Q2 2020 Earnings Call
For the census.
Quarterly.
Yes, Paul I learnt vice President.
Cost of quarterly.
That's our second quarter results for fiscal 2020.
The sound.
Our commentary, we will be happy to answer questions.
Exactly.
Private Securities Litigation Reform Act of 1995 provide the safe Harbor.
Thing Thank you for joining us right.
Forward looking.
Oh, I learnt <unk> Vice president.
Looking statements.
It's costar.
The company's current views.
20.
[laughter] financial.
Correct commentary, we will be happy to answer.
Statements are subject to.
Right.
Occasion Reform Act of 1995.
Certainly from those we made.
Yes.
<unk>.
The litigation.
Refer you to.
Sure on these points contained in our most recent filings with the FCC.
They're reflect the company's current views.
Second quarter fiscal 2020 was a record 1.8.
Forward looking statements are subject to.
Craig.
Certainty.
Three.
Cause actual results.
<unk>.
From a purely from those we.
The growth rate, which.
Okay.
The impact.
Discussion on.
Acquisitions.
Our most recent.
Yes.
<unk> was also 7.3.
The second quarter of fiscal 2020 was a record 1.8.
So again.
In.
For the year for my phone facility services operating.
The.
<unk>, 0.8%.
Yes, the organic growth rate, which.
First aid and safety services operating.
Thanks.
Foreign currency.
Good point.
Fluctuations was also seven.
Margin for the second quarter fiscal 20.
For fiscal 2000.
$52.4 million.
Rental.
Great.
Services operating segment.
It's Mark you know the percent of revenue.
The organic growth rate for.
2% for the second quarter.
The.
It's.
Thanks.
Compared to 45.1% in the second quarter of fiscal 19.
Quarter of fiscal 20.
In Brazil.
852 point.
Segment gross margin.
Some of your revenue improved 130 basis.
<unk> expense of revenue.
Mr Second.
Fixed.
40.
For.
<unk>.
The second quarter fiscal 2000.
Stayed and safety services operating.
One.
Thanks.
Second quarter.
40 basis points.
Uniform rental and.
Services operating segment gross margin.
Compared to second quarter fiscal 20 334.5 million.
In order.
<unk> increased.
1.3%.
In the first aid and safety services operating.
Okay.
Excellent.
The 0.1.
We're seeing a.
Improved 40 basis.
At this point.
Compared to 16%.
In fiscal 19.
Operating income for the second quarter of Fisk.
We're a fiscal 19.
Appeared in.
Hi.
Billion.
Exceed it to the gene.
For some.
Free.
Sorry $8 million.
Operating margin was.
<unk>.
Just.
2.1% in the second.
Income from continuing operations for the second quarter fiscal.
I think.
240.
Operating income in the second quarter of fiscal 19.
Earnings per diluted share.
<unk> expenses.
For $2 and 27.
Susan.
Yes.
Of seven point.
Excluding the onetime gain on the on the sale of a cost method investments and the gene care acquisition.
For the second quarter of.
Next in fiscal 19.
200.
<unk> increased 29.
$6 and reported earnings per diluted share.
For summer was quoted in.
20.
As to release, we're pleased with our second quarter and year to date.
One of a cost method investments.
Partner.
Being paid acquisition.
If you want to execute well.
Next fiscal 19.
Thank you Carol Moore.
<unk> increased 29%.
In addition to the strong financial performance.
Scott Farmer.
Neither.
Strong cash flow and commit to effectively.
Deploying cash to increase shareholder value.
We thank our employee partners.
<unk>.
Continuing it.
First we paid an annual dividend of $2.55.
Take care of our.
That's an increase of 24 point.
In addition to the strong financial.
The annual dividends.
We continue to generate.
The dividends.
Pretty six consecutive.
Respectively.
In the past 10.
Depreciation holder value.
As Gary increased at a compound annual growth rate of 18 point.
We will dividend of $2.55 per.
Trickle over to Paul for more detail.
There or.
I'll provide an update.
First years annual dividend.
20.
We've increased the dividend.
We have increased our expectations of financial.
Hey years.
We expect revenue to be in the range of seven point.
Well trade of 18 point.
Two.
$7.33 billion.
Before turning the call over to Paul for more detail.
$8.
Yes.
<unk>.
Our.
$8.75.
We have increased our expectations.
Hey, guys.
So three at the revenue guidance ranges.
Yes.
So I point.
$9 billion to seven point.
Fiscal 20.
Yeah.
I think teens, one less work day than ours.
See in the range.
$8 and.
Adjusting for this one day deferred.
Collars.
Since constant workday basis.
And.
Revenue growth rate range guidance.
The three at the revenue guidance ranges.
It's like E.
Eight to 6.4.
Lets workday also has a negative impact on yes.
Contains one.
No.
Yesterday that.
Okay.
Okay.
Which is a 90 basis point drag on the EPA.
Any.
Yes.
It's on a constant workday.
Yes, beep, yes.
Its rate range that.
14.
Two.
Thanks.
Yes.
The.
16.
So.
One of US Workday also has a negative impact on.
Perfect.
Reducing at about.
Yes.
22.
To the 90 basis point drag on the.
Page seven.
Percent.
Just.
For this EPS.
The tax.
Growth rate.
Let's move up or down from period.
Our.
The period.
Based on this.
The.
She events, including the amount of stock.
Versus assumes an effective tax rate for.
It assumes a share count for computing EPS of 109 million shares.
This point.
Yes, just consider some diluted weighted average shares.
In mind that the.
That's perfect.
Acts of up or down from period.
To bid.
Based on discrete events.
The guidance does not assume any future share buybacks, where any additional genes day.
It assumes a share count for computing EPS of 109 million shares.
Thank you Mike.
To assist consists of diluted weighted average shares.
Just one last work day that.
Offsetting securities in the form of.
As much Dave will negatively impact the.
This does not assume any future share buybacks or any additional gene to integrate.
Magnitude on the headwind using fiscal Nineteens annual revenue.
Thank you.
Workday.
Please note that our fiscal 20 contains one less work data centers.
Let's work day also has a negative impact on operating margin.
Yes.
Okay.
Total revenue growth.
20 operating income margin will be reduced.
The magnitude of the.
Using fiscal nine.
Yes.
The annual revenue.
No.
One last workday.
27 million.
On the margin occurs because.
This workday also has a negative impact on operating margin.
Yes.
Fiscal 20 operating income margin will be.
It was too on a daily.
Basis.
We'll have one less day of revenue.
18.
We.
Due to one less day of.
Like stated one less work days, a headwind about 90 basis.
Thanks on EPS.
So they can have.
Got.
To six cents drag.
On total EPS in comparison to.
As opposed to on a daily.
Second quarter fiscal 20 contains.
They have.
New cover the.
In comparison to fiscal 19.
Hi, good one less workday is a headwind of about 90 basis.
The additional.
Yes.
Our Q4 will happen one less day.
Moving on total EPS in comparison to.
It's in line.
Sure.
When modeling our fiscal 20.
For fiscal 2000 contain 65.
Two reportable operating segments.
Two fiscal.
I went to one facility.
Q3 of.
State and safety.
Just one additional day.
The remainder of our business isn't.
I have one.
In cold weather.
Please keep the quarterly day differences in.
The.
And going.
No foreign direct sale.
First aid safety services.
Total operating.
Thanks.
Our combined been presented as other services on the income.
Safety services.
The remainder of our businesses.
See services operating segment includes the rental and service thing of.
In addition.
Since now.
Yes, so form.
The provision of restroom supplies and other.
Safety.
Yes and serve.
As in all other.
With the segment also included.
It has other.
Catalogs to our customers on route.
Yes uniform rental and.
And.
The services operating.
Yes.
Yes, it's inclusive the rental and servicing of.
No worse.
Mattson.
Five.
And provision of restroom supplies and other.
So the impact of acquisitions and foreign currency exchange rate changes.
His line items from our catalog.
Okay.
Customers on.
[laughter].
Uniform rental and.
Our uniform rental and facility services segment gross margin.
So ceiling in.
40.
An increase of five.
For the second quarter compared to 45.3% in last year's second.
Currency exchange rate.
And 130 basis.
Gross rate was 5.8%.
Operating income margin was a record 19.5%.
Services.
So that gross margin.
<unk>.
And what he said.
Yeah.
66%.
But margins have strengthened for many reasons.
Excluding strong revenue growth.
Steve.
And realization of cost synergies.
And 100.
Position on <unk>.
Operating income margin was a record 19.5% for.
Revenue from the sale in servicing a first they.
Certainly.
Safety products and.
Margins have strengthened for many reasons.
Second quarter was $169.7 million.
These from the acquisition of.
So.
The segment was 10.6.
And our first date and safety services operating segment includes revenue from the sale in.
Entering the second.
Yes.
Compared to 48.0% and last year's second.
Second quarter was 100.
$9.7 million.
The first date segment gross margin.
Let me to increase.
For this.
Listen revenue growth.
So first date segment gross margin.
And uniform direct sales.
Listeners.
In the second.
Reported and all other.
Oh Percentand.
Fire business continues to grow each year at a strong pace.
Points.
Uniform direct.
First date segment gross margin.
Next low single.
Strong.
Objective volatility so just wondering install a multimillion dollar.
Direct sale.
Uniform direct sales however is a key business for us and its customers are often significant.
I had a strong.
So and provide products and services from our other business.
Low single digit and are subject to.
With delays.
$4.1 million and.
In dollar.
Slide 2%.
Uniform direct sales however.
The business for us.
Was 5%.
