G&K Services F2Q09 (Qtr End 12/28/2008) Earnings Call Transcript

| About: G&K Services, (GK)

G&K Services (GKSR) F2Q09 (Qtr End 12/28/2008) Earnings Call January 27, 2009 11:00 AM ET

Executives

Shayn Carlson - Director of IR

Rick Marcantonio - Chairman and CEO

Jeff Wright - SVP and CFO

Analysts

John Healy - FTN Midwest Securities

Mike Hamilton - RBC Dain Rauscher

Scott Schneeberger - Oppenheimer

Andrea Wirth - Robert W. Baird

Andrew Steinerman - JPMorgan

Ted Kundtz - Needham & Company

Operator

Good day, ladies and gentlemen, and welcome to the G&K Services Second Quarter Fiscal 2009 Earnings Conference Call. (Operator Instructions).

I would now like to turn the conference over to your host, Mr. Shayn Carlson, Director of Investor Relations. Sir, you may begin.

Shayn Carlson

Good morning, everyone. Thank you for joining us to discuss G&K's fiscal 2009 second quarter results. Once we've completed our prepared remarks, we'll open the call for questions.

Joining me on the call today is Rick Marcantonio, Chairman and Chief Executive Officer; and Jeff Wright, Senior Vice President and Chief Financial Officer.

Before I turn the call over to Rick, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of Federal Securities laws, including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in the press release distributed this morning reflect management's best judgment at this time, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements provided. Additional information concerning potential factors that could affect future financial results are included in the company's annual report and from time to time in the company's filings with the SEC.

A replay of this call will be available starting today at approximately 1 PM Central Time through February 26. You may access the replay by visiting the Investor Relations section of our website.

At this time, I will turn the call over to Rick Marcantonio.

Rick Marcantonio

Good morning and welcome to our second quarter conference call. This morning, we reported second quarter revenue of $241.8 million, earnings that exceeded analyst consensus estimates and solid free cash flow.

To start, revenue continues to be impacted by the difficult economic conditions affecting almost every customer across all markets. For the quarter, rental organic growth was below our expectations as a result of the recent steep decline in employment levels, particularly in November and December.

Jobs are being lost at an accelerating pace and across almost every industry, especially in industries that have traditionally worn uniforms, like the automotive, manufacturing and the printing sectors.

In a few minutes, Jeff will provide more detail on how the economy continues to pressure revenue growth.

Shifting to earnings and cash flow performance, for the quarter earnings were $0.52 per diluted share, which met management's expectations and exceeded analyst consensus estimates. We're very pleased to deliver solid earnings performance as a result of the proactive cost reduction actions and the discretionary spending controls we began about nine months ago.

These efforts were offset by lower revenue, increased bad debt expense and the impact of the weak Canadian dollar. Clearly, our earnings performance was strengthened as a result of taking proactive actions to align our cost structure and drive higher profits, while facing lower demand and tough economic conditions.

From a cash flow perspective, we drove solid cash flow. For the quarter, cash flow from operations was $25.8 million and free cash flow was $18.5 million. Generating cash is a top priority for our entire organization, and we'll continue to aggressively scrutinize all non-revenue generating spending to squeeze cash from our operations and control expenses.

Let me take a minute to expand on how we're managing the business to maximize our earnings and cash flow performance. As you may recall, last spring we began to see signs the economy was continuing to struggle. For example, in May, the unemployment rate jumped 50 basis points to 5.5%, the highest rate since October 2004. The following month, non-farm payroll shrank by 100,000 jobs, the first monthly triple digit loss of jobs since 2003.

As a result of these softening conditions we saw last spring, we began a series of actions to reduce our discretionary spending in our fourth quarter. Moving through the summer, it was clear that the economy was getting worse as industrial production and automotive sales continue to contract and consumer confidence declined further to levels not seen since the early 1990s.

Again, in anticipation of continued difficult business conditions and pressure on organic growth and earnings, in the first quarter we announced a number of aggressive cost reduction actions to lower our cost structure. These actions included plant closures, headcount reductions and the outsourcing of our fleet maintenance function.

Recently, we've seen the employment levels drop at an even more accelerated pace. As reported, the economy shed over 500,000 jobs in both November and December.

With these indications of a prolonged economic downturn, we recently initiated additional actions. As announced in early January, we further reduced our overall workforce by about 4%, a significant proactive step that aligns our cost structure to customer demand and in advance of further economic weakness.

While these decisions to eliminate positions are difficult, we continue to manage our business proactively to drive financial performance. Importantly, while these actions adjust our cost structure, we continue to serve all customers and markets as our strong service capabilities and broad geographic coverage remains intact.

Jeff will provide the detailed savings from our cost reduction actions in a few minutes.

In these tough times, we remain extremely focused on generating strong cash flow. Let me provide more detail. In addition to the cost structure actions I mentioned, we are tightly managing working capital and capital expenditures. We're further increasing our emphasis on closely managing inventories, accounts receivables and payables to drive working capital and increase cash flow.

From a capital spending standpoint, we previously announced that we delayed plans to build one proposed new plant, and we're evaluating the construction of a second proposed plant. We have now decided to postpone the construction of the second new plant as well. We continue to evaluate all available capacity options before deploying additional cash to any capital expansion project.

