信達思 (CTAS) 2012 Q1 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.

Thank you for joining us this evening to report our first-quarter results for fiscal 2012.

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

After some commentary on the results, we will be happy to answer questions.

We are pleased to report that our first-quarter revenue grew 10.1% from last year's first quarter, to a record revenue of $1.017 billion.

It was also our second consecutive quarter of double-digit growth.

Net income increased by 12% to $68.6 million, and earnings per share were $0.52, a 30% increase over last year.

As noted in the release, we are particularly pleased with the expansion of our operating margin, compared to last year's first quarter.

Despite increases in energy-related costs and garment material costs, our operating margin improved from 10.9% in last year's first quarter, to 12.6% this year.

We continue to focus on selling profitable business, controlling our costs, and improving the efficiency of our operations.

These initiatives have allowed us to improve our overall gross margin by 60 basis points over last year's first quarter, more than offsetting the headwinds of higher energy-related costs and commodity costs, and to improve our SG&A by 130 basis points compared to last year's first quarter.

Looking forward, we reiterate our guidance for fiscal 2012, which includes revenue in the range of $4 billion to $4.1 billion, and earnings per diluted share in the range of $1.97 to $2.05.

While we continue to be encouraged by our results, we are cautious about the state of the US economy.

We have now seen 4 consecutive months of employment growth under 100,000 per month.

We have also seen numerous 2011 and 2012 economic forecasts being revised downward, which have generally resulted in lower employment expectations for those years.

While we have not yet seen the significant change in our business due to the state of the economy, we do, however, remain cautious.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements.

This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance.

These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss.

I refer you to the discussion on these points contained in our most recent filings with the SEC.

Now, I would like to turn the call over to Mike Hansen for more details on the first quarter.

Thanks, Bill, and good evening.

As Bill mentioned, total revenue increased 10.1% from the first quarter of last year, with total Company organic growth being 7.6%.

Total Company gross margin for the first quarter was 43.2%, which is up from last year's first quarter gross margin of 42.6%, despite a 50 basis point increase in energy-related costs.

Before providing you with details about our first-quarter performance, please note that there were 66 workdays in our first quarter, which is the same as last year.

As a planning note for the remainder of fiscal 2012, our workdays will be as follows -- 65 in the second quarter, 65 in the third quarter, and 66 in the fourth quarter.

The total workdays in the fiscal-2012 year are 262.

We have 4 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 71% of Company revenue in the first quarter.

Rental revenue was $719.4 million for the quarter, which is up 9.4% compared to last year's first quarter, and up 7.3% organically over last year.

We continue to be pleased with our increase in uniform wearers, and the growth generated by our newer product lines.

Our new business and customer adds through the quarter were not quite as robust as in our fourth quarter.

We did, however, begin to see some easing of the pricing environment during the quarter, as expected, most likely due to the input cost headwinds facing our industry.

Our rental segment gross margin was 43.9% for the first quarter, an improvement of 40 basis points over last year's first quarter gross margin of 43.5%.

This was despite an increase of 40 basis points in energy-related costs.

The first quarter's gross margin was a 30 basis point improvement over the fourth quarter of fiscal 2011 gross margin of 43.6%.

Improved capacity utilization from higher volumes more than offset the higher energy-related costs, and higher material costs.

Obviously, we did not see any impactful hiring at current customers during the quarter that would allow us to take advantage of existing stockroom inventories.

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 10% of Company revenue in the first quarter.

First-quarter revenue of $101.7 million represents an increase of 3% compared to last year's first quarter.

Organic growth was also 3%.

The revenue from this segment tends to be a bit choppy, based on the timing of new product roll-outs, refresh programs, and customer openings.

Last year's first quarter uniform direct sales revenue benefited from more of these, and was a very strong quarter.

Uniform direct sales gross margin was 28.6% for the first quarter, which is down from last year's first quarter gross margin of 30.3%, and fourth quarter gross margin of 30.9%.

These decreases are primarily due to some cotton impact on garment costs, higher freight costs on shipment from our distribution centers, and higher energy-related costs associated with our rental catalog service.

