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Cintas (NASDAQ:CTAS)

Q1 2014 Earnings Call

September 19, 2013 5:00 pm ET

Executives

William C. Gale - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

J. Michael Hansen - Vice President and Treasurer

Analysts

Sara Gubins - BofA Merrill Lynch, Research Division

Joe Box - KeyBanc Capital Markets Inc., Research Division

Manav Patnaik - Barclays Capital, Research Division

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Sean Sun-Il Kim - RBC Capital Markets, LLC, Research Division

Molly R. McGarrett - JP Morgan Chase & Co, Research Division

Gregory W. Halter - LJR Great Lakes Review

Operator

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.

William C. Gale

Thank you for joining us this evening as we report our first quarter results for fiscal 2014. With me is Mike Hansen, Cintas's Vice President and Treasurer. After some commentary on the results, we will be happy to answer questions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC.

We are pleased to report first quarter revenue of $1,120,000,000 which represents growth of 6.6% from last year's first quarter. Our first quarter had one less workday than last year. Adjusting for this workday difference, revenue increased by 8.2% over last year's first quarter. Organic growth, which adjusts for both the impact of acquisitions and the difference in workdays, was 7.1%. As mentioned in today's press release, the organic growth for each of our 4 operating segments exceeded 6%. Mike will give more detail by operating segment in a few minutes.

Our operating income for the first quarter was $140.1 million, which is 12.5% of revenue. This operating margin is 70 basis points lower than last year's first quarter operating margin of 13.2%. On our July earnings call, I indicated that comparisons to last year's first quarter would be difficult due to 3 items. First, as I mentioned a few minutes ago, our first quarter had less workday than last year. This had a negative impact of approximately 50 basis points on this year's operating margin due to a number of our large expenses, including rental material costs, depreciation and amortization, being determined on a monthly basis instead of a workday basis. Secondly, this year's first quarter recycled paper prices were over 20% lower than last year's first quarter recycled paper prices. This resulted in a negative impact to operating margin of 30 basis points compared to last year's first quarter. Finally, we began adding route capacity in the second quarter of last fiscal year, so last year's first quarter had none of the expenses associated with that capacity expansion. All in all, we are pleased with our first quarter operating margin results and a solid start to our fiscal 2014 year.

First quarter net income was $77.8 million, and earnings per diluted share were $0.63. We were active with our share buyback program and purchased a total of 3 million shares of Cintas stock in the first quarter and into September. Since we purchased the shares in the latter part of the first quarter and in September, the buybacks had no impact on our first quarter earnings per share. However, we expect that these buybacks will benefit fiscal year 2014 EPS by about $0.04. We announced in July that our Board of Directors authorized an additional share repurchase program of $500 million. As of today, we have available for future share repurchases $15.4 million under the October 2011 board authorization and $500 million under the July 2013 board authorization.

As Scott Farmer indicated in our press release, much uncertainty remains in the U.S. economy. The employment picture from month to month remains uneven and inconsistent, a reflection of businesses' uncertainty about future investment plans. As a result, we are maintaining our fiscal 2014 revenue expectations to be in the range of $4.5 billion to $4.6 billion. We are updating our EPS expectations to include the impact of the buybacks through today so that we now expect fiscal 2014 EPS to be in the range of $2.70 to $2.79.

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

J. Michael Hansen

Thanks, Bill. As Bill mentioned, total revenue increased 6.6% from the first quarter of last year, with total company organic growth being 7.1%. Total company gross margin for the first quarter was 41.6%, which is down from last year's first quarter gross margin of 42.4%. I'll discuss these items in more detail by segment.

Before doing so, let me remind you that there were 65 workdays in our first quarter, which is one less than last year. In fiscal '14, we will have 65 workdays in each quarter, for a total of 260 workdays. This creates year-over-year workday differences in each quarter except the second and results in one less workday for the entire fiscal year.

We have 4 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 71% of company revenue in the first quarter and totaled $792.9 million, which is up 5% compared to last year's first quarter. Adjusting for the one less workday in this year's first quarter, this segment's revenue grew 6.7%. Organic growth was also 6.7%. This was a nice uptick from the 4.8% organic growth rate in the fourth quarter.

