Mike Hansen - VP, Finance and CFO Paul Adler - VP and Treasurer

Hamzah Mazari - Macquarie Capital Jay Hanna - RBC Capital Markets Joe Box - KeyBanc Andrew Steinerman - JPMorgan Minaz Putnik - Barclays Adrian Paz - Piper Jaffray Justin Hauke - Robert W. Baird Jeff Goldstein - Morgan Stanley

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.

Thank you and good evening. With me is Paul Adler, Cintas' Vice President and Treasurer. We will discuss our third quarter results for fiscal 2017. After our commentary, we will be happy to answer any questions. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC. We are pleased to report that revenue for the third quarter, which ended February 28th was $1.281 billion, an increase of 5.3% over last year's third quarter. The organic growth rate, which adjusts for the impacts of acquisitions, foreign currency exchange rate fluctuations and differences in the number of work days was 6.5%. New business wins; penetration of existing customers with more products and services and customer retention remains strong. Organic growth for the Uniform Rental and Facility Services segment accelerated to a rate of 7.3%. Third quarter gross margin improved to 44.2% from 43.1% last year. As Cintas Chairman and CEO, Scott Farmer stated in this afternoon's press release, this is our 14th consecutive quarter of year-over-year gross margin improvement. This and our industry leading revenue growth are indicative of a healthy company, with significant opportunities ahead. We thank our employees whom we call partners for best in class execution and results. Gross margin of the Uniform Rental and Facility Services segment improved to 45%, an increase of 100 basis points, compared to last year's third quarter. The First Aid and Safety segment gross margin improved to 44.8%, a year-over-year increase of 260 basis points, due to the realization of synergies from the acquisition of ZEE Medical in fiscal 2016. Selling and administrative expenses as a percentage of revenue were 28.3% in the third quarter, compared to 27.3% in last year's third quarter. 50 basis points of the increase was the result of a difficult comparison due to favorable workers' comp experience in the prior year's third quarter. In addition, labor and related expenses increased as a percentage of revenue as we continue to prepare for the acquisition of G&K Services. Operating income for the third quarter of $195 million increased 0.9% from last year's third quarter. Operating income margin was 15.2%, compared to 15.9% in last year's third quarter. Third quarter operating income included $9 million or 0.7% of third quarter revenue of transaction expenses related to the previously announced agreement to acquire G&K. Excluding this G&K transaction related expense, our operating income margin was 15.9%. We're pleased with our incremental profit margins. Note that our third quarter had one less work day than last year. That's had negative impact of approximately 40 to 50 basis points on this year's operating margin due to many large expenses, including rental material cost, depreciation and amortization being determined on a monthly basis instead of a work day basis. In addition, as Paul will soon discuss in greater detail, energy had a negative impact on this year's third quarter operating margin of 50 basis points. So, to put it in perspective, excluding G&K transaction expenses, operating margin was same as last year's third quarter, despite about 100 basis points of headwinds from one less work day in energy. Net income and earnings per diluted share from continuing operations for the third quarter were $119 million, and $1.08 respectively. This quarter's EPS, included a positive $0.03 impact from a change in the accounting for equity compensation, as required under ASU 2016-09. Remember that this benefit shows up in the way of the lower effective tax rate, offset by higher equity compensation expense and share counts. We also had a $0.06 negative impact from expenses related to the G&K transaction, such as legal and professional expenses associated with the regulatory review. Exclusive of these items, EPS was $1.11. Yesterday, we closed on the acquisition of G&K. First and most importantly, I want to welcome our new partners from G&K. We look forward to getting to know you better and we remain very excited about this opportunity. As we have discussed, we continue to expect annual synergies in the range of $130 million to $140 million in the full year following the acquisition. We will now begin the process of integrating the two companies together. As Scott Farmer indicated in today's press release, we have pulled our revenue and EPS guidance for the remainder of the fiscal year ended May 31, 2017, because we need to complete the purchase accounting process and confirm our assumption used in estimating non-recurring costs. For example, in an acquisition of this size, we are required to use a third party to value our intangibles. There can be a fairly wide range of outcomes in this type of analysis, and we won't know that outcome until the third party completes its process. Another example is that we need to record all G&K fixed assets and inventory as fair value. Much of this work is performed by a third-party firm. Again, we will not know these values until the process is completed. In the absence of this information, providing a meaningful guidance range for our fourth fiscal quarter is not possible at this time. Paul will soon provide additional details of the quarter. Before I turn the call over to Paul though, I wanted to add that we are very pleased with our third quarter results. Excluding the impact of the G&K acquisition that will come in our fourth quarter, our third quarter results keep us on pace to attain the annual guidance previously provided, and to achieve a seventh consecutive year of organic growth in the mid to high single digits with double digit growth in EPS. I’ll now turn the call over to Paul.

