Michael Hansen - VP, Finance and Chief Financial Officer Paul Adler – VP and Treasurer

Manav Patnaik – Barclays Capital George Tong – Piper Jaffray Gary Bisbee – RBC Capital Markets Nate Brochmann – William Blair Sara Gubins – Bank of America Merrill Lynch Andrew Wittmann – Robert W. Baird John Healy – Northcoast Research Partners Scott Schneeberger – Oppenheimer Shlomo Rosenbaum – Stifel Nicolaus Andrew Steinerman – JPMorgan Securities

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

Good evening and thank you for joining us. With me is Paul Adler, Cintas' Vice President and Treasurer. We will discuss our second quarter results for fiscal 2016. And after our commentary, we'll be happy to answer any questions. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC. We're pleased to report second quarter revenue of $1.219 billion, an increase of 8.5% from the prior-year second quarter. Organic revenue growth, which adjusts for the impact of acquisitions and foreign currency exchange rate fluctuations, was 6.5%. Organic revenue growth for Uniform Rental and Facility Services was 6.2%, and the First Aid and Safety Services organic growth was 9.8%. The performance of our sales force in both segments continues to be strong, with the solid improvement in the sales rep productivity. We are pleased with our ability to continue to add new customers and to provide existing customers with additional products and services from our broad line. Second quarter operating income was $200.3 million, an increase of 10.3% over last year's second quarter. Second quarter operating margin improved to 16.4% of revenue compared to an operating margin of 16.2% in the prior-year period. The Uniform Rental and Facility Services segment led the way with a margin of 18.1%. Net income from continuing operations for the second quarter of fiscal year 2016 was $115.5 million, compared to $103.7 million in the prior-year period. An increase of 11.3%. Net income from continuing operations as a percent of revenue improved to 9.5% from 9.2% of revenue in last fiscal year's second quarter. Earnings per diluted share or EPS from continuing operations for the second quarter of fiscal year 2016 were $1.03 compared to $0.86 for the second quarter of last year. Second quarter fiscal 2016 EPS from continuing operations increased 19.8% compared to the prior-year period. We are on pace to achieve our sixth consecutive year of double-digit increases in EPS. As Cintas CEO Scott Farmer stated in today's press release, we're happy to again report strong increases in revenue, operating income and EPS. We thank our employees, whom we call partners, for continuously striving to exceed expectations. As a result of our second quarter results, we're updating our annual guidance. We expect fiscal 2016 revenue to be in the range of $4.825 billion to $4.880 billion and fiscal 2016 EPS from continuing operations to be in the range of $3.83 to $3.90. This guidance does not include any potential deterioration in the U.S. economy or additional share buybacks. The EPS guidance is detailed in the table within today's press release. On December 4, we paid an annual dividend of $1.05 per share, totaling $115.5 million. The dividend per share was 23.5% more than last year's annual dividend of $0.85 per share, and was the 32nd consecutive year it have been increased. The dividend coupled with our share buyback program demonstrates our commitment to increasing shareholder value. As previously disclosed since the beginning of fiscal year 2016, Cintas repurchased about 4.5 million shares under our buyback program at an aggregate cost of $382.9 million, including $180.4 million of repurchases in the second quarter. The company still has $380 million available under the current Board of Directors stock repurchase authorization. Before Paul provides more details of company financial performance, I want to briefly address the impact of oil, gas, and coal on our results. We've talked a lot about the benefits of low fuel prices, but we've seen these low fuel prices affect our customers more than anticipated 90 days ago. U.S. oil rig counts are down over 60% compared to last year, and the price of oil has tumbled below $40 per barrel. We see the impact of headcount reductions in not only the oil industry, but also in gas and coal. We estimate that headcount reductions in these industries lowered our organic growth rate by about 75 basis points in the second quarter and reduced our operating margin by about 35 basis points. While low fuel prices still more than offset this bottom-line impact in the second quarter, we expect this net impact to be even or slightly negative in the second half of the year. I'll now turn the call over to Paul for additional information.

