Q4 2019 Earnings Call
Bigger Santa Barbara probably joining please.
Since our last earnings.
Regarding your name a spelling please.
Conner CEO and are.
Mcdaid M.C.D.A.D.
Your phone number three code.
Two one too.
960 3658.
And your company.
Its era A.I.E.R.A.
<unk> right.
Hi, just a moment.
Thanks.
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So are you solving for someone.
My subbing.
Are you talking anyone else's place.
They have reserved for today's call.
No I Didnt reserve a place I'm just listening in as a personal investor.
Okay sounds good one second.
This is for Santos correct.
Just verifying foreplay should there yeah, Okay Harry again.
[music] the uniform rental and facility services operating segment was 6.8% and the organic growth rate for the first aid and safety services operating segment was 10.7%.
Gross margin for the fourth quarter of fiscal 19 of $823.6 million increased 9.5%.
Gross margin as a percent of revenue was 45.9% for the fourth quarter of fiscal 19 compared to 45.1% in the fourth quarter of fiscal 18.
Uniform rental and facility services operating segment gross margin as a percent of revenue improved 100 basis points from last year's fourth quarter to 46%.
And the first aid and safety services operating segment gross margin percentage improved 70 basis points to 47.7%.
Reported operating income for the fourth quarter of fiscal 19 of $314.4 million increased 18.4%.
Operating margin was 17.5% in the fourth quarter of fiscal 19 compared to 15.9% in fiscal 18.
Operating income was negatively impacted by integration expenses relating to the gene K acquisition by $900000 in the first fourth quarter of fiscal 19.
And $15 million in the fourth quarter of fiscal 18.
Excluding the integration expenses related to the gene care acquisition operating income increased 12.4% and operating margin improved 80 basis points to 17.6% in the fourth quarter of fiscal 19 compared to 16.8% in the fourth quarter of fiscal 18.
Reported net income for continuing operations for the fourth quarter of fiscal 19 was $226.2 million and reported earnings per diluted share from continuing operations for the fourth quarter of fiscal 19 were $2.06.
Reported EPS was negatively impacted by integration expenses related to the gene K acquisition by one cents in the fourth quarter of fiscal 19.
Excluding the gene can acquisition integration expenses net income dollars increased 13.5% and net income margin was 12.6% compared to 12% last year.
EPS increased 16.9%.
We are pleased with these fourth quarter results, which concluded a very successful year.
A year ago in our prepared remarks, we shared our our expectations for fiscal 19.
We provided revenue and earnings per share guidance, we've committed to an estimated amount of synergies from the gene K acquisition and the continued conversion of operations to a new ERP system.
We shared our excitement for with returning to our debt to EBITDA target ahead of schedule and we committed to returning to our historical priorities for deployment of cash.
We are happy to report that we not only achieved but exceeded these expectations.
For the ninth consecutive year, our organic growth rate was in the mid to high single digits. This means we have been able to grow consistently in multiples of GDP and employment growth.
Due to our strong growth innovative products and services and hard work and dedication of our fleet partners. We moved up 41 places to number 459 in the Fortune 500 ranking.
For the ninth consecutive year, we achieved double digit earnings per share growth from continuing operations when adjusted for onetime special items.
We paid an annual dividend of $220.8 million that increased 26.5% over the prior year.
We've now increased the annual dividend paid to our shareholders for the 35th consecutive year.
And the company deployed excess cash by purchasing 4.8 million shares of company stock for a total amount of $953.4 million.
Fiscal nineteens achievements were especially noteworthy given that they were accomplished in a period of extreme change management in which we were integrating our largest acquisition to date and implementing a new enterprise resource planning system, namely safety.
The integration of a very large acquisition required the extra effort of everyone in the organization.
Our partners executed our playbook and made the right adjustments when necessary.
Better revenue retention and more cost synergies have resulted in a higher return on investments and plan.
In many respects the implementation of an ERP system is like an integration of a very large acquisition. It impacts hundreds of operations and requires the involvement of experts from all departments of the company.
The conversion of each operation to S&P has an eight month process of planning changing business processes and employee mindsets training and certification and customer communication.
And implementing S&P, we're moving from a decades old platform to new technology that provides powerful information and data designed to help us improve our business.
Through fiscal 19 about 65% of the operations are now in S&P, we will complete the rollout to the remaining locations in fiscal 20.
Since our story is one of growth we have grown both revenue and profit 48 of the past 50 years, the only exceptions, where the great recession years.
