信達思 (CTAS) 2013 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, sir.

Thank you for joining us this evening.

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 third-quarter revenue of $1.076 billion, which represents record quarterly revenue for Cintas, and growth of 6.3% from last year's third quarter.

Organic growth, which adjusts for the impact of acquisitions and the impact of one less workday compared to last year's third quarter, was 6.9%.

As we noted in the press release, the organic growth in each of our four operating segments improved from second-quarter levels.

We indicated in last quarter's call that we expected our Uniform Direct Sales segment to have a good second half of the fiscal year.

And that was certainly true in our third quarter.

The execution of our global accounts and strategic markets, and our global supply chain teams, during the third quarter was outstanding, as we rolled out several large new programs on our way to over 15% growth in the Uniform Direct Sales operating segment.

Third-quarter net income decreased by 1.7% to $75 million.

And there were a number of factors that contributed to this decrease.

Our third quarter had 64 workdays, which is one less than last year's third quarter.

Keep in mind that a number of our large expenses, including rental material cost, depreciation and amortization, are determined on a monthly basis instead of a workday basis, and one less workday results in one less day of revenue to cover those expenses.

In addition, we have discussed on our last few calls that strong new business sales and the absence of meaningful customer hiring over the past few year's have resulted in increasing rental material cost and capacity pressure on our routes.

As a result, rental segment material costs exceeded last year's third-quarter material cost, just as it also did in this year's second quarter.

We also continued to add route capacity during this quarter to insure that we have the ability to continue providing excellent service to our customers.

In our selling and administrative expenses, our costs associated with employee-related medical benefits increased by roughly 60 basis points compared to last year's third quarter.

Keeping in mind that we are self-insured, this increase was due to new claims experienced during the quarter.

Medical costs have historically been in the range of 3% to 4% of revenue.

And this third-quarter expense continued to be in that range.

In addition to higher medical costs, our expenses associated with auto and other liability claims increased roughly 50 basis points compared to last year's third quarter.

Despite these added costs during the quarter, our earnings per diluted share for the third quarter did increase over last year's third quarter.

This year's earnings per diluted share were $0.60, a 3.4% increase over last year's third quarter of $0.58.

This was due to the positive impact of our share buyback program.

During the third quarter, we purchased roughly $28 million of our stock, bringing our total purchases during the last 12 months to $309 million of Cintas stock.

As of February 28, we have $191 million available under the current Board authorization for future shares repurchases.

As we enter our fourth fiscal quarter, we are updating our fiscal 2013 guidance based on our third-quarter performance.

We expect revenue to be in the range of $4.3 billion to $4.325 billion.

And earnings per diluted share to be in the range of $2.50 to $2.54.

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

It also assumes no impact for additional share repurchases.

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

Good evening.

As Bill mentioned, total revenue increased 6.3% from the third quarter of last year, with total Company organic growth being 6.9%.

Total Company gross margin for the third quarter was 41.1%, which is down from last year's third-quarter gross margin of 42.1%.

But slightly better than this year's second-quarter gross margin of 40.7%.

I will discuss these items in more detail by segment.

Before doing so, let me remind you that there were 64 workdays in our third quarter, which is one less than last year.

Our fourth quarter will have 66 workdays, which is the same as last year's fourth quarter.

As a planning note for fiscal 14, we will have 65 workdays in each quarter for a total of 260 workdays.

This creates year-over-year workday differences in each quarter except the second, and results in one less workday for the entire fiscal year.

We have four reportable operating segments -- Rental Uniforms and Ancillary Products, Uniform Direct Sales, First Aid, Safety and Fire Protection Services, and Document Management Services.

Uniform Direct Sales, First Aid, Safety and Fire Protection Services, and Document Management Services are combined and presented as Other Services on the face of the income statement.

The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms, mats, towels and other related items.

This segment also includes restroom supplies and other facility products and services.

Rental Uniforms and Ancillary Products revenue accounted for 70% of Company revenue in the third quarter.

And totaled $748.9 million, which is up 3.9% compared to last year's third quarter.

Organic growth was 5.5%, which is a nice uptick from the 4.5% organic growth rate in the second quarter.

Sales rep productivity continued to be strong.

And we did see a slight pick up near the end of the quarter in our net adds-stops metric.

Our Rentals segment gross margin was 41.9% for the third quarter, a 120 basis point decrease from last year's third quarter gross margin of 43.1%.