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 were $103.7 million, an increase of 10.9% versus last year's first quarter.

Organic growth was 7.9%.

This segment's gross margin was 43.2% in the first quarter, compared to 40.9% in last year's first quarter.

Energy-related expenses were 30 basis points higher this year compared to last year.

More than offsetting the higher energy-related costs was improved capacity utilization from the higher volumes in both our facilities and on our routes.

The first quarter's gross margin of 43.2% was also an improvement over the 41.7% in the fourth quarter of fiscal 2011.

Again, higher volumes helped with capacity utilization.

Our document management services operating segment includes document destruction, storage, and imaging services.

Document management accounted for 9% of first quarter total Company revenue.

Revenue increased 24.7% over last year's first quarter, to $92.3 million, with organic growth of 15.9%.

Recycled paper prices continued to be at historically high levels, and contributed positively to the segment's organic growth.

Document management's gross margin for the first quarter was 53.2%, the same as last year's first quarter.

However, energy-related costs were 80 basis points higher than last year's first quarter.

Offsetting these higher costs were improvements in the efficiency of both facilities and routes, mainly due to higher volumes.

The first quarter gross margin of 53.2% was also better than the 51.4% in the fourth quarter of fiscal 2011.

Moving to selling and administrative expenses, first quarter consolidated selling and administrative expenses were 30.5% of revenue, a decrease from 31.8% in last year's first quarter.

Selling expenses continued to be lower as a percent of total revenue, due to higher revenue levels, and greater rep productivity than a year ago.

Administrative expenses as a percent of total revenue also decreased, due to cost control initiatives, and lower medical expenses.

The SG&A of 30.5% of revenue was slightly higher than the fourth quarter of fiscal 2011, of 30.1%, primarily due to higher bad debt expense in the first quarter.

Our effective tax rate was 38.5% for the quarter, compared to 30.8% last year.

Keep in mind that last year's first quarter rate was positively impacted by the resolution of several tax audits.

The effective tax rate can fluctuate from quarter to quarter based on tax reserve builds and releases relating to specific discrete items.

As noted in our press release, we expect the effective tax rate for the entire 2012 fiscal year to be 37.3%.

Turning now to the balance sheet, our cash and marketable securities were $277 million at August 31.

This is down from the $525.3 million at May 31, but $259.5 million of that balance was used to purchase shares of Cintas stock during June and July.

Accounts receivable increased by $10 million since May 31, primarily because of the higher revenue levels.

DSOs on accounts receivable was 40, down slightly from 42 at May 31, but the same as at August 31 of last year.

New goods inventory at August 31 was $280.2 million, up $30.6 million from May 31.

This increase is mainly due to continued high demand levels in our Carhartt program, our flame-resistant clothing line, and some build for fall seasonal wear.

We expect to see inventory levels decrease during the remainder of fiscal 2012.

Accrued liabilities decreased $17.3 million compared to May 31, due to the timing of bond interest payments, and the payment of fiscal 2011 profit sharing accruals.

Long-term debt at August 31 was $1.3 billion, of which $226 million was in current liabilities.

We have $225 million maturing on June 1 of 2012.

Our current expectation is to pay off this maturity with cash.

The average rate on the outstanding debt is 5.1%.

Total debt as a percentage of total book capitalization was 38%, while net debt, or long-term debt less cash and marketable securities, as a percentage of total capitalization, was 32%.

Moving on to cash flow, cash provided by operating activities in the first quarter was $56.6 million, which is up from last year's first quarter amount of $35.3 million.

CapEx for the first quarter was $44.4 million.

Our CapEx by operating segment was as follows -- $28.2 million in rental; $1.1 million in uniform direct sales; $4.8 million in first aid, safety, and fire protection; and $10.3 million in document management.

We expect CapEx for fiscal 2012 to be in the range of $180 million to $200 million.

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

(Operator Instructions).

Andrew Wittmann with Robert W.

Baird and Company.

I wanted to dig a little bit, to start out with, on the document business.

Good organic growth there.