Our successful financial Formula is organic revenue growth in the mid to high single digits.
Double digit earnings per share growth.
Significant cash generation and prudent deployment of excess cash.
Our priorities for uses of cash are investing in the business for growth.
Acquisitions dividends and share repurchases.
Our opportunity for continued growth is great we have a product or service to help nearly every business get ready for the workday.
This is evident in a diverse customer base spread over numerous verticals in both services, providing and goods producing sectors of the economy.
All businesses care about image safety, cleanliness or compliance and businesses continue to outsource to concentrate on their core competencies.
We are well positioned to continue to benefit from these tailwinds.
We enjoy unrivalled scale.
Innovate our product and service offering.
Invest in technology and build our brand.
Since has possesses a numerous competitive advantages.
But our greatest one is our culture.
This year since celebrates our heritage 90 years in the making.
The sentence culture is the foundation upon which the company has built and it is the reason for the company's success.
Other hallmarks, including positive discontent and competitive urgency drive us to innovate and stay out in front of the competition.
The Santas culture is why even after nearly a century of success. We believe our best years are ahead.
Before turning the call over to Paul for more details I'll provide our fiscal 20 expectations. We expect revenue to be in the range of $7.24 billion to $7.31 billion.
We expect EPS from continuing operations to be in the range of $8.30 to $8.45.
Note the following regarding the guidance.
The growth rate at the revenue guidance range is 5% to 6.1%. 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 5.4% to 6.5%.
One less workday also has a negative impact on EPS, reducing it about six cents, which is a 90 basis point drag on the EPS growth rate.
The guidance assumes an effective tax rate for fiscal 20 of 21% compared to a rate of 19.9% for fiscal 19.
The higher effective tax rate in fiscal 20 negatively impacts our EPS growth about 180 basis points and total EPS by about 14 cents.
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.
The guidance 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.
It does not assume any future share buybacks any potential deterioration in the us economy or any further specifically identified gene K integration expenses.
And lastly, the guidance does not does include the impact from the adoption of the accounting standards update 2016, two on leases.
With the adoption significant changes to the balance sheet will occur, we expect assets and liabilities to increase in the range of $160 million to $185 million.
However, we do not expect any material effect on the PML for the cash flow.
I'll now turn the call over to Paul.
Thank you Mike.
Please note that our fiscal fourth quarter contain the same number of workdays as the prior year fourth quarter.
Looking ahead to fiscal 20. Please note that there will be one less workday than in fiscal 19.
One last day will negatively impact fiscal 2000 total revenue growth by 40 basis points.
To illustrate the magnitude of the headwind using fiscal Nineteens annual revenue one less work day equates to about $27 million.
One less workday also has a negative impact on operating margin and EPS.
Fiscal 20 operating income margin will be reduced by about 12, and a half basis points in comparison to 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 and comparison to fiscal 19.
Each quarter of fiscal 20 will contain 65 workdays.
In comparison to fiscal 19, the fiscal 20 Q1 will have one less day.
Q2 will have the same number of days Q3, we'll have one additional day and 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.
Reform rental and facility services, and first aid and safety services. The remainder of our business is included in all other.
All other consists of fire protection services, and our uniform direct sale business.
First aid and safety services and all other are combined and presented as other services on the income statement.
Uniform rental and facility services operating segment includes the rental and servicing of uniforms mats and towels and the provision of restroom supplies and other facility products and services.
The segment also includes the sale of items from our catalogs to our customers on routes.
Uniform rental and facility services revenue was $1.43 billion, an increase of 6.4%.
Excluding the impact of acquisitions and foreign currency exchange rate changes the organic growth rate was 6.8%.
Our uniform rental and facility services segment gross margin was 46.0% for the fourth quarter compared to 45.0% and last year's fourth quarter.
An improvement of 100 basis points.
Energy expense as a percentage of revenue was 2.4% compared to 2.55% in the prior year quarter.
We are pleased with the gross margin expansion and our ability to overcome wage pressures and tariff impacts.
Our first aid and safety services operating segment includes revenue from the sale and servicing of first aid products safety products and training.
This segment's revenue for the fourth quarter was $163.5 million.
The organic growth rate for this segment was 10.7%.
The first aid segment gross margin was 47.7% in the fourth quarter compared to 47.0% in last years fourth quarter.
An increase of 70 basis points.
First aid segment gross margins continue to increase with strong topline growth.
As our volume grows we can negotiate better pricing from vendors growth also enables us to improve route density producing gasoline and diesel costs and enabling our service teams to spend more time, serving and upset.
