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Cintas Corp
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Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Mike Hansen, senior VP of Finance and Chief Financial Officer. Please go ahead, sir.
Good evening, and thank you for joining us tonight. With me is Paul Adler, Cintas' Vice President and Treasurer. I am battling a little bit of a cough tonight, so I'm going to turn it over to Paul to get us through our prepared remarks.
Thank you, Mike. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC.
We are pleased to report that revenue for the second quarter, which ended November 30, was $1,606,000,000, an increase of 26.4% over last year's second quarter. The organic revenue growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 7.7%. The organic revenue growth rate for the Uniform Rental and Facility Services segment was 7.3%, and the organic growth rate of the First Aid and Safety Services segment was 10.8%.
Operating income for the second quarter was $235 million compared to $200 million in last year's second quarter. Fiscal 2018 second quarter operating income was negatively impacted by $13 million of transaction and integration expenses related to the G&K Services acquisition compared to about $3 million of such expenses in the second quarter of last year. Excluding G&K transaction and integration expenses, operating income increased 21.8%.
Operating income margin, excluding G&K transaction and integration expenses, was 15.5% versus 16% last year. Current year second quarter operating margin was negatively impacted 75 basis points by intangible asset amortization expense resulting from the purchase price accounting of the G&K acquisition.
In addition, current year operating margin was negatively impacted by 25 basis points due to depreciation and implementation costs of our enterprise resource planning system, SAP. Net income and earnings per diluted share, or EPS, from continuing operations for the second quarter of fiscal 2018 were $137 million and $1.24, respectively. EPS was negatively impacted by transaction and integration expenses related to the G&K acquisition of $0.07 and $0.02 in the second quarters of fiscal 2018 and fiscal 2017, respectively. Excluding these expenses, EPS was $1.31 versus $1.14 last year, a 14.9% increase.
As our Chairman and CEO, Scott Farmer, was quoted in today's press release, the integration of G&K continues to proceed as planned. Our pace of closing duplicate operations increased in the second quarter. We have now closed 50 operations. Also, 47% of G&K locations have been converted to the Cintas operating system. This activity enabled us in the second quarter to realize about $14 million in synergies, almost twice the amount of synergies achieved in the first quarter, which is right in line with our expectations.
In addition, significant progress was made in our implementation of SAP, which remains on schedule. A total of 55 operations have been converted from the old operating system to the new SAP system.
Our second quarter was one of solid progress on 2 important investments, G&K and SAP. Meanwhile, strong execution on the day-to-day mission of profitable growth continued. The steadfast focus of our employees on helping our customers get Ready for the Workday is evidenced by the strong organic revenue and earnings per share growth rates.
As a result of our second quarter results, we are increasing our annual guidance for fiscal 2018. We now expect revenue to be in the range of $6,365,000,000 to $6,430,000,000 and fiscal 2018 EPS from continuing operations to be in the range of $5.39 to $5.46. Our guidance excludes any future G&K transaction and integration expenses. It also assumes a pretax reform effective tax rate range of 31% to 33%.
Note that our guidance includes the following assumptions related to the acquired G&K business, revenue of $895 million to $915 million compared to a prior year amount of $965 million; synergies of approximately $50 million to $55 million; and EPS contribution of about $0.17. While the EPS guidance does not include any future G&K transaction and integration expenses, we do expect that these expenses will be incurred in the remainder of fiscal 2018 as we continue to integrate this significant acquisition. We estimate that these expenses will range from $50 million to $60 million for the full fiscal year.
I want to comment on the impact to Cintas of U.S. tax reform. There will be significant benefits. As a profitable business with the vast majority of our earnings in the United States, we have historically paid a high tax rate. The reduction in the corporate tax rate will boost Cintas' earnings and increase cash. Also, we expect many of our customers to benefit from tax reform and invest additional amounts of cash to grow their businesses. Healthy and growing customers are good, of course, for our business. Tax reform will enable us to repay debt more quickly and then have additional cash on hand for our priorities, namely, investments, acquisitions, dividends and share repurchases.
The signing of the legislation by the President will be an accounting event for Cintas. We will need to revalue deferred tax liabilities.
