信達思 (CTAS) 2012 Q3 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 would like to turn the call over to Mr.

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

Please go ahead.

Thank you for joining us this evening where we will report our third-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 your questions.

We are pleased to report that our third-quarter revenue grew 7.9% from last year's third quarter to revenue of $1,012,000,000.

Net income increased by 28.7% to $76 million, and earnings per share were $0.58, a 41.5% increase over last year.

I would like to make a few comments on this quarter's revenue growth.

This year's third quarter had one more workday than last year's third quarter, which benefits our overall revenue growth.

On a same workday basis, our revenue growth was 6.3% over last year's third quarter.

Our organic growth, which accounts for both workday adjustments and the impact of acquisitions, was 5.9%.

Keep in mind that the recycled paper prices remained at approximately $150 per ton throughout the quarter.

This lower price negatively impacted our consolidated revenue growth over last year's third quarter by [6/10 of 1%].

Our operating margin continues to reflect our focus on high-quality growth.

The operating margin of 13.6% was an improvement over both the third quarter of last year and this year's second quarter.

We also benefited this quarter from lower than expected energy-related costs and medical costs.

Energy-related costs for the third quarter were 3.3% of revenue, which is slightly better than the expected level of 3.5% assumed in our guidance.

In addition, medical-related expenses were 30 basis points lower than last year due to better than expected experience.

As a result of the better than expected results in the third quarter, we are updating our guidance for fiscal 2012.

We now expect fiscal 2012 revenue to be in the range of $4.09 billion to $4.12 billion.

We expect earnings per diluted share in the range of $2.24 to $2.27.

This guidance assumes no deterioration in the current US economy, an effective tax rate of 37% for the entire 2012 fiscal year, and recycled paper prices to continue to be approximately $150 per ton.

It also assumes that-energy related costs will increase to approximately 3.5% of revenue and medical expenses to increase to normalized levels.

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 third quarter.

Thank you, Bill.

As Bill mentioned, total revenue increased 7.9% from the third quarter of last year, with total Company organic growth being 5.9%.

Total Company gross margin for the third quarter was 42.1%, which is up from last year's third-quarter gross margin of 41.8%, despite a steep drop in recycled paper prices.

I will discuss these items in more detail by segment.

Before doing so, please let me remind you that there were 65 workdays in our third quarter, which is one more than last year, and there are 66 workdays in our fourth quarter, which is the same as last year.

As a planning note for fiscal 2013, our workdays will be as follows -- 66 in the first quarter, 65 in the second quarter, 64 workdays in the third quarter, and 66 in the fourth quarter.

The total workdays in fiscal 2013 will be 261, which is one less than fiscal 2012.

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 71% of Company revenue in the third quarter.

Third-quarter rental revenue was $721 million, which is up 8.4% compared to last year's third quarter and up 6.5% organically over last year.

All areas of our rental business grew in the third quarter, and we continue to focus on selling profitable business.

Our rental segment gross margin was 43.1% for the third quarter, an improvement of 30 basis points over last year's third quarter gross margin of 42.8%, primarily due to lower energy-related costs.

The impact of cotton continued to be at the expected level.

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 third quarter.

Third-quarter revenue of $109.1 million represents an increase of 6.4% compared to last year's third quarter.

There were no acquisitions in this segment.

Uniform Direct Sales gross margin was 30.5% for the third quarter, which is up from last year's third quarter gross margin of 29.5%.

The increase is mainly due to better capacity utilization from the higher volume, slightly offset by the expected cotton impact.

The gross margin of 30.5% was an improvement over the second quarter gross margin of 29.6%, mainly due to a better mix of higher margin products.

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 third quarter.

Revenues were $101.4 million, an increase of 11.2% versus last year's third quarter, and organic growth was 9.1%.

We continue to see good revenue performance out of this segment, as both first aid and safety and fire protection grew nicely for the quarter.

This segment's gross margin was 43.2% in the third quarter compared to 41.5% in last year's third quarter.

Energy-related expenses were 10 basis points lower this year compared to last year.

However, improved capacity utilization from the higher volumes in both our facilities and on routes was the driver of the gross margin expansion.