Our fire protection services and uniform direct sale business.
Businesses are reported in the all other category.
Our fire business continues to grow each year at a strong pace.
Uniform direct sale business growth rates are generally low single digits and are subject to volatility.
Such as when we install a multimillion dollar account.
Uniform direct sale. However is a key business for us and its customers are all off and significant opportunities to cross sell and provide products and services from our other business units.
All other revenue was $201.8 million an increase of 12.7%.
The organic growth rate was 11.6% and was driven by 14.3% organic growth in the fire business.
All other gross margin was 43.7% for the fourth quarter of this fiscal year compared to 43.6%.
For last years fourth quarter.
Selling and administrative expenses as a percentage of revenue were 28.3% in the fourth quarter of fiscal 19 and 18.
Lower labor expense as a percent of revenue was offset by increases and other expenses, including stock compensation insurance workers compensation and medical.
We are self insured and therefore subject to some volatility in workers comp and medical expense from quarter to quarter.
Our effective tax rate on continuing operations for the fourth quarter of fiscal 19 was 21.7%.
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 May 30, Onest was $96.6 million.
Operating cash flow in the fourth quarter of fiscal 19 increased 31%.
From the amount of operating cash flow in the fourth quarter of fiscal 18.
Capital expenditures in the fourth quarter was $68.9 million, our capex by operating segment was as follows.
$54.7 million and uniform rental and facility services.
$9.6 million in the first aid and safety.
And $4.6 million and all other.
We expect fiscal 2000 capex to be in the range of $280 million.
Two $310 million.
As of May 30, Onest total debt was $2 billion $849 million $2.537 billion was fixed interest rate debt.
And $312 million was variable rate debt in the form of a term loan and commercial paper.
At May 31, we were at our targeted leverage of two times debt to EBITDA.
That concludes our prepared remarks, we are happy to answer your questions.
Ladies and gentlemen, if youd like to ask a question at this time. Please press star one on your telephone keypad, if you're honest speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again for questions. At this time. Please press star one now.
And our first question will come from Manoj Patmax with Barclays.
Hi, This is actually Greg, calling and I was just hoping to get an update on the Gn case synergies in terms of.
Where we were exiting 2019.
What we expect in 2020, and how you guys are feeling about potential sources of upside going forward.
We finished fiscal 19, a little bit over $100 million for the year of little bit better than we expected at the beginning of the year.
And I would expect that in fiscal 20, we'll get to the neighborhood of $135 million, which is right in the middle of the range that we guided to three years ago, when we announced the GSK deal. So.
We feel great about achieving the synergies we initially set out to do.
If we can get to that 135 in fiscal 20. That's a year ahead of schedule, we had talked about a four year plan and and so we we feel really good about.
About achieving that.
The lifting the heavy lifting that's left.
<unk> continues to be the route optimization.
That will continue in fiscal 20, that's as we've talked about over the last few years thats not a source of significant synergies.
We will get some energy benefits as we eliminate to.
Mileage on our routes, but but we certainly are growing and need to continue to add capacity on routes.
So all in all Greg we feel great about the about where we are in that TNK integration.
Okay that makes sense and then I also wanted to ask about.
Natural adjacencies out of your outside of what is the core business.
Currently.
Seems like we're getting towards the end of some of the heavy lifting on the integration and the S&P implementation.
And leverage is pretty pretty reasonable at this point I'm just wondering if that changes how you guys think about potentially going after some of these.
Markets, and what kind of markets that could potentially be thanks.
Well we.
I would say this we I mentioned little bit my prepared remarks that that we look for opportunities in image safety cleanliness and compliance and those are some some pretty good umbrella has to be covering for our customers and there are a lot of opportunities there.
As as we've seen over the years.
We have had product adjacent season, all of our businesses and we're continuing to look for those under those four umbrellas that I mentioned and certainly we're looking for other things that may also be included.
Under those umbrellas that could be possibly a different.
Ralph structure or what have you.
But we're being disciplined and we want to make sure that there is long term value that there is a big market opportunity for any any new type of.
Of product to Jason C or business, we certainly as you mentioned, we are at our two times leverage.
Kind of.
Goal and we've got a strong balance sheet and so we're going to be looking for opportunities to deploy that cash in and certainly acquisitions and other investments in our product lines are right at the top of our list. So we will be.
We'll be looking for opportunities.
Our next question will come from Toni Kaplan with Morgan Stanley .