In addition, the lower corporate tax rate will be applied January 1, resulting in a negative effective tax rate in our third quarter and a blended effective tax rate for the fiscal year. Our EPS guidance is based upon pretax reform effective tax rates of 31% to 33%, because we need more time to understand the new tax laws.
However, we do want to provide you with the results of our preliminary analysis. Under the new tax laws, we expect the effective tax rate for this full fiscal year to be in the range of 8% to 12%. We will incorporate this lower fiscal year '18 rates into our guidance over the next several months. We expect the effective tax rate for fiscal 2019 and thereafter to generally be in the range of 23% to 26%.
Please note that our fiscal year 2018 contains the same number of workdays per quarter as fiscal year 2017. The number of workdays by quarter within fiscal year 2018 do differ, however, and are as follows, 66 in Q1, 65 in Q2, 64 in Q3 and 66 in Q4. One less workday in a quarter has a negative impact of approximately 50 basis points on operating margin due to many large expenses, including rental material cost, depreciation expense and amortization expense being determined on a monthly basis instead of on a workday basis.
We have two reportable operating segments, Uniform Rental and Facility Services; and First Aid and Safety Services. The remainder of our business is included in All Other. All Other consists 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 segments includes the rental and servicing of uniforms, mats and towels and the provision of restroom supplies and other facility products and services. This segment also includes the sale of items from our catalogs to our customers on route. Uniform Rental and Facility Services revenue was $1,308,000,000, an increase of 30.8% compared to last year's second quarter. Excluding the impact of acquisitions and foreign currency exchange rate changes, the organic growth rate was 7.3%.
Our Uniform Rental and Facility Services segment gross margin was 44.7% for the second quarter, a decrease of 20 basis points from 44.9% in last year's second quarter. A slight year-over-year margin decline results from the inclusion in this year's second quarter of a lower margin G&K business.
In time, the G&K gross margins will improve to Cintas' legacy levels as we further integrate this business and we increasingly realize more of the synergies. For instance, one of the factors resulting in a lower G&K gross margin is that energy expense as a percent of revenue is much higher than the Cintas legacy business. Total segment energy expense as a percent of revenue was 20 basis points greater than in last year's second quarter. Half of the increase was due to G&K. This is the result of the smaller G&K business lacking the route density that the larger Cintas legacy business possesses. The fuel savings from route density, along with the benefit of reducing redundant capacity will drive significant improvements in G&K gross margin.
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 second quarter was $139 million, which was 11.5% higher than last year's second quarter. On an organic basis, the growth rate for this segment was 10.8%. This segment's gross margin was 46.9% in the second quarter compared to 46.1% in last year's second quarter, an increase of 80 basis points. While year-over-year improvements to gross margin driven by ZEE acquisition synergies have largely been lapped, we still expect strong gross margin improvements as the business continues to grow.
Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other category. Uniform Direct Sale business long-term growth rates are generally low single digits and are subject to volatility, such as when we install a multimillion dollar account. Our Fire business, however, continues to grow each year at a strong pace. All Other revenue was $159 million, an increase of 8.9% compared to last year's second quarter. The organic growth rate was 7.8%. All Other gross margin was 42.1% for the second quarter of this fiscal year compared to 40.4% for last year's second quarter, an increase of 170 basis points. Both businesses had healthy increases in gross margin.
Selling and administrative expenses as a percentage of revenue were 29.1% in the second quarter compared to 28.4% in last year's second quarter. Current year second quarter SG&A was negatively impacted 75 basis points by intangible asset amortization expense resulting from the purchase price accounting of the G&K acquisition.
In addition, current year SG&A was negatively impacted by 25 basis points due to SAP depreciation and implementation costs. The prior year second quarter did not include any depreciation expense from SAP because the project was still in the pilot phase.
Our effective tax rate on continuing operations for the second quarter was 33.3% compared to 34.9% for last year's second quarter. This equates to a $0.03 benefit to EPS year-over-year. Note that the effective tax rate can fluctuate from quarter-to-quarter based on tax reserve bills and releases relating to discrete items. As stated earlier, our EPS guidance assumes a pretax reform effective tax rate range of 31% to 33%. Our cash and equivalents balance as of November 30 was $236 million, and we had $22 million of marketable securities as of quarter end. Cash flow from operating activities in the first 6 months of fiscal 2018 was $379 million and free cash flow was $246 million.