Customers are often significant.
Any growth rate was 9.6.
These products and services from our other business.
No business had an exceptionally strong.
It.
Hi, good organic growth rate of 25%.
This increase of 17 point.
First was driven in large part due to the rollout.
Spark branded.
I just fortune 100.
Higher business organic growth rate was.
Let's see 1.8% for the second.
Next we direct sale there.
Our full year compared to 41.
Two.
And a growth rate of 25%.
Selling and administrative.
Large part due to the rollout.
For 28.1% in the second quarter of.
This 20 and 28.6% in the second quarter fiscal.
Right.
This quarter.
Improvement was realized in many areas.
Excluding lower DNA labor expense as a percent of revenue.
Selling and administrative.
Expenses as a percentage of revenue were 28.1.
Our.
<unk>.
In this.
Came back in line in the second.
Okay.
Sent in the second quarter fiscal 19.
Expected tax rate on continuing operations for.
This quarter of.
As lower DNA labor.
One.
Makes sense of revenue.
Stock based compensation positively impacted the tax.
And as a percent of.
I stated earlier the tax rate can move from.
Just as we.
Based on discrete events, including the amount of stock compensation.
Expirations for the second quarter fiscal 2000.
Should.
It was one.
Instead of November Thirtyth was 220.
Yes and.
Canadian dollars.
The tax rate.
Year to date operating cash flow increased about.
Tax rate can move from period.
Last year.
Took on discrete.
Strong earnings growth.
The amount of stock.
Working capital, particularly accounts.
In addition.
As of November .
These farms and other rental items in.
<unk> point $5 million year to date operating cash flow increased about.
61 point.
From a million.
Last year.
Our capex by operating segments was as follows.
Prove mentioned working.
Snowing in dollars and uniform rental and facility services.
Uniforms and other rental items in.
It's and safety.
But it sounds.
$2 million in all other.
Enters into second quarter.
Fiscal.
First point.
Capex.
I think for.
Range of 200.
Backed by operating segments was.
$690 million.
$8.6 million in uniform rental.
So you have to total debt was.
Was 2 billion seven.
$2 million in first aid.
$2.536 billion.
In fact.
Interest rate debt.
This back to be in the range.
$99.8 million was variable rate debt.
$30 million.
In the form a term loan.
As of November .
Remember 30 at our leverage was 1.8 times.
Were 38.
Yeah.
$4 million.
That concludes our prepared remarks, we're happy to answer your.
Lets fixed interest rate debt and $199.8 million.
Variable rate debt.
For a six star.
It's a term loan.
If you're using.
Yes.
The at our leverage was 1.8 times.
You bet.
Good.
But then you got for start.
That concludes our prepared remarks, we're happy to answer your question.
My questions.
[noise].
I would like to ask a question.
Let's pick up.
Sure.
Good luck.
So please go ahead.
You are using your speakerphone, please make sure.
Good afternoon.
Oscillators signals.
Yeah.
The.
That's right.
If I want to pose the question.
<unk>.
The.
In order, but.
Sorry.
But only a modest.
You can't reach for the full year.
Yes.
Maybe just talk about your expectation.
And ground.
Maybe the broader macro.
Oh.
Please go ahead.
Turning out that might be.
Okay.
In order or might reverse.
Good.
<unk>.
Pretty much.
Just wondering why not.
The bigger.
In the quarter, but only a modest.
Until you're speaking of a of revenue right now correct.
Nations around maybe.
Macro.
Anything else.
Yeah.
LP.
And so.
From a a lot let let's talk about the quarter.
I was wondering why not.
Hi, good quarter.
Yes.
For the the all of our businesses grew and in particular.
Thanks.
Our direct sale business had a had a really nice.
Nice quarter.
And so.
But about the macro.
Let's talk about the quarter.
I would say not a lot of change.
Yes.
The all of our businesses grew.
And in particular.
Getting a quarter that energy.
I had a really nice.
He did a softness in the in the energy area.
Tony you would.
Asked a little bit about the macro.
During the quarter in fact, we had.
Not a lot.
During the.
Space go bankrupt.
But you know I would say.
The other thing is industrials are a bit choppy.
Gee area.
Generally.
Just a little bit of that.
During the quarter in fact, we had.
During the quarter.
Good.
We are encouraged as we kind of.
Summer in.
We are encouraged.
At.
Yeah.
We.
I.
We've made some progress in the U.S.M. CA.
It's are a bit choppy.
Craig.
Generally.
We're encouraged by the movement there.
A lot of change.
So.
During the quarter.
Like we've seen a little bit of.
Our urged as we kind of.
Direction out of.
Yeah.
On interest rates and so.
It looks like we've made some progress in the USM CA.
The second quarter I would say there are some encouraging signs.
The movement there was.
Before to getting those results.
During the election year there.
So we've seen a little bit of.
Our son.
Key.
In terms of the noise in the.
For the fed on.
At this and whether or not.
Small businesses and other businesses will continue to invest.
I would say there are some encouraging.
Thats a bit with.
In sum, but.
As we.
During the election year.
We're still is a lot going on.
Relate.
In terms of the noise in the.
We had a very good.
And whether or not.
For our partners did a great job and here's the Irrs playing out generally.
We still look a little bit with.
We had growth of roughly.
Can you think about.
The organic growth of.
As it.
Per cent for.
So the guidance look we had we had a very good.
For the things that a that went our way.
For enters did a great job and years.
The first quarter, where.
As we.
We.
A little bit of year over year benefit in.
Organic growth.
Thats certainly helped as we kind of.
The first half of the year.
The next year.
But we also had some things.
As we lap.
That went our way.
Apt acquisition.
Right.
I talked a little bit about this in.
Bear.
In the quarter.
Sure about pricing being or.
Sure.
Incrementally positive.
Yes.
Year over year benefit in the first.
Maybe not quite as.
Certainly helped as we kind of.
Positive in the second.
Were in our rental business as we lap.
Okay and fit in the first.
First of all of the year I.
And can benefit in the first half there.
There will fall back into kind of the pricing range, we've been in the.
Few.
Our first quarter.
Maybe not quite as.
At the direct sale business, where we talked about that.
Yes, Sir.
Got a few times.
Certainly some.
Great year.
Yes.
First half of the year.
In the second half.
I.
Expectation is as this business can be lumpy.
It accessing range we've been in the.
Okay.
Last few years.
Down in that and so just.
When you think about the direct sale business, we talked about that Weve referred to that a few times.
If you compare.
Okay, great year.
Okay.
Your first.
My talk a little bit about the outlook on the macro and so.
Half as.
As we think about the second half were.
Is that.
First thing about the macro we're thinking about you know there are some things that really went well in the first.
First.
Five.
Okay all of that benefit.
Just when you compare the first half.
In this I'm, having said all of.
My talk a little bit about.
Our.
On the macro and so.
So to say.
As we think about.
The.
Yes, we're.
The year is shaping up pretty much.
First about you know there are some things that really went well in the first.
And.
First the not get all of that benefit.
The numbers, that's a really nice.
In the some having said all of that look at our.
Sure.
Thing workday growth of.
6.2 to six.
6.8.
Really.
And.
Jeremy.
Additive.
The year is shaping up pretty much.
Okay.
The way we.
Expected it to.
And.
Yeah.
We can.
If we can hit those kind of numbers, that's a really nice.
<unk> philosophy, or just why why it's very minimal buyback this quarter.
Yeah, we do have we've got the authorization of about 1 billion too.
And we look at that as we've talked about we look at that Opportunistically.
One thing to keep in mind is we in the first week of December we made a $268 million payment related to our dividend.
And and we also had some debt interest payments so.
We're back into CP in the month of of December .
But we'll look at the buyback opportunistically as we move through the rest of the year end.
Specifically to your question, we have not made any changes to the way, we think about capital allocation.
Thank you.
I'll take the next question from Hamzah Mazari Jefferies. Please go ahead.
Good afternoon. Thank you.
My first question is just on on the actually it'd be rollout.
Sort of just just I'm uptick there specifically where do we see benefits. Once that's regarding your grew a little bit of next year is that going to be an organic growth through cross selling or do we see sort of you're going to come off a any color. It's the benefits.
Got a little longer.
Hamzah, we're about 85% or the way through our SVP journey at this point in time. So we've made some good progress in the quarter and we're still on track to complete the project by the end of the fiscal year.
As far as benefits are concerned.
Yeah, I think the benefits from S&P youre going to be kind of throughout the PML.
We've talked about some of them already.
That.
That can be achieved by locations individually.
Better technology in the half the hands of the people providing the.
Services.
Better information at their disposal the ability for our.
Our accounting and finance people and operations people to.
Look at data from the very back of house fall away to invoicing and pricing with the customer. But then there are other benefits to that we believe will be you're benefiting the topline later on in more perhaps impactfully when the entire network is in the system, but.
You know certainly we believe that putting the uniform rental business and our first aid business and the same operating system will foster more collaboration more cross selling which will help.
Topline and just better as I mentioned earlier, you sort of data.
Looking at our big large national accounts from city to city to city to do analyses and make sure that we're getting all the entitled revenue that we should pretty agreements make sure the pricing is appropriate.
Contract, so lots of opportunities, but I'm not able to quantify anything at this point in time as I said, we'll complete that rollout this fiscal year and have more color next fiscal year for you.
That's very helpful and just a follow up question I'll turn it over what do you think about a millionaire outside of core.
Form right Bill and the businesses you're in.
What are some of the metrics you're looking there I know you wanted to touch more businesses.