Hi, Good afternoon, I wanted to get a sense of how you're thinking about the economic and employment outlook and basically what you're hearing from your customers right now in terms of their propensity to spend going forward. You know just some some background on the on the industry that would be great.
Well, we we feel pretty good about the macro still.
You know the environment's still feels pretty conducive to sell new business to continue to penetrate then and.
You see with our fourth quarter.
Our revenue results as well as the guidance that we've given that we feel pretty good about the momentum.
That we have in the business and that will continue into our fiscal 20.
We we look at GDP.
For our COVID-19 still above.
Expectations are still above.
2% think about the last nine years, that's the neighborhood in which Weve.
Performed and we've had a pretty good nine year period.
Where we have grown in excess of that GDP and employment. So we still like the macro environment in the in the last quarter.
We've seen just under 500000.
Jobs being created in the last six months a million in the last two year $2 million and so the job growth is has has continued to be pretty good.
As well, so Tony we likely environment and as you can see by our fourth quarter and our guidance.
We like the momentum in the business.
That's great and then in terms of margins, how should we be thinking about expansion across the segments in the upcoming year as and then additionally.
How should we be thinking about incremental S&P costs over next year.
So from a margin perspective, our guidance would imply something in the way of of low to mid Seventeens as a company.
And we're certainly striving within each of our businesses.
To grow margins and that's our expectation.
That.
That margin.
Expectation for fiscal 20 would include some pretty good incrementals.
As a total business and.
And so we continue to look for opportunities and and expect improvements in that from an S&P cost perspective, we'll continue to roll that.
System out this fiscal year, and we've talked about some of those rollout costs rolling off after fiscal 20.
Thats been somewhere in the let's call it $10 million to $12 million, because weve talked about S&P costs from a few years ago, increasing about 25.
About half of which has been.
<unk> costs that are related to the roll out whether it's training consultants et cetera.
So we do expect that some of that will roll off in fiscal 21.
Thank you.
And next we'll go to Kevin Mcveigh with credit Suisse.
Great. Thank you, Hey, really nice job the organic growth in the fire business to 14.3% was there anything in there in particular, the kind of drove that and then just really really really nice.
Margin expansion can you give us a sense of how much of a headwind kind of the tariffs and wages were because obviously, we're able to really offset that nicely.
That Kevin It's Paul I'll talk about Hey, Byron.
Mike on the tariffs, but died in terms of fire yeah. The organic growth was strong at 14%.
But we continue to expect out of that business organic growth of 10% or a little bit better.
So very good execution in Q4.
But that's kind of par for the course for the fire business of late so nothing specific to really call out.
But we just continue to do a great job of winning business.
We have a very you know.
Professional aggressive sales force and kind of leveraging our service capabilities that.
We have and the uniform rental in on our experience is there to the fire business and that.
Very professional service oriented business is on the service side and so we expect that strong organic growth to continue.
Kevin from a from a tariff standpoint, there certainly has been a lot of noise.
In the in the tariff environment and.
But I would say.
Certainly a little bit of impact not a lot.
The noise around Mexico kind of came and went.
China.
While we have seen a lot of noise and seen some tariffs we have not been to affected by the first couple of buckets of those tariffs.
But but.
We're not immune to.
Two two additional chair tariffs that might happen.
We have to we have to stay ahead of those things and so we're we're seeing a little bit of it.
But theres, probably more noise than impact from a labor perspective.
We have we have certainly seen some impact to market by market, especially.
I wouldn't say that it's been significant.
We we do.
In our production or our plants environment, we do see a little bit.
More difficulty in hiring people, but but generally speaking the.
The pressures that we've seen have been.
Not significant and and we've been able to deal with them quite well. So far we're certainly going to need to continue to keep our eyes on all of the tariff.
Information, that's going on though as we move forward.
Super really nice job.
Thank you.
Our next question will come from Gary Bisbee with Bank of America Merrill Lynch.
Hey, guys. Good afternoon, I guess, if I could go back to margins in the margins implied in the guidance I think if we back out the margin benefit from the tail that gene K synergies and also the drag from one less workday. It doesn't sound like there the guidance implies a whole lot of margin expansion outside of the from those two factors. So I know you tend to have some conservatism in how you guide, but is there anything else you'd call out that would lead to less operating leverage in fiscal 2000.
No and quite honestly, Gary I'm, not I'm not sure that.
And I would agree I think.
If you think about that margin improvement that's.
That's right.
Let's call it low to mid Seventeens on compared to a 16 seven.
For fiscal 19.
Would imply.