Capital expenditures for the first half of the fiscal year were $132 million. Our CapEx by operating segment for the 6-month period was as follows, $111 million in Uniform Rental and Facility Services; $13 million in First Aid and Safety; and $8 million in All Other. We expect fiscal year 2018 CapEx to be in the range of $280 million to $300 million.
As of November 30, total debt was $2,834,000,000, consisting of $300 million in short-term debt and $2,534,000,000 of long-term debt. At November 30, our leverage was 2.5x debt-to-EBITDA. Subsequent to quarter end on December 1, $300 million of fixed rate debt with a coupon of 6 1/8% matured. This debt was paid with cash on hand and from borrowings under our commercial paper program.
On December 8, we paid a dividend of $1.62 per share, an increase of 21.8% over last year's dividend. We have increased this dividend for 34 consecutive years. It is an important part of our capital allocation strategy and illustrates our enduring commitment to effectively deploying cash to increase shareholder value.
Overall, our cash flow remain strong, and we continue to expect our leverage ratio to decrease to approximately 2.0 to 2.2x debt-to-EBITDA at May 31, 2018.
That concludes our prepared remarks. We are happy to answer your questions.
[Operator Instructions] And we'll first go to Toni Kaplan from Morgan Stanley.
I didn't catch if you gave the G&K revenue and growth rate in the prepared remarks?
We did not, but the -- it was down about 4.4% year-over-year for the quarter, which is slightly better. You probably saw that Paul had mentioned an increased range. And so it was slightly better than what we expected, and -- but down still about 4.4%.
Okay, that's helpful. And I wanted to ask about -- given Aramark's AmeriPride acquisition, have you seen any changes in the competitive environment yet? I know the deal hasn't closed, but just any -- are you expecting to see any impact from those 2 companies coming together? And basically, yes, just any color on that would be helpful.
Well, the deal hasn't closed, as you mentioned. And so I would say, we're -- I would expect that if we do see some impact to the industry, it won't be until after it closes. I would say, today, it's still very competitive. The environment is still very competitive and not much changed, though, from 3 months ago.
Got it. And just lastly, in First Aid, you had another double-digit growth quarter. Can you just give us a little bit of color on how long you expect this pace of growth to hold up? And what you would consider maybe a normalized growth rate in this segment, if you think that double digit is not normalized?
Well, Toni, we hope it's forever.
Yes, I'm sure.
Certainly, the expectations for that business, First Aid, have continued to be high single digits. We still have a lot of opportunity to grow our customer base and with the safety cabinets and other products and services, got OSHA and others drive required in those cabinets. There's still plenty of good organic growth to come.
And we'll take a question from Manav Patnaik from Barclays.
The first question was, I think you made a comment that the pace of synergies was growing faster than maybe what you expected and, I guess, that's indicated with the $14 million versus $7 million. But broadly, I guess, your guidance for the synergies for this year and for all of G&K, I guess, hasn't really changed. So I was just wondering if there was a disconnect between those 2 comments or how we should think of that?
I think Paul's comment was synergies certainly have increased and accelerated in the second quarter, but it is in line with our expectations. We certainly did expect to see that number go up. If you remember after the first quarter, we had talked about a couple dozen locations being consolidated in the first quarter, but many at the end of that first quarter. And so we were able to see the synergies from those as well as some others during the second quarter. And so it is in line with where we expected, but certainly an acceleration of what we saw on the first quarter.
Got it. And then the comment on 47% of the G&K locations moved to Cintas operation platform and so forth. Is it fair to assume that, that 47% were probably the bigger heavy lifting locations and the remaining should be a much smoother integration? Or is that not right?
No, it really is based on our timetable geographies and markets. And so it is a combination of both small locations and large locations. Still many to do, and -- but going well.
Okay. And then the last one I had was just on tax reform, I appreciate the color you guys gave. But I was just wondering, what if any, were some of the offsetting pieces from the legislation versus just a reduction in corporate tax rate?
