Mike Hansen - Vice President of Finance and Chief Financial Officer Paul Adler - Vice President and Treasurer

Joe Box - KeyBanc Capital Markets Nate Brochmann - William Blair Denny Galindo - Morgan Stanley Sara Gubins - Bank of America Merrill Lynch Justin Hauke - Robert W. Baird John Healy - Northcoast Research Adrian Paz - Piper Jaffray Scott Schneeberger - Oppenheimer Gary Bisbee - RBC Capital Markets

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 third quarter results for fiscal 2016. 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 third quarter revenue of $1,216 billion, an increase of 9.7% from the prior year's third quarter. Organic revenue growth which adjusts for the impact of acquisitions and foreign currency exchange rate fluctuations was 6.8%. Organic growth for the Uniform Rental and Facility Services operating segment was 6.1% and the First Aid and Safety Services organic growth was 11.9%. Third quarter operating income was $193 million, an increase of 11.1% over last year's third quarter. Operating margin improved to 15.9% of revenue compared to an operating margin of 15.7% in the prior year period. The Uniform Rental and Facility Services segment led the way with a margin of 17.9%. Net income from continuing operations for the third quarter of fiscal 2016 was $117 million compared to $100 million in the prior year period, an increase of 16.9%. Net income from continuing operations as a percent of revenue improved to 9.6% from 9.0% of revenue in last fiscal year's third quarter. Earnings per diluted share or EPS from continuing operations for the third quarter were $1.05 compared to $0.85 from the third quarter of last year. Third quarter EPS from continuing operations increased 23.5% compared to the prior-year period. As a result of a third quarter results, we are updating our annual guidance. We expect fiscal 2016 revenue to be in the range of $4,860 billion to $4,890 billion, and fiscal 2016 EPS from continuing operations to be in the range of $3.98 to $4.03. This guidance does not include any potential deterioration in the US economy or additional share buybacks. The EPS guidance is detailed in the table within today's press release. Since the beginning of fiscal year 2016, Cintas repurchased about 5.7 million shares under our buyback program at an aggregate cost of about $483 million, including $100 million of repurchases in the third quarter. The company still has $280 million available under the current Board of Directors stock repurchase authorization. Before Paul provides more details of company financial performance, I want to take the opportunity to thank our employees, whom we call partners, for an outstanding job. We are proud of our strong financial results. We expect fiscal 2016 to be our sixth consecutive year of double-digit increases in EPS. Our organic growth rates are well in excess of the growth rates in US gross domestic product and employment, and we continue to both sell new accounts and add value to existing customers by addressing their specific business needs. We have distinct competitive advantages. Our corporate culture which guides and drives everything that we do. Our innovative and expansive product line that is comprised of many proprietary products that cannot be offered by our competition. And an unmatched scale that provides unique leveraging opportunities, global sourcing capabilities and the best and broadest service structure in North America. These competitive advantages have led to our history of strong financial results and have made us the clear leader in our industry. We are significantly larger than our competitors. We are growing faster and our margins are better. These strong financial results, our unmatched scale and our focus on the long-term, allow us to invest in ways not possible for our competitors. We are continuously engaged in the research and development of new products and services. This is evident in the breadth of the product and service offerings compared to others in the industry. We are able to embark on a national branding campaign visible on television. Our new tagline, Ready for the Workday, speaks to the value we provide our customers in helping them prepare for their workdays. This campaign is resulting in greater brand awareness to assist with cross selling efforts. It’s also energizing our partners who are now even more ready for our customers. And we are able to make transformative investments, such as our conversion to the SAP system. I'll discuss the status of the SAP project in a few minutes, after Paul provides more third quarter details. But these investments will continue to strengthen our industry leading position and ensure that we continue into the future helping many, many businesses get Ready for the Workday. 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 third quarter, the same number of days as last year's 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, 2 more than in fiscal 2015. Finally, note that our next fiscal year of 2017 will have one less day than this year. We estimate that this one less day will negatively impact fiscal 2017 total revenue growth by about 40 to 50 basis points in comparison to fiscal 2016. As Mike stated, total revenue increased organically by 6.8% in the third quarter. This solid growth rate was driven largely by new business wins, penetration of existing customers with more products and services and strong customer retention. Total company gross margin was 43.1% for the third quarter of this year compared to 42.9% last year. Total company energy-related expenses, including gas, diesel, and natural gas for this year's third quarter were 1.8% of revenue, about 50 basis points lower than last year's third quarter. Note however, that we continued to see the impact of headcount reduction in the oil, gas and coal industries. We estimate that the resulting decrease in revenue from customers in these industries lowered our organic growth rate by about 80 basis points in the third quarter and reduced our operating margin by about 40 basis points. So on a net basis, the low fuel prices benefited our operating margin by about 10 basis points. Recall that effective June 1st 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 $936 million, an increase of 6.0% compared to last year's third quarter. Excluding the impact of foreign currency exchange rate changes and acquisitions, organic growth was 6.1%. Our Uniform Rental and Facility Services segment gross margin was 44.0% for the third quarter, an increase of 70 basis points from 43.3% in last year's third quarter. Energy-related costs were 50 basis points lower than in last year's third quarter. We estimate that job losses in oil, gas and coal negatively impacted this segment's current year third quarter operating margin by about 40 basis points. So on a net basis, the low fuel prices benefited our Uniform Rental and Facility Services operating margin by about 10 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 third quarter was $119 [ph] million, which was 50% higher than last year's third quarter. Total growth benefited from the ZEE Medical acquisition. On an organic basis, growth for the segment was 11.9%. This segment's gross margin was 42.2% in the third quarter, compared to 47.3% in the prior year period. Operating income margin was 10.6% compared to 14.2% in last year's third quarter. The reduction in margins is wholly attributable to the impact of the recently acquired ZEE Medical business. We are in the integration phase and incurring the typical conversion costs. The assimilation of the business, including route consolidation is in process. The completion of which is integral to the realization of synergies. We are excited about the benefits and opportunities that will result upon completion of the integration in about six months. Regarding selling and general and administrative expenses, total company SG&A was 27.3% as a percentage of third quarter revenue compared to a total company SG&A in last year's third quarter of 27.2%. Medical expenses as a percentage of revenue were 10 basis points higher in this year's third quarter. Also note that our new national branding campaign impacted SG&A by about 45 basis points. Our effective tax rate on continuing operations for the third quarter was 33.8% compared to 36.3% for last year's third quarter. A prior year federal tax audit closed during the quarter with favorable results. We expect the effective tax rate for fiscal 2016 to be about 36.5%. Our cash and marketable securities were $386 million as of February 29, a decrease of $286 million from the balance as of November 30. Uses of cash in the quarter included $115 million for the dividend, $100 million for repurchases of Cintas common stock and $166 million to pay some of the taxes due on the gains related to the sale of our Shred-it investment. Capital expenditures for the third quarter were about $85 million. Our CapEx by reportable operating segment was as follows, $76 million in Uniform Rental, $6 million in First Aid and Safety, and $3 million in all other. We expect CapEx for fiscal 2016 to be in the range of $270 million to $300 million. Before we open the call up for questions, I'd like to turn the call back to Mike who will provide some additional information related to investments and SAP. Mike?

