信達思 (CTAS) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to the Cintas quarterly earnings results conference call.

Today's call is being recorded.

At this time, I 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, as we report our first-quarter results for fiscal 2014.

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 first-quarter revenue of $1.120 billion, which represents growth of 6.6% from last year's first quarter.

Our first quarter had one less workday than last year.

Adjusting for this workday difference, revenue increased by 8.2% over last year's first quarter.

Organic growth, which adjusts for both the impact of acquisitions and the difference in workdays, was 7.1%.

As mentioned in today's press release, the organic growth for each of our four operating segments exceeded 6%.

Mike will give more detail by operating segment in a few minutes.

Our operating income for the first quarter was $140.1 million, which is 12.5% of revenue.

This operating margin is 70 basis points lower than last year's first quarter operating margin of 13.2%.

On our July earnings call, I indicated that comparisons to last year's first quarter would be difficult, due to three items.

First, as I mentioned a few minutes ago, our first quarter had one less workday than last year.

This had a negative impact of approximately 50 basis points on this year's operating margin, due to a number of our large expenses including rental material costs, depreciation and amortization, being determined on a monthly basis instead of a workday basis.

Secondly, this year's first-quarter recycled paper prices were over 20% lower than last year's first quarter recycled paper prices.

This resulted in a negative impact to operating margin of 30 basis points compared to last year's first quarter.

Finally, we began adding route capacity in the second quarter of last fiscal year, so last year's first quarter had none of the expenses associated with that capacity expansion.

All in all, we are pleased with our first-quarter operating margin results, and the solid start to our fiscal 2014-year.

First-quarter net income was $77.8 million, and earnings per diluted share were $0.63.

We were active with our share buyback program and purchased a total of 3 million shares of Cintas stock in the first quarter, and into September.

Since we purchased the shares in the latter part of the first quarter, and in September, the buybacks had no impact on our first-quarter earnings per share.

However, we expect that these buybacks will benefit fiscal year 2014 EPS by about $0.04.

We announced in July that our Board of Directors authorized an additional share repurchase program of $500 million.

As of today, we have available for future share repurchases $15.4 million under the October 2011 Board authorization, and $500 million under the July 2013 Board authorization.

As Scott Farmer indicated in our press release, much uncertainty remains in the US economy.

The unemployment picture from month-to-month remains uneven and inconsistent, a reflection of businesses' uncertainty about future investment plans.

As a result, we are maintaining our fiscal 2014 revenue expectations to be in the range of $4.5 billion to $4.6 billion.

We're updating our EPS expectations to include the impact of the buybacks through today, so that we now expect fiscal 2014 EPS to be in the range of $2.70 to $2.79.

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

Thanks, Bill.

As Bill mentioned, total revenue increased 6.6% from the first quarter of last year, with total Company organic growth being 7.1%.

Total Company gross margin for the first quarter was 41.6%, which is down from last year's first quarter gross margin of 42.4%.

I'll discuss these items in more detail by segment.

Before doing so, let me remind you that there were 65 workdays in our first quarter, which is one less than last year.

In fiscal 2014 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 work day 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.

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

Rental Uniforms and Ancillary Products revenue accounted for 71% of Company revenue in the first quarter, and totaled $792.9 million, which is up 5% compared to last year's first quarter.

Adjusting for the one less workday in this year's first quarter, this segment's revenue grew 6.7%.

Organic growth was also 6.7%.

This was a nice uptick from the 4.8% organic growth rate in the fourth quarter.

National account revenue penetration was strong during the quarter which enhanced the growth.

Additionally, sales rep productivity was strong, and net add-stops showed modest improvement over both last year's first quarter, as well as the fourth quarter.

Our Rental segment gross margin was 42.6% for the quarter, down from 43.3% in last year's first quarter.

Energy-related costs were 10 basis points higher than last year's first quarter.

The remaining decrease compared to last year was due to having one less workday in this year's first quarter, and due to the costs associated with adding route capacity last fiscal year, beginning in the second quarter.