Energy-related costs were down 10 basis points from last year's third quarter.

Bill touched on the primary reasons for the decreased gross margin -- the impact of one less workday, the higher material costs and service costs associated with added route capacity.

The third-quarter gross margin of 41.9% was the same as the second quarter.

The negative impact of one less workday in the third quarter was offset by the impact of the processing system write-off in the second quarter.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms, branded promotional products and other related products to national and regional customers.

Uniforms and other related products are also sold to local customers, including products sold to rental customers through our direct sale catalog.

Uniform Direct Sales revenue accounted for 12% of Company revenue in the third quarter.

And totaled $126.1 million, which represented sales growth of 15.6% compared to last year's third quarter.

As Bill mentioned, we had several rollouts in the third quarter in our Fortune 1000 business, including the largest single customer rollout in Cintas' history.

Uniform Direct Sales gross margin was 29.2% for the third quarter, down from last year's third quarter gross margin of 30.5%.

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

And this year's third-quarter revenue included a much higher mix of Fortune 1000 national account sales, which tend to have slightly lower gross margins than are hospitality and gaming business.

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.

Revenue was $112.9 million, which is up 11.3% over last year's third-quarter revenue.

Organic growth was 6.9%, which is a nice improvement over the 4.8% organic growth rate in the second quarter.

This segment's gross margin was 44% in the third quarter, which is up 80 basis points from the 43.2% in last year's second quarter, and the 42.4% in this year's second quarter.

Our First Aid and Safety gross margins were very strong due to continued efficiencies gained by the good performance in this business.

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

And it accounted for 8% of third-quarter total Company revenue.

Document Management revenue totaled $87.8 million, which is 8.9% higher than last year's third quarter.

Revenue increased organically by 5.8% compared to last year.

We have lapped last year's steep drop in recycled paper prices and now have better year-over-year comps.

This year's third-quarter average recycled paper price remained relatively low at $140 per ton.

But this is slightly higher than last year's third-quarter average of $135 per ton.

This $140 average price also remained lower than our expected third-quarter paper price of $160 per ton.

Our updated guidance for the fourth quarter assumes that recycled paper prices will stay roughly at the $140 level.

The third-quarter gross margin of 47.1% is comparable to last year's third quarter of 47%.

Switching to selling and administrative expenses, SG&A was 28.7% as a percentage of revenue in the third quarter, which is up slightly from the 28.5% in last year's third quarter.

As Bill mentioned, medical and auto and other liability claims were up a combined 110 basis points.

Offsetting these increases were better leveraging of our G&A functions and constant challenging of our cost structure.

Our effective tax rate was 36.1% for the quarter compared to 37% 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 approximately 37%, 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 $246 million at February 28, down $30 million from the $276 million at November 30.

This decrease was due to the $80 million payment of our annual dividend in December, offset by cash generated from operations.

Included in the $246 million at February 28 was $54 million of cash located outside of the US.

Accounts receivable increased by $16 million since November 30, due to the higher sales level in the third quarter compared to the second quarter.

DSOs were roughly 40, which is the same as at last year's third quarter.

New goods inventory at February 28 was $247 million, up $11 million from November 30, due mainly to inventory associated with several large Uniform Direct Sales customers.

Despite higher sales this year, the inventory level of $247 million is down $29 million since last year at February 29, due to improved inventory management.

Accrued liabilities decreased $87 million compared to November 30, primarily due to the $80 million December payment of our annual dividend.

Long-term debt at February 28 was $1.3 billion.

As of February 28 our total debt to EBITDA remains slightly below 2 times.

Moving on to cash flow.

Cash provided by operating activities in the third quarter was $141 million, which is up from last year's third-quarter amount of $132 million.

CapEx for the third quarter was $52.7 million.

Our CapEx by operating segment was as follows.

$38.3 million in Rental, $1.4 million in Uniform Direct Sales, $2.5 million in First Aid, Safety and Fire Protection, and $10.5 million in Document Management.

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

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

(Operator Instructions)

Sara Gubins of Bank of America-Merrill Lynch.

You saw a nice pick up in the organic growth trends.

I'm wondering if you could talk about the tone of your clients?

And any details on types of clients, maybe by industry, that are adding programs or expanding their programs.

Sara, what we saw is, we saw a weak beginning of our quarter.

December was relatively weak.

January first couple weeks started out, and then things got a little bit better.

