信達思 (CTAS) 2011 Q2 法說會逐字稿

Good day, everyone.

And welcome to the Cintas quarterly earnings results conference call.

Today's call is being recorded.

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

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 Hansen, Cintas's Vice President and Treasurer.

After some comments on the quarter's results, we will open the call to questions.

For the quarter ending November 30, 2010, total revenue was $936.6 million, an increase of almost 6% compared to the second quarter last year.

Organic growth was 4.2%.

As noted in the release, revenue in all of our business segments grew over last year with rates even better in rental, and first aid and safety and fire than what we saw in the first quarter of this fiscal year.

We also saw improved revenue per workday of 3% compared to our first quarter results.

Net income was $55.9 million, and earnings per diluted share were $0.38.

Our tax rate in the second quarter was 38.3% versus 30.8% in our first quarter.

The first quarter tax rate reflected the release of certain tax reserves resulting from the resolution of several tax audits.

As we mentioned in our first quarter call, we expected the tax rate to be higher in the second through fourth quarters.

While unemployment continues to be stubbornly high, we are encouraged that business confidence has appeared to turn the corner.

We have seen the third consecutive quarter of increased wearers in our uniform rental business, and our direct sale business posted another good growth quarter.

Our emerging businesses of first aid, safety and fire protection, and document management had good revenue increases also.

We continue to reiterate the guidance we provided at the beginning of the fiscal year, and updated at the end of the first quarter for the share buyback.

We expect our revenues to be between $3.55 billion and $3.75 billion, and our earnings per share to be between $1.55 and $1.63.

Our financial condition remains very strong.

While we did use approximately $200 million of our US cash to purchase our stock, we still have sufficient borrowing capacity, as well as sufficient cash outside the US to fund our growth initiatives.

The Board of Directors also gave us another $500 million share authorization in late October, to be used as directed by the Board if market conditions warrant.

None of that authorization has been used as of this time.

Cintas paid its annual dividend of $0.49 per share on December 15, approximately three months earlier than our traditional March date.

The dividend was increased from the $0.48 paid last year, the 28th consecutive year we have increased our annual dividend since we went public in 1983.

The last couple of years have been very difficult for the US economy, with the loss of millions of jobs.

While it could take some time for employment to return to pre-recession levels, we are encouraged by some of the positive signs that are appearing.

Generally speaking, our customers' businesses have stabilized their workforces, and appear to be on the verge of modestly expanding.

We also are very appreciative of the efforts of all of our employees who we call partners, who made it their mission to take care of our customers, and to continue to keep Cintas profitable and cash flow positive during the difficult past few years.

We see growth opportunities with all of our business segments.

We believe that with the growth, as well as the ongoing productivity initiatives underway in the Company, we will continue to see margin improvement and positive operating cash flow.

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.

I will now turn the call over to Mike Hansen.

Thank you, Bill.

Total revenue for the second quarter of fiscal 2011 was $936.6 million, representing a 5.9% increase from the second quarter of last year.

Total Company internal growth was 4.2%, an increase from the 2.8% internal growth in our first quarter.

Each operating segment's 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 were 65 days in the second quarter, and there will be 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, masks, 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 70% of Company revenue in the second quarter.

Rental revenue was $657.8 million for the quarter, which is up 2.2% compared to last year's second quarter.

Internal growth was 1.9% over last year, which is an improvement from last quarter's internal growth of 0.1%.

Our revenue momentum of the last few quarters continued in our second quarter.

The modest US private sector job growth in the second quarter positively impacted our business.

In addition, the productivity of our salesforce continued to improve.

This improvement was due to the impact of new products and services like Carhartt, and our tile and carpet service, and was due to improved rep tenure.

As you may recall, we increased our investment in sales about a year ago, and have seen steady productivity improvement since then, as new reps become more efficient.

In addition to the productivity improvements, our account retention improved compared to last year, and compared to this year's first quarter.

The stabilization of the economy has certainly helped, but we have also been very focused at providing outstanding customer service.

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 12% of Company revenue in the second quarter.

Second quarter revenue of $108.8 million represents an increase of 9.4% compared to last year's second quarter.

Internal growth was also 9.4%.

Our uniform direct sales business has shown a nice rebound over the past three quarters.

As in the first quarter, this rebound continued to be a broad improvement, in which we saw large national account customers, 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 second quarter.