The third quarter's gross margin of 43.2% was roughly consistent with the second-quarter gross margin of 43.1%.

Our Document Management Services operating segment includes document destruction, storage, and imaging services, and it accounted for 8% of third-quarter total Company revenue.

Document management revenue increased 2% over last year's third quarter.

Revenue decreased organically, though, by 1.3% compared to last year.

As we mentioned in the press release, our third-quarter document management revenue growth was adversely affected by lower recycled paper prices.

The recycled paper prices stayed at roughly $150 per ton during the quarter, which is the same level we saw at the end of our second fiscal quarter.

This results in a paper price that is roughly 30% lower than last year's third quarter and close to 50% less than the first quarter of this fiscal year.

While it is difficult to predict this price for the fourth quarter of our fiscal year, as Bill mentioned, our updated guidance assumes the prices will stay at $150 per ton.

The Document Management gross margin is also adversely affected by the drop in recycled paper prices, as the change in the prices generally drops to the bottom line.

The third-quarter gross margin was 47% compared to last year's third quarter gross margin of 49.4%.

The negative impact of lower recycled paper prices was somewhat offset by better capacity utilization from higher service volumes.

Moving to selling and administrative expenses, we are pleased with our continued leveraging of the consolidated selling and administrative expenses.

Third-quarter selling and administrative expenses were 28.5% of revenue, a 170 basis point improvement from last year's third quarter of 30.2%.

Selling expenses continued to be lower as a percent of total revenue, due to higher revenue levels and continued rep productivity improvements; and administrative expenses continued to be lower as a percent of revenue, due to lower medical expenses and administrative labor.

Third-quarter selling and administrative expenses of 28.5% of revenue were also lower than the 29.2% in this year's second quarter.

Although payroll taxes increased due to resetting at the beginning of the calendar year, decreases in medical expenses and Workers' Comp-related expenses, and continued cost control initiatives more than offset that increase.

Our effective tax rate was 37% for the quarter compared to 38.9% last year.

The effective 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%.

Turning now to the balance sheet, our cash and marketable securities were $353 million at February 29, up $15 million from the $338 million at November 30.

Please note that about $170 million of this cash and marketable securities is located outside of the US.

Accounts receivable decreased by $8 million since November 30.

DSO's on accounts receivable were 40, which is the same as at November 30.

New goods inventory at February 29 was $276 million, down $12 million from November 30.

This decrease was expected, as the relatively high levels of the past year, due to the SAP conversion, normalized.

Accrued liabilities decreased $95 million compared to November 30, primarily due to the December payments of the annual dividend and accrued bond interest.

Long-term debt at February 29 was $1.3 billion, of which $226 million was in current liabilities.

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

We intend to pay off this amount with a combination of cash on-hand and short-term borrowings under our commercial paper program.

However, if longer-term borrowing rates remain at the attractive low levels they are currently, we may reevaluate and decide to refinance the amount.

The average rate on the outstanding debt is 5.1% and total debt to EBITDA is roughly 2 times.

Moving on to cash flow, cash provided by operating activities in the third quarter was $131.8 million, which is up from last year's third quarter amount of $98.7 million.

In addition to higher net income, the decrease in inventory during this year's third quarter added to the improvement over last year.

CapEx for the third quarter was $37.9 million.

Our CapEx by operating segment was as follows -- $26.8 million in Rental; $1.9 million in Uniform Direct Sales; $3.4 million in First Aid, Safety and Fire Protection; and $5.8 million in Document Management.

We expect CapEx for fiscal 2012 to be in the range of $160 million to $170 million.

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

(Operator Instructions) James Samford, Citigroup.

Great quarter.

Just wanted to touch on your guidance.

And if I just sort of back into what Q4 is implying, it seems like you're implying some modest [de-sell] and perhaps even sort of flat margins year-over-year.

Is that your intention?

Or is that really conservatism that I should read into that?

Well, it's -- that was certainly thought through when we provided that guidance, so let me give you a little more color on that.

We are -- we tend to be a bit conservative, but I also think a few things deserve mention that Mike brought up in his comments.