Thank you, Mike. First please note that our fiscal year 2017 contains one less work day than fiscal year 2016. As Mike stated, it was this quarter, the third quarter of fiscal 2017 that had one less day in the prior year quarter. One less day will negatively impact fiscal 2017 total revenue growth by about 40 to 50 basis points, and operating margin by approximately 10 to 15 basis points in comparison to fiscal 2016. The negative impact on the fiscal 2017 third quarter was about 40 to 50 basis points of revenue growth and about 40 to 50 basis points of operating margin. Our fiscal fourth quarter contained 66 work days, the same number in the prior year fourth quarter. We have two reportable operating segments, Uniform Rental and Facility Services and First Aid and Safety Services. The remainder of our business is included in All Other. All other consist primarily of fire protection services and our direct sale business. First Aid and Safety Services, and All Other are combined and presented as Other Services on the income statement. Uniform Rental and Facility Services operating segments 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 $993 million, an increase of 6.1% compared to last year’s third quarter. Excluding the impact of foreign currency exchange rate changes, acquisitions and work day differences, the organic growth rate was 7.3%, compared to 6.5% last quarter. We continue to see the impact of weakness in the oil, gas and coal industry. However, as we predicted on last quarter’s earnings call, the impact has lessened. We estimate that the resulting decrease in revenue from affected customers lowered our organic growth rate by about 60 basis points in the third quarter. This compares to about a 75-basis point headwind in the previous quarter. Our Uniform Rental and Facilities Services segment gross margin was 45.0% for the third quarter, an increase of 100 basis points from 44.0% in last year’s third quarter. Energy related costs were about 20 basis points higher than in last year’s third quarter. In addition, job losses in oil, gas and coal negatively impacted this segment’s current year third quarter operating margin by about 30 basis points. So, on a net basis, the low price of oil had a negative impact on our Uniform Rental and Facility Services operating margin of 50 basis points. Keep in mind that margins were also negatively impacted by one less day of revenue. Therefore, gross margin expansion of 100 basis points was achieved despite about 100 basis points of headwind from one less work day and energy. 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 $124 million, which was 4.4% higher than last year’s third quarter. On an organic basis, the growth rate for the segment was 5.5%. Last quarter, we disclosed that we believe that the First Aid segment organic growth rate hit the bottom and the segment was positioned for improving organic growth rates. Acceleration in the organic growth rate from 3.3% in the second quarter to 5.5% this quarter was expected. Route consolidation and optimization have been completed. We previously disclosed that we added sales reps in our first quarter. ZEE Medical did not have a dedicated sales force as the business previously relied only upon SSRs to grow the business. The added sales reps will help us grow the acquired customer base through penetration with our broad range of products and services. We expect improving organic growth rates through the remainder of this fiscal year. This segment’s gross margin was 44.8% in the third quarter, compared to 42.2% in last year’s third quarter, an increase of 260 basis points. Our margins continue to benefit from the realization of acquisition synergies, including improved sourcing and the leveraging of existing warehouses. Our year-to-date gross margin dollars are up 51% over two years ago, and up 18% over last year. Our year-to-date gross margin percentage is almost back to pre-ZEE levels and our revenue of course is significantly greater. Our Fire Protection Services and Direct Sale businesses are reported in the All Other category. All Other revenue was $163 million, an increase of 1.9% compared to last year's third quarter. The organic growth rate was 2.4%. All Other gross margin was 39.1% for the third quarter of this fiscal year, compared to 38.9% for last year's third quarter. The direct sale business by its nature is not the recurring revenue stream that our other businesses are such as Uniform Rental and Facility Services and First Aid. Therefore, the growth rates are generally low and are subject to volatility, such as when we install a multi-million-dollar account. Our Fire business however continues to grow at a consistently rapid pace. The fire business organic growth rate was just short of 10%. As Mike stated earlier, selling and administrative expenses as a percentage of revenue were 28.3% in the third quarter compared to 27.3% in last year's third quarter. 50 basis points of the increase was the result of the difficult comparison due to favorable workers' compensation experience in the prior year third quarter. We're self-insured, which can result in some volatility from time-to-time. In addition, labor and related expenses increased as a percentage of revenue, as we continued to prepare for the acquisition of G&K. Finally, this year's third quarter includes SAP expenses amounting to about 20 basis points of revenue. Regarding SAP, since last quarter's earnings call more locations have been converted. We continue to be pleased with the conversion efforts and the capabilities of the new system. Due to the acquisition of G&K, we are planning and adjusting our SAP implementation plan as necessary. Our effective tax rate on continuing operations for the third quarter was 34.5%, compared to 33.8% for last year's third quarter. This year's third quarter rate is lower than historical rates due to the adoption of ASU 2016-09 on stock compensation. Note that last year's third quarter effective tax rate benefited from the closing of a federal tax audit with favorable results. Our cash balances as of February 28, were $147 million, and we had no marketable securities as of quarter end. Cash flow from investing, or rather cash flow from operating activities in the current year quarter was $182 million, and free cash flow was about $119 million. Uses of cash in the third quarter included CapEx and payments of our regular annual dividend. Capital expenditures for the third quarter were about $63 million. Our CapEx by operating segment was as follows. $55 million in Uniform Rental and Facility Services, $5 million in First Aid and Safety and $3 million in All Other. As of February 28, total debt was about $1.1 billion, consisting of $399 million in short term debt and $745 million of long-term debt. Subsequent to quarter end, debt increased about $2.3 billion to fund the acquisition of G&K. Sources of acquisition funds included the following; $100 million of G&K senior notes, $50 million of additional existing Cintas senior notes due in 2022, $1 billion of senior notes due in 2027, $650 million of senior notes due in 2022, a new term loan of $250 million and commercial paper of about $250 million. With this additional debt, we estimate that our leverage has increased to about 3.1 times debt to EBITDA. Our goal is to reduce our leverage to 2 times debt to EBITDA within three years. With $300 million of senior notes maturing in December that we will not refinance; $250 million of term loan and $250 million of commercial paper, we have structured our debt appropriately to achieve the goal. That concludes our prepared remarks. We're happy to answer your questions.