And as we got into February, I would say the latter part of February began to show a little bit of life in the add-stop metric among existing customers.

I would say the general tone that I'm hearing from our operating and sales management is a little bit of a relief that we got through some of these big issues -- the year-end fiscal cliff and some of the other things that were going on.

And while I don't think there is a robust attitude that things are going to be really great, I think that there's just a relief and maybe a little bit more optimism in the marketplace.

Sara, I would say that we did not see any one segment have significant improved performance over another.

It was generally pretty broad.

Okay.

And then it's a little hard to compare because of the year-over-year days not matching.

But if I look at the guidance for the fourth quarter, it looks like you could be expecting a slowdown in the organic growth rate.

So, first, is that correct?

And, second, if so, could you talk about why?

I'm not sure that's totally correct.

The low end of our guidance would show growth of about 5.6% and the top end of about 8%.

But I would say within that guidance we're looking at a quarter relatively similar to what we saw this quarter.

Okay.

And then just last question, any update on the pricing environment?

Is it getting any marginally easier now that there's some incremental optimism?

Thank you.

I would say the answer to that question is no.

It's no different.

The pricing environment appears to be no different than what we've seen for the last several quarters, which is a pretty competitive environment.

Okay, thanks a lot.

Nate Brochmann with William Blair.

I wanted to talk two things, one following on that question.

I'm definitely encouraged to see the organic growth picking up.

And I would assume that's in spite of probably a little bit of a weather impact too, I would assume.

Some of your regions seeing a couple lost days because of weather, compared to last year where we didn't really have much weather.

Would that be fair to say that that was a little bit of a headwind during the quarter?

I'm not sure I could really say that.

There were a couple of those winter storms but I didn't hear a lot of problems among our locations with deliveries and that sort of thing.

There is always a little bit of that in the third quarter in different parts of the country, but nothing out of the ordinary.

Okay, that's great.

And then in terms of adding some of the route capacity back to handle the new business, how do you feel about where you are with that right now?

Do you have more to go based on the level of business that you have right now?

And then, also, would it be fair that if we did see some pick up in the economy and the employment rate, and that add-stop metric shoot up a little bit at hopefully some point, that we could see even a little bit greater route density than we normally would see in a rising environment like that?

Nate, that's certainly our hope.

What we have seen, we've had just some really nice new business over the last year or so.

And as we've spoke in the last couple quarters, we've had to add some routes because we have more stops.

And we just needed to have the capacity in order to handle that new business.

And there is no doubt that when we see adds consistently taking place in our existing customers, that is going to be very beneficial to route density.

And thus is going to have a nice marginal impact positively on our results because not only will we get more revenue from a stop, but we'll be able to utilize, with adds, more of our existing stock room inventory as customers do add employees to their headcount.

Now is that going to necessarily happen in the fourth quarter?

I don't know.

I hope that we'll begin to see some of that but it's still been a pretty sluggish employment growth, especially in the uniform rental wearing sectors.

But with a little bit of uptick we saw at the end of February maybe that will continue.

I know there have been a few analysts who have put out some reports of their surveys with private customers that indicate there might be some trends of that.

So we'll have to wait and see but we're certainly going to have the capacity on our routes to handle that, those adds, if they do occur.

Okay, great.

Thanks and definitely optimistic for that to hopefully start trickling through.

Joe Box with KeyBanc.

You put up two consecutive years of solid SG&A leverage.

And obviously that abated this quarter.

And I get it that medical costs and liability were up a combined 110 basis points.

I'm just curious, do you see those headwinds reversing in the coming quarters?

Or could we be looking at an ongoing drag?

And then, more importantly, how should we think about SG&A leverage going forward?

Joe, I don't think we expect those type of spikes to continue.

Of course we're self-insured for medical benefits.

And you are going to have quarters when you'll have some relatively expensive cases.

And this happened to be one of them, that we had several of them hit.

But I'd say that we would expect, if you look over the average cost of our medical benefits over the past year or so, it's been lower than what we saw in this most recent quarter.

So I have no reason to expect that to increase, at least this year.

Obviously going into '14, all companies are going to face some additional costs associated with some of the requirements of the Affordable Care Act.

But that's going to be every company is going to feel that.

As to these cases, again, I think that's an aberration.

I can't say that it won't happen again, but it's more likely not to happen than to happen.

