信達思 (CTAS) 2011 Q1 法說會逐字稿

Good day, everyone.

Welcome to the Cintas quarterly earnings results conference call.

As a reminder 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 and thank you for joining Mike Hansen, Cintas' Vice President and Treasurer, and myself for our first quarter of fiscal 2011 earnings conference call.

Cintas reported today growth in revenues and net income for the first quarter.

We saw revenue growth in each of our operating segments.

Overall revenue growth was 3.6% compared to last year.

Revenues were also approximately 1.7% higher than the fourth quarter of fiscal 2010, a quarter with the same number of workdays as this quarter.

Earnings per share were $0.40 this year, compared to last year's $0.35 per share.

Last year's first quarter earnings did include an $0.08 charge for a legal settlement on wage and hour litigation.

During the quarter, and continuing into September, the Company purchased 7.6 million shares of its stock.

Most of these purchases were made under a 10-B-5 filing that went into effect when the Company entered a quiet period in mid August.

The Company made these purchases from cash and did not incur any debt.

At August 31, 2010, Cintas had $369 million in cash and marketable securities.

Of this amount, approximately $167 million is outside the US resulting from cash flow from non-US operating units, leaving about $202 million of US cash and marketable securities and no short-term debt.

In September, $72 million of the August 31, 2010, cash was used for share purchases.

This completes the authorization for share purchases by the Board.

The Board will determine at its future meetings whether any additional authorizations will be given.

As noted in our release, the share purchases had no impact on earnings per share in the first quarter, but will increase earnings per share by about $0.05 over the rest of the year.

As a result, while revenue guidance for the year remains unchanged from that provided in July, our earnings per share guidance is increased by $0.05 per share on both the lower and upper end of the range given in July.

We are encouraged with the recent modest growth and we believe that the North American economy will continue to improve at a relatively slow pace.

As a result, Cintas will continue to focus on taking care of its customers by providing valued products and services.

In addition, we will continue to enhance our existing customer relations by providing additional products and services as well as seeking out new customers in all of our business lines.

Finally, we will focus on cost control and investment in acquisitions, or capital investment, that meet the appropriate return criteria.

As a reminder the Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigations 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, as well as in the press release issued today, announcing our first quarter 2011 results.

I will now turn the call over to Mike Hansen who will discuss this quarters results in more detail.

We will then be happy to answer your questions.

Thank you, Bill.

Total revenue for the first quarter of fiscal 2011 was $924 million, representing a 3.6% increase from the first quarter of last year.

Total Company internal growth was 2.8%.

As Bill mentioned, each operating segments revenue grew compared to last year both in total and organically.

Before discussing the quarter in more detail, please note that our fiscal 2011 workdays are the same as last year.

That means there are 66 workdays in the first quarter, 65 in the second quarter, 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.

This 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 first quarter.

Rental revenue was $657.6 million for the quarter which is relatively flat compared to last years first quarter, but up 1.5%, compared to the quarter ended May 31.

Internal growth was 0.1% over last year which is also an improvement from last quarters internal growth of negative 1.1%.

The steady revenue improvement that we saw in the fourth quarter continued through our first quarter.

The modest US private sector job growth continued in the first quarter.

In addition, the focus of our sales force of adding new customers and penetrating existing customer accounts positively impacted our first quarter rental revenue.

Our wearers increased for the second straight quarter and our new business and net add stops improved over the fourth quarter levels.

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 first quarter.

First quarter revenue of $98.8 million represents an increase of 10.6% compared to last years first quarter.

Internal growth was also 10.6%.

We are encouraged that our Uniform Direct Sales customers have shown a willingness to spend uniform dollars on new hires and new programs.

Our revenue growth over last year for our global accounts and strategic markets division was a broad improvement in which we saw large national accounts as well as lodging, hospitality and gaming customers increase spending.

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 first quarter.

During the quarter, revenues within this operating segment increased 3.9% versus last years first quarter.

Internal growth was 2.2%.

First Aid Safety and Fire Protection revenue increased sequentially over the fourth quarter by 6.4%.

