信達思 (CTAS) 2010 Q4 法說會逐字稿

Good day and welcome to the Cintas quarterly earning results conference call.

Today's call is being recorded.

At this time, I would 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.

Thank you for joining us to discuss the fourth quarter of fiscal 2010.

With me this evening is Cintas's Vice President and Treasurer, Mike Hansen.

Mike Hansen was recently promoted to this position from Corporate Controller to replace Mike Thompson, who has assumed a role in our rental organization as Senior Vice President, Facilities Services.

We are pleased to report that revenues increased 3.5% from last year's fourth quarter.

Internal growth, adjusting for acquisitions and the one additional workday in this year's fourth quarter compared to last year, was also positive at 1.9%.

After the very difficult economic conditions experienced since the beginning of the recession, this marks our first positive growth period in revenue since our quarter ending August 31, 2008.

Our fourth quarter revenue of $909 million was above our previously released guidance of $870 million to $890 million.

Earnings per share for the quarter were $0.36 compared to last year's $0.03 per share.

Prior year numbers included restructuring and impairment charges of approximately $49 million before tax, or $0.35 per share.

Current year earnings per share were positively impacted by approximately $0.01 due to the reversal of certain restructuring charges.

As we have reported in the last couple of quarters, we continue to see signs of stability with the employment levels of our customers.

While customers continue to be hesitant to add employees, we no longer see the significant reductions that occurred during the past couple of years.

The result is that our new business is beginning to offset the impact of lost business or stops at existing customers.

The pricing environment continues to be very competitive, both with the new business as well as renewal of existing contracts.

We continue to be very pleased with our overall financial condition.

During fiscal 2010, we paid our annual dividend, amounting to $74 million, and still increased our cash and marketable securities by over $300 million.

As of May 31, 2010, we had no commercial paper outstanding and have cash and marketable securities of over $560 million.

During the recession, we continued to generate substantial cash flow and are able to keep our debt capacity available for opportunities that will arise for additional acquisitions or more rapid expansion throughout the world.

Now that we have more confidence in our view of the future economic environment, we are resuming providing guidance.

Our expectations are for revenues for the fiscal year ending May 31, 2011 to be between $3.55 billion and $3.75 billion, and earnings per share to be between $1.50 and $1.58.

This guidance assumes a slowly improving economy with a relatively modest increase in employment levels, and no significant increases in costs such as energy or medical benefits.

We also expect our growth in both sales and profits to improve as the year progresses on a workday-adjusted basis.

We are pleased to report our continued expansion outside of North America.

Earlier this month, we acquired Squirrel Storage in the United Kingdom that has 10 record storage centers, serving six markets in England, Scotland, and Wales.

This acquisition, which has over GBP10 million in annual revenue, now gives Cintas the opportunity to provide Document Management Services to customers in Germany, the Netherlands, Belgium, as well as the UK.

We are excited to have a Cintas presence in the United Kingdom.

We are encouraged with the stabilization of the economy.

Through the very hard work of our employees, coupled with our strong customer relationships, we have weathered the most serious economic downturn since the 1930s.

With our breadth of business services and strong financial position, we believe that we are prepared to benefit from the improved economic conditions that we expect to prevail in the next several years.

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.

Mike Hansen will now provide more detail on our results, and after his comments, we will open the call to questions.

Thank you, Bill.

Total revenue for the fourth quarter of fiscal 2010 of $909 million represented a 3.5% increase from the fourth quarter of last year.

This year's fourth quarter had 66 work days, one more than last year's fourth quarter, and two more than this year's third quarter.

On an adjusted workday basis, total revenue grew 1.9% compared to last year's fourth quarter.

Total Company internal growth was also 1.9%, an improvement over third quarter internal growth of negative 3.6%.

As compared to this year's third quarter, revenue increased 2% on an adjusted workday basis.

Before discussing the quarter in more detail, please note that our fiscal 2011 work days will actually be the same as fiscal 2010.

That means there will be 66 work days in Q1, 65 in Q2, 64 in Q3, and 66 in Q4.

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.

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

The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms, mats, towels, and other related items.

