Q1 2020 Earnings Call
Good day, everyone and welcome to <unk> quarterly earnings results Conference call.
Today's call is being recorded.
At this time I would like to turn the conference over to Mr., Mike Hanson Executive Vice President and Chief Financial Officer, Sir. Please go ahead.
Thank you and good evening, thanks for joining us with me as Paul Adler tossed Vice President Treasurer, we will discuss our first quarter results for fiscal 2020.
Her commentary will be happy to answer questions.
The private Securities Litigation Reform Act at 1995 provides a safe harbor from Civil litigation for forward looking statements. This conference call contains forward looking statements that reflect the company's current views as to future events and financial performance. These forward looking statements are subject to risks and uncertainties, which could cause actual results.
Differ materially from those we made the Scott I refer you to the discussion on these points contained in our most recent filings with the FCC.
Revenue for the first quarter of fiscal 20 was a record $1.81 billion, an increase of 6.7% over last year's first quarter.
The organic growth rate, which adjusts for the impacts of acquisitions foreign currency exchange rate fluctuations and differences in the number of work days was 8.3% in the first quarter fiscal 20, your organic growth rate for the uniform rental and facility services operating segment was 7.5% any organic.
Growth rates for the first aid safety services operating segment was 13.8%.
Gross margin for the first quarter fiscal 20 $849.1 million increased 9.6%.
Gross margin as a percentage of revenue was 46.9% for the first quarter of fiscal 20 compared to 45.6% in the first quarter of fiscal 19.
Uniform rental and somebody services operating segment gross margin as a percent of revenue improved 150 basis points from last year's first quarter to 47.2% and the first aid safety services operating segment gross margin percentage improved 110 basis points to 49%.
Reported operating income for the first quarter of fiscal 20 of $306.1 million increased 15.4%.
Operating margin was 16.9% in the first quarter of fiscal 20 compared to 15.6% in fiscal 19.
Operating income in the first quarter fiscal 19 was negatively impacted by integration expenses related to the gene T. acquisition by $4.9 million were 30 basis points.
[noise] reported net income for the first quarter of fiscal 20 was $250.8 million and reported earnings per diluted share for the first quarter fiscal $22.32. Excluding the gene K acquisition integration expenses in fiscal 19, EPS increased 20.2%.
As our chairman and CEO Scott Pharma was quoted in today's press release, we're pleased with our start to our fiscal year, we thank our employee partners for continuing to execute well on our important initiatives.
Before turning the call over to Paul for more details I'll provide an update of our fiscal 20 expectations. We expect revenue to be in the range of $7.28 billion to $7.32 billion.
We expect the P.S. to be in the range of $8 in 47 cents to $8.57.
The following regarding the guidance.
The growth rate at the revenue guidance range is 5.6% to 6.2%. However, our fiscal 20 contains one less work days and our fiscal 19.
Adjusting for this one day difference on a constant work day basis revenue growth rate that guidance it was 6% to 6.6%.
One less work. They also had a negative impact on yes, reducing it about six cents, which is a 90 basis point drag on EPS growth rate for the year.
The guidance assumes an effective tax rate for fiscal 20, or 20.3% compared to a rate of 19.7%.
Well 19.
The higher effective tax rate in fiscal 20 negatively impact EPS growth about 80 basis points and totally P.S. by about six cents.
Keep in mind that the tax rates 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 U.S. economy or any additional gene K integration expenses.
Now I'll turn the call over to Paul.
Thank you Mike. Please note that our school 20 contains one less workday then fiscal 19.
One less day will negatively impact the school 20 total revenue growth by 40 basis points.
To illustrate the magnitude of the headwind using Cisco Nineteens annual revenue, one less workday equates to about $27 million.
One last workday also has a negative impact on operating margin any yes.
Our school 20 operating income margin will be reduced by about 12, and a half basis points in comparison to fiscal 19 due to one last day of revenue.
Negative impact on the margin occurs because certain expenses like amortization of uniforms and entrance mats or 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 working as a headwind of about 90 basis points on E. P. S growth and about a six cents drag on total S. In comparison to fiscal 19.
Each quarter of fiscal 20 will contain 65 work days.
In comparison to fiscal 19, our upcoming Q2 fiscal 20, well have the same number of days.
Q3 will have one additional day and Q4 will have one less day.