The mid point roughly incrementals.
Right around 30% Thats at the high end of where we've talked about.
Being if you strip out those incremental synergies you are still above 20% at the midpoint. So we feel we're right where we want to be with those with those operating margins and.
And we do expect continued improvement even without the synergies, but but.
Inclusive of the synergies.
We like the margin expansion quite a bit.
Keep in mind.
Gary keep in mind that.
When we compare if you're backing from Aes, we've got a 14 cents headwind in the higher tax rate than in fiscal 18, and then as you mentioned, we've got the six cents headwind from the one less workday. So so if you're backing in from EPS, you've got to keep in mind. There is a 20 cents headwind.
Yeah, I guess I was just doing you said 35 incremental million incremental savings that's 50 basis points and then that's offset by 10 or 15 from the from the one less workday. It it's sort of like half of that margin, but it but I guess I guess your points fair that.
The other half is still pretty good expansion. So so that's fine.
Yes, I guess I just got I was wondering I wouldn't say from a.
From a synergy standpoint, Gary I would we think about it as about 105 to 135, so about a 30 30 million dollar improvement.
Okay, all right fair enough and then on Etsy Asap.
You know I did a two parter you've you've I guess, you said your 65% of the way through the through the network rollout at this point that you've talked about two benefits. The one you're most excited about is just the information, allowing you to cross sell and run the business better how is that playing out you know once once you've got.
One of your facilities that is up and running is that pretty quick or is there a meaningful learning curve and I guess, what I'm really trying to get at is are you beginning to benefit yet from the rollout to date or should we think of it more as a future as a future benefit you know in later this year, maybe even more so into next year.
Thanks.
Sure I I. The if there is a learning curve no no question about it this is a.
This is a system that is heavily data dependent and we have to change our business processes locally.
To be able to use that system. It most efficiently. So there is a drag in terms of.
We talked about an eight month planning process prior to implementation there is also.
A period of time, afterwards, where we're getting efficient that using the system. So it is a it's certainly as a process and a lot of change going on.
But from a from a local perspective.
I think we are seeing some incremental benefits like new portable route computers for our SS ours and so there are some incremental.
Benefits that are probably more on the minor side I think from the ability to manage the information.
We would typically do that at greater than a one location at a time type of a of a look and so the more we get on them. The the more we can begin to to look at the different regional groupings and.
And take advantage of the power of that information. So I think most of that is going to come as we move into 21.
And 22.
Great. Thanks, and then if I could just sneak in one quick cleanup numbers that you said last quarter you expected like in the cadence of 19 that the Q1 tax rate to be a lot lower he is his last year's number a good ballpark or should we think it's it's.
Higher than that.
But but still much lower than the rest of the year. Thank you.
Yes, you're right Gary it will be it will be quite a bit lower I would probably think of it in terms of a kind of a.
12% to 13% type of of a range and a lot of that will will depend on.
The the level of stock compensation benefits based on the on the price of our stock the performance of the stock, but you're right. It will be a much lower than the rest of the year.
Thank you.
Our next question will come from Blake Johnson with Goldman Sachs.
Hi, good afternoon, Thanks for taking my question.
Regarding your revenue guidance, how much of the growth do you expect to be driven by further penetration of the non programmer market versus headcount growth at existing customers and can you discuss traction in penetrating underrepresented verticals, such as healthcare and industrials this quarter.
Sure so so.
For fiscal 20.
Our new business efforts are generally the driver of our of our revenue growth in all of our businesses and we like the opportunities there, particularly in that no programmers space.
We can get to that no programmers space.
With our unique garments with our unique garments solutions like our scrub.
Systems.
And and we think Theres a big opportunity there. So that we expect that to continue to drive the growth like it has.
For years past, but the penetration remains good its its when we can provide a good product and.
Articulate the value to our customers we they they certainly have shown.
That they're willing to spend.
So that certainly will be important for us, but it's led by the new business efforts from a fourth quarter perspective, those underpenetrated verticals continue to perform very well.
Healthcare education and government sectors.
They they continue to perform very well we are focused on those areas, particularly with our sales.
Efforts and we're encouraged by what we have seen in 19 and expect good things out of those verticals also in fiscal 20 and beyond.
Great that's helpful.
And then regarding GE and Kay.
No one of the strategic benefits was to drive higher penetration of ancillary products to legacy Gentech customers.
Can you discuss any progress made here.
Maybe the current percentage of cross selling between various lines of business or or any other metrics there would be great.