This sequential improvement came in both First Aid and Safety and in Fire Protection.

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

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

Revenue increased 30.7% over last years first quarter with internal growth of 23.2%.

Recycled paper prices remained at historically elevated levels during the quarter.

Internal growth for Document Management Services excluding the recycled paper revenue was 10.6%.

Moving on to margins, total Company gross margin for the first quarter was 42.6%, a decrease compared to last years gross margin of 42.9%.

This decrease is due to a 10 basis point increase in energy related costs and a 35 basis point increase in maintenance costs.

As our volumes declined during the past two years, we reduced maintenance on certain equipment and trucks not needed for the declining capacity requirements.

Consequently as volume now increases, we have some higher maintenance requirements.

We expect this increased level may continue into the second quarter as well.

The gross margin of 42.6% did represent a slight increase over the 42.4% gross margin for the quarter ended May 31.

First Quarter energy related costs were down 15 basis points from the fourth quarter level.

Rental gross margins of 43.5% were down 110 basis points from last years first quarter and the same as that of the quarter ended May 31.

Regarding comparisons to last year, energy related costs were 15 basis points higher this year and as just discussed our maintenance cost increased 40 basis points.

Other Services gross margin was 40.4% for the quarter as compared to 38.2% in last years first quarter, and 39.8% for the quarter ended May 31.

Compared to last year, the Other Services gross margin improvement was due to an improved Document Management gross margin resulting primarily from the higher paper prices and an improved First Aid, Safety and Fire Protection gross margin resulting from better sales mix in both First Aid and Safety and in Fire Protection.

Selling and Administrative expenses were 31.8% of revenue, an increase from 29.7% for the first quarter last year.

Selling expenses were up 110 basis points higher than last years first quarter.

As we've discussed on the last few calls, we had a planned increase in our sales force during mid fiscal 2010 as a result of the stabilization that we saw in the economy.

Going forward we expect our selling expenses to stabilize and start to come down as a percent of sales as revenue levels continued to increase.

In addition to the increase in selling expense, professional service expenses increased 20 basis points compared to last year due to our enterprise wide system conversion and bad debt expense increased by 40 basis points due to a slight deterioration in our aging.

Please keep in mind that our bad debt expense and allowance for doubtful accounts are based on a consistent application of our established accounts receivable policy, which includes specific reserve percentages for each aging category.

Sequentially, SG&A increased from the quarter ended May 31, due to an 80 basis point increase in bad debt expense.

Please keep in mind that last years first quarter included a legal settlement amounting to $19.5 million pre-tax, net of insurance proceeds.

Our effective tax rate was 30.8% for the quarter, compared to 38.1% last year.

This rate was positively impacted by the closure of various tax audits in the quarter.

Due to the timing of specific reserve builds and releases under FIN48, our effective tax rate can fluctuate from quarter to quarter.

We still expect our fiscal 2011 tax rate to be approximately 37.3%.

As Bill mentioned in his opening comments, we completed our authorized share buyback program by purchasing 7.6 million shares of our common stock at a cost of $202 million, and we did not incur any added debt as a result of these purchases.

Since the purchases began at the latter part of the first quarter, these share buybacks did not impact our first quarter diluted earnings per share.

As a result of completing our authorized share buyback program, we have now acquired 27.9 million shares since May of 2005 for a total cost of $1 billion.

Primarily as a result of the completion of the share buyback program, our cash and marketable securities decreased $197 million to $369 million at August 31.

We also increased our capital expenditures and acquisitions during the quarter.

The steadily improving economic conditions provided some incentive to begin returning to historical levels.

Accounts receivable increased by $18 million since May 31, primarily because of the higher revenue levels.

DSOs on accounts receivable were 40, a slight decrease from last quarters 42.

However, we did have a slight deterioration in our aging since May 31, which caused the higher bad debt expense mentioned earlier.

Our August 31, aging though is consistent with the aging of a year ago.

New goods inventory at August 31, was $184 million up $15 million from May 31, mainly due to planning for the increased volume levels and the Fall season.

This balance is relatively consistent with the total at the end of last years first quarter.