Please keep the quarterly day differences in mind when modeling our fiscal 20 results.
We have two reportable operating segments uniform rental one facility services and first aid safety services. The remainder of our business is included in all other.
All other consist of fire protection services, and our uniform direct sale business.
First date and safety services and all other our combined and presented as other services on the income statement.
The uniform rental and facility services operating segment includes or the rental and service thing of uniforms, Masson towels and the provision of restroom supplies another facility products and services.
The segment also includes the sale of items from our catalogs to our customers on route.
Uniform rental and facility services revenue was 1.4 or $5 billion, an increase of 5.8%.
Excluding the impact of acquisitions foreign currency exchange rate changes.
Differences in the number of work days, the organic growth rate was 7.5%.
Our uniform rental and facility services segment gross margin was 47.2% for the first quarter compared to 45.7% than last year's first quarter and improvement of 150 basis points.
Energy expense as a percentage of revenue was 2.20% compared to 2.4 or 5% than the prior year quarter.
Gross margin expansion.
Was driven in large part by the strong revenue increase covering certain fixed production.
And service Department costs.
Our first date and safety services operating segment includes revenue from the sale in servicing a first day products safety products and training.
Segments revenue for the first quarter was $172.1 million the organic growth rate for the segment was 13.8%.
The first aid segment gross margin was 49.0% than the first quarter compared to 47.9% than last year's first quarter, an increase of 110 basis points.
First date segment gross margins continued to increase was stopped with a strong topline growth.
Our fire protection services and uniform direct sales businesses, our reported any 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.
Formed direct sale. However is a key business for us and its customers are often significant opportunities to cross sell and provide products and services from our other business units.
All other revenue was $184.5 million an increase of 8.8%.
The organic growth rate was 9.7%.
The fire business organic growth rate came in at 12.5%.
Uniform direct sales business had a good quarter to hosting and organic growth rate of 5.8%.
All other gross margin was 42.8% for the first quarter of this fiscal year compared to 42.9% for last years.
First quarter.
Selling and administrative expenses as a percentage of revenue were 30.0% than the first quarter fiscal 20, and 29.7% in the first quarter of 19.
Lower labor expense as a percent of revenue was offset by increases and other expenses, particularly an 80 basis point increase the medical expense.
We are self insured and therefore subject to some volatility and medical expense from quarter to quarter.
Our effective tax rate on continuing operations for the first quarter fiscal 20 was 10.1%.
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.
Please note three new line items on our balance sheet, resulting in an increase in assets and liabilities by about $165 million.
These relate to our adoption in the quarter of the accounting standards update 2016 Dash show two.
Entitled leases.
Option does not have a material impact on net income or cash flow.
Our cash and equivalents balance as of August 31st was $102.1 million operating cash flow in the first quarter fiscal 20 increased about 70% from the amount of operating cash flow in the first quarter of fiscal 19.
And benefited from strong earnings growth and improvements in working capital.
Capital expenditures in the first quarter were $64.7 million.
Our capex by operating segment was as follows $53.0 million in uniform rental and facility services $8.1 million in first aid and safety and $3.6 million in all other.
We expect to school 20, capex to be in the range of 280 million to $310 million.
As of August 31st total debt was 2 billion $876.9 billion.
2 billion $538.1 million was fixed interest rate debt and $338.8 million was variable rate debt in the form a term loan and commercial paper.
At August 31st our leverage of 1.9 times debt to EBITDA was slightly lower than our target of two times.
That concludes our prepared remarks, we're happy to answer your questions.
Alright, thank you.
At this time, we will open for question.
He would like to ask a question you may just by pressing star one telephone keypad, please make sure that.
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Again, Please press star one question.
And our first question will come from Toni Kaplan with Morgan Stanley .
Hey, good afternoon uniform gross rental margins were really strong this quarter expanding by about 144 basis points.
Anything one time in there or you know I guess, how much could be attributable to synergies and how should we think about pacing of synergies this year.
Nothing really onetime we did as Paul mentioned, we got a little bit of a benefit 25 basis points from energy. So we've got a little bit of benefit there are these synergies our expectation is.
That they will be generally consistent from quarter to quarter I'm. So call. It roughly $35 million that would if that happens that will get us rights to that a $140 million for the year.
Which we as we talked about a few months ago.
We're going to be right around that range 135 to 140, so we feel pretty good about our ability to capture those synergies I would say the rest of it is a nice execution.