National account revenue penetration was strong during the quarter, which enhanced the growth. Additionally, sales rep productivity was strong, and net add-stops showed modest improvement over both last year's first quarter as well as the fourth quarter.

Our Rental segment gross margin was 42.6% for the quarter, down from 43.3% in last year's first quarter. Energy-related costs were 10 basis points higher than last year's first quarter. The remaining decrease compared to last year was due to having one less workday in this year's first quarter and due to the costs associated with adding route capacity last fiscal year beginning in the second quarter. The first quarter gross margin of 42.6% improved from the 42.1% in the fourth quarter, despite having one less workday in the first quarter compared to the fourth quarter. Energy-related costs were 30 basis points lower than the fourth quarter, and we did start to see improved efficiency in our recently added routes.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms and other related products to national and regional customers. Uniforms and other related products are also sold to local customers, including products sold to rental customers through our direct sale catalog. Uniform Direct Sale revenue accounted for 10% of company revenue in the first quarter and totaled $107.5 million, which represented growth of 7.2% compared to last year's first quarter. Uniform Direct Sales gross margin was 27.7% for the first quarter, down from last year's first quarter gross margin of 29.4% and the fourth quarter gross margin of 30.8%. This decrease is mainly due to a greater mix of national account sales in the first quarter. National account sales generally have a lower gross margin than hospitality accounts.

Our First Aid, Safety, and Fire Protection Services operating segment includes revenue from the sale and servicing of first aid products, safety products and training and fire protection products. First Aid, Safety, and Fire Protection revenue, which accounted for 11% of company revenue in the first quarter, was $125.9 million. This represents an increase of 13.6% over last year's first quarter revenue. Adjusting for one less workday in the first quarter compared to last year, revenue growth was 15.3%. Organic growth was 9.2%. This segment's gross margin was 43.6% in the first quarter, which is up 50 basis points from the 43.1% in last year's first quarter. Energy-related costs were lower by 20 basis points. The remaining improvement is due to better leveraging of the infrastructure, as well as an improved mix of high gross margin sales in the first quarter compared to last year's first quarter. These improvements were partially offset by the one less workday in this year's first quarter. The gross margin of 43.6% is relatively consistent with the fourth quarter gross margin of 43.5%.

Our Document Management Services operating segment includes document destruction, storage and imaging services, and it accounted for 8% of first quarter total company revenue. Document Management revenue totaled $94.1 million, which is 10.3% higher than last year's first quarter. Adjusting for one less workday in this year's first quarter, revenue increased by 12%. Revenue increased organically by 6.3% compared to last year. Average recycled paper prices remained relatively low at about $125 per ton, which is about $45 per ton lower than last year's first quarter average. Organic growth, excluding recycled paper revenue, was 10%. The first quarter gross margin was 45.9%, which is down from last year's first quarter gross margin of 49.1% and from the fourth quarter gross margin of 46.4%, primarily due to the drop in paper prices. However, we also invested in off-site shredding facilities in the past year to allow additional migration to the more efficient service model of off-site shredding.

Switching to selling and administrative expenses, SG&A was 29.1% as a percent of revenue in the first quarter, which is down slightly from last year's first quarter figure of 29.2%. General and administrative labor was down as we continue to leverage our cost structure. This was somewhat offset by a 20 basis point increase in medical expenses. Our effective tax rate was 37.1% for the quarter, compared to 37.5% last year. The effective tax rate can fluctuate from quarter to quarter based on tax reserve builds and releases relating to specific discrete items. We expect the effective tax rate for the full fiscal 2014 year to be 37.3%.

Turning now to the balance sheet, our cash and marketable securities were $283 million at August 31, down $75 million from the $358 million at May 31. This decrease was primarily due to using $101 million of cash for the share buyback program. Accounts receivable increased $15.6 million since May 31. DSOs were just below 40, which was slightly better than last year's first quarter. New goods inventory and in-service inventory levels at August 31 were $245 million and $500 million, respectively, both up just slightly from May 31 levels. We continue to be pleased with our ability to manage inventory levels appropriately. Accrued compensation and related liabilities at August 31 decreased by $35 million from the May 31 balance, mainly due to payment of fiscal year 2013 bonuses and commissions. Accrued liabilities decreased $37 million compared to May 31, primarily due to payments of accrued bond interest and accrued profit sharing. Long-term debt at August 31 was $1.3 billion. As of August 31, our total debt-to-EBITDA remains slightly below 2x.

