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 conference over to Mr. Mike Hansen, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Thank you for joining us. With me is Paul Adler, Cintas' Vice President and Treasurer. We will discuss our first 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 first quarter revenue of $1.294 billion, an increase of 7.9% from the prior year first quarter. Organic revenue growth, which adjusts for the impact of acquisitions and foreign currency exchange rate fluctuations was 5.7%. First quarter operating income was $207 million, an increase of 11.6% over last year's first quarter. Operating margin improved to 16% of revenue, compared to an operating margin of 15.5% in the prior fiscal year. The Uniform Rental and Facilities Services segment led the way with an operating margin of 18.5%, a 90 basis point expansion from the prior year. Net income from continuing operations for the first quarter of fiscal 2017 was $138 million compared to $106 million in the prior year, an increase of 30%. Net income from continuing operations as a percent of revenue was 10.7% compared to 8.9% of revenue in last fiscal year's first quarter. Earnings per diluted share or EPS, from continuing operations for the first quarter were $1.26 versus to $0.93 for the first quarter of last year. First quarter EPS from continuing operations increased 35.5% over the prior year. During…

Thank you, Mike. First, please note that our fiscal year 2017 contains one less workday than in fiscal year 2016. It is the third quarter of fiscal 2017 that has one less day than the prior year quarter. We estimate that this 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. As Mike stated, total revenue increased organically by 5.7% in the first quarter. This solid growth rate continuous to be driven largely by new business wins, penetration of existing customers with more products and services, and strong customer retention. Total company gross margin was 45.1% for the first quarter of this fiscal year, compared to 43.7% last year. 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 consists 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 segment included 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 $1 billion, an increase of 6.5% compared to last year's first quarter. Excluding the impact of foreign currency exchange rate changes and acquisitions, organic growth was 5.9%. We continued to see the impact of headcount reductions in the oil, gas and coal industries. We estimate that the resulting decrease in revenue from affected customers lowered our organic growth rate…

[Operator Instructions] We will hear first from Toni Kaplan with Morgan Stanley.

Hi, good afternoon. It looks like you are raising your guidance by about $0.19 at the midpoint, and you mentioned the $0.07 benefit from the tax change. Could you just give a little bit of color on the main drivers behind the rest of the increase? Is it more margin driven? I saw uniform margins were extremely strong this quarter, so just wanted to get a little color on that -- the remainder of the increase in guidance?

Sure. So there are a couple pieces. First of all as you indicated the ASU 2016-09 is about $0.07. That is again not simply a tax change but a guidance -- FASB guidance change that affects stock comp, shares and taxes. So about $0.07 is from there. Our share count is a little bit lower than we anticipated and Paul maybe you can give the share count that we are going to model.

Yes. We are modeling a 108 million diluted weighted average shares outstanding.

And so keeping in mind that you will have to take into account participating securities when you calculate EPS but that's a little bit lower than we expected. So that has some impact. There is a little bit of an impact when we think about SAP. And then there is certainly margins got off to a good start and then we are very pleased with that first quarter performance. So those are a little bit of different pieces.

Okay, fantastic. And then I know you mentioned you don't want to talk about the G&K process, so if you don't want to answer this that's fine, but just wanted to ask in terms of -- assuming the deal were to close, how high would you expect sort of retention of G&K's workforce in light of the integration? Do you have specific retention targets for the workforce and/or for their revenue? If that's a little too close to the process, I understand.

Well, we certainly have some thoughts on synergies that we gave when we announced the transaction. This is a fairly large merger for us and we talked about a couple of the benefits being that in certain markets we need capacity. And G&K has some capacity that we certainly can take advantage of that may allow us to defer some building of plants. We also look forward to the -- when we incorporate their route structure into ours, we expect improved route density. So improvements in terms of the fuel usage and certainly less time driving from customer to customer. In order to those things, we need a lot of people from G&K. And so while I don't have any specific numbers to shares, we won't be able to get into that level of detail until we close the transaction. We certainly anticipate that many of those employees of G&K will come over to become Cintas partners.