I I assume it's <unk> Baird, because they'd have to be accretive growth accrued good for margin.
I know you guys. Good record go a long time ago, and you know got business clock sold.
We did your in peer that were part of the core.
Just any color as to the metrics you can share how you'd think about larger eminent onsite decor. Thank you.
Sure. We first of all we we look for B to B, we love the recurring revenue.
Nature of the our kinds of businesses.
Whereas based is is a preferred but it's not absolutely necessary. The key is what kind of service can we add to provide some some level of value to the customer.
So.
That's that's the real key.
We wanted to be a we would want it to be an opportunity that Ken.
Add value to many of our customers not just a small subset and we would want it to have a margin potential so.
You asked does it need to be growth accretive in margin accretive, we certainly would love it to be but but they're there really aren't that many out there.
We're looking hard for them.
But those are the kind of things that we will look for recurring revenue streams can benefit our current customers or is it a large opportunity for us or is it very narrow.
What's the service component.
Very helpful. Thanks, Thanks, a lot Mike.
Okay.
Well take a next question from enough top line.
Please please go ahead.
Thank you. Good evening guys. My first question is just can you just walk us through wide be lower Capex assumptions and then maybe just some context when you look at the over the next to the two years like I guess, where your greatest investment.
Yeah, we.
You know generally we are.
Making our capex in terms of our.
Growth opportunities like new routes and.
And Dan and adding capacity I would say we continue to add the routes. So in other words buying trucks.
And that is certainly important for us.
But as it relates to laundry capacity for example, a we've we've got some really interesting projects that are going on that that we think can help us out in certain cases, and and so we're seeing a little bit of a benefit.
Because of that I've talked a little bit about a gene K auto sort of it that.
That's kind of a.
A a clause I auto sort.
That helps us in certain facilities.
And we're moving on on a rolling out some of those kind of things were looking at things like efficiency in the wash Sally.
And and then we certainly still have a little bit of the capacity that we that we have gotten from the gene can acquisition. So the combination of all of those things.
Has has.
Created efficiency opportunities for us.
Particularly in the in the production environment, and and you're seeing a little bit of that benefit.
Gross margin.
And then just in terms of gene key and then maybe tied to the CP implementation I damage. Since then I guess on HCP as well and use it.
Still too hard for you guys to quantify any revenue synergies that you might be getting from that deal.
Well keep in mind, we converted all GSK locations to either.
The since Haas, that's a piece system or the legacy Syntbots systems. So that we could fully get off of that system and that was completed.
Gosh.
Probably a.
Over a year ago.
And so the we still have some of those that need to get from distant past legacy system to FCP.
And so it's we inserted those locations as it made sense into the safety rollout.
And so we're almost there Paul said were 85% of the way there in total in terms of the conversion and are we made good progress.
So we have a we have a pretty good handle on in terms of viewing the gene K legacy locations in much the same way that we're viewing.
Cintas locations.
And so we see some benefits are there I would call them anecdotal we need to get all the way on Sep before we really start taking advantage of the power of that information.
All right. Thank you guys.
Well take your next question from Andrew Steinerman JP Morgan. Please go ahead.
Hey, Mike you mentioned that you just treat gene K legacy locations likes in test locations wondering though about the inventory how much of the uniforms today are still the gene k., our uniforms and when you convert over and and and introduced in cash out uniforms, which are presumably.
Better I uniforms to GSK legacy customers, how have they responded and has there been a price adjustments since they are getting better uniforms.
Your from an inventory conversion standpoint, we are.
We're in the midst of that and knows this happened at such a different type of Andrew So for example.
If we have a customer that Scott 10 wears for example.
In legacy gene K inventory.
We may be in a style.
Where as that age churn in other words as they have turnover and they replaced.
They're they're up open positions with new hires and we put them into a legacy gene K car garments, there's going to be a point in time at which we run out of those garments, whether it's the style or the size and and that happens that very different intervals, depending on the kind of go.
Permit that they have.
And so it is a customer by customer approach.
When they start to run out of when we start to run out of GSK legacy garments.
We will start to put them into centrus garments and generally that can be all at once because we don't want them to have different looks but but I, but as I said that it's a customer by customer.
Decision point based on the styles. So it's really hard to give you a full percentage because it's happening all over the country. We are not finished.
With that we're still working our way through gene K legacy inventory when they get on to send to us inventory.
As you know pricing becomes a customer by customer conversation as well and there maybe some where where are we there is no change at all and we put them into something that's a let's say a workwear type of a garment there, maybe others, where where we give them an opportunity to upgrade.
Into a carhartt garment for example, and in that case, there may be times, where we will increase the pricing or just the pricing as it's a as it's necessary. So it is a customer by customer decision on when to convert and then it's also a customer by customer decision on what does that pricing and what does that.
Contract look like.
And do you think the customer recognizes that the sometimes uniform on average is a better uniform than the legacy uniforms ahead.
You know I can give you anecdotally.
The answer is yes.
We we need to be doing a pretty good job of showing why they're moving into a syntax garment and what are the features and functions of that new garment did baby that it's softer it may be that fits a little bit better and maybe that is.
The fabric breeders, a little bit better and generally when we explain those kinds of features to the customer they get it and and they understand and it doesn't take very long for them to be in those garments to recognize that there is a quality difference.
Okay. Thank you.
Well take your next question from Gary Bisbee Bank of America. Please go ahead.
Hey, guys, good evening and happy holidays.
I guess a first first question from me just.
The uniform rental revenue slowed somewhat obviously in a much tougher comp, but but anything other than that I guess, you mentioned, one a little weaker energy anything other than that Youd call out in the sequential.
Celleration your organic constant currency revenue growth.
Yes, I I don't think it's anything of of real significance, but I would I would point to the three things I mentioned earlier, though a little bit of the the the absence of that lapping.
I'm, a little bit of the Choppiness in the energy and maybe industrials.
Generally and and pricing, maybe maybe wasn't quite as as a incrementally positive as we've seen in the previous two quarters I think those things kind of capture what we what we saw in the quarter still a good quarter for us, but but I think those things captured.
Okay and then.
You've been asked for a few years about.
Cross sell potential both within GSK and just more broadly yet again youre your your different businesses and and I realize you don't have the data.
And haven't provided real granular color, but can you give us any sense like that as your salespeople for the for the for the main businesses go out.
How often are they.
Targeting people that are customers are your other businesses, how how important is cross sell in terms of how you're trying to compensate the different types of salespeople.
Really something you've focused a lot on to date or should we think that data that sep will provide is really going to be the key to unlocking that more broadly.
Oh, we do spend a lot of time with that.
Today Gary.
You know Rss ours are looking for opportunities we have our Oh, we call a market development of reps, who are who are looking at some of our more complex customers and looking for.
Upsale and penetration opportunities there and we've we've become a bit better at the cross sell between rental and and first aid and fire I think we still have.
Some some a ways to go there too to.
Take advantage of all of that opportunity, but we're starting to spend more time.
And in the past so if it has been important to us and and I think we've been doing a pretty good job it out over the last few years.
Including in the last probably 18 months with gene K legacy customers.
But having said that S&P will unlock some additional potential that is going to be something that should that should prove to be a nice opportunity for us.
Great and then just one more indecision, so much next quarter or anything like that but as we think out over the next.
Two years in sort of a normalized economy. How are you thinking about incremental operating margins. These days, what what's the potential they've been obviously terrific. The last few years, particularly as the as the GK savings have flown through but whats like a long term.
Target or opportunity there.
Yeah, we still like the we talk a lot about incrementals of 20% to 30%, we're getting pretty darn close to the bottom of that with our with our rental division.
But you know as we continue to couldn't get success with.
Penetration opportunities to get success in some of the verticals that can be a even bigger types of customers with a with a service opportunity that's more efficient.
We think there are still opportunities and that incremental.
As we move forward, we think that incremental certainly isn't the 20 to 30 and and you know if we can if we can capitalize on some of those different things that we've talked about the penetration the sales into these customers with a maybe more efficient service aspects.
Capacity efficiencies.
We think we can get that that incremental into that mid twenties type of a neighborhood.
So it's a nice opportunity that looks a that we look forward to.
Great. That's all I've got thanks.
Well take your next question from Andrew Wittmann Pardon W. Baird. Please go ahead.
Great. Thanks for taking my questions here, Yeah, I was looking at the to your growth rate stuck in your rental segment it looks like.
Becomes pretty proud at 12.4 over the last two years, both for the first quarter in the second quarter, but kinda breakthrough. The question you've talked about in the past, which is your sales force productivity.
You mentioned that kind of the headwinds for the deceleration in the in the growth rate, but I was just wondering how the salesforce is performing for you I think it was not that many quarters ago, you said, even with gene K people that you kept on well producing at record levels.
Can you just give us an update Mike about what you're seeing out of them in terms of their ability to.
Gross new customers.
Yeah, we when we think about a total you know look we have one sales team and so that's sales team continues to perform well and they're doing a nice job of adding customers and and selling into existing customers.
Our productivity levels are still.
This quarter was a little bit higher than last year in this quarter. So we're still making some some really nice improvements. So we are still very pleased with the sales rep productivity.
That's helpful. Then.
Oh, sorry, then I guess I wanted to maybe Paul if you just help us a little bit on some of that is in the cost structure I think typically you've given a energy as a percentage of your rental segment revenue how much would benefit was that and just any other details you could cause in the cost structure I think labor has been something that people in flag that would be maybe that would.
To be something you address you mentioned health care that it's back to normal, but if anything else you can help us understand the moving pieces inside the margins or they could be helpful.