CapEx for the first quarter was $37.5 million. Our CapEx by operating segment was as follows: $22.2 million in Rental; less than $1 million in Uniform Direct Sales; $3.3 million in First Aid, Safety, and Fire Protection; and $11.3 million in Document Management. We expect CapEx for fiscal 2014 to be in the range of $240 million to $260 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch, Research Division

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

J. Michael Hansen

The share count at the end of the quarter was 120,778,000. And for the year, we're modeling about 122.5 million shares.

Sara Gubins - BofA Merrill Lynch, Research Division

Right, okay. You saw a nice acceleration in uniform rental. And in your prepared remarks, you mentioned seeing some improvement in national accounts. Could you give us any more color on perhaps what type of national accounts and if you would expect that acceleration to continue?

J. Michael Hansen

Sure. As you know, Sara, we have quite a few facility services offerings, and we saw some real nice penetration into our national accounts in -- particularly, in our cleaning areas, our floor cleaning, our emergency floor cleaning businesses, restroom cleaning. And as far as we'll -- do we expect that to continue, it's a little bit hard to say. But we certainly believe that our national account customers see the value of those products and services. But I would say, it's a little too early to tell whether we'll see that throughout the rest of the year.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then just last question. On the fourth quarter call, you mentioned that you'd be adding route capacity during fiscal '14, although not as much as in fiscal '13. Any change to those plans?

J. Michael Hansen

No. We -- I would say, going forward, we'll typically add route capacity as necessary. And we'll generally add some in a -- certainly, in a growing environment. And where our new business remains strong, we'll continue to add routes throughout the year and into the future. I would say, though, it would not be at the pace that we saw beginning in the second quarter of last year. We did have a little bit of a catch-up for some -- from added capacity, so I wouldn't say we'd be at that same pace for the rest of the year.

Operator

And we'll go next to Joe Box with KeyBanc.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Just a bit of a follow-up on that question, more taking it from the margin angle. How do you think that we should be viewing incremental operating margins over the next couple of quarters? Obviously, they've been subdued as you've deployed more route capacity. Do you think that incremental margins should remain subdued? Or would it be reasonable to assume that they could potentially reaccelerate now that you'll actually be anniversary-ing the capacity expansions?

William C. Gale

Well, Joe, it'll come down to where is the business coming from. As we've said on last several quarters, the more of our growth that comes from new accounts, the less improvement we'll see in margins because we have additional material costs, we -- that tends to fill up the routes a little faster. And therefore, you just don't get the rapid improvement in the margins. If, on the other hand, and we haven't seen this yet, but if on the other hand we were to see a real acceleration of growth of wares in existing accounts, then obviously, that would have a much better impact on the margins themselves. So I can't really tell you that. At this point, we did -- as Mike said, we had a modest improvement in our add-stops, but it wasn't significant. So we're still in a, I would say, a lackluster employment growth environment.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay, fair enough. It looks like your first aid margins were actually the highest first quarter margins that you've had since the downturn. Just curious, is that a function of the benefits of scale? Are you getting a more favorable mix there? If you could just maybe give us any color on what's driving it and maybe how we should think about the upset from current levels.

William C. Gale

I think it's kind of a scale situation. We have been developing our national footprint in the first aid and fire business over the last several years. And the more volume we have in those different markets, those -- some of those markets that are relatively small, the better impact that we have on our margins. I think it also is attributable to some of the initiatives the management team put in place to make sure that, that business was generating the profits that we think are appropriate. And they've done a good job at basically providing additional products and services offerings to their customers that have enhanced the revenue at each of the existing stops. So I think that's been -- that's also been a factor in it.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Great. And then just one question on the buyback. Over the last few years, when you've been in the market buying stock, you done it in a meaningful way. I realize you obviously don't provide guidance on buybacks, but should we view this as a more one-off opportunistic quarter? Or would you say you're putting more emphasis on the buyback?

William C. Gale

Well, I would say that it is -- we felt confident, given our board's directive, to proceed with the buyback that we did in this quarter, which I think was significant. As far as what we do going forward, it is all dependent on what happens with our other opportunities for uses of cash, our confidence in the future and how the board directs us to proceed with what they feel is the best way to enhance shareholder value.