Thank you. [Operator Instructions] And we'll take our first question from Hamzah Mazari with Macquarie Capital. Please go ahead.

The first question is just on customer attrition. Are you guys baking in any customer attrition post the G&K deal? Obviously, that's closed now. And any thoughts on the Uniform market potentially getting incrementally more competitive, as you work to integrate that deal?

Well, Hamzah, I would say that the industry is always very competitive and it will continue to be so. As it relates to the customer attrition or retention, I don't know that I expect much of a difference there, but let me speak a little bit towards revenue; our thoughts on revenue in general. So, when we think about the Cintas business as we move forward, we have no expectations for change. We continue to expect growth in that mid-to-high single-digits. When we think about the G&K revenue though, you can think about it in terms of there's a new business component, there is the kind of customer penetration, and there's a lost business or attrition component, in the normal course of doing business. And as we move forward, we're going to continue to have that customer attrition that we've seen in -- that G&K has seen historically, and that we'll likely see continue into the future. There will likely be a little bit of an increase due to disruption of the integration, but generally speaking I would say not a lot of change. The difference though will be the new business component. So as you can kind of think about new business and the G&K sales team over the course of the last seven months, they have been trying to sell in an environment where selling a five-year contract under kind of an uncertain future is, as you could imagine is quite difficult. So the new business component certainly has been pressured quite a bit over the last seven months. As we move into now the post-closing process, that momentum carries into our post-closing process. In addition, as we think about their sales people, you can imagine that the difficulty in selling new business and contractual new business in the environment resulted in some attrition. And so as we move forward, we will need to hire new people to replace some of those sales people, but also train all of their sales people as we move forward. So training them on selling our products and services, training them on our systems, using our processes et cetera and there certainly will be a productivity -- a negative productivity impact. So as we look forward, we will continue to probably see the normal customer attrition that the business has seen, maybe a little bit higher. But we will also see some significant pressures on the new business. And so as we think about that moving forward, our experience has been for years and years that we will see some pressure to the point where we may see revenue come down in the 5% to 10% range over the course of the next year or so.

