信達思 (CTAS) 2010 Q2 法說會逐字稿

Good day, everyone, welcome to the Cintas Corporation quarterly earnings conference call.

Today's call is being recorded.

At this time, I'd like to turn the call over to Mr.

Bill Gale, Senior Vice President of Finance and Chief Financial Officer.

Please go ahead, sir.

Good evening, and thank you for joining us.

With me today is Mike Thompson, Cintas's Vice President and Treasurer.

After some comments, we will be opening the call to questions.

For the quarter ending November 30th, 2009, total revenue was $884.5 million, a slight increase over the first quarter of this year, when adjusted for this quarter's one fewer work day.

While job losses appear to be moderating, the industries in which the majority of our customers operate in, continue to lose jobs, so there still is a negative drag on our revenue.

While we are hopeful that a recovery may be near, we are still uncertain as to when that will occur.

We continue to see revenues below the comparable period in the prior year for the next several quarters.

As a result, our key focus will be to continue to take care of our customers, ensuring they value our service offerings.

We also recognize the need to continue to right-size our organization's structure to adapt to the new revenue environment.

We have substantially reduced costs in all areas of the Company, as Mike will explain shortly.

Net income was $57.2 million, down from last year's $71.8 million, but higher than our first quarter income of $54 million.

Please note, both our first and second quarters of this fiscal year contained legal settlements that are reported separately on the income statements.

These settlements were made in order to avoid the potential cost and distraction that these cases would have had on the organization for the next few years.

During the quarter, the Company continued to aggressively manage capital spending and acquisitions.

We currently have almost $0.5 billion and marketable securities and no commercial paper outstanding.

We are well positioned to aggressively pursue acquisitions when the right opportunities present themselves.

We are continuing with our practice adopted last year at this time of providing no guidance.

We caution everyone that in our view, the recovery in the job market will be slow in coming and will take some time to return to what we saw in the late '90s or even in the middle of this decade.

We will continue to focus on providing our customers with exceptional service and manage our cost structure efficiently.

Because of our view of the sluggish recovery, we believe the current analysts' estimates are overly optimistic for the remainder of this fiscal year and into 2011.

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.

Now I would like to turn the call over to Mike Thompson, who will give you more color on the quarter.

Thank you, Bill, good evening everyone.

Total revenues for the second quarter were $884.5 million, a 10% decrease from the second quarter of last year.

The decrease was mainly due to the significant job loss experienced during this economic downturn.

When compared to the first quarter of this fiscal year, revenue decreased 1%.

This year's second quarter had 65 work days, the same as the second quarter of fiscal 2009.

But one less work day than the 66 in the first quarter of this fiscal year.

When adjusted for the one less day, revenue for the second quarter increased by 1% over the first quarter.

Company internal growth was negative 10% and improvement from first quarter internal growth of negative 12.5%.

Work days for the remainder of this fiscal year are 64 for the third quarter, and 66 for the fourth quarter.

Our third quarter is traditionally our most challenging quarter, due to the lower work days and customer holiday closures.

We anticipate customer holiday closures will be longer and more widespread than they have in better economic climates.

Any revenue and earnings estimates for the remainder of this fiscal year should take these factors into account.

We have four reportable operating segments, Rental Uniforms and Ancillary Products, Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services.

As a reminder on the face of the income statement Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services are combined and presented as other services.

The rental uniforms and ancillary products reporting segment consists of the rental and servicing of uniforms, mats, towels and other items.

The segment also includes rest room supplies and other facility products and services.

Rental uniforms and ancillary products revenue accounted for 73% of company revenue in the second quarter.

Rental revenues were $643.6 million for the quarter, a 9.5% decrease in revenues as compared to the second quarter of last year.

But flat as compared to the first quarter on an equivalent workday basis.

While the US economy continued to shed jobs, especially within our customers' industries we were able to somewhat offset that revenue impact over the last six months and rental revenue has been flat the last three quarters on an adjusted workday basis.

Our loss business metric, while slightly higher than the first quarter of this year, has improved from fiscal 2009 levels.

Our add/stop metric, which includes both uniform wearers and facility service products was a positive add metric for the second consecutive quarter, and our second quarter adds were stronger than the first quarter.

Improvement was due to combination of moderation of job loss and our continued focus on further penetration into our existing customer base.

While these adds help maintain top line revenue, they have also increased our selling costs.

Offsetting these positives were reduced new business and a difficult pricing environment.

New business was down from the first quarter as new customer prospects appear to be hesitant at adding new services at this time of economic uncertainty.

In addition, competitive pricing in the marketplace has become more aggressive.

Pricing for both customer retention and new business has been challenging, however, as long as it makes economic sense we will continue to aggressively fight our competition in the marketplace.

We continue to protect our market share and our customer satisfaction level remains high.

Our focus remains on taking care of our customers and enhancing our opportunities for future rental growth.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms, branded promotional products and other related products to national and regional customers.

Uniforms and other related products are sold to local customers including products sold to rental customers through our direct-sale catalog.

Uniform direct sale revenue accounted for 11% of total company revenue in the second quarter, up slightly from 10% in the first quarter.

While uniform direct sale revenue increased 11% from the first quarter, revenue levels continue to be soft.

Internal growth was negative 17% in the second quarter.

A moderation from the negative 25% in the first quarter.

A large amount of this segment's business is with the lodging, hospitality and gaming industries.

While these industries appear to be stabilizing, head count remains low as compared to historical levels.

In addition, location expansion and existing location, refresh programs, and/or rebranding initiatives have been isolated.