The segment also includes restroom supplies and other facility products and services.

Rental Uniforms and Ancillary Products revenue accounted for 71% of Company revenue in the fourth quarter.

Within rental, based on fourth quarter revenue levels, uniform rental accounts for approximately 52% of revenue.

Dust control, which is mainly entrance mats, accounts for 22%.

Hygiene, which is mainly restroom supply and cleaning, is 11%.

Shop towel revenue is 6%.

And linen and other, which is mainly nonperson-specific garments, such as aprons and butcher coats, is 9%.

Rental revenue was $647.7 million for the quarter, down 1.5% compared to last year's fourth quarter, on an adjusted workday basis, but up 1% compared to last quarter on an equivalent workday basis.

Internal growth was negative 1.1%, an improvement from the third quarter internal growth of negative 5.9%.

Our rental revenue benefited from the modest US private sector job growth during our fourth quarter, as well as our efforts to maintain and further penetrate our existing customer base.

Our uniform wearers increased during the quarter, as we had improvements in our new and lost business metrics and our add/stop metric.

Pricing continues to be aggressive for both customer retention and new business.

We are protecting our market share by maintaining high levels of customer satisfaction and by fighting our competition in the marketplace.

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 also sold to local customers, including products sold to rental customers through our direct sale catalog.

Uniform Direct Sales revenue accounted for 11% of Company revenue in the fourth quarter.

Fourth quarter revenue of $103.2 million represents an increase of 10% compared to last year's fourth quarter and represents internal growth of 8.3%.

Additionally, this revenue level represents an increase of approximately 6% over last quarter on an adjusted workday basis.

Within this segment, our Global Accounts and Strategic Markets division has a significant amount of business within the lodging, hospitality, and gaming industries.

These industries gained jobs in our fourth quarter and we began to see some willingness on our customers' part to resume spending.

We also experienced improved levels of spending at the local level through our direct sale catalog.

However, the fourth quarter segment revenue is still well below pre-recession levels.

Our First Aid, Safety, and Fire Protection Services operating segment includes revenue from the sale and servicing of first aid products, safety products, and training, and fire protection products.

First Aid, Safety and Fire Protection revenue accounted for 10% of Company revenue in the fourth quarter.

During the quarter, revenues within this operating segment increased 5.8% versus last year's fourth quarter.

Internal growth was 2.8%, which is an improvement over last quarter's internal growth of negative 6.1%.

Both the First Aid and Safety revenue and the Fire Protection Services revenue showed improved levels and growth rates in the fourth quarter compared to last quarter.

First Aid and Safety revenue increased by 3.4% compared to last year, while Fire Protection Services increased by 9.5% compared to last year.

As with Uniform Direct Sales revenue, the revenue in this segment is still well below pre-recession levels.

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

Document Management accounted for 8% of fourth quarter total Company revenue.

Revenue increased 30% over last year's fourth quarter, with internal growth of 25%.

Recycled paper prices remained at historically elevated levels during the fourth quarter and this was a significant contributor to the relatively high internal growth rate of 25%.

Internal growth excluding the recycled paper revenue for document destruction service and purge business was 10.5%.

Turning to margins, we continue to actively manage our cost structure to ensure it is appropriate given our revenue levels.

Total Company gross margin for the fourth quarter was 42.4%, an increase over last year's gross margin of 38.1%.

Keep in mind that last year's fourth quarter gross margin included a loss on inventory valuation of $27.5 million due to excess inventory levels caused by the significant deterioration in the US and Canadian economies.

Excluding this charge, the adjusted gross margin in last year's fourth quarter was 41.2% compared to this year's fourth quarter of 42.4%.

This 120-basis point improvement in gross margin was in spite of a 50-basis point increase in energy-related costs.

Fourth quarter total Company gross margin improved by 70 basis points from the third quarter.

Energy-related costs accounted for a 10% basis point improvement.

Higher volumes were also a contributor to this improvement.

Rental gross margin of 43.5% was down 10 basis points from last year's fourth quarter, adjusted for last year's loss on inventory valuation.