Could you separate out on a same paper price level what maybe an underlying organic rate was there?

Excluding the recycled paper, it was 7.7% for the quarter.

Okay.

Great.

And then just to try to dig in more strategically, can you just talk about what you're seeing in the acquisition market for that business, a little bit in terms of pricing, availability of deals, and your propensity, or maybe philosophically -- about your desire or non-desire to have storage as part of that offering?

Andy, the acquisition pipeline has been relatively -- let's say the acquisition activity has been relatively quiet.

We still are in active discussions with numerous players.

However, at this time, during the quarter there just really weren't a lot of actionable things, I think partly due to our price propensity versus their price expectations.

But I don't think there's a lot of deals being made anywhere based on what I am seeing.

We are continuing to focus on the shredding side.

We have done some storage start-ups recently, but we have not really pursued any storage acquisitions in the last several quarters.

It just -- I guess focus on shredding, is that just because that's where you've been able to have immediate operating leverage?

Is there an aversion generally from using the balance sheet for storage?

Say if you were able to go in with larger scale and maybe get some immediate leverage out of the business?

Do you think that would be a potential use of balance, even though historically it has not been something you have done?

We would certainly look at it.

1 of the issues you run into often in a storage acquisition is that the seller is selling because he doesn't want to invest in the additional capacity he needs to continue to grow.

So one of the first things that happens, typically, is that when you buy a storage operation, you've got to invest a lot of capital right away in order to continue to grow.

This tends to drive down the price we're willing to pay for the operation, because we want to demand a certain return on our investment.

So I think that has been part of the issue.

The other part of the issue or the other part of the strategy that Cintas has had, is that we believe there's an awful lot of core competency that we have in route-based businesses that we can apply and have applied to the shredding business.

So we look at that as a better return for our shareholders.

It's a business that has grown very, very nicely, both in terms of revenue growth, as well as margin expansion.

And so that's why our focus has continued to be more in the shredding side, because of the returns and the growth potential.

Great.

Just wanted to dig in 1 thing on the Uniform Direct sale, if you will.

Mike, I think you mentioned the new product lines have helped kind of the core business results this quarter.

Can you help quantify how much of the organic growth was maybe driven by some of the new product lines, whether it's facility services or maybe the deal with Diversey, what have you.

We don't give that kind of detail, Andy, by product line.

But those new businesses are performing well, and we're seeing good growth in those, as well as all of our businesses.

We're pleased to see growth in all of our business lines, within the Rental segment.

Okay.

I'll jump back in queue.

Thank you guys.

Sara Gubins with Bank of America-Merrill Lynch.

Hi, this is David Ridley-Lane for Sara.

Maybe on Rental Uniform sales, they're nearly back to peak levels.

The gross margin for that segment is also nearly back to the 44% level that's historically been pretty much the high there.

Is there a lot of further room for gross margin expansion in that segment?

Or have you kind of squeezed the capacity utilization back to kind of normal levels already?

David, no, there is certainly room for continued margin expansion for a couple of reasons.

1 is we still have capacity in our facilities that we can leverage off of.

But even more importantly, I would say, is the opportunities that still exist at some point for increased volume at existing customers.

Much of our growth over the last several quarters has come from new business as opposed to growth in existing customers, and as we've talked on numerous occasions, when you can get a customer to add an employee, which at this point we haven't really seen yet, that is very profitable business, and that would contribute to margin expansion.

So hopefully at some point here in the not too distant future, we'll begin to see customers increasing the sizes of the workforce, at least.

What we've seen for the last year has been that they're maintaining their workforces, so the next step would be when confidence comes into the economy, these businesses will start increasing and we'll see additional profitability from those wearers.

And David, when it comes to capacity, some of the newer businesses, the chemicals, the hygiene businesses, the tile and carpet, they do not really use capacity at our plants, and so we've been able to grow without using as much capacity as in the past.

Just on the Rental Uniforms sub-segment of that, are you back to normal capacity utilizations, sort of in a normal range or are you still below even the normal ranges?