We did see our medical expenses be lower in the third quarter than what is typical, so we expect those to rise to more normalized levels and thus impact SG&A.

We do expect energy costs to be back up about 20 to 30 basis points from what we saw in the third quarter.

We still have some concerns about the economy in terms of job growth and just overall confidence.

The paper price has a big impact on us, and we continue to expect that to be low.

Keep in mind last year's fourth quarter, we were seeing rising paper prices from the third quarter of last year.

And therefore, if the paper prices do not increase, which we don't really expect them to do at this point, the impact of the lower paper prices this year is going to have a bigger impact to what Mike talked about for the third quarter.

And then, finally, I think another thing that's worth some mention here is that we have seen a pickup of our turnover in our sales force to more normalized levels over the last few months.

And as we replace these more productive salespeople with newer salespeople, we tend to think that the impact on new business might be impacted a bit.

So that's why the guidance was as we provided it.

That's fair enough.

One quick follow-up on the rental gross margin, I think came in just slightly below where we thought.

Just wondering how much of fuel costs versus I guess the natural gas benefit that you probably got -- how much of that is -- was a factor in the quarter?

The energy-related costs in total were down from last year by about 30 basis points, but some of the leveraging that we have seen was offset by some rise in material costs.

Our cotton impact has accelerated, as we expected it to, from the first and second quarter.

And so we're seeing a little bit of that as well.

Great.

Thank you.

Scott Schneeberger, Oppenheimer.

I just want to pick up on something just mentioned.

With this increased turnover of salespeople, where are they going?

Is it a product of an improving economy and they're seeing opportunities elsewhere?

What's the dynamic there, guys?

We have a -- first off, I don't want make a big deal about this, Scott.

I just wanted to mention that it is going to have a slight impact on the growth rate.

But as the economy improves, our salespeople are in great demand for other industries.

They also -- there's a burnout in some of our salespeople because it's all new business.

They're hunters, basically.

So, I don't think it's anything that we are alarmed about.

It's just the fact that it's a reflection of what's the strength of our sales force and that the economy is picking up a bit.

Thanks.

That segues well into -- you guys are seeing nice revenue growth; you're obviously getting leverage from that.

You talked about energy and medical, and getting benefits there.

But it appears that you're operating quite effectively.

Could you talk about some of the initiatives you have occurring and where you think you're seeing success among expense management?

Well, I think we're seeing success in many areas.

Let me give a commentary on a few.

In our plants, our rental plants, we've implemented quite a bit of automation, and we have been able to incentivize our workforces in the plants that have enabled us to improve productivity.

We're seeing, in our routes, the impact of the portable route computers certainly have helped the productivity of our service sales reps.

And the fact that a significant number of our rental routes and some of our other services routes have gone to four-day work weeks instead of five.

And that's improved our fuel efficiency as well as the productivity of our workforce.

The G&A area has certainly been benefited by our CEO's initiative of looking -- making sure that everything we do is of value to our customers, and that they recognize it and are willing to pay for it.

So we've been able to streamline a number of our processes, plus we're getting some of the benefits of the SAP conversions as we roll those out to some of our functional areas, like all of our finance activities and our global supply chain -- the continuing at Cintas to always do improvement of what we have, and the fact that we're seeing some top-line growth is enabling us to get some leverage in all the different areas.

Great, thanks.

One more before I turn it over -- the pricing environment, this is broad for all the segments but particularly for rental -- are you able to take advantage of the improving environment right now?

And could you speak to how much of the organic growth you're seeing is price-related?

Thanks.

Well, we actually -- we saw some pickup on pricing earlier this fiscal year.

And as Mike and I were analyzing the results during this quarter, I would say that pricing hasn't deteriorated, but it hasn't improved at the same rate that we were seeing earlier in the fiscal year.

So we didn't really get a whole lot of benefit in this quarter on pricing but -- nor did we get any deterioration.

Okay, thanks.

Congratulations.

Nate Brochmann, William Blair & Company.

Good evening, everyone.

Great quarter.

I know you don't disclose it precisely, but I was just wondering if anecdotally you could talk a little bit about the add stop metric kind of trend during the quarter, and how that's trending overall throughout the year?