Thank you, Mike. First, please note that there were 65 workdays in this year's second quarter, same number of days as last year's second quarter. The same will hold true for the third quarter. However, this year's fourth quarter will have 66 workdays, compared to only 65 in last year's fourth quarter. In total, fiscal year 2016 will have 262 workdays, two more than in fiscal 2015. As Mike stated, total revenue increased organically by 6.5% in the second quarter. New business wins, penetration of existing customers with more products and services, customer retention, and price increases, all contributed to this solid growth rate. Total company gross margin was 43.3% for the second quarter of this year compared to 42.9% last year. Total company energy-related expenses for this year's second quarter were 2.0% of revenue compared to 2.6% of revenue in last year's second quarter. I will address the impacts of oil, gas, and coal and the recent ZEE Medical acquisition on gross margin at the operating segment level. Recall that effective June 1 of this year, we have three reportable operating segments: Uniform Rental and Facility Services, First Aid and Safety Services, and All Other. All Other consists primarily of Fire Protection Services and our Direct Sale business division. First Aid and Safety Services and All Other are combined and presented as Other Services on the income statement. Uniform Rental and Facility Services operating segment includes the rental and servicing of uniforms, mats, and towels, and the provision of restroom supplies and other facility products and services. The segment also includes the sale of items from our catalogs to our customers on route. Uniform Rental and Facility Services revenue was $937.7 million, an increase of 5.2% compared to last year's second quarter. Excluding the impact of foreign currency exchange rate changes, organic growth was 6.2%. Our Uniform Rental and Facility Services segment gross margin was 43.9% for the second quarter, an increase of 60 basis points from 43.3% in last year's second quarter. Energy-related costs were 50 basis points lower than in last year's second quarter. We estimate that job losses in oil, gas, and coal negatively impacted this segment's current year second quarter gross margin by 20 basis points. Our First Aid and Safety Services operating segment includes revenue from the sale and servicing of first aid products, safety products, and training. This segment's revenue for the second quarter was $120.4 million, which was 46.4% higher than last year's second quarter. Total growth benefited from the ZEE Medical acquisition. On an organic basis growth for the segment was 9.8%. This segment's gross margin was 43.2% in the second quarter compared to 46.7% in the prior-year period. The reduction in gross margin is wholly attributable to the impact of the recently acquired ZEE Medical business. Given that the acquisition occurred about four months ago, we are in the integration phase and incurring the customary costs of conversion. The assimilation of the business including route consolidation is now under way, which is integral to the realization of synergies. And we're pleased to report 90 basis points of improved gross margin on a sequential basis. We're excited about the benefits and opportunities this acquisition provides. First Aid and Safety is well on its way to becoming a $0.5 billion operating segment for us. Regarding selling and general and administrative expenses, total company SG&A was 26.8% as a percentage of second quarter revenue, compared with total company SG&A in last year's second quarter of 26.7%. Medical expenses as a percentage of revenue were 10 basis points higher in this year's second quarter. Very soon, we will introduce an exciting new marketing campaign. The expense of the campaign began to be recognized in the second quarter. Its impact on SG&A was about 10 basis points. The related expense will continue through the end of the fiscal year with the greatest impact falling in our third quarter. Our effective tax rate on continuing operations for the second quarter was 37.4%, the same rate as in the prior-year period. For the remainder of the fiscal year, we expect the effective tax rate to be 37.3% in both the third and fourth quarters. For comparative purposes, the effective tax rate in last fiscal year's third and fourth quarters was 36.2% and 37.6%, respectively. On October 1 of this year, we sold our investment in Shred-it for $578.3 million before taxes. Cintas also has the opportunity to receive up to $34 million in additional consideration in the future, subject to certain holdback provisions. Note that the gain on sale of the investment is included in discontinued operations. The sale of the investment completes our exit from the document management business. As a result of both the shredding transactions and the sale of the documents storage business, we realized total proceeds of $1.100 billion on a segment that had annual revenue of about $316 million. That's a multiple of three times annual revenue. Our cash and marketable securities were $672.6 million as of November 30, an increase of $472.4 million from the balance as of August 31. Cash provided by operating activities was $122 million in our second quarter. Uses of cash in the quarter included $180.7 million for repurchases of Cintas common stock. As previously mentioned, $578.3 million was received in the quarter, as proceeds on the sale of the investment in Shred-it. Note that our cash will be used in part to pay the taxes on the gains on our Shred-it investment in our fiscal third quarter and fourth quarter. The amount of taxes to be paid is approximately $225 million. Capital expenditures for the second quarter were about $59 million. Our CapEx by reportable operating segments was as follows: $51 million in Uniform Rental, $3 million in First Aid and Safety, and $5 million in All Other. We expect CapEx for fiscal 2016 to be in the range of $250 million to $300 million. That concludes our prepared marks. We're happy to answer your questions.