However, energy-related costs increased by 50 basis points from last year's fourth quarter to this year's fourth quarter.

Aside from the effect of energy, our improvement was due in part to better capacity utilization in fiscal 2010, driven by the impact of our restructuring activities, which were completed throughout this year.

Rental gross margin improved 80 basis points compared to the third quarter.

Energy costs decreased 10 basis points in the fourth quarter compared to the third quarter.

The remaining improvement is mainly due to higher overall rental volume.

Other services gross margin was 39.8% for the quarter, as compared to 34.5% in last year's fourth quarter, adjusted for last year's loss on inventory valuation, and 39.2% last quarter.

The improvements over both last year's fourth quarter and this year's third quarter are generally due to better fixed cost absorption due to improved volumes.

Selling and administrative expenses were 31.5% of revenue, an increase from 28.9% for the fourth quarter last year.

Selling expenses were 120 basis points higher than last year's fourth quarter.

As we discussed on last quarter's call, we have continued to use our sales force to penetrate our existing customers with new and different products or services.

Sales commissions paid on these nontraditional adds where the sales force was involved have resulted in increased commissions compared to last year.

We also continued our planned increase in sales force headcount.

Future increases in our sales force will depend on the direction of the economic environment.

In addition to the increase in selling expense, medical expenses increased 50 basis points compared to last year due to higher utilization of the medical plans, and profit sharing expense increased by 40 basis points due to the higher net income levels in this year's fourth quarter compared to last year.

Sequentially, SG&A decreased from our third quarter, mainly due to a combination of the lower payroll taxes and lower bad debt expense due to improved collections of past due accounts.

We were positively impacted by a $2.9 million change in estimate to the restructuring reserve during the fourth quarter.

This change in estimate represents the difference between severance and other exit costs estimated during last year's fourth quarter and the costs actually paid during fiscal 2010.

Our effective tax rate was 38.2% for the quarter, which reflects the timing of specific reserve builds and releases under FIN 48.

For the full fiscal 2010 year, our effective tax rate was 37.3%.

We expect our effective tax rate for fiscal 2011 to again be approximately 37.3%.

Our balance sheet and cash flow continue to be strong.

Our cash and marketable securities increased $14 million from February 28, despite paying our annual dividend of $74 million.

Since May 31 of 2009, our cash and marketable securities increased $316 million.

DSOs on accounts receivable were 42, a slight increase from last quarter, but consistent with last year's fourth quarter.

Although we had a slight increase in DSOs from last quarter, our aging improved substantially due to a focus on past due accounts.

New goods inventory levels at May 31 were relatively consistent with the levels at the end of the past two quarters.

We believe the current balance is appropriate based on our current revenue level and mix.

Accrued liabilities decreased $58 million compared to February 28 due to the $74 million payment of the annual dividend, which was paid on March 10.

The dividend of $0.48 marks the 27th straight year in which we increased the dividend.

The decrease in accrued liabilities due to the dividend was offset by a $12 million increase in accrued bond interest.

Long term debt at May 31 remained at $786 million, as all outstanding debt is now at fixed rate.

Any early retirement of this debt would require a prepayment penalty and is not currently attractive.

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

Total debt as a percentage of total book capitalization was 24%; while net debt, or long-term debt less cash and marketable securities as a percentage of total capitalization, improved to 8%.

As mentioned earlier, our cash flow continues to be strong.

Our cash flow provided by operations in fiscal 2010 was $562 million, an increase of 7% over fiscal 2009, and our free cash flow was $450 million for fiscal 2010, an increase of 24%.

CapEx for the year was $111 million, including $32 million in the fourth quarter.

Our CapEx by operating segment was as follows -- $68 million in Rental; $7 million in Uniform Direct Sales; $8 million in First Aid, Safety, and Fire Protection; and $28 million in Document Management.

We expect our CapEx to modestly increase in fiscal 2011, to be between $125 million to $150 million.

We invested $50 million in fiscal 2010 on strategic acquisitions, primarily in our Document Management Services operating segment.

We continue to evaluate acquisition candidates and we have sufficient cash and access to capital for when opportunities arise.