While customers have planned for future expansion and improvements we expect stabilization needs to occur before these types of discretionary spending returns to traditional levels.

Our first aid, safety and prior protection services operating segment includes revenue from the sale and servicing from first aid products, safety products and training and fire protection products.

First aid, safety, and fire protection accounted for 9% of the Company's second quarter revenue as compared to 10% for the first quarter.

During the quarter, revenues within our first aid, safety and fire protection services operating segment decreased 19% versus last year's second quarter, and were down 8% on an adjusted workday basis from the first quarter.

Internal growth was negative 17%, a slight improvement from negative 18% last quarter.

While the first aid and safety revenue in this segment decreased 11% from last year's second quarter, revenue has stabilized, and was relatively flat as compared to the first quarter.

First aid services and training revenue were positive as compared to the first quarter, while the sale of safety items including AEDs, suffered as these items are a more discretionary cost for customers.

Fire protection services revenue continued to suffer with revenue down almost 30% from the second quarter of last year.

And approximately 20% from the first quarter.

The majority of this decline is due to the continued pressure on fire installation business.

We have been exiting the fire installation portion of this business over the last year, and that process is now effectively complete.

We continue to focus on test, inspection repair service within fire protection.

Test inspection repair revenue was also down, but not as dramatically as the installation business.

In addition to our focus on exiting the installation business, business closures, competitive pricing pressure and seasonal fluctuation all had an effect on this business during the quarter.

Similar to first aid safety product sales, fire equipment upgrades and enhancements have been lagging as customers delay these purchases and request price concessions.

Our Document Management Services operating segment includes document destruction, storage and imaging services.

Our Document Management Services operating segment includes document destruction, storage, and imaging services.

Document Management represents 7% of second quarter company revenue, up from 6% in the first quarter.

Revenue increased 13% over the second quarter of fiscal 2009.

And 6% over the first quarter.

Internal growth was 9%.

When excluding the impact of recycled paper revenue and the related impact of recycled paper prices, internal growth for document destruction service and purge business was 15%.

Our document destruction services as well s our storage and imaging services continue to provide solid growth.

Recycling revenue was down 12% from the second quarter of last year, due to lower paper prices.

However, beginning in the month of November, we have anniversaried the impact from recycled paper prices, so moving forward full division revenue comparisons will be more meaningful, provided recycled paper prices remain stable.

Turning to margins, we continue to actively manage our cost structure in order to maximize results in this difficult environment.

Total Company gross margin for the first quarter was 41.8%, a 30 basis-point decrease from the second quarter of last year.

However, to combat the decline in revenue, cost of goods was reduced by $56 million as compared to last year's second quarter on a dollar basis.

Total Company energy costs improved 60 basis points versus last year.

Second quarter total Company gross margin decreased 110 basis points from the first quarter, while energy costs were flat.

Rental gross margin of 43.5%, was down 10 basis points from last year's second quarter.

As with the Company in total, energy costs improved as compared to last year.

The improvement in energy was offset by margin pressure due to reduced revenue levels.

However, as compared to last year's second quarter, expenses decreased by $38 million on a dollar basis.

When adjusted for work days and seasonality, rental margins were comparable to the first quarter and as with the Company in total, energy costs were flat.

As we mentioned last quarter, pricing has become more aggressive in the marketplace.

We'll we're maintaining our customer base at historical retention levels, the reduced pricing levels have impacted our margins.

Other services gross margin was 37.3% fort quarter, as compared to 38.4% in last year's second quarter, and 38.2% last quarter.

The lower margin was due to lower fire revenue within the first aid, safety and fire segment.

Within that segment, first aid and safety margins were maintained as were margins for fire, test and inspection business.

However, margins continued to be pressured in the fire installation business.

As I mentioned earlier, we have now essentially exited the installation business and expect fire margins to begin to recover.

Uniform direct sales margins were also lower, due to reduced revenue levels from last year and a change in sales mix.

Generally, customers are purchasing base-level and general stock garments, but have been delaying purchases of more specialized, higher-end garments.

Document Management gross margin was below the second quarter of last year due to lower recycled paper prices.

However, margins were up as compared to the first quarter due to a combination of higher revenue and improved recycling paper prices as compared to the first quarter.

We have achieved a solid national footprint for destruction services, and depending on recycled paper prices, we expect margins to continue to strengthen as local operations reach scale.

We continue to actively pursue document management acquisition opportunities, both domestically and abroad.

Selling and administrative expenses were 29.3% of revenue, an increase from 28.9% from the second quarter of last year, but an improvement from 29.7% last quarter.

We reduced our SG&A spend by over $25 million from the second quarter of last year, but the reduction in revenue over that time frame caused SG&A to increase by 40 basis points.

G&A labor and labor related costs as a percent of sale improved from last year second quarter while the relatively fixed type of expenses such as insurance costs, professional fees and property taxes increase on a percent to sale basis.

The 40-basis-point improvement from the first quarter was due in improvement in medical costs.

As mentioned in our first quarter earnings call, medical costs spiked during your first quarter.

While still high, medical costs did moderate to account for 3.7% of revenue.

G&A labor improved as a percent of sale from the first quarter.

Partially offsetting these improvements was increase in selling and bad debt expense.

The increase in selling related to commissions paid on adds where the sales force was involved.

We have also increased the head count of our sales force during the quarter.

These new sales professionals are currently in training, and it typically takes approximately one year for a new sales professional to achieve solid new business sales results.

While bad debt increased from the first quarter, it remains at a manageable level.

Our effective tax rate was 39.3% for the quarter, which reflects the timing of specific reserve bills and releases under FIN 48.