We're still below where we were back in the fiscal 2008, 2009, first quarter of 2009 periods when we were at these revenue levels in Rental before.

As Mike said, part of the new businesses that we're in have added to those rental lines and aren't the traditional garment business.

So we're still down from where we used to be in the garment side.

Okay, and maybe a quick 1 on the Uniform direct gross margin.

Does the cotton impact there get worse before it gets better?

I would say it probably won't get much worse.

It will probably start getting a little bit better, because the occurrence of the higher cotton prices happens quicker in the Direct Sale businesses than it does in the Rental business, because in the Rental business, of course, we're amortizing that over a longer period of time.

So the high cotton prices that we were experiencing in the fall have pretty much entered the product cost.

We have a mix, still in the distribution centers, but they have entered and they come in much quicker on the direct sale business.

So I'd say you're probably not going to see it getting worse in direct sales, and we'll start to hopefully offset a little bit of that too, with higher pricing going forward.

Okay.

And maybe if I could squeeze 1 last 1 in.

Do you have quarter-end share count or the current share count?

The outstanding shares were 129.7 million and you can see that on our balance sheet.

Thank you very much.

James Samford with Citi.

Thank you.

Just wanted to touch on, at a high level from a macro perspective, what's the state of the union among sort of small business and the feedback that you're getting?

Sounds like you're obviously more cautious.

Obviously we are, as well.

Just wanted to get anything you're hearing back from your customers, relating to hiring plan, things like that.

I think what we are seeing is that most customers are just trying to maintain their status quo from a labor standpoint.

So as Mike mentioned, we did not really see many adds at our existing customers.

Fortunately, we didn't see many reductions either.

It was kind of a status quo.

So I sense, in talking with our salespeople and our operating people, that companies are just kind of holding with what they've got, and hopefully we won't see a forced reduction in headcount, if the economy goes a lot -- slows down a lot more.

So people are just kind of generally holding on to what they have.

With regards to pricing, obviously cotton prices coming down, fuel prices coming down, that helps you and your competitors.

Have you seen competitor pricing change at all as a result of this, or have you been able to get some benefit at least from the prior hikes in cotton prices?

No, we got some nice benefit in the quarter, as Mike mentioned, and these cotton prices -- the higher cotton prices are going to be with Cintas and our competitors for some time in the Rental business, because that stuff is really just entering the cost categories.

As those products get injected into their customers, and then you're kind of stuck with those higher cotton prices for the period of amortization.

I would say we've seen a firming up of the pricing environment in most cases, not in all cases, and that is certainly a positive sign as far as we're concerned.

Bill mentioned that cotton impact in the Uniform Direct side.

In the Rental side, we saw a minor impact this quarter but we expect that will -- that impact will grow as we go throughout the quarters of the year because of, as Bill said, it's entering that amortization stream.

I believe you said it was roughly $15 million impact in 2012 and $5 million in 2013.

Is that still valid?

We said something less than $15 million in fiscal 2012 and we still believe that, and we likely saw less than a quarter of that, so if you think about that growing impact, we expect to see a little bit more throughout each quarter of the year.

And then that $5 million was on top -- the $5 million was an incremental impact in fiscal 2013.

So roughly a $20 million impact in 2013.

Great.

I'll hop back in queue.

Thanks.

Nate Brochmann with William Blair & Company.

I want to talk a little bit more strategically in terms of how you're thinking about costs within the business, in terms of whether you put the pedal down on hiring to take advantage of some opportunities out there, or whether you take a more cautious approach, and how do you think about the balance about that right now?

I would tell you that we are remaining relatively cautious.

We're not doing any significant adds to our headcount.

We're certainly adding to accommodate the additional growth, especially in our Service side.

But I would say, we're being cautious also.

Okay.

Fair enough.

And then also, obviously new business and greater penetration has been a big part of the story here recently to somewhat of the better, more consistent performance and earnings growth that you've been putting up nicely.

How do you feel about the pipeline of new business activity?

Is there still a lot of eager discussions out there, and accounts that continue to close?

Our salespeople still feel very good about the new business pipeline and selling the value of our different products and services.