When we think about that kind of an ongoing rate of 23% to 26%, there are -- there is a big benefit, obviously, from the drop in the corporate rate. However, couple of things that I might point out. There is something called a Section 199 manufacturing credit that is no longer existing, and that had a small impact on us. There is also the Section 162(m) impact, which is the loss of the deduction for any executive comp over $1 million, that certainly will have an impact. But that's about it. And certainly then for there's the onetime toll charge, if you will, related to the taxing of foreign E&P. But generally speaking, look, we're very excited about the tax reform getting done. We do certainly still need to spend some more time with all of the details. But I would say, over the course of the next couple of months, we'll likely update our guidance to give some more specific thoughts.
And we'll now go to Andy Wittmann from Baird.
I guess maybe my first question is on the guidance, it looks like you took the tax rate down, I think it was 34%. The last quarter here was 32%. That's an EPS help right there. Is there an implicit -- as you look at the earnings profile of the business tax reform, is there something that changed in the profitability of the business that you expected in the quarter and the outlook for the balance of the year?
Are you saying as it relates to tax reform?
Well, no, I mean, it looks like, I think, previous guidance for tax rate was 34% now it's 32%, that should be about $0.15 of help, I think, to EPS, all else equal. But the guide range wasn't that much, so I was just wondering what explains the difference?
Well, one thing to keep in mind is our third quarter has an additional loss of workday. But no, we think that margins for the second half of the year are still going to be pretty strong. And I wouldn't read a whole lot of detail into that other than the fact that we're kind of pleased with the quarter, and we're set up still to have a very good year in the back half of the year.
All right. And then I wanted to go over to the G&K for my next one, with a pretty good number of facilities of G&K on the system like you've talked in the past that getting on the system is the prerequisite to revenue synergy. I know you've said pretty consistently that those were going to take longer, but I'm just curious, are you able to start talking about selling some of that stuff, now you've got a number of locations or do they all need to be on before you can get after that?
No. When a location gets on, we can start to have training conversations and start to get into that. It's going to take a little bit of time to get the ball rolling and to create an impact. But no, once one location is on, we can start talking more about Cintas products and services. They will be available to that location from a system perspective upon conversion.
Can we have some contribution, you think, later here in fiscal '18?
I'm not expecting anything in fiscal '18. No.
And then just on the cost synergies, if this quarter was $14 million realized and approximately $7 million in the first quarter. If you just take the run rate of $14 million per quarter from the last 2 quarters, that gets me to $49 million for the year, which is pretty much at the low end of your guidance range for the year. How should we think about those cost synergies? Are you -- does it look like you could exceed the targets that you laid out? Or should we expect some level of deceleration of the cost synergies for the balance of the year?
We, I would say, there is a lot of heavy lifting to go still in the back half of the year. Our goal will be to get that synergy number to the high end of that range, certainly. But yes, there is a possibility that we can exceed that. I would say that that's more of a timing thing than a increase to the entire range of 130 to 140. But I think there's an opportunity for that as long as we continue to execute well.
And our next question comes from Scott Schneeberger from Oppenheimer.
Guys, just curious, some little items in the quarter. There was talk about the hurricane last quarter. Could you just give us an update, and I believe what you had said last time was it would have an impact on revenue by $10 million to $15 million and EPS 5 to 8. Can you just kind of give us a little bit more clarity? And then I'll follow up with the next one in a second.
Yes, Scott. That was our estimates at the time. You got that correct. And we said of the $10 million to $15 million, about half of that would be in Q2. Fortunately, we were always in good shape. We had mentioned on the last call that we didn't have much damage to our facilities, and we were able to be up and running. So it was just dependent upon how quickly the customers could get back up and running. But pleasantly to our surprise, they get up and running pretty quickly. And instead of, what, $5 million to $7 million top line impact in the quarter, it was only about $1 million. And then for the remaining 2 quarters, $1 million is probably top line at most. So good news is this turned out to be really a nonevent from the headwind to the top line.
Okay. And I mean, you guys had a good quarter and revenue guidance went up for the year more than what you did in the outperformance versus at least our estimate in the quarter. I'm guessing, this contributed and was a sizable factor to that, that increased revenue?