Our cash flow emphasis combined with our proven business model is generating solid cash flow, which further strengthens our financial position and our flexibility to support revenue growth and pay down debt. Later in the call, we will highlight a few areas where we've significantly reduced spending and discuss our utilization of our strong cash flow.

In addition to maximizing earnings and cash flow, we equally are focused on restoring revenue growth. During the quarter, our organic growth rate was pressured by the recent significant acceleration in lost jobs. While customers' employment levels are outside our control, we continue to focus on factors that we can control.

For example, we continue to support segmented marketing programs that provide unique solutions to our customers image and safety needs. Programs like ProSura, BioSmart and ProTect continue to expand our competitive advantage and contribute to our overall revenue growth.

As one example, for the quarter we achieved solid year-over year revenue growth in our food business. Food industry customers from food processors to grocery stores to restaurants continue to adopt our safety programs to mitigate one of their biggest concerns, cross contamination in the food environment.

In industrial settings, our ProTect safety program provides customers flame-resistant garments that enhance employee safety and comfort. For the quarter, rental revenue tied to our flame-resistant offerings also grew at a high single digit rate compared to the prior year.

In addition, we continue to position G&K to meet customer needs that result from changes in regulation. Late last fall, the Federal Highway Administration Regulations made it mandatory for all roadside service personnel to wear high visibility garments. In supporting this requirement, our rental revenue of high visibility garments was up over 30% in the second quarter.

As evidenced by the growth of these areas, we continue to capitalize by offering unique solutions that meet the safety needs of our customers, whether they are in a food environment, industrial setting or a service business.

Shifting to our sales organization, we continue to maintain the investment in our sales force. As you heard me describe before, we will continue to carefully and gradually add to our sales team to adjust growth and capacity utilization on a market-by-market basis. We will continue current sales training programs to enhance the ability of our sales reps to sell our full suite of image and safety offerings.

In addition, we recently finished deploying laptops throughout our sales force, which is now also armed with an automated web-based sales automation system. This increases our visibility and the management of sales force activity and pipeline, which we believe will drive increased future sales productivity.

All of these past investments are being supported and measured closely to improve current sales results and take advantage of opportunities when the economy eventually recovers.

Staying with sales for a moment, we also continue to add selectively to our national account sales organization. During the quarter, we continued to drive solid national account results. In fact, our national account business is up at a double-digit rate over the prior year period.

We added a leading oil service company, a nationwide fitness business, a large regional grocer and a recognized power distribution company to name just a few new wins. We also renewed significant relationships with a leading food and drug retailer, a Fortune 500 packaged food manufacturer and a very large water supply service company. We are pleased with our continued success in our national account business.

Let me turn to another important long-term growth engine for G&K, our direct purchase business. As we communicated over the past couple of quarters, we continue to support driving revenue growth in our direct purchase business. For example, we continue to rollout the Dockers brand as a complimentary offering to our over 175,000 customers. Through our phased approach, we expect to have Dockers apparel programs available to all US regions by the end of this fiscal year.

In the initial stages, the deployment of the Dockers brand is generating positives consumer feedback. Our exclusive offering of Dockers enhances our customer's image, differentiates us from competition and supports our long-term revenue growth.

We're also nearing the completion of our annual outerwear promotion, which occurs primarily in our second quarter. Annual outerwear revenue will be up slightly compared to last year, we believe, a solid accomplishment during these challenging economic times.

Staying with our direct purchase business for one more minute, as most of you know, the merger of Delta and Northwest Airlines was approved last fall. As we reported last quarter, in November, our Lion Uniform Group began hosting [fit clinics] to integrate all Northwest in-flight service personnel to the Delta uniform program.

With the successful completion of these fit clinics, late in the quarter we began shipping new uniforms to in-flight and customer service representatives who are based internationally. While we continue to fulfill the international orders, it's important to know that the bulk of this new program volume will benefit our fiscal third quarter as we plan to outfit the majority of the personnel by the end of March, another great win for our direct purchase business.

Before I turn the call over to Jeff, I'd like to remind everyone that this tough economic environment demands an experienced team that has navigated difficult conditions and is committed to taking action. Our team is seasoned and the actions we've been taking are helping us to drive solid earnings and cash flow.

We'll continue to take the cost structure and spending actions necessary to anticipate customer demand in advance of further economic weakness. When conditions do improve, we'll be an even stronger company positioned to capture an increasing share of the growth opportunities in our industry.

I'd now like to turn the call over to Jeff.

Jeff Wright

Thank you, Rick. I'll begin with a brief financial overview of our second quarter results.

For the quarter, revenue totaled $241.8 million compared to revenue of $255.3 million in the prior year period. Revenue continues to be impacted by difficult economic conditions, significant reductions in customer employment levels and the impact of a weak Canadian dollar. For the quarter, the conversion of our Canadian business to US dollars resulted in an $8 million reduction in revenue as compared to the prior year period.

For the quarter, earnings totaled $0.52 per diluted share, which met management's expectations. This level of earnings was driven by proactive cost reduction actions, discretionary spending controls and ongoing productivity initiatives, offset by the economic driven impact of lower revenue, increased bad debt expense and the impact of the weak Canadian dollar.