The first quarter gross margin of 42.6% improved from the 42.1% in the fourth quarter, despite having one less workday in the first quarter compared to the fourth quarter.

Energy-related costs were 30 basis points lower than the fourth quarter, and we did start to see improved efficiency in our recently-added routes.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms 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 sale revenue accounted for 10% of Company revenue in the first quarter, and totaled $107.5 million, which represented growth of 7.2% compared to last year's first quarter.

Uniform direct sales gross margin was 27.7% for the first quarter, down from last year's first-quarter gross margin of 29.4%, and the fourth-quarter gross margin of 30.8%.

This decrease is mainly due to a greater mix of national account sales in the first quarter.

National account sales generally have a lower gross margin than hospitality accounts.

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, which accounted for 11% of Company revenue in the first quarter, was $125.9 million.

This represents an increase of 13.6% over last year's first-quarter revenue.

Adjusting for one less workday in the first quarter compared to last year, revenue growth was 15.3%.

Organic growth was 9.2%.

This segment's gross margin was 43.6% in the first quarter, which is up 50 basis points from the 43.1% in last year's first quarter.

Energy-related costs were lower by 20 basis points.

The remaining improvement is due to better leveraging of the infrastructure, as well as an improved mix of high gross margin sales in the first quarter compared to last year's first quarter.

These improvements were partially offset by the one less workday in this year's first quarter.

The gross margin of 43.6% is relatively consistent with the fourth-quarter gross margin of 43.5%.

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

Document Management revenue totaled $94.1 million, which is 10.3% higher than last year's first quarter.

Adjusting for one less workday in this year's first quarter, revenue increased by 12%.

Revenue increased organically by 6.3%, compared to last year.

Average recycled paper prices remained relatively low at about $125 per ton, which is about $45 per ton lower than last year's first-quarter average.

Organic growth, excluding recycled paper revenue, was 10%.

The first-quarter gross margin was 45.9%, which is down from last year's first-quarter gross margin of 49.1% and from the fourth-quarter gross margin of 46.4%, primarily due to the drop in paper prices.

However, we also invested in off-site shredding facilities in the past year to allow additional migration to the more efficient service model of off-site shredding.

Switching to selling and administrative expenses, SG&A was 29.1%, as a percent of revenue in the first quarter, which is down slightly from last year's first-quarter figure of 29.2%.

General and administrative labor was down, as we continue to leverage our cost structure.

This was somewhat offset by a 20 basis point increase in medical expenses.

Our effective tax rate was 37.1% for the quarter, compared to 37.5% last year.

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

We expect the effective tax rate for the full fiscal 2014-year to be 37.3%.

Turning now to the balance sheet, our cash and marketable securities were $283 million at August 31, down $75 million from the $358 million at May 31.

This decrease was primarily due to using $101 million of cash for the share buyback program.

Accounts receivable increased $15.6 million since May 31.

DSOs were just below 40, which was slightly better than last year's first quarter.

New goods inventory and in-service inventory levels at August 31 were $245 million and $500 million, respectively, both up just slightly from May 31 levels.

We continue to be pleased with our ability to manage inventory levels appropriately.

Accrued compensation and related liabilities at August 31 decreased by $35 million from the May 31 balance, mainly due to payment of fiscal year 2013 bonuses and commissions.

Accrued liabilities decreased $37 million compared to May 31, primarily due to payments of accrued bond interest and accrued profit-sharing.

Long-term debt at August 31 was $1.3 billion.

As of August 31, our total debt to EBITDA remains slightly below two times.

CapEx for the first quarter was $37.5 million.

Our CapEx by operating segment was as follows.

$22.2 million in rental, less than $1 million in Uniform Direct Sales, $3.3 million in First Aid, Safety and Fire Protection, and $11.3 million in Document Management.

We expect CapEx for fiscal 2014 to be in the range of $240 million to $260 million.

This concludes our prepared remarks.

And we will now be glad to answer any of your questions.