We certainly have made progress in fiscal 19 in terms of some penetration it's hard I'm not going to provide any specific penetration because so much of that volume is intermixed with.
Legacy Santas volume.
However.
We certainly have seen that that our penetration has been has been strong.
Our hygiene.
Growth has been strong for the year and and so we are encouraged and believe that weve.
We've made some good headway there and expect to continue that in fiscal 20.
But.
Yeah, I would say overall, we're pleased.
Great Thats helpful. Thank you.
Next we'll go to Andrew Steinerman with Jpmorgan.
Hi, how about it and just a quick comment about client retention levels in any changes year over year and my second question is the pricing for <unk>.
New accounts, you know how does that.
Seen any upward movement in recent years.
Andrew It's Paul I think in terms of retention I would say that really no significant change.
In our business you know, it's been roughly about 95%.
And that's that's still where it's at where it was last fiscal year and that's what we still expected to be of course, we're always working on improving that and there are opportunities but.
I would say nothing significant to note.
In terms of pricing.
I wonder what kind of business is very.
For new accounts hi.
You know Andrew it's a it's a pretty competitive environments still out there and I'll give you. An example, you know when we're when we're out there selling workwear for example.
Our customers have lots of options and.
And and so there is a retail option, where where we're seeing billions of dollars being spent at retail.
Large retailers were seeing direct sale options, where are those competitors can design and manage programs and we're seeing the rental option.
As well, so our customers have alternatives and options and a and so we have to.
We have to continue.
To innovate and create good garments and other products, we've got to be able to articulate the value of what we do versus a retail environment versus a direct sale program and and we've got a follow through on a great service. So there is a point Andrew is our customers still have lots of options.
The competition is certainly out there and and is available to them and we've got to make sure that we are.
Providing the right value and so all of that competition.
Keeps a it's a bit of a governor on what we can do with pricing and so while we are looking.
As for the best price and we sell profitable new business.
There's certainly as competition that keeps that pricing.
In a in a bit of a tighter range.
Okay. Thank you.
Next our question will come from Seth Weber with RBC capital markets.
Hey, good afternoon everybody.
I wanted to ask about the the big share buyback in the fourth quarter you know in your in your prepared remarks, you kind of listed share buyback as I think third or fourth in your pecking order. So.
I mean is this just a function of you couldn't find acquisitions that you want that you liked or valuations just stretched above what you're willing to pay are you can you just sort of.
Characterize why the buyback was so strong in the fourth quarter relative to kind of your your pecking order. Thanks.
Sure we.
We are pecking order is just as we said and we are certainly looking for opportunities.
But.
I'll tell you that set our cash flow was really good.
In the in the fourth quarter, our cash flow from operations was just under $400 million in the third quarter. It was $325 million. So 750 $725 million in the second half of the year. So cash flow has been really good and and look we like to put that to work.
We would love could be we have continued to invest in the business. We would love to find acquisitions, we are aggressively working on on those but.
We can do with the buyback that we just did in the fourth quarter and still.
Do.
Execute on a large acquisition if it became available so it's a little bit opportunistic we like the momentum in the business.
The average of those.
The average buyback.
Was something in the way of.
Just under $220 million for the fourth quarter.
And.
Based on where our stock sits today.
It feels like a pretty good move for us. So I think it's opportunistic we'll continue to look at it this way.
But we certainly love investing in the business and we love to make acquisitions as well.
Okay. That's fair. Thanks, and then just maybe just a comment on the on the S. DNA in the fourth quarter was kind of flattish year to year you did mention some.
Some extraordinary costs, so I think.
You know that offset the lower labor. So how are you thinking about SGN as a percentage of revenue for next year do you should you see some leverage there.
Sure to go down as a percentage of revenue. Thanks.
We do we certainly do.
If you think about the fourth quarter.
But one of the call outs that Paul made was our stock compensation expense.
Our our stock continues to perform very very well and we love that.
But but it does result in greater stock comp expense. It was higher by about 30 basis points than last year when we have.
Good stock performance, we generally will also get a lot of stock option exercises, which we had in the fourth quarter, which was why are so our tax rate was a little lower than guided.
And when we have those exercises because they are non qualified stock options. There is an employer portion of payroll tax and so when you combine those things, it's a little bit of a headwind.
We we we don't mind it because of the stock performance, but it was there for the year.
Our equity and it was down 30 basis points and we certainly do expect to get leverage in fiscal 20 and beyond.
That doesn't mean, it's going to happen every quarter, but certainly over the course of the year we expected.