Yeah, Hi, Andy Energy was a 20 basis point benefit year over year.
Flat sequentially, So I think that's.
You know if oil continues unit price per barrel.
In the second half where it is in the first half it will be it a little bit of a tailwind for us and the cost structure in the second half a labor Yeah, you know I would say overall in check we talked about.
Gosh was probably a year ago now about.
Certain areas of our.
Of our workforce, particularly in the production area, we were having some labor inflation and we made some changes. So we believe that that you as behind us and we don't have to make any further adjustments there, but otherwise a year inflation is you know it is is that normal I would say, it's something that we've been able to.
You know to deal with.
You I, certainly tight but you haven't prevented us from running the business and serving our customers Yeah and Andy when you when you think about.
Our gross margins for example.
We've seen some really nice and year over year improvement in this first half over the year and certainly the growth levels have been good and that helps so we're getting a really nice leverage our salespeople are.
Productive and they're selling good profitable business and that's been good.
And you know over that we are we've done a nice job of capturing the gene case synergies, but what we're also seeing a little bit of as we've talked about over the last few years.
There's a lot of inefficiency in running the facilities when you're going through a lot of conversion of of.
Incorporating GSK volumes into sentiment legacy plants in closing those plants and rebar coating inventory and and there's a lot of work that goes on there and really what we've seen in the first half of the year is.
We captured those June K synergies, just as we wanted them to and we've seen some real nice up efficiency gains because they're quite as many of those projects going on there those are a little bit more in the past and and so are we we've the time.
Thing for US has been kind of fortunate and good from the standpoint of when we were seeing a little bit of pressure in our production Labor. For example, we were also we're also making some synergies and capturing some synergies there too and and we've been able to to.
Get more efficient in this first half of the here and I think that's a little bit of what you're seeing.
Great. Thanks, I'll leave it there Doug.
Well not taking this question from Scott Schneeberger I'd open. Please go ahead.
Good evening guys. Its Daniel on for Scott you discuss sufficient this earlier could you provide a little more perspective on some type of efficiencies you pursue on a go forward basis. Besides the route optimization and a little bit color on automation or processes and use that advanced technology.
How about as applied and where you could go there. Please thank you.
Sure, we we're always looking for them and a and so when we think about efficiencies going forward.
I've talked a little bit about capacity, how how how can we.
Continue to get more efficient in terms of using our wash sally's some of that is automation I'm, sorry, a technology and some of that is a a is a six sigma like process improvement.
There are opportunities there, we still have a lot of route optimization.
Go.
That is both a little a little bit of technology, but just.
Customer touching and so we're we're we're being cautious in that regard we've talked about getting through the S.A.P. conversion.
And.
As we are able to then pull off over the legacy since Pos system, a bit that's going to create some efficiency just because we won't have duplicate systems, but also then using that technology for things like sales rep productivity gains and.
Cross selling and penetration opportunities.
So there we do have a number of those different.
Efficiency opportunities as well other than just typically.
The six Sigma processes that we're always working on and how can we get better and as a business changes.
Can we get more efficient in the way, we move product and through our plants and provide services. We're looking at all of those different things, but we think we've got some nice opportunities ahead.
Got it was helpful. Thank you switching gears, a little bit cotton prices went down in the first half of this fiscal year on year over year basis.
Could you. Please discuss talk how bad is impacting earnings I mean, I know historically, a smooth that out through a amortization, but how does that really impacting margins presently thank you.
Not really any impact in the first half of this year.
We are as you mentioned it takes a while for that cotton price to two ripple through a into our PNM.
We have to so the garments, we have to bring the garments into our distribution center. We then ship them from a distribution centers out to our rental locations and at that point. They started an 18 month amortization process.
So it takes a while and and then even when it doesn't get through we're generally smoothing that out as you said because we've got if we see a spike for a few months you might have 118th worth of that in the in one month, you may or could have two or 318th.
Worth of that it's got to be sustained movement in that before it really starts to hit us and keep in mind.
Cotton isn't a he its not one of the more significant.
Pieces of our cost structure.
If you think about our cost structure.
Our cost of rentals is you can think of it in three buckets. One is material costs. One is production artists as sort of running of our laundry facilities and the third is our service cost so the routing.
The cotton piece is then part of that material cost, but that material cost includes also the labor content. The soda garments the freight on the garments to trim on the garments et cetera.
So it really takes some sustained large movement and cotton before it really starts to impact us.
Got it caused some color. Thank you very much.
Okay next question from George Tong Goldman Sachs. Please go ahead.
Hi, Thanks, Good afternoon, your revenue outlook, certainly improved from where it was a quarter ago. You discussed the macro factors that that are impacting that up but can you elaborate on some internal initiatives, where you're seeing traction that improves your revenue expectations for the full year.
Well there they are.
Things generally, Georgia that a that we've been working on for a while and that is we are looking to continuously.
On a focus on some of the verticals that have been really powerful for us. So for example, the healthcare vertical the education government.
Hospitality those places where.
The sales are a little bit more complex the purchasing decisions might be a little bit more complex and and we've made some really good progress in those areas and we we still are in the early innings and think there are great opportunities as we move ahead and so those are areas that our.
Turning to us.
Penetration I mentioned that we have been working more on the penetration opportunities I think we can get better and more opportunities ahead.
For that area as well and that penetration is both.
Better coordination between our businesses, but also taking advantage of of our newer products and making sure. We're getting things like schuff works in front of all of the right decision makers and so it's really continuing to move forward with our what we believed to be our unique products.
That create opportunity in the marketplace.
We are doing the same kinds of things in our first aid safety business.
Where we are looking for those penetration opportunities product adjacencies are great and and continue to look for a larger national type.
Customers as well in both first state and our fire businesses. So we're doing all of those things we've made some really nice progress and.
You know, we think we've got a really nice year.
Ahead of us as we as we move into the second half.
Got it that's helpful. Your gross margins expanded about 110 basis points year over year in the quarter can you discuss how much pricing contributed to this margin expansion and how sustainable pricing increases are at the current pace.
Oh.
You know pricing certainly has an impact I mentioned that it wasn't quite it's incrementally positive in this quarter as it had been in the previous two quarters and so I would say the the pricing is is.
Somewhat in line with what we've seen over the last couple of years absent the last a couple of quarters.
You know generally we've been able.
To to win when we can show value and when we can have a REIT conversations with our customers, but generally we we've been able to get some pricing and I don't see that necessarily changing.
But but I would <unk> as it relates to then the margin opportunity in the margin improvement, it's really more about the the growth creates leverage it creates efficiencies in our plants.
When we grow in our rental.
Business in particular, where we don't use capacity.
Like our restroom in hygiene products.
We effectively get some really nice leverage and get more efficient with the capacity and in addition to that we pulled out a little bit of inefficiency in the business. So.
More of the gross margin improvement.
Relates to the revenue of the business, the leveraging and the efficiencies that we're able to gain.
Very helpful. Thank you.
I'll take the next question from coming next day at Credit Suisse. Please go ahead.
Great. Thanks, Hey, I'm just to follow up on the guidance a little bit I know last year. There were some severe weather in the third quarter.
It was kind of unexpected.
Do you have any kind of tend to just thoughts on or any.
Lounge for that in the Q3, God without obviously, which would be incorporated into the full year or how are you thinking about just the weather impact as we work or we see the back half of the year.
Yeah. Good good question last year in the third quarter, we talked a little bit about the weather and the holidays.
It's hard to predict the weather.
And and so we we are I would say, we're not trying to build in any particular weather pattern as it relates to the holidays one of the things we talked about last year was was.
Christmas New years, falling on Tuesday, which was which was the first time in a number of years.
And a you know that has an impact this year the holidays, both fall on a Wednesday and and the last time they fell in the Wednesday I think it was like our fiscal 14 years, what's been a bit of a have a time period since we've had a wednesday and so if you think about our weekly flow.
Oh volume you can you can think of it as a bit of a bell curve.
Monday, Mondays and Fridays I would call our our maybe our lower days and our <unk> as you go from Monday Tuesday, the volume starts to build because customers are just more they're more easy to see et cetera, Wednesday tends to be one of our heavier days and then.
You start to come back down as you go through the rest of the week.
With when by the holidays, both being on a Wednesday this year, we art.
Considering that we will have any year over year benefit because of the comments. We made last year. During the holidays were kind of thinking that that look we're going to still have.
That holiday disruption in a little bit I don't think it necessarily will be a drag on growth, but it certainly doesn't gonna help us.
With an easier comp.
It's super helpful and then just.
You know the margins again really nice and if I have a right it looks like kind of the other category.
At least outpaced our estimates and in or they can be kind of a uniform cells, which are lower margin is there anything else in there that's helped boost to the gross margins overall, despite the mix.
You know we are continuing to make improvements in the fire business.
We really like that business in the and it has performed very well in the second quarter ended the first half and as we as we gain as we get bigger and we gain scale and we like that that revenue growth allows us to.
Leverage our infrastructure a bit better it creates more dense routes and that creates some margin opportunity. We've got a long way to go.
But but certainly have seen some nice performance in the fire business and certainly the heavy volume in our direct sale business was a bit of help too.
Super Thank you.
Let's see if your next question from Seth Weber of RBC capital markets. Please go ahead.
Hey, guys good afternoon.
Most most of the questions asked and answered, but I wanted to see if we could dig into your you've made good pricing.
Comments, a few times down or just a little bit less robust than maybe what we saw in the first quarter is or anything you'd call out is there isn't a mix issue or the comps just getting harder or is there something going on from a competitive front that you would you would highlight thanks.