They're still excited about selling the newer product lines as well, and so they're still feeling good about their ability to produce at rep productivity levels that we've seen.

Sounds great.

So while there's a cautious tone in general, we still see some good activity out there.

Yes.

And I think we do because as we talked about the last quarter, so many of our products and services are very appealing to the no programmer market and that's where we're seeing a pick-up in new business.

Plus some of those products and services have led to more competitive wins with some of the traditional uniform rental suppliers.

So I think what we're not seeing is just the expansion of existing accounts, which I alluded to earlier, which, once that starts, that really just adds another push to our top line growth and obviously improves our margins.

Sounds good.

Thank you very much.

Andrew Steinerman with JPMorgan.

Could you mention the effect of lost business?

I know you've said pricing up a little bit, add stops flat, new business you commented on.

Lost I don't think you've said.

We did not say anything, Andrew, because basically we saw a reduction in lost business about 3 or 4 quarters ago, and it has gotten back down to more historical levels, and really hasn't changed.

Okay.

And could you make a comment about merchandise amortization?

I expect that's still a higher merchandise amortization at this point and give us a sense kind of within the guidance, how you're thinking about merchandise amortization?

Well, we're still seeing the amortization give us some upward pressure, because as we continue to inject new business and new garments for those new accounts, it certainly is making the in-service inventory go up and our amortization go up.

So we continue to expect that to go up, as we are continuing to add new business, and that certainly is in our guidance.

We do believe that we can continue to offset that with the efficiencies of our plants and our routes, though.

But is this a headwind bigger than what you highlighted for energy, or just it's smaller than energy's headwind?

I would say that it's not any larger than what we've seen in the last year.

Okay.

Fair enough.

Thank you very much.

Gary Bisbee with Barclays Capital.

So I'm looking at a chart here that I got from you in your fiscal 2004 that actually broke down at sort of excruciating detail.

I can't remember if I got this at Investor Day or where, but the end market exposure of your customers, and it dawned on me that I don't think we've gotten a good update since then on that.

At the time, like manufacturing and related and autos and auto mechanics and auto -- I don't know if it was retail or whatever, and related seemed to be the 2 biggest areas, and then it was really pretty diversified beyond that.

Has there been any major changes?

Are you doing more, like in restaurants, food service, hospitality, anything -- and I guess this is specifically to the Rentals business.

Has there been any big change in the last few years?

I would say, Gary, I don't have it in front of me, I'm not sure how recent data we've had our marketing group do that.

But the last time I looked at it, we certainly have had an increase in the sectors you just mentioned, the hospitality sector including hotels, restaurants, that sort of entertainment-type things.

We have had an increase, slight increase in the retail sector.

We've started seeing some increases in the healthcare, as you may probably never even saw that pop up on the last schedule.

We've seen a reduction in manufacturing from that period, due to the shrinkage of the manufacturing sector in the US.

But it's still a pretty diverse chart, because no 1 customer still accounts for more than 0.5% of our business, and no 1 sector really is that big a component of our business either.

Okay.

That's helpful.

I'll ask you what -- I guess a fairly obvious question.

You put up great growth and big numbers, and yet you maintained the guidance, which clearly implies a pretty substantial deceleration.

Obviously the comps get much tougher given how strongly you did in the back half of last fiscal year, and you sounded a cautious tone on the economy.

Is there anything else going on there or would the comps and the economy be what's driving that decision to maintain and not raise the guidance.

Gary, it's absolutely what you just said.

Yes, we've got a little tougher comps, but the bigger thing is, we just don't know what the economy is going to deal with us.

And we would rather express our caution, because everything you pick up and read seems to imply that there's not going to be a lot of job growth here in the next -- at least for the next 12 to 18 months, so while we will continue to grow, if we don't get some job growth, it's going to be tough to continue to grow double-digit levels.

Okay.

And then just the last 1 from me.

I think in your opening line, Bill, you made a comment that you focused on selling profitable business, controlling costs, and I think you said then continuing to find efficiency opportunities.