Thank you. [Operator Instructions] We'll take our first question from Manav Patnaik with Barclays.

Yeah. Hi, good evening, gentlemen. I just wanted to just get a little bit more color on the energy, gas impact that you guys talked about. So you said 75 basis points to your organic growth for the total company, if I heard you right. So what is the assumption embedded in the full year guidance in terms of how that impacts your top-line number?

Well, Manav, that – first, let me say that understanding this is not – the impact of this is not an exact science. So we said 75 basis points in the second quarter. And I would say in the second half of the year, we would expect roughly the same in the third quarter, 70 to 80 basis points. And then probably in the fourth quarter, about half of that, because we – the fourth quarter is when we started to see the negative impact from our customers last year. And so, if we continue at the current rate, we would expect that the year-over-year impact is going to be slightly smaller in the fourth quarter.

And is it fair to say that most of that is in the Rentals or is there some of that in the First Aid as well?

There is some of that in the First Aid as well. We do have a very nice business in that industry from a First Aid and Safety standpoint.

Okay. And then just around sort of these impacts from layoffs and so forth, I mean we've been reading a lot of that happening on the industrial side of things. Can you remind us of your exposure there, or if you're seeing any of those come in more negatively than maybe you would have thought?

Yes. Manav, this is Paul. First, I would say that we've worked hard to diversify our customer base. And we've disclosed previously that we have no single customer that comprises more than 1% of our revenue. And we also don't have any three-digit [makes] [ph] code or industry code that comprises more than 10% of our revenue. And obviously, we have weathered the offshoring of all the U.S. jobs, U.S. manufacturing jobs years and years and years ago, and we continued to evolve. Now, we have more hygiene products than we ever had before. We have retail-inspired work wear like Carhartt that enables us to put people in uniform that previously did not want the program or were not interested in one. And we're in healthcare with scrub rental. So we continue to evolve, such that currently, our percentage of our customer base that is in the service-providing sector of the economy is about 70%. So about 30% of our customer base is in the goods-producing areas of the economy. And by goods-producing, I mean oil, gas, coal, construction, and manufacturing as well. So we obviously are reading the same press releases that you are. We understand the headwinds to U.S. manufacturing, and we're keeping an eye on it. But at the same time, we're trying to keep things in perspective. We do know that not every single one of our customers in manufacturing exports. And so, for many of those, they are receiving the benefits of lower energy prices and other low input costs to their cost structure like commodities, et cetera. So the bottom line is we're continuing to monitor it. But at this point in time, the only negative impact to our business that we see in this goods-producing sector of the economy is from oil, gas, and coal.

All right. Fair enough. That's really helpful. Thank you so much for all that color.

You're welcome.

We'll go next to George Tong with Piper Jaffray.

Hi, thanks. Good afternoon. Can you discuss how add-stops performed in the quarter, both including oil and gas, and excluding oil and gas?

Yes. I would say there's two things that were noteworthy regarding adds and the stops in the quarter. And the first, of course, is the impact to our metric from the headcount reductions in the oil, gas, and coal. We definitely saw that negative impact in our flame-resistant garment add-stops metric. The second item of note was that we did have some softness in our add-stops as it relates to weather. If you recall last year, at this point in time, winter seemed like it had already arrived, and it's been a much milder fall and start to winter this year. And when we don't have that snow, we have fewer mat placements. And that cold weather also helps us to get some additional revenue change over into outerwear, jackets, long sleeves, et cetera. So it's hard to quantify, but we do know that there is some softness as a result of that seasonal fluctuation.

Got it. And so, would you characterize the add-stops as being overall positive low single-digits, negative?

Well, George, the second quarter is generally a positive quarter from us because of some of the things that Paul mentioned, because of the seasonal nature of jackets and extra mat placements. So it was positive, but not as positive as last year, and due to the reasons that Paul cited.

Very helpful. And then can you discuss some plans to add to routes this year and how you expect route efficiency to evolve?

We plan to add routes similarly to the way we've done in the last few years, and that is throughout the year. Our anticipation is to add routes to allow our drivers, our service sales reps, the time and the daily capacity to proactively serve our customers to look for up-selling opportunities, et cetera. And so I think we'll – we don't expect any dramatic changes in route efficiency this year compared to last year because in both years, we're going to be adding.