Operator

And we'll go next to Manav Patnaik with Barclays Capital.

Manav Patnaik - Barclays Capital, Research Division

Just one, first, quick question. I mean, it seems like you did some acquisitions like this quarter. I know you typically provide the breakout of where you did those in the Q. Could you just give us a flavor of maybe the spread this quarter?

William C. Gale

They were primarily in the Document Management segment. I would say about 2/3 of it were Document Management and the other 1/3 -- or the other 30% or so was in our first aid and safety segment.

Manav Patnaik - Barclays Capital, Research Division

All right. That's what I figured. So can you maybe just elaborate a little bit more around the -- just the Document Management side? Obviously, the organic growth there for the last 3 quarters has been in around that 6% mark. Is that a sustainable rate? And what the trends behind that are?

William C. Gale

Well, the Document Management segment continues to provide us with a lot of acquisition opportunities because there are so many businesses doing document management around the country. And now that we have established a pretty decent national footprint, it behooves us to look for other tuck-in acquisitions that we can have in some of these markets in order to improve the profitability. So I think we're going to continue to see opportunities in Document Management going forward because there are just still so many out there. So at this point in time, we are very disciplined on it. We're making sure that they generate the returns we want. But we see this probably will continue for some time.

J. Michael Hansen

And as Bill mentioned just a minute ago how our First Aid, Safety, and Fire segment's gross margin has benefited from the scale of these -- of adding more volumes. So these tuck-ins are quite nice to help the leverage and the gross margin and overall operating margins in those businesses. As they become bigger, we become more efficient.

Manav Patnaik - Barclays Capital, Research Division

Yes. So I get that on the acquisition front. I guess I was trying to pin more on the organic side. So is a lot of the organic growth, then, being driven basically from accumulating all these prior acquisitions you guys have done and now finally benefiting from the footprint? Is that what the main driver there is?

William C. Gale

Well, we've had pretty good organic growth, absent the fluctuations in paper prices, for some time in this segment. The benefits you'd get from having more locations available to you gives you opportunities on a national scale to sell a national account. So from that perspective, it does enhance organic growth. But I don't want to leave you with the impression that we couldn't grow organically if we didn't make these acquisitions. We feel very good about that, our ability to do that. But our goal has always been to become a national player in that business.

Manav Patnaik - Barclays Capital, Research Division

Got it. And just one last thing. I mean, in terms of the guidance, obviously, you left the revenue unchanged. So -- and I guess tieing to the earlier question on if the organic growth on the rental side can continue this -- I guess, the 6.7% range. I guess -- I mean, that clearly implies there's probably some deceleration towards the back half. But would you say that's just more caution? Because, like you said, it's a lackluster environment, but there -- if these trends continue, obviously, there would be upside there.

William C. Gale

I think it's a -- I don't want to call it conservative, but we want to factor in all the uncertainty that we still hear out there in the marketplace. I think the Fed's action yesterday gave you some indication of their view of the economy as relatively soft. So I would say, yes, we're being cautious, but I don't think unreasonably so, given all the other things that we continue to see and hear.

J. Michael Hansen

This -- we mentioned that there was a modest improvement in net add-stops. This is not the first time we've seen a nice uptick in net add-stops only to be followed by a downturn. And as we've talked about quite often in the last couple of years, this employment picture is so bumpy and inconsistent that we're certainly hesitant to say that there is momentum.

Operator

.

And we'll go next to Andrew Wittman with Robert W. Baird.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

I guess since we've done some talking about document, I'm going to do one more and just talk about what's going on in that business. Obviously, paper prices have been kind of stubbornly low, I guess, I would say here. It's weighing on the overall profitability of that business, at least to the income statement. Can you talk about reaction in the marketplace on the service levels and the pricing for service levels? Are we starting to see that go up, in other words, to offset these paper price challenges? And just talk about another initiatives that you might have to improve the profitability there outside of paper prices.

