信達思 (CTAS) 2014 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, sir.

Thank you for joining us this evening as we report our second-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 second-quarter revenue of $1.144 billion, which represents growth of 7.9% from last year's second quarter.

The number of workdays in both this year's and last year's second quarters was 65.

Organic growth, which adjusts for the impact of acquisitions, was 7.1%, the same organic growth we achieved in our first quarter.

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

Our operating income for the second quarter was $153 million, which is 13.4% of revenue.

This operating margin is 30 basis points higher than last year's second-quarter operating margin of 13.1%.

It should be noted that last year's second quarter included an $8.5 million gain on the sale of an investment, and a $1.6 million write-off of a garment processing system used in one of our rental locations.

When adjusting for these two items, our operating margin actually improved by almost 1 full percentage point.

We are also very pleased with our results so far in fiscal 2014.

Second-quarter net income was $84.9 million, and earnings per diluted share were $0.70.

It should be noted that our revenues and earnings per share were record quarterly amounts for Cintas, and I wish to congratulate all of our Cintas employees, who we call partners, for this achievement.

We also just recently paid our annual dividend of $0.77 per share, which was a 20.3% increase over last year's dividend, and was the 31st consecutive year in which we raised our dividend.

As Scott Farmer indicated in our press release, based on our second-quarter results and our view of the US economic climate, we are updating our fiscal 2014 guidance, with revenue in the range of $4.525 billion to $4.575 billion, and EPS in the range of $2.73 to $2.79.

This guidance assumes no deterioration in the US economy, and does not consider any future share buybacks.

In July, when we provided our initial guidance, we gave our expectation that fiscal 2014 medical expense would be higher than fiscal 2013 by 10 to 30 basis points due to the effects of the Affordable Care Act, and that this impact would be seen in the second half of the fiscal year.

While there remains a great amount of uncertainty about the impact of this program in the future, we still expect it to increase our medical expense in the second half of this fiscal year.

However, the impact will likely be at the lower end of the 10 to 30 basis point range provided in July.

This expectation is included in our updated guidance.

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

Thanks, Bill.

As Bill mentioned, total revenue increased 7.9% from the second quarter of last year, with total Company organic growth being 7.1%.

Total Company gross margin for the second quarter was 41.7%, which is an improvement from last 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 65 workdays in our second quarter, which was the same as last year.

As we look ahead to the remainder of the fiscal year, our third quarter will have 65 workdays, whereas last year's third quarter had 64, so we will have one additional day.

Our fourth quarter will also have 65 workdays, whereas last year's fourth quarter had 66 work days, so we will have one less workday in the fourth quarter.

For the full fiscal year, we will have 260 workdays, which is one less than last year's total.

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 second quarter, and totaled $804.3 million, which is up 6.4% compared to last year's second quarter.

Organic growth was also 6.4%.

Sales rep new business and productivity continued to be strong, and similar to the first quarter, our national account revenue penetration was very good.

Our rental segment gross margin was 42.9% for the second quarter, an increase from 41.9% in last year's second quarter.

Energy-related costs were comparable to last year's second quarter.

As Bill mentioned, we wrote off a garment processing system during last year's second quarter.

Excluding this impact, rental gross margin improved by 80 basis points.

As we've discussed on previous calls, we began to increase our route capacity in last year's second quarter, and we have now lapped that initial investment.

The efficiency of these routes has improved throughout the past 12 months and has helped to improve rental's gross margin.

In addition, we continue to see improved leveraging of our plant infrastructure.

The rental segment's second-quarter gross margin of 42.9% was also an improvement from the 42.6% in the first quarter.

Energy-related costs were about 10 basis points lower than the first quarter, but improved route efficiency and plant infrastructure leverage also contributed to the improvement.

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 sales revenue accounted for 11% of Company revenue in the second quarter, and totaled $121.9 million, which represented sales growth of 10.6% compared to last year's second quarter.

We've been very pleased with the uniform direct sales revenue this fiscal year, which is up 9% for the six months ended November 30.

In fact, uniform direct sales revenue is up 11.5% for the trailing 12 months.