Since the adoption of FIN 48, our effective tax rate has increased during the second quarter due to the timing of reserve requirements but then returned to lower level for the remainder of the year.

We expect this to be the case again this year and anticipate our effective tax rate for fiscal 2010 will be approximately 37.5%.

Despite the difficult economic environment, our balance sheet continues to get stronger, primarily due to robust cash flow.

Our cash and marketable securities increased $122 million from August 31st.

Over the last 12 months, we have increased our cash and marketable securities on hand by over $350 million.

Reduced our outstanding debt by over $80 million and paid an annual dividend of over $70 million.

So during the most difficult period in our Company's history, we increased free cash flow, improving combined cash and debt levels by over $430 million and increasing our annual dividend to shareholders.

DSOs on accounts receivable were 41, a slight improvement from August.

We continue to actively manage our accounts receivable order to lessen any impact from current economic conditions.

As mentioned earlier, bad debt expense increased in the first quarter but remains at a manageable level.

New goods inventory levels continue to fall, given reduced demand, especial until our direct uniform sale business.

Inventory decreased by $19 million from August 31st.

Net property, plant and equipment balances continue to decline as we have significantly reduced our capital expenditures due to lower revenue levels.

CapEx for the first six months of this year were $48 million, including $23 million in the second quarter.

This is 50% of the amount we spent through six months of last year, when CapEx was $96 million.

Our capital expenditures are near maintenance CapEx levels, and were consistent by segment with spending in the first quarter.

We continue to inject growth capital where appropriate, which is mainly in our Document Management business.

Included in our capital expenditures are costs related to our SAP financial system implementation.

Year-to-date SAP related capital expenditures totalled $10 million, including $4 million during the second quarter.

Accrued liabilities increased as of November 30th, due to increases on retirement and profit sharing, interest on debt, and legal settlement accruals.

Long-term debt at November 30th remained at $786 million as all outstanding debt is now fixed rate.

Our average rate on the outstanding debt is approximately 6%.

Total debt as a percentage of total book capitalization and improved to 24%, while net debt or long-term debt less cash and marketable securities, as a percentage of total capitalization, decreased to 11%.

We continue to evaluate acquisition opportunities and have sufficient cash and access to capitals, were opportunities to become available at attractive valuations.

Our strong cash flow and robust balance sheet continue to provide us financial stability to withstand the current economic conditions while enabling us to be poised for additional expansion should market conditions improve.

Thank you, we'll take your questions

(Operator Instructions).

We'll take your first question from John Healy with Northcoast Research.

Quick question on the margins, as you look at the margins for the business as we go through the remainder of this year and go into 2011, can you talk a little bit about how we should see those margins move in terms of how we should see those heal up and improve from here?

I'm trying to understand at what point do you begin to anniversary large losses of employees within your customer base, and how we should think about the margin improvement solely from that fact as we move forward?

John, first off, when do we anniversary the large losses, that's going to take a little longer, because we were still losing uniform wearers at our customer up through and including this quarter.

Now, obviously the rate of loss has declined somewhat, but essentially we still saw an awful lot of job losses in the first half of calendar 2009.

As for margins what we need is a further stabilization of revenue, and a stabilization in the pricing environment.

We saw very aggressive pricing taking place.

I think it began in our first quarter, but it really seemed to accelerate in the second.

We are looking at all of our customers very closely before we grant a price decrease, if necessary, or looking at new business aggressively to determine whether or not it's profitable and has some potential down the road.

But we're we're going to have to meet some of those pricing pressures in order to maintain the volumes.

So I am really uncertain as to when we're going to see some margin improvement because I don't know when I'm really going to start to see some increase in the revenue line, and that's what we really are going to need to drive this thing forward.

Great.

And could you talk a little bit about just the environment as a whole, maybe where that pricing pressure is coming from?

Is it competitors just trying to hold on and stay in business?

Is it some of your better capitalized players that are maybe pursuing different business strategy?

I was hoping to get a little bit of color on your commentary in the release talked about plant closures or facility closures, maybe what you're seeing there, how severe that is and kind of the timing of that.

I think what you have to do -- lets first off make sure everyone understands that if you just pay attention to the macro changes in the reported jobs, that is not going to really tell you what the impact is on our industry.

So you've got to cut through the reported numbers and look at it by industry.

If you look at just the month of November, what the government reported, whether it was only a net decrease of 11,000 jobs, the problem was is that the job losses were still relatively high in our traditional industries that we service.

They were offset by increases in health care and education services, which really don't help our revenue lines too much at all.

So I think, first off, one needs to really judge that.

But to get back to the first part of your question, there is absolutely a desire on the part of our competitors, both big and small, to hold on to their business, and to continue to replace business that they've lost through client closures or through reductions in workforces.

So I think they're trying to offset some of their fixed costs just to continue to have some revenue and some cash flow, to withstand this very sluggish recovery that we're in.

I don't think that's going to abate in the near-term, and I think that we're going to have to continue to aggressively pursue and hold on to our customers and pursue new customers, and that is going to continue to be the margin closures.

As for actually facility closures, they are continuing.

Customers are continuing to assess whether they want to keep their operations open or keep as many plants open, and while it's not nearly as bad as it was 12 months ago, or nine months ago, it is still an indication that this economy is still in a very precarious state.

And to be clear, also, John, in the release we talk about holiday closures, what we're talking about there is third quarter, typically starting about this time, businesses will close down for the Christmas and new year's breaks.

And your concern about where they open back up and in this economic environment.

So that is what we talked about in the release.

Okay.

Great.