You know, we have not seen a significant improvement in add stops.

As we mentioned a year ago, we finally saw a stabilization in that.

As we look at the numbers week to week, you'll get a few weeks where you'll see some positive impact.

And then that same trend won't necessarily continue into the next week.

It doesn't go negative, but it's just not as robust.

So I'm not willing yet to say that we're really seeing any real impact of adds.

It's just kind of a very, very modest improvement over what we saw earlier this year.

And that's helpful, thank you.

I mean, it sounds like pretty much the same that's been going on.

In order to, like, continue to support the new services and the new business wins that you've been getting, how do you feel about your current net level of hiring?

Is it still to the point where you can continue to get several productivity improvements still there?

Or is it to the point where you're starting to have to hire again net-net to support the service levels?

Well, certainly, on the routes, to the extent you add new stops in any of our businesses, you have to quickly add capacity, because we had right-sized the routes during the downturn, and we continue to be focused on keeping our service sales reps pretty full and productive.

So there's not a lot of additional capacity for new stops.

There's capacity for additional business on existing stops, especially in the Rental division.

When you have additional wearers at a stop, the effort to take the uniforms in for the new wearer are really not that significant over what you were doing anyway.

So you get some nice revenue growth there.

But generally speaking, the impact of new business does require us to continue to expand the routes.

On the production side, I think we've been saying this for some time, and we continue to feel pretty confident that we have adequate production capacity in most areas of the country.

Therefore, we will not need to invest in a lot more plant capacity as our revenues continue to increase.

And then to the other businesses, the Document Management business is primarily route-based.

We have a little bit of storage business.

And, of course, the storage revenue continues to increase.

You've got to make sure you have capacity and racking to put those boxes in storage.

But since most of our -- the bulk of our business is shredding, that's a route-based business.

And again, it depends on, is it additional stops?

Or is it just additional volume within the stop that determines what kind of capacity you need to have?

Great.

Thank you very much.

I'll turn it over.

Andrew Steinerman, JPMorgan.

I wanted to talk about the selling administrative line where it's been coming down remarkably as a percentage of revenues all year long.

And I definitely heard your comment, Bill, about the sales force.

So my question is, near-term, are we going in reverse?

Are we going to go much higher than we are now, 28.5?

Are we going to head back towards 30?

What is the kind of the near-term kind of level of efficiencies for the S&A line?

Andrew, near-term, you're not going to see a significant change from where we're at today.

Our only -- I don't see any impact really on the selling expense.

It's more some of those items Mike mentioned, like on the medical costs.

They may rise modestly from what we saw in the third quarter.

You know, sometimes you have a little bit of bad debt expense that will fluctuate from quarter to quarter, but you're not going to see a material change in that line.

I think the overall longer-term trend will continue to be pointing downward, although not quite as rapid a pace as that what we've seen over the last year or so.

Right.

And that's true for the fourth quarter as well, S&A as a percentage of revenues will be down but not to the extent that it has been?

Well, no, no.

I said medical expenses could impact that modestly (multiple speakers) --

(multiple speakers) Now I'm talking year-over-year, so (multiple speakers) --

Yes, it will be down year-over-year, yes.

Okay.

Thanks so much, Bill.

Gary Bisbee, Barclays Capital.

Let me just follow on that with one quick one on the SG&A.

Can you give us any sense of the magnitude of those likely sales hires?

And I'm not even so concerned with, like, the fourth quarter, but if we think over the next year, the SG&A expense has decelerated, you've lapped the easier comp.

And it still stayed incredibly low growth in the number.

I understand the medical comment and all the other comments that you made, but are we talking mid-single-digit growth in headcount?

Or what types of numbers are we going to need here?

No, Gary, I think you misunderstood.

It's primarily the result of replacing headcount that we had.

Okay.

So it's not a significant increase in headcount that we're anticipating right now.

It's more or less just continuing getting back to a level that we may have seen in the second quarter or so.

That's all I was trying to imply.

Okay.

Well, then, so let me take another cut at that.