Uniforms and other rental items and service increased by $15 million from May 31, to August 31, due to the higher volume levels throughout the first quarter.

Accrued liabilities decreased $24 million compared to May 31 ,due to the payment of our annual profit-sharing contribution and other benefit related accruals and scheduled bond interest payments.

Long term debt at August 31, was $787 million.

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 booked capitalization was 24% while net debt, or long term debt less cash and marketable securities as a percentage of total capitalization was 14%.

Turning to our cash flow, cash provided by operating activities was $35 million, a decrease from $145 million in last years first quarter.

Last years cash flow benefited from lower working capital needs associated with our decreasing volumes and the accrual of the legal settlement.

This year, the increasing revenue levels have increased our working capital needs such as increased inventory levels and higher accounts receivable balances.

CapEx for the first quarter was $48 million including $15 million for our SAP conversion.

Our CapEx by operating segment was as follows.

$23 million in Rental, $2 million in Uniform Direct Sales, $8 million in First Aid, Safety and Fire Protection, and $15 million in Document Management.

The CapEx associated with the SAP conversion was largely in Document Management and First Aid, Safety and Fire Protection operating segments.

We invested $48 million in the first quarter on strategic acquisitions.

This includes the Document Management business in the UK which we announced in July and also several other smaller acquisitions in our Facility Services business, our Document Management business, and our First Aid, Safety and Fire Protection Services business.

We will continue to evaluate acquisition candidates as opportunities arise.

That concludes our prepared remarks and we will now take any of your questions.

(Operator Instructions) Our first question comes from Vance Edelson from Morgan Stanley.

Hello?

Hi, Vance.

Yes, this is [Steven Gregory] actually from [Mandalay Research].

A couple questions, Bill.

Congratulations on a good quarter.

On 2011 they are talking about eCommerce is going to be the number one driver of businesses, that article was written in the Wall Street Journal about two months ago about how companies are going to look to eCommerce to transform their businesses.

Can you provide some color today as what you believe your eCommerce vision will look like over the next couple years and how you plan to get Cintas to that point?

Well, eCommerce for Cintas is primarily driven by some of our large national customers who have requested that they do ordering, inventory checking and other various reporting through an eCommerce platform and our IT, our information technology group, works closely with our global accounts division to help these national customers do that.

It is not going to be an appreciable part of our business though given the fact that most of our customers are small businesses or small operations of big businesses.

And we'll go next to Gary Bisbee with Barclays Capital.

Mr Bisbee, please check your mute button.

And due to no response we'll move on and go next to Andrew Steinerman with JPMorgan.

Hi, Bill and Mike.

Hi, Andrew.

Hi.

I'd like to talk about pricing.

I know there's sort of two pieces to pricing, what I'll call the ordinary annual pricing that will happen in the middle of a contract and I actually think during the fiscal first quarter that we just completed there might be kind of an aggregation of some of that typically in this season, and then of course there's prices that come into play when contracts are renewed and that's usually the more competitive side of the equation.

If you could talk about kind of both sides of pricing, what I'll call kind of the annual pricing versus the competitive contract renewal or new business and when you put those two together, is net pricing still positive?

Andrew, the pricing that goes into effect during the terms of a contract is primarily in our rental business and that is driven by the CPI, which has been basically flat to slightly positive.

So, we've had very little pricing improvement over the last year or so in our rental business due to the fact that there's basically no inflation.

With regard to renewals, we're finding that to be the most competitive situation that we're running into.

Our customers, when they're at the end of their contract terms, are vigorously approached by our competitors and it has resulted in a more competitive environment than we have seen, but we've been talking about that from some time and that has continued into and through this first quarter.

I talked to our salespeople with regard to new business and while we have more competitive situation that we've had in the past, we haven't seen the degree of pricing pressure on brand new business that we see in renewals of our existing customers.

So, overall to answer your question, we had very little impact in our revenue during the quarter from increased pricing.

I would say that basically pricing for our services in the rental business is probably flat compared to where it was over the last 12 months.

And that's flat all in considering both sides of pricing, right?

It is.