No, I don't know if it was sizable. But yes, I mean, certainly, based upon our last guide, as I said, we expected maybe $5 million to $7 million of headwinds and it was only -- in the second quarter, it was only about $1 million. So yes, $4 million, $5 million of benefits but certainly the top line we see was much more than that.
Yes, and I think, Scott, as I mentioned, the G&K revenue was a little bit better than we had expected. And our own -- the legacy organic growth continues to perform well.
Great. I'm curious just kind of a two-pronger for the last question. The tax reform, you mentioned, the 23% to 26% tax rate in fiscal '18 and thereafter. But I had heard that you will have some deferred tax liabilities being revalued. And I thought I heard that you may even have a negative tax rate in the fiscal third quarter. So that's -- when you speak of the 23% to 26%, it's actually going to be lower for the year in fiscal '18 when that gets factored in the third quarter impact. Is that right?
Yes. The range that Paul gave was 8% to 12% for fiscal '18 because of that revaluation of the deferred tax balances. So when you think about the -- if President Trump signs this on January 3, that creates an accounting event for us. We revalue deferred taxes. We have to -- we book the toll charge. And there may be other smaller adjustments that have to be booked, but the impact of the deferred tax reevaluation -- and keep in mind, all those deferred taxes are recorded at a 35% tax rate today and they will go down to 21%. That is a significant benefit or, let's call it, reduction in deferred taxes. And that will create the negative in the third quarter. But thereafter '18, the idea was, look, that's going to be disruption, no question about it at the time in the third quarter. But thereafter, we expect that 23% to 26% as kind of a normalized rate. Now clearly, there are always discrete events that happened like audits and other items that may cause us to move below or above that range at times, but that's kind of what we're thinking in terms of an ongoing rate.
Got it. That's helpful. Yes, I totally missed the 8% to 12%, so thanks on that. And just the last part of the question, you did alluded to the benefits, obviously, this will have for your customers and for you. Could you kind of talk about a priority thought process of how you may use the excess cash benefit that you'll get from this tax reform event?
Well, we're certainly evaluating that, Scott. I would say that when you think about the cash flow that we've generated in the past, our first priority is to invest in our business. And that's investing in our business, in our employees, whom we call partners, but then also in capital expenditures, et cetera. That is always our first priority. The second priority is we will continue to look for M&A opportunities when they make sense at the right value. We will likely continue to look at dividend increases and then share buyback. So I would say that our prioritization hasn't changed much, but certainly, this is the new wrinkle that we're going to need to spend some time on in terms of both short-term and long-term. And we're -- we don't want to make any quick decisions on that. That's an important opportunity and we're going to take the time we need.
And we'll now go to Andrew Steinerman from JPMorgan.
What's the implied organic constant currency revenue growth for the total company in the second half of the year? And has that changed from a quarter ago? Or is the dollar revenue increased mostly around G&K doing a little bit better?
It's a little bit of both now. Andrew, when we think about organic growth, keep in mind, our third quarter will be the same kind of organic growth calculation that we've been under for the first 2 quarters, and the fourth quarter is going to be impacted by the G&K deal being lapped, right. So we are -- it's just simply a math problem. We are going to see organic growth drop in the fourth quarter. So to answer your question about the guidance, it's a little bit of both. It's a little bit of nice performance in our legacy organic businesses, especially our First Aid and Safety. And it's also a little bit of nice performance in the G&K revenue. I would suggest that we're going to have another quarter of relatively normalized, if you will, organic growth in the third. It's going to come down in the fourth, just simply because we've lapped that and that's the way the math works. We then expect to see as we move in to '19, that organic growth begin to accelerate back to Cintas levels.
Our next question comes from John Healy from Northcoast Research.
I wanted to ask just a philosophical question for you guys about pricing. With the comments that you made about tax reform it's clear that your customer should be in a better spot in '19. I was curious to know if you guys -- if you could remind me, if you do most of your price increases at the calendar level, or just simply when the contract comes up on an annual basis? And I was just trying to think about how you've approached price in the last couple of years, and does what you see in the economy cause you to be more confident and maybe pursue more pricing than maybe you have over the last couple of years?