William C. Gale

You certainly have seen a, I would say, a stabilization of service pricing because some of these people just were trying to survive on the paper price itself, and they obviously cannot do that with the cost of servicing. So to the extent that there's an upside to lower paper prices, it's more rational service pricing. I think we've got to keep in mind, this paper price is driven by a lot of different factors from currency levels, from foreign demand, et cetera. We're going to see fluctuations from quarter-to-quarter. But I think the general trend is that what we saw in the first quarter was probably a low for the year. We expect there to be a more -- a slight increase as we go through the year, more comparable on average to what we saw last fiscal year.

J. Michael Hansen

And Andy, as it relates to your question about improved profitability, one of the comments I had made was that we've invested -- we continue to invest in the business, and we've invested in some offsite shredding facilities, and that allows us to replace the very expensive, large shredding trucks with much smaller box trucks. We use less fuel because of that. We're able to see more customers because we're not shredding on-site. And so we get a lot of leverage and efficiency once we start to fill those off-site shredding facilities up. Today, we've got excess capacity in those shredding facilities because, as we've talked, we've just created a number of those in the last year or so. So we've got, certainly, a plan to create more efficiency and become more profitable in the business.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Got you. Can you help us get our arms around that trade-off from on-site to off-site shredding, what the economics look like, maybe the cost of a truck versus building a facility, just to help us understand what that could be?

William C. Gale

I would say, I really don't want to get into details of that because it's -- some of it's kind of a strategic thing on how we're structuring these things and what we're paying for them. So suffice it to say that you can get more volume on a per capital dollar basis through an off-site shredding than you certainly can with an on-site shredding.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Fair enough. Jumping over to the core rental segment, then, can you talk a little bit about customer retention, the sales hiring pace and potentially the amount of new business that you're seeing in the market today?

J. Michael Hansen

Customer retention is -- remains very good. We're at historically pretty high levels, and we feel very good about that customer retention. Sales productivity is very good. New business continues to be the fuel for the growth, and I would say I don't see that necessarily stopping in the next several quarters. We feel very good about the execution in that area. And as far as continued growth in that business, we certainly would love to see some better employment, some add-stops pickup, but we're not ready to certainly say that we've seen a trend from that employment.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

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

J. Michael Hansen

Well, we strategically will look for opportunities to add reps when we can, when it makes sense, if we have capacity that we want to fill up in certain markets, if we have additional prospects that we identify in certain markets. So we're generally adding sales reps as we see opportunities, and that will continue to happen throughout the year. We've not made any significant investments like we did about 3 years ago. But we'll continue to look for opportunities where it makes sense.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Okay. Last one for now, was -- can you describe just -- like the characteristic of the new business wins? Is it still roughly 50-50 split between a no-programmer versus a market share gain?

William C. Gale

I would say it's a little bit more no-programmer, probably 60%. We don't measure that every quarter, but the last time we looked at it, of course, in conjunction with the last fiscal year and basically looking, talking to our salespeople anecdotally, that seems to still be the case that it's a little more coming from the no-programmer. Competitive wins, sure, we're still there. We're still getting some competitive wins. But again, the preponderance or the -- let's say, the majority of the new business is no-programmers.

Operator

And we'll go next to Scott Schneeberger with Oppenheimer.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Following up on that last question within rental. You've touched a bit on, obviously, new business, new programmers and then add-stops. Could you talk to pace of lost business? I imagine that, that stabilized nicely and perhaps an improvement for you in the overall picture. And then also taking it a step further into pricing and what type of environment you're seeing out there.

J. Michael Hansen

Retention, like I said, is still pretty strong, and we didn't see any change in trend. It's -- our retention has been pretty good for the last couple years and has gradually improved, but we didn't see any difference or change in trend in the quarter. From a pricing standpoint, it continues to be very aggressive. And particularly, when it comes to a customer renewal, we're still seeing very aggressive competition. And so pricing is competitive. We're in a relatively low inflationary environment. And as it relates to us going to our customers and looking for price increases, it's generally a customer-by-customer conversation, but it's one that's not as easy to do in a low inflationary environment and where there is very competitive prices at renewal time. So it's been a difficult environment for price increases. I wouldn't say that it's changed much from the last several quarters, but it continues to be very competitive.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Okay. On the cost side, obviously, nothing like what you saw 2, 2.5 years ago. Cotton prices starting to swing from down year-over-year to up year-over-year. Could you just address that? It doesn't look like that's going to be a major issue, and you certainly operated well through it last time we saw a spike in those, but could you readdress it? Also, any initiatives with regard to synthetics or any changes?