Thanks Paul. Our investment in the SAP system began years ago. We first converted to SAP in our accounting and finance functions. We soon followed that conversion with the implementation of portions of our global supply chain, including production planning and sourcing. With this experience under our belt, we put our first operating business into SAP, our Document Shredding business, and then our First Aid and Safety business. Over the past 2 years, we have been communicating our efforts to convert our largest operating division, Uniform Rental and Facility Services to SAP, which is a capital investment of approximately $100 million. We started with the blueprinting phase, which was designing the system. About a year ago, we moved into the realization phase, which was building the system and testing at. At this time, we expect to complete this realization phase in the next three to four months and then move into the pilot stage. The great news is we've been able to maintain the project costs and time line that we introduced two years ago with minimal changes. I want to say thanks to all of our partners working on this project. They've done and continue to do a tremendous job. In fact, we feel good enough with our progress to date that we've made decisions to extend the footprint of the SAP system into our distribution network and expand our e-commerce capabilities. We anticipate that these extensions will be a capital investment of roughly $40 million over the next year or so. Given the progress made and proximity to implementation, we have better visibility and are now able to share with you the estimated impacts to our fiscal years 2017 and 2018. We expect to begin depreciating the rental capital project around December of 2016. Therefore, our fiscal year 2017 will include about a half of a year of depreciation. It will also include about half of a year of system maintenance costs. The conversion of hundreds of our operations to SAP will occur during fiscal 2017 and extend through fiscal 2018. Training costs, which are expensed when incurred as opposed to amortized over time, will exist in both fiscal '17 and '18. As is customary in such a conversion, we expect to have additional - other additional costs in 2017 and 2018 as a result of inefficiencies until the old system is completely offline. We estimate that the investment in SAP will result in $30 million to $35 million of expense in fiscal 2017 and $45 million to $50 million of expense in fiscal 2018. We will begin to realize some cost structure benefits in fiscal 2019, but will likely see the power of the system beginning in fiscal 2020, once all operations have had some experience in running it. This is a transformational investment and we are confident it will be successful. We've seen many companies, including some in our own industry, struggle with these large implementation projects. Our financial strength and commitment to the long-term has enabled us to dedicate the required internal resources to the project in every phase. We also have the best external resource assisting us as SAP and not a third-party consulting firm has been working with us every step of the way. And as previously mentioned, we have a great experience with SAP from our prior implementations. We look forward to the long-term benefits this investment will provide. That concludes our prepared remarks and we'll now be happy to answer any questions.

Thank you. [Operator Instructions] And we'll take our first question with Joe Box from KeyBanc Capital Markets.

