信達思 (CTAS) 2013 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 would like to turn the call over to Mr. Bill Gale, Senior Vice President of Finance and Chief Financial Officer.

Please go ahead.

Good evening, and thank you for joining us as we report our second-quarter results for fiscal 2013.

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

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

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.

We are pleased to report second-quarter revenue of $1.060 billion, which represents growth of 4% from last year's second quarter.

Second-quarter net income increased by 4.9% to $78 million, and earnings per diluted share were $0.63, a 10.5% increase over last year.

Our operating income for the second quarter was $139 million, or 13.1% of total second-quarter revenue.

The effects of Hurricane Sandy did have some adverse effect on our second-quarter results, but the effect was not material.

Our second-quarter operating income included an $8.5 million gain on the sale of stock of an investment, and a $1.6 million write-off of a garment processing system used in one of our rental locations.

The operating income was also negatively impacted by recycled paper prices.

The average price for the second quarter was slightly over $150 per ton, representing a 32% decrease from last year's second-quarter average price of just over $220 per ton.

This year-over-year drop in paper prices resulted in a negative impact in the second quarter of $5.5 million.

Keep in mind that this negative impact affects both revenue and operating income.

We expected the second-quarter recycled paper price to be $170 per ton, so the actual average second-quarter price created a $1.5 million negative variance for the quarter versus our expectations.

Mike will give more details on the operating results by segment in a couple minutes.

Throughout our second quarter, our customers have continued to tell us that the economic uncertainty in the US caused them to be very cautious in spending, hiring, and investment decision making.

Unknowns concerning US tax policies and the impact of changing healthcare regulations have created a pause in many of their business activities.

In addition to this feedback from our customers, we continue to see GDP forecasts below 2% for calendar 2013.

With these in mind, we are updating our fiscal-2013 revenue expectations to be in the range of $4.275 billion to $4.325 billion.

We are not changing our earnings per diluted share guidance, which is an expectation of fiscal-2013 earnings per diluted share to be in the range of $2.50 to $2.58.

The guidance assumes the current US economic environment continues, and does not worsen going forward.

We are bringing down our recycled paper price expectations for the remainder of the year to be approximately $160 per ton in the third quarter, and $170 per ton in the fourth quarter.

And finally, this guidance incorporates the 1.9 million share buyback from our second quarter, but does not contemplate any additional buybacks.

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

Thanks, Bill.

As Bill mentioned, total revenue increased 4% from the second quarter of last year, with total Company organic growth being 3.4%.

Total Company gross margin for the second quarter was 40.7%, which is down from last year's second-quarter gross margin of 42.2%.

I will discuss these items in more detail by segment.

Before doing so, let me remind you that there were 65 workdays in our second quarter, which is the same as last year.

Looking to the remainder of fiscal 2013, we will have 64 workdays in the third quarter, and 66 in the fourth quarter.

Keep in mind that the third quarter has 1 less workday than last fiscal year, where there were 65 workdays in the third quarter of 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 rest room supplies, and other facility products and services.

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

Rental revenue for the second quarter was $755.8 million, which is up 4.6% compared to last year's second quarter.

Organic growth was 4.5%.

As Bill mentioned, our customers continue to be affected by a business environment filled with uncertainties, and this showed in our second-quarter net add stops, which was lower than each of the last two years.

The pricing environment remained very competitive, and the absence of rising energy and commodity prices made the implementation of customer price increases very difficult.

The productivity of our sales force, though, continued to be strong, and our lost business metric improved from last year.

Our Rental segment gross margin was 41.9% for the second quarter, a 130-basis-point decrease from last year's second-quarter gross margin of 43.2%.

Energy related costs were consistent with last year's second quarter.

As Bill mentioned, we wrote off a garment processing system during the quarter that totaled $1.6 million.

This system represented new technology that did not provide the required operational improvements.

In addition, material costs continued to rise as a percent of revenue, due to garment injections associated with our new business.

We have not been able to take advantage of our stockroom inventory due to the absence of any consistent customer hiring.

Finally, as we mentioned in our last call, we began to expand our route capacity in the second quarter, due to the new business and the number of new stops added over the past year.