Okay. Thank you very much guys appreciate it.
Okay.
And next we'll go to Scott Schneeberger with Oppenheimer.
Hi, Thanks, very much and good afternoon.
I have three but a couple may be quick and easy.
First one the way you guys have side the synergies it's been more in a time period of achievement than it has been now any change to the absolute level and you said obviously the route optimization is the last big piece that yeah.
That yeah.
Isn't going to be Super impactful. So I guess the question I'm getting at is is there potential upside to the 131 worthy once we get out a year from now or is this is probably going to be it for the way you guys discuss it.
Well.
Two things first of all.
The upside I I've I've mentioned, a few times in the past, we think is coming will come from our sourcing.
Environment as we kind of.
Combine the the Gn case spend legacy GSK spend in our spent we have seen some of that heavy lifting that is rolling into our PNM and we'll continue to do so in fiscal 21.
And and we look for continued opportunities and benefits there. So if it gets above the 135 that that I mentioned earlier and we generally expect that it will likely be in that service I'm sorry in that.
My supply chain.
Area.
You know I'll say this though Scott it gets harder as the further we get from the acquisition date, it gets harder and harder to to specifically.
Say, whether its a synergy or just.
More efficiency in the business and so our expectation is after fiscal 20, we won't be talking about that quite as much and we'll be moving forward with looking for all different kinds of efficiencies in the business.
Hi, Thanks, Yeah understood and appreciate that.
The next question is just on on Capex looks like an increase of about 1% to about 12% at the high end of the range year over year I was just curious what what would be the swing factors of all of the <unk> of the of the 1% versus the 12% over the coming year on a year over year basis. Thanks.
I'm a little confused by what you mean by 1% to 12%.
Oh, just comparing the same game.
For the guided fiscal 20 versus fiscal 19, assuming my numbers are right.
So the guide the guide of 280 to 310, you're saying, it's a two youre, saying, a 12% increase over our capex for fiscal 19.
Yes, Thats correct did at the high end is one person at the low end if I at the high end.
Yes, I'm, sorry, I I sort of took me a bit to understand that.
Look where we are growing we are growing nicely and we as you know we've we've we consolidated quite a few.
Gee NK locations into Cintas locations, but.
They are still our capacity needs, particularly in those markets that didnt have a gene K operation in them and so we do have capacity needs as we as we continue to grow and I would expect.
That that would.
That that fact would continue if we continue to grow the way were growing.
And so we're going to probably have a little bit.
Of an uptick this fiscal 20, just simply because.
We are continuing to grow and add more plants than probably we have in the last few years because of the consolidation efforts.
Hi, great things in that third question I wanted to get in with.
It was on the fourth quarter call in years past, you've shared a little bit of information with regard to uniform segment revenue mix.
I am not anticipating much of a change but is that something you're open to sharing.
This year.
Yes, Scott I have that and you're right not much of a change.
Uniform rental when as you mentioned this is measured as a as a percentage of the uniform rental and facility services segment.
And its Q4 data so uniform rental 50% of the mix dust control came in at 18%.
Hygiene is 14%.
Shop towels at five.
Linen, 9% and then catalog was about 4%.
Okay. Thanks.
Barely changed from last year appreciate all that color guys. Thank you.
And once again, ladies and gentlemen that is star one if youd like to ask a question at this time and next we'll go to Justin Hauke with Robert W. Baird.
Yeah, Hi, good evening, guys I guess, the one question that I had here just on the balance sheets, and and kudos for getting the leverage down to where you're looking to hold it at two times, but I'm curious on the upside you know.
In the cycle, where we are today.
How much leverage would you be willing to tolerate to the extent that there were opportunities whether any ancillary business or your current business.
You know were maybe there were more material acquisitions that be out there what how much leverage would you be willing to put on the balance sheet here.
Well.
I'll start with we currently have a covenant that limits us to three and a half now.
We've got a great banking group and if we had a a an acquisition that.
Forced us to go above three and a half.
Then then we would look at it in a couple of different ways first.
Or does it create the ultimate long term value.
That would warrant that kind of leveraging and secondly, given then the combined cash flow would we be able to reduce that fairly quickly like we did with the gene K. After the gene K a deal close we would look at it from those two standpoints.
So I think it just depends on the value in the long term.
Value creation.
But we'd certainly if we felt like.
If we felt like it was a great opportunity, we certainly would evaluate that.
Great. That's helpful. That's up that's all I had here. Thank you.
Our next question will come from Dan Dolev with Nomura.