Thank you. Our next question comes from Gary Bisbee with RBC Capital Markets.

Hi, this is Jay Hanna on the line for Gary today. Regarding gross margins, they seemed to expand pretty dramatically across all the segments, particularly within first aid? Could you just explain what some of the main contributors were to this expansion?

Yes. I mean at first stage Jay as we noted in the script, we are excited to finally see some of the synergies that we banked on. They come from many different areas. For example, one is insourcing. Our ability to source the various products is much better with our scale than with ZEE. We expected to be able to have better ability to purchase and we are seeing those benefits in cost of goods which translate into that gross margin. We also are seeing benefits from distribution. They had five distribution centers. We've closed almost all of them. And so we are leveraging our fixed cost structure, our distribution supply chain for that. And other example was we mentioned warehousing in the script which is the location, physical operation that we run the routes of. As we had talked about previously with our scale even though this is a sizeable acquisition for the First Aid segment, it was largely a tuck in and by tucking this business in to those existing locations we were starting to realize those synergies. And that's really what's pushing those margins forward as I said we expected.

Great. And then lastly, G&K released a proxy couple of weeks ago which included some of their internal forecasts which included sales growth at 6% plus, and EBITDA growth in the low double-digits. Would you be willing to comment on these? Are they similar to your expectations going forward?

We don't have any comments on those. Those were G&K numbers and we'll let their proxies speak for itself.

And we will go to Manav Patnaik with Barclays.

This is actually Greg calling on for Manav. I just want to talk a little bit more about the part of the guidance change that isn't the tax change, the SAP and specifically what's driving there. And also kind of curious, if the fact that you're waiting on this G&K deal impacts how you're thinking about hiring for Cintas standalone and if there is any impact there in guidance?

So let me make sure I understand the question. What was your first question or your first part of the question was more color on the SAP?

No. The question is on the part of the guidance change that isn't related to SAP or the tax.

Okay. Yes, when we think about the guidance that we provided it excludes any impact from G&K. And that would be any benefits, any synergies, any transaction costs et cetera. So the guidance that we are providing is based on Cintas performance.

Okay. I guess my question was more along lines of does that -- has it impacted how you think about hiring I guess new sales force or what have you because you know or you are thinking that G&K will come online.

Well, I'd say Greg that we certainly have thoughts about how the integration will occur once the transaction closes but we need to close the transaction first.

Okay. Fair enough. And then I was hoping for a little more color on the lower growth in First Aid. What are the moving pieces there? Are you exiting less profitable parts of the medical or any color to help us with what's going on there?

Yes, Greg. I mean I don't think there is anything much else to add. I mean this is in the scheme of things for that segment. Again, it is a significant chunk of the segment that added one third of the volume. And just think about the math with getting to that 5% organic growth rate two thirds of that business the legacy business it's growing strongly. But the other, the acquired business I mean the focus has been on integration and goodwill and training those SSRs. You have to get the stability in the customer base, establish that foundation that takes time to build those relationships before you can make the emphasis on growth. And so there hasn't been much growth in that acquired business which is as expected but as we mentioned previously we do intend to grow it. And we are implementing, not implementing but we've hired some sales reps, getting them trained because we are at the end of -- near the end of the consolidation, the integration and the optimization process so that these sales reps then would be able to hit the ground running and start penetrating with the other products and services that we have in First Aid that ZEE did not previously have.

Yes, Greg. This is a bit of unique opportunity for us in that I think Paul mentioned in his opening remarks that their drives or SSRs are the -- they were the sellers of that organization. And while we are going through the system integration, it doesn't make a lot of sense to bring on sales people to try to sell product on a different system and then retrain them on our system. And so this is a logical progression and a logical investment for this particular acquisition.

Thank you. We will go to new one to Hamzah Mazari with Macquarie Capital.

Good afternoon. Thank you. Just had a question around adding dedicated sales reps that you highlighted on ZEE Medical. Should we expect other businesses aside from uniform to have direct sales reps too as those businesses either gain critical mass or is this sort of more differentiated or how should we think about that going forward?