The second-quarter gross margin of 41.9% was lower than the 43.3% in this year's first quarter, due to the garment processing system write-off, one less workday in the second quarter compared to the first quarter, and the cost of adding some route capacity.

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 second quarter.

Uniform Direct Sale revenue was $110.2 million, representing a decrease of 1.6% compared to last year's second quarter.

Although our hospitality business continues to perform well, we saw weakening in our Fortune 1000 business.

However, we expect that to change in the second half of the year due to several large roll-outs scheduled to occur.

Uniform Direct Sales gross margin was 27.4% for the second quarter, down from last year's second-quarter gross margin of 29.6% and this year's first-quarter gross margin of 29.4%.

This segment's gross margin can move from quarter to quarter due to changes in mix of product and timing of program roll-outs.

In addition, we did start to incur some expenses associated with the scheduled roll-outs just mentioned.

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 11% of Company revenue in the second quarter.

Revenue was $111.5 million, which is up 9.7% over last year's second quarter.

Organic growth was 4.8%.

Our First Aid and Safety business in particular continues to perform very well.

This segment's gross margin was 42.4% in the second quarter, which is down 70 basis points from the 43.1% in both last year's second quarter and this year's first quarter.

This decrease is primarily due to a heavier mix of national account fire business in the second quarter compared to the other quarters, as well as the impact of some acquisition related costs incurred during the quarter.

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

Document Management revenue was roughly flat compared to last year's second quarter.

Revenue decreased organically by 1.8% compared to last year.

As Bill mentioned, recycled paper prices had a negative $5.5 million impact on second-quarter sales and gross margin compared to last year's second quarter.

The average recycled paper price during the second quarter was roughly $150 per ton, which was down from last year's second-quarter average of roughly $220 per ton, and less than the first-quarter average of roughly $170 per ton.

This lower recycled paper price was one of the main drivers of the lower gross margin in the second quarter compared to last year's second quarter.

In addition, energy related expenses were 30 basis points higher than last year, and our shredding service labor was higher due to the addition of some route capacity in anticipation of several new national accounts.

Lastly, we also incurred some acquisition related costs during the quarter.

Switching to selling and administrative expenses, SG&A was 27.6% as a percent of revenue in the second quarter.

This is an improvement from last year's second quarter of 29.2%.

As Bill mentioned, second-quarter SG&A includes a gain on the sale of stock of an investment.

Aside from this item, amortization of deferred charges relating to prior-year acquisitions and medical expenses were both lower than last year.

Second-quarter SG&A of 27.6% of revenue was lower than the 29.2% in this year's first quarter, due to the gain on the stock sale and lower payroll taxes.

Our effective tax rate was 36.5% for the quarter, compared to 35.5% last year.

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

For the full fiscal-2013 year, we expect our effective tax rate to be 37.3%, which is slightly higher than last year's 36.8%.

Last year's rate was impacted favorably by the resolution of federal audits.

Turning now to the balance sheet.

Our cash and marketable securities were $276 million at November 30, down $54 million from the $330 million in cash and marketable securities at August 31, due to the share buyback of $81 million during the second quarter, offset by cash generated from operations.

Included in the $276 million at November 30 was $54 million of cash located outside of the US.

Accounts receivable increased by $20 million since August 31.

We did experience some slowing of collections in the second quarter, but nothing that concerns us from an ultimate collection standpoint.

New goods inventory at November 30 was $236 million, down $6 million from August 31.

We're pleased with our inventory performance since the implementation of SAP.

Given the scheduled roll-outs that will occur in the second half of the fiscal year, our new goods inventory level will likely fluctuate in the next few quarters based on the specific timing of shipments to customers.

Accrued liabilities increased $112 million compared to August 31, primarily due to the accrual of our annual dividend, which was paid on December 12, and due to an increase in bond interest accrued.

Long-term debt at November 30 was $1.3 billion.

As of November 30, our total debt to EBITDA remains slightly below 2 times.

Moving on to cash flow.

Cash provided by operating activities in the second quarter was $132 million, which is up from last year's second-quarter amount of $119 million.

