be reduced in fiscal '20. We don't expect that implementation to take the entire fiscal '20 year, but it will go into '20. So we would expect something of the same in '19 and non-recurring less in '20.

Thank you. We'll now take our next question from Joe Box with KeyBanc Capital Markets.

So no mention on the route consolidation piece, I'm just curious is that a process that happens only when you guys consolidate facilities or can it be separate. And then when that route consolidation does happen, what's been your experience with the level of disruption you might have with your customers, relative to maybe the benefits you might see.

So you're right, we didn't - we really didn't speak a whole lot to the, let's call it, the prioritization of the synergy buckets. And so maybe I'll touch on that a bit. And so I'm speaking of the 130 to 140 now, we would expect that the largest bucket is the G&A stream. It's the elimination of redundant, corporate processes as well as some location G&A expenses. The second largest would be - the second largest bucket would be that production facilities. So the combination of locations, the elimination of redundant capacity is certainly a fairly good sized opportunity for us. We think that third bucket will be the sourcing piece and while that is one of the longer timeframes of this process, we think that's a good opportunity. We think that from a routing perspective, there certainly is the fuel benefits that Paul talked about from combining the route forces and creating much more density. But we're hesitant to say that there will be a lot of route consolidation. We definitely need capacity on our routes to make sure that we have the time to meet with our customers, the time to build relationships, to make the service calls that we need to make. And so we see that as certainly a route optimization opportunity, but we don't see that as one of the bigger, a consolidation being one of the bigger opportunities there because we like the capacity. We're general - for the last probably seven years, we've been adding routes every single year. And the last thing we want to do is cut routes only to add them again. So it's really more about route optimization. And now as it relates to the timing of that, an integration generally will mean the system is first. We have to get on the same system, so that our different operations can speak to each other. And once we get on the same system, then the route optimization can happen. So, it's usually following the location consolidation or system integration.

I guess, do you have the ability to bring a lot of G&K's route into your existing facilities or vice versa? Or you could pass the constraint maybe at the plant level and I guess ultimately, I'm trying to understand how much can be pulled and what the consolidation opportunity could be among the different plants, because obviously there's a lot of overlap.

I'm not going to get into a specific number, but I was - let me be clear. I was speaking of route opportunities there, not production facility and location opportunities. We think there is quite a bit of opportunity. That was that second largest bucket that I mentioned. So in other words, the servicing of the routes, we certainly think there are consolidation opportunities in many markets and that certainly is one that is a big part of our integration plan. I'm not going to get into location numbers, but that certainly is the second largest opportunity within that overall synergy play.

Thank you. We'll now take our next question from John Healy with Northcoast Research. Please go ahead.

Thank you. Mike, I wanted to ask a question based on the prepared remarks. I think, you made a comment that over the next four years, you would see G&K operating margin at 25%. Did I catch that right and if that is the case, maybe you can provide some perspective on where you could potentially see Cintas or what I would say real Cintas operating margins, maybe potentially over the next four years or so?

You did hear correctly, John and so if we think about that G&K block of business, that had been at about a 12.5% operating margin. The synergies of 130 to 140, it gets you to 25 or better percent of that block of revenue. So that's what I mean by that 25% operating margin for that block of business. Now, obviously, that block of business is - we're in the process of fully integrating that into this Cintas block of business. And so we will lose the specific reporting of that. But, if we add that kind of volume with that kind of incremental margin, I certainly see that, I want to say that alone is 100 basis point improvement in overall operating margins. And I think that we have room to grow still in all of our businesses as well. So I think there is still opportunity in rental to drive higher. There certainly is opportunity in first aid and safety and the all other still has opportunity to grow. So without giving you a number, I think all of our businesses have opportunities to grow and the incremental margin from the G&K block of business certainly will be a big part of that.

And I wanted to ask, I might have missed it, but did you guys give CapEx guidance for 2018 and is there any thought about what CapEx could be, maybe as a percentage of revenue or kind of longer term, once the businesses are completely married together and running smoothly? And then lastly, just on tax rate, I thought you said 34%, so a little bit lower than what you guys have seen in the last couple of years and I was just wondering if that's kind of a new kind of run rate for you guys.

Yeah. John, the tax rate is lower because of that change in accounting standard on equity stock compensation. So it muddied kind of our results this year and that's why we're - that's one of the columns and the tables in the earnings release to try to get that out, so you can see an apples-to-apples comparison, but because of that standard, we do believe the effective tax rate will be lower than the typical 37% that it had been. So - and that's why we've guided that way. In terms of CapEx, we did guide - I thought it was in the script 280 million to about 320 million for fiscal '18. And, I think what is a percent of revenue, we've typically been in that 4.5% of revenue area. It's been higher from time to time in the past few years especially with the SAP spend of what, 140 million over the last three years. But I think that that's probably a good metric now to use going forward as a percent of revenue.

Thank you. We'll now take our next question from Toni Kaplan with Morgan Stanley.