As Bill mentioned in his opening comments, we expect fiscal 2011 revenue to be between $3.55 billion and $3.75 billion, and earnings per diluted share to be between $1.50 and $1.58.

While we expect a return to growth of sales and profits in fiscal 2011, the US economic environment still appears mixed and we expect job growth to continue to be sluggish.

Any downturns in the US economic climate and further job losses in fiscal 2011 will have an adverse effect on our results.

Additionally, the low end of our earnings per diluted share considers slight deterioration in medical and energy-related expenses and recycled paper prices.

Thank you and we will now take any of your questions.

(Operator Instructions).

Our first question is John Healy with Northcoast Research.

Good evening, guys.

Was hoping we could talk a little bit about the operating environment right now.

Great to hear that it appears the revenue trends are stabilizing and the business conditions are stabilizing.

Could you talk about how you are thinking about revenue growth in 2011, maybe talk about what areas you feel the most bullish on, whether it's firming in the pricing environment or the new sales or just increased ancillary sales?

Maybe talk about where you're thinking you're going to see the most improvement in those metrics?

Well, John, I think what we are expecting and what our plan calls for is that we are going to continue to see good organic growth in our Document Management business.

So that will continue to do well.

We expect the businesses that are really impacted by employment levels, such as Uniform Rental, Uniform Direct Sale, and even First Aid and Safety, to basically show some very modest growth as we go through the year.

Reason being that we are seeing customers at least starting the process of adding some employees in some sectors and therefore needing some uniforms.

We're seeing additional hands in the first aid cabinets.

We're seeing some of the hospitality customers, as Mike mentioned, looking now to refresh their programs and buy some uniforms.

But until we see a dramatic increase in employment, I don't think we're going to see a dramatic increase in those lines -- in those particular segments.

So while we continue to sell new business, the fact that customers are not reducing headcount is going to help us show positive growth, albeit at relatively modest rates.

That's helpful.

And I was hoping we could talk about the cash flow of the business.

Pretty amazing, the cash flow you generated in 2010.

Can you give us some thoughts about utilizing cash flow?

I mean, it appears that you're at an inflection point here where the business is stable and looking up, and you've done some good things with the balance sheet.

Maybe how you're thinking about using cash, whether it's for acquisitions or if there's any thoughts about returning cash to shareholders and increasing the dividend or maybe getting more aggressive with buying back stock?

Well, as we've talked about over the last couple of quarters, John, now that we see the economic environment become more predictable, I think we anticipate being more aggressive on looking for good acquisitions in all of our business segments, and I think that would be the first use of cash.

But as we said in the last couple of quarters, especially the last quarter, if we can't find a good acquisition that can give the return that we feel is justifiable, I'm sure the Board will continue to look at what is the best thing to do for our shareholders, be that resume our share buyback program or more aggressively increase the dividend.

And that is a constant discussion item that will take place at the Board level.

Right now, though, we are hopeful that we can find some very good acquisitions that we can deploy this cash with.

Great, and just last question; I might have missed it.

Did you guys give a free cash flow guidance number for 2011 or maybe mention what working capital should be?

No, we did not.

I think Mike mentioned the CapEx.

But we don't -- we did not predict what was going to happen with working capital.

I will tell you that we did bring down our inventory levels quite a bit during the year.

And as Mike said in his comments, we now think they are pretty much at the levels that they should be.

So we're not going to get that benefit in fiscal 2011 of another drawdown in inventories.

Okay, thanks.

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

Hi, guys.

Good afternoon.

Hi, Gary.

Hi, Gary.

Any updated thoughts on strategy for storage versus shredding?

I know you've been real excited about shredding and taking a somewhat more cautious approach on storage, I think in part just due to the fact that it seems to be a much more capital intensive business.

But it sounds like this acquisition overseas was more storage, and maybe you're doing more of that there.

Any thoughts on how you're looking at that, and is that a plan you want to do in the US as well?

Yes.

Well, the acquisition in the UK is strictly storage, and we really like that Company.

It's a great management team, gives us a nice presence throughout the United Kingdom.