I think it's a I think it's a bunch of a of different things Seth I think it's a there is a little bit a mix going on.
You know.
Yeah, we we've we've had some good performance.
In a in a few quarters in a row now and if you know that's that that kind of outperformance isn't a sustainable in the long term and.
You know I don't think it's anything that we are concerned about but but just something a little bit of a maybe a notch below where we have seen in the last couple of quarters made up of a you know a number of different things.
Okay, and then just lot on working capital is going you know frankly better than what we would have thought given given the growth trajectory making.
Do you think that working capital can continue to be just a little bit better than you know normal <unk>.
You normally I think you'd expect to see little bit more usage here I was there something you're you know you'd call out that's really helping that or can we expect that to continue thanks.
Well look out from a working capital standpoint.
We we certainly have been in a period of disruption over the last couple of years as it relates to our accounts receivable.
Converting to systems as it relates to our inventory and shutting down bdcs opening new Dcs converting a lot of a volume.
And you know, where we're starting to get or some of those inefficiencies and disruption that behind us and so for example in accounts receivable.
We've seen a a a nice improvement year over year and that's that's part because we've we've gotten a little bit of that disruption behind us there still is some system conversion to go.
But we think we think we're getting a little bit a better and better and more efficient at it.
If you think about the.
Oh, it's also worth two to a cash flow.
For a second when you think about our operating.
Cash flow. It was it was pretty strong this this quarter and really for the first six months of the year and our conversion of net income to cash.
Operating cash flow has been been over 100% I would expect that that's going to continue for the second half of the year.
Free cash flow was really strong and I think that's going to be strong for the rest of the year and so I think more than anything staff, it's getting a little bit of this and disruption of.
Two system conversions, a new business conversion, a little bit of that stuff behind us.
But as we've talked in the past when when we're growing.
Well generally going to use some working capital in other words were going to see a our continue to increase we're gonna see generally speaking inventory and then service inventories grow overtime.
Inventories a little bit different from the standpoint of we do have opportunities there were some of those opportunities will create more inventory.
For example, if we believe we can have enough volume to bring new products into our distribution center that may create new inventory.
However, as we get more efficient and and you get the GE and K conversion behind us.
That's going to create some some.
Forecasting and supply chain opportunity. So there's gonna be some ups and downs in that in that inventory line item, but generally the performance has been good we've gotten a little bit of that disruption behind us, but were generally going to be a user of working capital.
Right. Okay Super helpful. Thank you guys have a good night.
Thanks.
It appears there no further questions at this time lets turn conference back to the speakers. Please go ahead.
Well, thanks, very much for joining us Tonight.
We will issue our third quarter financial results in March.
And we look forward to speaking with you again at that time, and we wish you all happy holidays.
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According to this time like to turn the conference over to Mr., Mike Hanson Executive Vice President and Chief Financial Officer. Please go ahead Sir.
Good evening. Thank you for joining US Tonight with me as Paul Adler since I was vice President Treasurer, we will discuss our second quarter results for fiscal 2020. After our commentary we will be happy to answer questions. The private Securities Litigation Reform Act of 1995 provide the safe Harbor from Civil litigation for forward looking.
These 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.
Revenue for the second quarter of fiscal 2020 was a record $1.84 billion, an increase of 7.3% over last year's second quarter.
The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations was also 7.3%.
In the second quarter fiscal 20, the organic growth rate for the uniform rental and facility services operating segment was 5.8% and the organic growth rate for the first aid and safety services operating segment was 10.6%.
Gross margin for the second quarter of fiscal 20 of $852.4 million increased 10%.
Gross margin as a percentage of revenue was 46.2% for the second quarter fiscal 20 compared to 45.1% in the second quarter of fiscal 19.
Uniform rental and facility services operating segment gross margin as a percentage of revenue improved 130 basis points from last year's second quarter to 46.6% and the first aid and safety services operating segment gross margin improved 40 basis points to 48.4%.
Operating income for the second quarter of fiscal 20 of $334.5 million increased 21.3%.
Operating margin was 18.1% in the second quarter of fiscal 20 compared to 16% in fiscal 19.
Operating income in the second quarter of fiscal 19 was impacted by integration expenses related to the gene acquisition of $7.8 million or 50 basis points.
Net income from continuing operations for the second quarter of fiscal 20 was $246.4 million and reported earnings per diluted share were $2.27.
Excluding the onetime gain on the on the sale of a cost method investments and the gene K acquisition integration expenses, both in fiscal 19, EPS increased 29%.
As our chairman and CEO Scott Farmer was quoted in todays earnings press release, we are pleased with our second quarter and year to date performance. We thank our employee partners for continuing to continuing to execute well and take great care of our customers.
In addition to the strong financial performance, we continue to generate strong cash flow and commit to effectively deploying cash to increase shareholder value.
On December six we paid an annual dividend of $2.55 per share an increase of 24.4% over last year's annual dividend.
We've increased the dividend for 36 consecutive years.
In the past 10 years, the annual dividend per share increased at a compound annual growth rate of 18.2%.
Before turning the call over to Paul for more details I'll provide an update of our fiscal 20 expectations.
We have increased our expectations of financial performance, we expect revenue to be in the range of $7.29 billion to $7.33 billion.
We expect EPS to be in the range of $8.65 to $8.75.
The following regarding the guidance.
The growth rate as our revenue guidance ranges, 5.8% to 6.4%.
However, our fiscal 20 contains one less workday than our fiscal 19.
Adjusting for this one day difference on a constant workday basis, the revenue growth rate range at guidance is 6.2% to 6.8%.
One of US Workday also has a negative impact on EPS, reducing at about six cents, which is a 90 basis point drag on the EPS growth rate.
Adjusting for this EPS growth rate range is 14.7% to 16%.
Guidance assumes an effective tax rate for fiscal 20 of 19.2% compared to a rate of 19.7% for fiscal 19.
Keep in mind that the tax rate can move up or down from period to period based on discrete events, including the amount of stock compensation expense.
It assumes a share count for computing EPS of 109 million shares.
This consists of diluted weighted average shares outstanding plus participating securities in the form of restricted stock.
The guidance does not assume any future share buybacks or any additional gene K integration expenses.
I will now turn the call over to Paul.
Thank you Mike.
Please note that our fiscal 20 contains one less workday than in fiscal 19, one less day will negatively impact fiscal 20 total revenue growth by 40 basis points.
To illustrate the magnitude of the headwind using fiscal Nineteens annual revenue, one less workday equates to about $27 million.
One less workday also has a negative impact on operating margin Andy PX.
Fiscal 20 operating income margin will be reduced by about 12, and a half basis points in comparison for fiscal 19 due to one less day of revenue the negative impact on the margin occurs because certain expenses like amortization of uniforms and entrance mats.
Our expense on a monthly basis as opposed to on a daily basis, and we will have one less day of revenue to cover the expenses.
As Mike stated one less workday is a headwind of about 90 basis points on EPS growth and about a six cents drag on total EPS in comparison to fiscal 19.
Each quarter of fiscal 2000 contained 65 workdays in comparison to fiscal 19, our upcoming Q3 as fiscal 20, we'll have one additional day and our Q4 will have one less day.
Please keep the quarterly day differences in mind when modeling our fiscal 2000 results.
We have two reportable operating segments uniform rental and facility services and first aid safety services. The remainder of our business is included in all other.
All other consists of fire protection services and our uniform direct sales business first aid and safety services and all other our combined in presented as other services on the income statement.
The uniform rental and facility services operating segment includes the rental and servicing of uniforms, mattson towels and the provision of restroom supplies and other facility products and services. The segment also included the sale of items from our catalogs to our customers on route.
Uniform rental and facility services revenue was $1.47 billion, an increase of 5.7%.
Excluding the impact of acquisitions and foreign currency exchange rate changes the organic growth rate was 5.8%.
Our uniform rental and facility services segment gross margin was 46.6% for the second quarter compared to 45.3% in last year's second quarter and improvement of 130 basis points.
Operating income margin was a record 19.5% for the second quarter and it was 19% year to date.
Profit margins have strengthened for many reasons, including strong revenue growth and realization of cost synergies from the acquisition of GM Ken.
Our first data and safety services operating segment includes revenue from the sale in servicing a first aid products safety products and training.
The segment's revenue for the second quarter was $169.7 million the organic growth rate for this segment was 10.6%.
The first date segment gross margin was 48.4% in the second quarter compared to 48.0% in last year's second quarter, an increase of 40 basis points.
First date segment gross margins continued to increase with strong revenue growth.
Our fire protection services and uniform direct sale businesses are reported in the all other category.
Our fire business continues to grow each year at a strong pace.
Foreign direct sale business growth rates are generally low single digits and are subject to volatility such as when we install a multi million dollar account.
Uniform direct sales however is a key business for us and as customers are often significant opportunities to cross sell and provide products and services from our other business units.
All other revenue was $204.1 million an increase of 17.2%.
The organic growth rate was 16.5%.
A fire business organic growth rate was 9.6%.
Uniform direct sale business had an exceptionally strong quarter posting inorganic growth rate of 25%.
Growth was driven in large part due to the rollout of carhartt branded garments to a fortune 100 customer.
All of our gross margin was 41.8% for the second quarter of this fiscal year compared to 41.2% last year.
Selling and administrative expenses as a percentage of revenue were 28.1% in the second quarter of fiscal 20, and 28.6% in the second quarter fiscal 19.
Improvement was realized in many areas, including lower DNA labor expense as a percent of revenue.