I mean you've obviously had good revenue growth and you're starting to comp the real-time when revenue growth accelerated, but you continue to have good growth.

Don't you need to layer in more salespeople to keep that going?

Or is there much more productivity that can come out of the system?

Other than I understand the short-term comment about replacing people that left.

It would be a modest increase that would not be that significant.

Okay.

All right.

Well, let me move on then.

The uniform rental pretax margins were excellent -- I think a level we haven't seen in a couple of years.

And how should we think about the trending here over the next couple of years?

Is there a chance to get back to the prior highs of many years ago in this business?

Or has anything changed that would make that not possible if we had several more years of revenue growth?

Well, from a gross margin standpoint, Gary, the good news is we're still -- we still have fewer wearers today than we had pre-recession, which means we have more processing capacity than we did before.

We also (multiple speakers) --

Gary, just a clarification, were you talking about direct sales or the rental business?

Oh, no, the rental business.

I guess when you look at it, it's been 2.5 years since you had -- and I guess I was looking at the pretax margin, but since you had a level this high, I guess I'm trying to understand how much more -- on both margins -- how much more this can go over time?

I mean does the business potentially get back to where the margins were five, eight years ago when they were a lot higher?

Or --?

Gary, to kind of finish the thought I had before, we've got a lot of production capacity.

And a lot of the revenue that we're adding, like hygiene services, chemical business, tile and carpet cleaning, does not require any laundry facility capacity.

So we still think that we can get leverage going forward from a gross margin standpoint.

Now there may be ups and downs because of material cost up and downs maybe due to cotton, but we still think there is some leverage opportunity in our gross margin and in our production facilities.

And if you think about the fact that we still haven't seen a significant amount of customer hiring, if our customers start to hire and we get a lot of adds at existing stops, we're going to see even better margin impact there.

So keep in mind a lot of that hire -- some of the highest margin revenue left us during the recession and has yet to come back.

So we still have some gross margin opportunity.

In the SG&A, you know, if you think about some of the costs that maybe we didn't have in the earlier part of the 2000's, which were stock option expensing, medical wasn't as high -- there may be some reasons for not getting all the way back to the SG&A levels that we saw.

But still some leverage over the next couple of years.

Okay.

And then just one more on a point you just made.

I guess why do you think you haven't seen job growth among your customers?

I realize that part of the customer base maybe has a bit more industrial/manufacturing slant, but we've even seen some growth in recent months.

And in that, we're seeing small businesses, which I know you skew towards growth faster than the total job market.

I guess I'm struggling to understand why you haven't seen that yet.

Do you have any insight into it or any thoughts as to when that may happen or why it's not happening?

Well, I think we're going to have to see more robust job growth.

200,000 or whatever jobs a month, I don't think it really is going to show up too much on our numbers yet.

When we get up to 400,000, 500,000 job growth, especially in our sectors, I think you're going to begin to see a little bit more of that.

It's just -- it really hasn't been that significant yet.

Okay.

And actually I thought of one more I'd love to sneak in.

The European document management, I think you said that lost money a quarter ago.

Is that still operating at that weak level?

Thanks a lot.

We haven't seen any further deterioration in the European business.

It's still a very difficult operating environment.

We expect improvements going forward, but it wasn't quite as bad as the second quarter but still not where we want it to be.

Great, thanks for all the color.

Shlomo Rosenbaum, Stifel Nicolaus.

Thank you very much for taking my questions.

I actually want to continue beating the SG&A horse.

Just in terms of understanding sequentially why the SG&A is going down, if I take the 50 basis points between medical and energy, that's about $5 million sequentially (multiple speakers) --

We try to highlight for you some of the big ones, but we really -- we don't have the detail to provide publicly on the rest of it.

Well, let's take it from two quarters ago, then.

And where the revenue is down $5 million from two quarters and the SG&A is down $22 million.

Can you talk about some of the difference from just, say, two quarters ago and highlight some of that?

Shlomo, some of the -- it gets a little bit problematic to compare different quarters.

So, for example, in our first quarter, we have some expenses that don't normally occur throughout the year, like some management meetings, some sales meetings.