So, with all that said, I'd say as long as we continue to see that top line growing, we're going to see some additional SG&A leverage.

Not necessarily to the same degree we've seen over the last two years, but some marginal continued leverage improvement in the SG&A line.

Okay, great.

That's helpful, Bill.

And then maybe switching gears to the merchandise amortization component, can you maybe just help us understand the different moving pieces?

Was there a benefit from lower cotton but yet that was more than offset by newer uniforms going out?

Just curious for some color there.

Sure, Joe.

When we look at material costs, as we mentioned, it was higher this year than last year.

But what we did see is that the increase in the third quarter over last year was less than the year-over-year increase in our second quarter.

And we've talked numerous times in the past about how we expected cotton to peak mid fiscal '13.

And so we probably did get a bit of a relief coming off of that.

But also just saw a little bit of a decrease in the rate of the material cost increase.

So it was a positive sign during the quarter.

And maybe can you just talk about some of the garments that you've put out into service post recession?

We're coming up against a couple years of pretty good growth.

Are you starting to replace some of those uniforms and products now?

Or is that not really coming up yet?

I think that certainly can come up.

And it just depends on the type of the customer and how they use their garments.

We will always be replacing garments.

But I wouldn't say that we've seen a serious uptick in the amount that we're pulling from the stock room based on these new accounts put in service over the last couple years.

I would say that more of the impact has been we're just continuing to sell new accounts.

Okay, got you.

Last question and then I'll turn it over.

On the Direct Sales side, clearly a standout.

Can you just talk to the longevity of some of these programs?

Are they meant to last a few quarters?

Last a year?

Or are they generally more seasonal in nature?

I wouldn't say they've seasonal but they're more related to a specific customer requirement to do the rollout.

So our sales organization is constantly working on replenishing these type of big account rollouts.

But obviously it's dependent somewhat on the customers themselves.

So, what you saw this quarter is probably not repeatable in the short term.

We would expect there still to be positive growth in the Direct Sales segment in our fourth quarter.

But this certainly was an unusual event, one that we knew was coming.

And that's the nature of direct sale.

We see this all the time, where we can have these very high growth quarters followed by flat to somewhat down quarters.

And it just is the nature of the business.

Understood.

Thanks, guys.

Andrew Wittmann with Robert W. Baird.

You talked about the extra workday, setting up for comparisons on the revenue side.

It's harder to peel out what the margins would be adjusted for that.

Is it fair to gross up the revenue from this quarter by that extra day, look at the same cost structure, and then compare that to last year?

Is that a fair way to look at it?

Or if we do that are we missing something?

That's a little too simplistic, I think, Andy.

You can do a little bit of that, like when you look at maybe some of the rental gross margins.

But the problem we have is the quarter gets complicated when you have some of these things that we talked about in SG&A, when you have a different mix percent of the Direct Sale business than you had in previous quarters versus the Rental business.

And the Direct Sale business tends to have a little less margin.

So you just have to be a little cautious.

I think, suffice it to say that we certainly are impacted negatively on a margin standpoint when we have fewer workdays because, as Mike mentioned, with material cost, depreciation, amortization all being done on a monthly basis, that could have a 50, 60 basis point differential just on the margins.

And then you get other things that are being factored in there.

Okay.

I guess that makes sense but it sounds like, if you were to do it, the only segment that you would even have a chance would be the core Rental segment.

And if I do that math, I see a 20 basis point gross margin hitting a 30 basis point Rental hit.

Which, it's not up but there's clearly a very big impact from the extra day.

Yes, but I think I wouldn't make too much out of a 20, 30 basis change.

Your mix of new business, the mix of the types of business, those type of variations are going to happen quarter to quarter.

Yes, okay, that's good.

And just in terms of the routes, you talked about this a little bit, but you've split some routes.

Is the business supportive of a continuation of that?

Or is it now, have you done the splitting of the routes and now it's just making those happen?

Or should we see the route splitting as maybe an ongoing headwind to near-term leverage with long-term benefits?

Let's keep in mind, I think the splitting of routes is a good long-term strategic move to enable us to serve more customers.

And we will continue to, I think, be very successful in selling new business.

And therefore we need to stay ahead of the game, and having the routes available to handle that new business so that we can properly take care of our customers.

So I see it going on.

What I hope will happen is, obviously, we'll see some improvement in the attitude of businesses to hire additional people at existing stops.