And it's a very good business.

So we found what we think is a gem, and that has been our approach any time we look at storage.

If we can find a good acquisition that isn't ready to all of a sudden require millions of dollars of capital expenditure to expand their capacity, we will entertain that.

In the UK, let me just say that -- now, this will give us a platform on which to maybe perhaps launch other products and services as we go forward.

In the US, and in Canada, we continue to look at potential storage acquisitions, but we also are saying to ourselves that the opportunities in shredding appear to be more actionable and viable for us right now.

So while storage acquisitions might come along, we tend to find most storage, most companies that are selling their storage business really are maxed out in the facilities they have.

And so it makes the return on capital not so attractive because we have to inject so much money right upfront to expand their facility.

We have looked at starting up some storage operations in a couple of different cities, and we've been successful in doing that when you can get a good base customer.

So those are some of the -- we continue to look for the right things to do, but I would say most of our acquisitions in the US will be more on the shredding side.

Given how strong cash flow's been in the balance sheet, underlevered relative to your history -- I remember at one point you told us you had, if I remember correctly, 90 different potential businesses you were tossing around as long-term ideas.

Is there room for another leg here?

I still struggle with the fact that it seems to me other than uniform, there may not be sort of scale acquisition candidates or at least not many of them that really could make a change in your mix.

Is there anything else that is out there that you think you could do in a fashion that would impact the business in the next couple of years?

Gary, yes, there are.

I would differ a little bit with you.

I think there are some good acquisitions of scale in the other businesses, especially in Document Management and in the Fire business.

So I'm not sure that we couldn't get quite a bit of volume relatively quickly by making a good acquisition there.

We have -- we continue to test a couple of different things.

We also see a opportunity to expand quite a bit in the Facility Services business that I think will prove out to be a real nice growth vehicle for us.

So the additional leg of the stool, that may be less likely in the next year or two, but you could see quite a bit of an expansion or a broadening of some of the services in some of the businesses, especially facilities services.

And then just one last one for me -- when I look to the margins this quarter, how much of that improvement sequentially was just the extra workday?

I think I remember a quarter ago you saying you didn't think that would be such a big deal.

So was that a big part of this improvement, or is it much more, just other things going on in the business?

There's a lot of other things going on there.

There's a little bit of that, but it wasn't significant.

Okay, thank you.

Our next question comes from Scott Schneeberger with Oppenheimer.

Thanks, good afternoon, guys.

Hi, Scott.

I guess following up on Gary's question, you mentioned CapEx is going to be higher this year versus last, and you alluded to potentially starting some storage operations, which may involve a bit of capital.

Is that what the incremental spend is, or might it be for SAP -- just updates there and other thoughts on why the increase?

The increase will be both in the Document Management business.

Because that is a growing business, we will be of course buying trucks and other plant-based equipment as we continue to move some of that business offsite into our facilities, and do the shredding in our facilities.

So we'll see capital expenditures in that Document Management space.

And we'll also, as it relates to SAP, we are going to be embarking on a transition of a couple of our operating systems onto the SAP platform and we do expect that that will increase over the fiscal 2010 SAP spend as well.

Thanks, that's helpful.

Could you also address -- just in the core rental business, where the -- among your top-tier verticals, what are they and trends?

Can you discern on the vertical level mix differentiations?

Thanks.

Are you talking in terms of the kind of customer, industry we're serving?

Exactly, yes.

Well, the largest segment, if you lump it all together in NAICS codes, is what we call automotive and automotive related.

And that encompasses anything from Big Three auto plants down to dealerships, auto repair, oil change, tire change, et cetera.

And we've seen pretty stable numbers there.

We have not -- we don't have a lot of growth there, but we have seen pretty good stability because even though people aren't buying a lot of cars, they are repairing a lot of the cars they have.

So that business has done okay.

The second largest segment is what we lump together as hospitality.

Some of that is Uniform Rental, but a lot of it's Facility Services type products that services restaurants and hotels and other type of hospitality-type events.

So that one has suffered a little bit in the recession, but as Mike indicated, we're seeing in our Direct Sale business a pickup in volume there, as actually the employment is starting to pick up in those categories.