Well, I would say that the pricing environment is very competitive. It remains that way. But as I've said in the last several quarters, it seems to be constructive still. We probably have more price increases during the close of the beginning of our fiscal year, but that's not all customers, but probably a little bit more in that beginning of the fiscal year. In terms of our philosophy, it's a conversation about the value that we're providing to all of our customers. And so it is a customer-by-customer conversation about the wear and tear of the garments, the different products and services that we're providing, the service component, et cetera. And so it's a lot of different things that go into pricing.
Makes sense. And I want to ask you a question about kind of investments into the business. When you look at acquisitions, clearly, Aramark's doing a big deal with AmeriPride. When you guys get down to that 2x leverage or so, call it, 6 months from now, do you think that you're capable from a FTC standpoint to pursue acquisitions of that type of size? And do you feel like you're kind of limited in terms of the size of assets that you can pursue post G&K?
Well, if we're speaking about specifically the Uniform Rental business, look, we'll take a look at all opportunities that are available to us. And do I think that we'd be able to do a large deal? I think it really would depend on that specific opportunity, and there could be some challenges. Our goal would be to take a look at it and evaluate how we feel about those challenges. And so, John, look, that's a -- to say whether or not we could. I think it just depends on the opportunity, but any big deal will likely come with some challenges.
Now we will go to Hamzah Mazari from Macquarie.
This is Mario Cortellacci, I'm filling in for Hamzah. Actually to piggyback off the last question. If there is further consolidation in the space, can we expect better pricing? Or what would that look like?
Well, look, I mentioned that the pricing environment is fairly competitive today. It's been that way for many years, maybe a little bit more constructive in the last couple years. But I don't expect that to change. I think it will continue to be very competitive because there are many players both local, regional and national. And there are -- not everyone has to rent uniforms. And so I think there is -- we have to continue to show that we can provide a good value. But I think it's going to continue to be competitive. I don't see it changing much because of the Aramark/AmeriPride deal.
Okay. And then, I know you've already touched on this in the past as well. But could you frame for us, I guess, how are you thinking about the longer-term benefits of the SAP implementation?
Sure. We love that the information that this system will provide to us once we are -- once we have our entire business on. It allows us to much more quickly see opportunities that exist to look at industry specifics and be able to better target prospects, target existing customers for different types of products and services. And so more than anything, the information, we believe, will allow our salespeople and our service people to be more productive and efficient.
And we'll now go to Gary Bisbee from RBC Capital Markets.
Let me take another -- a different approach to the pricing. This has always been a competitive industry, you've acknowledged that regularly. What is the risk that some of the tax reform savings that the industry will earn gets competed away, think about an after-tax return as their margin or whatever is their focus. Is that -- do you see that as a risk? Is that -- any thoughts on that at this point?
I think it's too early to tell, Gary. Certainly, that could throw a little bit of a wrinkle into the way our products and services are priced in the marketplace. We're going to have to keep our eyes on that and see how it plays out. But I think it's a little early, but certainly that we're going to keep our eyes on it. It is something that could add a little bit of a wrinkle.
Okay. All right. And then staying on the tax theme for just one more question. Does -- I realize it's early, but does the outline of the plan have you thinking any differently about your investment plans? I realize you've got a ton of stuff going on and probably the first thing to do is pay down the debt. But as you think out over the next couple of years, would it make you more likely to invest, to raise wages to hire people more quickly to accelerate investment projects? Or not really?
Yes, I think, Gary, that all those things are likely on the table. We're going to evaluate, and we are going to -- we, first and foremost, we are long-term operators. And so, we're -- the first thing that we will do is evaluate how best this can make us stronger for the long-term. And there could be some short-term decisions because of that, there could be some longer-term decisions. But I think -- this is -- look, it's a new day, and we're going to have to get busy evaluating how to invest, how to best invest this benefit. But I don't have any answer. It's just -- it's not even signed yet, and we need to spend a little bit more time with it, but it certainly will have an impact.