That’s extremely helpful. And just a follow up question. Are there any divestitures build into your cost synergy target number of 130 to 140 or is that something you are working through right now?

There were no divestitures baked into that assumption.

Our next question comes from Gary Bissey with RBC Capital Markets. Please go ahead.

Hi, this is actually Jay Hanna on for Garry today. I was wondering if you guys could give a little more detailed look at what the pace of those cost synergies will be? And maybe a more detailed timeline for the full integration of G&K within Cintas as well?

Well, as you probably have seen, we talked about $130 million to $140 million in annual synergies, fully realized in year four. We have also talked about this being fully accretive or accretive in our second full year. That would be our fiscal '19. As we move forward, we certainly have had a lot of assumptions about those synergies, but I will tell you over the course of the last seven months, one thing that I need to make sure is clear, is we have been operating as two separate companies, and that was a requirement, so that we were not jumping ahead of the regulatory process. And I tell you that because we are just now -- we just closed yesterday. We are just now getting into the confirming of our assumptions, and we need to do that before we can provide more timing, more specific timing on the synergies. But we do feel like we will be accretive in year two, and in year one we are going to have some onetime expenses that are non-recurring in nature; things like rebranding, asset impairments, severance, lease breakage type thing and we're going to be going to work over the course of the next several months, really confirming what those amounts will be. Once we do that, once we confirm our assumptions for the integration plan, we'll have a better idea of what fiscal '18 will look like and our expectation would be we certainly share that in July. But having said all of that, we certainly do think that there will be synergies in year one. We’re just not ready to provide any specific numbers.

Great. And then excluding the acquisition and following in this quarter, you spoke to it a little bit earlier. But do you think full year ’17 guidance, would it remain the same or possibly increase following third quarter?

I would say that we would likely have either left them the same or possibly narrowed by bringing the bottoms up a little bit. So third quarter, we are very pleased with the third quarter. I think we’ve got some nice momentum and execution going on in the business and we are poised to have a good fourth quarter.

And we’ll take our next question from Joe Box with KeyBanc. Please go ahead.

Yes. Hey guys. So I was hoping to dig into the 80 basis points sequential pick-up in organic growth for Uniform. Looks like there was about 15 basis points sequential tailwind from less oil and gas drag. So can you maybe put a little bit more color on the non-oil and gas improvement, really just aside from calling out ancillary products and better customer retention?

Yes. Joe, it’s Paul. You are right, the 15 basis points is part of the math. I would say in addition to that, we had a very good strong quarter from a new business perspective, especially as it related to garments. And so not only do you benefit from the new business in terms of that additional recurring revenue, that you will receive from the garments going forward over these five-year agreements, but we have new business installed related to garments. You also have some good revenue in terms of peripheral charges, incentive fees and emblem costs. So that definitely helped as well. But really outside of that Joe, there was nothing extraordinary. It’s just the continuation of execution that the game plan, quality service, retention remained strong, a very strong organic revenue growth quarter, something we’re proud of, given all the excitement of the pending acquisition. But just continuation of what we’ve done the last six years of growing top-line and that 5% to 7% organically, and again proud of those growth rates compared to the competition, which has been posting much, much smaller organic growth rates.

I appreciate it Paul. And then just a question on guidance. I guess, I’m just curious, why not provide a non-cash goal post here. So purchase accounting is really kind of the biggest unknown. And then I guess just from an expectation standpoint, should we think about maybe an inter-quarter 8-K with guidance, once you guys get the third-party valuations done or should we be thinking about this as being maybe a more 4Q call type item?