Hey, good afternoon, guys.

Hi, Joe.

Hi, Joe.

I just wanted to dig into the 6.1% organic growth rate in uniform. I know you guys usually wait until 4Q to give us a little bit more detail on the breakout of that segment. But can you maybe just talk to were there any noticeable differences in the growth rate between the 52% that’s uniform and the 48% that is other or any directional trends between the two?

Well, we've talked a little bit, Joe, about the issues that we've had in the oil and gas sector. Outside of that though, we haven’t seen much of a change in the operating environment. And I would say that our sales continue to be broad-based in terms of the different verticals that we're selling to and the different products and services that we're actually selling. And so we haven’t seen much of a change with the exception of the oil and gas that continues to be problematic and has deteriorated even further in this third quarter.

Got you. So it's fair to say that there's not any sort of moderation above and beyond within the uniform only component relative to where you were at over the last quarter or two?

No, and I think the organic growth is fairly consistent with the last quarter, second quarter which was at 6.2%. And so, no, we haven’t seen a lot of change in the economic environment, and based on our guidance, we still feel pretty good about going forward.

Got it. Thanks for that. And then Mike, I appreciate the commentary on the breadth of your products earlier. How should we think about the pace of new product intros going into hygiene, first aid, non-uniform markets? Are you seeing an accelerating pace there based on the new workday campaign?

Well, I think from a campaign standpoint, first of all, Cintas and all of our partners are very energized by the campaign. We are really excited about it and it really speaks well of the value that we offer. I would say that reactions though, to the campaign are primarily anecdotal. We hear a lot of good news from our locations. But it’s too early to tell whether that’s having any impact on our current results. I think we'll know more about that as we go through the next several quarters. But getting back to the products and services, you know, Joe, we spend a lot of time in terms of innovation. And we invest a lot in R&D to find the right products that can solve problems for our customers. And again, I think that speaks to our new tagline, Ready for the Workday. And you know, Joe, when we think about the products and services, we've got retail inspired products, like Carhartt and our wrinkle free garments that people want to wear. We've got customer focused solutions like our scrub rental programs and our chemical cleaning solutions. And the beautiful thing about these products are they are all proprietary. All of these that I have mentioned are proprietary and cannot be offered by anybody else in the industry. We will - when we introduce a new product, we've got 900,000 or so customers out there that are warm leads. And even though they are warm leads, we don’t get fully penetrated overnight. It takes a while to educate our people on it, on selling new products, and then it takes a little bit of time to sell it to our customers. But having said that, we've been able to grow quite a bit above, as I said GDP and employment and the industry because in part we've created innovative products and services that our customers want. And I would say that we've also - we've got a very, very, diverse customer base and that diversity has really helped us. You see others in our industry who are really suffering because of less diversity. We've got a very diverse customer base. And part of that is on design and part of it is we have products and services that reach farther and reach broader than our competition. So we're going to continue to penetrate our existing customers with our products that we have, and we've got a lot of runway with those. We will also continue to work on R&D. I am not ready to announce any new products. But, Joe, we feel really good about our ability to continue to grow better than GDP, better than employment, better than the industry, because we are innovative. We've got a broader product line. We've got a diverse customer base, and we've got a great penetration opportunity. We think that has served us very well in the past and will continue to serve us into the future.

Got it. Thanks for all the color on that. Just one real quick one, relative to the stronger dollar, the impact is pretty clear on the Canadian business. I'm just curious though, if there is more broadly an opportunity to maybe source your garments better?

Well, Joe, I would say there's always - we would tell our global supply chain people, there are always ways we can improve and I think they believe that as well. The Canadian impact that you are referring to was primarily a top line impact. We haven't seen a significant bottom line impact. But, yes, there are certainly sourcing opportunities. The good news is we've got a great global supply chain and they are – they source globally and they are very flexible. We do not own a lot of our manufacturing. And so this group brings us lots of value. And I would say there are always ways to improve, whether it's new technology, new sources or just changes in mix and volume. We certainly think there are opportunities.

Appreciate it. Thanks, guys.

We'll take our next question from Manav Patnaik with Barclays.

Hi, this is actually Greg calling on for Manav. I just want to ask about the cross sell opportunity between the First Aid and Safety business and the Uniform business? I think you talked about 20% penetration on the last call. Just wondering how you guys are thinking about accelerating that and whether getting this ERP system in place will help to do that?