And to just increase the amount of revenue without increasing the number of stops in all our routes.

But with a very large sales force that is very productive, and we think we have some competitive advantages with product and with service systems, we'll continue to see robust new business.

And when you have new business you'll have to have the route capacity to handle it.

Is there any one of your segments that's getting a disproportionate amount of new routes, Bill?

The Rental -- no, I'd say any of our route-based businesses are all adding routes.

Okay, great.

And then just final question.

Mike, document constant currency ex-paper, what was that for the quarter?

We had a nice improvement in the quarter to 7.1%.

Great.

Thank you very much.

James Samford with Citigroup.

I just wanted to touch on a few things.

Fuel prices and natural gas have been on the rise here.

You're still seeing some leverage on the energy cost side.

I was just wondering if you could comment on how we should think about Q4 in terms of energy costs with the current levels of commodity prices.

And how does adding new routes impact the energy cost line just in general?

Right now, our energy costs as a percent of revenue were relatively consistent with what we saw in the second quarter.

We're a little over 3% of revenue.

And the natural gas prices, yes, have shown a little bit of uptick, but not significant enough that I would think there would be a big change.

Quite honestly, James, it's the price of the gas and diesel.

The more dramatic change in those prices have a bigger impact on our energy costs overall because that's the biggest percentage of our energy cost by far.

As to the route capacity, the more trucks you have on the road, the more gas you're going to use.

So you certainly will see an increase in utilization of gasoline and diesel because you have more trucks.

And therefore will have that cost going on.

And we won't get the leverage necessarily on the revenue line that we would if we were not adding route capacity and we're just seeing revenue increases in existing accounts.

That's fair enough.

That's what I was trying to get at.

But from a capacity perspective, where do you stand right now in terms of total wearers versus prior peak?

And maybe comment on what the mix of rental wearing versus other products is at this point?

We still have fewer wearers today than at the peak.

I won't get into the details any more than that.

But, because of that, we still have capacity, generally speaking, and more than we did in '08.

Now, capacity is certainly a local issue.

And there are some spots that have grown faster than others in the last couple years.

And we may have some capacity needs from a plant standpoint in the next few years.

But, generally speaking, we have some pretty good capacity.

And when I talked about fewer wearers today, our revenue is higher than it has ever been.

And that is because we have replaced the revenue from those lost wearers with other things, like cleaning chemical solutions and hygiene products, that don't require a lot of capacity.

So, to answer your question, plant capacity is still pretty good.

One quick question on the Affordable Care Act.

I know you've talked about some impact on your business.

Any update on where you're thinking the impact in 2014 might be, and what kind of offsets you have or levers you have to change, to absorb some of that cost?

I think everyone is aware that it's getting a lot more press.

There was an article in the Journal a week ago that talked about the $63 charge that everyone is going to have to pay for every covered individual and their dependents.

So the rules are just getting announced and written.

There is certainly going to be an increase.

So what is our strategy?

Our strategy has got to be to provide our employees with a decent medical program.

But because of the significant increases in costs, they're going to have to share in some of that through higher weekly cost of their share of the cost.

Maybe higher co-pays.

We're offering some high deductible plans and inducing employees to get into those, that we think would help us control our cost.

And we continue to work with our various suppliers in trying to get the best deal possible in terms of the amount we have to pay for prescription drugs, for medical coverage, et cetera.

There's just no doubt that there's going to be some increase in overall costs, both to the employee and to companies.

And we'll do our best to keep that cost to a minimum.

But there's still a lot to be resolved yet in terms of what the government is going to be forcing companies to do.

And we're just watching it and we'll try to react accordingly.

Great, thank you.

Andrew Steinerman with JPMorgan.

I want to ask about the Rental gross margin line, which is down 120 basis points.

I know you explained the reason.

If it was not for the one less day, how close to even would Rental gross margin be in the third quarter?

And is there a shot that Rental gross margin will be up in the fourth quarter, given your comments about add-stop and even days?

If you would adjust for the workday in the third quarter, as Bill mentioned, we would see the Rental gross margins likely go up about 50 basis points, because of that one day, one less workday.

It was about a 50 basis point impact.

Last year's fourth quarter gross margin in Rental was 43.3%.

And do I think we can get to that?

It depends a bit, again, on how our revenue comes back.

If we continue to see a positive trend in add-stops, like we saw at the end of this quarter, then certainly we can see a very good gross margin in the fourth quarter.