As a relates to why not provide some sort of guidance, whether it’s cash or something else. Joe, we’re going to get busy right away and we’re going to get busy on the integration items. And as we do that, the businesses blur. It’s not like we’re going to go through the next two and slightly over two months and have two distinct businesses still by the end. They are going to get blurred, because we’re bringing them together and we’re going to be doing quite a bit of integration work. And it just -- it becomes very, very difficult to keep those pieces separate. And because of that we're not -- I don’t like the idea of trying to dissect that. If we do come up with the purchase accounting results during the quarter and we feel that we're in a position to provide them, you may see us do that, but our first goal is to really understand it and get it right and then provide.

Understood, and I do appreciate that the lines will get blurred here, but I assume that the fiscal year 4Q revenue guidance for standalone Cintas probably is still generally intact. Is that fair?

As we've talked about, yes. We think that's fair and it probably -- we would probably have narrowed it by bringing the bottom up. We feel good about the fourth quarter and the third quarter I think is very indicative of the second half of the year that we expected to have. So yes, the answer to your question is yes.

[Operator Instructions]. Our next question comes from Andrew Steinerman with JPMorgan.

Hi, would you be willing to talk how long you think the amortization period will be. And in year one if it wasn't for the amortization, would the merger be accretive?

The amortization period will be 10 years most likely. We expect that to be in the range of about 3% to 4% of the deal value. And would it be accretive without that? I think yes. I think the answer Andrew is yes, that you can kind a think about that as a what, $66 million to $88 million annual number. It will be fairly a large non-cash number.

Our next question comes from Minaz Putnik with Barclays.

Thank you, good evening gentlemen, and firstly congratulations on getting the deal done. So I appreciate -- I think why you I guess retracted the guidance to '17. And just to your point on calling out that amortization as a non-cash number in Q4. Going forward when you guys do initiate '18 guidance, will you be -- if not giving sort of the cash EPS number at least call out all these non-cash charges pretty clearly for us to calculate that?

That will be our goal yes. We will likely provide GAAP guidance but we will -- our goal will be to give you some of these large items to give you a sense of what the performance detail will look like.

Okay that would be very helpful. And then just on the organic performance, another strong quarter obviously. Just like how you describe the three components for G&K in terms of new business penetration and retention, or attrition, can you just help lay that out in terms of where the growth is coming for Cintas standalone right now?

Definitely new businesses continue to be the strongest driver of the growth. As we've said it, new business in terms of new customers; we're still selling that 60/40 split of 60% of the new business wins, our new programmers versus the 40% taking market share. So that's been very consistent through this year and really in the near past as well. New business also includes the penetration of our existing customers. That is certainly part of our vision and that continues at a very good pace. A lot of the hygiene products that we've talked about in the past, our Sanis signature series, new offering in the last couple of years, that's really helped us with penetration. Retention has been roughly 95%. So still strong, no significant change in that. So, really no significant movement in any of the key component of organic growth drivers.

And that 40% share gain you talked about, does that typically end up being from the smaller regional players or do they -- or is it a broad mix with the national players as well?

No, it's a broad mix of wins versus small, medium, large competitors.

Our next question comes from George Tong with Piper Jaffray. Please go ahead.

Hi this is Adrian Paz calling for George. I just have question on the G&K transaction. Can you provide -- on the synergies, can you provide the breakdown of what's going to be revenue synergies versus what's going to be synergies?

We have not included any revenue synergies in that $130 million to $140 million. Those are cost synergies and they come in four primary buckets and in no particular order. We think of them in terms of material cost. So, a sourcing benefit. We think of them in terms of production improvements. So, the more efficient use of capacity. We think of them in terms of the route density allowing us to use less fuel because of more dense routes. And then we think about it in terms of overhead and the reduction of duplicate overhead. Did not include any revenue synergies in that amount. And one of the reasons we didn’t is because we need to get through the integration work. We need to get them on to our systems. We need to optimize the routes and we need to have our new G&K partners really trained and comfortable in selling our product line, and that takes a little bit of time.

And on the -- so with the SAP implementation, do you expect your cost savings from the SAP platform to be bigger within the G&K transaction or are your estimates since then?