We do think that - a couple things, our First Aid and Safety business is doing a great job of digesting the ZEE acquisition. But keep in mind that’s a fairly large acquisition for them. It was more than a third of the legacy Cintas First Aid and Safety business. That’s priority number one. But clearly, yes, when we are on the SAP system, one of the benefits is that all of our operations will have more visibility and clarity into our customers and the different products and services that they have or don't have. And so we really do believe one of the real big benefits of the SAP system is to improve that penetration. But having said that, hey look, we feel really good about the First Aid and Safety business altogether. We know that we've got, as Paul said, two more quarters of integration; the integration is going well. Our margins are down from a year ago. We certainly understand that and certainly some of that is due to integration costs. And others are just due to a different business. We're integrating a different business than Cintas is. And we have penetration opportunities. And when we think about that organic growth that we saw this quarter of 11.9%, we're really excited about that. Our people in the First Aid and Safety business have still been able to focus on selling and servicing the customers, as well as starting to get into this the ZEE penetration opportunities. We talk a lot about the penetration opportunities for our rental business. But our ZEE customers generally have been only First Aid cabinet customers. And with our First Aid business, we have the ability or the opportunity to expand into safety products, training services, AEDs, et cetera. And so have - we feel like we've got a good penetration opportunity there and I think our 11.9% organic growth speaks to that a little bit.

Okay. That makes a lot of sense. Also just wanted to kind of level set, I guess, on energy. It sounded like it came in pretty close to what you were saying with the 80 basis point headwind on the top line and I guess, 1.8% of cost. Is the expectation for the fourth quarter still half as much of an impact on the top line and then that 1.8% on the cost side?

Yes, Greg, it’s Paul. On the top line, from the customer and the headcount reductions, that about half of the impact from Q3 to be experienced in Q4 is a good figure. In terms of the energy, the cost side of it, though, I think the price per barrel really dropped low in our third quarter, I think it reached $26 at one point. It’s kind of rebounded through the $40 threshold. So I think if it stays at about that level our energy as a percent of our revenue would probably be more in line with our Q2, which was about 2.0% of revenue. And in Q4 last year, our energy was about 2.2%. So the bottom line is we're expecting probably about 20 basis points of benefits from the prices at the pump. But then really offset by the headcount reductions that we expect to continue to incur into Q4.

Right. Okay, that makes sense. And I guess the last one, just from a modeling perspective, the organic growth in all other would you guys be able to give that?

Yes. So Greg, it was about 8.2% for the quarter. And it’s a strong year-to-date as well. All other, just as a reminder, includes that direct sale business and our fire protection business. That direct sale business is typically a slow grower relative to everything else we have, meaning 3%, 4%. So for that organic growth to be as high as it was in that all other segments, that fire protection business is growing quite nicely.

Okay. Thank you so much.

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

Yes, good evening, gentlemen.

Hi, Nate.

So I wanted to talk a little bit more about the campaign. I know you won't really be able to look back in the rear view mirror for a while to see the impact. Have you - is that still going on the same timeline that you originally thought that it would or has that extended at all? And then second question, to my knowledge at least since covering you, that this is the first big huge national campaign that you've ever embarked on, and if that is true, why the timing was kind of right to do that?

So a couple things. It is following the timeline that we originally established and thought of. I would expect that the spend on this campaign is going to be a bit lower, quite a bit lower in our fourth quarter and likely ramp up again next fiscal year, second quarter-ish. So it is following the original timeline that we had established. This is the largest and the first national campaign certainly that includes television. And it is the largest campaign that we've ever done. And so, why now? Look, we think it’s the right time to continue to get our brand awareness greater and greater throughout the country. We've had many customers over the years say to us, gosh, I didn't know you did that. I didn't know that you did first aid and safety. I didn't know that you had fire protection services. I didn't know you had chemical cleaning services. And the more we heard this, we kept thinking we need to educate. And so we thought that, look, now is a great time to do this because we've got some businesses that are really doing well and executing well. We've got a lot of great products, a lot of fairly new products and we want to get the word out to many, many businesses in North America that when those businesses have issues, need problems solved, think about calling Cintas. They can maybe help us get Ready for the Workday. And so we think it's a great time to do that because we're executing well. We've got a lot of good products and services, and we think its going to give us some momentum going into the future.

Okay. Great for that. And then just kind to circle back on the end market questions a little bit, just to dive in one layer deeper. But at this point, obviously, I would assume that you feel that you kind of have your arm around the oil and gas headcount reductions. Obviously, by kind of giving where we probably are going to go in the fourth quarter versus the third quarter, I would assume that’s the case. And also based on your earlier commentary regarding some of the other end markets, I would assume you are not seeing any further weakness in kind of maybe some of your industrial end markets, is that all fair to say?

That’s correct, Nate. As far as oil and gas, right, we believe we have a handle on for Q4 in terms of the quantification. We wish we had our hands around it in terms of thinking and believing that it was at the bottom. But those rig counts that we continue to monitor continue to decline and they are probably down about 60% year-over-year. So we'll continue to watch that into next fiscal year. And then in terms of manufacturing, it continues to be positive for us. We believe that more of our customers in the sector are stable or growing as opposed to shrinking. But, of course, we understand the headwinds that are out there and the industry statistics. So we'll continue to monitor it. But, yes, you nailed it, at this point in time the only negative impact in any particular sector is from oil and gas and coal as well.