In addition to solid earnings performance, we also continue to generate strong cash flow. For the quarter, cash flow from operations was $25.8 million and free cash flow was $18.5 million. During the quarter, we utilized the strong cash flow to support continued revenue growth initiatives, repurchase our shares, pay our quarterly dividend and also pay down debt. G&K's financial position remains strong.

With these comments as a financial overview, let me provide some perspective on the economy and discuss how our economic driven pressures are impacting growth.

As we all know, companies in almost every industry across North America continue to suffer from a prolonged downturn in economic activity. While G&K has a long history of consistent performance, this economic cycle continues to challenge our ability to generate growth.

Most recently, we've been impacted by the rapid acceleration in lost jobs. Employment levels dropped by more than 1 million jobs in November and December alone, driving the unemployment rate to the highest level in 16 years.

For 2008, the employment in the US, as reported by the Bureau of Labor Statistics, is down almost 2.6 million jobs. It's important to recognize, so I will state it again that while we've seen job losses all throughout 2008, the rate of losses accelerated significantly this past quarter, particularly in November and December.

Jobs continue to be shed in virtually every industry from traditional uniform wearing industries like automotive and printing companies to service providing sectors like retail, trade and business services. Clearly, our revenue growth is being pressured as our customers reduce employment levels to respond to these difficult economic conditions.

Revenue growth is also being impacted by the increasing number of customers who are going out of business due to the financial difficulties being suffered in these stuff economic times. In addition, customers continue to scrub expenses, leading to a reduction in usage items and delays in decisions to install new programs or add items.

In summary, our revenue growth is being pressured by the economic stress that is influencing customer behavior.

Let me turn back to the second quarter. Our organic rental revenue growth rate was approximately negative 2% in the second quarter. Rental growth reflects a significant acceleration in lost jobs, a continued economic driven increase in customer attrition, a reduction in usage items and lower new account sales.

Let me just give you a couple of examples. In one specific case during the quarter we had a customer in the automotive parts supply chain reduce its employee base by about 40%, thus impacting our revenue.

Our organic growth also continues to be pressured by customers in a variety of industries who are struggling to stay in business. In one region during the quarter we saw two newspaper customers shut their doors, which resulted in a loss of about $100,000 of annual revenue.

Again, these are just a couple of customer instances to help you understand how tough economic conditions impact organic growth.

While weak overall economic conditions continue to pressure organic revenue growth, we remain focused on factors we control to drive higher productivity and stabilize organic growth.

Now shifting to earnings and cash flow, as Rick highlighted earlier, we continue to take aggressive actions to align our cost structure and spending to reflect expected customer demand and anticipate the continued weakness in economic conditions. In doing so and managing our business proactively, we continue to increase our focus on maximizing earnings and cash flow.

Let me give you more detail as it relates to the steps we've been taking over the last nine months to align our cost structure and reduce spending in advance of continued economic weakness. Last spring, we began scrutinizing all controllable non-revenue generating expenses across the organization. We implemented tight companywide administrative controls to monitor and limit discretionary spending. The result, second quarter travel and entertainment expenses, as just one example, were down over 30% compared to the prior year second quarter.

While these controls were a proactive first step to adjust challenging economic conditions, we did not stop there. During the summer, it became clear that the economy was softening further. Rather than hope for an economic rebound, we took additional actions to reduce our cost structure in the first quarter.

As announced in October, we closed three plant locations and two branch facilities, reduced selected headcount at our US and Canadian corporate offices and moved to outsource our fleet maintenance function. In all, these actions reduced our employee base by about 200 positions and will generate anticipated annual savings of $3.5 million to $4.5 million. Importantly, these actions improved our capacity utilization while maintaining our existing geographic customer service coverage.

Since initiating those cost reduction actions, we've seen steep declines in employment levels, particularly in November and December. In response to lower customer demand and in anticipation of a prolonged economic downturn, we recently executed an additional round of actions to reduce our cost structure.

In early January, we announced a significant workforce reduction across North America. This proactive step eliminated another 340 current and 120 open positions and will result in annual savings of approximately $14 million. Again, we continue to take the steps necessary to lower our cost structure to expected conditions and support our overall performance.

From a cash flow perspective, we continue to focus on driving even higher levels of free cash flow. As Rick mentioned, we continue to manage working capital tightly by scrutinizing the level of inventory, accounts receivable and accounts payable needed to run the business. In addition, we're carefully evaluating all capital spending requests.

As you may recall, at the outset of the fiscal year we were planning the construction of two proposed plants. On our last earnings call, we communicated that we had decided to delay construction of one new plant and we are evaluating all potential capacity alternatives for the second proposed plant. We've now decided to forego the building of the second new plant location. Again, in this tough economic environment, cash is king and generating continued strong cash flow is the top priority for the entire company.

With all of that being said, we will continue to maintain support for generating revenue growth. This includes supporting our sales force, maintaining our focus on segmented marketing programs and continuing our rollout of Dockers to our large customer base. These growth areas are core to our strategic vision and important drivers of future revenue growth.

Now let me highlight a few details from our second quarter margins, our balance sheet and cash flow. First, rental gross margins for the quarter were 31.3% compared to 32.5% in the prior year period. The change in gross margin was a result of savings from expense reduction actions, offset by the impact of fixed cost absorption from lower rental revenue.