We do expect the benefit to be bigger. We are -- first of all the additional revenue certainly provides better leverage over the system. But certainly, operating on one system in total certainly will create additional benefits for us. And the better visibility into all of our new customers will certainly help us in terms of identifying cross seller penetration opportunities, identifying where certain industries we are -- customers in certain industries where we believe we have got a good product mix to provide value, but certain customers in that industry don’t have some of those. We think there is a lot of opportunity, and certainly by adding the G&K volume, that certainly helps it out.

And to add to that. More benefits and then really not a lot of significant additional costs; that's the beauty of the acquisition. Just another positive is that we get to leverage G&K over that existing $140 million spend. So, we'll have some have additional licensing costs, nominal amount but the capital investment is not going to increase.

And if I could just ask one more, on the non-programming market or the no-programmer market, how do you think about that market and how much growth you believe is available there and do those declines have the margin profile as your existing clients?

We think there is a lot of runway there. As Paul said about two thirds of our new business comes from that no-programmer segment, and it's been that way for a long time. The -- we have talked a little bit about what that no-programmer may look like. It could be outdoor trades, people that are now renting our Carhartt products. It could be culinary people now renting our Chef Works product, it could be healthcare workers now renting our scrub rental programs. There are lots of opportunities there and there will continue to be. The margin profile is I would say is not significantly different from any other type of account, but certainly we know that with all of our customers the more penetration that we can take -- that we can have, the product and services that we can add to them, the more valuable those stocks become. Usually the lesser the probability that they leave us because we are more fully penetrated. So once we sell any account, penetration becomes really important afterwards.

And our next question comes from Justin Hauke with Robert W. Baird. Please go ahead.

I just wanted to talk a little bit more about maybe how does think about revenue synergies, and I guess the reason why I ask is obviously you guys have been very successful in broadening out services that you offered. You are acquiring 170,000 customers here. Is there a difference, and maybe you can give us the number of average services you sell to your current customers and how that compared to G&K; so we can kind of think about what the incremental opportunity to sell into that base is? And I guess related to that also would be, is there any material difference in the 95% retention rate that you have and the retention rate that maybe you are acquiring here?

I would -- so first of all, I don’t know the penetration of G&K. Again, we haven’t had visibility and insight until really starting today, and we’ll start to learn that more and more. So it’s hard for me to try to estimate what any revenue penetration might be. We have told -- we have talked a lot about, if you think about our Uniform Rental customers for example, the highest penetrated item is our mats, entrance mats. And I would say about 60% of our Uniform Rental customers have entrance mats. That doesn’t mean they have as many as we believe that they should we have, but it means they have at least some presence in the entrance mat. In addition to that, all of our other products are less than 20% penetrated. So we have a lot of runway on our own and I would suspect that G&K’s profile is from a Uniform Rental and match, is probably not a lot different than ours, although that is purely a guess. And I would say that the broader line for us likely in the hygiene and the chemical cleaning First Aid and Safety Fire Protection, those become nice opportunities. I don’t have any kind of information as far as qualifying that, because we just don’t know enough about those customers. And an example would be, I want to see, or we would want to see the profile of the G&K customers. And that’s when we start to analyze or look for the opportunities in terms of what are the products and services we can provide to that. So we need some time to be able to do that. As it relates to your second question of retention, again don’t have specifics on that, but I would say that they are probably not two different from ours. Although, I would suggest that because our growth rate is so much higher than the industry in general, that our retention is likely a little bit better.

Okay, great. No, I understand it’s still early. So that’s fair, and we’ll look forward to learning more about it, as you learn more about it. I guess just two more mechanical questions into modeling purposes. First, are you planning on reporting all of G&K in the rental segment or should we think that some of it goes in the other business? And how much of it would go there? And then second, the SAP cost that you previously outlined, the 40 million to 45 million for 2018, how should we think about that number, now that you’re bringing in G&K? Is that still the right number or does it have to be larger than that?