Sure. This is -- you should think about this first aid investment in sales people as a unique example. We are in our other businesses and even in the first aid business; we are generally investing in the business every single quarter. So in other words we are adding routes for growth, we are adding sales people. We are investing in all of our businesses and it happens at generally fairly steady pace. This is a unique example where we are now that we are on the system platform; it makes all kind of sense to add the investment. And we'll start -- our expectation is that we will start to see productivity as we throughout the year.

Great. And just a follow up if you could just update us pro forma on your capital structure post G&K and how to think about capital allocation post that deal closing. Thank you.

Yes. Sure. So we are -- our expectation is to pay for that transaction in cash. So in other words we will be borrowing with part short term, part long term borrowings. Our goal is to -- that was certainly get us to leverage levels that are not typical for us. And our goal over the next two to three years is to bring that leverage level back in line with where we've historically been and that is generally at about 2x EBITDA.

And we will now go to Dan Dolev from Nomura Securities.

Hey, guys. Hey thanks for taking my questions. If I go back to last year the same time you also raised your revenue guidance quite significantly. I think by about 220 basis points. What should we read into the no increase to the revenue guidance? Thanks.

Last year's first quarter revenue guidance was increased quite a bit because of the ZEE acquisition. We closed that deal on August 1st of last year. And that was the primary reason for the change.

Got it. So there is nothing to be read into that this year.

I think our raising of the low end of the guidance today is a bit of reflection that we feel better today than we did 60 days ago about the revenue performance. Generally it is in line with where we expected to be but maybe slightly better. So I don't think there is anything to read into but I would say this Dan we -- let maybe talk a little bit about the economy and thinking in terms of -- it's been -- it remains a challenging environment and I'd -- I think I called it stable without momentum in July and I would say the same thing today. And if you look at the last three quarters of GDP in US, the average is slightly under 1%. The three quarters preceding our first quarter last year that average was 2.3%. And so we've certainly seen a bit more of a challenging environment. But having said that, we are operating a high level we believe and that organic growth of 5.7% in total is a reflection that even in a bit of more challenging environment today than a year ago, we are still growing at pretty good levels.

Understood. And how do you feel about this growth rate throughout the rest of the year?

Well, I think our guidance would suggest that we feel pretty good about it.

Thank you. Our next question comes from Nate Brochmann with William Blair.

Hi. Good evening, gentlemen. So just follow up on that little bit Mike if we kind of think about like about add stop metric I would assume that's still somewhat neutral if we exclude the oil and gas folks in terms of that end market. And one if you could comment on that and two when you think about the oil and gas sector are you starting to see the incremental negative decline kind of plateau a little bit so as we think about over the next 12 months that should be a little bit more of stable impact rather than a drag?

Yes. Our hope is that we've seen the bottom. I know we've kind of hope that would have been the case for last several quarters but I would suggest that top line impact -- negative impact is somewhere in the 80 basis points to 100 basis points for the fiscal year. That's a little higher than we talked about in July but a little bit better than our first quarter experience. That said, we also talked a little bit about the prices at the pump getting a little bit higher as the years go on. And I would suggest that based on our first quarter experience it might not be as high as we thought it to be originally. So let me talk two things. First of all, yes, the revenue we expect that impact will lessen as we go through the year. From a net standpoint when you think about prices at the pump plus the negative impact of the revenue, I'd suggest that it's about the same as we thought it to be in July. One last point if I go back to Dan's question about revenue for the rest of the year. One thing to keep in mind is in the first quarter we now have lapped that ZEE acquisition. And so now our future growth -- our future revenue growth for the rest of the year will not have the revenue, the acquisition benefit going forward from that ZEE deal.

And Nate, answer your question specifically about add stop, so you are correct that in that metric outside of the FRC related to the energy customers there is nothing really noteworthy, the metric is slightly positive but it typically is positive. This time of the year we have some seasonal impacts with schools and other summer type business is coming on in June. It is less positive than a year ago however.