Having said that, the nature of this business is that the revenue can be quite choppy based on the timing of large national account program rollouts.

As we've discussed on previous calls, we had several very large national account rollouts during the second half of last fiscal year, which will not repeat this year.

As a result, we expect uniform direct sale revenue for the second half of fiscal 2014 to be down 5% to 10% compared to last year's second half.

Uniform direct sales gross margin was 28.8% for the second quarter, up from last year's second-quarter gross margin of 27.4%, and the first-quarter gross margin of 27.7%.

This increase is mainly due to a greater mix of hospitality account sales in the second quarter, and better leveraging of our distribution network infrastructure.

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 second quarter, was $124.6 million.

This represents an increase of 11.7% over last year's second-quarter revenue.

Organic growth was 8.8%.

This segment's gross margin was 43.4% in the second quarter, which is up 100 basis points from the 42.4% in last year's second quarter.

Energy-related costs were lower by 20 basis points.

The remaining improvement is due to better leveraging of the infrastructure, particularly at the warehouse level.

The gross margin of 43.4% is relatively consistent with the first-quarter gross margin of 43.6%.

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 totaled $93 million, which is 12.2% higher than last year's second quarter.

Revenue increased organically by 6.9% compared to last year.

Average recycled paper prices remained at about $125 per ton, which is down about 17% from last year's second-quarter average.

Organic growth, excluding recycled paper revenue, was 9.4%.

The second-quarter gross margin was 45.7%, which is an increase from last year's second-quarter gross margin of 45.4%.

Energy-related costs were 30 basis points lower than last year.

The lower recycled paper prices had a negative impact of $1.9 million on document management's gross margin.

Using the same recycled paper price as last year, the second-quarter gross margin would have improved by about 140 basis points.

This improvement is due to our continued migration from on-site to off-site shredding, and better performance in both our North American and European storage businesses.

Switching to selling and administrative expenses, SG&A was 28.3% as a percentage of revenue in the second quarter, which is up from last year's second-quarter figure of 27.6%.

However, as Bill mentioned, last year's second-quarter SG&A included an $8.5 million gain from the sale of stock in an investment.

Adjusting for this one-time item, last year's second-quarter SG&A percentage would have been 28.4% compared to this year's 28.3%.

Our effective tax rate was 37.9% for the quarter compared to 36.5% last year.

Last year, our second-quarter effective tax rate reflected the favorable impact of a change to certain tax regulations.

We had no similar items in this year's second quarter.

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 $313 million at November 30, an increase of $30 million from the $283 million at August 31.

Accounts receivable increased $8.9 million since August 31.

DSOs were slightly below 40, which was a nice improvement from the 43 in last year's second quarter.

New goods inventory and in-service inventory levels at November 30 were $249 million and $509 million, respectively, both up slightly from August 31 levels.

Accrued liabilities at November 30 increased from the August 31 balance, primarily due to the accrual of our annual dividend that was paid on December 11.

Long-term debt at November 30 was $1.3 billion, comparable to the amount at August 31.

Net cash provided by operating activities for the second quarter was $140 million, an $8 million improvement over last year's second-quarter.

And CapEx for the second quarter was $39.3 million.

Our CapEx by operating segment was as follows: $24.4 million in rental; less than $1 million in uniform direct sales; $4.4 million in first aid, safety, and fire protection; and $10.1 million in document management.

We expect CapEx for fiscal 2014 to be in the range of $225 million to $250 million.

This concludes our prepared remarks, and we will now be glad to answer any of your questions.

(Operator Instructions).

Andrew Steinerman, JPMorgan.

Hello there.

Could you give us a sense of how you see organic growth proceeding through the balance of the year, particularly looking at year-over-year comps in the rental business?

Andrew, our expectation is that we should see mid-single-digit organic growth in the rental business, again assuming that the economy stays in the mode that it's in.

We saw a decent jobs report in the month of November.

However, it was choppy relative to the prior months.

So our expectation is we're going to continue to see that choppiness.