So your first question is, yes. I would say almost all of that revenue and operating income would fall into the rental segment. As it relates to the second question, we will give some thoughts on SAP, when we provide our guidance in July. But I would suggest that it’s going to be lower than 40 to 45 for -- probably because, we’ve seen that we’ve been a little bit more efficient this year than we expected. And the additional -- any additional costs related to an integration of G&K will come in the way of length and integration or implementation process. So I wouldn't expect that it drives up our costs in fiscal '18. I would just -- I think we talked a little bit about it drives the implementation process into fiscal '19. So we'll see a little bit of -- a little bit more expense in '19 than we initially expected, because of the duration with G&K. But again, the process has been going well and we've been spending less than we expected, and I would expect that results in lower numbers for '18.

[Operator Instructions]. Our next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Hey this is actually Jeff Goldstein on for Toni. I wanted to piggyback a little bit on an earlier question. One of your primary competitors called out industry weakness in the most recently completed quarter. Can you just comment on what you're seeing in the marketplace, why you think you continue to have more; and if you've seen any type of irrational behavior among competitors, maybe in anticipation of your merger with G&K.

I would say from a -- what are we seeing differently. From an economic standpoint, I would say that our third quarter from an economy standpoint didn't really feel any different than our first two quarters of this fiscal year, other than there has been a lot of sentiment about maybe the new administration being a little bit more pro-business et cetera. But I would say I'm not sure that's translated much into what we've seen on the street. Having said that it's been a constructive environment, and with the exception of the oil and gas vertical, which we've in fact seen get a little bit better, we haven't seen much of a change one way or the other. And because of that, as you've seen, we've continued to execute well and continued at maybe organic growth levels of the first half of the year and in fact even a little bit better. And I think that is simply as Paul mentioned good execution, good new business productivity. Our sales people are doing a great job. As it relates to your second question of are we seeing any irrational behavior, I would just say that it's always very competitive. Once we get into the to talk more of our G&K partners, we may find that it's -- it was a probably a little bit more aggressive on G&K customers. But we certainly know when an acquisition is announced the competition gets very aggressive around the acquired customers. And I would say that's kind part for the course.

Okay. And then can you just provide a little more color on the sequential decline in First Aid margins and what the big driver of that beyond just the one fewer workday? And then just longer term, do you think the First Aid segment could ever close the margin gap with rental or do you see kind of structural differences in those businesses of that.

Yes Jeff, First Aid we were pleased with the results overall. As we talked about in the prepared remarks, we felt like last quarter that we had hit a bottom, and that became reality and then we expect those organic growth rates to continue to climb. That business should grow in the high single-digits. That's what it grew coming into ZEE, and that's what we expect going forward. In terms of the margins though, we're -- the gross margins continue to improve. We mentioned in the prepared remarks, how much the dollars are up over couple of years, 50 some odd percent, 18% year-over-year increase in gross margin dollars. The incremental gross margins have been very strong. Last year they were in the 30% range. This year last two quarters they were 100%. So gross margins are moving along as we expected, as we continue to realize those synergies. SG&A we do have a little bit of heavier investment in the selling part of that component. As we mentioned in our first quarter we invested in the sales force to be able to grow that acquired big block of ZEE business. And they've only been there what, a quarter or two at most. They'll continue to become more productive; they'll grow that top line, we'll get that leverage and so we are optimistic about not only the top line growth but the margin improvement going forward.

I think Jeff, as Paul mentioned, we've made an investment in our sales team there. ZEE did not have a sales team and so we've -- as we came out of the system conversion, it was time to start really selling in a little bit more -- well, in higher volumes and that's what we did. We invested to be able to do that. Do we have the confidence that those margins can get into those mid to high teens? We certainly do and if you go back to our fiscal '15 results, we were at about 13.8 for the year of fiscal '15, but the last three quarters all exceeded 14%. And with the addition of the ZEE business, that certainly is going to benefit us long term and we really like the business. It's doing exactly what we would expect that it should do, and those margins will continue to improve.

It appears there are no further questions at this time. Mr. Hansen I'd like to turn the conference back over to you for any additional or closing remarks.

Well thank you for joining us tonight. We'll issue our fourth quarter earnings in mid-July and we look forward to speaking with you again at that time. Good night.

And that does conclude today's presentation. Thank you for your participation. You may now disconnect.