And so there are some things that cause maybe first-quarter SG&A to be a little bit higher than third quarter.

But generally speaking, we continuously look at all of our processes, particularly in our G&A area, and we continue to ask, is it value-added?

In other words, is it something that the customer wants?

And if not, then we look for new ways of doing things or we eliminate things.

And that can go towards processes, all different kinds of expenses that we have in SG&A.

So we're always looking (multiple speakers) [just through every line item].

(multiple speakers) Can you just give an example of that then?

Just talk about one example where as a process a customer wasn't paying you for, that you decided to eliminate, just so you know (multiple speakers) --

Well, a good example is just you have staff people creating reports for -- that were needed for some reason a couple of years ago, and all of a sudden you find out 50% of somebody's time is producing these reports, and the need for those reports are no longer necessary -- no longer there.

So that could be one.

Or the reports get replaced by some sort of automation.

That would be an example of things that you basically get rid of.

Is there something directly related to the SAP implementation that's allowing you to take some of those costs out?

Sure.

Yes, we're basically -- one of the benefits we're getting from SAP in the financial arena is we now have the ability for our accounting organization to handle more locations than they previously were able to handle, and produce information that previously they had to go to our IT organization to get, and they can do it themselves.

So, there's savings that happens as a result of just improved systems.

Okay.

No, I appreciate the color on that.

And then just -- I know you're just highlighting some of the change in the sales force, but you're not alarmed by it.

I'm just wondering, you're starting to see some change over there but usually that's indicative of a change in the economy.

Yet you're not seeing any changes with regard to your customer base in terms of employment within your customer base.

Is that what you're saying?

That's what we're saying.

The salespeople that are leaving, is there any -- do they hit ceilings?

Or is there anything else that's indicative of why they would want to leave what's considered a very good organization out (multiple speakers) --?

I think some people just tend to the job design itself.

They get tired of doing it the way they were doing it, and they have an opportunity at another company.

With our -- the society that we have today, we see more and more people -- two couples, both with careers, and sometimes there's an impact of people leaving because they -- their significant other has another opportunity somewhere else.

So it's just a myriad of things.

I think the fact that the economy for professional-level people seems to have picked up a little quicker than for the more -- the blue-collar work force, is enabling some of this mobility too.

Are they moving, in your sense, are they going to competitors?

Or just doing something different?

No, they're not going to competitors, Shlomo.

They're basically maybe going to other industries or leaving the sales profession.

I think, again, I'm going to make the point -- you guys are making a bigger deal out of this than I think is necessary.

All we're getting -- all we're seeing is approaching our more historical turnover levels that we saw back before the recession.

Okay.

Well, that's fair color on that then.

I appreciate it.

Thank you very much.

Shlomo?

Shlomo, just one last point on the SG&A.

One thing to keep in mind if you compare first-quarter to third-quarter, for example, is we do have one less workday.

And that means one less day of labor and other related expenses.

So just keep that in mind as you kind of analyze quarter-to-quarter.

Mike, how much of your SG&A pushes the clock versus being salaried?

That's something that we haven't disclosed publicly.

I would expect that they would primarily be salaried labor.

A lot of clerical people in SG&A also.

Okay (multiple speakers) --

But it doesn't -- from the standpoint of a workday, it doesn't matter, Shlomo.

If you've got fewer workdays, you're paying less.

All right, thanks.

Joe Box, KeyBanc Capital Markets.

Just wanted to ask a quick follow-up question on document management.

Can you just give us a sense of what the organic growth rates and maybe the margins were in Europe versus the US?

And can you maybe just talk about what you're doing in Europe to right-size the cost structure over there?

Joe, we do not separately break out the growth rates in Europe versus US.

We just keep it in Document Management in total.

Our strategy in Europe, as we mentioned at the last call, was basically to assimilate these acquisitions we've made, to implement some of the techniques that we've been successful with in the US in those businesses over there, and focus on improving the profitability of the business.

And at this point, we are still encouraged by the potential that exists there.

We did not see a deterioration from the second to the third quarter, nor have we seen a significant improvement yet.

Okay.

And maybe just changing gears, question on the inventory front.