Got it. And then lastly, can you discuss the sustainability of a high single-digit organic growth in your First Aid and Safety segment, and how penetrated your customer base is with First Aid, i.e., what percentage of rental customers are also purchasing First Aid products?

Far fewer than 20% of our Uniform Rental customers are purchasing First Aid and Safety Services from us. We think there's a lot of runway there. And we still believe that there are a lot of opportunities outside of our existing customer base as well. In that First Aid and Safety business, there are a lot of businesses today who are handling these issues themselves in-house, maybe going to a catalog company or to Wal-Mart to serve – to take care of their first aid and safety needs. And we believe that we can do it much, much more efficiently at a great value for them. But we've got a lot of opportunity there to get more into our programs, again both within our customer base and outside of our customer base. How long can we continue this high single, low double-digits? We believe into the future. We love the opportunity that the umbrellas of first aid, safety, and compliance bring us, and we think it's really a great business model for us and a great value proposition for businesses.

That's very helpful. Thank you.

Okay.

We'll go next to Gary Bisbee with RBC Capital Markets.

Hey, guys. Good afternoon.

Hi, Gary.

It's sort of curious that with the All Other segment as you're calling it now having larger revenue and gross profit than First Aid and Safety that you don't provide any commentary. But I wondered if, at a minimum, you can give us the organic revenue growth for that segment in the quarter.

Yes, Gary, the organic growth was 6.1% in the quarter. And just remember that that All Other contains predominantly your fire protection services and then also contains our direct sale business, or our national account programs. And so just remember that that can be choppy just by the nature of that direct sale business with the fact that you have rollouts with large customer programs that don't, by their very nature, repeat.

Right, yeah. It looks like that -- is it fair to say that it gets a little tougher from the trend of that in the next couple of quarters? It looks like you've now grown solidly four quarters in a row.

I would say that while it can be certainly a bumpy business, the direct sale, I don't know that I would say we're facing headwinds. We still expect good organic growth and improving operating margins. And keep in mind Gary, there are specific segment accounting rules that I think Paul went over last quarter that we have followed and will continue to follow as it relates to break out of the businesses.

Yeah. No, No, I was just – it was curious that you've given comments on the first two but not the third. But I understand it – no, I understand why. So, at any rate, moving on, just any updated color from what you said a quarter ago just on how we should think about the phasing of the integration of ZEE and the costs? Is it reasonable to think that that gross margin continues to decline sequentially like it did this quarter over the rest of the year, or is there anything that would make that more less in the near-term?

It is reasonable. So we're about a quarter into that integration. It's going well as Paul mentioned. We are converting routes on to our SAP system. We are rebranding our trucks and that process is going very well. We like the improvements that we're seeing. We still have a lot of improvement opportunities and we would expect that sequentially, over the next several quarters, we'll continue to improve. We could have a little bumpiness here and there given the integration process, but generally speaking, yes, sequentially, going forward, we expect to see improvement, and we're excited about the opportunities that they bring. I would say that when we get to our July earnings release, we'll probably be in better position to speak to our thoughts going forward on the business. But as for this fiscal year, we're focused on the integration, and as I said, it continues to go well.

Thank you.

You're welcome.

We'll go next to Nate Brochmann with William Blair.

Good evening, guys. Congratulations on another good quarter.

Thank you.

So I just want to talk two things. One, obviously, you guys have been getting a lot of sales productivity. Part of that is just a function of some of the process things; part of that is the ability to sell more. Just wondering how much more runway you think you have there before you might have to reload or kind of juice a little bit a hiring on the sales force front.

Well, just, Nate, just as we are with our routes, we're consistently adding sales reps as well. We certainly understand that in order to keep growing, we do need to continue to expand. We believe that we have opportunities, that there are prospects available for us to continue to add. And the other great thing is, while we're adding, we're also seeing productivity improvements. And as you said, some of that is process and some of that's innovation that allows us – allows our sales reps to have more opportunities to sell. So, we're going to be adding, just as we have over the last few years. There have been times in the last several years, both in our sales reps and in our routes where we have increased the rate of additions in a quarter here or there, but absent that increased rate, we're generally adding because we want to continue to grow, we want to give capacity to our routes, we want to give – we want to get in front of more prospects and existing customers.