Final question I mean, the cash flow you guys generated is pretty amazing for the first six months the of the year and the balance sheet is very solid.

You made some comments about being interested in being more active on the acquisition side.

Could you guys talk a little bit about how -- how big of an acquisition you guys could make in terms of what level of comfort you would be in terms of taking that on a balance sheet and maybe just kind of remind us again of what your available commercial paper borrowings could be and other access to liquidity you guys would have?

We certainly have commercial paper available to us right now that would enable us to quickly pick up $500 million to $600 million in a relatively quick time period.

We could also sell some longer-term bonds.

We've talked to some of our advisors and there would be a very good appetite to increase that.

As for the size of acquisition, it could be relatively large, because I think we have a lot of capacity, given the cash flow strength of our businesses, we could easily buy a company very large and put quite a bit of debt on the balance sheet, and because of what might happen with what would continue to happen with cash flow from our existing businesses as well as the acquired businesses, we could pay down that debt relatively quickly.

I would just point out what we did in 2002, when we bought Omni Services, we added a lot of debt to the balance sheet, but our debt to cap ratio quickly came down because we generated a lot of cash from that particular acquisition as well as our existing operations.

So we would be very comfortable in a relatively good-sized acquisition.

Okay.

And just one final question, since you brought up the Omni deal.

If you look at the big players that are still in the space, and the uniform side of things, from a industry consolidation standpoint, could you see Cintas as an acquirer of a large property from a DOJ standpoint, do you think that is still something that could happen in this industry?

It could, but I don't know what the current attitude on the part of the FTC in this administration would be.

But we would certainly expect to be able to make a very large acquisition and get it approved.

Okay.

Great.

Have a happy holidays, guys.

Thank you, John, same to you.

Let's go next to Scott Schneeberger with Oppenheimer.

Thanks, good evening.

Guys, you mentioned in the press release and then in the prepared remarks, some discussion of adding on products and services to customers.

And also in addition to the sales force in the quarter.

Could you just speak to, A, on the first subject, what would the cross-sells that you were doing and, two, the strategy behind the additional sales folks, and what you're looking at going forward.

Scott, we've always been interested in trying to become a larger provider of services to our customers.

So as we have expanded our offerings within our different businesses, as well as expanding the number of different businesses we offer, we've been very much interested in trying to get our customers where it made sense to take additional services from Cintas.

In this period of economic difficulty, we've turned our existing sales force in our service group, to work with our customers, to try to find areas where we could provide additional value to them, by offering some other services, be it facility services, first aid and safety, document management, if it made sense, et cetera.

So we really kind of ratcheted that up over the last six months or so.

As for increasing the size of our sales force, we also I guess are showing a little bit more confidence now, in that the what everybody was seeing 12 months ago, you were staring into the potential of a depression, I think we all feel that that's not going to happen.

And we have seen stabilization as Scott Farmer mentioned in our release, in the last three quarters as far as revenues.

We think it is time to train sales people to be prepared to take advantage of the opportunities as the economy really starts picking up.

Okay.

Thanks.

That's helpful.

How is -- how is utilization running at your facilities?

And what steps are you taking in good locations and bad?

Well, as you may remember, back in May, we shut down some facilities to improve the utilization of what we had.

We haven't shut anything further down since that time, or anything that we hadn't already planned to do.

And we're seeing basically utilizations somewhere probably in the mid to upper 70's from a capacity standpoint, so we have adequate capacity available to grow back in -- as the business conditions improved.

And I would think that we should be in a position where we're going to be able to get by with very little capital expenditure in our rental business, because we've got that capacity available.

We basically have right-sized the organization, but have kept available to us the ability to add a lot of volume in our plants without having to build new facilities.

Now, as Mike mentioned, we certainly have to increase capacity in our growth industry, which has been document management, that has continued to grow during this entire period.

And so we are spending money there and getting new trucks available, new facilities opened up so that we can service more markets, and I think we should be sitting pretty well from a capital spending standpoint for the near-term because of the available capacity we have.

Sounds good.

Could you speak -- you mentioned health care and education, you may see a pickup in employment but that doesn't necessarily translate to your business.

Could you take us a level or two more granular on where you're seeing the real pressure among verticals that you serve, and are there any bright points?

I don't really have the details on that to be able to share that with you.

I mean, I would just say generally speaking, manufacturing continues to be very difficult.

And while manufacturing isn't that large a segment of ours, it does provide an awful lot of support for a lot of distribution and other service businesses which are customers of ours.

So we're not seeing growth there because the manufacturing basis is really growing.

Retail continues to be very sluggish and retail has been a target of ours over the last few years.

I would say the most stable really has been is automotive after-market.

The service stations, dealerships seem to stabilize from all of the turmoil of nine months ago.

In looking at that data, that seems to be doing better from our customer standpoint.

But again the manufacturing and service industries continue to be hurt.

Thank you.

One more if I could sneak it in.

You guys are projecting you want to be in position for acquisitions once you deem the time is right and it doesn't sound like we're there just yet.

But is there consideration on use of cash beyond the stockpile because you do have access to capital in other ways, is there consideration for share repurchase, any other use of cash that's being considered, or is it just much more primary focus on acquisition?

I think that is a Board level decision that the Board continues to evaluate.

I would just point you to what our behavior has been over the last 18 months, to tell you what the appetite really is for the Board with regard the use of cash.

Given it is building up in the balance sheet, I would say that barring a significant reduction in the price of our stock, where it might be deemed to be a time to, perhaps, reenter the market, I think what we are looking for is the opportunities that we think will come for some very nice acquisitions.