In addition to higher net income, the decrease in new goods inventory contributed to the improvement in operating cash flow.

CapEx for the second quarter was $51.6 million.

Our CapEx by operating segment was as follows.

$38.2 million in Rental, $1.6 million in Uniform Direct Sales, $2.4 million in First Aid, Safety, and Fire Protection, and $9.4 million in Document Management.

We expect CapEx for the fiscal 2013 to be in the range of $190 million to $210 million.

That concludes our prepared remarks.

And we will now take any of your questions.

(Operator Instructions)

Sara Gubins.

I was wondering if you could start by maybe giving a little bit more color around the net add stops.

You've seen a bit of fluctuation there with the fourth quarter having been negative and the first quarter turing positive, and I guess second quarter now being negative.

So any more color about the nature of the decline that you're seeing either in more details on the type of product or the type of clients.

Yes, what we saw was a slight weakening on the add stops versus the first quarter in terms of the trend.

You have to be very careful when you look at add stops, you've got to look at it on a year-over-year basis, not necessarily on a sequential quarter basis.

But what we think that is certainly evidence of, is what I mentioned earlier is the lack of any momentum in employment in our type of industries.

There was a slightly better employment report last month.

However, it really didn't impact the traditional Rental business at all.

So what we are seeing basically is just a lack of any real momentum with existing customers and I think everybody's just taking a wait and see attitude to see what happens.

Sara, just a point.

I didn't say it was negative for the quarter but I did say it was lower than the last couple years.

Typically, in the second quarter we tend to pick up jacket rental and some mats for the winter season, but it was not negative.

Okay.

Second question.

If I look at the revenue guidance, it would suggest a pick-up in the year-over-year growth rate in the second half, kind of in the 5% to 7% range versus a little less than 4% in the first half.

Comparisons do get easier so that probably helps.

Could you talk about what's driving it.

Is it just easier comparisons or is there something else happening?

There are certainly two easier comparisons.

One is the -- from the first half of the year, we start to lose that significant headwind of the year-over-year paper prices.

So our second half of the year paper guidance that we gave you is in line or slightly ahead of last year's second-half paper prices.

And the other item is our Direct Sale, we expect to have a better second half certainly than the first half of this year.

Our first half ended in Uniform Direct Sale down 1.5% or so and we expect to have growth in the second half of the year.

Okay.

Great.

And then just last question.

Are you expecting any impact for your Company regarding the new healthcare bill that's going into effect?

Does it impact your costs at all?

Well, we certainly are very concerned because it will increase our cost.

There's no question about that.

We just don't know to what extent at this point in time.

And so we're monitoring it.

But there's still so many unknowns, it's difficult to predict.

Okay.

Thank you.

Shlomo Rosenbaum, Stifel.

Bill, can you talk a little bit about the pricing, I think last quarter you talked about the competitive pricing environment for I think it was national accounts.

Can you just give us just a broader overview what you're seeing in a trend, is pricing competitively getting better?

Worse?

Or the same?

It still remains very competitive and relatively aggressive on the part of many of our competitors, especially with national accounts and large regional accounts.

I think, again, it is due in part to the lack of the ability to grow existing customers because customers are reluctant to add employees.

So as a result of that, new business is very competitive and we have to be aggressive in obtaining new business.

Additionally, as Mike mentioned in his comments, price increases on existing customers have been also somewhat difficult, given the lack of any real increase in cost.

The general low inflation rate has not enabled us to really be enabled to increase prices on existing accounts either to any great extent.

Okay.

And then you talked about splitting apart some of the routes to create new routes.

Could you talk about how -- I assume there's an initial inefficiency.

Could you talk about how that impacted your numbers and how long does it take until you kind of grow into that and overcome that?

I'm not going to give the quantitative amount because it would be difficult really to do it.

But when you add new routes, they certainly aren't full and we were in the position where we were forced to add new routes in a couple of our businesses because so much of our growth has come from new accounts.

Therefore, new stops.

And so while we tried to efficiently add them, there comes a point in time where you have more route capacity and, therefore, you have greater cost and not getting quite the efficiency.