I will have to say to you, it is very difficult to be given the number of products and the number of customers we have to be absolutely definitive on that, but as we look at trends and we take out selected major products, that statement is true.

Okay, very fair, thank you.

We'll go next to Justin Hawk with Robert W.

Baird.

Good evening, guys.

Thanks for taking my call.

Yes, Justin.

So, just wanted to get a little more clarification on the guidance.

I guess is it fair to assume that this quarter was kind of in line with your expectations and your guidance from here is still assuming employment remains weak and margins either hold flat to increased slightly?

That is a very true statement.

We were pretty much in line with expectations and as a result of that, we did not see any reason for us to increase our guidance for the year at this time.

We still expect a very, very modest recovery over the rest of our fiscal year and into next.

Okay, and then just one more clarification on the pricing question.

So, were you saying in aggregate your pricing is flat?

So, including any benefit that you are getting from annual price escalators and an offset by any decrease in new business or are you saying that both of those in aggregate are flat?

Basically, I'm saying in total that we're flat in the aggregate.

Total pricing is flat?

Yes.

Okay, and then just the last question.

One thing we've been monitoring is cotton prices have been elevated for a while and I'm just wondering if there's any impact to your margins at this point from -- as you're starting to source some new garments as the volumes are picking back up, if you've seen any pressure there or if you're able to pass that on to your customers?

We have not seen any pressure there from our suppliers that I am aware of, therefore we've had nothing to pass on to our customers.

So, the impact of higher cotton prices really has not impacted the cost of our garments that we're buying throughout the world.

Great.

Great.

Thank you very much.

Very helpful.

We'll go next to Chris McGinnis with Sidoti & Company.

Thanks for taking the call.

Can you talk maybe a little bit about the acquisition environment, I guess for all segments and then maybe talk a little bit about the Document Management and how that's progressing for you?

Yes.

The acquisitions, as Mike indicated, have picked up.

We told everyone on prior calls that we continue to be active looking for acquisitions, but we were very disciplined.

We wanted to make sure we didn't overpay in a declining economic environment and it's very difficult to predict exactly when things will develop, but we saw a nice quarter of closures and as a result of that we're very happy with these acquisitions.

None of them really are large in and of themselves.

The biggest one of course was the one we talked about in July and that's still modest in size.

The one that's in the United Kingdom, the document storage business.

So, right now, I would say that the acquisition pipeline is very active.

We're continuing to pursue a number of targets, none of which though at this point are any of significant size, but I would certainly expect there to be more acquisitions made throughout the rest of this year.

Regarding the Document Management business, continues to be a very good business for us.

We're working diligently on expanding our footprint across North America and into Northern Europe.

We're continuing to make small acquisitions in markets that we're not in as well as acquisitions in markets we are in that we can tuck them in, and it continues to be a very good business.

The environment is such that the paper prices remain high, therefore a lot of little competitors are being very price aggressive with their customers because they are after the paper so they can get the recycled price which is at relatively good levels.

So -- but it's a great business, continues to be small relative to our other businesses, but we have a lot of very positive feelings toward this business going forward and how it will continue to grow.

And I don't know if you can break this down anymore.

Typically you do in the Qs, but can you just give a break down of what segments the acquisitions were for?

Not at this time.

I'm not prepared to give out that information.

Thank you very much.

We'll go next to Ashwin Shirvaikar with Citi.

Hi, Bill, hi, Mike.

Hi, Ashwin.

Just to start I wanted to ask if you can provide a little more clarity on the sales environment, where you have success, is it primarily selling new clients or is it cross-selling new services to existing clients?

Where is the success coming in?

We've really seen the new business and the sales to existing customers improve this quarter over the last quarter and the last few quarters and so as the jobs increase, we get some benefit there.

As our sales force continues to focus on penetrating existing customers with additional products and services, we're getting some benefits and we're seeing some pick up in new business, so we've seen some improvement in both areas.

Okay, and with regards to your macro environment assumptions, I know you said they didn't change, but could you sort of remind us with regards to what your assumptions are on employment trends?