And therefore, as a result of that, we expect that most of our growth is going to come from new business, which is what has been happening so far this year; and, therefore, we're targeting somewhere in that mid-single-digit area.

Yes, I would also love, for you, Bill, to make a comment about add-stops.

When I look at the end markets for uniforms and look within the labor report, it just seems like we've moved past the bottom, and there's been a little bit of acceleration in the end markets that you guys serve the most since the summertime.

You characterize the Fall in the same way?

I'm not as bullish on it as you are, Andrew.

I looked at it.

Mike and I have been looking at it.

We study it every month.

And I would agree with you.

November looked good, as I just said earlier; but October was poor.

There just is no consistency to our -- as we look at it.

So I would hope that it might pick up and stay consistent, but right now I have to be honest and say I'm not confident at that level that it will continue.

We saw -- if you look at our add-stops, we've had some choppiness.

We've talked about it being up one quarter and then down another quarter.

And if you look at our add-stop in the second quarter, it was slightly down compared to the first quarter, and to the second quarter last year.

So we sure haven't seen any robust improvement in hiring among our existing customers yet.

Okay.

Makes total sense.

I appreciate the comments.

Thank you.

Manav Patnaik, Barclays.

Hello, this is actually Greg calling on for Manav.

And going off of what Andrew said, could you give a little bit of your thoughts on which verticals you are starting to see improvement in, just comparing the different verticals, and where the hiring environment has been picking up a little bit versus some of the others?

I would say that we continue to see reasonable strength in the energy sector, and we're seeing building strength in the healthcare arena.

Okay, thanks.

And just one more on the rollout of the ERP system, maybe just a little update there on how the rollout has worked for first aid and document management, and when you think you're going to move on to some of the next stages?

We are about 60% to 70% through the rollout in document management and the first aid business.

It has had a few bumps in the road but we have overcome them.

We have had some technical issues that we've been working very closely with our ERP provider to rectify, and I think we've gotten over that now.

So our expectation is we will complete that rollout in those two businesses sometime in mid-calendar-2014.

At that point in time, we will be most likely embarking upon a design effort for one or two of our other businesses.

We're going to be making that decision here over the next several months.

Great, thank you.

Sara Gubins, Bank of America Merrill Lynch.

Hello, thank you.

You saw nice gross margin expansion, particularly on an underlying basis, in rental uniforms.

And I'm wondering if you think that 80 basis point year-over-year expansion is a reasonable run rate for the second half of the year.

Well, we do believe that we'll continue to see some expansion.

As we say often, Sara, a lot depends on where the revenue comes from.

And if new business continues to be the driver, the expansion will be a little more muted.

If we do see a continued trend like we saw in November employment, and we have our customers hiring, we may see some better expansion.

Built into our guidance, though, I would say probably something similar to the second-quarter levels.

Okay.

And how should we think about longer-term gross margin potential in that segment?

Well, we've talked a little bit -- when we've talked earlier in the year about our CapEx expectations, we did discuss that in some cases, in some markets, we're running out of plant capacity.

So we will probably have to invest maybe at the end of this fiscal year, or into next fiscal year.

So there may be some investment that we have to do to add some capacity.

But generally speaking, we expect continued margin improvement over time.

Okay.

And then last quarter you talked about of your new business wins, about 60% were no-programmers and 40% you thought were market share.

And I know that you don't look at that every quarter, but I'm just wondering if there's any reason as you look out at the marketplace to think that that's changing.

No, I would say there's no reason to think that's changing.

That's been pretty consistent as we've come out of the recession, and I wouldn't expect that that would change much.

Great.

And then just last question, so, nice to hear that you think your healthcare increases will be at the low end of prior expectations; I'm just wondering why.

What's driving those lower?

Well, when we thought about how this would impact us, there were a couple of different things.

First, there is something called a transitional reinsurance fee, which we know will happen.

There are other administrative costs and expenses that will happen.

The other thing that we expected to happen was that more people would come on to our insurance plan, both for the higher dependent ages because of the individual mandate, and also because we thought other companies may be eliminating their coverage, or at least making it less beneficial.