However, over time that gets eaten up and would really be benefited if we could see some additional headcount at existing customers.

We've been talking about that for the last couple of years.

But what we need to do is continue to invest in the routes to handle the new business and then position ourselves to be able to handle growth in existing customers.

So I think over time, it will come back and we'll get back to improved margins.

But you add a new truck, new depreciation, another driver, and those costs start mounting up as you run them across the country.

And then just in general, can you comment a little about where you thought the jobs were, the better-than-expected jobs report, where were those jobs happening vis-a-vis where we need to see jobs happening in order -- improving in order for you guys to see a pickup in your business.

Shlomo, you've got to be so careful with these job numbers, because when you look at just the total number, one might think oh, well this should be positively impacting a Company like Cintas.

But when you delve into the details of the jobs number, it paints a different picture.

The most recent one, for example, the increase in jobs was due to primarily in the professional arena and that really doesn't help us in the Uniform Rental business at all.

So you just -- you have to go through and look at the different areas where jobs are being added.

One of the analysts that follows Cintas recently put out a report and he made the same comment.

He said after you delve into the details, you begin to realize that any big increase in jobs did not have a positive impact on the Uniform Company.

To answer the question, I think if you can see job growth in the 250,000 plus level, that you would expect that, that should start impacting our types of customers.

And hopefully, we'll see that as we get into '13, but I think it's not a sure thing by any means right now.

When you look at this last jobs report, from a typical Uniform Rental standpoint, it was probably the poorest of the year.

There were -- that 146,000 included over 100,000 jobs in motion pictures, administrative positions, clothing -- retail clothing stores, so it was really a weak jobs report as it relates to our businesses.

Okay.

Thank you for the color.

Nate Brochmann, William Blair.

Hey, just one quick housekeeping thing.

I just want to make sure I got this right.

But on the write-off, that came in the cost of goods sold from the Rental side; is that correct?

Correct.

Yes.

And then if I net that out with the gain that feels like, quick math, using the same tax rate, is about $0.04 per share?

Yes.

For the gain --

Well, the gain was about $0.04.

The write-off was offsetting that.

Then if you -- you really take into account some impact of Hurricane Sandy as well as then the difference in our paper expectation, you kind of wash out.

Wash out.

Okay.

Fair enough.

And then kind of getting to some real results on the revenue side, I know that there's a little bit of pressure just in the add stop sequentially, but I mean, I continue to be pretty impressed that despite all the uncertainty from your customers out there that you guys are still putting up pretty solid revenue growth relative to expectations and I know you said you had some increased productivity.

Could you talk a little bit further in terms of where you're really getting that if everybody's so cautious out there?

Well, it's very similar to what I said in this first quarter, that where we're getting the new business growth is coming from the fact that, one, customers who have never had the program before recognize the value of the program, because it is so cheap to provide your employees with just a tremendous service by providing their uniforms every day, cleaning them, repairing them, replacing them, et cetera.

That really helps our no program or sales efforts.

Additionally the FRC business, or flame resistant clothing business continues to be a star with us, because of the growth and the strength of the energy business in the US, which requires many of their workers to wear FRC garments.

And third, I would say is the new product offerings, like Carhartt, the chemical dispensing, again, are attractive type services and/or products to customers and, therefore, businesses again are signing up for that new business or converting over from one of the competitors because the competitors cannot offer some of those things.

Okay, fair enough.

I mean, I think that's obviously really positive that you guys keep showing that.

And then just finally -- what's that in.

I said we agree.

And then just finally, you guys talked about having some more uniform injections, obviously as you brought some of that new business on.

Can you talk right now in terms of just general numbers how you feel you are with inventory in terms of utilization levels, et cetera?

Nate, you mean utilization from our stockroom?

From your stockroom, correct.

Our utilization, when we -- when our customers aren't hiring and adding people, our utilization in our stockroom goes down because we're not -- we're not pulling garments, similar garments out of our stockroom to put onto new hires within existing customers.