So after that, manufacturing is kind of a hodgepodge of things because it encompasses everything from pharmaceuticals to food processing to heavy machinery, et cetera.

And while we have seen a slowdown on the outward transfer of jobs outside of the United States, there's really no growth we're seeing in the manufacturing sector right now.

It's just finally stabilizing somewhat.

Thanks.

That's very helpful.

And just in Direct Sales into fiscal 2011, optimistic in that area?

If you could just single that out, thanks.

Well, I'm cautiously optimistic.

I don't foresee a lot of new casinos and new hotels being opened, but I do foresee a slight uptick in employment levels, which will require uniforms.

And the fact that so many of these institutions have really stopped buying things over the last couple years, they have got to start spending money to refurbish some of their programs.

So we feel like there will be an increase in sales in that category, but we're still probably a ways from returning to the heyday of that particular segment.

Thanks very much.

Our next question comes from Ashwin Shirvaikar with Citigroup.

Hi, this is Phil Stiller on for Ashwin.

Thanks for taking my questions.

I just had a question on the Rental business.

Can you talk about as to revenue growth, returns in that unit, and how you guys think about incremental profitability of each dollar you get?

Well, it depends where it comes from.

If it comes from an existing customer and we already have the truck stopping there, it is very profitable business.

We often also are able to use garments that are in our stockroom.

So the amortization of those garments continue, whether they are in service or not, until they are fully amortized.

If it is from new business, new customers, in the short run, you don't get a lot of profit from that.

But as that customer evolves and after the selling costs have been absorbed and the injection of the new garments, those customers become more profitable as we go forward.

Right now, I would say our thoughts are that there's going to be not a lot of growth within existing customers, but there will be some new customers, either that we're going to get from competitors or that we're going to convince that should entertain a uniform rental program.

So there will be a little bit of margin pressure from the new customers, but in the long run, they are certainly with five-year contracts, very attractive business.

Does your guidance assume margin contraction in the Rental unit for this year?

No, it assumes, as Mike said, varies from either very modest increases in some of the costs like medical benefits and energy to essentially kind of flat; and with higher revenue growth, a little bit more leverage.

So that's the kind of the -- the range that we gave you at the upper end is, okay, the top line's going to grow a little stronger; and, again, as I said, the mix, even in that assumption, is that most of it's going to come from new business as opposed to increases in existing customers.

Okay, and then just lastly on the balance sheet, I know you guys want to keep some for potential M&A.

But is there a certain number that you guys want to keep on the sidelines for that?

And how much do you need to operate the business on a daily basis?

Well, I mean, we would have no problem operating the business with no cash on the balance sheet because we have such good access to commercial paper that we can fund our operating needs quite well.

We would be easily able to absorb $1 billion plus acquisition if the right opportunity came along.

With our $500 million plus cash hoard, as well as our line of credit, with commercial paper of about $600 million, and then we could easily go out and sell more debt on the markets.

So I don't think there would be any concern on that at all.

We're just waiting now to see if the right opportunity comes along and if not, we'll figure out other ways to get that cash deployed for our shareholders.

Okay, thank you.

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

Hi, thanks for taking the questions.

Regarding the selling environment, you pointed out for a couple quarters now how it's taking some increased sales effort to penetrate existing customers and so forth.

Can you say that the environment has gotten at all easier during the fourth quarter?

And I guess the related question, is there anything you can tell us about demand trends during the quarter, kind of the monthly progression?

Well, the -- I will say the job growth in the private sector and in the businesses to which uniform rental plays a big part certainly helped.

We are still certainly not seeing a lot of jobs coming back, and so the environment is still pretty difficult.

We expect that throughout fiscal 2011, the job growth is going to continue to be pretty sluggish.

And so we don't necessarily think that the environment is going to get much easier, but we do think that, as we saw in the fourth quarter, we think it's going to be some very slow, sluggish growth and hopefully no contraction of jobs.

Okay.

That's helpful.

And another M&A question, regarding the candidates that you're tracking, which direction would you say domestic valuations are currently heading?