During the quarter, revenues within this operating segment were $93.3 million, an increase of 14.4% versus last year's second quarter.

Internal growth was 8.4%, a strong improvement over the first quarter internal growth rate of 2.2%.

Both First Aid and Safety, and Fire Protection Services internal growth improved relative to the first quarter, and the Fire Protection services internal growth was in double digits.

Fire benefited from an improving economic environment, growth in our national accounts business, and greater sales team productivity.

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

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

Revenue increased 27.9% over last year's second quarter to $76.6 million, with internal growth of 14.7%.

While this is still very positive internal growth, it is a decrease from the first quarter internal growth of 23.2%.

Much of this decrease in growth rate relates to recycled paper revenues.

The price of recycled paper increased significantly during last year's second quarter, and has remained at historically elevated levels since that time.

As a result, we have started to anniversary that large increase, thereby reducing our recycled paper revenue growth rate.

If the recycled paper prices continue at current levels into our third quarter, we will see some further slowing of the growth rate.

Moving on to margins, total Company gross margin for the second quarter was 41.7%, which is in line with last year's second quarter gross margin of 41.8%.

Energy related costs were up 15 basis points, and as was the case in our first quarter, our maintenance expenses were up 25 basis points.

The gross margin of 41.7% decreased compared to the 42.6% gross margin for the first quarter.

This decrease is largely due to having one less workday in the second quarter compared to the first.

An example of the workday impact is that our in-service inventory material cost is based on a monthly amortization schedule, so we essentially have the same expenses as the first quarter, but one less revenue-generating day.

We experienced a similar decrease, in that case 110 basis points, from last year's first quarter to the second quarter.

Rental gross margin of 42.6% was down 90 basis points from last year's second quarter.

Higher energy and maintenance expenses accounted for 50 of the 90 basis points.

The remaining decrease is due to higher material cost.

As our wearers have increased over the past three quarters, and new business results accelerate, we have injected more garments into our in-service inventory.

The rental gross margin of 42.6% was also a decrease from the 43.5% in our first fiscal quarter.

As already discussed, this decrease is largely driven by one less workday in our second quarter.

Other Services gross margin was 39.6% for the quarter, as compared to 37.3% in last year's second quarter.

All three of the operating segments within Other Services improved, with Fire Protection services improving the most due to the elimination of installation work.

All businesses also benefited from higher volumes this year.

Relative to the first quarter, the Other Services gross margin of 39.6% was a decrease of 80 basis points.

This is primarily due to the Document Management Services gross margin, which decreased by 180 basis points from the first quarter for a few different reasons.

Our European Document Management business, which now accounts for roughly 14% of our total Document Management business, had a decrease in its gross margin due to various initial expenses associated with our recent acquisitions.

Our Storage business had several greenfield starts this fiscal year, and lastly, our Imaging Services business is primarily a project-based business, which makes the margins more volatile from quarter to quarter.

Selling and administrative expenses in the second quarter were 30.8% of revenue.

This is a 100 basis point decrease from the 31.8% of revenue in the first quarter.

A number of different areas contributed to this decrease, including G&A labor, and medical expenses.

Selling expenses as a percent of revenue were similar to the first quarter.

The selling and administrative expense of 30.8% of revenue was an increase from the 29.3% for the second quarter last year.

Selling expenses were 60 basis points higher than last year's second quarter.

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

In addition to the increase in selling expense, professional service expenses increased 30 basis points due to our enterprise-wide system conversion, and bad debt expense was 20 basis points higher than last year due to a slight deterioration in our aging compared to last year.

Please keep in mind that last year's second quarter included a legal settlement amounting to $4.1 million pre-tax, net of insurance proceeds.

Our effective tax rate was 38.3% for the quarter compared to 39.3% last year.

Due to the timing of specific reserve builds and releases under FIN 48, our effective tax rate can fluctuate from quarter to quarter.

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

Our cash and marketable securities were $285 million at November 30, a decrease of $85 million from August 31, 2010.

As we discussed last quarter, we used $72 million in September for the execution of our share buyback program.

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

DSOs on accounts receivable remained at 40 days, the same as at August 31.

New goods inventory at November 30 was $208 million, up $24 million from August 31.

We will be converting our global supply chain to the SAP system in our third quarter as part of our Company conversion to the enterprise-wide resource system.