And then along those lines, in terms of some of those process/innovative improvements, are those ongoing in terms of constantly know very year, identifying a couple new tweaks that make those processes or those innovations better? Or has there been a couple one-time things that have had kind of oversize impact, or anything that might have an oversize impact over the next 12-18 months?

Well, we're – a part of our culture is to continuously challenge ourselves and improve. And so I think we get incremental improvements every year, whether it's with the hiring of new reps and the profiles that we're looking for, whether it's the training that we do to get them ramped up as quickly as possible. The selling process itself, we're constantly looking for ways to improve. We do have a nice sales prospecting system that we put in, gosh, in the last year or so that is helping us. But I don't know that I'd see or care to share any other improvements that will be a leap forward in productivity levels in the next year or so.

Fair enough. And then just kind of a – kind of more industry question, but it feels that right now, things are kind of rational out there. I know it's always competitive pricing, but I was wondering if you could kind of comment a little bit on where you see industry pricing right now in terms of both renewals as well as for new awards.

Yeah, Nate, this is Paul. Pricing environment really hasn't changed significantly from last quarter. Still favorable overall, as we continue to talk about the value of our services and our products. But at the same time, it does remain competitive. National accounts are, in particular, more competitive than other business, and that's why we still focus on new business efforts around those no-programmers, those that have not had the program before, as we get the best value there. And that split, Nate, at still 60-40: 60% from no-programmers, 40% in terms of getting share from our competition.

Great. It sounds good. Thanks for the time.

You're welcome.

We'll go next to Sara Gubins with Bank of America Merrill Lynch.

Hi. Thanks. Good afternoon. Was the marketing campaign planned earlier and always contemplated in the guidance, or is that new? And could you tell us a little bit more about it?

Let me make sure I understood that correctly. Did you ask if it was in the original guidance or...

Yeah. I'm just wondering if it's something that's – I'm wondering if it's something that was – that is a new development over the course of this fiscal year or if it was something that you had always contemplated when you originally gave guidance for the fiscal year?

Got it. We did contemplate it as we moved into the early in the fiscal year. And with something like a campaign, you can kind of turn it on and off a little bit, you can serve it to meet the needs, and we've done a little bit of that. And we didn't – because at the beginning of the year, there's – we've got so much of the year to go. We want to see how the beginning of the year goes before we commit to things. But the year has gone well so far. We did start spending on that campaign in the second quarter. I would expect as Paul said to see that expense go up in the third quarter. We're excited about the campaign. One of the things that we hear from our customers frequently is that, they didn't know that we can provide all of the different products and services that we do. So for example, we hear from Uniform Rental customers, gosh, I didn't know that you were in the first aid and safety business or I didn't know that you have – that you provide fire protection services. And so one of the goals is to raise awareness of all of the ways that we can provide value to our customers and we're excited about that. As it relates to more details, I would say stay tuned, but we're excited about that. Now, when we...

Okay.

When I mentioned that – and Paul mentioned, that we'll see a little bit more expense in the third quarter, let me speak a little bit to the second half of the year guidance. Paul touched on a few things in his opening comments. One is we may spend a little bit more on this marketing campaign in the third quarter. Secondly, our tax rate in the third quarter last year was less than what we're guiding towards this year in the third quarter. It was more in the fourth quarter last year than what we're guiding towards. So that's going to have a year-over-year impact, so slightly negative in the third, maybe a little bit positive in the fourth. And then the last thing I would point to as it relates to the second half of the year guidance is that we have one more work day in the fourth quarter than we do in the third quarter. And so when you take all three of those things and you think about our guidance and you think about your modeling, I would suggest that the fourth quarter is going to be weighted more heavily in terms of profitability than the third quarter is. So, sorry for that [indiscernible].

Okay. Great. Thank you. No, that's very helpful. Thank you. I think that before, you talked about energy cost being – expecting them to be about 2.5% of revenue this year. I'm guessing that now you expect that they will be lower. What are you anticipating for energy costs this year as a percent of revenue?

Yes, Sara, the guidance for the remainder of the year assumes that we're going to remain at that same percent of revenue that we are in Q2, which was that 2.0%.

Okay, great. And then just last question about margins for from rental. I know there are a lot of puts and takes given the marketing campaign, given the pressure from energy clients. Is it fair to assume that the margin expansion you saw in the second quarter is – on a year-over-year basis is about what we should expect to see in the back half? Or would we even maybe potentially see less because of the marketing campaign ramping?