Aside from that, our what we call pull percentages, the amounts that we pull for lost garments, replacement garments are very good, but we just need to be able to use that asset, that stockroom asset much better by our customers hiring.

So it certainly is down because our customers aren't hiring as much.

Keep in mind, for those of you who may not recall, a new customer gets new garments, does not get used garments out of the stockroom.

Right.

Okay.

Thanks, guys.

Andrew Wittmann, Baird.

Wanted to start out with a couple just clerical ones here.

I think I heard you said at least in one of the segments that energy was flat year over year.

Does that go for the Company as well or what was the percentage of revenue for energy?

It was pretty much flat year over year, just slightly over 3%.

And then in Document Management, what was the organic ex-paper.

We might be able to get there with 5.5% but just to clarify with you guys.

It was about 7%, Andy.

It was a nice improvement over what we saw in the first quarter.

Our businesses in most areas of Document Management improved but that increase was really led by our shredding business.

So we had a nice quarter ex the recycled paper.

As you look at that 7%, is that -- can you give us a feel for volume versus new customer, I mean, new customers typically been a pretty big driver for you guys.

Color there would be helpful.

The bulk of that, just like in the Rental business, the bulk of that growth is coming from new customers.

We certainly do get some benefit from increased volume but much more of it is from the added customers.

Right.

And then just moving over to the core rental segment, guys, wanted to get a sense for the relative growth rates between kind of core Uniform and the facility services side.

Is it still fair to kind of think of that business growing at -- the services side, being 1.5 to 2 times faster than the core Rental business.

Is that a fair approximation?

No, no, I think -- I remember saying this in the first quarter.

They're growing at relatively comparable rates right now.

Great.

And then Bill, just kind of touching on an earlier question, I think the impact of the healthcare legislation and now we've got some clarity that apparently that will happen, I know that Scott wrote a letter and kind of quantified a $58 million cost with that.

Is your earlier comment saying that it's maybe not as certain, just due to the fact that we're not there yet or has something changed from Scott's earlier comments?

No, I think that was a -- there still is a lot of unanswered questions, Andy, with regard to what the regulations are going to be and what the provider costs are going to be, et cetera.

So I wouldn't say that I have any better information than what Scott put in his letter, but I think it's important to understand that there's an awful lot of things that have yet to be decided and resolved between now and when that thing goes into effect.

And I was just looking at something, reading an article the other day that the CEO of one of the huge insurers talked about just doubling of premiums to companies.

Now, we're self-insured, but obviously if an insurance Company is going to double premiums, that's going to have an impact on those of us who are self-insured also.

I think it's definitely going to be a higher amount of expense.

Whether it's $58 million, $75 million, I think it's too early to tell.

Okay.

But in terms of when that would theoretically hit, as of right now that big bump is really January 1, 2014, correct?

The biggest bump is then.

But I think we're going to begin to see some cost pressures as we move through '13.

There are additional reporting requirements that happen in '13.

But you're right, the '14 is when we're going to see quite a bit of impact.

Andy, keep in mind that all companies are going to face an issue in 2014 or shortly thereafter of whether or not they want to incur these tremendously more expensive items to provide healthcare or they can pay this penalty that at the current time is like $2,000 per employee.

Now, I don't think Cintas has any intention of necessarily dropping its healthcare coverage unless we see all companies begin to drop it because then that puts us in a noncompetitive situation.

So I think there's so much yet to be decided and resolved and determined on what the impact of this thing is going to be, that it's just too early to tell.

It will be very interesting to watch that unfold.

Thanks for all that color Bill.

Final question, guys.

Wanted to understand a little bit about the acquisitions.

It looks like about $50 million of deals in the quarter.

Can you just give us really a couple things related to that.

What segments primarily?

Can you give us kind of like maybe a percentage or some way to understand what the revenue contribution might be to each segment for the year?

And the impact that that had on your guidance?

Because it looks like obviously revenue guidance is up some but I've got to think that acquisitions were at least part of the factor that went into that.

Andy, the acquisitions are primarily in the Document Management space, primarily shredding, and in the First Aid and Safety and Fire segment.

And I would tell you that it still was a little less than what I had hoped to see.