Getting through a little bit more of the a the integration activities and seeing some efficiencies that play.
The the environment for pricing was similar to the fourth quarter, where we set a bit incrementally better than we had seen so got a little bit of.
Revenue with help from that standpoint, as well, but not really any onetime items.
And <unk>.
Now that you've reached your target leverage can you talk a little bit more about what you would look for in an acquisition.
Would you prefer or sort of domestic or international core uniform rushes ancillary services and lastly would you expect any regulatory issues just given your size.
So from an M&A perspective, we love M&A and are in the businesses that were currently then certainly anything from a tuck in.
Our fire first aid and uniform rental businesses to something larger a we certainly a if there were any M&A opportunities in our space. We certainly want to be involved and what does have a great interest and in pursuing that at the right value I, we certainly like.
From a geographic standpoint.
It's easier to capture synergies for example.
With acquisitions in the U.S. in Canada, because we have a presence here and.
It allows us to get density in markets to combine capacity if those opportunities present themselves. So we would prefer acquisitions.
Where we can capture better synergies.
Your last question of of.
Do we expect any regulatory issues I'd certainly depends on what type of of acquisition and the size of that acquisition, but.
But you know at what let's assume a a large acquisition in the in the workwear space for example.
If one came available we love to a two to take a look at it and you know when.
I I would say something that that you may not be considering others may not be considering is we we have so many people that look at our business from a served market perspective, and we view the market is so much bigger than that so for example.
We compete in a workwear space, there's a lot of competition in the workforce space some of our competitors in ER and work where or from a retail <unk> standpoint, so in other words, they simply sell workwear.
Walmart Amazon each cell over $5 billion annually of work where those are they are there a large competitors in space and.
We have other competitors that provide workwear and design and.
A ship they haven't shipping capabilities are they managed programs to a certain extent. So there are those kind of competitors and and we happened to provide workwear through managed programs. We source, we deliver we maintain we longer.
For our customers and so.
There's a lot of competition in the space. We've we've kind of told you for many years.
Over 60% of our new business comes from no programmers and and who are there's no programmers a their retail space. Other direct sellers there are people who do it themselves.
But but we've we've shown on a year after year that we that as part of our market space. We can also lose business to those kinds of of the let's call. It nontraditional competitors.
Points in telling you all of this is.
The opportunity is really large [laughter] and much larger than our served market [noise].
And so you know look if there's an opportunity that's large in our space. We certainly would have interest we'd want to understand it it would have to be at the right value.
And we'd have to we'd have to articulate.
That that competitive set which we think is quite large.
Thanks, so much for all the color.
Sure.
Thank you. Our next question comes from Manav Patnaik with Barclays capital.
Thank you good evening gentlemen, my first question is obviously, the first quarter or growth was pretty impressive and you know well above your full year guidance.
Ranges I guess can you just help us maybe walk through you know if there's any quarterly cadence is that we should be you know.
Looking at.
Well sure. So maybe we'll start with the first quarter, we did have a really nice.
First quarter.
Our non rental businesses performed.
Really well call, maybe Oh gave a little bit a comment on those but but but maybe you can get a little bit more color on those business. Yeah. Yeah sure models. So let's start like what first aid we mentioned the organic growth at 13.8%.
That's a business that has executed very well, we typically expect organic growth to be in high single digits. You know maybe 10% as what we've talked about for that business. So they came in a little bit stronger.
Got you of course, there's a lot of blocking and tackling a lot of variables that go into the performance.
In the quarter, but you know of note. We did have a new item that we rolled out in the quarter I'm, a new item in the cabinets and you know it's kind of like a kinda like a roll out of a direct sale program. You know if for example in uniform direct sale business, where you know you're putting that into the cabinets you get a lot of revenue and then your key.
Counting on some smaller trail about revenue going you know going on in the yeah. The lapping quarter, so I'm a little bit of a boost because of that new products Rollouts and so you know our outlook for first aid is gonna be continuing to have a great year, but probably a the latter quarters more in the high single.
Digits, you know, where we historically have been.
Fire, a that business impressive organic growth rate of 12.5% again, a lot of pieces to that with execution of the salesforce and great quality service, but that you know they didn't have a little bit of an easier comps Mon of I think our growth rates.