And so, if we think about the overall operating margin, I think that we expect that we'll get some continued margin improvement in the back half of the year. It is going to be a little bit pressured, though, because the year-over-year benefit of energy is going to decrease, probably if – assuming that 2% rate is down to 40 basis points in the third and 20 basis points in the fourth, and that negative impact from oil and gas customers will start to become a bigger part of the net number, if you will. So while we do expect to continue to improve margins, I would say that given the pressure of that alone, we might be a little – we might see a little bit of narrowing in the second half of the year.

Okay. Thanks very much.

We'll go next to Andy Wittmann with Robert W. Baird.

Hey, guys. So, Mike, just to build on this, and sorry for beating a dead horse, but is it the growth investments that you're making that's preventing more operating leverage from coming through? I mean ex-energy here, obviously there wasn't a whole lot here. It seems like there could be more, but it's – is it just really more reinvestment in the business that's holding you back from putting up [indiscernible] margin gains higher than this, given that organic growth has been excellent?

Well, so, Andy, keep in mind that you can't just take the energy benefit, the 60 basis points year-over-year and say that that is the only impact from energy. We are seeing our oil and gas customers being negatively impacted, probably to a larger extent in the second quarter than we anticipated 90 days ago. So, certainly, that low fuel price is having an offset, and we're seeing some of that. On the other hand, we are – we will continue to invest in the business. And you are correct: some of that – I mean, if we pulled back on investment, we could certainly make margins get higher. But we want to keep investing in the business, and we'll continue to do that going forward.

With the medical being – thank you for that. With ZEE Medical now being four months in, and actually, sequentially showing some less-tier – is this one of the reasons for the guidance? It's like, Mike, before, you were saying kind of zero contribution, but it seems like it might to be off to a little bit better start than that. Is that true or how will you break down the guidance hike?

I would say that the guidance hike is a bit on second quarter performing pretty well, and maybe a little bit slightly better than we anticipated, and then just a firming of how we feel about the overall business including the First Aid and Safety improvements. So while I wouldn't put a lot into saying that the ZEE is going much better than we expected, it's going well, and it's going fairly closely to as we expected, and maybe a little bit of that improvement could come from ZEE. But I think it's the combination of feeling really good about the second quarter performance and seeing that move into the second half of the year.

Thanks. Maybe the last question, then, like on – you picked up an acquisition or some assets from one of your competitors in a court proceeding in the past few months here. I was just wondering if you could give us some help on how that's going to flow through your income statement, including what you expect in terms of the revenue contribution maybe on a go-forward basis, or even what it was in the second quarter? Any financial numbers, color on that transaction, I think, would be helpful for shareholders.

Sure. On December 4, we closed an acquisition of Coyne Textile Services. Coyne was in bankruptcy proceedings. We did not buy all of the business; we bought only a part of the business. It's a little bit of a different kind of acquisition for us; first time we bought a business out of bankruptcy. And so, we're in the midst of integrating that, and because it's in – because it was in bankruptcy, obviously it probably wasn't the strongest business that we've every acquired. And so we want to make sure we understand how it rolls in, but it's – we paid about $33.6 million for the acquisition. We believe that it will provide about $25 million to $30 million of annual revenue. We're in the midst of integrating that into quite a few different rental facilities where it's a really nice tuck-in opportunity. We have contemplated that into the guidance. And I would say from a top line perspective a couple things to keep in mind, while we have contemplated that into the guidance, we have also seen the impact of the Canadian dollar weakening a little bit more than we anticipated 90 days ago. And as we talked about oil and gas, that impact, negative impact is a little bit higher than we anticipated 90 days ago as well. And so when you combine those three things together, we feel like the right thing to do is to leave the top end of the guidance where it is, but we feel good enough about the operating environment to move that bottom end of the guidance, revenue guidance up $25 million. From an EPS standpoint, that acquisition kind of fits into, again, getting a better feel for where we are at the middle of the year. And while we might see some benefit, we are – from a bottom-line standpoint, we really need to see what we've got coming out of the holidays before we can adequately assess that business's impact.

That's really helpful. Thank you very much.

Okay.

We'll go next to John Healy with Northcoast Research.

Thank you. Mike, I wanted to ask a little bit just to get some more color on how you're feeling about the holidays and how they'll impact the business. With Christmas week on, plant shutdowns and whatnot over the – at the end of the year could be quite volatile and just kind of any initial early read on how those might trend to the last year and maybe the prior years.