Can you provide an update on what you're seeing in the pricing environment, both in terms of existing business and new business wins. We heard from one of your primary competitors in the quarter that they were seeing some increased competitive pressure on pricing. So just wondering if you're seeing any of that as well.

I would say, Toni that the pricing environment hasn't changed a whole lot. It's still fairly constructive and it doesn't feel much different than it has for the last year or so. And I would say that that would mean that it's always competitive and it remains competitive, but I wouldn't say it's been any more so in the last quarter than prior to that.

Got it. And then on de-levering, you mentioned you want to get to two times that EBITDA, just to clarify is that gross or net and then just on M&A, should we expect that you'll continue to do tuck-ins as you integrate G&K or would you sort of wait until the integration is over.

So the leverage question, generally, that's gross because some of the cash that we have on our balance sheet is outside of the US and can't really be used to pay down and some is in restricted. For example, letters of credit type things. So it is gross and we expect that certainly to come down nicely in fiscal '18. As it relates to acquisitions, yes, I would say that we like tuck-in acquisitions. We like them in our rental business and our first aid and safety business and in our fire business. And I would expect that once we get to that leverage level that we've guided towards, that two times range, that will become, I would say, active like we have been in the past.

We will now take our next question from Dan Dolev with Nomura.

Can you discuss the level of new business in the core Cintas rental that you're expecting for the next year? I think you discussed it for the G&K part and you discussed the lost business for both, but can you discuss it for the core - the new business for the core. Thanks.

Sure. We would expect growth in that new business. Certainly, that is the - that's the driving force behind our organic growth. We want to make sure we are signing up new customers, because that certainly helps with future penetration opportunities. We expect it to be strong and we expect it to grow over 2017 levels.

Did you expect it to be in line in terms of the magnitude, in line with the 2017 rate or higher or lower?

Yes. I would say yes, because the implied growth rate from our guidance that we talked about is pretty much in line with the last couple of years opening guidance and so, yeah, so that would be in line.

And the 5% to 6% rental or implied rental growth guidance, is it just conservatism?

No. We think it's a reasonable rate. It's where we've been the last couple of years and we certainly would like to do better than that, but I think as we look to the next year, we'll lap the energy - the easier comps from energy. As we sit here today, I would say that I feel - while the economy is constructive, I would say it's maybe not quite as so as it was six months ago. So what we feel good about the guidance and look if we do see the economy do better, if we start to see some - even some better penetration rates, we can certainly do better, but we think it's a good starting point.

Thank you. We'll now take our next question from Tim Mulrooney with William Blair.

Yeah. I'm just trying to get a sense for what your Uniform Rental gross margin could be in a couple of years. Can you point to any historical examples of when you increased your route density from an acquisition, how that impacted your gross margin? Was there any material structural lift when you acquired Omni or Unitog, for example? And if so, how long did that take to manifest?

I don't have anything from those two acquisitions right in front of me. Keep in mind those were 15 and 17 years ago, but I think as we think about today, given the synergy cadence that I kind of mapped out a few minutes ago, it certainly would imply that the G&K gross margin of 40 will improve. And I would expect that that improvement will be over and above where current Cintas levels are today. So while I'm not ready to give you a specific number, that certainly will be accretive to the overall gross margin of the rental segment. And I think we should see some nice movement in the next couple years as we complete the integration and recognize those synergies from the consolidation.

No, that's very helpful. And given the - we're running up against 5:00 here. I'll just throw one more out there. For a long time now, you guys have talked about 60% of new customer growth coming from no programmers. And the question I often get is where are these new customers coming from? Can you give us a few examples of new industries or verticals that you're entering or maybe in the early stages of penetration that maybe you weren't in 5 to 10 years ago? Uniform Rental has been around for a long time, obviously, and I'm just trying to get a better idea of where you're getting this very solid growth, where that's coming from. Thank you.

Yes. You're right, Tim. We've talked about of our new business dollars, about 60% of them are coming from no programmers, those customers that don't have a rental program and yeah, I mean, there are a few buckets that we can talk about, the first is scrub rental. We've talked about that in the past. Scrubs was largely a direct sale, commodity and we work to change it into a rental program with a service element to help hospitals and other health care institutions control their inventory through those dispensing units, but that's something we've really gotten into in earnest in the last five years. It's a huge market and it's a market that we're in the very early innings of penetrating. And so we're getting some good wins, but we have a long way to go in that sector. Another good industry for us, the sector for us for no programmers is in the trades areas, that Carhartt product line that we've talked about, that rugged look. Those are garments that really appeal to people that work in the utility industries or plumbers, electricians, anyone in trades and we've had a lot of traction with that product. So - and then just in general, it's really the recognition that, I think Mike mentioned this earlier, we have to gravitate in the product line to where the employment is. We've done a very good job of that by creating these garments, some are branded, but also creating garments that are more retail inspired, polos and microbial shirts, et cetera that we can get into industries that are customer facing like resorts, theme parks, et cetera. And so, yeah, a lot of opportunity, that just kind of gives you an idea of some of those no programmers that are out there.