Sure. Okay. That's great. And then one last, if I could squeeze it in. We talked about, obviously, and – I mean, it's the way everything goes with the SAP and congratulations for not having any major hiccups so far, knock on wood. But with some of those costs that you're anticipating going into next fiscal year and the following, are there any potential offsets? And I mean, I know every day you're always working on productivity improvements and efficiency improvements via technology or whatnot. But is there anything on the horizon that might give us a little bit of an offset to that, that would be above the norm or would there be any potential upside from any synergy benefits related to ZEE?

Well, are there any benefits related - synergy benefits related to ZEE? That's a little bit of an independent question. Yes, we absolutely think there are and that will be – we'll incorporate those thoughts into our guidance for fiscal '17 in July. So, yes, we do think that ZEE and the first aid margins are certainly going to improve. From an SAP standpoint, let's keep in mind this is the largest project that we've ever done. As we've kind of come to the end of this realization phase and we've been testing the project, we're really starting to see the power of the system and we're excited about getting this implemented. And we believe that there is the power in the system that we hoped for. We certainly still see that there are long-term benefits. But having said that, we're not going to take any shortcuts in this implementation. We're going to make sure we do it the right way with no adverse impact to our customers. And one of the risk mitigating things about the way we are rolling this out is that we've got hundreds of operations that need to be converted and they effectively happen one at a time. And so its not like we turn it on and our entire rental segment goes live. We have to do this one at a time. Now that mitigates the risk to us. But it extends the rollout a little bit as well through that fiscal '18. And so we - look, we think we're doing this the right way. As I mentioned, we've seen others, both in our industry and outside of our industry struggle with these and we feel fully confident that, that’s not going to happen to us. Now, certainly those numbers that I gave you are fairly large, and as you know, Nate, we're not going to sit idly by and just let those fall to the bottom. We are going to manage the impact as best we can. We are going to control our cost structure and we're going to become as efficient as we can become in the next couple of years. Now in fiscal '17, look, we're going to be on probably less than half of our locations and I would not expect that we're going to see a lot of system benefit. In fiscal '18 we might start to see a little bit of system benefit. But it’s going to be muted because we're going to still be converting quite a few locations. But having said that again, Nate, we're not going to sit idly by and just let $30 million to $35 million drop to the bottom without really managing the impact through our cost structure, through efficiency gains, et cetera. And will we be able to offset all $30 million to 35 million? No, but we will do our best to manage that impact.

That sounds great. Thanks for the added color, Mike. I appreciate that.

No problem. And you know, we – look, do not do things for the short term. So this is a transformational system that’s going to carry us for a long time. And it’s worth the investment. It is absolutely worth the investment we're putting in, in the next couple of years.

Great. Thanks.

Okay.

Thank you. We'll take the next question from Denny Galindo with Morgan Stanley.

Hi there. Thanks for taking my call.

Sure.

I had a question on California market, little geographic question. Aramark said they were expanding capacity there and judging by your number of locations, I would guess maybe 7% of your rental revenue comes from California. Have you seen any impact, any competitive impact from Aramark's increased presence in California or are things pretty much business as usual over there?

Denny, we haven’t seen any marketable impact. Our West Coast locations are performing very, very well, and I would expect that they will continue to do so. And we haven’t seen an impact.

Is that about the right estimate of the size of California, somewhere around that 7% to 10% of revenue?

I don’t have – I honestly do not have that number in front of me, Denny.

Okay. And then a little bit more color on the SAP question. Is the rollout and it sounds like it's location-by-location, is that evenly distributed throughout the year or is there any kind of seasonal impact to the enrollment? It sounds like it kinds of picks up maybe in the second half of this next fiscal year and does it mean it peaks in like Q1, Q2 and then tapers off after that?

So as I mentioned in my opening remarks, we're going to start the pilot sometime in the next three to four months. And that pilot is a very important part of our process. That pilot will make sure that the first several systems are operating the way we think they should operate, that the system performance is as we expect, et cetera. And so, the first half of fiscal '17 is really going to be working through the pilot to make sure that we've built a system, we've tested it, but its not – we've not gone live with it. That first part of fiscal '17 is really the first test on live customers, and we're going to make sure that, that goes right before we start rolling it out. So we'll start to see the implementation pick up in the second half of the year and it will continue all the way through fiscal '18.

Okay. And how flexible are those cost numbers, if something like if the macro deteriorated, that you think you could reduce the impact from the SAP training by extending it out further or I imagine there is some kind of range of where you think the numbers will really shake out?

Well, we - first of all, the longer the implementation takes, the more expensive it becomes, because we have more people tied up in that rollout process. So it does not benefit us to slow or stop that process once we get it started. We need to get it started when we expect to and we're going to see that move through the finish. But, Denny, if we saw a significant change in the economy, there are things that we can certainly do to help manage our cost structure and really continue to generate some pretty good cash flow, similar to the way we did in the last recession where we generated more cash than ever before in a two year period in the company's history. So we're going to get this thing done. I would certainly hope that we don’t get into a recession in the next two years. But we're operating for the long-term, Denny. And we believe, as I said, this is a transformational system and it’s going to be great for our customers and our partners who are operating the system.