Last quarter, we mentioned that medical expense as a percent of revenue spiked. It came back in line in the second quarter as we expected.
Our effective tax rate on continuing operations for the second quarter of fiscal 20 was 20.1%.
Stock based compensation positively impacted the tax rate.
As Mike stated earlier, the tax rate can move from period to period based on discrete events, including the amount of stock compensation expense.
Our cash and equivalents balance as of November Thirtyth was $226.5 million year to date operating cash flow increased about 66% from last year because of strong earnings growth.
And improvements in working capital, particularly accounts receivable inventories uniforms and other rental items in service and accounts payable.
Capital expenditures in the second quarter were $61.4 million, our capex by operating segments was as follows $48.6 million in uniform rental and facility services.
$10.8 million in first aid safety and $2 million in all other.
We expect fiscal 20 capex to be in the range of 265 million to $290 million.
As of November Thirtyth total debt was 2 billion in $738.4 million.
2 billion $538.6 million was fixed interest rate debt and $199.8 million was variable rate debt.
In the form a term loan.
At November 30 at our leverage was 1.8 times debt to EBITDA.
That concludes our prepared remarks, we are happy to answer your question.
Houston linked to ask the question is six Lymphoseek storm line is helpful. Keypad, if you're using your speakerphone. Please make sure mute function is turn off the lower single to return equipment again for star one to pose the question pause for just a moment until everyone. The opportunity to single for questions. Please go ahead.
Well I think our first question from Toni Kaplan at Morgan Stanley . Please go ahead.
Thanks, very much and good afternoon.
Yes pretty much on Monday.
It is pretty solid fee in the quarter, but only a modest 2% range for the full year.
Talk about your expectations around Cds, a broader macro and anything else that might be one time in the quarter or might reverse as we go through the year. Just just wondering why not and I think a range. Thanks.
And until a year speaking of revenue right now correct.
Yeah.
Yes, and so.
From a let let let's talk about the quarter, we had a very good quarter.
The.
The all of our businesses grew.
And in particular, our our direct sale business had a had a really nice quarter.
Tony you had asked a little bit about the macro first and I would say not a lot of change.
During the quarter, we did this.
Say at the beginning of the quarter that energy, we were starting to see a little bit of softness in the in the energy area, we did see a little bit of that.
During the quarter in fact, we had one fairly good size.
Customer in this space go bankrupt.
But I would say the other thing is industrials are a bit choppy generally speaking having said that.
Not a lot of change during the quarter. We are encouraged as we kind of think forward. We are encouraged that.
Weve it looks like we've made some progress in the USM CA and the China trade.
And we're encouraged by the movement, there and we look forward to getting those result.
Seems like we've seen a little bit of a steady.
Direction out of the fed on interest rates and so.
As we as we leave the second quarter I would say there are some encouraging signs.
But theres still a we're entering the election year, there still is a lot going on.
In terms of the noise in the in the marketplace and whether or not small businesses and other businesses will continue to invest.
And so we still look a little bit with caution.
As we as we think about the second half of the year.
As it relates to to the guidance look we had Oh, we had a very good first half of the year. Our partners did a great job in the years veers playing out generally.
As we expected we had we had growth of roughly 7% the organic growth of over 7% for the first half of the year.
But we also had some things that does that went our way.
I talked a little bit about this in the first quarter where.
Rental probably got a little bit of level year over year benefit in the first quarter and Thats certainly helped as we kind of we're finding the bottom last year in our rental business as we lap the the gene K acquisition. So we've got a little bit of benefit in the first half of their we talked about pricing being are incrementally positive in the fourth quarter in the first.
First quarter.
Maybe not quite as as up incrementally positive in the second quarter.
But certainly some some benefit in the first half of the year.
I would I.
I would expect that there will fall back into some of the pricing range. We've been in the last few years.
When you think about the direct sale business, we've talked about that we've referred to that a few times had a great year in the first half in the second half.
Our expectation is as of this business can be lumpy.
That will be flat to down in that and so just that alone is about 75 basis points of growth impact when you compare the first half to the second half.
My talk a little bit about the outlook on the macro and so.
As we think about the second half Fort worth thinking about the macro we're thinking about you know there are some things that really went well in the first half may not get all of that benefit in the second half.
Having said all of that look it's a are seeing workday growth of 6.2 to 6.8 and.
The year is shaping up pretty much the way, we expected it to and.
If we can if we can hit those kind of numbers, that's a really nice year for us.
That's great and just wanted to ask about buybacks really pulled back pretty dramatically in this quarter here.
Just wanted to get some color around how many shipping thinking about any sort of change can capitals Atlanta philosophy.
All right just why why it's very minimal buybacks. Thanks.
Yes, we do have we've got a the authorization of about 1 billion too.
And we look at that as we've talked about we look at that Opportunistically.
One thing you keep in mind is we are in the first week of December we made a $268 million payment related to our dividends and and we also had some debt interest payments. So.
We are back into CP in the month of of December .
But we'll look at the buyback opportunistically as we move through the rest of the year end.
Specifically to your question, we have not made any changes to the way, we think about capital allocation.
Thank you.
Right now taking this question from Hamzah Mazari Jefferies. Please go ahead.
Good afternoon. Thank you.
My first question is just on the Sep rollout.
Sort of just just any update there specifically where do we see benefits. Once that's regarding your grew a little bit next year is that going to be in organic growth through cross selling or do we see sort of as CNN income off any color as to benefited some off on got little model.
Hamzah, we're about 85% or the way through our S&P journey at this point in time. So we've made some good progress in the quarter and we're still on track to complete the project by the end of the fiscal year.
As far as benefits are concerned.
I think the benefits from S&P.
We're going to be kind of throughout the PML.
We've talked about some of them already on that.
That can be achieved by locations individually.
At our technology in the half the hands of the people providing the.
The services.
Better information at their disposal the ability for our.
Our accounting and finance people and operations people too.
Good data from the very back of house, all the way to invoicing and pricing with the customer, but then there are other benefits to that.
We believe will be.
You are benefiting the topline later on and more perhaps impactfully when the entire network is is in the system, but certainly we believe that putting the uniform rental business and our first aid business in the same operating system will foster more collaboration on more cross selling which will help you know the topline.
And just better as I mentioned earlier use of data.
Looking at our big large national accounts from city to city to city to do analyses and make sure that we're getting all the entitled revenue that we should pretty agreements make sure the pricing is appropriate.
For the contract so lots of opportunities, but I'm not able to quantify anything at this point in time.
As I said, we'll complete that rollout this fiscal year have more color next fiscal year for you.
That's very helpful and just to follow up question I'll turn it over on when you think about M&A outside of core uniform rental and the businesses you're in.
Whereas some of the metrics you're looking Eric I know you want to touch more businesses.
Hi, sooner Tropez does it have to be accretive to growth accretive to margin I know you guys. Good Frederick or long time ago on year on that business club sold.
We did see in peer that was part of our core.
Just any color as to metrics you can hear how to think about larger M&A.
Outside the core thank you.
Sure. We first of all we we look for B to B, we love the recurring revenue.
Nature of of our kinds of businesses.
Well based is is a preferred but it's not absolutely necessary as a key is what kind of service can we had to provide some some level of value to the customer.
So it's it that's that's the real key.
We wanted to be a we would want it to be an opportunity that can add value to many of our customers not just a small subset and we would want it to have a margin potential so.
You ask does it need to be growth accretive in margin accretive, we certainly would love it to be but but they're there really aren't that many out there we're looking hard for them.
But those are the kind of things that we will look for recurring revenue streams Kenneth benefit our current customers.
Is it a large opportunity for us or is it very narrow.
What's the service component.
Very helpful. Thanks, Thanks, a lot more.
Okay.
Well take the next question from enough Tonight.
Please go ahead.
Thank you. Good evening guys. My first question is just can you just walk us through wide the lower Capex assumption and then maybe just some context when you look at the over the next two to use a against malaria yield greatest investment needs.
Yeah, we.
You know generally we are.
Making our capex in terms of our.
Growth opportunities like new routes and and in adding capacity I would say we continue to add the routes. So in other words buying trucks and that is certainly important for us.
But as it relates to laundry capacity for example, a we've we've got some really interesting projects.
That are going on that that we think can help us out in certain cases, and and so we're seeing a little bit of a benefit.
Because of that I've talked a little bit about.
Hey, a gene K auto sort to that.
That's kind of a.
Acquires I auto sort.
That helps us in certain facilities and we're we're moving on on a rolling out some of those kind of things were looking at things like efficiency in the wash Sally and and then we certainly still have a little bit of the capacity that we that we have gotten from the gene cap was there.
So the combination of all of those things.
Has has.
Created efficiency opportunities for us.
Particularly in the in the production environment, and and you're seeing a little bit of that benefit in our gross margin.
Right and then just either in terms of gene key and maybe tied to the CP intimidation dash systems, I guess on HCP as well and use it.
Still too hard for you guys to quantify any revenue synergies that you might be getting from that deal.
Well keep in mind, we converted all GSK locations to either.
The since hospice, a piece system or the legacy since our system. So that we could fully get off of that system and that was completed.
Gosh.
Probably a.
Over a year ago and so the we still have some of those that need to get from the since our legacy system to STP.
And so this is we inserted those locations as it made sense into the safety rollout.
And so we're almost there just Paul said were 85% of the way there in total in terms of the conversion and we made good progress.
So we have a we have a pretty good handle on in terms of viewing the gene K legacy locations in much the same way that we're viewing.
The same toss locations.