(Operator Instructions)

Sara Gubins, Bank of America Merrill Lynch.

One quick housekeeping question, could you give us your share count at the quarter end, and maybe today, given the late nature of the repurchases?

The share count at the end of the quarter was 120.778 million.

For the year, we're modeling about 122.5 million shares.

Okay.

You saw a nice acceleration in uniform rental.

And in your prepared remarks, you mentioned seeing some improvement in national accounts.

Could you give us any more color on perhaps what type of national accounts, and if you would expect that acceleration to continue?

Sure.

As you know, Sara, we have quite a few facility services offerings, and we saw some real nice penetration into our national accounts.

In particularly in our cleaning areas, our floor cleaning, our emergency floor cleaning businesses.

Restroom cleaning, and as far will -- do we expect that to continue?

It's a little bit hard to say.

But we certainly believe that our national account customers see the value of those products and services.

But I would say, it's a little too early to tell whether we'll see that throughout the rest of the year.

Great.

And last question, on the fourth quarter call, you mentioned that you'd be adding route capacity during fiscal 2014, although not as much as in fiscal 2013.

Any change to those plans?

No.

I would say going forward, we'll typically add route capacity as necessary.

And we'll generally add some, in certainly in a growing environment and where our new business remains strong.

We'll continue to add routes throughout the year and into the future.

I would say, though, it would not be at the pace that we saw beginning in the second quarter of last year.

We did have a little bit of a catch-up from added capacity, so I wouldn't say we'd be at that same pace for the rest of the year.

Okay.

Thank you.

Joe Box, KeyBanc.

Just a bit of a follow-up on that question, more taking it from the margin angle, how do you think that we should be viewing incremental operating margins over the next couple of quarters?

Obviously, they've been subdued as you've deployed more route capacity.

Do you think that incremental margins should remain subdued?

Or would be reasonable to assume that they could potentially reaccelerate now that you will actually be anniversarying the capacity expansions?

Joe, it will come down to where is the business coming from?

As we've said on the last several quarters, the more of our growth that comes from new accounts, the less improvement we'll see in margins, because we have additional material costs, that tends to fill up the routes a little faster.

And therefore, you just don't get the rapid improvement in the margins.

If on the other hand -- and we haven't seen this yet -- if on the other hand, we were to see a real acceleration of growth of wares in existing accounts, then obviously that would have a much better impact on the margins themselves.

So I can't really tell you that, at this point.

As Mike said, we had a modest improvement in our add-stops, but it wasn't significant.

So we are still in a -- I would say a lackluster employment growth environment.

Okay.

Fair enough.

It looks like your first aid margins were actually the highest first quarter margins that you've had since the downturn.

Just curious, is that a function of the benefits of scale, are you getting a more favorable mix there?

If you could maybe give us any color on what's driving it, and maybe how we should think about the upside from current levels?

I think it's a scale situation.

We have been developing our national footprint in the First Aid and Fire business over the last several years, and the more volume we have in those different markets, some of those markets that are relatively small, the better impact that we have on our margins.

I think it also is attributable to some of the initiatives the management team put in place to make sure that business was generating the profits that we think are appropriate.

And they've done a good job at basically providing additional products and services, offerings to their customers that have enhanced the revenue at each of the existing stops.

So I think that's also been a factor in it.

Great.

Thanks.

And then just one question on the buyback, over the last few years when you've been in the market buying stock, you've done it in a meaningful way.

I realize you obviously don't provide guidance on buybacks, but should we view this as a more one-off opportunistic quarter, or would you say you're putting more emphasis on the buyback?

Well, I would say that it is -- we felt confident, given our Board's directive to proceed with the buyback that we did in this quarter, which I think was significant.

As far as what we do going forward, it is all dependent on what happens with our other opportunities for uses of cash, our confidence in the future, and how the Board directs us to proceed with what they feel is the best way to enhance shareholder value.

Thanks.

Manav Patnaik, Barclays Capital.