And we think the pipeline right now, and it has been for the last six months, is pretty good on acquisitions.

It is just valuations haven't come back in line where we think is appropriate yet.

We continue to be actively discussing various acquisitions in the pipeline but they just haven't come to fruition.

Okay.

Thanks a lot, guys.

We'll take our next question question from Ashwin Shirvaikar from Citi.

Hi Bill, hi Mike.

I want to take a step back and ask you about what are your underlying economic assumptions when you say that estimates are too high.

Because on the one hand you did mention that revenue seems to have stabilized, so if we assume stable revenues for the next couple of quarters, is that fair in your mind, and then on the cost front, you have taken out a lot of costs, are you at a level of operating cost that you feel is optimal for the circumstances?

Can you talk about that a little bit?

Yes.

Both of those items.

On the first, certainly you have to look at where we are year-to-date and if you look at a stabilized revenue environment, and stabilized economy, as we indicated in the release, we're not looking at future expansion at this point in time.

So combining that outlook with the workday and the holiday closure we talked about in the third quarter, I think gives you a feel of the where we believe it will be, which is a more stable environment that we've seen over the last excluding current month, going back the previous year, and kind of being consistent from there.

We just think that job recovery, which does typically lag economic recovery, is going to be slow and it's not going to be a snap-back that we're going to be seeing jobs added at a tremendous rate.

As far as our cost structure, we feel we're at a pretty good spot right now at a cost structure.

We have right sized the organization.

We don't feel to add a lot of costs back in.

We have looked at the sales force and taken opportunities.

It takes a while to train reps and get them ready.

We have taken some steps there.

I wouldn't say it is dramatic but we're taking steps there as we're being cautious in that area as well.

One of the things that I think you need to consider, Ashwin, often when you see the ads coming back at your existing customer base, that becomes more profitable business and you get some more leverage there going forward with the results.

But as we have seen over the last couple of quarters, we've seen revenue stabilization, but the fact is it's not coming really through ads, per se, as much as it's coming through some new business in new offerings within existing customers.

So that's a little bit more expensive business and that is why you see a little bit of the margin pressure, our selling expense, as Mike indicated, was up 50 basis points.

I'm afraid chat is happening, there is expectation on the part of many analysts, that there is going to be a more robust job recovery which is going to add more profitable business to us in the near term that I don't think we necessarily hold the same view.

And then the second thing is I don't think there's a true understanding that while revenues may be relatively stable, the problem is that the cost of that revenue is a little bit more expensive than just adding customers or adding wearers to existing customers.

So that the disconnect that happens.

Also, don't underestimate the fact that our third quarter tends to be more difficult, because of the holiday closures, the fewer number of work days, weather issues, and that sort of thing.

Some of that has to be factored in also.

Got it.

That is very useful.

I have a question, one of the points you mentioned a couple of times.

The costs associated with new revenues, is that anything other than normal commissions and amortization?

It's pretty much commissions, amortization of the new garments or the product.

You also will have some additional costs relatively minor with just sizing and that sort of thing, that would enter into it, and as I mentioned in my comments, and as Bill talked about with the focus on trying to add additional services within our existing customer base, we have shifted some of our focus on our sales force into selling into certain items within our existing accounts.

So those adds are paying commissions to sales reps versus strictly a straight growth add-on from a customer that adds an employee.

Right, right.

And you talked about pricing and medical costs on the call.

I may have missed it but did you quantify pricing, and also what is the outlook going forward on medical costs?

We did not talk about the pricing because that's a very difficult thing to quantify.

It just varies across the board with new business, versus what we were selling new business for, and what we're having to do with existing customers.

So I don't really have that data to give you.

I can just tell you it has certainly been more competitive.

As for medical costs, I have no way to predict on what the future will be on medical costs.

We were encouraged that we did see a drop from what we had experienced in that first quarter which is just higher than we've ever seen.

Our hope is that we will continue to manage that as best we can.

We want to be able to provide our employees with a good medical plan that will cover them, and, you know , it's really what happens with the whole cost of medical -- from the medical providers this new health care legislation, whatever it may turn out to be, we don't know what impact that's going to have on company's such as ours which are self-insured for medical.

So it really is uncertain going on into the future.

We're committed to continue to provide a good package to our employees, and we recognize that we have to manage the costs accordingly, but it's very difficult to predict what will

Okay.

My last question is eventually when you return to growth, let's call it late in the -- late next year and into 2011, maybe, will that return to growth result in maybe at least a temporary negative impact on cash flow because of CapEx going up and working capital rising?

It will certainly impact the capital, working capital will definitely absorb some cash.

Injection of new garments you'll have to have that take place.

But as I mentioned earlier, from the uniform rental perspective, we don't see a plan for a lot of new rental plans.

I don't think we'll have the same degree of spending on plants and facilities as we maybe saw in the 1990s when we had very robust growth.

You know, some of our other business s the most capital intensive of other businesses, document management, from the cost of the trucks, I don't think that is going to cause much more capital spending than what you have seen over the last few quarter s because that has continued to grow.

Right.

Thank you, guys, and happy holidays.

Thank you.

You, too.

Go next to Andrew Steinerman with JPMorgan.

Hi, you talked about three quarters now of a rental business being stable, and you also gave your economic comments, but it seems to me that perhaps the most recent quarter that the business was a little less stable, I think I heard you correctly, that the loss business was a little higher sequentially in this quarter, versus sequentially the last quarter.

And I think you made a similar comment about new business.

And so is there some additional headwinds happening right now, or am I sort of not asking the question correctly?