Second quarter gasoline costs, net of our hedging program, were slightly favorable as compared to the prior year period. The gasoline hedging program continues to meet our objective of reducing the volatility of energy costs.

Direct sale gross margin was 25.9% compared to 29.2% in the prior year period as a result of lower direct sale volume. As Rick mentioned earlier, we expect to see a third quarter uptick in direct sale volume as we outfit Northwest in-flight and customer service employees into the Delta uniform program.

Selling and administrative expenses in the quarter were 22.7% of consolidated revenue, down from 22.9% in the prior year period. Selling and administrative expenses decreased due to reductions in non-revenue generating spending despite an economic driven increase in bad debt and the impact of foreign currency.

When combined, bad debt expense and the impact of foreign currency increase by 0.7% of consolidated revenue compared to the prior year period. Without these impacts, selling and administrative costs would've been down almost a full point due to our cost control efforts.

The second quarter operating margin was 8.1% of consolidated revenue compared to 9.3% in the prior year period. The change in operating margin was driven by recent cost structure actions, spending reductions and ongoing productivity initiatives, offset by the impact of lower revenue, higher bad debt expense and losses due to foreign currency transaction costs.

Now let me turn to our capital structure and cash flow, which remains strong. Let me remind everyone that G&K maintains a strong balance sheet and a strong position regarding our debt financing. Total debt was $285.7 million as of December 27, 2008 and debt as a percent of total capitalization was 35.5%. Compared to the first quarter, total debt, net of our cash balance, is down $6.2 million.

As a reminder, our primary revolving credit facility is not set to renew until August 2010. Again, we maintain a strong credit position.

Cash flow from operations for the six months ended December 27, 2008 was $37.5 million compared to $43.5 million in the prior year period. For the quarter, free cash flow, defined as cash flow from operations less capital expenditures, was a strong $18.5 million.

During the quarter, we utilized our strong free cash flow to repurchase approximately 0.5 million shares at a cost of approximately $10 million. We also paid our quarterly dividend, which was increased this past August and we also paid down debt, net of cash, by $6.2 million.

While we took advantage of the lower share price in the second quarter to repurchase our stock, at this time we do not plan to repurchase shares in the third quarter. Our strong business model combined with our focus on reducing expenses and spending will continue to generate strong cash flow. Moving forward, our priority for utilizing our strong free cash flow will be to continue to support revenue growth initiatives and to pay down debt.

Now let me turn to our guidance for the third quarter. The company expects fiscal 2009 third quarter revenue to range from $230 million to $240 million and earnings per diluted share from $0.40 to $0.50 per share. We have widened our guidance range for both revenue and earnings per share due to the recent significant acceleration of job reductions and the quickly changing economic environment.

This revenue guidance represents a rental organic growth rate that we anticipate will decline from the second quarter due to the full quarter impact of the recent acceleration of declining employment levels and the impact of difficult economic conditions on customer exemption, customer usage items and new account sales. Due to the weaker Canadian dollar, our third quarter revenue is projected to be reduced by approximately $9 million when compared to the prior year period.

The earnings guidance includes field operation merit increases, which take place at the beginning of the calendar year, and also the reset of payroll taxes at the beginning of the calendar year. Similar to last year, these increases always impact earnings when comparing second to third quarter performance.

The earnings guidance also reflects the weaker Canadian dollar exchange rate, which lowers earnings per diluted share by approximately $0.05 per share when compared to the prior year period. In addition, the earnings guidance reflects a lower than normal effective tax rate of approximately 30% to 32% due to the reduction of reserves resulting from the anticipated expiration of certain tax statute of limitations.

I'll repeat that we are focusing on managing the business proactively and taking aggressive actions in advance of continued weak economic conditions to support our overall performance.

So that concludes our prepared remarks and we'd be glad to take your questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from John Healy from FTN Midwest Securities. Your question please.

John Healy - FTN Midwest Securities

Good morning. Jeff, I was hoping you could help us a little bit with the guidance for the quarter. I know you called out the Northwest - Delta contract and that probably helped the direct sales business. But could you try to size that for us a little bit, as well as maybe try to break down what you are impeding in your guidance for organic growth changes in the third quarter? Any help you could give us there would be appreciated.

Jeff Wright

Sure. This is Jeff. Let me see if I can provide a little bit of guidance and Rick can add to my thoughts.

From a direct sale perspective, as we mentioned, the bulk of the Delta - Northwest rollout will be happening in the third quarter. As you know, the last few quarters, our direct sales business on a quarter-over-quarter business has been below prior year. In the third quarter, we're expecting revenues will be up on a quarter-over-quarter basis. So, third quarter revenues will be higher than last year's third quarter.

I think last year we were a little over $18 million of direct sale revenue. At this point, we're anticipating something in the $20 million to maybe as high as $21 million type of range. So we'll be up nicely.

On the rental side of the business, as we mentioned, we are expecting our rental organic growth will continue to decline further due to the recent acceleration of job losses as everyone knows in the economy in November and December. Quite frankly, it's getting a little bit difficult to put an exact percentage on that, but we do expect a continued progression, a continued decline, and then we're going to continue to focus on our controllables, which is continue to focus on route sales, solid customer retention and our new account sales efforts.