In anticipation of this, and as a precaution, we have intentionally built up inventory levels prior to the conversion.

We have also built up our Carhartt, and our flame-resistant clothing inventory levels.

Uniforms and other rental items in service increased by $17 million from August 31 to November 30, due to the higher volume levels throughout the second quarter.

Accrued liabilities increased $101 million compared to August 31, due to the $72 million accrual of the dividend, which was paid on December 15, and increased bond interest and accrued profit sharing.

Long term debt at November 30 remained at $787 million.

Any early retirement of this debt would require a pre-payment 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 25%, while net debt, or long term debt less cash and marketable securities, as a percentage of total capitalization was 17%.

Turning to our cash flow, cash provided by operating activities was $74 million for the second quarter, a decrease from $149 million in last year's second quarter.

Last year's cash flow benefited from lower working capital needs associated with our decreasing volumes, and the accrual of the legal settlements.

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

The second quarter cash provided by operating activities of $74 million was an increase over the first quarter's $35 million.

CapEx for the second quarter was $40 million.

Our CapEx by operating segment was as follows, $27 million in rental, $1 million in uniform direct sales, $5 million in first aid, safety and fire protection, and $7 million in document management.

We invested $41 million in the second quarter on strategic acquisitions.

This includes a number of small acquisitions in 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) We'll take our first question from John Healy from Northcoast Research.

Good evening.

Hello, John.

Question for you about cost and input cost in your business.

Been reading a lot about rising cotton prices, was wondering if you could talk a little bit about those, and maybe how much they are as a percentage of sales and what you're seeing there?

And as well as your thoughts on energy prices going forward, I know there's a lot of speculation that oil is going to have a big run up in 2011 and I wanted to get your thoughts on how you feel about the likelihood that you'll be able to pass any energy cost increases we see next year through your business without really crimping back the margins?

Thanks.

Sure.

As far as cotton prices go, they are less than 5% of our rental business and the reason is because many of our garments are 65%/35% poly cotton blend and then when you include the direct labor cost component, the overhead cost component freight to get in, it is the cotton content is not a significant piece of the garment total cost.

When you then think about that cost of the garment being amortized over 18 months, it almost acts like a natural hedge such that cotton costs need to be elevated for quite a long period of time before it has a significant impact on us.

So we don't expect that big of an impact on it on this fiscal year but certainly we're keeping our eyes on it and we are working with our vendors to minimize the impact to us.

As it relates to passing these costs on, we feel pretty good about the ability to do so to our customers.

There's a lot of talk about this increasing cost and I think it's a reasonable thing to do to pass that on at some point .

In the energy area, especially with gasoline, John, it's something we're having to keep our eyes on and we believe that if the gasoline prices continue to increase, we will have the ability to pass along those price increases tends to be a bit of a lag but we'll be able to recoup that as we go forward, we expect at this

Okay, great.

And then I was hoping you could talk a little bit qualitatively about just the environment that you're seeing out there on the new sales item.

I was thinking more of on the rental business.

Are you seeing signs of life the small business customer you focus on is showing any better vital signs?

Are you starting to see more RFP activity?

I know the rental business is firm up a little bit and I'm just trying to get a little better understanding of where the firming is taking place?

We are seeing a much more accepting attitude on the part of the business to look at potential expansion of their own businesses.

I don't want to characterize it as extremely bullish but it is certainly we've turned the corner on this given that it's our third consecutive quarter of increased wearers.

Our salespeople are getting a lot of presentations, a lot of interest on the part of prospects both that are current programmers as well as no programmers.

So yes, it is a better environment than we've seen for the last few years and we're cautiously optimistic that as we get into 2011 we're going to see a reasonable growth rate in our wearers and continued expansion of all of our business lines.

Great.

Look forward to it.

We'll take our next question from Gary Bisbee with Barclays.

Hi guys.

Happy holidays.

Hi, Gary, thank you.

Just a couple of questions.

Let me follow-up that one on rentals.

I've seen a couple press releases out there targeting what looks more like some of the facility services type stuff.

There was one last week I think that it sounded like to me it had a healthcare angle to it, maybe it was infection control or something and I've seen a couple others.

How much is this whole facility services area contributing to the rental service growth?

Should we think of that as one of the things driving the growth rebound or I should say reacceleration there?

Gary, it's contributing to it but I don't want to leave the impression that the garment revenue isn't growing also because it is.