Just one first quick question, seems like you did some acquisitions over this quarter.

I know you typically provide the breakout of where you did those in the Q. Could you give us a flavor of the spread this quarter?

They were primarily in the Document Management segment.

I would say about two thirds of it were Document Management and the other third -- 30% or so was in our First Aid and Safety segment.

That's what I figured.

So can you maybe just elaborate a little bit more around just the Document Management side?

Obviously the organic growth there for the last three quarters has been in and around the 6% mark.

Is that a sustainable rate, and what the trends behind that are?

The Document Management segment continues to provide us with a lot of acquisition opportunities, because there are so many businesses doing Document Management around the country.

And now that we have established a pretty decent national footprint, it behooves us to look for other tuck-in acquisitions that we can have in some of these markets, in order to improve the profitability.

So, I think we're going to continue to see opportunities in Document Management going forward.

Because there are just still so many out there.

So at this point in time, we are very disciplined on it.

We're making sure that they generate the returns we want.

But we see this probably will continue for some time.

As Bill mentioned, just a minute ago, how our First Aid, Safety and Fire segments gross margin has benefited from the scale of these -- adding more volume, so these tuck-ins are quite nice to help the leverage and the gross margin, and overall operating margins in those businesses.

As they become bigger, we become more efficient.

Yes.

So I get that on the acquisition front.

I was trying to pin more on the organic side.

So is a lot the organic growth being driven basically from accumulating all these prior acquisitions you guys have done?

And now finally benefiting from the footprint?

Is that what the main driver there is?

Well, we've had pretty good organic growth, absent the fluctuations in paper prices for some time in the segment.

The benefits you get from having more locations available to you gives you opportunities on a national scale to sell a national account.

So from that perspective, it does enhance organic growth.

But I don't want to leave you with the impression that we couldn't grow organically if we didn't make these acquisitions.

We feel very good about that, our ability to do that.

But our goal has always been to become a national player in that business.

Got it.

And just one last thing, in terms of the guidance, obviously you left the revenue unchanged.

So I guess tying into the earlier question on if the organic growth and the rental side can continue the 6.7% range, I guess, that clearly implies there's probably some deceleration towards the back half, but would you say that's just more caution, because like you said, it's a lackluster environment that if these trends continue, obviously there would be upside there?

I think -- I don't want to call its it conservative, but we want to factor in all the uncertainty that we still hear out there in the marketplace.

I think the Fed's action yesterday gave you some indication of their view of the economy.

It's relatively soft.

So I would say, yes, we're being cautious, but I don't think unreasonably so, given all the other things that we continue to see and hear.

We mentioned that there was a modest improvement in net add-stops.

This is not the first time we've seen a nice to uptick in net add-stops, only to be followed by downturn.

And as we've talked about quite often in the last couple years, this employment picture is so bumpy and inconsistent, that we're certainly hesitant to say that there's momentum.

Fair enough.

Thanks a lot.

Andrew Wittmann, Robert W. Baird.

Since we've done some talking about Document, I'm going to do one more, and talk about what's going on in that business.

Obviously, paper prices have been kind of stubbornly low, I guess I would say, here.

It's weighing on the overall profitability of that business, at least to the income statement.

Can you talk about reaction in the marketplace on the service levels, and the pricing for service levels?

Are we starting to see that go up, in other words, to offset these paper price challenges?

And just talk about other initiatives that you might have to improve the profitability there outside of paper prices?

You certainly have seen I would say a stabilization of service pricing, because some of these people just were trying to survive in the paper price itself, and they obviously cannot do that with the cost of servicing.

So to the extent that there's an upside to our paper prices, it's more rational service pricing.

I think we've got to keep in mind, as paper price is driven by a lot of different factors, from currency levels, from foreign demand, et cetera.

We're going to see fluctuations from quarter-to-quarter, but I think the general trend is that what we saw in the first quarter was probably a low for the year.

We expect there to be a more slight increase as we go through the year, more comparable on average to what we saw last fiscal year.