You guys got a bit of a benefit this quarter.

Was that a one-time correction that was primarily related to the SAP implementation?

Or could we potentially see inventory being a source of cash over the next couple of quarters?

We hope to see it continue to be a source of cash for the next couple of quarters, because we did see a significant increase in the inventory about over a year ago when we implemented SAP.

So at this time, we would expect there to be a reduction in the overall inventory levels, barring some significant new customer rollout program.

But at this point, I don't anticipate increased inventories.

Okay.

And just one last question for you.

How should we think about the timing of lower cotton costs rolling through your direct uniform business?

And obviously, you talked about headwinds this quarter, but should we start to see that benefit roll through over the next couple of quarters?

We wouldn't expect a benefit.

Do you mean a benefit from the fact that cotton is a bit lower than it was a year ago?

Correct.

You know, Joe, we buy fabric all the time.

And you know that's kind of entering our supply chain at varying levels.

And I wouldn't say that we bought all of our fabric last year at the highest prices.

We're kind of getting average prices, and they're rolling through at varying levels depending on the turns of the various inventory.

But generally speaking, I would not expect to get a benefit in the next couple of quarters from that in our direct sale business.

And in our uniform rental business, we're going to continue to see kind of an accelerating number through probably mid-year fiscal '13.

Great.

That's all I have.

Thank you.

Greg Halter, Great Lakes Review.

Just wondered where you stand in terms of the SAP implementation?

Is it fully done?

Or is there still more components to roll out?

No, we have several years left, assuming that the system appears to be the correct alternative as we roll it into our business units.

But it's a three, four more year project that we would have.

Okay.

And I know about, oh, five to eight years ago, there was some talk and discussion and experimentation with RFID and so forth and so on, in terms of the facilities.

With the prices or the cost of those chips and so forth coming down, has any more progress been made in that area?

I'd say there's been some progress made.

The issue we've always had is the chip, multi-read chip that can withstand the industrial laundry process.

And we have experimented with a number of different manufacturers.

We make some progress and then all of a sudden they don't have the life we expected.

So while it is continued to be tested in a couple of our operations, we're a long way away from saying we have success and be able to roll it out across the Company.

Okay.

Regarding the uses of cash, obviously, the stock has had a nice move upward here, which I would presume would not put you in the buying area.

And you can only do so much with the dividend, and obviously, on the debt as well, with rates where they are.

Just wondered what your uses or priorities for cash are, given the strong cash generation?

Well, there's really been no change from our philosophy before.

This is a Board-level directive on how we utilize that cash.

We just completed the third quarter where we paid our dividend, 10% increase from the prior year.

We have a $225 million debt tranche coming due on June 1.

The acquisition pipeline appears to be showing some life again, so there might be some opportunities down the road there.

And we just bought $500 million worth of stock less than nine months ago.

So, the authorization -- we've always completed our authorizations over time.

And I would say that the Board will direct us on what they think is in the best long-term interest of our shareholder.

Okay.

And one last one for you.

I think on the last call, you talked about the fire garments in Carhartt.

And just wondered if you had any comments on how those two areas in particular are doing?

Still doing well.

The FRC, the Flame Resistant Garments, continue to be successful, as government mandates that different industries must put their employees in such garments.

And we continue to be the leader in selling those type of customers.

The Carhartt business -- or Carhartt relationship continues to be a very successful one.

It is enabling us to provide uniform rental programs to companies that, in the past, may not have considered one because they didn't like their offerings, but they do like Carhartt.

So while it is not a very, very significant part of our rental business, it is an important part and we continue to feel very good about it.

Great.

Thanks a lot.

Sara Gubins, BofA Merrill Lynch.

This is David Ridley-Lane for Sara.

As paper prices fall, I'd imagine that competition will increase among document management firms and training companies.

How will the dynamic change if the paper prices linger at these levels?

Well, David, when paper prices are relatively high -- so at this past summer's levels, the pricing for the service gets very competitive because some providers look at it as a paper collection.

So the service pricing is very competitive.

As we see the prices come down and stay at this [150] level, it will bring some discipline back into that service pricing, which we believe is a better long-term range for our business.