And while we did see an increase in the number of enrollments -- more than normal -- it was less than we had originally feared.

All right, thank you.

Yes, so we think it's going to be the cost of the administration, the reinsurance, and more participants.

Okay.

Hamzah Mazari, Credit Suisse.

Good afternoon, thank you.

Just a question on the national account business.

You have talked about that being pretty competitive.

Could you give us a sense of how much of that is related to just the economy being choppy, versus potential overcapacity in the industry?

I'm not quite sure I understand your question, Hamzah.

I'm just asking on the national account business, could you give us an update of how competitive pricing is in that business?

Well, yes.

It remains very competitive.

We believe that part of the reason that our national account business continues to be strong is our relatively broad product offering that we have, especially compared to some of our other industry participants.

So when we go to some of our national account customers, we are able to offer more than just one particular product offering, be it like a uniform program or an entrance mat program or whatever.

So I think as a result of having a number of different things, we're able to be more successful with some of these national account customers, and bundle different products and services for them.

And that enables us to probably have greater penetration than others.

Great, thank you.

That's helpful.

And just a follow-up, if you could give us a sense of what your expectations are on building out capacity going forward.

Well, we certainly -- as Mike mentioned a few minutes ago, we certainly are seeing some pressure points in some of our geographic markets, for need for some capacity in the rental business.

And as a result of that, we have several projects underway at various stages that anticipate the building of additional capacity.

It takes a while to do that, in that you have got to find the right piece of land, negotiate for that, and then obviously design and build out the facility.

So, based on where we're at today versus where we thought we would be, I would tell you that we're a little behind our original timetable on building some of that capacity.

It certainly hasn't caused us to not be able to grow in a market, but we've been able to utilize what we have.

But as a result of that, I would expect our CapEx to pick up in the latter part of this year and maybe bleed over into 2015.

That is certainly going to require more cash flow to build the plants; but also, as Mike said, could cause a little bit of short-term, less robust improvement in gross margin as result of that.

Okay, great.

I appreciate it.

Thank you.

Joe Box, KeyBanc.

Hello.

Good evening, guys.

Just a quick clarification on that.

So it looks like you're taking down your CapEx guidance by about $10 million to $15 million or so.

Is that all based on the new plants that you're constructing?

And is it basically all just push out into the next year?

Yes, pretty much so.

Yes, Joe.

Okay, perfect.

And then just switching over to the first aid side.

The last couple of quarters, you guys have put up pretty good margin performance there, and it sounded like you were starting to get some scale benefits.

I guess it seems to me like you might have taken a little bit of a step back this quarter on an easy comp.

Was there something specific there within first aid?

Well, the gross margin improved.

And you're talking about sequentially or year-over-year, Joe?

Year-over-year on the operating margin side.

Yes.

So in the gross margin, we improved by about 100 basis points, and I talked a little bit about that in my prepared remarks.

On an SG&A basis, there is some reflection of the investment in SAP.

And keep in mind, that's a pretty large endeavor in both document management and first aid and safety.

And you do see a little bit of an increase in the SG&A this quarter, year-over-year, for both of those businesses.

And while we certainly expect benefit from that system, it is not a 1- to 2-year payback, so that the blip that you're seeing in SG&A that falls down to that operating margin.

Is that something that we should expect to see then flow through over the next several quarters?

Or is that quote-unquote a blip?

Well, I think you'll still see that level of investment as we implement the project.

So, while we're in the implementation phase, we do have some groups of people going around and training our new users, and so there are some additional costs.

That will likely, as Bill said, run through the rest of this fiscal year.

And then we should be almost fully implemented by mid-calendar-2014.

So I wouldn't expect that incremental cost to continue, but certainly there's the cost of SAP that will continue.

Having said that, we expect to get benefit going forward, and that benefit will come through better information, better price reviews.

And that should come; it's just not a quick turn.

Right.

Thanks for the color there, Mike.

Just a quick question on pricing in your legacy uniform rental business.

I know pricing is still probably very competitive, but we are starting to get some chatter that it could be loosening up for non-national accounts.