Okay. That's helpful, I appreciate that. And then in terms of the pricing environment, I mean obviously I know it's always competitive out there and a little bit more competitive on renewals rather than new wins, but anything at all in terms of any changes that you have seen, particularly maybe after or since you've announced the acquisition?

No. Nate, as you said it's always very competitive, no, nothing remarkable in the environment that indicates any change one way or the other.

Okay. And then just finally, just one technical question on the ASUs, and not to get too deep into accounting knowledge here, but why, just out of curiosity, why do you get such the big positive benefit in this quarter and then it turns negative the remaining quarters? And then when we look at next year should the comps be about equal? What kind of -- obviously I know the underlying number of employees and how well the bonus pulls do and whatever, I'm sure that would have an impact. But how should we think about that dynamic and why that change?

Yes. I think that's a good question, Nate. We will generally see a bigger impact in our first quarter because our restricted shares that we have generally vest in the first quarter, our stock, we have more stock option exercises just for whatever reasons it is the end of our -- it is getting end of the year our fiscal year and into our new fiscal year. So we have more stock option exercises. In this quarter, we also had a nice increase in our stock price. So when that the volatility is created by stock price movement, option exercises, vesting of restricted shares and we generally have more of that in the first quarter, as we move through the rest of the year we generally don't see as many of those exercises and vestings but we still carry the additional stock comp expense and we still carry the additional shares created by this new guidance.

So essentially then, the expense outweighs the tax benefit in the upcoming quarters, versus the huge tax benefit in the first quarter? Is that essentially the way to think about it?

It is. That is our expectation. Now as I said, there are -- we can't control the stock pricing, we can't control when options are exercised necessarily and so there can still be volatility but you are correct in the assumptions that you just stated.

Okay. And just one less cleanup thing just to ask and I think it was something that you had mentioned before. But now with the new rule that is going into place in terms of the overtime and where the thresholds are, I assume that you have kind of thought about that at this point and are pretty comfortable that the impact from that will be fairly minimal, if anything?

We have thought about that. And yes we don't see a significant impact to us.

Thank you. [Operator Instructions] We will go to George Tong with Piper Jaffray.

Hi. Thanks for taking my questions. Can you discuss any new findings from your due diligence of G&K that either confirm or change your expectations for total synergies that you previously guided to $130 million to $140 million? And any incremental color on how this will split between revenue and cost synergies?

George, we don't have any new commentary to add on that process at all.

Okay. And then related to your comment on adding to ZEE Medical sales force, can you elaborate on how much you are adding to the sales force and how much of a lift to revenue performance these additions will drive?

George, we don't like to get into specifics about sales expenses or counts. But we can tell you that our expectations are incorporated into our guidance.

Okay, got it. And then lastly, can you discuss how you expect your route efficiency on a standalone Cintas basis to evolve over the next four quarters?

On Cintas standalone basis I would say I think I mentioned a little bit ago that we are constantly investing in the business. And one of those investments is to add routes to allow for continued growth in all of our businesses. And we will continue to do that. And when we add those routes, it creates more density and so that means we are having less windshield time and so there are certainly some incremental benefits every time we add new routes. We also expect that the productivity of our drivers or SSRs will improve over time as we add those routes and have more time to spend with our customers.

Our next question comes from Sara Gubins with Bank of America.

Yes, hi, thank you. You lowered the cost hit from SAP this year, but you mentioned that the pilot had been going as expected, so I'm wondering, is it that you expect lower cost related to SAP specifically or are you finding cost savings elsewhere to help offset that what you were originally expecting?

Yes. I think I heard you properly so if I am missing the question please let me know. But to answer your question, we are finding that we are just simply spending less on the integration so far than are initially expected. It doesn't really have to do with offset; it is more about the specific SAP integration.

Okay, great. And then hopefully you can hear me. Could you comment on expected wage cost and any trends you might be seeing there?