John Healy - FTN Midwest Securities

That's helpful. I know you talked last quarter about the cost reduction efforts, the first round of them. I thought the phrase that you used in the 1Q call was that they were to help short-term profits or profits in the near term. This next round of cost savings seems a bit more substantial to me. At some point, this economy is going to turn and your business is going to turn around.

I guess my question is how do you feel about the long-term margin outlook for this company? When this thing turns, would you anticipate margins to come back quicker? Where do you think that in a normalized environment you guys could get to from an operating margin standpoint?

Jeff Wright

Sure. The whole margin discussion is a little bit difficult in this tough economic period. We've been as proactive as we possibly can on getting ahead of the reduced customer demand that we see out there.

As I think you know, we reduced our headcount in early January here by about 4%. Again, though, we're just trying to get out ahead of revenues that were negative 2% in the second quarter and look like they are declining further here in the third quarter. So we're trying to match those expense reductions against revenue declines.

To your point, I think when revenue does turn around and the economy bottoms out and we start to see job growth and so forth, that will put us in a position of having a tight expense structure then moving forward to put us in a position of growing margins in the future. But in the near-term, we're really proactively managing those expenses to match them up against customer demand levels.

Rick Marcantonio

This is Rick. We now feel given some time in this economic downturn that this is worse than the one we experienced in the early 2000s. Again, that was right about the time I was joining the company. We're much more proactive in terms of taking cost out of the system as the business scales differently and we're also more proactive about keeping revenue generating activities, investments in those activities.

I think both of those for me suggest that you if couple that with the fact that we've cut costs pretty significantly, we think that we should be able to respond and rebound margin-wise much more quickly than we did in the last economic downturn.

John Healy - FTN Midwest Securities

That's helpful. Then, from a capacity standpoint in your facilities, is there anything you could share with us on how the facilities are being run today -- if you are on a one-shift, two-shift, and what the capacity utilization is at this point for what you're seeing in your business and maybe where it was 6 or 12 months ago?

Rick Marcantonio

This is Rick. I personally don't have the numbers on capacity utilization in front of me right now. But I can tell you that based on the actions that we have taken in the last couple of quarters that where we've closed some facilities without obviously vacating the market, we've put revenue that we had in our more efficient plants. So, we're improving our capacity utilization.

Frankly, that's one of the things we're really focused in on in the coming second half of our year. We're looking at our capacity utilization, given both the downturn in economics because of the economy as well as the revenue falloff. We're looking at some capacity improvement initiatives that we've put-in in the past as a way to maybe take some additional costs out of the business and drive up our capacity.

So, I think we're in good shape and I expect us to been in an improving state going on in the second half of the year.

John Healy - FTN Midwest Securities

Great. One last question. Jeff, I might have missed it, but how should we be thinking about the tax rate for the full year?

Jeff Wright

For the full year, I think we've had more of a normalized tax rate in Q1 and in Q2. Q3 is going to be a bit lower than normal, again, due to some statutes of limitations that are going to be expiring. It will allow us to reduce some reserves for tax. But for Q4, I think we'd move back more into that normal rate.

So I think when you melt that altogether, something in the 39% type of range would probably be appropriate.

John Healy - FTN Midwest Securities

Okay, great. Thanks.

Jeff Wright

You're welcome.

Operator

Our next question is from Mike Hamilton from RBC. Your question, please

Mike Hamilton - RBC Dain Rauscher

Good morning, everyone.

Rick Marcantonio

Hi, Mike. How are you?

Mike Hamilton - RBC Dain Rauscher

I was wondering, with all the moving parts right now if you could comment a little bit on dynamics of what you're seeing in sensing and pricing?

Rick Marcantonio

This is Rick. Without being too specific, I would tell you that it's an aggressive, competitive market right now. It's more aggressive than it was six months ago in terms of the pricing to maintain existing business or to compete for new business whether there's a competitor in there. So it feels more competitive.

Mike Hamilton - RBC Dain Rauscher

Thanks. Could you pull out what you view as one-time costs given a lot of the business resizing you've been doing in the quarter? In other words, what margin impact, taking whatever examples you want, whether it is healthcare or bad debt, but lump it all together to give an assessment of what the run rate on margins are looking like?

Jeff Wright

Sure, Mike. This is Jeff. I guess the one thing we kind of really tried to focus on was bad debt expense was clearly up on a quarter-over-quarter basis. Then, one of the things that caught us a little bit -- I shouldn't say caught us -- but the sizable reduction in the Canadian dollar versus the US dollar, and we end up incurring some FX transaction losses.

And those two combined were about 0.7% of revenue and those two are kind of two more unusual things that stuck out during the quarter that, without those, we'd have had a 0.7% higher margin.

Mike Hamilton - RBC Dain Rauscher

Is there anything in there on restructuring?

Jeff Wright

We had announced in the first quarter the three plants and two branches and outsourcing of fleet maintenance. During the second quarter, there were some levels of costs that we incurred related to that. It may have been in the range of $0.01 or so of earnings per share, but weren't real significant because most of those costs were, in fact, recorded in Q1.

Mike Hamilton - RBC Dain Rauscher

Does that accelerate in Q3?

Jeff Wright

Now I'll turn to the more recent actions that we took. Obviously, in early January we reduced headcount by 340 current positions. So, there are certainly severance costs related to those that's fairly significant, although, by the time we get to the end of the quarter, we'll have gotten the severance behind us and should actually be incurring some of the savings.