I thought as we got closer to the end of the calendar year, we would see a little bit more acquisition activity but we really didn't.

It is going to have a marginal impact on the revenue for the remainder of this fiscal year.

If you think about it, and I don't have the detail and I don't think we will give the detail of the exact revenue, but it is not significant relative to the amount that was spent and relative to the size of the Company.

Okay.

I'll leave it there.

Thank you.

John Healy, Northcoast Research.

Wanted to ask a question about the SG&A expense going forward.

I know there's been a couple quarters where you've benefited from some of the amortization rolling off of some prior deals.

Looking at the cash flow statement, looked like it's helped by $8 million or $9 million this year.

Just wondering if that starts to accelerate going forward even further or if we stop to lap comparisons in the next quarter or two and how we should think about that cadence.

I think it won't be really anniversaried until the first quarter next fiscal year on the amortization.

There's some minor changes, but the big impact was when we came into this fiscal year and, well, it wasn't big, but the impact was coming into this fiscal year and we'll kind of anniversary next June.

The thing in SG&A that fluctuates quite a bit of course though is things like payroll taxes, keep in mind the third quarter, 64 day quarter and yet our payroll taxes are at the highest of any other quarter because everything resets January 1. We have fluctuations in our medical expense and in workman's compensation type costs, and of course in this quarter we had the positive variance associated with the sale of the investment that Mike alluded to.

Got you.

That makes sense.

Mike, I think last quarter you had kind of laid out some expectations of how you thought paper would fluctuate throughout the year.

And I know it's awfully difficult to predict the paper market.

But is there a way to think about what your expectations are for the third and fourth quarters so we can make sure our models maybe more accurately reflect the potential headwinds or tailwinds?

Sure.

Our guidance in -- so we for the second quarter, we had a price of about an average of $150 per ton and our guidance incorporates a $160 per ton average in the third quarter, and $170 in the fourth quarter.

Okay.

Great.

And then just wanted to ask just a final question just on the balance sheet, continues to remain very underleverred.

You guys continue to generate great cash flow.

Any updates on -- I know you've been active as a previous question mentioned some acquisitions, are you seeing any movement on some of the more regional or larger properties that might be out there on the Document side or on the Uniform side, some of these businesses that have been out there for a while?

John, I really can't comment on any specific acquisition.

I can just tell you that we obviously would be interested at the right price.

Okay.

Great.

Thank you.

Scott Schneeberger, Oppenheimer.

Bill, just following up on an earlier question real quick, you mentioned you had anticipated perhaps some more acquisitions at the end of the year and obviously the quarter ended in November and perhaps some incentive for sellers to sell before year end.

I don't imagine you're going to give more color, but that disappointment, should that trickle through to early into this quarter?

And just thoughts on just incrementally on the acquisition environment, would we expect to see a pick-up from you guys?

Scott, you know I can't tell you that.

I could just tell you that yes, I was disappointed on the lack of acquisitions as we got closer to year end.

Of course, we're only reporting what we did through November.

If we had made anything material we would certainly be telling you at this point in time.

But I was a little surprised.

I thought sellers would be looking at the possibility of much higher tax rates and would be a more willing seller, but obviously through our November, end of November, that did not happen.

Understood.

Thanks for sharing even that much.

I appreciate it.

You guys had mentioned strong productivity in the sales force and a few years removed project one.

Could you elaborate on that a little bit, how's -- I know you don't speak to headcount in sales, but could you speak to your favorable trends there, please.

I think our favorable trends have been what we've seen for the last couple of quarters.

Let's give a little -- go back in time a little bit.

We did start increasing our headcount in sales back in calendar '10, as we began to gain confidence that the financial difficulties that were facing the country and the severe recession we were in were beginning to dissipate.

And it took a while for those salesmen to achieve productivity, but they began to really do that late in our fiscal '11, and has continued through this latest quarter.

Now, what's caused it is a more tenured workforce, sales force, certainly an increase in the headcount from what we had back during the recession, but third is a great selection of products and offerings that we think have contributed to their productivity improvements and have resulted in at least giving us the growth that we're getting because we're getting it from the new business.