I know for manufacturing, you had, except for the last month, you had some pretty good manufacturing employment data and that obviously helps you guys, so at what point do you kind of call it a tipping point where you get more positive than you are?

Well, Ashwin, I'm not an economist and I read everything that I can in trying to gauge what is happening, but our expectations are that we do not see a significant pick up in private sector growth which is what is important to us.

We do anticipate there will be some modest growth and therefore, we would expect as we go through the year the comparables become easier because we don't have a significant drop off that we -- we had such a significant drop off last fiscal year and the year before that we'll begin to see a more of an impact of this revenue growth.

So, I would say that as you look at our organic growth this quarter, our expectations here internally in our plan range from basically remaining at those levels going forward to slightly increasing them and that's what drives you to the top end of the range.

Maybe we would get up to a revenue per day that's modestly higher than it is now as we go through each quarter for the rest of the year.

That's very useful.

So, if I take that and take your comments on pricing and look at the gross margin trend, I should probably expect gross margins to be flattish, maybe a modest uptick, which would then still be 100, 150 basis points lower than a year before and two years ago.

Is that sort of the new normal for gross margins?

No, I don't think it's a new normal, but I think your assumption is correct in that it is going to be a slight improvement.

We will get back to those levels of where we were several years ago when we get back up to those revenue levels, and assuming that there isn't a significant spike in energy cost or a significant deterioration in the pricing environment, but it's not going to happen this year and I'm not even sure it will happen next fiscal year unless the economy really booms and we see a lot more top line growth, which I really don't expect at this point.

Okay, and my last question on the cash flow and CapEx front.

CapEx for the quarter seemed a little bit higher when introduced to sort of the trend line.

You might have mentioned this, but I missed it.

What was the CapEx for and are you kind of implying a upper end of the range CapEx currently and then correspondingly, cash flow was much weaker than we anticipated.

Was that primarily just CapEx and bad debt type of situation or was there something else going on?

Well, let's start with CapEx.

Yes, back in July we gave you a range of $125 million to $150 million for the year and we do expect that we'll be at the high end of that range.

We did have $15 million of SAP in the quarter and that project is moving somewhat quicker than anticipated earlier and so we may have a little bit more spending on that front than we thought back in July.

From a cash flow perspective, as our revenue has grown throughout the quarter, we've seen our accounts receivable come up.

We've seen our working capital needs come up and that's had some drag on our cash from operating activities, but nothing that we think is unusual.

Nothing that's going to change our strategies going forward.

We will certainly continue to watch it and manage it and as I stated in my remarks, we're being very cautious on only approving capital that makes sense, or acquisitions that make sense, but certainly in the more positive environment, we want to continue to invest in the business and we will continue to do so.

Great.

Thank you.

Very useful, thank you.

We'll go next to [Bhupendra Bora] with Oppenheimer.

Hi, this is Bhupendra sitting in for Scott Schneeberger from Oppenheimer.

My first question, could you give some color on competitive environment of your shredding business and especially related to pricing and volume?

The shredding business is a business that is -- there are a lot of players in it.

There are three relatively good size players, Cintas, Iron Mountain and Recall and Shred It.

There's four big players.

And I would say that all four of the big players continue to aggressively go after national business.

I think Cintas is a little bit more aggressive going after local business as we continue to develop our footprint around the country.

Our biggest competitive situation right now though rests primarily with the smaller players in all the markets that we're at and as I mentioned, they are being very aggressive on their pricing because they're after the paper itself to sell it to the recyclers.

So, while we certainly are going to continue to pursue business growth, we want to be cautious that we don't destroy the market by driving prices too far down.

So, we think some of this is a short-term competitive situation on the part of some of the smaller players, but even with that, you could see our margins were still very good.

We still are continuing to grow that business and we still have a long way to go to really fill out our footprint and grow the relatively small size businesses we have throughout the United States into much bigger entities within each of those markets.

Okay, and the next one, I have one more actually, on your UK storage acquisition.

Just wanted to know, like, as you mentioned in your previous call you plan to launch some products and services, if you can just give some color on that like in future on that--?