And so, for the quarter, that ends up being more neutral-ish or maybe even slightly positive. So some fair amount of severance in kind of January, February here, but starting to get into "the savings" or the reduced levels of expense from that point forward.

Mike Hamilton - RBC Dain Rauscher

Thanks. Last for me, is there anything out of the ordinary in what you're seeing geographically in terms of impact and pulling aside Canada?

Jeff Wright

Probably the one area, and this would probably be fairly obvious, I suppose, is that we have big businesses in that Windsor area of Canada and Detroit area. And that area, due to the automotive market being way off and the automotive parts suppliers and so forth, that's a tough market right now. Besides that, I think it's fairly soft and there are impacts everywhere across the country.

Mike Hamilton - RBC Dain Rauscher

Thanks for all the detail.

Jeff Wright

All right. Thank you.

Operator

Our next question is from Scott Schneeberger with Oppenheimer. Your question, please.

Scott Schneeberger - Oppenheimer

Thanks. Good morning. I guess with your interactions with customers, what are they looking for now? You had alluded on an earlier question that pricing is getting competitive amongst you and your peers. What do customers want? Is it purely pricing, are they asking for servicing change mixes, how are you working with them right now?

Rick Marcantonio

I can't tell you specifically by every customer, but generally what customers are looking for is, number one, nothing has changed in the respect that they're looking for us to deliver the original service that we're supposed to deliver them. They're not looking for a significant cutback in the service.

Obviously, during these tough times, everyone is looking for ways to save money. And so, as we come up with new programs or ideas on how to improve or reduce their costs, we focus some of our marketing effort and our selling to both new customers and existing customers on ways to reduce their costs, which appears to be working well for us at this point in time. But I'd say those would be the two areas.

Scott Schneeberger - Oppenheimer

Thanks. When you alluded earlier that fiscal third quarter sequentially is going to show some softer organic rental revenue growth versus the negative 2% in the second quarter, could you give us any more color on the magnitude that you anticipate there, please?

Jeff Wright

Yeah. I think, Scott, it's a little bit difficult given how quickly the economy is moving and how quickly the job losses have happened here in November and December. I saw in the newspaper this morning all of the news on a lot of major companies, so it's really tough to do. We clearly see it moving down. Whether that ends up being a couple of percentage points further or in that range, it's really hard to say.

Rick Marcantonio

Scott, this is Rick. I would say, I think when we look at the second quarter there was a perfect example of things moving very quickly. If you'd had asked us that question in October, we'd have given you a much different number than what we would have in November and then December. We saw November, December really fall off quite a bit.

We know how to analyze the things that we're in control of. We know our new sales volume pipeline. We know the programs we have. We know the trends on selling to new customers and existing customers. We can build-off if we know our pricing dynamics. We can put those kinds of trends in, but the one that knocks you sideways is when the employment figure goes down and a customer lays off a portion of his organization or goes out of business, and we've clearly had a number of them just go out of business.

Those are things that it's impossible to put a trend line on and have confidence in. That's one of the reasons we're kind of hedging it a little bit. It's one of the reasons we gave you a wider than normal range of revenue and earnings, because we don't know how to peg that with the kind of accuracy that you'd want us to commit to.

Scott Schneeberger - Oppenheimer

Sure, that's fair enough and thanks for that color. Since you're saying that there was progressive deterioration in October, November, December, I suspect that you're seeing the same from December to January with all of these layoff announcements. A further question here is, are you seeing any bright spots amongst any of the segments which you serve?

Rick Marcantonio

Well, if we're not looking in terms of bad economy, we're very pleased with some of the growth we've gotten out of some of our new initiatives, and that's number one. Our national account business is growing at a double-digit rate and that group of customers really gets benefits from some of our segmented marketing areas. So, those kinds of things look very positive for us.

Sure, we'd like them to be twice as large and they are not, but they're very strong. I'm happy to say that our national account business was up double-digit rates, and that's good in this kind of economic environment. The problem is that it's offset by things that we don't have control over, and that's what makes it difficult. But we've done a good job at that.

I would also tell you, frankly, that we've got an organization that has gone through some difficult times. There is tremendous support in this organization for what we're trying to do, whether it be the kind of cutbacks we had to go through, and they understand the importance of serving our customers against their existing needs.

So, I'd say the bright spot for me is I've got an organization I'm really comfortable is aligned with what we're trying to pull off.

Scott Schneeberger - Oppenheimer

Thanks. And then, one more for me and I'll step aside, but to just kind of get the ball rolling on energy prices. I believe you said it, and I'm afraid I missed it. Could you update us what the percent of revenue that was in the quarter? Then, compare it sequentially in the first quarter and give us an idea of what your hedging program looks like for this current quarter, and what should we think about as far as directional moves there? Thanks.

Jeff Wright

For the second quarter now, as a percent of revenue, it was about flat. I will give you the exact numbers. Gasoline was positive by about three-tenths. Our hedging program offset that by about two-tenths. And then, natural gas went the other way by a tenth or so. And then, in total, energy was about flat on Q2 last year to Q2 this year.