A year ago was you know about 8% so little bit higher than 8%. So I think some of the 12 and a half was a little bit of that easier comp.
And in that business the fire business, there's really two types of revenue streams, there's a oh more recurring revenue stream that we call test and inspection testing and inspecting fire extinguishers sprinkler systems et cetera, you had tends to repeat more often but we also have another right.
Revenue stream when things break when alarms don't work you have to perform repair and maintenance and we had some national account repair and maintenance type revenue in the first quarter that was a little bit larger than we expected and we don't expect that to repeat so I think the 12.5% was up a little bit higher than we typically.
Perfect.
And then finally kinda rounding out the other our business units a you'll note that well you part you can't or something that we might have mentioned in the in the prepared remarks that.
Direct sale business had a good growth rate of 5.8% a year ago. The growth rate was rather weak in the fact that actually had some shrinkage of about 1.8%. So that's a business that I think benefited from that easier comps.
In the first quarter and as we've talked about previously in our prepared remarks that direct sale business is typically more of a 3% grower long term.
Yes amount of when you when you look at the performance. So I would say the non rental businesses had a great quarters, maybe outperformed our expectations, a little bit and probably a don't expect that going forward from a rental perspective again at a really nice quarter.
We had some really good execution by our rental partners I mentioned, a little bit of of Oh. The pricing was it was similar to the fourth quarter, which was incrementally good so got a little bit of benefit there probably got a little bit of a have a year over year benefit.
Keep in mind last year or in the first quarter that was our lowest organic growth. So we were our volumes were still kind of finding the bottom so probably got a little bit.
Oh benefit in that regard to so as we look out over the next three quarters I. We don't look at a wheel there's shouldn't be a lot of inconsistency in terms of the growth, but a you know things can happen from quarter to quarter, but but don't see a lot of moves.
Went from one quarter to the next for the rest of the year.
Got it and then if I could just ask you know in terms of C.G. in key revenue synergies I know I don't think you're looking to quantify anything but any anecdotal color on if you're starting to see that he a needle mover in terms of be resolved.
Well, we you know we started talking about this a little bit we saw signs of of.
Have a benefit in the first quarter of last year, and and I saw some nice execution throughout last fiscal year and so we did see some benefits throughout last year and and saw a little bit it out in the first quarter.
As we move forward I, you know from a lapping perspective, I don't know that I've I would expect anything.
That is significant but I work, it's a it's something that we're constantly a every week that we visit those customers.
We're talking with them. We're we're we're educating them on what we do and sometimes these take time and we're going to coal to continue to cultivate those relationships as we go I wouldn't expect any.
Any a significant amounts in any one particular quarter, but it's a it's certainly is a nice benefit for us.
All right. Thanks, a lot guy.
Alright, thank you.
Our next question will come from Kevin.
Credits.
Great. Thank you.
Really nice job.
At this point you know given the gross margins is it fair to say and then no. We're not just JK, but it's GK up to the corporate average at this point or would you expect that you continue to kind of narrow relative to where should costs relative to GK.
Well as low as you are referred to its really hard to to say. So for example, a lot of that TNK volume resides in and legacy sentenced locations. So when you think about that volume. It's certainly has has.
Helped us in those kinds of locations create more capacity utilization creates a little bit more density and so is there certainly is a benefit from from standalone locations. Many of them have inherited some legacy sentence volumes, but.
They're not quite to where we where we would see the rest of the of the sent US a legacy locations, but they're making nice progress.
So we we hope to continue to see improvements as we move forward.
Got it and then just with the benefit from energy was that was.
Organic growth headwind I would there have been maybe benefit last year from surcharges and you don't have those surcharges or whatever then on the expense.
You know, we started to see a little bit of softening towards the end of the first quarter in the energy space, but keep in mind, it's not a it's not a big part of our revenue base.
But we started to see a little bit of softness or <unk> I would say no headwind in the in the quarter from a revenue perspective, we're keeping our eyes on it though as we as we move into the second quarter and beyond.
Got it I guess I'm, sorry, I was thinking more in terms of fuel D. You don't get the fuel surcharges I know it sounded like you saw some relief from from energy costs I, just wondered if that was a headwind on the revenue lunch.
Yeah, I'm, sorry, we don't have a fuel surcharge.
So so the the energy the gas prices [noise], we don't flex, our our pricing or surcharges based on the price of a price at the pump I'm sorry, what I was referring to was our customers.