No initial signs that it will be different from the previous years. I will tell you that we're cautious about the way we view this economy. And coming out of the holidays, we're a little bit probably more cautious than we thought we would've been 90 days ago. But we still feel good about our ability to execute in this environment. I think, John, a little bit more as it relates to the holiday, and then rolling into January-February, I think a little bit more has to do with the weather. We'd like to see a little bit cooler weather to add more jackets; a little bit of – a little bit more rain and snow will add some more mat placements. That, we'd like to see, and probably has us watching more closely than any shutdowns during the holiday period.

Got you. And on the direct sales business, I think this is around the time of the year, or maybe it was a few weeks, that usually starts some of those outerwear promotions. Is the outlook for the direct sales business a little bit more – a little bit softer than maybe you would've thought 90 days ago just given the weather, and that's kind of business that you just won't be able to recoup?

I would say that while there is a little bit of that, yes. We do have a lot of good projects in the pipeline in that business and our expectation is that we'll see an offset. So I don't anticipate any unusual softness in that business in the next six months.

Okay, great. And then just one final question. I know you touched on a bit about the new marketing campaigns. I was hoping you could maybe give us a little bit color in terms of how you're trying to reach the customer. Is it a different – is it more of a different message or is it a different way. Maybe you're going more to social media or maybe you're going to the television commercials. Any way you can maybe talk to how the ad campaign attempts to reach the small business customer who is putting your services on the shelf?

John, I would say we're looking at ways to get as many touches as we possibly can, but I'd rather not get into too many details. I would just say stay tune and we'll talk about it certainly more at our third quarter call.

Great. Have a great holiday.

Thank you. You too.

We'll go next to Scott Schneeberger with Oppenheimer.

Thanks. Good evening, guys.

Hi, Scott.

Hey. Going back, you highlighted 70% of the business is really a lot of service customers, and then 30%, I think you've said oil, gas, coal, construction, manufacturing was the brunt of the that. And thank you very much for the color you provided on oil, gas, coal. I heard some cautionary remarks on construction, manufacturing saying those domestically – who don't export are doing okay, but what's in the guidance? Is it – going back on the guidance overall, what effects those first three components that are more commodity components, is that basically if the current commodity prices remain the same is how you're thinking about the guidance? And then part of the question too is if you could just elaborate on the concern you discussed on construction and manufacturing, was that just reading headlines like the rest of us? Was it the import-export? And is that petering on being something that could go incrementally worse? Thanks.

So our guidance contemplates that the environment that we see today continues. And I would say that we have – throughout our second quarter, we did see our oil, gas, mining customers being more negatively impacted than in the previous quarters. But I would say we haven't seen it extend to any significant degree outside of that. We didn't see that in our second quarter. And I think what Paul was referring to is that we're not convinced that we're in an industrial recessionary environment. We certainly know that the strong dollar can have some impact on certain types of manufacturing and certain types of customers, but we also know that it's a benefit to others. And our thoughts are generally that the current operating environment will continue in the second half of the year. And while we're cautious and maybe a little bit more so than 90 days ago, we still feel good about this operating environment and in our ability to achieve the guidance in this environment.

Thanks. And a moment ago, when you mentioned that forex, obviously a headwind, could you remind us what your mix of international revenue is? I believe it's predominantly Canada. And I recall you went a little bit international in hospitality just to follow customers a few years back. And given these conditions – so, international mix is the first part, but the second of the question would be how are you thinking about M&A abroad right now, just expansion. And I guess particularly within Canada. Thanks.

Well, so, I would say 6% to 7% of our total revenue is international, most of which is in Canada. We have primarily our Rental business in Canada. We do have a direct sale business that is not significant, but certainly part of that business. And with the ZEE acquisition, we just got into Canada. That is a – not a significant amount of the ZEE business either, but all of that combined, probably 6%-ish in Canada, 1% or less everywhere else. And so, let me pause, did I answer your question Scott?

Yeah. And the follow-up would just be appetite on M&A, I guess, in general?