Is that something that you've seen, or is it still a bit premature?

You know, Joe, we have so many operations around the country, and different customers we're going to.

I hear, anecdotally, lots of different things.

I cannot confirm for you that I've heard that take place.

I hear in some markets, it's -- oh, this is more aggressive, we've seen it.

Other markets -- yes, it's firming up.

So, from what I'm hearing, I can't confirm that that's happening based on our experience.

Fair enough.

Thanks, guys.

Andrew Wittmann, Baird.

Hello, guys.

Good evening.

So just maybe a couple of bookkeeping things here.

Maybe this is in the commentary, but can you comment on the number of shares repurchased and maybe the average price?

I get about 961,000 shares; about $59 per share.

But can you give us the real numbers?

We purchased about 1.2 million shares during the quarter.

We talked about most of those purchases were prior to our first-quarter earnings release.

We have about $505 million remaining on the authorization.

We bought about 3.2 million shares for the year.

Andy, I don't have in front of me the average price, but that will show up in our Q.

Yes, okay.

And then you can you, Mike, maybe a little bit of detail inside -- Mike, I think I ask this question every quarter -- but can you give us some color inside the rental segment between core uniform wearing versus the facility service?

Are you seeing any differentiation in the growth rates between those business -- maybe some color there?

We're seeing real good growth in all of the pieces within the rental business.

And while we don't disclose the different pieces individually, I will say that garments are growing nicely.

And the different businesses within the facilities services -- the dust; the chemicals; hygiene products and services; our deep clean business -- all of those businesses are growing fairly well, and there's not any real overweighting of any of them.

Got it.

Thanks.

Just in terms of -- so a year ago, we've now lapped the investments in human capital that you made, in terms of routes and maybe some more salespeople.

Can you just talk about where you are in that curve right now?

Are we still folding those and ramping those new routes up?

Or are we at the point where, in addition to plant capacity, we need some more route capacity?

Can you just talk about where we are in that today versus a year ago, and if there's an expectation for growth there?

We always are going to be adding routes.

So as long as we grow, we're going to be adding routes.

But we don't anticipate, at this point, adding routes to the same degree we did a year ago.

So the fact that we have gone a year now from the unusual surge in number of routes has certainly -- we're starting to feel the positive impact of that as those routes fill up.

And I think that was part of the reason you saw some improvement in the margin in the rental business.

Right now, Andy, unless there is a major increase in the revenue growth rate, I think route capacity will be added at kind of a nominal pace going forward.

That's very helpful.

Thank you.

Maybe one last question here on the Affordable Care Act.

With some of the provisions changed and others delayed, we've got the outlook for this fiscal year.

Is there anything that's changing about your out-year outlook from the experience that you've had so far enrolling people for calendar 2014 that makes you think that maybe the longer-term effect in your fiscal 2015 is maybe greater than, or less than, your previous expectation?

I guess I'm somewhat encouraged by the fact that we didn't have as many participants coming on to the program that we had feared might happen.

But there is so much yet to be played out on this whole thing, with some of the delays in parts of the law, and that certain businesses do not have to necessarily add or offer the service.

I think we've got to wait and see.

I just don't think we have enough information yet to know what the full effect of this thing is going to be; and, therefore, while we are set now for our enrollment for 2014, we really don't know what's going to happen to the cost structure -- because we're self-insured -- and what ends up happening from the standpoint of the cost per head.

So I think we've just got to wait and see, Andy.

That's a fair answer.

Thanks, guys.

John Healy, Northcoast Research.

Thank you.

Guys, I wanted to ask a little bit about the fire resistant garments segment.

There's been a little discussion in the industry that maybe that market is showing little plateauing, or just baselining of the growth rates.

And I was curious to get your thoughts on what's happening in that end market from a demand perspective, and may be some color in terms of what that might represent as a percentage of the uniform business today.

I think there's been a little bit of a slowdown in that business, John, only because we're comparing it to that robust growth that we were seeing as energy was just booming throughout the country here a couple of years ago, and through most of last year.

But given the fact that we have seen a plateauing of that, obviously our new business is not as big as it was.