Okay. And one last one, just on the acquisition pipeline. I mean, with kind of energy almost bottoming here, are you seeing any small kind of regional players maybe in an energy heavy area that might be worth buying here or what does the acquisition pipeline look like more broadly?

The acquisition pipeline still - I would say still looks pretty good. I mean, we've spent $150 million on acquisitions so far this fiscal year. We continue to look for tuck-in opportunities. We think they are out there. And we just need to have the willing seller at the right value. But we think there is a nice pipeline and we're going to continue to work that pipeline. So, yes, I do believe there are still opportunities out there.

That's it for me. Thanks.

Okay.

We'll take our next question from Sara Gubins with Bank of America Merrill Lynch.

Hi, thank you. On the costs that you mentioned for next year, the $30 million to $35 million, is that all incremental spend? I mean, could you help us understand what it was or what you are expecting it to be in fiscal '16?

So it is - I would say that it is mostly incremental spend, and in fiscal '16, we haven’t spent much. There is some training, we are doing things like training the trainers. But there is not a lot of spend that's hitting the P&L this fiscal year. It will primarily start to happen once we get to the pilot stage and then ramp up once we get to the actual rollout.

Okay. And you mentioned that we should also see D&A start to pick up. Could you give us some sense of how we should think about that in fiscal '17?

I would say that, I'd rather give you a little bit more information on that in July, because while we've talked about the SAP capital project starting to depreciate, we've got other capital projects that are important to us, like making sure that we have the routes to continue to handle our growth and making sure that we've got capacity. So I think, Sara, I'd rather answer that question in July.

Okay. And then just last question, could you give us an update on add-stops, what you are seeing including energy clients and excluding?

Sara, its Paul. The commentary is very similar to last quarter, meaning that really only two things were noteworthy. First is that in our add-stops metric we certainly see the negative impact to our FRC, our Flame Resistant Garments, as a result of the headcount reductions in oil, gas, and coal. Outside of that though there is nothing remarkable, nothing trending significantly one way or the other. And then the only other item of note would be that the winter weather here across the country was definitely a little more mild this year than last year. And we typically count on more of that snow and slush to drive mat placements and increase revenue accordingly, changes in garments, outerwear, et cetera. We didn’t see it to the extent we did last year. But it wasn’t significant and it's certainly a seasonal type of an impact.

Thank you.

We'll next go to Justin Hauke with Robert W. Baird.

Thank you; good evening, guys. I appreciate as well the SAP expense guidelines. I guess, maybe as an offset, a number that we hadn't really gotten is the integration costs associated with ZEE Medical and it was a sizable acquisition. I think the plan was that, that would be fully done by the end of the year, maybe just an update on that and if you could kind of quantify how much that expense has been?

We have talked a little bit about getting that completed by the end of the year or shortly thereafter. And it’s probably going to be shortly thereafter. That does not mean that we've seen any major slippage in the integration. It’s just – it is a large implementation or integration for our business and we feel like it is going very well. We haven’t gotten into a lot of specifics about the ZEE integration cost. Justin, with tuck-in acquisitions it becomes a little harder to fully separate total integration costs compared to operating costs. And so, we haven't tried to come to specific numbers on that - on what is specifically integration, because at the end of the day, we've got costs of operating and costs of connecting the businesses and we're hiring service sales reps, those are our drivers. We're hiring service sales reps and there are costs to getting a tuck-in acquisition ready. And so, we haven’t called out anything specific. But I would suggest that probably in the fourth quarter we're going to see some results that are probably about the same, maybe slightly better than we've seen in the third quarter. And I would say that the first quarter, maybe even less so in terms of the mix impact.

Okay. Yes, I appreciate that. I'm just trying to just understand how incremental the costs are and independent of the synergies if there was something that would come out. But it did sound like we'll get more of that in '17? I guess, maybe my second question is just the implied guidance for the fourth quarter, and I know this is a little short term oriented. But is the message that you are assuming in the way the guidance is laid out, is that assuming that your margins are relatively flat year-over-year with the fuel cost benefit moderating? And if that is the case, I guess, how should we think about it from the standpoint that the marketing expense falls off as well in the fourth quarter?

Yes, I would say that the guidance suggests that we're kind of bracketing last year. Last year our fourth quarter we were at 15.6% operating margin and I would suggest that if we can reach the high end of that guidance, if things go well, I would expect some margin expansion. If we see a little bit of a pullback in the economy, if we see the oil and gas broaden to affect other verticals, we might be at the lower end and see flattish or slightly down. But I'd like to think that we're going to continue to operate in the existing type of economy and if we can hit the top end of the guidance, I would expect that to be some margin improvement.

All right. Thank you very much. I appreciate the time.