Can you give an update on what those are today, what you're doing on the efficiency front?

Thank you.

We're doing quite a few things.

We're obviously continuing to look at our plants and try to do more mechanization to operations so that we can basically, I think, improve the throughput of those facilities, so we've invested in some technology there.

On our routes, we've -- you probably remember we did have a route-based computer.

We've done quite a bit on expanding the capabilities of those route-based systems that the drivers are carrying with them.

In our G&A functions, we've invested in SAP and continue to invest in SAP, and that's helping reduce the need for additional headcount.

I think in all of our businesses have been charged with eliminating non-value-added work, and as a result of that, keeping headcount at the appropriate level of service for our customers, but certainly not having excessive headcount around.

So it's a combination of process improvement and technology investment.

Okay.

Thank you very much.

Shlomo Rosenbaum with Stifel Nicolaus.

I want to focus a little bit more on the pricing, and do you have a metric as to how much the firming of pricing, and your ability to move that pricing impacted the margin in the quarter on the Rentals business?

Shlomo, we certainly know that internally, but we don't disclose those components publicly.

Is it material -- like we talked a lot about some of the other areas in terms of offsetting headwinds.

Would you say that is one of the biggest areas to offset the headwinds from some of the cost items?

I wouldn't say it's one of the biggest, but it was certainly a contributor.

I think the volume was probably a bigger contributor.

Just 1 other thing.

How much -- how long does it take to push that pricing through your base?

Does that like go through the year because the contracts take some time to roll through?

Yes, it does that.

But it's also an impact of the new business that we're getting is coming in at a higher price than what we were seeing a year ago.

Okay.

And then how should I think about free cash flow for the year?

I remember, when we were talking about this last quarter, one of the things that we talked about were inventory builds around the SAP implementation, which would probably reverse.

Do you have kind of a number that you guys are targeting, or at least a range that we should think about?

Well, we do have that.

I'm not sure if I have it right in front of me.

We'll have to get back to you with that.

I would say it's somewhere probably in the $450 million to $500 million range.

That's cash from operations?

Yes.

Okay.

And then CapEx, Mike said $180 million to $200 million.

And then in terms of SAP implementation, are things kind of going the way you guys were expecting or is there anything -- are you getting more efficiencies out of that?

Usually that's kind of a risky period for a Company.

Well, it's going pretty much as expected.

We haven't had any glitches.

We've had probably some little lengthier implementation times than we originally expected.

Right now, we are in the process of working on a couple of our emerging businesses to roll out the SAP order-taking to invoicing cycle, basically if you will.

We had previously focused on the financials and on the global supply chain, which both went very well.

And I would say that other than just taking a little bit longer, we haven't really run into any difficulties, but to this point, we haven't really impacted the customer yet.

So that's always a more critical point I think, when you're putting in a system.

1 question, just back on pricing.

It seems like when cotton pricing came to a head, the industry as a whole is starting to push it through, but there seemed to be less of that when there was fuel type of increases to the overall cost base.

Why do you think that is?

Well, I think part of it is cotton is a bigger impact than fuel, and I think that it stays with you a longer time, whereas the fuel was somewhat volatile, go up and down, whereas the cotton, once it kind of got into the supply chain, it takes a while for it to settle back down.

Okay.

That's a good answer.

I appreciate that.

Thank you very much.

And it was the first time we've seen cotton move like that in a long time, and it moved drastically.

Okay.

Great.

Thanks a lot, guys.

Chris McGinnis with Sidoti & Company.

Just 1 question on the new business that you're seeing.

Is it new -- the new business you're seeing, is it more on the Uniform side, or is it more on the Ancillary side of business?

In both, we're seeing -- we are certainly seeing wearer increases in the number of wearers.

We're seeing increases in the price of the product that the wearers are having and we're also seeing nice progress with the ancillary services.

So they both have contributed very nicely to the growth in the Rental business.

And then just 1 side question, just on SG&A.

Obviously last year you put a little in and it really paid off on the top line.

Is there, I guess, a moment where you think about increasing the sales force again, investing in that and what would -- I guess what would set you up to do that?