However, we are still the largest provider in that market.

I don't think there's been really a reduction in the number of employees in the energy sector that are required to wear these garments.

We really haven't seen any big competitive situation.

It's just that you're not seeing as many oilfield workers going forward.

But our FRC business is still one of the highlights of our rental business, and continues to be.

Got you.

And I wanted to ask you a big-picture question, Bill.

You are always good at giving us a read on how you feel about the economy.

And just as we move into the calendar year, you've had a great last six months in the business, and your growth rates organically show that there's a little bit of moderation.

But I guess if you do the postmortem on calendar of 2013, did the business and the economy maybe come out better than you might have thought?

And then as you look to calendar 2014, are you feeling better about where we're at versus six months ago?

I just appreciate any color or perspective that you could provide there.

Well, I would say calendar 2013 certainly turned out to be modestly better than what I had originally expected.

And I think we've seen similar results in many businesses.

So I think many businesses were able to adapt to a slow growth environment and have done quite well in it.

As we look into 2014, we kind of see -- right now, I think our expectation is more of the same.

We don't see any catalyst out there to really improve growth substantially, nor do we see anything on the horizon that would throw us yet into a recession.

So right now, I guess we're thinking it should be comparable to what we saw this year.

With that said, I think people have to keep in mind, though, it has not been a consistent year or -- month-over-month improvement.

There has been some real choppiness that we've seen throughout 2013, and I kind of think that maybe is what we'll see in 2014.

But when you step back and look at it, you'll say, oh, okay.

That wasn't a bad result, given what pressures continue to exist out there in the economy.

Okay, great.

And just final question on -- in the first quarter, you guys were kind enough to call out the operating margin headwind associated with the lack of the workday.

And I think it was around 50 basis points or so.

Is that a realistic type of benefit we should expect, just from a comp standpoint in the third quarter, given the extra workday that should benefit you guys?

Yes.

I think that's a reasonable way of looking at it, John.

We'll get the same kind of impact, in that we'll have an extra day of revenue to cover things like depreciation, amortization of the garments, and other rental items.

So I think that's a good way of looking at it.

But then, keep in mind, the fourth quarter, you're going to have that negative comparison again.

Right, right.

Makes perfect sense.

Thanks, guys.

George Tong, Piper Jaffray.

Thanks.

I'd like to revisit the margin discussion a little bit, particularly around the uniform rental business.

On one hand, we're definitely seeing improvements in route productivity.

That's balanced, I think, somewhat by the fact that the non-program (technical difficulty) isn't really changing, and isn't really expected to change over the next couple of quarters.

So can you talk a little bit about how those dynamics are going to play out, and how you expect margins to play out over the course of the fiscal year and into fiscal 2015?

Well, as we talked a little bit earlier, we would expect that the routes that we added last year will continue to become more efficient.

In probably the next six months, we'll see continued improved leveraging of our plant infrastructure.

But probably towards the end of the fiscal year, maybe into the next fiscal year, we will have some investments to make in different pockets for plant capacity.

So that will certainly affect us going into fiscal 2015.

And, George, again, there's a lot of dependence on how the revenue comes.

And if we see the kind of year that Bill just mapped out, then I would expect to see some continuing improvement, with a little bit of an impact of the investment that I mentioned.

Does that help?

That's helpful, Mike.

And could you give us an updated view on what employment figures need to be (technical difficulty) acceleration in organic performance?

Well, I think we've looked at it, George, and said that if we could see -- I'm going to throw out this as a general number, because it really will depend on where the job growth is coming.

But if you can see job growth consistently 250,000-plus a month, that generally correlates to existing businesses adding employees.

And as long as that is across the whole economy, then we would see the impact of that happening on our customers; and, therefore, we would see an improved add to over stop rate.

That's very helpful.

Thanks, guys.

Shlomo Rosenbaum, Stifel.

Hello.

Thank you for taking my questions.

I don't have too many questions left, but we talked a lot about expanding the routes and how that's been productive.