And Andy, as it relates to your question about improved profitability, one of the comments I had made was that we've invested -- we continue to invest in the business, and we've invested in some off-site shredding facilities.

And that allows us to replace the very expensive large shredding trucks with much smaller box trucks.

We use less fuel because of that.

We're able to see more customers, because we're not shredding on-site.

And so we get a lot of leverage and efficiency, once we start to fill those off-site shredding facilities up.

Today, we've got excess capacity in those shredding facilities, because as we talked, we've just created a number of those in the last year or so.

So we've got certainly a plan to create more efficiency and become more profitable in the business.

Got you.

Can you help us get our arms around that trade-off from on-site to off-site shredding, what the economics look like?

The cost of a truck versus building a facility, to help us understand what that could be?

I wouldn't say I really don't want to get into the details of that, because some of it's a strategic thing on how we are structuring these things.

What we're paying for them.

So suffice it to say that you can get more volume on a per capital dollar basis through an off-site shredding, than you certainly can with an on-site shredding.

Fair enough.

Jumping over to the core Rental segment, then can you talk a little bit about customer retention?

The sales, hiring pace, and potentially the amount of new business that you are seeing in the market today?

Customer retention remains very good.

We're at historically pretty high levels, and we feel very good about that customer retention.

Sales productivity is very good.

New business continues to be the fuel for the growth.

And I would say, I don't see that necessarily stopping in the next several quarters.

We feel very good about the execution in that area.

And as far as continued growth in that business, we certainly would love to see some better employment, some add-stops pick up, but we're not ready to certainly say that we've seen a trend from that employment.

Got it.

So your sales force is flattish in terms of your headcount there?

Well, we strategically will look for opportunities to add reps when we can.

When it makes sense if we have capacity that we want to fill up in certain markets.

If we have additional prospects that we identify in certain markets.

So we're generally adding sales reps, as we see opportunities.

And that will continue to happen throughout the year.

We've not made any significant investments, like we did about three years ago.

But we'll continue to look for opportunities, where it makes sense.

Last one for now was, can you describe the characteristics of the new business wins?

Is it still roughly 50-50 split between a [non-programmer] versus a market share gain?

I would say it's a little bit more non-programmer, probably 60%.

We don't measure that every quarter, but the last time we looked at it, of course in conjunction with the last fiscal year, basically looking -- talking to our salespeople anecdotally, that seems to still be the case, that it's a little more coming from the non-programmer.

Competitive wins, sure, we're still there, we're still getting some competitive wins.

But again the preponderance -- let's say the majority of the new business is non-programmers.

Thank you.

Scott Schneeberger, Oppenheimer.

Following up on that last question within rental, you've touched a bit on obviously new business, new programmers and then add-stops.

Could you talk to pace of lost business?

I imagine that's stabilized nicely and perhaps an improvement for you in the overall picture.

And then also taking a step further into pricing, and what type of environment you're seeing out there?

Thank you.

Retention, like I said is still pretty strong.

And we didn't see any change in trends.

Our retention has been pretty good for the last couple years, and has gradually improved, but we didn't see any difference or change in trend in the quarter.

From a pricing standpoint, it continues to be very aggressive.

And, particularly when it comes to a customer renewal, we're still seeing very aggressive competition, and so pricing is competitive.

We're in a relatively low inflationary environment, and as it relates to us going to our customers, and looking for price increases, it's generally a customer by customer conversation, but it's one that's not as easy to do in a low inflationary environment, and where there's very competitive prices at renewal time.

So it's been a difficult environment for price increases.

I wouldn't say that it's changed much from the last several quarters.

But it continues to be very competitive.

Okay.

Thanks.

On the cost side, obviously nothing like what you saw 2, 2.5 years ago.

Cotton prices starting to swing from down year-over-year to up year-over-year.

Could you just address that?

It doesn't look like that's going to be major issue, and you've certainly operated well through it last time we saw a spike in those.

But could you readdress it?

Also, any initiatives with regard to synthetics or any changes?