William C. Gale

Well, the cotton price, what you -- the headlines are the spot prices, and they'll fluctuate just like all these other commodities do on a spot basis based on weather forecast and other things. Our global supply chain group is very cautious on ensuring that they have an adequate supply of low-cost products, and I am not too concerned right now by this recent increase. It's something we'll keep our eye on, but it certainly is nothing that I think is going to cause us any big difficulties going forward.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Great. And just one more last. I noticed last sentence of the press release, discussion about guidance, including the impact of Affordable Care Act. Since the last that we heard from you, any changes in assumptions, expectations, strategy on how you may approach that? Still a lot up in the air, but just curious on an update.

William C. Gale

Yes, I don't think anything has changed from the 2 months ago when we talked about this initially. We put in our guidance and what we talked about our fourth quarter that we expected a 10- to 30-basis-point increase in medical cost due to the Affordable Care Act. I have no reason to say that any different today. I think there's still a lot of uncertainty. A lot of things are still up in the air as to what is going to be put in, how it's going to be put in. So as far as I'm concerned, really nothing has changed in the last couple of months. All I can kind of be confident in saying, it's going to be more expensive than it had been. And I think we have reflected that appropriately in the guidance.

Operator

And we'll go next to Nate Brochmann with William Blair.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

I wanted to talk a little bit kind of around those last couple of questions. But when we talk about retention and we talk about pricing and the ability to bring on some new customers, whether it's a nonprogrammer or in a competitive bid, how important, at this point, is your diversity of services in terms of bringing that immediately to the table as an additional offering and something that maybe not all the other competitors offer? Is that helping you get in the door a little bit faster or winning a little bit more business or creating that additional retention above and beyond what you might have historically seen with maybe just 1 or 2 products?

William C. Gale

Well, certainly, I think it -- and it does, we've proven to ourselves that adding additional products and services to a customer improves the retention of that customer because the more things you do for the customer, the less likely it is you're going to lose that customer. So I don't think there's any question about that. I think the variety of offerings that we have gives us more opportunities for new business for different types of customers. So we don't always lead with Uniform Rental. Depending on what the customers' needs are, we may get in there initially on tile and carpet cleaning or document shredding or first aid and safety. And then, I think, once they begin to know us and see us, then we share with them opportunities of other things we could do for them. So I think the fact that we have so many different things that we do probably gives us a broader spectrum on which to go after new business.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

And is that still being identified by route person? Or how is that kind of changing if you're looking at more of a enterprise, what's best for the customer and what's best for Cintas to lead with? How are you able to identify that via the fact that -- I know there's different sales forces within each different segment.

William C. Gale

Well, I think we've stratified our sales force to handle different-sized customers, different business units. So I think that's one way we do it. We have a fairly active marketing group that is constantly working with the sales organization, identifying prospects, identifying opportunities for all of our different service offerings or sale offerings. So it's -- with a sales force as large as we have, with the variety of different businesses we have, we've got a marketing committee for each of the businesses, which works -- meets every, what, 6 weeks, I think, to basically look at ways to penetrate other types of industry segments or other type of customers. So it's just a collaborative effort, Nate, that we're constantly looking for opportunities.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay. Yes, I mean -- and that sounds great. It's just, I mean, at the end of the day, I think you're seeing some really nice trends in -- particularly in those other services, as alluded to. I mean, obviously, some decent strength. Part of that is scale and maturity, but part of that is, I feel like, the broader sales effort is probably making a few more inroads than it used to.

William C. Gale

All right. Well, yes, well said. I totally agree with that.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

And then just one last thing. I know you talked about this before, and people have asked you about it before, and I think it's probably still early and there's other macro things that mask this, but I think the more we see -- and every once in a while, we hear about another plant opening in terms of this kind of "nearshoring" on the heavy manufacturing-type theme, are you guys seeing any impact at all from that in terms of your somewhat industrial base of customers? Have you won any accounts that kind of feel that, that's been a benefit? And if so, do you think that there's anything to be said for whether that helps in terms of acceleration or not?