What would trigger you to do that going forward?

Chris, I think that's going to be driven more by market penetration, especially in the emerging businesses where, as we get into different markets, as we continue to establish our footprint, we'll see increases in sales force there.

But as far as our rental business, we're in all the markets pretty much anyway right now and I think we feel like we're appropriately staffed to take advantage of the opportunities that are there.

Great.

All right.

Thank you very much.

Scott Schneeberger with Oppenheimer.

Just going back on the subject of Rentals, and the fact that things are good now, but you're cautious looking forward.

Could you guys give us a feel kind of going back to Gary's question, of the end markets which you serve, are there any that are significantly outperforming or underperforming, where you're getting an early read on any potential downturn?

Thanks.

The only thing I've really heard is, of course, healthcare continues to be a very good market, continuing to see growth there.

I think the hospitality business has also shown some nice resilience, and with all of our different product offerings we're continuing to expand the things that we can do for a Company in that business.

We've seen stabilization in manufacturing, but we're not seeing growth.

We've at least seen some stabilization.

Mike, have you heard anything else?

No, I think -- I don't think we've seen any change that would tell us that a new trend is coming.

Okay.

Thanks.

That's helpful.

Just on target margin, target operating margin, where do you think that can go?

It sounds like you're not really seeing any of the red flags that have the economy spooked.

What are you thinking about for target margins here and what can you do?

What are you handling on the expense controls or are you -- is it putting on the gas pedal or the brakes right now?

I don't think I can -- I'm prepared to really say what our target margins are because there's so many different factors that go into play.

It depends on how much -- how fast our emerging businesses grow, and how much we're going to invest in the sales side to grow those businesses.

It depends on -- in the Rental business, where does the growth come from?

Is it new business?

Is it existing customer adds?

Is it wearer improvement?

All I can tell you is this.

We are committed to margin expansion and margin improvement.

I think we've done a very nice job over the last couple years demonstrating our capability to do that.

We're still below where we used to be but the trend is good going there and we will continue to focus on improving margins, while at the same time improving the long-term value of Cintas.

So there's just so many different factors that I can't really tell you that this is the target level we're going to get to.

All I can say is it will be better than what it is, barring a significant downturn in the economy or significant spike in costs such as energy or other type factors that we are not foreseeing at this time.

Great.

Thanks, guys.

Andrew Wittmann with Robert W.

Baird and Company.

Thanks for taking my follow-up.

Maybe I missed this, but, Bill, you mentioned that new customers were up.

Did you give a split between no programmers and programmers?

I think last quarter you said you reached historical levels of kind of like a 60/40 split between no programmers and market share gains.

Has that changed in the most recent quarter, or is it looking like it's changing further?

That was -- that did not change significantly from the fourth quarter to the first quarter.

It is still in that historical range, nudged up a little bit on the no programmer side, but still pretty close to that historical level.

Got it.

Great.

And then just on the Direct Sales side, I think the industry has broadly been seeing some benefits from fire retardant uniforms, that were, I guess mandated from OSHA.

Obviously this business has been pretty good the last several quarters.

Is that one factor that may be running out of steam, or what do you think the Direct Sale business is being driven by or could be driven by for the remainder of the year?

Well, Andrew, that fire retardant garment, the FRC is really more of a driver in the Uniform Rental business.

We are seeing a good amount of success in the rental space.

From a Direct Sale business, I think it's -- again, it's a choppier business, and we still expect to see refreshes and new programs coming up, and we haven't seen a trend that would make us think otherwise for that business.

Okay.

Great.

I think I'll leave it there.

Thank you.

And at this time we have to additional questions in our queue.

I'll turn the call back to our speakers for any closing remarks you may have.

Thank you all very much for joining us this evening.

I know it had to be a very hectic day for all of you in the investment business.

So we'll look forward to speaking with you again during our second-quarter announcement, which we expect to take place sometime the week of December 19.

Thanks again for joining us.

And ladies and gentlemen, this does conclude our conference.

We appreciate your participation.