Thanks.

Well, the cotton price, the headlines are the spot prices and they'll fluctuate just like all these other commodities do on a spot basis, based on weather forecasts and other things.

Our global supply chain group is very cautious on ensuring that they have an adequate supply of low-cost products, and I am not too concerned right now by this recent increase.

Something we'll keep our eye on, but it certainly is nothing that I think is going to cause us any big difficulties going forward.

Great.

Thanks, Bill.

And one more, last I noticed, last sentence of the press release, discussion about guidance including the impact of the Affordable Care Act.

Since the last time we heard from you, any changes in assumptions, expectation strategy on how you may approach that?

Still a lot up in the air, but just curious on an update?

Thanks.

I don't think anything has changed from two months ago, when we talked about this initially.

We put in our guidance when we talked about our fourth quarter, that we expected a 10 to 30 basis point increase in medical costs due to the Affordable Care Act.

I have no reason to say that's any different today.

I think there's still a lot of uncertainty, a lot of things are still up in the air as to what is going to be put in, how it's going to be put in.

So, as far as I'm concerned, really nothing has changed in the last couple months.

All I can kind of be confident in saying, it's going to be more expensive than it had been.

And I think we have reflected that appropriately in the guidance.

Okay.

Thanks.

Appreciate it.

Nate Brochmann, William Blair.

I wanted to talk a little bit around those last couple questions, but when we talk about retention, and we talk about pricing and the ability to bring on some new customers, whether it's a non-programmer in a competitive bid, how important at this point is your diversity of services in terms of bringing that immediately to the table as an additional offering?

And something that maybe not all of the other competitors offer?

Is that helping you get in the door a little bit faster and winning a little bit more business, or creating that additional retention above and beyond what you might have historically seen with maybe just one or two products?

Well, certainly I think -- and we've proven to ourselves that adding additional products and services to a customer improves the retention of that customer, because the more things you do for the customer, the less likely it is you're going to lose that customer, so I don't think there's any question about that.

I think the variety of offerings that we have gives us more opportunities for new business, for different types of customers.

So we don't always lead with uniform rental.

Depending on what the customers' needs are, we may get in their initially on tile and carpet cleaning, or document shredding, or first aid and safety.

And then I think once they begin to know us and see us, then we share with them opportunities of other things we could do for them.

So I think the fact that we have so many different things that we do, probably gives us a broader spectrum on which to go after new business.

And is that still being identified by route person, or how is that changing if you're looking at more of an enterprise, what's best for the customer and what's best for Cintas to lead with?

How are you able to identify that via the fact that -- I know there's different sales forces within each different segment?

We stratified our sales force to handle different sized customers, different business units, so I think that's one way we do it.

We have a fairly active marketing group that is constantly working with the sales organization, identifying prospects, identifying opportunities for all of our different service offerings or sales offerings.

So with a sales force as large as we have, with the variety of different businesses we have, we've got a marketing committee for each of the businesses, which works and meets every six weeks, I think, to basically look at ways to penetrate other types of industry segments or other types of customers, so it's just a collaborative effort, Nate, that we're constantly looking for opportunities.

Okay.

That sounds great.

It's just -- at the end of the day I think you're seeing some really nice trends.

Particularly in those other services, as alluded to, obviously some decent strengths, part of that is scale and maturity.

But part of that is I feel like the broader sales efforts probably making a few more inroads than it used to.

Yes.

Well said.

I totally agree with that.

And then one last thing and I know you talked about this before, and people have asked you about it before, and I think it's probably still early and there's other macro things that mask this, but I think the more we see and every once in a while we hear about another plant opening, in terms of quote-unquote this kind of near shoring on the heavy manufacturing type theme, are you seeing any impact at all from that, in terms of your somewhat industrial base of customers?

Have you won any accounts that feel that's been a benefit?

And if so do you think that there's anything to be said for whether that helps in terms of acceleration or not?

I'm sure there are cases where it's helped.