You're asking the question correctly.

We only see it that way -- as we mentioned on last quarter's call, we weren't as optimistic as the numbers tend to be and the downturn that we've seen this quarter we think is a little bit of timing and just effort.

Sometimes you get fluctuations that are a little more positive or negative, over all when you look at the output, stable, and you're going to see a little bit back and forth.

We didn't see lost business down -- decrease dramatically from Q1 but it was down a little bit.

We didn't see adds spike tremendously over Q1, but they did improve.

I wouldn't look at it too much that there was a dramatic change.

Certainly new business has been a little more difficult but it was difficult in the first quarter as customers, as new prospects, are just a little bit hesitant to put in new programs.

We're still selling new business but it is not at the same levels.

And Andrew, I would be very careful I think Mike is right, it is kind of like minor changes in these parameters and I think sometimes people try to read too much into it.

We -- we are actually encouraged as Mike said, from a rental standpoint on a comparable workday basis, it was relatively flat, and I think that that's an encouraging sign and hopefully we'll continue to see that and then start seeing things get better as we move throughout 2010.

But I think it will be very slow.

Right.

So maybe take it -- let me take a shot of asking a little bit -- little bit more about the February quarter and obviously you have given a lot of qualitative comment about one less business days and factory shutdowns seem tough.

When I look at a typical February quarter historically, this is your worst quarter, it is down about 1%, this is rental revenues when you look at the kind of last decade, and we're also losing point and a half over the course of one less day.

My question is, if we were going to quantify how much the February quarter will be down from the November quarter, will it be down a lot more than normal, or do we lose the day and a half which is 1.5%, we lose a day which is one and a half percent down and talk about normal seasonality you lose another point or so.

And when we try to say stepping back that is still stable.

Well, I would -- you're looking at the revenue line correctly.

I would say that there tends to be in addition to what you just said, a little less success on selling new business, because you have the month of December and then you get in by the time you come out of the holidays before companies are willing to start thinking about adding new services, that factors into it.

So I think that's another issue.

We've seen, in the last year for sure, you come in out of the holidays, companies shut down for longer periods of time.

Not sure what's going to happen here this time.

I think a lot of it depends on the confidence level.

And then we have some cost pressures that we experienced in our third quarter that we don't have in the other quarters.

All the payroll taxes are reset, so we have all of that expense, for all of the employees in the Company.

So you always see a little pickup in our SG&A spending as a result of that.

And so it is just a number of those different things that give us reason to ask you guys to be very cautious in how you look at the third quarter.

Yes--

I would agree with Bill on that.

As you look at it, you're correct on revenue, it is just that we're a little more cautious than in a typical quarter.

Remember, also, when you get those shorter workday months, when you get to the margin side, you have things such as material costs that is calculated on a monthly basis or depreciation, where you are taking a full quarter hit despite one or two less work days in the quarter.

So it does have impact on the margins more extensively than just the top line.

Right.

But are you comfortable saying that sequentially in this February quarter, that revenues won't be impacted as much as they were in February of 2009?

No, I'm not -- I can't say that.

I can't say that's true.

I can't say it's false .

I don't

Okay.

All right.

Now we always appreciate you being straight forward.

Thank you.

We'll go next to Vance Edelson with Morgan Stanley.

Hi, thanks a lot.

So one more question on your point that analyst estimates are too high.

Is that specifically referring to the quarterly estimates that you see out there going forward, or are you thinking of that partially in terms of the 2010 fiscal year, and if that's the case how much of the rejiggering is needed simply was the second quarter results already fell shy?

I think I see it -- in answer to all of your questions -- in the next several quarters as I mentioned in my opening comments into 2011.

It is not because we missed supposedly the estimates for this quarter.

I think there was just too much optimism in those numbers.

Okay.

Got you.

And then you mentioned that you're adding new customers, which is helping to offset other revenue declines, and that your competitors are cutting prices and it sounds like they're doing what is necessary to hold on to their customers as best as possible.

So could you elaborate on the competitive dynamics that are allowing you to add customers when you do add them.

Is it essentially a matter of taking market share from smaller less well capitalized players and is that becoming easier?

Yes, it is becoming easier, so we are taking market share, not only from them, but also from some of the bigger competitors.

But certainly the little guys are having more difficulty.

And I think we're also finding that there are still companies that are willing to take on the service.

So it's not like we are -- our whole source of no-programmers has totally dried up.

That's not the case.

We are still selling some no-programmer business.

It is just not near what it used to be.

And one quick follow-up on that.

When you think about the pricing pressures across your business, where are they pronounced across your business lines?

Uniform and services rental have been the most impacted.

We saw in the second quarter our fire service business, there was a -- it was a fairly dramatic competitive increase in competitive pressure there, also.

Okay.

Got it.

Thanks a lot.

We'll go next to Vishnu Lekraj, with Morningstar.

Hey, guys, how is it going?

Looking at -- listening to what you've been saying in terms of what you expect over the next half year to 12 months and the recovery, manufacturing and goods producing industries, how that's going to impact your revenues going forward, are you looking to explore moving outside or building more service-type customers into your customer base to motivate growth going forward?

Yes, absolutely.

We are looking at our strategic direction to identify those industries that will provide greater opportunities for growth over the next five to 10 years, and we are going to see what we can do to develop products or service offerings that appeal to that type of customer.

Right.

Specifically, though, with your uniform rental, are you looking to move into more hospitality, move into health care, which seems to be resilient in terms of jobs?

Absolutely.