Well, we've only had it for three months and so far, everything is great.

We have a terrific management team over there.

We're still working on developing our strategies on how we want to launch additional products and services.

We haven't done anything at this point, but it's like I said its only been a few months, so so far we're very excited with the potential that exists over there.

Okay, and if I can have the last one, if you can give some color on new product development, anything planned for fiscal 2011?

Well, I think everyone probably saw the announcement on our tile and carpet cleaning business which is starting out very well.

It's very small right now, we're in about 50 markets usually with just one or two trucks within those markets, but we're finding great reception on the part of many large institutions that have been looking for a provider that can take care of their carpets and tiles and refurbish them to a point where they don't have to replace them as quickly as they need, primarily in the hospitality and in schools, colleges, convention centers, that sort of thing.

So, that is one big area that we're in.

And then I'd say the other one in our rental business, because we certainly don't give up on the uniform rental business, is we have now a relationship with a provider of garments called Carhartt, which is a very loyal customer base that is primarily serving outdoors type activities and we now have developed a rental garment that we're having some great success in penetrating new customers with and as well as existing customers at higher prices, and we think that this is -- that will be a significant advantage going forward.

We're in chemical dispensing which is doing very well.

So, I would say all of our businesses are looking for opportunities, but those three that I mentioned seem to have quite a bit of momentum right now.

Thanks a lot guys.

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

Hi guys.

Can you hear me this time?

Yes.

Hi, Gary.

Just following up on that last one, can you give us just a sense of the scope of offerings and size of the facilities services businesses right now?

I've just noticed in the last couple press releases and even one or two spots on your website that's getting more play than it used to.

So, is it basically just what we've thought about historically as the hygiene business or is there a lot more going on right now?

There's a lot more going on and it represents about half of the rental segment, so it has become quite large.

I think the approach that we've taken now is instead of a bunch of individual products we're coming up with solutions for our customers, floor care, restroom care, that sort of thing, that I think it's more of a package solution, more responsive to what the customer needs as opposed to just renting them an entrance mat or renting them an air freshener.

So, we've broadened it out to be more service-oriented over the last few years.

Mike Thompson who used to fill in on these calls is now working with our COO, Phillip Holloman on really trying to determine what's the best strategic direction for that business and how to continue to grow it and add products and services and come up with solutions that are geared toward a customer and taking care of many different things as opposed to just one or two items.

So, when you say half of the rentals business that would include mats and mops and some of these other things?

Yes, when I use facility services that includes all of those.

Okay.

I guess the second question, can you just give us a sense or remind us of how the profitability compares on new business in the first year versus growth from existing?

I know -- and not adding an employee which we know customer adding an employee which we know is really high margin, but selling an additional service to a new customer.

Are those both profitability weighed down a lot by the sales commission initially or should we think about that as still being fairly profitable?

It depends on the business.

If it's a uniform program, there tends to be lower profitability in the first year because you're injecting all those new garments, you've got all of the sales costs, the fitting costs, et cetera.

And so it takes a while for that account to become profitable, but on some of the other products and services when you go in let's say to a customer and we're going to add tile and carpet cleaning, that's pretty profitable stuff from day one.

So, it really varies depending on what the product is or the service and how much material cost is associated with it, what type of selling commissions are we paying, are there any set up type costs, et cetera.

And so I guess the new business sales how they are each trending would correspond pretty closely to the organic growth that you've talked about.

Is there anything that could really energize the rentals business in the near term other than a much brighter economic picture and I guess what I'm really getting at here is how much revenue growth do you think you'd need in rentals for the margins to really start filling some of this gap down over the last year?

I think not much higher growth than what we saw this quarter, if we -- as we go through the rest of the year and into next fiscal year, as we continue to see an uptick in each quarter, I think you're going to see some margin improvement.

Because we have a lot of capacity that can be used.

And then I guess just the last question for me.

I thought the buybacks certainly was a good move.

It was somewhat surprising given commentary over the last couple of quarters.

Did anything really change because I have sensed from you that you'd much more likely want to follow revenue growth strategies.