We are seeing in certain specific markets there are more pressures than in others. We operate in many, many markets around the US and Canada. And I'd say that we are not seeing specific themes nationally. But there are certainly are some markets here and there that are more -- that are tighter than others. We deal with those all the time, that's not something that is particularly new. And it's our job to execute and to get the right people at the right places and time.

Thank you. [Operator Instructions] We will go to John Healy with Northcoast Research.

Thank you. Mike, I wanted to ask you a question, just from a top line perspective. I think it's pretty impressive as you continue to put up this kind of organic growth this late into what could arguably be described as late into an economic cycle. Is there anything, when you look at the business that maybe we don't get by just looking at the organic growth rate? Do you see a segment of the marketplace, whether it's healthcare or hospitality or some sort of end market that is just doing something that's exceptional as well as just from a regional performance when you look at the company today? I believe the West Coast had always been a tougher region for all the uniform companies, but is there anything that's driving this growth rate that would surprise us or not be obvious to us?

I think it's the things that we talked about in the past, John. And the exciting thing to us is it is not necessarily vertical driven, it is really about the innovative products and services that we've been able to create over the last several number of years. And it's about the great execution by our partners. We believe that we can add value to any business in the US and Canada with our products and services. And we are going about doing that and that is kind of vertical agnostic. We believe every kind of business is a potential customer. And we are targeting them as such. So we want to continue to look for new opportunities to sell our for example our signature series hygiene products. We want to look for new innovative solutions and ways to sell our Carhartt products for our scrub rental programs, for our chemical cleaning solutions. We've got a lot of innovative products and services that we created and they can really add value to lots of different kinds of businesses. And so I think it's that. It's the execution by our partners and it's a great product line.

Got you, and I want ask on the acquisition of G&K. You talked about the $130 million to $140 million in synergies, is that kind of a big picture number? And would you expect the synergies to be less than that post purchase accounting?

Well, I'd say that when we announced in August we talked about the $130 million to $140 million in annual synergies. That is looking at their cost structure primarily. And there certainly are things that will let say subtract from that like the interest cost related to the financing like the amortization of intangibles. So that's a bit of a big picture what are the synergies and we would not -- we did not include the interest expense and the intangible amortization as a net against those --.

Was there an assumption for the inventory, the garments in the stock rooms and things like that?

Well, we have thoughts on that. We didn't share any in August and I am not ready to do that today. We need to get the deal closed and that when we can dive into more of the details. And really get more specific.

Thank you. [Operator Instructions] We will go to Scott Schneeberger with Oppenheimer.

Thanks, good afternoon, guys. A couple clarification questions first. With regard to the SAP number down a little bit, this was asked earlier, but is it going to be pushed out, or is it just the less on integration spend? And why I'm asking is I'm wondering if you're holding things up waiting for the closing of the G&K acquisition, or it's just pure integration savings?

I think it's just we are spending less on the integration in the early periods that kind of lead us to think we maybe more efficient over the course of the integration.

All right, thanks. And then a real quickie, on the accounting change you mentioned that fiscal first quarter is typically going to be the big one, and obviously it's going to be a headwind in the coming three. In our modeling, should we just equal weight the next three quarters, or is there any seasonality to that we should think about?

I think that's a reasonable assumption to equal weight.

All right, thanks. And then obviously we have the election coming up, so I will be that guy and ask the question, but it sounds like infrastructure is probably going to be strong under either candidate. Thoughts on that and then trade maybe not so much. I'm not sure that would have an impact, but if you could address those two if meaningful or anything else you think are resulting from what you have heard thus far. Thanks.

I think it's -- I would say that it's a little unclear for us to get specific on any kind of future benefits. We will certainly operate in whatever environment occurs after the election. And it's too early to tell and too early to try build any kind of specific assumption.

Thank you. With no additional questions in the queue, I'll turn things back over to our speakers for any additional or closing remarks.

Well, thank you very much for joining us tonight. We appreciate it. We will issue our second quarter earnings in the end of December. And we look forward to speaking with you again at that time.

Thank you. Ladies and gentlemen, again that does conclude today's conference. Thank you all again for your participation.