In the oil or gas mining areas that generally when you see the prices of of the gas at the pump come down in the past when we've seen those prices really come down at kind of hurts that business here in the U.S.
And ER and so the we saw some benefit in that price at the pump as we said 25 basis points in rental but we also saw a little bit of softening in the business side of it from a customer perspective, and so that's what we're keeping our eyes on but we don't have.
Fuel surcharge, so no impact relative to that.
Awesome. Thank you so much.
Thank you.
Next question comes from Gary Bisbee with Bank of America Merrill Lynch.
Hey, guys. Good afternoon, I guess, you sort of alluded. This earlier in the commentary about some of the places where you saw strength this quarter, but clearly in the rentals business you had a much easier comp on both organic revenue and and margin in the year ago, and and so I guess I just wanted to ask.
Is it right to think that that you know it is a portion of the rentals business improvement and maybe more significant than any sort of sequential improvement in momentum relative to what you were seeing this past spring is that fair.
So in other words, a yes, and Gary I think your your comments on did we get some year over year benefit Yeah. I think there was probably some of that.
As you as you alluded and I mentioned a minute ago, our organic growth was still finding the bottom or in terms of our volumes in rental and so there certainly is a little bit of year over year benefit there.
So I think that's I think you're you're your commentary is reasonable.
Okay, and then just you know thinking sequentially is as we've moved over the last few months <unk> are you hearing anything different.
From your clients in in the U.S. and Canada around the macro backdrop some of the.
Forecast you know for for GDP growth in the U.S. are moderating some of the industrial activities moderated a bit though employment you continues to be good but any change in dialogue or is it really steady as she goes.
Yeah, we haven't heard much a a change from our customers and our first quarter results with kind of show that.
You know when we think about the economic picture, though as we move in the you know the last two quarters of our fiscal year are are going into mid calendar 20.
We do think about the noises around interest rates. The noise is a continued noises around trade and tear ups, we're gonna be entering an election year, where where there was going to be a lot of noise and and I would say, we look today with a little bit more cautiousness, then maybe earlier in the summer.
And while we haven't seen much change from our from our customers a yet and we're keeping our eyes on it because there's just so much noise in the any environment today.
Great and then just lastly can you give us a sense how much of the all other segment is fire versus uniform sales and really the reason I ask is you know I think a lot of people have always just plugged in low single digit growth 'cause uniforms was was always bigger but it sounds like fire keeps growing you know is is that understanding there.
Volatility quarter to quarter. It is is it possible that's really more should be a mid single digit type grower all in given that fires growing quickly and uniform fairly moderately is that is that fair assumption and if you could give us the mix that'd be great. Thank you.
Yeah, Gary its Paul I think that even in our 10-K, we actually have to a break at any of those revenue recognition adoption of that that that fas be caused us to provide more detail Ah. So you can take a look at the last 10-K.
And you'll see it but my recollection is in doing the math the last time that fires kind of like about 55%.
Of the mix at this point in time, a 45% than is the direct sale business.
And then you know to your point you know we've tried to add some color that you know the fire business because your high single digits, 10% organic.
Whereas that direct sale business is typically around three.
Fire the fire business I had a very good quarter. It improved gross margins and improved operating margins, but to your point because of the fact that we lump those together pretty accounting guidance.
We call. It all other you it blends this particular quarter to a little bit of a shrink and the gross margin by I think 10 basis points that was but that's you know more due to the the mix shift in the fact that de asked the direct sale business grew 5.8% you know in it shifts that.
Next and can cause that you had to move but you parse those two businesses out fire business actually improve their their margins as I said.
Great. Thanks, a lot guys.
Thank you. Our next question comes from Seth Weber with RBC capital markets.
Hey, good afternoon guys.
Wanting to wanted to ask about a working capital if it came down nicely up relative to first quarter last year. You know do you think you can kind of flip the negative. So I think it was to 60 or to 75 or so for 2019 do you think you can flip that you know all the way back to par this year.
Here are king <unk> can you just talked to how you're thinking about working capital for 2020. Thanks.
Yeah, when we are.
Our thoughts on working capital our when we are growing we're gonna use some working capital. So for example.
Life, we're growing the way we want to grow.
Accounts receivable is going to grow.
Inventories are going to grow in service inventory is going to grow because were injecting a new inventory into new customers in a penetrated customers. So.