If, however, that doesn't play out, and we turn to a negative trend or a flattened trend, then because of the increase in routes, we may have a little bit more difficult matching that gross margin from last fourth quarter, last year's fourth quarter.

Great, that's very helpful and promising.

And if you could go over the acceleration of Rental revenue growth in the third quarter, which pieces to revenue growth accelerated year over year?

It really came through both the uniform wearer, as well as the facility services.

It was consistent.

We've seen very nice growth continuing, albeit from a relatively low base, in the chemical dispensing and the tile and carpet cleaning.

But I was encouraged with seeing an across-the-board improvement with pretty much the core business -- the dust business, the rental garment business.

We've expanded into some different segments, like healthcare, with some microfiber mops and wipes and scrub rental.

And I think that has been somewhat of a benefit for us, also.

Again, it was not consistent through the whole quarter.

As I mentioned earlier, we had a tough December but we began to see a little life in mid January, and then it picked up as we moved through the end of February.

So I'd like to say I'm very optimistic for the fourth quarter but I can't because I just don't know what's going to happen.

But at least the trend was more positive as we exited the third quarter.

Great.

And, Bill, often you describe that same thing in terms of new business/lost business.

So if you take the third quarter as a whole, did new business accelerate?

Did lost business ebb?

Lost business ebbed a bit.

New business, again, was very strong, especially in the second half of the third quarter.

Perfect.

Thanks for the color.

Scott Schneeberger with Oppenheimer.

This is [Don Harburg] filling in for Scott.

Can you take us a little deeper on the strategy employed to drive some cost leverage in the business, please?

Thank you.

The strategy has been always to get as much capacity revenue on our routes.

And, as we mentioned earlier, route density is a key to that.

Utilization in our plants is certainly something that we're always looking for.

And then the SG&A leverage.

Our strategy has been always, add routes as needed to handle additional stops, and then do whatever we can to increase revenue at those stops.

Okay, thank you.

Shlomo Rosenbaum with Stifel Nicolaus.

Bill, is there anything that's different about the add-stop change at the end of the quarter?

We've had a number of head fakes with the add-stops.

It's clearly the biggest lever of potential for your business.

Is there any sense you have that at this point in time we might be feeling the real thing as opposed to the head fakes we got a couple of times in the last few years?

No, I couldn't tell you that convincingly.

I wish I could but I can't.

I agree.

And how long -- when you talk about the end of the quarter, how long did you see it for?

In other words, you guys manage your business, I assume, on more of a weekly basis.

So what part of the quarter did you see that in?

The last two to three weeks.

And did that continue going into this quarter?

We really don't have anything yet.

This is pretty early in March so I would say I don't have anything that I could really look at and tell you whether it did, because it's just difficult that we're so early in the month.

And then the trends in the business have been improving.

I'm trying to bridge that with the EPS guidance being narrowed down to the lower half.

What are you expecting to change in the fourth quarter?

A couple things.

One is, of course, the paper price.

As Mike alluded to, we've now reduced our expectation on paper price in the fourth quarter from what we had assumed back in December when we gave you that updated guidance.

And that probably cost us in that quarter alone $0.015 or so.

We're also a little bit concerned that maybe we will not have a repeat performance on the lower medical expenses that we saw last year.

And therefore, based on what we saw in the third quarter, we've ticked that up a little bit.

We continue to expect there to be more impact, the material cost impact.

Although we've seen that trend come down a little bit, we still think that will be higher than last year's fourth quarter.

I think the tax rate is a tad bit higher.

So I'd say those are the major factors.

But with all that said, we're still looking at fourth quarter, our guidance still indicates a fairly nice improvement in operating income in the fourth quarter over last year, even looking at the low end of the guidance.

So I feel pretty good that it's going to be a decent quarter, assuming that the revenue comes in.

So just to quantify some of that.

Is it fair to say that the tax rate in total is $0.015 per quarter?

So, like, $0.03, the difference -- or not the tax rate, I'm sorry, the paper pricing?

The paper price was, yes, based on what we thought it was going to be in December, it's like $0.015, yes.

So is it $0.015 per quarter or $0.015 per --?

Per quarter.

Okay.

So that's $0.03 out of the $0.04 change?

Right, $0.025 to $0.03, Shlomo.

Okay.

And then tax rate is a fraction of $0.01?

Yes, okay, you're getting into the minutia.