Great.

Thanks.

One more housekeeping, and I apologize if I missed it.

I believe your prevailing tax rate guidance for the full fiscal year is 37.3%.

Is that still a good target for us to think about and model on?

Yes.

Thanks very much, guys.

Andrew Steinerman, JPMorgan.

When you look at your F&A line without the gain it comes out to 28.4% of revenues which shows some decrease sequentially and year over year.

And you did speak somewhat about this line, but my question is do you feel like some of the efficiencies gained on this line are permanent, meaning that over time it could go down from this percentage?

Or do you feel like you've held back on some costs and so you're going to really have to be additive to this line as business grows?

Andrew, absent the quarterly fluctuations, I think there is still some potential for marginal improvement in the SG&A line.

I don't think we've held back on costs.

I think that we're continuing to get leverage and so when you look at it on an annualized basis, I think you should continue to see some modest improvement.

Not to the extent we've seen over the last few years, but I think that it still could get slightly better.

I want to just make the point again, the third quarter for us --

64 days.

64 days.

Resetting of payroll taxes, et cetera.

So keep that in mind, those of you who put out your expectations.

I got it.

Thank you very much.

Gary Bisbee, Barclays.

I guess the first question, Bill, you mentioned a line we've been hearing a lot but just about companies, the uncertainty and it impacting them.

Did you feel that more this quarter or is that just a continuation of what's been going on for six to nine months?

I think it was maybe a little bit more in this quarter, slightly more than what we saw maybe in our first quarter, just because we were in the height of the election and a lot more people were focusing on all the different viewpoints and what should happen on January 1. It was a headwind in the first quarter, maybe a bit more of a headwind in the second.

Okay, all right.

And then can you be any more specific about what impact you think Hurricane Sandy had on the business and if that impact will linger for a while?

I see so many of your trucks rumbling around New York City and I was one of the unfortunate ones without power for a week downtown.

I have to imagine there was an impact in the Northeast and any sense of what it was.

It's really difficult to come up and give you an exact number.

Our commentary was it did have an impact.

It wasn't material.

What happened is as those of you who had to go through it, without power, our facilities were down for a few days.

Our customers were down even longer.

We've had customers that haven't returned to business.

It doesn't impact just Uniform Rental.

It impacted all of our businesses.

The Fire business, the First Aid, and Safety.

Some of that you get back and it's just a delay in when you get it.

But some of it you may never get back.

It had a modest but not a material impact on the quarter.

Okay.

Fair enough.

And then you mentioned in a couple of your businesses some reasons for optimism.

Obviously the paper comparison's important.

I think I heard in Uniform sales the few roll-outs you're expecting, you said adding capacity in Documents because of some recent national account wins.

Is this sort of normal course of business, normal trend or have you seen some things despite the weak environment that are actually getting somewhat better in the last few months or quarter or two?

No, I do see trends, some positive.

We know we're going to have -- well, due to these roll-outs, should have a much better results in the Direct Sale business and that's -- the Direct Sale business is going to do that.

It's going to fluctuate.

But I'm very pleased with some of the new customers that we're getting in the Direct Sale business and hopefully even after the initial surge of the roll-out we'll see some ongoing business as a result of that.

As far as some of the other businesses, as Mike alluded, the shredding business saw a nice pick-up.

I think that that's positive in the First Aid and Safety revenue looked very good.

Some of the Fire, national account businesses that we're getting.

So overall, yes, I am I think in a very tough economic environment, I'm pleased with our results and I feel very good about going forward that we've got a very strong sales force and great businesses that we're in, that should continue to do well.

We just are obviously at the mercy somewhat of what the economy does.

Just one last one.

I was looking at your website the other day and looking at what continues to -- it seems to be you continue to expand the offerings in facility services.

I guess I've also seen a few press releases talking more about the chemicals business and what not.

According to the mix you gave us at the end of last fiscal year, it looks to me like it was at that point 11% of total Company revenue.

I guess at what point do you break that out from Rentals?

They run a different fleet, a different network.