Was this just an acknowledgement that there aren't enough big targets willing to sell or was there something else that drove that decision to do that now?

Thanks.

I think there were a number of factors that came into play.

The large cash balances, the lack of executable big deals at this point, the fact that many of our shareholders have been communicating with us and some of their thoughts, the price of the stock, the fact that we couldn't earn hardly anything on the cash that was sitting on the balance sheet, and I'd say our confidence in the future.

Okay, thanks for all of the color.

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

Hi.

Can you hear me this time?

Yes.

Somebody popped in on you last time.

Yes, that was odd.

Very odd.

So, the first question just your thoughts o geographic expansion of the greenfield variety for the core uniform rental business within the US, are there underpenetrated regions?

Is this something we could see more of?

Could this be a potential growth driver going forward beyond acquisitions, beyond cross selling opportunities?

Vance, it certainly can be because there are markets that we are not -- that we don't have a large market share in very populated parts of the country, the Northeast, California, the Southeast, so I think there are great opportunities there.

You think of Chicago, we've got five or six uniform rental facilities within the Chicago area.

There's no reason that we wouldn't see similar or even greater numbers of opportunities in places like Southern California or the New York area or the Washington, New York, Boston corridor type situation.

So, yes, there's still continued expansion, just because we're in one city today doesn't mean that we can't add two or three more facilities within that same geographic area, so we will continue to look for that.

I think we evaluate whether it makes sense just to continue to follow our branch and plant spoke scheme or to look for a nice tuck in acquisition like we did when we bought Van Dyne Crotty here a few years ago.

So, there are a number of ways to do it and as employment has finally stabilized and now is beginning to show some life and some growth, we think that you'll begin to start seeing some of those expansions in areas as we go forward.

There really aren't a whole lot of cities in North America today though that we are not in.

I think it will be primarily expanding within cities, regional areas where we're already present.

Okay.

That makes sense, and I may have missed it earlier.

I was off the call for a minute and I know you did address pricing, but did you address the discipline or lack thereof on the part of your larger competitors?

Have there been any changes on that front as the economy has improved some?

We haven't really seen a whole lot of change from the larger competitors from that standpoint, no.

Okay, and just one more if I may.

Regarding the share buyback, as long as you are going to do it or you have done it historically and there could be another one going forward, I'm just curious why purchase under the 10-B-5?

A lot of companies indicate they are going to buyback opportunistically.

In other words they want to move in when the share price is low.

Does the plan prevent you at all from having that kind of flexibility?

No.

We decided as the Board advised us that they were comfortable with us establishing a 10-B-5 under certain parameters so that we could buy in the first quarter during the quiet period if the proper conditioned warranted which they did.

So, that's why we implemented.

Otherwise we felt we legally could not be buying our stock during a quiet period and we wanted to take advantage of the opportunity if it presented itself.

Okay, that makes sense.

Thanks for the color.

(Operator Instructions) We'll go next to Greg Halter with Great Lakes Review.

Yes, good afternoon.

Hi, Greg.

I don't know if you could provide any additional color between or behind the add stops, but if you can, I would appreciate it.

Well, as we mentioned, the add stops did improve in the quarter and I would say that a lot of that improvement came in the uniform rental business, so we have seen our wearers pick up in the last couple quarters and we've also had some good performance on adding wearers at existing customers.

Okay, and I know you talked about energy costs and so forth, but I'm not sure you related that to your total revenue and what that increase or decrease may have been relative to a basis point change.

It was about a -- well compared to last year -- let's get the numbers, hold on just a second.

Mike did talk about it.

It was 3% for the quarter and that was for the rental business, we were 10 basis point increase in energy costs -- there was a 10 basis point decrease in energy costs in the first quarter compared to last years first quarter.

Is that right, Mike?

Yes.

So, it was about 3% of total revenue.

Okay, that sounds good.

Thank you very much.

We have no further questions at this time.

Well, thank you, everyone, for joining us this evening.

We're glad to have reported some positive results.

We will plan to release our second quarter earnings some time in mid to late December.

So, appreciate it very much.

This concludes today's conference.

Thank you for your participation.