We have -- if you look at our total revenue business today it's about 50/50 facility services garments so I would tell you that we're seeing growth in both areas.

Okay.

That's good to hear.

Two questions on the Document Management business.

You mentioned a couple of new storage facilities.

I know a year or so ago you were treading cautiously maybe is the right way to say it with that business and it seems to me there's a fairly weak return on invested capital and it takes significant upfront capital investment to scale.

I guess given what seems like a pretty competitive business, how are you thinking about the decision to scale the storage piece and how are you trying to position yourself competitively to be successful in that business?

We are continuing to be very cautious in the storage business.

We have not in the US made any acquisitions of existing storage operations but rather we have selectively picked out cities where we will have a base amount of business from a national customer and established shredding business that we will then start up an operation on storage.

So while there are short-term losses associated with these greenfields, it's nothing like the significant investment that needs to be made and then a lengthy return on the investment that might happen from being very acquisitive with storage companies so it is selective, it's very strategic, and it's pretty much driven by customer relationships that we already have.

Okay, that's helpful and I guess the follow-up question on that business, I think you mention growth could slow a bit more if recycled paper prices continue to stabilize where they seemed to have been recently but I guess we've lapped the big year-over-year increase.

How should we think about the margins as we look over the next few quarters?

You mentioned a couple of investments that have brought margins down a bit.

Is that reasonable to expect you'll continue to make that level of investment and the margins could drift a little lower or should we think of scale helping the margins in the document business overall?

It's difficult to project when an acquisition might make itself available, but I would tell you that we believe you should see margin expansion in those businesses.

We're not going to pass up on a great acquisition opportunity if it becomes available, but I think that at this point, my expectation is that the new acquisitions that we made specifically the European ones are going to continue to show improved margins going forward and certainly our US operations have done very well and will continue to do so, so I think you'll see improvement there.

Okay and just one last one.

The SG&A, can you give us any sense how you're thinking about that trending?

Nice to see it down a bit this quarter as a percent of revenue, but now that we're starting to lap that sales hiring, should we expect that you might begin to get some leverage on that if we continue to see this modest sales reacceleration or are you still investing heavily there?

Thanks a lot.

Gary, we mentioned last quarter that Mike and I both talked about the fact that we expected leveraging of our SG&A line as we went through the year, so I think it is clear that what we said was going to happen is starting to happen and you could see it in the second quarter.

And as long as that revenue continues at the growth rates that we have seen and even accelerate some, I think you'll continue to see even more leverage in that line.

When you think about sequentially our SG&A, our third quarter something to keep in mind, our third quarter has 64 workdays so one less than the second quarter and there's some payroll taxes to reset, so the sequential movement of SG&A will likely reflect the impact of that, however as Bill said we do expect some leveraging going forward.

Great.

Thanks for the color guys.

We'll take our next question from Scott Schneeberger from Oppenheimer.

Thanks, good afternoon.

I'm curious in the press release, there's discussion and you guys mentioned there's customer penetration, could you speak a little bit about what you're seeing there and perhaps the ability to cross sell as well?

Well what we're seeing is it goes back to the comments we made on businesses now realizing that the economy is generally beginning to improve.

There's more visibility with regard to what's going to happen now that the tax law, tax changes have been resolved.

I think our existing customers are more confident on their ability to grow their businesses and as such, they are more willing to talk about other products and services that we may have to offer as well as expanding their own workforces.

So it's a modest type of growth but it's certainly a much more positive development than what we saw 12 months ago.

And one of the -- as we increase that investment in sales, we did focus some of our sales team on improving penetration so that's been a part of the momentum we've seen in the last year.

Thanks and on these lines, mention of retention improved.

Could you speak a little bit as well as new business, could you speak to the competitive environment, specifically the pricing, primarily in rental but also across other businesses?

Well, pricing continues to be aggressive and I think that what we have seen for the last several quarters has continued in that our competitors in all of our business lines are looking to grow their own businesses.

And as such, they have been aggressively going after our customers as well as customers who are looking for the service from a number of different providers, so the competitive environment has not really changed in terms of aggressive pricing.

I would say it has not gotten any more aggressive but it certainly, there's not a lot of ability to get increased prices on new business at this time any different than what we've seen over the last several quarters.