Vishnu, we have mentioned that before, it is our strategy to identify how we can convince those types of companies that have traditionally always bought uniforms or have their employees to buy their own uniforms, as in the case with health care, what the value of perhaps a rental program could be.

And we've got some experiments going, they're showing some promise.

And we are hopeful that will provide a new avenue for growth down the road.

And we have been doing that as well, especially in healthcare, but over the last five or six years as manufacturing jobs have left the US for abroad, we were able to (inaudible) to that environment mainly because we took our uniform programs and developed them for other industries.

So we're certainly doing that and continue those efforts.

Right.

You expect that maybe some higher costs associated with the selling of those newer garments to newer customers?

Not necessarily.

I think it's more of a having the right type of products and convincing those type of customers the value of what a program like that can bring to them.

It is certainly a longer sales process in the beginning when you enter a new industry or have a new product offering for the new industry, to educate those first few customers of taking that product.

About the cost, it will be the same as from a sales cost prospective.

I want to drill down a little bit on your Uniform Direct Sales.

Have you heard anything from your customers in terms of the expect to start spending here in the next over 2010, or is there just no communication between yourself or they have not said anything to you?

We have had a lot of discussion with customers and what we've seen in the uniform direct market, is a discussion on their part about future plans.

The difficulty we have, is until they pull the trigger, it is hard to determine when that is going to be because it is discretionary in nature.

The activity has picked up.

There is certainly more discussion about new redesign programs.

Not so much as openings, although there has been some talk about that, redesign of brands, upgrading of -- freshening up of programs, so to speak.

But, again, we're cautious there because we want to make sure, until they see the revenues begin to increase, it will be difficult for them to make that spend.

But we're encouraged somewhat, at least we're having those discussions now.

To clarify that, we can expect slower growth in that service line than the past due to the nature of what is going on with those types of customers.

Correct?

I think at this point that is probably a fair assumption because I think many of those types of industries are sitting on the side lines talking about a lot of things but not doing it much yet.

Got you.

Happy Holidays, guys.

You ,

Go next to Andrea Wirth with Robert Baird.

Hi, Andrea.

I want to first dig into pricing.

Is it fair to say most of the pricing pressure is coming in on the renewals, so maybe it is call it 20% of your rental business right now is seeing some of the pricing pressure, or is that not necessarily the right way to think about it?

It is not just on the renewals it is on the new business, it's on the even within a contract, being able to convince a customer to accept a price increase.

It is more difficult.

So it really runs through across the whole board of business.

And at this point should we consider the pricing levels now to sort of be the permanent levels going forward or is there actually the opportunity for pricing to go back up from here?

I think it goes back up but I think it can also go down.

I mean, certainly people are being more aggressive today, the competition, to maintain and generate some cash flow to cover their fixed costs.

Certainly customers today are being much more cost conscientious than they have been in a growth economy.

We would hope that pricing would rebound.

Will it come back to levels before, that's hard to say.

Once growth returns, what typically occurs, they're not looking strictly at cost probably as hard as they are today.

In terms of actual contract terms, are you seeing any changes there, customers looking for shorter terms, anything on that front?

You occasionally get requests on that but we are holding pretty firm on that.

That's not in the best interests of the industry to allow that to happen, because the investment that one makes and all the uniforms.

So while there might be some inquiries, I don't see much of that happening in reality.

Okay.

And then in terms of your sales force and adding to the head count there, is the head count actually up year-over-year now for your sales force?

Yes.

All right.

And so then in terms of just the increased costs so we should probably assume there is a little bit of head wind call it the next 12 months, or so--

At least that, yes, because we also as we continue to see that it opportunities down the road, it takes a while to get people trained and in place and we've got to invest in that future.

So, yes, there is going to be some headwinds for a little while until we see some nice growth coming from not only new business, but also from existing customers.

Got it.

Looking at the energy cost, going forward into next quarter is it probably fair to say that those are a little bit higher just given what we've seen kind of on the natural gas front and a little bit higher on diesel and gasoline?

You tell me what is going to happen with diesel gasoline and natural gas for the next three months and I will tell you whether that has an impact on our quarter.

It is what it is.

So we have done a lot to try to become efficient but we can't predict what's going to happen with energy prices.

We were happy to see they were stable from the first quarter to the second quarter.

And they're going to fluctuate up and down, but hopefully we're going to stay within a reasonable range.

Okay.

Great.

Thank you, that's very helpful.

We'll go next to Gary Bisbee with Barclays Capital.

Hey, guys, first of all, happy holidays.

Thank you.

Same to you.

I guess a couple of questions.

First of all, can you clarify for me the commentary you made the last two quarters on the add stops.

Are you talking it is up sequentially up a bit in each of the last two or sit up year-over-year?

And then I guess is the right way with revenue being flattish next to work day changes, is the right way to think about it that sales or new business activity is down an equal amount so offsetting the improvement you're seeing in add stops thanks?

It is kind of a mixed bag but it is sequentially we're talking about.

Because these were two straight add quarters that were up year-over-year as well.

But we're talking sequentially.

When you talk about directionally what's occurring, you're right the adds are making up more of the growth so to speak to offset the job loss.

Lost business has been pretty consistent.

It is better than last year.

Sequentially it was down a little bit.

New business I would say the adds are making up more of the lower new business as well as the price increase pressures that we talked about.

So price increases have taken a hit.

And new business is lower if you go to sequentially and those adds are offsetting that.

Keep in mind I want to make sure when everyone understands, when we talk adds, we're not just talking about additional uniform wearers.

When we talk about adds, we're talking about adding an entrance mat to an existing customers, adding hygiene services.