And Paul touched on garments and I would say another difference is, over the course of probably the last five to seven years, we've - because of the breadth of our product line, we lead with facility services much more than we did maybe ten years ago. And so we are able with our facility services, I think, we talked about this earlier, we can add value to almost every kind of business there is, because almost every business has doors that can use entrance mats, have restrooms that can use our rest room and hygiene products. Many of them have employees that can use our first aid and safety services. Almost all of them have fire protection needs and so we're able to lead with non-uniform rental opportunities and solutions much more than we did ten years ago and that has certainly helped us as well.

Thank you. We'll now take our next question from Shlomo Rosenbaum with Stifel.

I just want to probe a little bit more about the component of the moving parts of attrition versus new business in terms of your calculation that G&K's revenue would decline 7% to 10%. What's a normal attrition rate for that business and can you just discuss that a little bit in what you might be doing to just try and offset some of that. Generally, I think you guys are very customer focused and I would expect you to be even more so in a situation like this.

Sure. So you've heard us probably talk about our customer retention being in the mid-90% range. And G&K ran a big - ran a good business and they were in the - their customer retention was in the low 90% range and so when we think about that, let's call it, 7-ish lost business factor, that's not unusual for our industry and the difference as I spoke to in the prepared remarks, the difference is we'll continue to see that and we're certainly doing our best to build relationships with our customers. But that happens and typically a business will replace that with the new business efforts and there will be a temporary disruption to that replacement as we train our reps and get them productive.

And how long does it take you to train those reps, because what you're also doing is you're not taking unskilled reps, you're taking reps that have been doing things in a certain way and I guess you're improving upon it, but you're not taking someone - very often, you're not taking someone green.

We're not, but that doesn't mean that they train and they're up to - they're up to normalized productivity levels as soon as they're finished training. It's a process and while the training, the specific training, maybe over the course of a month or so, the ramp up in productivity takes a bit of time and then in our business Shlomo, I'm sure you understand this, the weekly sales are not huge businesses. This is a momentum kind of a business and our new sales partners are going to go from not selling much at all to ramping up to $100 to $200 in revenue per week. And so it's a - that ramp up takes some time to make an impact on the overall revenue of the company. And so as we think about the - that replacing, we certainly are going to see an impact to our fourth quarter growth rates of fiscal '18 and now continue into probably the first half of fiscal '19.

Are you talking about the impact you're talking about where it's going to start to accelerate?

I'm talking about - when I talk about the impact, I'm talking about the fact that you're going to see some deceleration in our growth rate in that fourth quarter of fiscal '18 and into the first half of fiscal '19. So if you think about it, I mentioned that the revenue run rate of G&K is about 960 right now for our fourth quarter, right. We're guiding to 870 to 900 for the year. So clearly, our fourth quarter is going to have a less revenue for that block of business and that's going to impact growth. And that impact is going to happen for probably the first half of the year and then we'll start to see that acceleration come back.

Just to be clear, you're talking about fiscal year '18 where you're going to see the impact or fiscal year '19 where you're going to see the slowdown?

Fourth quarter of '18 and first half of '19.

So the training will come at that point in time after you've upgraded the systems?

No. The training is happening right now. The training is happening right now. It's just that again when we go through this period of time where this selling resource isn't bringing in much new business, it takes a little bit of time to recover from that.

Thank you. And we'll now take our final question from Andrew Steinerman with JPMorgan.

It's actually Judah on for Andrew. Just a very quick question here at the end. I wanted to clarify the clean EPS number in the quarter. We called out $1.18 for legacy Cintas, and there was also $0.05 of contribution from G&K. So I think it's pretty clear that would imply a $1.23 if you include G&K together. But I wanted to confirm that the G&K results include that $9.5 million of amortization or $0.05 of EPS. So if you fully included G&K, I'm calculating an adjusted EPS of really $1.28. Is that the right way to think about it, adding back the amortization?

Well, you are correct in saying that certainly the $1.18 plus the $0.05 get you to $1.23 as a clean number. Yes. The amortization was $9.6 million in the quarter, which is roughly $0.03. So if you want to add that back, yes, that would get you to $1.28. And you'll notice when we convert to our guidance for fiscal '18 and show a comparison of fiscal '17, you'll notice that we show a baseline of 4.77 [ph]. And so just to be clear, that is then the Cintas legacy plus the G&K operating results plus the ASU impact on the full year that gets you to the 4.77. Is that clear, Judah?

Yeah. That is.

Thank you. And that does conclude today's question-and-answer session. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Well, thank you, again for joining us tonight. We look forward to talking to you as we complete our first quarter and have our conference call in September. Good night.

Thank you. That does conclude today's conference. Thank you for your participation and you may now disconnect.