It would certainly aid all of our ability to think about how the business is doing if we could see that separately, and I think the SEC standard is like 10%, something normally then would make sense to split off.

Is that something you could do at the end of this fiscal year?

The problem we have is while the revenue side is relatively easy to split out, it's impossible at this point in time to appropriately split out the costs because they are housed in the same physical facility.

There is often a route that will carry both products, both facility services and uniforms, so at this point in time we have no way to properly be able to split that out separately.

Okay.

All right.

Fair enough.

Thought I'd try.

Happy holidays, guys.

(Operator Instructions)

Greg Halter, Great Lakes Review.

One quick easy one.

I missed the organic growth for the Uniform Direct business in the quarter.

It was the same as the total growth.

A decrease of I believe it was 1.6%.

That's easy.

Then second, relative to capital allocation, obviously just raised the dividend 18.5%, bought back I think 1.9 million this quarter, 1.8 million last quarter, made some acquisitions, $51 million in the quarter.

Just wonder what your appetite is for, I guess from the standpoint of looking at the share repurchase, what your appetite is in that regard.

Well, I would just say if past practice is any indication of future, we continue to be hungry at the appropriate use of our cash and keeping our options open for other things.

So it would not surprise me that we would not see additional share buybacks pending what else -- what other opportunities we might see for cash.

All right.

And what's the rate that you're paying on your debt now?

Is it fixed or variable?

It is all primarily fixed.

I think the --

It was less than 5%.

The all-in rate is in the mid-4%s, I believe.

Alright, thanks very much.

James Samford, Citi.

One question for you on cotton prices.

Looks like cotton prices have been coming down.

I know that it takes time for that to work through your inventory.

Just wonder if you could comment on if and when we could see some kind of benefit from lower cotton prices working through?

James, we had talked about cotton peaking in our second quarter of this year.

What will be very difficult to see is any change in that because as you know, the cotton impact rolls through so slowly, and also running through our material cost are all of the injections of new garments for all of the new accounts that we've sold.

And so it's going to be very -- it's going to be very difficult to spot a trend in the changes due to cotton.

I guess on the Rental side, I believe you said in the past that typically your clients won't put uniforms on temporary workers.

One of the areas of growth in terms of hiring has been in the temp area.

I think there's even a thesis out there that with the Affordable Health Care Act, companies, particularly smaller companies might use temps even more than before.

Are your clients talking about it that way or is there a possibility that they may change the way they think about temps over time?

I think the idea of putting a uniform on a temp worker depends what that temp worker is doing.

If that temp worker has customer-facing responsibilities that require the image of their employer to be properly represented, they're going to put a uniform on the temporary worker.

If they're trying to protect the product from contamination from an employee, regardless if it's a temporary or permanent worker, they're going to have a uniform.

So I would tell you that it all depends on what the buying motive is for the customer on the uniform side.

To provide a uniform for a temporary worker as a perk has not necessarily been the practice but if we do go into a new world where many companies decide to have a lot of temporary workers as opposed to full-time workers in order to avoid potential costs, if they need that employee to be in a uniform for image or for protecting the product, I think you will see them use uniforms.

I think we may see a change in the way, because of the healthcare, we may see a change in the way our customers view their employees and there's a -- you can think of temporary as being temporary until we've can find a full-time replacement and there may be less need to put that kind of worker in a uniform versus a part-time worker where in the future there may be more part-time workers that are kind of a permanent part-time and we may see a shift of putting more of them into uniforms.

So I think we -- we're going to keep our ears close to our customers and see how this Healthcare Act changes their perception of their employees.

I guess just a housekeeping.

Where does the gain from the sale flow through?

Is that in Rental operating income as well?

That is primarily in Rental.

It's a bit of a spread between all four segments but mostly in Rental.

Great.

Thank you.

And that does bring us to the conclusion of our question and answer session.

I'll turn the conference back over to Mr. Gale.

I would like to thank everyone for joining us this evening and on behalf of all of the Cintas partners throughout the world, we want to wish all of you a very happy holiday and a prosperous new year.

Ladies and gentlemen, that does conclude today's presentation.

We appreciate your participation.