I could not give you any real examples.

Obviously, if you open a manufacturing plant anywhere in the US, that previously had not been there, that's not only going to provide an opportunity for that particular customer, but all of the businesses that serve that new facility.

And so I think it's a more gradual type thing that certainly helps the overall economy continue to grow.

So we've seen growth in the economy, albeit more modest than we all would like, but we've seen growth.

We've seen growth in our business, and I think certainly that has been a factor to the extent that there's been creations of new businesses within a particular area.

Unfortunately, you also have continued closures and reductions of elimination of businesses, as we go through there, so we haven't seen this rapid growth, but -- so I think it's there.

It's just probably just one element of why we're seeing some modest growth.

Okay.

Fair enough.

Thanks a lot.

I appreciate it.

Sean Kim, RBC Capital Markets.

My first question is regarding CapEx.

I think your CapEx was less than $40 million in the quarter.

And yet you're still guiding to $240 million to $260 million for the full fiscal year.

So it seems that is an increase over the rest of the year.

And I'm trying to understand, you said the pace of route capacity additions were probably slower -- and yet your CapEx I think is going to go up.

I'm trying to understand, what's going on there?

Probably the biggest reason, Sean, is as we talked about the CapEx guidance that we gave in July, which we've retained the same number, we indicated that one of the reasons for the relatively good size increase in CapEx and expectations in 2014 versus 2013 was the fact that we needed to build some rental capacity, some new plants, and we had some initiatives on our ERP computer system.

Those two items take a little bit longer to work through the system.

Decisions have to be made, we have to find land, we have to contract for the design of the building.

So I would say that we would most likely see our CapEx higher as we go through the year, under the presumption that we move forward with some of these new plants, and with some of the ERP software initiatives that we thought we were going to do back in July.

So we continue to evaluate that as of right now.

I have no reason to believe we're not going to do those things, and that's why we have retained the CapEx guidance where it's at.

Okay.

Thanks.

One last question, in terms of gross margins in the Rental Uniforms segment, do you think we've hit bottom -- it's gone down for the past four quarters or so.

And now we're beginning to anniversary the route capacity additions.

So do think still we've hit bottom there, we're going to see some leverage there going forward?

Well, I think we will, as our routes continue to get more efficient, we think that's there will be some improvements there, but as Bill mentioned a little while ago, it really is hard to tell based on until we know where the revenue growth is going to continue to come from.

If we were to see employment really pick up, and our customers started hiring, we would really see some nice leveraging of those routes, because we're adding revenue to the existing stops.

If we continue to see the growth be driven by new accounts, then we may continue to add routes, and at some point, as Bill also said, we'll add some plant capacity.

And so it's dependent on where the revenue comes from.

But I would expect that our routes that we added last year will continue to get a little bit more efficient through this year.

Great.

Thank you both.

Andrew Steinerman, JPMorgan.

This is Molly McGarrett for Andrew.

I just have one brief one.

Can you give me a view on long-term targets, what you're thinking for top line growth and operating margins relative to prior peaks as you drain through the cycle, and what will drive that in terms of length of the cycle or penetration rate, what kind of variables do you think will drive that?

Well, Molly, as we have indicated, on a number of occasions publicly, probably in previous calls, the top line growth rate that we're going to be able to achieve is going to be dependent to a large extent on the robustness of the economy.

So let's put it this way.

If we continue to see an economy growing as it has been for the last year or so, the growth rates that you're seeing today are probably what you're going to continue to see.

Unless we see an acceleration of employment, we're not going to see an acceleration of our growth rates organically.

With that said, I think as we've talked a lot about on this call, we also have initiatives underway to improve the profitability of our business.

We're getting to scale on some of the newer businesses.

We've done some things I think in the rental side that will continue to improve the profitability there.

So I feel good about growth.

I just would say that I'm not going to really believe that we can do something that's not possible organically, unless the economy cooperates a little bit more robustly.

Great.

Thank you.

Gregory Halter, Great Lakes Review.