Thanks, and then finally I think you mentioned $41 million in M&A primarily in Document Management and then some in First Aid, Safety and Fire.

Could you give a little more color on where geographically where these were and were they predominantly Document Management and just a prioritization of use of cash from here?

A bit of buybacks recently at sizeable authorizations but just the hit list there.

Thanks.

The acquisitions, we did make an acquisition in Document Management in the UK to complement the acquisition we made last summer.

The remainder of the rest of the acquisitions in Document Management, First Aid and Safety and some in Facility Services were located here in the United States and they were all pretty much small acquisitions, some were tuck-in, some opened us up into some new markets with some of the products but nothing was very big during the quarter.

As far as use of cash, I think the attitude is that we will continue to use our cash to grow our businesses.

We are going to look for good acquisitions that have the appropriate internal rates of return that we require.

But the Board did issue another authorization on a share buyback and depending upon what the availability is of acquisition opportunities as well as the market conditions of our stock, they will direct us on how they want to execute under that buyback if at all.

Thanks very much.

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

Hi, Bill, Mike.

Hi, Ashwin.

My first question is with regards to the top line growth and congratulations by the way of labor rebound there and the internal revenue growth, but is it possible to parse out maybe size the various components, how much is coming from new clients versus same-store sales, versus pricing?

And you mentioned pricing stability bit here but is it still negative on a year-over-year basis?

Ashwin, we used to break that out many, many years ago and that was when the business was much simpler and we had, I would say a better ability to make sure that the information we were being provided from our operations was consistent.

And at this time, I am not comfortable in breaking out the details of the growth in specifics.

I would tell you that most of the growth though has come from new storefronts.

That is new customers or new products at existing customers.

We have not really seen a significant amount of growth like wearers within a customer.

There's been some of that but not a significant amount.

What we've seen is no further deterioration.

So right now, it's mostly new storefronts that we're seeing the growth from.

Pricing, we're not getting a lot of growth from pricing at all, of course the CPI is basically flat, so on our existing contracts it's at this point has been relatively minimal about price increases so it's pretty much the new storefronts.

Okay, and when you think of -- so your target margin by segment, and the reason I ask this is obviously the business has changed a bit as you're going through this downturn, with regards to your own cost structure as well as a little bit in the competitive environment, how do you think of target margin by segment?

Is it possible in the core rental business to get back to these levels that you used to have and what should we think about for the Paper Destruction business?

Well, let me answer the Paper Destruction business.

Assuming stability in the recycled paper price, the margins in the Paper Destruction Shredding business should certainly be at levels that we saw and we see in traditional rental type margins.

We're very confident of that.

The rental margins themselves, I would be a little too optimistic to say we could get back to pre-2005, 2004 levels because it's difficult to assume that all of the cost increases that we now have incurred as a result of much higher medical costs, higher energy costs, expensing of stock options, Sarbanes-Oxley expenses.

I'm not sure we can ever overcome all of those expenses, but however, I will say that we are optimistic that we will see improved margins from what you're seeing today in the rental business as well as the other businesses, and barring again a spectacular increase in some component of costs like energy or medical expenses or something along those lines.

Fair enough and just last clarification.

It's been asked a couple of times here, but with regards to the buyback that was announced in October, I was a little bit surprised to not see any of the deals in the remainder of the quarter.

Is there not a time limit to use it within two years, three years?

Is that how you're thinking of it or is it just purely use it only if the stock is below a certain price or something like that?

Well, I think it certainly is driven to its degree by the stock price but it's also driven by the other cash needs in the Company.

We're always looking out into the future of what we're going to do and what we're going to need for our cash and as I mentioned, we did pay the dividend here just last week so we knew we had $70 some million we needed to do for that.

We've had some acquisition activity.

We have this working capital build up so we balance all of that out and we also look at what's coming down the road here in terms of growth initiatives, capital requirements, potential acquisition opportunities, et cetera.

And I think we would -- we have got borrowing capacity, if the market condition and our stock warranted it we would certainly look at the opportunity to execute under that buyback but it's a very complicated evaluation of what we expect to happen, what we see happening with our valuation and the Board helps us figure out what they think we should do for the benefit of our shareholders.

Okay, what are your free cash flow expectations for this year?

Ashwin, we really don't give that out as guidance at this point because it becomes a little bit more specific in terms of evaluating the working capital needs and the capital, so we publicly have decided not to disclose that.