Generally speaking.
Yeah, we expect in in a growth environment, we expect to use working capital now last year in the first quarter.
Our use of working capital was was quite larger than it was this year in the first quarter. So we were in the midst of a lot of system integration activity a lot of GE in K integration activity and so we had some disruption in the accounts receivable.
Environment.
We feel really good about where we are today and so you use you you've seen a little bit of up a less of a usage there from an inventory perspective last year in an in service inventory last year, you know when we where do we make an acquisition like GE into their points in time at which we are.
We're going through inventory a little bit more quickly because we're transitioning out of a legacy gene K inventory into since Haas types of inventory now that that didn't happen all at once in the first quarter last year, but it's certainly pick up it continues today.
But but certainly at a lesser pace.
And so that's where there was a little bit disruption last year in the first quarter, a little bit more of a steady state. This year in the first quarter, but we would expect continued use as long as we can continue to grow up.
Okay. So so the balance of the year, probably look something like the balances you know to Q through you know the balance of last year, then is that fair way to think about Uh huh.
Oh, you know and stuff I don't have the balance of last year right in front of me, but I would I would generally speaking, yes, do we wouldn't expect any or anything of a disruptive nature in those in those areas.
Okay, and then just follow up on the on the yesterday I. Appreciate you calling out there were some extra expenses there for the quarters. So would you expect you know assuming those don't recur as DNA to be down then year over year for the rest of the year.
So that's a bizarre yep yep, yeah, that's certainly as are our expectation.
You know a from a self insurance standpoint, we've had quarters in the past, where we'll see onetime claims pop up and and it and it it results in a little bit of a higher insurance medical expense than than normal those may continue to happen.
But the but generally speaking we expect to see some nice leverage in S. DNA, particularly from the G and H side of things Paul mentioned that labor.
A gene a labor was down a little bit and we were very pleased with that so I will have disruptions from quarter to quarter generally speaking, we do expect leverage no doubt.
Okay, and just sorry, one last one for Paul This is tax rate kind of consistent here then for the balance so year, just spread evenly twoq to Fourq you.
Oh, Yeah. That's a that's that's reasonable staff, it's just that that Q1 that.
As a so such an outlier because of the stock option exercises. So I think that that's good for modeling the remainder of the year.
Okay. Thank you very much guys I appreciate it.
Sure.
Thank you. Our next question comes from George Tong with Goldman Sachs.
Noon.
Going back to organic revenue trends, how much of the acceleration in the quarter would you say do traction with penetration of the no programmer market versus improving at stop or using competitive trends that you're seeing.
Yes, you know, Georgia, I'm not a lot of a difference from a normal quarter from the standpoint of new business.
Continues to be strong productivity from our reps was really good.
And and within that new business set was it was a good no programmer performance. So a new business continues to lead or the growth effort.
From a from add stops nothing to call out really but Ah, but but as I mentioned earlier pricing in the quarter did did help similar to what we saw in the fourth quarter. So a little bit of certainly year over year help in that regard as well so real nice to.
Tivity little bit of pricing help real nice execution from our burgers.
Got it that's helpful. Your gross margins are continuing to improve across your segments can you elaborate on how your input costs are evolving and what's your latest thoughts are around the impact of trade negotiations on the business.
Hi, yes so.
From a material.
Costing standpoint standpoint, we haven't seen a lot of of change right now it seems like the trade and tariff conversation is.
More conversations and then impact at this point, but but still creating a lot of noise and uncertainty for for our customers a and us to a certain extent, but I haven't seen a a how much of an impact keep in mind from a material perspective, most of our material costs get amortized.
Hi, guys over some period of time, whether it's the life of a garment or the life of a Matt and that that amortization period really helps it's a it's a bit of a natural hedging it helps us smooth those kind of cost out, but but I would say no no costs to call out from that regard labor.
We've talked over the course of the last year. We've we've we've seen it some pressure in pockets and didn't see anything new or different in this quarter.
Very helpful. Thank you.
Thank you. Our next question comes from Andrew Wittmann with R.W. Baird.
Oh, great I just had a couple of maybe clarifying questions here first just on the guidance I think you guys. Obviously the tax rate was low we expected it to below one for you guys expect to the tree quite the slow Oh I'm just wondering how much of the tax rate was incremental or part of the guidance raised just to tease that element out of the a total.