And so we see some benefits there there's I would call them anecdotally, we need to get all the way on S&P before we really start taking advantage of the power of that information.
Alright, Thank you again.
Well take your next question from Andrew Steinerman JP Morgan. Please go ahead.
Hey, Mike you mentioned that you just treat gene K legacy locations like syntax locations I want to know about the inventory how much of the uniforms today are still the gene k., our uniforms and when you convert over and and introduce into cash out uniforms, which are presumably.
Better our uniform as gene K legacy customers, how they responded and has there been a price adjustments since they're getting better uniforms.
You're from an inventory conversion standpoint, we we are.
We're in the midst of that and knows those happen at such different times, Andrew So for example.
If we have a customer that Scott 10 wearers for example.
In legacy Gene K inventory is we may be in a style.
Where as they churn in other words, it as they have turnover and they replaced.
There there are open positions with new hires and we put them into a legacy gene K current garments, there's going to be a point in time, and which we run out of those governments, whether it's the style or the size and and that happens that's very different intervals, depending on the kind of got.
With that they have.
And so it is a customer by customer approach.
When they start to run out of when we start to run out of GSK legacy garments.
We will start to put them into cintas garments and generally that can be all at once because we don't want them to have different looks but but I, but as I said that it's a customer by customer.
Decision points based on the styles. So it's really hard to give you a full percentage because it is happening all over the country. We're not finished.
With that we're still working our way through gene K legacy inventory when they get on to send us inventory.
As you know pricing becomes a customer by customer conversation as well and there may be some where where we there is no change at all and we've put them in something that's a let's say a workwear type of other garmin, there may be others, where where we give them an opportunity to upgrade.
Into a carhartt garment for example, and in that case, there may be times, where we will increase the pricing ordered or adjust the pricing as it's a as it's necessary. So it is a customer by customer decision on when to convert and then it's also a customer by customer decision on what does that pricing and what does that.
Contract look like.
And do you think the customer recognizes that this in class uniform on average is a better uniform than the legacy uniforms. They had.
You know I can give you anecdotally.
The answer is yes.
We we need to be doing a pretty good job of showing why they're moving into a.
Sometimes garment and what are the features and functions of that new garment did maybe that it's softer if maybe just a fits a little bit better it may be that it's the fabric and breeders a little bit better and generally when we explain those kinds of features to the customer they get it and and they understand.
And it doesn't take very long for them to be in those garments to recognize that there is a quality difference.
Okay. Thank you.
Well take your next question from Gary Bisbee at Bank of America. Please go ahead.
Hey, guys, good evening and happy holidays.
But I guess a first first question from me just you know to the a uniform rental revenue slowed somewhat obviously in a much tougher comp, but but anything other than that I guess, you mentioned, one a little weaker energy anything other than that Youd call out in the sequential deceleration in the organic constant currency revenue growth.
Yes, I don't think if anything of note of real significance, but I would I would point to the three things I mentioned earlier, though a little bit of the the the absence of that lapping.
A little bit of the Choppiness in the energy and maybe industrials.
Generally and and pricing, maybe maybe wasn't quite as as a incrementally positive as we've seen in the previous two quarters I think those things kind of capture what we what we saw in the quarter still a good quarter for us, but but but I think those things capture.
Okay and then.
You've been asked for a few years about cross sell potential both within GSK and just more broadly yet again youre your your different businesses and and I realize you don't have the data.
And haven't provided real granular color, but can you give us any sense like that as your salespeople for the for the for the main businesses go out.
How often are they.
Targeting people that are customers, who your other businesses, how how important is cross sell in terms of how you're trying to compensate the different types of salespeople as it really something you'd focused a lot on to date or should we think that the data that S.A.P. will provide is really going to be the key to unlocking that more broadly.
So we do spend a lot of time with that.
Today Gary.
You know Rss ours are looking for opportunities we have are.
We go to market development of reps, who are who are looking at some of our more complex customers and looking for.
Up sale and penetration opportunities there and we've we've become a bit better at the cross sell between rental and and first stayed in fire I think we still have some.
Some some a ways to go there too to.
Take advantage of all of that opportunity, but we're starting to spend more time.
Then in the past so if it hasn't been important to us and and I think we've been doing a pretty good job it out over the last few years, including in the last probably 18 months with gene K legacy customers.
But having said that S&P will unlock some additional potential that is going to be something that should that should prove to be a nice opportunity for us.
Great and then just one more initiatives in so much next quarter or anything like that but as we think out over the next.
Few years in in sort of a normalized economy. How are you thinking about incremental operating margins. These days, what what's the potential they've been obviously terrific. The last few years, particularly as the as the JK savings have flown through but whats like a long term.
Target or opportunity there.
Yeah, we still like the we talk a lot about incrementals of 20% to 30%, we're getting pretty darn close to the bottom of that with our with our rental division.
But but you know as we continue to.
To get success with penetration opportunities to get success in some of the verticals that can be a even bigger types of customers with a with a service opportunity that's more efficient.
We think there are still opportunities and that incremental.
As we move forward, we think that incremental certainly isn't the 20 to 30 and and you know if we can if we can capitalize on some of those different things that we've talked about the penetration the sales into these customers with a maybe more efficient service aspects the capacity efficiencies we think.
We can get that.
That incremental into that mid twenties type of a neighborhood.
So the it's a nice opportunities it looks a the we look forward to.
Great. That's all I've got thanks.
Well take your next question from Andrew Wittmann R.W. Baird. Please go ahead.
Great. Thanks for taking my questions here, Yeah, I was looking at the to your growth rate stuck in your rental segment it looks like.
Becomes pretty proud at scene of 12.4 for the last two years, both for the first quarter into second quarter, but kind of breakthrough. The question you've talked about in the past, which is your sales force productivity.
You mentioned, the kind of the headwinds from the deceleration in the in the growth rate, but I was just wondering how the salesforce is performing for you I think it was not that many quarters ago, you said, even the GK people that you kept on we're producing at record levels.
Can you just give us an update like about what you're seeing out of them in terms of their ability to.
Gross new customers.
Yes, when we when we think about a total you know look we have one sales team and so that's sales team continues to perform well and they're doing a nice job of adding customers and and selling into existing customers their productivity levels are still.
This quarter was a little bit higher than last year in this quarter. So we're still making some some really nice improvements. So we are still very pleased with the sales rep productivity.
That's helpful and then sequentially.
Oh, sorry, then I guess I wanted to maybe Paul if you just help us a little bit on some of the other than the cost structure I think typically you've given a energy as a percentage of your rental segment revenue how much of a benefit was out and just any other details you could call out in the cost structure I think labor has been something that people in flag there would be maybe that would be something.
You address you mentioned health care that it's back to normal but anything else you can help us understand the moving pieces inside the margins I think it'd be helpful.
Yeah, Hi, Andy Energy was a 20 basis point benefit year over year flat sequentially. So I think thats.
You know if oil continues unit price per barrel and the second half where it is in the first half it will be it a little bit on that have a tailwind for us and the cost structure in the second half a labor Yeah, you know I would say overall in check we talked about.
Gosh was probably a year ago now about.
Certain areas of our.
Of our workforce, particularly in the production area, we were having some labor inflation and we made some changes. So we believe that that Ah you as behind us and we don't have to make any further adjustments there, but otherwise you inflation is you know it is is that normal I would say, it's something that we've been able to.
You know to deal with.
You know, it's certainly tight but side that you really hasn't prevented us from running the business and serving our customers Yeah and Andy when you when you think about.
Our gross margins for example.
We've seen some really nice and year over year improvement in this first half over the year and certainly the growth levels have been good and that helps so we're getting really nice leverage our salespeople are.
Productive and they're selling good profitable business and that's been good.
And you know over that we are we've done a nice job of capturing the gene case synergies, but what we're also seeing a little bit of is as we've talked about over the last few years.
There's a lot of inefficiency in running the facilities when you're going through a lot of conversion of of.
Incorporating gene K volumes into sentenced legacy plants and closing those plants and rebar coding inventory and and there's a lot of work that goes on there and really what we've seen in the first half of the year is.
We've captured those gene K synergies just as we wanted them to and we've seen some real nice up efficiency gains because there aren't quite as many of those projects going on there those are a little bit more in the past and and so are we used the time.
Mean for US has been kind of fortunate and good from the standpoint of when we were seeing a little bit of pressure in our production Labor. For example, we were also we're also making some synergies and capturing some synergies there too and and we've been able to to.
Get more efficient in this first half of the here and I think that's a little bit of what you're seeing.
Great. Thanks, I'll leave it there does.
Great well not taking this question from Scott Schneeberger on open. Please go ahead.
Good evening guys. Its Daniel on for Scott you discuss deficiencies earlier could you provide a little more perspective on some type of efficiencies you pursue on a go forward basis. Besides the route optimization and a little bit color on automation or processes and use that advanced technology.
How about is applied and where you could go there. Please thank you.
Sure, we Oh, we were always looking for them.
And and so when we think about efficiencies going forward.
I've talked a little bit about capacity, how how how can we.
Continue to get more efficient in terms of using our wash alleys some of that as automation I'm sorry of technology and some of that is a a is a six sigma like process improvement.
There are opportunities there, we still have a lot of route optimization to go.
That is both a little a little bit of technology, but just.
Customer touching and so we're we're.
We're being cautious in that regard we've talked about getting through the S.A.P. conversion.
And.
As we are able to then pull off of the legacy since Pos system, a bit that's going to create some efficiency just because we won't have duplicate systems, but also then.
Using that technology for things like sales rep productivity gains and.