William C. Gale

I'm sure there are cases where that's helped. I could not give you any real examples. I -- obviously, if you open a manufacturing plant anywhere in the U.S. that previously had not been there, that's not only going to provide an opportunity for that particular customer, but all of the businesses that serve that new facility. And so I think it's a more gradual-type thing that certainly helps the overall economy continue to grow. So we've seen growth in the economy, albeit modest -- more modest than we all would like, but we've seen growth. We've seen growth in our business, and I think that certainly, that has been a factor to the extent that there's been creations of new businesses within a particular area. Unfortunately, you also have continued closures and reductions of -- or elimination of businesses as we go through there, so we haven't seen this rapid growth, but -- so I think it's there. It's just probably just one element of why we're seeing some modest growth.

Operator

And we'll go next to Sean Kim with RBC Capital Markets.

Sean Sun-Il Kim - RBC Capital Markets, LLC, Research Division

My first question is regarding CapEx. I think your CapEx was less than $40 million in the quarter, and yet, you're still guiding to $240 million to $260 million for the full fiscal year. So there is -- it seems like it's a pretty -- there's an increase over the rest of the year. And I'm trying to understand, you said the pace of route capacity additions will probably be slower, and yet your CapEx, I think, is going to go up. So I'm trying to understand what's going on there.

William C. Gale

Probably the biggest reason, Sean, is as we talked about the CapEx guidance that we gave in July, which we've retained the same number, we indicated that one of the reasons for the relatively good-sized increase in CapEx and expectations in '14 versus '13 was the fact that we needed to build some new rental capacity, some new plants, and we had some initiatives on our ERP computer system. Those 2 items take a little bit longer to kind of work through the system. Decisions have to be made, we have to find land, we have to contract for the design of the building. So I would say that we would most likely see our CapEx higher as we go through the year under the presumption that we move forward with some of these new plants and with some of the ERP software initiatives that we thought we were going to do back in July. So we continue to evaluate that. As of right now, I have no reason to believe we're not going to do those things, and that's why we've retained the CapEx guidance where it's at.

Sean Sun-Il Kim - RBC Capital Markets, LLC, Research Division

Okay. Just one last question. In terms of gross margins in the Rental Uniforms segment, do you think we've sort of hit -- it's gone down for the past, say, 4 quarters or so, and now we're beginning to anniversary the route capacity additions. So do you think we've sort of hit bottom there and we're going to see some leverage there going forward?

J. Michael Hansen

Well, I think we will. As we -- as our routes continue to get more efficient, we think that there will be some improvement there. But as Bill mentioned a little while ago, it really is hard to tell based on -- until we know where the revenue growth is going to continue to come from. If we were to see employment really pick up and our customers started hiring, we would really see some nice leveraging of those routes because we're adding revenue to the existing stops. If we continue to see the growth be driven by new accounts, then we may continue to add routes. And at some point, as Bill also said, we will add some plant capacity. And so it is dependent on where the revenue comes from. I would expect that our routes that we added last year will continue to get a little bit more efficient through this year.

Operator

And we'll go next to Andrew Steinerman with JPMorgan.

Molly R. McGarrett - JP Morgan Chase & Co, Research Division

This is Molly McGarret for Andrew. I just have one brief one. Can you give your view on sort of long-term targets, what you're thinking for top line growth and operating margins relative to prior peaks? If you bring it through this cycle, what will drive that in terms of the length of the cycle or penetration rate? What kind of variable do you think will drive that?

William C. Gale

Well, Molly, as we have indicated on a number of occasions publicly and probably in previous calls, the top line growth rate that we're going to be able to achieve is going to be dependent, to a large extent, on the robustness of the economy. So let's put it this way: if we continue to see an economy growing as it has been for the last year or so, the growth rates that you're seeing today are probably what you're going to continue to see. We're not -- unless we see an acceleration of employment, we're not going to see an acceleration of our growth rates organically. With that said, I think as we've talked a lot about on this call, we also have initiatives underway to improve the profitability of our business where we're getting to scale in some of the newer businesses. We've done some things, I think, in the rental side that will continue to improve the profitability there. So I feel good about growth. I just would say that I'm not going to really believe that we can do something that's not possible organically unless the economy cooperates a little bit more robustly.

Operator

And we'll go next to Gregory Halter with Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

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

J. Michael Hansen

I -- we don't really calculate it that way, Greg. The total...