Raise here.
Versus your prior expectation.
Yeah, I would say in the in the quarter. It was about a six cents impact for the year, probably about an eight cents impact and look the so much of that that that impact that we speak of is kind of out of our.
Out of our control, who you've heard us talk about the equity piece of that.
And that's what kind of played or because of that plays a role in the first quarter here.
And then just on <unk> in the past you've talked about how well rolled out or else early road rolled out that is can you just kind of update us as to where we were either at the end of the quarter, where we stand today Mike.
Yeah, Andrew It we're about 75% of the way complete now.
And so we're still on track to finish that implementation at by the end of the fiscal year.
Great. That's helpful and then just.
Just for other detail here you did some pretty good amount of buyback in the quarter can you give the total number of shares that you bought in and how much is remaining on the authorization that you currently have in place.
[noise] yeah during the quarter, we we will well we have $263 million left on the authorization, we bought 837000 shares.
For just under 200 million dollar.
Keep in mind that.
All of that purchasing was done prior to our July call. So it was it was it did not have an impact on on the guidance.
That we gave you today.
Got it.
Okay, and then I guess just the only other question I had was specific around labor you talked about US you know kind of labor savings, but in the gross margin in the plant. This has been an area. That's inside it maybe more by some of your competitors, but you guys have talked about it a little bit as well I was just wondering.
If there's any changes that you've seen in the in the marketplace for your plant level labor and how you're dealing with that today if it if there's something to be dealt with.
Well Weve, you're right, we've talked a little bit about to pressures here in there in pockets, particularly in that production plant environment.
And I would say we didn't we didnt see much of a change it remains a competitive environment and we've got to do the best thing. We can do is is keep our turnover our partner turnover as low as possible.
And do we've we've we've been pretty successful at that so I know not not much of a change in.
In this first quarter compared to what we've seen over the course of the last year.
Great. That's all had thank you.
Alright. Thank you. Our next question comes from.
Well, let's say.
Hey, Thank you very much for taking my questions, Hey, Oh, we're talking about M&A earlier in the call have you guys. If were purchased a company that had unionized labor force and is that something that would be a nonstarter for you or is that something that you would still entertain if it's a you know if there's a lot of synergy potential.
Well Shlomo gene K had about a 20% union a workforce when we acquired them.
You know it a a union environment, a a different culture. It. It's certainly creates a different type of environment, the operating environment and and those kind of things can tend to make synergy capture a little bit more challenging.
And so at the end of the day or would we would we evaluate something with a with a heavy union component.
That's a value consideration more than anything else.
And we'd have to take a good hard look at it.
Because it does complicate the synergy capture opportunity, but but but theres. A you know that's a that's a part of the conversation around value and consideration.
Got it and then take here you're right that you did not buyback anymore stock after after the last earnings call.
Correct.
Okay.
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And then could to just is that usually <unk>.
Usually when companies don't buy back stock in their leverage is below the oh the level that the.
Consider a target level, there's usually something that is a potential out there is dead in unfair assumption Oh for us to make that there might be something in the near to intermediate term.
Well you Shlomo, we've always looked at that but a buyback as oh, we've executed as an opportunistic program and and if you go back over the course of last 10 years, where we are not consistent from quarter to quarter and that's by design, we kind of look at a bunch of different things we.
Look at.
The performance of the business.
Reinvestment needs of the business, we look at a M&A opportunities on the horizon, we look at things like a upcoming dividends and and we have Oh, we have a consistent history of not being consistent in the way that we execute on that buyback program and add.
And I'm not sure I'd look into anything more than that.
Okay and then if you just look at kind of the margins the business. The first state and safety had really good gross margin expansion was not you know not a whole lot. There is there a lot of investment going on in terms of building out routes or anything like that or that you're not seeing more leverage here.
Well, we had a real nice gross margin quarter with the gross margin being up 110 basis points been so were.
With that growth, we are continuing to invest invest in routes and capacity, but but really you're you're right Shlomo from an investment standpoint, we did continue to invest in the U.S. DNA space and so we do see a little bit of an elevated.
Ah, yes field any number compared to last year keep in mind. There also affected by the medical and a that was about an 80 basis point headwind, but but you're right, where we are continuing to invest in that business, we do really like it.