Cross selling and penetration opportunities.
So that we do have a number of those different.
Efficiency opportunities as well as then just typically the six sigma processes that we're always working on and how can we get better and as a business changes.
Can we get more efficient in the way, we move product and through our plants and provide services. We're looking at all of those different things, but we think we've got some nice opportunities ahead.
Got it was helpful. Thank you switching gears, a little bit cotton prices went down in the first half of this fiscal year on year over year basis.
Could you. Please discuss how bad is impacting earnings I mean, I know historically smooth that out through a amortization, but how does that really impacting earnings presently. Thank you.
Not really any impact in the first half of this year.
We are.
As you mentioned it takes a while for that cotton price to two ripple through a into our PNM. If any we episode of garments, we have to bring the garments into our distribution center. We then ship them from a distribution centers out to our rental locations and at that point. They started an 18 month amortization.
In process.
So it takes a while and and then even when it doesn't get through.
We're we're generally smoothing that out as you said because we've got if we see a spike for a few months you might have 118th worth of that in the in one month, he may or it could have two or 318th worth of that it's got to be sustained movement in that before it really starts to hit us and keep in may.
Mind.
Continent isn't a a its not one of them more significant.
Pieces of our cost structure.
So if you think about our cost structure.
Our cost of rentals is you can think of it in three buckets. One is material costs. One is production or is this sort of running of our laundry facilities and the third is our service costs. So they're routing.
The cotton piece is then part of that material cost, but that material cost includes also the labor content facility garments. The freight on the garments the trim on the garments et cetera.
And so it really takes some sustained large movement in cotton before it really starts to impact us.
Yeah. That's helpful color. Thank you very much.
I'll take the next question from George Tong Goldman Sachs. Please go ahead.
Hi, Thanks. Good afternoon. Your revenue outlook is certainly improved from where it was a quarter ago. You discussed the macro factors that that are impacting them up but can you elaborate on from internal initiatives, where you're seeing traction that improves your revenue expectations for the full year.
Well there they are things generally, Georgia that that we've been working on for a while and that is we are looking to continuously.
Our focus on some of the verticals that have been really powerful for us. So for example, the healthcare vertical the education.
Government.
Hospitality those places where.
The sales are up a little bit more complex the purchasing decisions might be a little bit more complex and and we've made some really good progress in those areas and we we we still are in the early innings and think there are great opportunities as we move ahead.
And so those are areas that are really important to us.
Penetration I mentioned that we have been working more on the penetration opportunities I think we can get better and more opportunities ahead.
For that area as well and that penetration is both.
Better coordination between our businesses, but also taking advantage of of our newer products and making sure. We're getting things like schuff works in front of all of the right decision makers and so it's really continuing to.
Moved forward with our what we believed to be our unique products.
That create opportunity in the marketplace.
We are doing the same kinds of things in our first aid safety business, where we are looking for those penetration opportunities product adjacent these are great and and continue to look for larger national type.
Customers as well in both first state in our fire businesses. So we're doing all of those things we've made some really nice progress and.
You know, we think we've got a really nice year.
Ahead of us as Weve as we move into the second half.
Got it that's helpful. Your gross margins expanded about 110 basis points year over year in the quarter or can you discuss how much pricing contributed to this margin expansion and how sustainable pricing increases are at the current pace.
Oh.
You know pricing certainly has an impact the I mentioned that it wasn't quite it's incrementally positive this quarter as it had been in the previous two quarters and so I would say the the pricing is is.
Somewhat in line with what we've seen over the last couple of years absent the last couple.
Couple of quarters.
You know generally we've been able.
To to win when we can show value and when we can have the right conversations with our customers a generally we've been able to get some pricing and I don't see that necessarily changing but but I would as it relates to them the margin opportunity in the margin improvement it's.
Really more about the the growth create leverage it creates efficiencies in our plants when we grow in our rentals, but does business in particular, where we don't use capacity.
Like our restroom in hygiene products.
We effectively get some really nice leverage and and get more efficient with the capacity and in addition to that we pulled out a little bit of inefficiency in the business. So.
More of the gross margin improvement it relates to the revenue of the business the leveraging and the efficiencies that we're able to gain.
Pretty helpful. Thank you.
I'll take the next question from coming like say at Credit Suisse. Please go ahead.
Great. Thanks, Hey, I'm, just a default on the guidance a little bit I know last year. There were some severe weather in the third quarter that was kind of unexpected.
Do you have any kind of.
Kind of just thoughts on or any.
Allowance for them in the Q3 God. We now obviously, we should be incorporated into the full year or how are you thinking about just the weather impact as we work our way through the back half a year.
Yeah. Good good question last year in the third quarter, we talked a little bit about the weather and the holidays.
It's hard to predict the weather.
And and so we we are I would say, we're not trying to build in any particular weather pattern as it relates to the holidays one of the things we talked about last year was was.
Christmas and new years falling on a Tuesday, which was which was the first time in a number of years.
And a you know that has an impact this year the holidays, both fall on Wednesday, and and the last time they fell on a Wednesday I think it was like our fiscal 14 years, what's been a bit of a have a time period since we've had a Wednesday and sorry, if you think about our weekly flow.
Oh volume you can you can think of it as a a bit of a bell curve.
Monday, Mondays and Fridays I would call our power, maybe our lower days.
And our <unk> as you go from Monday Tuesday, the volume starts to build because customers are just more they're more easy to see et cetera, Wednesday tends to be one of our heavier days and then you start to come back down as you go through the rest of the week.
With when by the holidays, both being on a Wednesday this year, we art.
Considering that we will have any year over year benefit because of the comments. We made last year. During the holidays were kind of thinking that that look we're going to still have.
That holiday disruption a little bit I don't think it necessarily will be a drag on gross but it certainly doesn't going to help us.
With an easier comp.
Super Helpful and then just.
You know the margins again really nice and if I have a right it looks like kind of the other category.
At least outpaced our estimates and in or they can become a uniform sells for sure lower margin is there anything else in it it's helped boost the gross margins overall, despite the mix.
You know we are continuing to make improvements in the fire business.
We really like that business in the in it and it has performed very well in the second quarter ended the first half and as we as we gain as we get bigger and we gain scale and we let rule that revenue growth allows us to.
Leverage our infrastructure a bit better it creates more dense routes and that creates some margin opportunity. We've got a long way to go.
But but certainly I've seen some nice performance in the fire business and certainly the heavy volume in our direct sale business was a bit of help too.
Super Thank you.
Let's take a next question from Seth Weber at RBC capital markets. Please go ahead.
Hey, guys. Good afternoon, most most of the questions asked and answered, but I wanted to see if we could dig into your you've made the pricing.
Comments, a few times now just a little bit less robust than maybe what we saw in the first quarter is or anything you'd call out is it isn't a mix issue or the comps just getting harder or is there something going on from a competitive front that you would you would highlight thanks.
I think it's a I think it's a bunch of a different things Seth I think it's a there is a little bit a mix going on.
You know.
Yeah, we we've we've had some good performance.
In a in a few quarters in a row now and if you know that that that kind of outperformance isn't a sustainable in the long term and you know I don't think it's anything that we are concerned about but but just something a little bit of a maybe a notch below where we have seen in the low.
Last couple of quarters made up of a you know a number of different things.
Okay, and then just slot on working capital has been you know frankly better than what we would have thought given given the growth trajectory and they can do.
Do you think the working capital can continue to be just a little bit better than you know normal.
You normally I think you'd expect to see little bit more usage here.
Hi, guys or something you're you know you'd call out that's really helping out or can we expect that to continue thanks.
Well look look from a working capital standpoint, we we certainly have been in a period of disruption over the last couple of years as it relates to our accounts receivable.
Converting to systems as it relates to our inventory and shutting down de sees opening new Dcs converting a lot of a volume.
And you know, we're we're starting to get.
Some of those inefficiencies and disruption that behind us and so for example in accounts receivable.
We've seen a.
A nice improvement year over year, and that's that's part because we've we've gotten a little bit of that disruption behind us there still is some system conversion to go.
But we think we think we're getting.
A little bit better and better and more efficient at it.
If you think about the.
Oh, it's also worth two to a cash flow for a second when you think about our operating.
Cash flow.
Was it was pretty strong this this quarter and really for the first six months of the year.
And our conversion of net income to cash.
Operating cash flows been been over 100% I would expect that that's going to continue for the second half of the year.
Free cash flow was really strong and I think that's gonna be strong for the rest of the year and so I think more than anything Seth it's getting a little bit of this and disruption of two system conversions, a new business conversion, a little bit of that stuff behind us.
But as we've talked in the past when when we're growing.
Well generally going to use some working capital in other words were going to see a our continued to increase we're going to see generally speaking inventory and in service inventories grow overtime.
Inventories a little bit different.
From a standpoint of we do have opportunities there were some of those opportunities will create more inventory.
For example, if we believe we can have enough volume to bring new products into our distribution center that may create new inventory.
However, as we get more efficient and and you get the GSK conversion behind us that's going to create some some.
Forecasting and supply chain opportunity. So there's gonna be some ups and downs in that in that inventory line item, but generally.
The performance has been good we've gotten a little bit of F. disruption behind us, but were generally going to be a user of working capital.
Right. Okay Super helpful. Thank you guys have a good night.
Thanks.
It appears there no further questions at this time its turn conference back to the speakers. Please go ahead.
Well, thanks, very much for joining us Tonight.
We will issue our third quarter financial results in March.
And we look forward to speaking with you again at that time, and we wish you all happy holidays.