So we would expect that some discipline will get back into the service pricing, and we can focus more on providing the security to this business that it really needs.

Okay.

And on a totally different topic, if you did decide to refinance the $225 million in debt, I heard you on the uses of cash, but would you just sort of let the cash sit on the balance sheet?

Or would there be a go-to use of cash if you did decide to refi that?

Well, that -- it presents an interesting dilemma, because you've got such what appears to be very cheap, or let's say, very inexpensive debt available to you, and yet you -- we also have a very strong cash flow business.

So, it becomes a point, well, how long are you willing to sit -- have that cash sitting on the balance sheet waiting for implementation?

So we'll have to consider all of that as we get closer to the summer, and decide whether or not it makes sense, and determine whether or not we should refinance and get that cash or just go ahead and use some of the cash we have available, and keep our debt capacity available for the future.

All right, thank you very much.

John Healey, Northcoast Research.

I have a capital allocation question for you.

With some of the uncertainty regarding dividends going forward, I know the Company has a very proud history of sustaining and increasing its dividend annually.

How does the Board, or how do you feel about that scenario if legislation changes, dividends are taxed?

Would that be something that would make you guys think about capital allocation a little bit differently?

I think the Board will certainly consider those potential changes as it decides on the dividend.

It also is very interested in listening to some of our long-term big shareholders and what their interests would be.

But there are so many variables, who knows what's going to happen, John?

We really don't have to face that since we don't pay a dividend until the end of the year anyway.

And maybe there will be more clarity by that time.

But I'm sure it will be considered.

Okay, great.

And then I wanted to ask a question -- you made a comment regarding the acquisition environment maybe being a little bit more active.

What part of the business is that on?

And what level of leverage do you think would be the highest you feel taking the Company up to if a more sizable acquisition presented itself?

Thanks.

The acquisition -- I think there will be -- the acquisition activity is picking up primarily in the document management business and a little bit in the rental business.

I think there will be some opportunities perhaps in our fire business also, down the road.

The -- as far as -- what was the last --?

Regarding leverage, where you feel comfortable with your leverage ratio.

Oh, leverage.

You know, it all depends because -- it depends on the type of acquisition you're getting, what type of cash flow it's bringing to you, EBITDA.

We absolutely could become more leveraged, but we also have to balance that with the ratings that we want to maintain with the rating agencies that give us access to a lot of capital.

So I would tell you that it would all depend on what the use of the leverage would be as to how comfortable we are on getting to a certain level.

If it's buying a company that's going to generate a lot of cash and that leverage will quickly come back down, we would take a much different view than if it's just a permanent leveraging up of the balance sheet.

Thank you.

Justin Hawk, Robert W.

Baird.

One last question on the margins.

I know we've kind of beaten the dead horse here, but just as we think about '13, I just wanted to clarify some of your comments.

It sounds like possibly the additional margin leverage you're expecting to see over the next couple of years will be more gross margin as opposed to SG&A -- a little bit of SG&A but more weighted to gross margin.

Is that what you were trying to imply?

Yes.

Without giving any particular timing and specific numbers, because we haven't really provided those, we think there is a fair amount of leveraging opportunity in our operations in all of our businesses.

And so we do think that that still is an opportunity going forward.

It may bounce up and down from quarter to quarter, but we think there is some good opportunity there.

From an SG&A, you've seen that number come down dramatically over the last six or so quarters.

And that rate of improvement will likely not continue.

Okay.

And then I guess just on that level, you've mentioned structurally some of the things that are different in the SG&A line.

So if I look back six or seven years ago, the SG&A margins in '11 were 500 basis points higher than they were in 2004.

How much of that is structural?

(multiple speakers) Somewhere between 100 and 300 basis points, probably.

100 and 300?

Yes.

Thank you very much.

And at this time, we have no further questions in the queue.

I'll turn things back over to our host for any additional or closing remarks.

Thank you all for joining us this evening.

I just want to remind you we will plan on releasing our fourth-quarter earnings some time in mid to late July.

Ladies and gentlemen, this does conclude today's conference call.

Thank you all for your participation.