Okay, Great and do you want just going over the the days in each quarter year over year. So we get that straight from the way next three quarters.
[noise] and Shlomo 65 in each quarter of this fiscal year.
And then.
Let's see compared to 19. So are we had 66 in Q1 last year than 65 in Q2 64 in Q3 and 66 in Q4.
Okay. Thank you very much.
<unk>.
Thank you My next question will come from Scott Schneeberger without that.
Thanks, very much good afternoon, I, just want to hone in a little bit more on pricing. You've mentioned you know nice nice improvement from fourth quarter or at least still solid we see it improved from third quarter could you delve into little bit to the to the end markets, where you're seeing that pricing improvement.
Or any competitive dynamics, that's changed to affect that and when I speak of end market also if you could just specify across the segments do please thanks.
Ah so from a from a market by Mark it from an end market perspective, nothing to call out of any significance.
You know you you heard us talk a little bit about the pricing environment over the years.
When the when businesses in the rental business or our is performing well when they're growing a they have limited capacity and it generally tends to add a little bit of.
A little bit more reasonable this to the pricing environment and so we do see a little bit of that are going on.
We're also we also I think do a pretty good job of of.
Articulating to our customers why at times pricing can be appropriate and so I think a that execution has been pretty good as well so combination of.
Of the health of the of the marketplace or our ability to articulate a I think that that has combined to a nice environment.
Thanks appreciate that and just following up on in response to monetize question earlier on in the in the human eight you were talking about a a new item in the cabin Ed and how that you know that could have a lumpy effect because the follow on tapers a bit. It's just curious how are you doing with opportunities like that role.
He out and if you want to share with that new item was that'd be great, but how are you doing with deploying new offerings in servicing services and and if you could tie that into gene K and if you're seeing any any any any cross sell a benefit from their that'd be great. Thanks.
We do we we are seeing some cross sell opportunities and benefit like we have over the over the course over the last year, and and but but I would say a generally speaking.
And we'd rather not call out that specific item, but but generally speaking we're always looking in investing for ancillary products ways that we can add some value for our customers and and so in this case it was a it was an.
Nice benefits, sometimes a those happen in a particular quarter and didn't happened last year or they can be lumpy in terms of when the rollouts occur.
But but but we like where we are in terms of Ah our ability to.
Create those ancillary products.
Within our businesses, that's what you know we've talked.
It many times about a the umbrellas of image safety, cleanliness, and compliance and and when we think broadly like that with our customers, sometimes we're able to come up with some pretty nice and unique ideas and we've been we've had some success.
Over the course of the last year and that would go for legacy gene K customers as well as into legacy sent us customers <unk>.
We've had some nice success.
Great. Thanks, a lot nice work.
Thank you. Our next question comes from Andrew Steinerman with JP Morgan.
Yeah.
<unk> I to Andrew I'm could you give a quick comment on merchandise amortization was it a headwind or tailwind in the first quarter and given the strong new wins do you feel like merchandise amortization will be more of a drag going forward.
To margins.
Yeah, right no it was or nothing to call out in that regard during the quarter.
We're in an interesting time as I was mentioning earlier Andrew.
Where we've we've we've injected a decent amount of Ah Ah news tend to us product into legacy gene K customers and that can create some.
Some rippling and we're going to we're going to see a little bit of that as we move forward, but or less of it today than a year ago I would say a you know as we as we move forward, we're going to continue to.
Or sell hopefully a lot of a new businesses. So we'll continue to inject a pretty good rates.
But again I would say nothing to nothing to call out where are our managers are managing the a the inventory in the in service pretty well.
Mhm.
Can I ask as you do injector excuse me at Jackson Tus uniforms into the June Kate customer base do they notice the the that there's a quality or upgrade there.
We certainly would like to think so I mean, when if we would we look at the is the inventory Andrew.
Our people understand the features in the functionality of the inventory and the garments that we have and their train two point those features and functions are out to our customers. So I you know as long as we are doing our job and and introduced.
Things those garments and introducing the those prominent features and functions of them.
I'm expecting that the customers certainly notice.
Great. Thank you.
Alright, thank you.
There are no further questions.
Well, thank you for joining us Tonight.
We will issue our second quarter financial results in December and we look forward to speaking you speaking with you again at that time Goodnight.
Thank you, ladies and gentlemen, SK.
Teleconference. You may now disconnect.
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Okay.
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