All right, I'll let it go on that -- the bulk of it, it sounds like it's the paper pricing, is what it sounds like.

The bulk of it, I would say, is the paper prices and a little more concern on some of these expenses like medical benefits, liability claims, that sort of thing, because we saw a little uptick in the third quarter.

Okay, that's fair, thank you.

Gary Bisbee with Barclays.

You were kind enough to give us the impact of the one less workday on the Rentals gross margin.

Can you give us a sense, either the actual numbers or directionally, the other two issues, how much they contributed -- the new customer impact and the route investments?

Gary, we haven't gotten into that level of detail and would prefer not to.

Okay.

That's not very helpful but I'll move on to the next one.

How about some color on how the new business has trended over the last 12 to 18 months?

And, in particular, what I'm getting at is, when will some of this amortization start to roll off?

Has this really picked up a lot in the quarter so that that expense is going to be there for awhile?

Or is this the combination of new business having improved over the last year, and so as you're rolling off quarters it wasn't as strong in adding in several where you've had good growth -- that that's the impact?

I'm trying to think of how long is this a headwind, is really the question.

I would answer that question by saying if we were to stop selling new business, it wouldn't become a headwind.

But the fact is, we still have an awful big sales force and they're continuing to be very productive.

So we're always going to have new business.

And as a result of that, you're always going to have that injection of products.

So I'm not sure you're going to see a significant drop in the material cost because the amortization drops.

As I mentioned, Gary, though, the rate of increase year over year in our third quarter was less than our second quarter.

And so we started to see a bit of that start to happen.

In other words, the headwind was a little bit less in the third quarter than in the second quarter.

If we get a little bit of help with net add-stops in the fourth quarter, we might get a little bit more help in the fourth quarter.

We did see some of that was cotton from the second quarter to the third quarter.

But, again, saw a little bit of an improvement in the rate of increase.

And I would say, rather than all of a sudden the headwind going away, it's probably going to be something that goes away very slowly over time, unless we see a real change in net add-stops.

Okay, all right, fair enough.

Can you give us any color on where the improvement in add-stops came from?

Was it more the wearers or more potentially bad weather leading to more jackets, which I've heard you reference in the past?

Or anything like that, to help us understand exactly where it improved.

Thanks.

It was more wearers and more facility services product adds.

And then just one last question for me.

I know I've asked you this a lot over the last couple years, but at what threshold do you think about breaking out the hygiene and facility services business into its own segment?

I think with the fourth quarter of last year, when you gave us the mix, it looks like it's getting close to that 10% threshold at which companies start to do that.

Is that something you might do next fiscal year?

And why not?

No.

Because we cannot properly split out the costs since they are housed in the same facility and often on the same routes.

So it could be set with a tremendous amount of allocations in order to split out the cost side.

And as a result of that, we are not going to do that in the near term.

I thought the Sanis business, when you acquired that many years ago, had its own route, and a lot more of that was done off of different trucks.

Is that not the case?

It's a mix.

There's a lot of trucks that are mix trucks.

There's trucks that are exclusively facility services.

But it's not clear cut.

Okay, thanks for all the color.

Jason Rodgers with Great Lakes Review.

Thanks for taking the question.

I just want to get an update on your business internationally, as well as growth opportunities there currently.

Thanks.

Our business internationally right now is, I think we've said a little over $40 million in revenue in Document Management in Europe.

And not doing very well.

They have experienced some difficulties in growing the business over there.

In fact, they shrunk a little bit from the third quarter last year.

Profitability has improved somewhat.

And we've been spending resources trying to improve the profitability.

But we have some issues with that.

And I think it was really caused more by the macro issues of Europe in total than by anything else.

As far as other international business, we do sell uniforms to many of our US-based customers, our North American-based customers throughout the world.

We are seeing a pick up in that.

More interest in having us service them.

But again, it's a relatively minor piece of our overall business.

Our focus continues to be in North America.

Between 95% and 98% of our business is North America.

And that's really what our ongoing focus is going to be.

This does conclude our question-and-answer session.

At this time I would like to turn the conference back over to your presenters for any closing comments.

Thank you again for joining us.

Mike and I appreciate everybody's interest.

And we will look forward to speaking with you on our fourth quarter earnings release sometime in mid to late July.

And we'll look forward to talking to you then.

Goodnight.

This does conclude today's conference.

We thank you for your participation.