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

Thanks. Mike, I just wanted to follow up on that question on the margin outlook for 4Q. I was hoping you could size the SG&A benefit you get from having the 66 workdays versus the 65 and just try to put that in context, and what type of scenario would you have to see to see margins going to be anything but up in the fourth quarter?

I think we've talked about a 50 - 40 basis point to 50 basis point impact in a quarter for the extra work day, and two thirds of that being in the gross margin. What would we have to see in order for margins to go down, I think we would have to see some pullback in the economy. I think we'd have to see some issues with our customer’s willingness to continue to spend with us. But I would like to think that it is not all that likely.

Okay. That makes sense. And from a big picture standpoint, I was trying to think about your customer base in three buckets, your national accounts, your Costcos or Walmarts and General Motors of the world, and then your mid side regional accounts and then your small business customers. Could you talk to any sort of change in performance in terms of how each of those buckets maybe is performing? Is one of those groups kind of driving the lion's share of the growth in the company these days and has that contribution moved at all?

I don't have any specific numbers. But I guess, John, I don’t – I am not aware of any changes in those buckets. And in terms of the mix and performance, I am not aware of any changes. Our improvement, our growth continues to be fairly broad. And its - I think its broad in all of our businesses, which tells me that we're seeing good performance in almost every vertical and type of business with the exception of the ones that we called out.

Okay. That makes sense. And then one final clarification question. When you mentioned the $40 million to $45 million of spend on the SAP initiative in 2018, was that an incremental $40 million to $45 million on top of the $30 million to $35 million this year or is that an all-in spend number?

John, the number was $45 million to $50 million for 2018 and that is an all-in spend. That is not incremental to the $30 million to $35 million for '17, so good question.

Thank you.

We'll next go to Adrian Paz with Piper Jaffray.

Hi. Quick question on the taxes. Can you provide more color on the lower taxes that we're seeing this quarter and do you believe that's going to continue into 2017?

I do not. Typically we guide towards about a 37.3% all-in tax rate and when we have federal audits, they are fairly large projects and when they - if they are resolved favorably, like this one was, then there can be reserves that we have set up for tax positions that can be released. And that's what happened in this quarter. I think Paul mentioned our expected tax rate is 36.5% for this year, I would expect 37.3% next year.

Great. Thanks. Thanks for the color there. And also I'm just trying to get a better understanding of what drove growth in uniform rentals. Could you provide some color on pricing trends that you're seeing in your uniform rentals?

Sure. In the US, we really did not see much of a marketable change in pricing from the second quarter, still very competitive, but I wouldn’t say that we saw much of a change. I would say that in Canada, little bit of a different story. We've seen some significant price increases from the competition. And I would suggest it looks likely that they may be looking for some margin opportunities. But I would say, back to the US, not a lot of change.

All right. Great. Thank you so much.

We'll now take a question from Scott Schneeberger with Oppenheimer.

Thanks and congratulations on the nice quarter, guys. I'm going to jump around a little bit. First one, anecdotally anything to share about the campaign, it’s been asked already, it's a little early. But you touched on it a little bit, but any specific, without naming names, like anecdotes of where someone actually capitulated and added business from the national campaign? Thanks.

I would say - I'm not sure about capitulated, but I would say we get – we have internal communications that will kind of bubble up comments from our sales people and they will be comments like, hey, I got a call today. A prospective customer heard our television ad and decided to call us and ask about our services. We might get, as an SSR stops by, a customer each week. We've gotten some examples of customers coming to our SSRs or our drivers, service sales reps. But we've got customers coming saying, wow, I love that commercial. Tell me more about first aid and safety. We've had examples where regional customers will come to one of our regional sales people and say, hey, I saw the commercial, digital commercial ad and it got me thinking about some of the issues that I have. And so we've seen it both from television, from radio, from digital; we've seen commentary from our salespeople that our customers are signaling out that they have seen the campaign, they like it; and it piques interest at times in some of the things that we can do for them.

Thanks a lot. And then someone asked earlier about or you guys brought up from a question earlier the new product pipeline. You mentioned a lot of work on R&D, nothing to announce yet. But you've had obviously a lot of success, Carhartts, Calentel [ph] What - are we on the cusp of seeing something new from you, something big as far as another addition to product service?

Scott, I would say that we still have a lot of runway in the products and services that we've announced. We do have some things that are in our pipeline that we're working on, but I am not ready to talk about any of them specifically.

Fair enough. And lastly, you mentioned extending the footprint on the ERP [ph] for distribution, and particularly including e-commerce. I'm curious, could you elaborate on that, what you are looking to achieve there and what the opportunity is? Thanks.

So from a distribution standpoint, that is primarily the distribution centers that ship to our rental locations. And so that is fairly obvious that gets them on the same platform and it makes a lot of sense. From an e-commerce standpoint, this system will allow us to share with our customers more information, to allow some of our customers an online buying experience similar to retail, and just allow much more ease-of-use from a selling and an understanding of what we do in the products and services. So it’s really getting to a little bit more of a retail-like application for particularly our larger customers, but for all customers.