As we move into Q3, we do expect that energy should turn positive for us. And even with the hedge offsets, given if gasoline stays where it's at, we should see a positive impact on a year-over-year basis Q3 last year to Q3 this year. It could be in the range of three-tenths or four-tenths.

Scott Schneeberger - Oppenheimer

Great. Thanks for that.

Rick Marcantonio

You're welcome.

Operator

Our next question is from Andrea Wirth from Robert W. Baird. Your question, please.

Andrea Wirth - Robert W. Baird

Good morning, gentlemen.

Rick Marcantonio

Good morning.

Andrea Wirth - Robert W. Baird

I just want to look at savings a little bit. Can you give us an idea of what savings actually amounted to in the second quarter, and then what your expectation is for savings that's built into the guidance for 3Q?

Jeff Wright

Sure. I think for Q2, again, we had some continued costs related to our fleet maintenance function. That was really an ongoing process of beginning to outsource that function. We also had plant reductions and branch reductions that we've discussed, but we really did not get up to a full run rate of cost savings in Q2.

Then Q3 again, there are a lot of moving parts, unfortunately. We've got a fair amount of severance happening in January and February. And then, we should turn that around and actually turn to where we're generating savings by March, if you want to break it down by month.

Andrea Wirth - Robert W. Baird

So we shouldn't expect really any savings to come through probably in 3Q net savings? I mean, is that probably a fair way to look at it?

Jeff Wright

There would be a nominal amount of savings net-net in Q3. But again, I would just caution a little bit that we're managing those savings, and I'll call them savings, but managing them against a revenue level that is declining. So we're trying to match, if you will, and we're trying to make sure that we reduce expenses, at least, consistent with revenue declines.

Andrea Wirth - Robert W. Baird

Right, it makes sense. I'm just trying to get an idea on the FX impact. You gave us the revenue side. Can you tell us what the operating income impact was for this quarter and what you would actually expect that $9 million impact to be next quarter on an operating income level?

Jeff Wright

Sure. I guess, I had it written down in front of me on an EPS perspective. But in Q2, the impact from an FX perspective was about $0.06 to $0.07 of earnings per share comparing Q2 last year to Q2 this year. We're expecting something similar in Q3.

The FX rate is down a little over $0.80 US dollar versus $1 in Canada and it was up close to $1 last year. So there's been close to a 20% decline in that value of the Canadian dollar. And again, on an EPS perspective, I've got it in front of me, it's about $0.06 to $0.07 of earnings per share. And I apologize I don't it in front of me in terms of the operating margin.

Andrea Wirth - Robert W. Baird

No, that's fine. That's helpful. Great. Then, I just want to get a couple of data points on your sales initiatives. I'm trying to look at your sales force headcount. I know your national count is up, but is your actual total sales force headcount still up year-over-year? I know that with the recent cutbacks, you've probably had to let a few people go there.

Rick Marcantonio

I don't have it. They're looking for the numbers. This is Rick. In terms of the people on the Street, we're really not cutting back in that area. I think it's about flat right now. We took a few managers out and increased the span a little bit, but we're not taking away from people actually directly interfacing with the customers, and I believe our national account headcount is actually up a little bit.

Going forward, we will continue to invest. We will slowly invest, but we are going to continue to invest. As we've said now for the last couple of calls, we really meant it when we said we're trying to protect any revenue generating kinds of investment. We feel that the investment in the sales force headcount as well as completing the automation of our sales system by putting in both laptops and giving them a web-based sales productivity tool were investments we wanted to complete, and I'm pleased that we completed them. It just puts us in a much better position going forward.

Frankly, it's a controllable from my standpoint. While our professional sales revenue is not quite as robust as it was a year ago, we were up against some pretty significant numbers. We're still generating solid new sales from new customers as well as sales from existing customers. While those numbers are affected somewhat, the quit levels and the ad-quits metrics are the areas that we have much more concern about and are a little less under our control, especially when you look at things like employment levels affecting add-quits and the number of bankruptcies that have occurred.

Andrea Wirth - Robert W. Baird

Are your new business wins actually still up year-over-year?

Rick Marcantonio

Not year-over-year, but we're still generating solid growth from new business. Jeff, correct me if I'm wrong, but I think a year ago our first half was some of the strongest we had. I think it was the strongest we've had in years if not for a long time I guess is the right way to say it. So we're up against strong history.

Andrea Wirth - Robert W. Baird

Sure. Okay. And then, just looking at the businesses that are very strong right now, the Hi Vis, the RF, foodservices, can you give us an idea what percentage of sales those are, either individually or collectively? Are they less than 10% of sales, more than 10% of sales? I'm just trying to get a rough idea what those are actually contributing.

Rick Marcantonio

We've never really broken down our sales other than how we've given them to you. I think the only metric we've ever reported is what percent of our total business is tied up in some form of transportation. So, I'd rather not get into that.

Andrea Wirth - Robert W. Baird

Okay. How about national accounts, where is that as a percentage of your sales these days?

Rick Marcantonio

Just give me a second and we can give you that number. About 15% of our total revenue.

Andrea Wirth - Robert W. Baird

15%. Okay, great. Thank you.

Rick Marcantonio

You're welcome.

Operator

Our next question is from Andrew Steinerman with JPMorgan. Your question, please.