I just wanted to be clear on what the rental business's organic revenue growth rate was, unadjusted for the one less day.

We don't really calculate it that way, Greg.

Would it be the 5.0%?

That was the total growth for the quarter.

Unadjusted.

Yes.

(multiple speakers) And there was -- actually, there were no there were no acquisitions so basically, 5% adjusting for the workday, 6.7% because there were no acquisitions.

Right.

Okay.

That sounds good.

And in your guidance, I know you mentioned, I believe you're modeling 122.5 million shares for the year.

And in the guidance on the EPS, does that assume that there won't be any further share repurchases, or they're not being counted in there?

That assumes that there will not be future share repurchases.

Now, keep in mind too, when Mike gave the outstanding shares you've got to adjust for share equivalents that are sitting out there in the form of invested restricted stock and stock options, so that's one reason why the number's higher.

I just want to be sure everybody understands that.

But our assumption is that and that's included in our guidance too, is that there would be no further share buybacks.

Because we just don't have any basis on which to say what they would be.

Right.

There's no 10b5-1 plan or anything like that in place?

Well, I didn't say that.

But --

Okay.

One last one for you.

Rental business, I wonder if you could comment on how things like the fire resistant clothing and Carhartt and womenswear are doing?

Thanks.

Fire resistant clothing continues to be a very nice business for us.

This is where I am very enthusiastic about government regulation, because it is forcing a lot of customers to basically provide these type of garments to their employees, and as a result of that, being the largest FRC provider in the world, we're doing well there.

That, coupled with the fact that the energy sector is a big user of that, and continues to grow nicely in the US, obviously has been one of the reasons that we've seen some growth there.

Carhartt continues to be a star within the Company.

There is a unique set of workers and people in this country that like that product, and we're the only one who can offer that as a rental product.

And it has certainly been beneficial to us and continues to do so.

Less so than the FRC, but it certainly is a benefit.

Womenswear has picked up a little bit.

I would say I'm not as enthusiastic about the growth there yet.

I think we need to continue to develop the appropriate type of garments that are appealing to women in different types of jobs on a rental program.

And so I would say, it's better than it was but it could be a lot better, and we're continuing to look at different things.

Thank you.

Andrew Wittmann, Robert W. Baird.

There's been a lot of talk about penetrating the healthcare market, I think, in the industry broadly.

Can you talk about some of your services that you're offering to the healthcare industry, some of the initiatives that you have in place?

It would be really helpful giving us some sort of size about the level of revenue that you're generating today from the healthcare industry, and what your outlook is on for the growth rate there?

I certainly think healthcare opportunities will continue to be one of the reasons why we will grow, and the penetration rate is still very low.

The focus that we have in healthcare from a rental side is more in the facility services, and providing products that can enable a healthcare institution to provide the sanitation they need, to avoid the in-house problems that they have with infectious diseases, and that sort of thing.

So we've worked with healthcare come up with some products that can help keep the place cleaner.

And on a rental basis, that provides cost-saving opportunities to the healthcare institution, and we're continuing to do that.

We've made some inroads, but it's still small.

We're not really focusing on the garments of the nurses and the healthcare providers that you would see -- that you would just generally see, but rather looking at scrub rentals and the facility services type products.

Now of course, healthcare is a big industry for us in the Document Management business and continues to be a driver in the growth of that business because of the privacy protection laws that all healthcare institutions need to worry about.

Can you help us by giving us a general size of that business?

No.

I don't have that information available, and if I did, Andy, I probably wouldn't be able to share it with you.

I thought I'd try.

Thanks.

And that concludes our question-and-answer session.

I'd like to turn the conference back over to Bill Gale for closing remarks.

I want to thank everyone again for joining us this evening.

We are very happy with these results, given the environment we're operating in.

And we feel good about this year, so I thank you and we'll look forward to speaking with you in December right before the holidays, when we announce our second-quarter earnings.

Thank you, everyone.

That does conclude today's conference.

We thank you for your participation.