Sounds good. All right; thanks very much.

Okay.

We'll take a question from Gary Bisbee with RBC Capital Markets.

Hey, guys, good afternoon. I obviously noted, as others have, your comments about the product portfolio and outgrowing GDP and all these things. I guess, a couple of questions on that from me. The first one just, is there anything that you think any reasons you would expect the business to behave differently in a future recession than it’s done in the last couple? You clearly did not outgrow GDP in 2008, 2009 and the business contracted quite a bit, not only the top line, but also margins. I realize that was a pretty nasty recession. But anything that leads you to believe you'd behave differently if we had another very difficult economic environment?

Yes, I think, first of all, Gary, you hit the nail on the head. That was the greatest recession we've seen in a long, long time. Unfortunately for us that interrupted 40 straight years of growth in sales and profit, so effectively for something like the last 46, 47 years we've grown in 45, 44 of them. So that was a big one. The next recession, a lot depends on how deep and broad it is. But I - one of the things, when we look at our business today compared to, let's call it, 2006, '07, '08, we've got a broader business. We've got a more diverse customer base. We were not much in the healthcare space back then. We were not much in financial services and other professional environments. We've been able to get into those much more with both rental, our rental products and services, but also first aid and fire protection. So we're in some verticals that might be a little less or more resistant, like healthcare to a recession. I think the other thing that I would say that’s different is today our uniform, total uniform business is less than 50% of our revenue. And so, I think if we saw a pullback in jobs, I would not expect that we would lose many customers. But a lot of our products and services are still necessary for our customers, like hygiene products and services, like the fire protection services, like some of the first aid and safety requirements. And in addition to that, there are some required garments like fire resistant clothing. So I think the broadening of our product line, the diversity of our customers, will help us through the next recession. But again, a lot depends on how deep is that recession and how broad is it.

Great that's helpful. And then just a follow-up on that. You talk about having a broader product portfolio and I realize a lot of that is the growth of first aid, fire, and safety. But it’s curious to me in that add-stops really haven't grown much. So it sounds like you haven't had a big part of your growth this up-cycle been driven by selling more stuff to the base. It's been more new customers, if I understand it. And then I go back to this number you give us on the fourth quarter every year and I'm awaiting next quarter of the mix within rentals and the mix of all the five or six different things you give us has been exactly the same percentages for four straight fiscal years. So I'm trying to really assess how much the composition of growth has really changed versus just executing well, bringing on similar types of new customers as you've always done in the past, any comments or thoughts on that? Thank you.

Well, the - let's talk about the growth. First of all, new business has been very important to us over the last five or six years and will continue to always be important to us. New business, when we sell a new account, we do not normally sell everything in our portfolio to that new customer. We have to earn the customers trust and we have to show them that our service is of value. So new customers are really important for us. First of all, because they bring revenue but secondly, they bring future revenue opportunities, and so new business will always be very important to us. It is now and will continue to be. And then the penetration is very, very important. And I would tell you that the net add-stops metric, it’s a legacy rental metric, and when we have broadened our business like we have, it really doesn’t apply as much when we're talking about selling hygiene products and services to our customers, selling chemical cleaning solutions. That net add-stops really speaks to uniforms and mat placements. And we don’t like to, we don’t pay attention to it quite as much internally because it’s just losing its importance as we broaden our business. So I would say, new business will continue to be important, penetration will continue to be important and the reason that you haven’t seen any change in the mix of our rental division is because its all been growing and its really important for us that it all grows, because that means we are adding new customers and we are penetrating existing customers. It’s all really important for us.

I think, Mike, too, and Gary, everything is growing. So the percentages are not changing significantly. But it's also an over $3 billion segment that's going to take some time to change. And one way it is changing, even though proportionally it’s not changing. But for example, in garments, you manufacturing is a minority of the business and we are replacing the typical blue-on-blue shirt and pants with Carhartt or with performance polo’s or cargo pants. And so in hygiene, for example, we have our hygiene standard [ph] signature line that is able to get us not just into the typical restrooms of manufacturing or oil change shops, but high end into offices and corporate complexes. And I think that changeover, even though proportionally it’s not changing, but the kind of the substance of it, the quality of it, so to speak, should bode well and hopefully make us more resilient in the future.

Great. Thank you. Just one quick cleanup one. The incremental SAP expense you called out, is that in SG&A or would any of that be in cost of services and should we on a segment basis think it's all in rentals? Thanks a lot.

I would expect that that will all fall into SG&A and the great majority of that will fall into rental.

Thank you.

Okay.

That concludes today's question-and-answer session. Mr. Adler, Mr. Hansen, I'll turn the call back to you for any closing or additional remarks.

Thank you very much for joining us tonight. We will issue our fourth quarter earnings in mid-July. We look forward to speaking with you again at that time. Good night.

That concludes today's conference and thank you for your participation.