We let you guys figure that out based on your expectations.

We give the sales and the EPS and capital spending and that's about it.

Got it.

Thank you guys and hope you get to enjoy your holidays here.

Thank you.

Thank you.

We'll take our next question from Vance Edelson with Morgan Stanley.

Hi.

Thanks for taking the questions.

First just a follow-up on an earlier one.

On the level of competition is it strictly in the form of pricing aggression or is anyone out there trying anything new or exciting in terms of service, quality or anything else or is it more like all they can think of is price?

Oh, I wouldn't characterize our competition as just being on price.

We have some very good competitors in all of our businesses and I think they are always attempting do things to help distinguish themselves in front of our prospects and customers.

So I think we are at the forefront in many of our businesses in the things that we do as evidenced by our ability to provide the Carhartt uniforms and some of the other comfort uniforms we have that many of our competitors don't have, some of the services we have in the imaging and shredding side I think distinguish us from some of the competitors.

And certainly first aid and safety and fire services we have really provided a lot of new things and a lot of interesting approaches to providing those services, but our competitors are aggressive.

They look for their niches also and we respect them very much, so they are keeping us on our toes.

Okay, makes sense.

And then I want to make sure I heard you correctly that the bad debt was higher due to a change in methodology I think you said.

Anything you can share with us on what the change was?

No.

That's -- we did not change our methodology.

We had a slight deterioration in our aging compared to last year but no change in the methodology.

Okay, great.

And then just on the geographic expansion initiatives within the US.

Is that ongoing?

Is there anything new to share there in terms of efforts to expand greenfield or otherwise within the US?

The primary expansion greenfield that we've had was in Document Storage and our Document Management Shredding business and Fire Service business continued to expand in different markets throughout the US because we still don't have the same coverage that we have in our rental business, so we are finding opportunities to expand into cities where we might have a rental operation but we don't have Fire Service or Document Management at this time and that's where that expansion takes place.

Got it.

Okay, I'll leave it there.

Thanks.

We'll take our next question from Andrew Steinerman with JPMorgan.

Happy holidays guys.

Could you give us a sense of what rental growth for the second half of the year is implied within the revenue guidance?

Rental growth?

Organically, sorry.

Yes, so we just did 1.9% in the first quarter we did basically zero and so I'm asking in the second half of this fiscal year what would be the organic rental growth implied in the overall revenue number that's guided for?

Well, Andrew, let me answer it this way.

The revenue guidance we gave you is still relatively broad, so for me to break that out is a little difficult because I've still got a pretty broad revenue guidance there.

Let me just say from my expectation is that assuming things continue as we've seen so far in the trend that I would expect organic growth in all of our businesses to improve from what you saw in this last quarter.

I can't really give you any more detail than that at this time.

Okay, and when you are looking for organic revenue growth acceleration in uniforms, do you think it would be the same drivers that drove the second quarter, I think you called it new storefronts being the biggest driver?

Yes.

And when you say new store fronts do you mean new business or I didn't quite catch what new storefronts mean.

What I mean by that Andrew is basically a new customer renting uniforms as opposed to existing customer increasing their workforce.

Perfect.

So new business.

I've got it.

Thank you so much.

We'll go next to Greg Halter with Great Lakes Review.

Good afternoon guys and happy holidays.

Happy holidays to you too, Greg.

Hope the snow isn't getting you guys too badly down there in Cinci.

We've had our share of it already this year.

More than us.

Looking at your cash and the securities how much of that is held in the US and how much is outside?

Roughly about $160 million is outside and the remainder is in the US.

And capital spending I think you had been talking levels around $150 million for the year.

Is that still in line?

Yes.

Yes, we're going to be certainly at that high end of the range that we talked about.

Okay, and how much of that is for the SAP installation?

It is likely going to be somewhere in the neighborhood of $10 million per quarter.

And talking about SAP, any issues so far that you've run across that would cause any problems in deliveries, and billings and so forth?

No, not at this point, we have not run into any problems.

We have fairly extensive testing and retesting underway, so we don't expect there to be any problem when we convert over the supply chain early next year.

Okay and I missed the figure you provided on SG&A due to selling expenses in terms of the increase year-over-year.

It was 60 basis points.

And you didn't, I don't believe, specifically address the [ap stock] metric, I think you have directionally but I presume that figure was a positive?