Yes, M&A. So from an international standpoint, because of some of the document management divestitures, we do have about $100 million of cash outside of the U.S. And we'd certainly look for good opportunities to make investments, for example with the ZEE business. We paid for the Canadian business with Canadian dollars – with international dollars. So we'd love to continue to do that kind of acquisition opportunity. As it relates to M&A, in general, so in the U.S., primarily, the pipeline has been good for us in the first six months or so of the fiscal year. We made the ZEE acquisition in August, we made this Coyne acquisition in early December, and we would love to continue to make acquisitions like these two that are great tuck-in opportunities where we feel like we can get really good incremental margins.

Great. I appreciate it guys. Thanks.

We'll go next to Shlomo Rosenbaum with Stifel.

Hi. Thank you for squeezing me in at the end of here. Most of my questions have been answered, I just have a couple. Could you give a little bit more specificity on the percentage of the revenues, especially from just like oil, gas, and mining? Maybe just honing in on that, is there a number that you can give us?

A lot – about a year ago, Shlomo, we talked about that being 2% to 3%; let's call it 3%-ish. I would say given the course of the events over the last year, that business is smaller than 3%. Our other businesses have grown and continued growing, and that business has not. So it's still a fairly small block of business for us, but it has suffered quite a bit.

Okay. So we're talking about it's like 3% going down maybe a little less than a 1% in terms of total revenue. Just looking at materiality?

I don't know that's going down that much, Shlomo, but probably in the 2%-ish.

No, I don't mean, 2%-1%. I'm saying it may be dropping from 3% to 2%.

Oh, yes, correct.

Okay. And then there's a fair amount of cash on the balance sheet from Shred-it, and outside of paying Uncle Sam, is it that the intention to use for more of these type of acquisitions or should we – if we're thinking about prioritizing on that, would you think – should we be continuing to model in a certain level of share repurchases as you guys have been doing for a while now?

So, a couple of comments on cash. Yes, there is a lot on our balance sheet at November 30. A couple of things again, about a $100 million of that is outside of the U.S. So to bring that into the U.S. would be fairly costly. We did spend a $115.5 million on our dividend in the first week of December. That was a dividend of a $1.05, which was a 23.5% increase, so we are happy to share that with our shareholders. We did make the Coyne acquisition that closed on December 4 to just over $33 million. And as Paul said, we've got a – you'll see on the balance sheet about a $236 million income taxes payable that will happen in February. So those last three items we're going to be spending just under $400 million on those alone. So while there is a lot of cash on the balance sheet at November 30, there are plans for a good chunk of that. Having said that, we'll continue to generate cash. We would love to put that cash to work in accretive acquisitions, similar to ZEE and Coyne. And we'll keep looking for those opportunities. That certainly is our highest priority. But if there aren't good opportunities and we believe that the share buyback program is appropriate, we've certainly got a track record of showing that we will put that cash to work.

Great. Thank you.

Okay. And we'll go next to Andrew Steinerman with JPMorgan.

Hi there. I just wanted to quantify a little bit more about the sales administrative line. It was under 27% of revenues, which is towards the low historically, and I definitely heard it's going to bump up at the marketing campaign. My question is just what's a normal sales and administrative percentage while revenues continue to grow at a healthy rate? Will we stay in this kind of 27% range in leverage or do you think over time that has to kind of go back towards 28%?

A couple of comments and thoughts. You may see from a First Aid perspective, we're getting really nice G&A leveraging from the ZEE Medical acquisition. That's a business that – where we didn't bring a lot of G&A and overhead across, and that's why we'd like that opportunity so much. So we've seen some real nice leveraging there. Yet a marketing campaign is a little bit of a blip in the second half of our fiscal year, but I would say going into the fiscal 2017 and then even more so in fiscal 2018, we're going to have the SAP project concluding and beginning to depreciate. And so we will see some impact of that in the next two fiscal years. Absent that, we absolutely believe that we should be and believe we can grow SG&A at a slower rate than our revenue growth, and we expect that every single year. And so absent the couple of callouts, we expect to get leveraging in the G&A area every single year. So getting back to, is 28% the right number, Andrew – or is 27%, 28% is right number, we need to see a little bit more of how our First Aid business operates with the ZEE integration. And I think next year will be a better indicator.

Okay. Thank you.

Okay.

At this time, we have no further questions. So I hand the call back over to our speakers for any additional or closing remarks.

Well, thank you all for joining us tonight, and we wish you all a happy holiday. We will issue our third quarter earnings in late March. And we look forward to speaking with you again at that time. Thank you. Good night.

That does conclude today's conference. We thank you for your participation.