Fair enough. And then have you put any thought yet to the CapEx ability to immediately deduct CapEx? It would seem to me likely that your cash flow would be -- have a meaningful benefit from that and that's your cash conversion, a percent of net income or however you want to look at it would likely improve at least for the next five years. Is it right to assume most of your CapEx would likely be eligible? Or is it also too soon to have a view on that?
I believe that, that certainly will benefit us. Gary, I need to spend a little bit more time on the specifics of those rules. But, yes, I think it certainly could create an improved cash flow because of that immediate expensing over the next 5 years. But I'm -- I -- we need to do a little bit more research on exactly the CapEx that we have that qualifies, but I like it. And I think it's going to be positive for us.
Okay. And then just one non-tax one to close it out for me. Talk about the -- just how the math will work in accelerating organic growth once you lap G&K. What are the key factors that then get the reacceleration back towards the normal Cintas level? Is it that you've been hiring salespeople in their territories? Although, I would think those would overlap with your territories, is it more of the cross-sell impact? Or just that, that business is flattening out at some point and then the rest of the base is growing? Just trying to think through [indiscernible]
Yes. Gary, I think it's all three of those. First of all, the revenue itself is going to bottom out, and that -- or that the decrease is going to stop, probably in our fourth quarter. But we have hired. We -- first of all, we brought on many legacy G&K salespeople for the open positions that they had. We have been hiring and training, and we saw some nice improvements in productivity from the first quarter to the second. And we like what we see so far. So -- and as you probably know, Gary, with our business, we sell many small accounts every single week and it takes a little bit of time for all of those small accounts to accumulate over time. And so as we think about fiscal '19, we will enter that fiscal year with a little bit better new business momentum from that block of salespeople. We will have seen the bottom of the trough in terms of the revenue overall.
And then lastly, yes, we're going to start to see some benefits of cross-sell and penetration into those customers. I don't believe we'll see any impact in fiscal '18. But fiscal '19, we should start to see some impact. I think the biggest thing is really the new business effort, though, that will get back on track after about a year of those legacy G&K salespeople seeing a reverse momentum because of the announcement of the acquisition and then the retraining, et cetera.
Our next question comes from David Stratton from Great Lakes Review.
I couldn't tell, I don't know if you said or not, did you give a legacy Cintas gross margin number for the quarter?
We did not, David. We have consolidated a number of those operations into the legacy Cintas locations, it becomes very, very difficult to separate what was from a gross margin perspective, what was legacy Cintas versus what was legacy G&K.
Got you. And then, if you would talk for a minute about energy impacts you saw in the quarter and then what you see the rest of the year shaping up like in regard to energy costs and your customers in that field?
Well, for the second quarter, we saw total overall energy rate of 2.2% of revenue. I would say for the second half of the year, maybe a slight increase, flattish to slight increase. Did that answer your question?
Yes. And then I guess -- yes. No, that's good.
David, on the top line, I think you mentioned our customers, too, in that business. And we do watch the rig counts as an indicator of how things are performing and we definitely have seen stabilization in that customer base. And we've talked about that from last quarter to that and we kind of lapped all that. So it's stable, but we haven't seen a lot of growth in the customer base fueling that line of garments, flame resistant type garments.
And we will now go to Tim Mulrooney from William Blair.
Last quarter, you were at $7 million in synergies. Some of the major activities were converting the payroll system into financial system, reducing functions of the former headquarters at G&K and consolidating a few dozen branches. But are there any other major activities this quarter to get you that $14 million synergy figure? Or is this mainly just continuing to benefit from the actions outlined last quarter?
Yes. It's primarily those that you just mentioned. So the continued reduction of the corporate G&A and getting almost a full quarter now of many of those savings, it is the benefits of the consolidation of a number of locations. So yes, it is all of those things. As we move forward, the items that are really left are continuing to convert to systems and to look at the sourcing opportunities that are out there because as we've talked in the past, we're still using much legacy G&K inventory, and so we need to burn through that. And once we burn through that, we'll start to then order through the Cintas supply chains. We expect that, that will create some saving opportunities.
Okay. You talked about material sourcing, is there perhaps also some room for density saving on the energy side, I mean, you said energy was 2.2% of sales today. I mean, what could that get to, could that get to below 2% at some point?