Slightly positive, yes.

Similar to what we saw in the first quarter.

Okay, great.

Thank you.

We'll take our next question from Justin Hawk with Robert W.

Baird.

Good evening guys.

Thanks for taking my question here.

Most of my questions have been answered but just a couple of clarifications here.

Just first of all on the productivity upgrades that you guys have initiated, beyond the SAP upgrade, can you just remind us what all is included in that and I guess what hasn't been rolled out thus far and what runway you have to continue to improve things on that side?

We've got a long way to go Justin in terms of what we're going to do with SAP.

All we have really tackled up to this point from a conversion is our financial system so we have now all of our financial systems and financial reporting under SAP.

We're very closely nearing the conversion of our global supply chain and then you'll begin to see some of our business units converted over if everything continues to go well over the course of the next couple of years.

Okay, got it.

So when you were talking about the productivity upgrades you were talking about the SAP upgrades specifically.

I'm having difficulty recalling with the context of productivity so I'm not sure.

I was just curious if there was other initiatives that you guys did that are driving some of the SG&A improvement.

Oh, yes.

No, there's a lot of other things that are going on in terms of leveraging our staffing.

It's not just all driven by SAP by any means.

It's a number of different areas that go back to this whole concept of value-added work and making sure that what we're doing makes sense and we're doing it efficiently and it's certainly beyond just SAP.

And when we were talking about productivity improvements, it may have been the in reference to our sales rep productivity, so those sales reps have been around longer, as they get tenured, they become better sales reps and their productivity levels improve.

That may have been also what we -- you heard.

Got it.

That makes sense.

And then just the last question just on the acquisitions again.

Just curious if you could give us a sense on what pricing looks like for deals that you're doing especially since Document Management business seems it's been pretty successful for you?

And I would imagine there's other players out there looking at some of the same companies.

A sense of what pricing looks like right now?

Well we don't disclose specific pricing in terms of multiples on our acquisitions as we tend to keep that confidential.

What I'll tell you though is that we have seen no real increase or decrease in the multiples that we've been paying for businesses over the past 18 months or so.

Got it.

Great.

Thank you very much.

You're welcome.

Tim?

Are you there?

We'll take our next question from Chris McGinnis from Sidoti & Company.

Hi good afternoon.

Just a question on how pricing -- you talked about getting some I think the gross margin to increase on the rental side.

I guess what's the -- just because the pricing has been so aggressive over the last -- almost two years.

I guess how much of a growth rate do you need for that to start to move in your favor or is there another dynamic that I'm missing in terms of that improving from here on out?

If we could get -- if we could continue to have pricing remain at the levels that it's at, we're going to see some margin improvement because of the higher revenue levels that we're able to spread all the fixed costs over and the improved amount of volume that we have on existing routes and that thing.

So, price improvement -- price increases will only add to the speed of the margin expansion but at this point I don't believe that margin expansion will happen even without prices.

And really, current customer hiring will be the best driver of gross margin improvement so if we can see our customers and generally, the job -- the employment levels improve that's going to be very positive.

And just in terms of -- I don't know if you'll break it out but of the new customers coming in, how many are new to programs themselves?

We only look at that on an annual basis, Chris, so we don't really have that data on a quarter by quarter basis.

And then last question, just the acquisition market for the industrial laundry segment?

I guess any opening up in terms of -- or maybe lowering valuations and the expectation they're looking for?

Really haven't seen any change and most of our acquisition activity has taken place in the emerging businesses area, Document Management and Fire service.

Got you.

All right, thank you very much.

Have a good holiday.

Thank you.

You too.

We'll take our next question from Gary Bisbee with Barclays.

Hey guys, just one quick follow-up.

Given one less workday this next quarter, is there -- it would seem reasonable that the rental margin -- gross margin would probably creep down a little bit more.

Is there anything that -- is that the right way to think about it or is there anything we should think about that --

You're absolute right.

That is the way to think about it and an improvement in the fourth quarter.

If you think about last year's second quarter to third quarter, we had a drop of about 80 basis points and same number of workdays.

Okay.

It's something similar would make sense.

Okay, thank you.

And at this time, there are no further questions in queue.

Well, thank you all very much for joining us this evening and on behalf of all of the Cintas family, we want to wish you and your families a very happy holidays and a prosperous 2011.

That concludes today's conference call.

We appreciate your participation.