Andrew Steinerman - JPMorgan

Hi, it's Andrew Steinerman from JPMorgan

Rick Marcantonio

Good morning.

Andrew Steinerman - JPMorgan

Good morning. Rick, did you just say that new sales year-over-year was not up? That's a change, right?

Rick Marcantonio

I said our professional sales number in total. It's not bigger than the year ago. We're talking about total new sales. The point is we're still generating new sales, but not quite as many new sales as we did a year ago. That's the easiest way to think about it.

Andrew Steinerman - JPMorgan

When you think about new business overall, that still has some growth or no?

Rick Marcantonio

Yeah. I'm not sure we're going to be clear on this. Let me take one more stab at it. All right?

Andrew Steinerman - JPMorgan

Okay. Thank you.

Rick Marcantonio

I'll ask my partners here to help out. We look at our new business in total and compare it to what new business we generated a year ago. So we are generating new business today. We just didn't generate as much new business today as we did a year ago, but we're still generating new business at significant levels.

It's a contributor to our organic growth. It's not quite as large as it was a year ago for two reasons. Number one, it is a tougher economic time and we are up against some of the strongest metrics we've ever generated in the company. But when we take apart our components of our organic growth, and again we don't report all of the details, the one that really is hurting us much more so than new sales is the add-quit metrics and the financial quits. These are numbers that were at pretty high levels.

Does that help? Okay.

Andrew Steinerman - JPMorgan

Sure, absolutely. Then, when you talk about new business wins, do you see any greenfield opportunities happening in this environment or are most of the new business wins from competitors?

Rick Marcantonio

I'm looking for guidance. We calculate the number each quarter. I don't know if we calculated it yet. It's still a significant amount, approaching 50% of our new business that's coming from [no programmers]. Those are kinds of the metrics that continue to make me comfortable that an investment in marketing initiatives and sales personnel is the right thing to do because we're generating new business, even if it's slightly less than we generated a year ago, but it's the kind of current business that we have that we don't have a lot of control on.

That relates to our customers' headcount and them going out of business. Those things are much more difficult to deal with.

Andrew Steinerman - JPMorgan

Sure. The last question, Rick, you mentioned that pricing in the general environment has gotten more competitive over the last six months. Could you give us what G&K's pricing strategy is in that environment, particularly as it comes to new business?

Rick Marcantonio

It's probably easiest to say that we're attempting to maintain a competitive position in the marketplace, whether it be for new business or trying to retain our existing business. It's more costly today than it was six months ago, but we are not walking away from a piece of it. We're trying to be competitive in that environment.

And that's one of the reasons we've stayed very close to our cost structure. We're trying to make sure that we maintain the proper cost structure so that we don't put ourselves from a cost structure standpoint in a position where we have to demand a higher price than a competitor would be because our cost structure is out of line.

Andrew Steinerman - JPMorgan

Okay. Thank you very much. Appreciate it.

Rick Marcantonio

Welcome.

Operator

And our final question is from Andy Aranda from Needham & Company. Your question, please.

Ted Kundtz - Needham & Company

This is Ted Kundtz. Hello, Rick and Jeff.

Jeff Wright

Good morning.

Ted Kundtz - Needham & Company

Two quick questions for you. One, on the pricing issue, can you say how much pricing is under pressure percentage-wise? Is that an average that you could give us or give us a sense of?

Jeff Wright

We know a lot about our price, but it is not a number we will report or have ever reported.

Ted Kundtz - Needham & Company

Okay. So you can't give us any color as to how much price pressure you're seeing?

Jeff Wright

No, sorry.

Ted Kundtz - Needham & Company

Okay. Alright. How about on the acquisition activity side? Given this environment, are there more companies available for sale that interest you?

Rick Marcantonio

I would say the acquisition pipeline is still active. We haven't seen the valuations come in line with current market conditions or a revenue decline that a lot of people are experiencing, because we're not the only company that has difficult customers at this point in time.

And so, we see the pipeline full. We haven't seen the valuations drop significantly. From our standpoint, we're still active in acquisitions, but I would say we're more picky. I think it's probably the right way to say it. Not that we weren't critical of everything we looked at, but if there is such a thing as a next level of being critical, we're there.

Ted Kundtz - Needham & Company

Okay.

Rick Marcantonio

It has to be something that really makes good short term sense for us and would provide us an advantage that we really want to deal with them right now rather than wait it out, because, again, we're trying to maximize our cash, pay down our debt at this point in time. Making acquisitions for the sake of making acquisitions at high prices doesn't make a lot of sense unless there is some strategic benefit that we would get for making one right now.

Ted Kundtz - Needham & Company

The other question was, have you seen prices really coming down where they aren't getting attractive and people are saying, 'hey, let's be realistic here?' Are you're saying you really haven't yet, but would be willing to throw in a proper bid if you see it?

Rick Marcantonio

You answered it for me. Thank you.

Ted Kundtz - Needham & Company

Great. Thanks a lot.

Rick Marcantonio

You're welcome.

Operator

This concludes our question and answer session. I'd like to turn it back to management for any closing remarks.

Rick Marcantonio

Well, first of all, thank you for joining us today. Thanks for great questions. Hopefully, we clarified our situation to the best of our ability. We look forward to talking with you in three or four months about our third quarter performance. Thanks again.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.

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