Adds to us includes everything from new uniform wearers to new entrance mats, new hygiene services, et cetera.

Okay.

And so that would explain why there could be incremental costs associated with it--

Right.

Okay.

Especially when you take those sales reps and they go in and sell a new service, but it is to an existing customer.

In a normal situation you may have a uniform-wearing customer, they hire three people, well there is a little bit of commission there for the driver but not like it would be sending a sales rep selling a new service.

Let me ask you a big picture question.

You clearly proven in the past that uniform acquisition can be accretive over time but in the last couple of times you've been much more documented on first aid, safety, fire, acquisitions, when you think about this great balance sheet that you've got right now, how do you weigh the benefits of continued diversification for the business overall, versus opportunities to gain market share with the core uniform business?

I guess my take is I think investors would be more pleased to see more diversification, but given that there can be good accretion from uniforms, how do you think about that, and can you give us any guidance on what we might expect?

Gary, that is a good question and we really study that continuously and we look at all of these different alternatives, and I think one of the interesting things that people maybe don't necessarily realize is that when you look at an acquisition, you also take into consideration what you perceive the future environment to be, and while acquisitions and uniform rental may have looked attractive in just general terms two years ago, as we began to see the weakness in the business, starting to come about, we didn't want to buy a company in like the uniform rental business, and then find out that a year later we only had 80% of what we thought we were buying.

So you have to be very careful there, and I think on the part of the sellers, they didn't have that expectation and wouldn't factor that into their expected price.

So I think you've got to look at an acquisition in light of what you expected to perform for you, over the near-term as well as down the road, and what synergies you can get.

And we are not against buying any additional uniform rental companies.

In fact, we would be interested in doing it at the right value in light of the current -- at least our expectation of mat what the economic environment is going to be.

So I think that we feel that we have the ability and the financial wherewithal to probably do both to pick up some nice uniform rental companies, to also expand offering -- look for additional acquisitions and fire and first aid and document management, and even start thinking about, okay, what is the next document management service that we want to have, and should we start thinking about buying a player in that and then doing a rollup like we've done with some of the other businesses.

So I think we're big enough, we're strong enough to be able to do all of those things, and we've got people working on each one of those within the Company.

Okay.

And then I guess just one question, help us think about currency impact going forward.

Can you remind me what percent of revenues from Canada these days?

It's under 10%.

We don't give an exact percentage but it is under 10% and in this quarter the Canadian dollar didn't move much.

There was minor impact.

So, again--

And our European business is relatively still very small.

And then just one last question obviously you're spending on increasing the inventory at uniforms has been down as the uniform business has slowed.

Should we have any expectation that we're going to see amortization of big programs you may have started 18 months ago fall off, and is that likely to be a benefit at any time in the near-term, or is that already--

Yes, you wouldn't see a significant change quarter to quarter just because any one customer is a huge customer and but certainly unless growth picks up higher, you're going to see either stable or down number there because the amortization there will continue to roll and your injects on existing customers isn't as great on new business injections.

So you'll see some stabilization but it won't drop as quickly because the revenues are stabilizing, but again you won't see any one-time dramatic change because we don't have any one customer that large.

Great.

Okay.

Thanks a lot ,

We'll go next to Nate Brochmann with William Blair & Company.

Happy holidays, gentlemen.

Same to you, Dave.

Just.

Just want to do ask a wrap-up question if I could, and that is combination of everyone else's questions.

I get the sense that we're ending the seasonally slow period, we are adding back to the cost line.

But yet overall, you still feel pretty good about the overall trends maybe not as rapid as people would have hoped in terms of embedded in estimates but yet we're still past the negative inflection point moving positively and the overall thing that I take away is that you are adding the sales force again, which means that, one, you can use your stronger balance sheet to become more aggressive, relative to your competition, and not just on pricing, but in terms of the sales effort.

But, two, it really does signal that better times are ahead and we can keep the positive trajectory and trends rather than worrying about kind of going negative again.

Is that kind of the general way to think about all of the comments?

I would absolutely agree with what you said.

I think the only thing I would caution is, again, I don't want to beat a dead horse here, but I just don't think you're going to see this rapid addition of into the work force in this country, and therefore all of the adds that we're going to get as a result of our customers adding on business.

I think it's going to be relatively slow.

But on the other hand it is not the doom and gloom that many people were predicting nine months or 12 months ago.

And I absolutely agree with that, that we have turned the corner.

Our Management here, we're still bullish on our business.

We had demonstrated that this is great cash flow business and we're very pleased to be -- to do what we do, and we think that being the strongest Company in all the businesses that we're in, that we are the best positioned to take advantage of what's going to happen as the US economy and the North American economy continues to improve.

So I would completely agree with what you said.

Yes, and while at the end of the day the rate and profile of economic recovery is certainly open to debate in any conversation with any customer, any company, any client right now, the fact, though, that you are adding more aggressively, you have a lot of different bullets in terms of whether it is acquisitions or new service offerings, and the fact that you do have a fair amount of leverage in your model again while the pace of earnings growth might not be as optimistic as we might have thought going into this call, it feels that the future is still pretty bright with all of those things especially on a comparative basis.

Yes, you are right on that.

Absolutely.

Okay.

Great .

Thank you

Thank you, Nate, happy holidays to you.

And there are no other questions in queue at this time.

I'll turn it back over to Mr.

Gale for closing remarks.

Well, thank you, all, very much for joining us this evening and we really appreciate your continued interest in our Company.

And we would like to wish all of you and all your family a very joyous holiday and a prosperous 2010.

This concludes today's conference call.

Thank you for your participation.