Can you talk a little bit more about products that you've added in the various lines of business that you have and -- in the last, say, year or two -- and how some of that is driving some of the growth?

Or is it really just adding the routes, and that's really what it is?

Well, I think we've expanded some of our offerings in -- like the hygiene arena, Shlomo, which has helped us grow a little bit faster in certain segments.

But I don't know if it's really any other significantly new products, other than that.

I think it's just been generally additional penetration of customers with some of those products.

We've talked, for example, of the chemical dispensing business.

Still a relatively small part of our business, but that has been an add-on to many of our hospitality-type customers, so that's been beneficial to us.

Okay.

And they could you talk a little bit about the floor cleaning business and how many cities are you in?

Are you continuing to expand that now?

I don't know exactly how many cities we are in.

We are in many of the major markets across the US.

Right now, our focus has been on additional penetration within those markets that we're in, as opposed to opening up new markets, because we like to take advantage of the management structure that's required to run that operation.

But I would tell you that -- I would think we've got to be in 50 of the top 100 MSAs.

All right.

Thank you very much.

Dan Dolev, Jefferies.

Hello.

Thanks for taking my question.

Just really quickly, back to the economy.

I did notice that on the press release Scott said that he is seeing some signs of economic growth beginning to appear.

And I looked back, and I saw that this was compared to previous press release, which said that there's still no -- any evidence in the economy.

Was that just November?

Am I reading too much into that?

Maybe you can please explain what he was saying versus what you were saying, that you're not that bullish.

It's the holiday season, Dan.

We were just trying to be optimistic.

Okay (laughter).

No, I'm teasing.

I would tell you that that it certainly feels a little better to us as we've gone through, now, two quarters of our fiscal year -- the fact that, yes, it has still been choppy.

And as I mentioned to Andrew at the top of the call, we still have no good consistency.

But when you look at the stock market and what's happening with that, you sense that maybe Washington is at least getting along a little bit better.

I guess there's a feeling that, okay, things are not going to be back like they were in the 1990s, but maybe we're going to be okay.

And so we kind of sense that in talking with our customers.

And we looked at the November jobs report, and we said, hey, that wasn't bad.

And I think we've had two quarters now in a row of each one of our business segments grew organically more than 6%.

So I think that gives us some comfort to say, okay, maybe things will be all right.

That's good.

I hope so.

One other question on shredding.

You are growing very fast.

And Iron Mountain I don't think discloses the growth in shredding, but a I am estimating they're growing about 3%, which is well below you.

So are you just -- can you maybe tell us what the market is growing at?

It looks like you are gaining a lot of share, and who you are gaining share from.

I do not have any statistics on what the market is growing, and I really can't comment on anything with Iron Mountain.

All I can tell you, Dan, is that yes, we've seen a nice pickup in our service revenue.

And while the paper prices continue to be a little bit of a headwind, we are pleased with the business.

Our model has been one of converting to more off-site shredding, and that seems to be going very well.

We've had some nice wins on some pretty good-sized national account customers, so I think that's been benefiting us.

And I would say that we are taking business primarily from the smaller players, because more and more companies realize that they're not really engaging a company to do waste pickup.

They are engaging a company to do privacy protection.

And they've got to be sure that it is securely handled, and that companies have the standards to do that.

And I think that has helped us with our growth rate.

Okay, fair enough.

Thank you very much.

Sean Kim, RBC Capital Markets.

Hello, thanks.

First on guidance, I think when you guys initially gave guidance, it assumed mid-single-digit organic growth in the rental segment.

It's come in a little bit ahead of that in the first half, so I guess it makes sense for you to raise the lower end.

But just wondering why you guys lowered the top end of the guidance as well.

Well, I think part of that is driven by the fact of paper prices in the document management business have not rebounded as much as we had initially hoped.

I think it also is attributable to what Mike was talking about in the direct sale business, in that we are not going to have as good a second half as we did in the first half -- and as we did in the second half last year.

And as we got closer to that period, we don't have any other big rollouts that are going to happen to replace that business.

And I think it's just a general conservative view of what we see we might have to deal with.