Gregory W. Halter - LJR Great Lakes Review

Would it be the 5.0%?

J. Michael Hansen

Well, that was the total growth for the quarter, unadjusted. Yes.

William C. Gale

And there was no...

J. Michael Hansen

Actually, there was no acquisition price [ph].

William C. Gale

Yes, there were no acquisitions. So yes, it basically -- well, 5% -- adjusting for the workday, 6.7%, because there were no acquisitions.

J. Michael Hansen

Yes, right.

Gregory W. Halter - LJR Great Lakes Review

Okay. That sounds good. And in your guidance, I know you mentioned the -- I believe, you're modeling 122.5 million shares for the year. And in the guidance, on the EPS, does that assume that there won't be any further share repurchases or that they're not being counted in there?

J. Michael Hansen

That assumes that there will not be future share repurchases, yes.

William C. Gale

Now keep in mind, too, when Mike gave the outstanding shares, you've got to adjust for share equivalents that are sitting out there in the form of invested restricted stock and stock options. So that's one reason why the number is higher. I just want to make sure everybody understands that. But no, our assumption is that -- and that's included in our guidance, too, is that there would be no further share buybacks because we just don't have any basis on which to say what they would be.

Gregory W. Halter - LJR Great Lakes Review

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

William C. Gale

Well, I didn't say that, but I just...

Gregory W. Halter - LJR Great Lakes Review

Okay, one last one for you. On the rental business, I wonder if you could comment on how things like the fire-resistant clothing and Carhartt and womenswear are doing?

William C. Gale

Fire-resistant clothing continues to be a very nice business for us, Greg. This is where I'm very enthusiastic about government regulation because it is forcing a lot of customers to basically provide these type of garments to their employees. And as a result of that, being the largest FRC provider in the world, we're doing well there. That, coupled with the fact that the energy sector is a big user of that and continues to grow nicely in the U.S., obviously, has been one of the reasons that we've seen some growth there. Carhartt continues to be a star within the company. There is a unique set of workers and people in this country that like that product, and we're the only one who can offer that as a rental product, and it has certainly been beneficial to us and continues to do so, less so than the FRC, but it certainly is a benefit. Womenswear has picked up a little bit. I would say I'm not as enthusiastic about the growth there yet. I think we need to continue to develop the appropriate type of garments that are appealing to women in different types of jobs on a rental program. And so I would say it's better than it was, but it could be a lot better, and we're continuing to look at different things.

Operator

And we'll go next to Andrew Wittmann with Robert W. Baird.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

There's been a lot of talk about penetrating the health care market, I think, in the industry broadly. Can you just talk about some of your services that you're offering to the health care industry, some of the initiatives that you have in place? What would be really helpful is giving us some sort of size about the level of revenue that you're generating today from the health care industry and what your outlook is on for the growth rate there.

William C. Gale

I certainly think health care opportunities will continue to be one of the reasons why we will grow. And the penetration rate is still very low. The focus that we have in health care from a rental side is more in the facility services and providing products that can enable a health care institution to provide the sanitation they need to avoid the in-house problems that they have with infectious diseases and that sort of thing. So we've worked with health care to come up with some products that can help keep their place cleaner and, on a rental basis, that provides cost-saving opportunities to the health care institution, and we're continuing to do that. We've made some inroads, but it's still small. We're not really focusing on the garments of the nurses and the health care providers that you would see, that you would just generally see, but rather looking at scrub rentals and the facility services-type products. Now, of course, health care is a big industry for us in the Document Management business and continues to be a driver in the growth of that business because of the privacy protection laws that all health care institutions need to worry about.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Can you help us by giving us a general size of that business, Bill or Mike?

William C. Gale

No, I don't have that information available. And even if I did, Andy, I probably wouldn't be able to share it with you.

Operator

And that concludes our question-and-answer session. I'd like to turn the conference back over to Bill Gale for closing remarks.

William C. Gale

I want to thank everyone, again, for joining us this evening. We are very happy with these results, given the environment we're operating in, and we feel good about this year. So thank you, and we'll look forward to speaking with you in December, right before the holidays, when we announce our second quarter earnings.

Operator

Thank you, everyone. That does conclude today's conference. We thank you for your participation.

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