Is there any sense that attractive pricing that exists now might not last, making this possibly the time to make some more moves?

I don't see any real pressure upward on prices and valuations.

In fact, if anything, I think some sellers may consider some of the tax consequences of waiting much longer to sell their business, that they are not going to get -- the government's going to get a little bit more piece of any gain that they have.

So I would hope that we might see some opportunities present themselves soon.

Okay, got it.

Just one more question.

As you look for new customers to spur growth, are there any existing customers that because of their reduced needs during this sluggish economy are just not as profitable and really not worth servicing anymore, such that you would be better off shedding them?

Is there any shrinkage of your customer base as a result?

Vance, I would say that generally speaking, unless a customer just gets down to only maybe one or two people in uniform, they still remain profitable.

It's only when they get down to such a low level that we have in our contracts a minimum stop charge, and it sometimes becomes just not viable for the customer to continue to obtain the service.

As for -- but even a small customer, though, with our pretty extensive route structure, it's still profitable to service them.

So I don't think we really have that situation that you're envisioning.

Okay, got it.

And then maybe just one more.

I might have missed it, but with direct sales showing better growth and actually quite strong growth the past year, is this what you would expect to see at this point in the recovery?

Is it a conscious decision on your part to emphasize that, or is the marketplace at all changing?

I think the market is reacting, again, because the hospitality sector, which is primarily what that -- our Direct Sale business serves, has shown some life recently.

And I think that's what you're seeing.

Got it.

It's been so long since so many of those customers have refreshed their program, as Bill said, that some spending is bound to come sooner or later.

And keep in mind, in that segment, we're still well below where we were a couple years ago.

So it's -- we've still got a long way to go to see the spending return in that segment.

Right.

Makes sense.

All right.

Thanks, guys.

Our next question comes from Chris McGinnis with Sidoti & Company.

Good afternoon.

My question's been answered.

Thank you very much.

(Operator Instructions).

We'll go next to Vishnu Lekraj with Morningstar.

How's it going, guys?

Hello, Vishnu.

Very well.

Want to dig down a little deeper into the pricing environment.

I know you've been saying that things have been improving a little bit.

But are you still seeing pricing concessions in terms of the current customers and concessions for maybe customers you're going after?

We're seeing -- first off, I don't think Mike or I really said the pricing environment is improving.

We're saying it's still pretty competitive, and we see it both in terms of new customers, [no] programmers who getting into the service because they are working with multiple providers, and we're also seeing it on any renewal of existing contracts, either with our customers or with our competitors' customers.

So to get -- Cintas, along with the other uniform rental providers and facility services providers, are still trying to keep their routes relatively full and their plants operating nearer to capacity than not, so you're continuing to see aggressive pricing.

Right, okay.

When you talk about slow growth or sluggish growth over here for fiscal 2011, is that assuming that employment trends as they currently are are going to be pulled forward, or do you expect a gradual improvement in these trends?

How should we view this in terms of employment affecting your business going forward?

Our guidance -- the guidance that we gave you, basically if you take the upper end of the guidance, what we're saying is we would see modest improvement in employment.

If you take the lower end of the guidance, we're saying you're going to see no improvement in employment, just basically speaking.

Makes sense.

One more question here in Document Management.

When we try to think about the growth within this segment -- is that going to mainly come more from overseas, your operations overseas, or are you going to do basically a balance of domestic/overseas?

How is that going to mix flow?

The significant amount of business that we do in that segment is still in the US and that will continue to grow very nicely.

The overseas volume is still relatively small, but we see good growth opportunities and we see some nice acquisition opportunities in that business.

So I think what you're going to see is the predominance of the growth will come from domestically, but the foreign stuff certainly is going to be additive to it.

Great.

All right.

Thank you.

We have no further questions in queue at this time.

(Operator Instructions).

We have no further questions in queue, sir.

All right.

Well, we appreciate everyone joining us today.

And we'll look forward to talking to you in the latter part of September, when we discuss our first quarter fiscal 2011 results.

This concludes today's conference.

Thank you for your participation.