We get into the winter -- if we have a bad winter, that has a bit of an impact on our business.

So I think it's just -- it's all those factors together, Sean.

I wouldn't read too much into it, other than it's not as optimistic as we hoped it might have been when we started the fiscal year, but it's certainly not as pessimistic as we feared it might be when we started.

Okay, great.

Just one more, if I may.

I think historically you guys have done more share repurchases in the fiscal first quarter and the fourth quarter.

Do you think that's something we should expect in fiscal 2014 as well, acceleration in buybacks towards the end of the fiscal year?

Well, I will remind everyone that during the first quarter and into early in the second quarter of fiscal 2014, we did purchase 3.2 million shares.

Whether or not we will purchase any shares in the fourth quarter is subject to our Board's direction.

And I can't predict at this time, nor can I signal, what we may do.

So all I would say is, past practice is sometimes indication of the future.

Okay, great.

Thank you very much.

Greg Halter, Great Lakes Review.

Yes, good afternoon, and thanks for taking the question.

I noticed that in the quarter, I think there was only about $300,000 or so in M&A.

I don't know if you address this, but wondered what your thoughts are there going forward.

And that kind of piggybacks on the question before that, you're obviously -- just boosted the dividend by over 20%, and if there were not to be any share repurchases, your cash would be growing very rapidly here, leading either to debt reduction or cash on the balance sheet that's not (technical difficulty).

That's not what?

Greg, are you still there?

All right, I'll try to answer his question.

Hopefully, he can hear the answer.

I think acquisitions always are going to be somewhat unpredictable.

We do continue to have a very active, full-time M&A staff within our Company that is constantly looking for good acquisitions.

And, unfortunately, in the second quarter we did not have a lot of meeting of the minds with sellers as to the appropriate valuations.

And as a result of that, we didn't make them.

That doesn't necessarily mean that's going to happen in the third and fourth quarter, because there's always ongoing discussions, and I don't know what will happen; can't predict that.

Regarding the cash buildup, it's a nice problem to have, in that it gives us a lot of options for maximizing shareholder value.

And I think our Board has shown a pretty good process of putting that cash to appropriate use, and I don't expect that to change.

(Operator Instructions).

Scott Schneeberger, Oppenheimer.

Following up on M&A, just on where you're looking there, Bill.

Should we think you're primarily focused in document management, still?

Is there activity in rental?

Just across your segments, thoughts on where you may be more or less active.

Thanks.

Scott, we're actually active in all of the business segments, I'd say, with the exception of direct sale.

There's not a lot of value to buying direct sale businesses, generally.

So we don't spend a lot of effort there.

But in the other three segments, we continue to evaluate different opportunities.

Great, thanks.

And then, last year, you said that the Superstorm Sandy had an adverse impact, but that it was not material.

Curious -- the weather has been solid this quarter.

Any benefit or lift on comparison from that?

And then just taking that a step further, how would you rank order the three biggest drivers of year-over-year margin expansion?

Thanks.

Certainly because of what we said last year, we knew there were a lot of concerns that people thought that Hurricane Sandy might have an impact on us.

And that's why we made the comment, that it was a minimal impact; it wasn't material.

So I can't really say that we had any benefit this quarter of any -- because it wasn't material to begin with.

Relative to the components of the gross margin improvement, I would say that most of it has come from the route.

Utilization of the leveraging off the route additions, and then secondarily probably from the plant utilization.

And then I think we had a minor energy pickup, didn't we, Mike?

Quarter-over-quarter?

It was minor, if there was one.

Yes, it was comparable.

It was comparable.

It was primarily those two items.

Great.

Thanks, guys.

Good luck in the back half.

Thanks.

And it appears there are no further questions at this time.

I would like to turn the call back over to our speakers for any additional or closing remarks.

Well, I want to thank everyone for joining us during this very busy time of the year; appreciate your interest in Cintas.

And on behalf of all of the Cintas family, we want to wish everyone a very happy holiday season, and a successful 2014.

Thank you.

And again, this does conclude today's Cintas quarterly earnings results conference call.

We thank you again for your participation.