Well, look, a lot of that depends on gas prices of the day. But I think Paul mentioned, if we were -- well, I'll say it this way, for that G&K block of business, that fuel is about 3% of revenue. And so there is an opportunity to pull that down, certainly. And as we have converted the system and we then begin the route optimization process, that allows us to do some rerouting and get those savings. So you are right, Tim. That will start to come over the next several quarters as we complete those kind of integration plans. Could it get below 2% in today's environment? I would say, it's -- I don't think so. I think it probably could come down 10 to 20 basis points as a company. But again, I would think about it from the standpoint of we can get that 3% down to probably something closer to 2% for that block of business.
Got it. Okay. And then staying on synergies, maybe just a couple more. Did you say that you closed 50 facilities since the acquisition was closed, Mike?
Yes, we did.
But I think you were at about 420 locations following the deal closing. Is that -- I mean, just simple math, are you at about 370 today?
I haven't looked at that. I believe your math, but I haven't specifically looked at that, but it sounds reasonable.
Yes, not important. I was just curious, I guess. And then on the $14 million in synergies today, is that then split pretty evenly between SG&A and the consolidation of facilities? That 50 was a little bit higher than I was expecting. And you still expect that $50 million to $55 million by the end of 2018 to be majority SG&A?
For the quarter, yes, Tim, you were correct that it's pretty close to a 50-50 split in terms of SG&A versus gross margin. By the end of the year, I think it's going to start to tilt towards gross margin as we get more and more of the benefits of consolidation of locations and that the system conversion and route optimization. So I think we will start to tilt more heavily towards the gross margin.
And we'll now go to Sean Egan from KeyBanc Capital Markets.
Just one quick one for me. I'm just curious if you can talk about any difference in the performance of G&K locations, those 47% on Cintas systems and the balance off in light of the 4.4% revenue decline within the legacy G&K? Just wondering if you're seeing any clear differential yet.
No. No, we're not, Sean. I think, the issue is as we move any location, whether it's a legacy Cintas or G&K, there is disruption during that period of implementation -- I'm sorry, of conversion, system conversion. And if you're comparing a converted location to one that hasn't converted, that one that hasn't converted hasn't had any disruption yet. And so we're still so early in that system conversion process that we're seeing, certainly, some impact of the disruption. But nothing -- I would say we're not seeing anything that is material in terms of the separation of performance at this point.
And we'll take a follow-up question from Andy Wittmann from Baird.
Great. And I wanted to talk just a little bit more about kind of the top line in both your key businesses. But in rental, Mike, can you comment a little bit on add-stop and the characteristics of the new business that you're bringing in, whether it's tilted to new folks or competitive wins and even a comment on retention? Similar questions really for the First Aid business, I mean, the growth rate is really impressive and I'm just wondering if that's being brought into new customers or is that more of a penetration focus there?
Yes. Andy, on the add-stops, the add-stops metric is positive, but it's typically positive at this time of the year. Nothing really remarkable in it to speak of. Still the main drivers of growth are new business and penetration. So to answer your question specifically about anything changing, not really. It's still been consistent in terms of retention and pricing as well. So no significant changes there. And then, First Aid, yes, again, we were talking earlier about the expectation of that growing high single digits, and it's still a good mix of brand new customers, who value the service and want us to handle the compliance for them and provide a benefit to their employees, but also some good penetration. We continue to evolve in that business to offer more and more ancillary products and services like that safety cabinets and other things that we can put in there and a lot around safety and training. That's becoming a significant part of the revenue base, whether it's a training on materials handling or training and the safety training on CPR. That becomes -- continuously becomes a significant portion of the overall revenue.
Andy, we're about 18 months from a fairly good sized investment in salespeople in that First Aid and Safety business, if you remember, kind of coming out of the ZEE integration process. And we're just -- we're seeing some real nice productivity out of our new sales partners.
And there are no further questions. I'll turn the conference back over to you, Mike, for any additional or closing remarks.
Thank you very much for joining us tonight and season's greetings to all. We'll issue our third quarter earnings in March and we look forward to speaking with you again at that time. Thank you.
This does conclude our presentation for today. Thank you for your participation. You may now disconnect.