Hey, guys. Thanks for taking my question nice job.
Hi, Dan.
Yeah. So on uniform rental organic growth you know I can't believe them complaining here because 6.8 is truly an amazing number but you know compares were about 120 basis points easier I mean, what what can get us upside to that number in fiscal 20 is it you know productivity or is it upselling like it when can you get to that the the heydays of the 8% organic growth and what needs to happen for that thanks.
Well, we are we would certainly need a a very good macro and we like the macro today.
But we would need a good macro.
We we need to be firing on all cylinders in terms of our sales productivity and.
With some good and innovative.
Products and services and a you know we've got to be we've got to be really on our game to sell up.
Into our current existing customers.
Dan as you know the look the last four years our.
Our organic growth has been right in this range, where we came in this fourth quarter and we've talked about a few times in the past we like this pace. It it allows us to manage the growth in sales reps the growth in route capacity the growth in.
Production capacity and so we do.
We do like the pace and.
You know, we think that we can get some pretty good.
Margin improvement when we're at this kind of pace, we can manage the business very well and we like it to the last four years, we've been our organic growth in total have been 68677165 and obviously the six five included the first quarter, where we were.
Where we were bottoming out in terms of the post TNK.
That's right, where we want to be that 6.8, and our guidance for next year is pretty darn close to that so.
That's the pace, we like Dan.
Got it great job and then just a quick follow up on the productivity just to be clear I think last quarter. You said that sales productivity was good but if I can quote not as good as it was in the second quarter is there an update to that one in terms of how how that trended in the fourth quarter.
Yes, Dan you are correct.
We were making great progress on sales rep productivity.
Kind of coming out of the GSK acquisition in terms of filling the sales roles and getting everybody trained and up to speed and then also getting the systems converted which was necessary for those GSK reps to sell this and toss up product line.
You'll recall, we were making nice improvement through Q2, and then last quarter in Q3 with some weather impacts we noted that the productivity debt, but in Q4 did bounce back very nicely even stronger than it was in Q2.
Excellent.
Nice job and congrats again.
Thank you.
Our next question will come from Tim Mulrooney with William Blair.
Hey, guys. Thanks for thanks for fitting me in a couple of quick ones here first of all if I go back to the fourth quarter and I look at the uniform rental segment gross margin expansion of 100 basis points year over year and that's a very solid result can you just walk us through the primary factor driving that expansion outside of the the lower energy costs.
Yeah, we.
We certainly got some good leverage from the revenue growth.
We we had some nice synergy.
Capture.
Energy as you said helped a little bit Dan and I were selling profitable business and so a lot of things went well in the quarter.
From a pricing perspective, probably a little bit better in the fourth quarter incrementally than than in previous quarters. The.
The pricing, while still competitive as I talked about.
With Andrews.
Question.
But probably just a little bit incrementally more positive and that certainly helps the margin as well. So all in all great synergy great leveraging selling good profitable business and a little bit of energy help all put together for a pretty good quarter.
Got away, it's Mike if I could if I could add to that.
You know this.
The rental gross margin for the year was up.
170 basis points from from our fiscal 16, which was the year before the GSK deal. So if you think about.
Adding a legacy GK business with a gross margin of about 37.5%.
Two now today that full.
Rental gross full year rental gross margin of 45 five.
We've made some great progress in the last few years and our partners.
Have worked so hard in integrating this acquisition, we bought a very good business and our new partners have done a great job, our existing partners have as well and.
And it really shows in this fiscal 19 year with some with some really good margins, especially in that gross margin area.
Yes, I think everybody in the investment community would would agree with that statement.
It's been very impressive.
If.
If I could move on how much you have remaining on your buyback Mike and does your guidance assume what does your guidance assume with respect to share repurchase.
We have 263 million on the 1 billion that was authorized last fall and the guidance assumes no additional share buyback.
No additional share buyback, Okay, and lastly from me any quantifiable impact from weather in the quarter I mean, we had more rainfall across the U.S. this quarter, but I'm not sure. If that is the same level of impact of the cold weather had last quarter. Thank you.
Not not nearly the same widespread impact.
So nothing nothing worth calling out.
Got it thanks, guys congrats on a great quarter.
Thank you.
And that does conclude our question and answer session for today and I'd like to turn the call back over to Mike Hansen for any additional or closing remarks.
Well. Thank you again for joining US Tonight, we will issue our first quarter financial results in September and we look forward to speaking with you again at that time.
That does conclude our conference for today. Thank you for your participation.