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Cintas Corporation (NASDAQ:CTAS)

F3Q 2014 Earnings Conference Call

March 19, 2014 17:00 ET

Executives

Bill Gale - Senior Vice President, Finance and Chief Financial Officer

Mike Hansen - Vice President and Treasurer

Analysts

Hamzah Mazari - Credit Suisse

Sara Gubins - Bank of America

Shlomo Rosenbaum - Stifel

Justin Hauke - Robert Baird

Nate Brochmann - William Blair

George Tong - Piper Jaffray

Scott Schneeberger - Oppenheimer

Dan Dolev - Jefferies

Sean Egan - KeyBanc Capital Markets

Manav Patnaik - Barclays

Operator

Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today’s conference 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.

Bill Gale - Senior Vice President, Finance and Chief Financial Officer

Good evening and thank you for joining us. With me is Mike Hansen, Cintas’ Vice President and Treasurer. We will discuss our fiscal 2014 third quarter results. In addition, we will discuss this morning’s press release in which we announced an agreement o combine our Document Shredding business with Shred-it International. After our commentary, we will be happy to answer questions.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company’s current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC.

We are pleased to report third quarter revenue of $1.130 billion, which represents growth of 5.1% from last year’s third quarter. Our third quarter had one more workday than last year. Adjusting for this workday difference, revenue increased by 3.5% over last year’s third quarter. Organic growth, which adjusts for the impact of acquisitions and workday differences, was 3.1%.

Let me provide some color on our organic growth figure. First, we experienced a weaker Canadian dollar relative to the U.S. dollar negatively impacting organic growth by 0.5 percentage points the. Second, we had a difficult year-over-year comparison due to our Uniform Direct Sales operating segment having the largest uniform program rollout in the company’s history during last year’s third and fourth quarters. This adversely impacted this year’s organic growth by 1.7 percentage points.

Finally, revenue in this year’s third quarter was impacted by the severe winter weather experienced by the majority of the United States. There were numerous days, in which our operations or our customers or both were closed as a result of the severe condition. Due to the nature of our businesses, the effects were greatest on our first aid, safety and fire protection services and document management services operating segment.

Our operating income for the third quarter was $150 million or 13.3% of revenue. This operating margin was 90 basis points higher than last year’s third quarter operating margin, up 12.4%. Much of this improvement was the result of a very strong performance by our rental uniforms and ancillary products operating segment. Also the additional workday in this year’s third quarter had a positive impact on operating margin due to the number of our large expenses, including rental material cost, depreciation and amortization being determined on a monthly basis instead of a workday basis.

Third quarter net income was $84.6 million and earnings per diluted share were $0.69, a 15% increase over the EPS of $0.60 in last year’s third quarter. As Scott Farmer stated in our press release, despite the many headwinds this quarter, we grew earnings at a double-digit rate. We are pleased with our results for the quarter and fiscal year-to-date and we complement our employees who we call partners. We especially recognize the hard work and dedication of our route-based operations and partners who were challenged by this winter severe conditions.

Earlier today, the company announced an agreement with the shareholders of Shred-it International Incorporated to combine Cintas’ Document Shredding business with Shred-it’s Document Shredding business. Under the agreement, Cintas and Shred-it will each contribute its Document Shredding business to a newly formed partnership that will be owned 42% by Cintas and 58% by the shareholders of Shred-it. The combined entity will operate under the Shred-it brand and is expected to have annual revenue in excess of $600 million. In addition to its 42% ownership of the partnership, Cintas will receive approximately $180 million in cash at the closing of the transaction, which is expected to occur before May 31, 2014. Following closing the new company will be led by Vince DePalma, current Chief Executive Officer of Shred-it, who will become CEO of the new venture and Karen Carnahan, current President and Chief Operating Officer of the Cintas’ Document Management Division, who will become COO of the new venture.

The partnership will allow the Document Shredding businesses of both companies to leverage the combined scale and create synergies in a way to generate more profitable growth for shareholders, additional opportunities for employees and better service to customers. Such synergies include one IT platform taking advantage of the enhanced revenue and lower cost of plant-based shredding facilities versus on-site shredding and improve route efficiency and density.

We also see this transaction as in the best interest of our shareholders due to the opportunity to enhance value as noted above but also due to the nature of the shredding business. The volatility of the paper price we receive for the shredded paper creates an unpredictable variable in performance that is not present in our other segments. Additionally while we’ve found many opportunities to extend service offerings in our other segments the same does not exist in the Document Destruction business.

Based on our third quarter results and our view of the U.S. economic climate we’re updating our fiscal 2014 guidance with revenue in the range of $4.550 billion to $4.575 billion and earning per share in the range of $2.75 to $2.79. This guidance assumes no deterioration in the U.S. economy, does not consider any future share buybacks, and excludes any impact of the transaction with Shred-it described previously.

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

Mike Hansen - Vice President and Treasurer

Thank you, Bill. As Bill mentioned total revenue increased 5.1% from the third quarter of last year with total company organic growth being 3.1%. Total company gross margin for the third quarter was 42.4% which is an improvement from last year’s third quarter gross margin of 41.1%. I’ll discuss these items in more detail by segments

Before doing so let me remind you that there were 65 workdays in our third quarter versus 64 workdays in the same quarter of last year. Our fourth quarter will also have 65 workdays whereas last year’s fourth quarter had 66 workdays, so we’ll have one less workday in the fourth quarter. For the full fiscal year we will have 260 workdays which is one less than last year’s total. We have four affordable 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 phase 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 third quarter and totaled $801.7 million which was up 7.1% compared to last year’s third quarter.

Organic growth was 5.4%. The weaker Canadian dollar relative to the U.S. dollar impacted our rental segment growth by 0.6 percentage points. We continue to be pleased with the amount of new business generated by our sales representatives. Our rentals segment gross margin was 43.9% for the third quarter, an increase from 41.9% in last year’s third quarter which had one less workday than this year’s third quarter.

We continue to see improved leveraging of our fixed costs. We’ve been able to increase revenue without adding additional processing capacity. Also as we have discussed on previous calls we began to increase our route capacity in last year’s second quarter and we’ve now lapped that initial investment.

The efficiency of these routes has improved and has helped to increase rentals gross margin. The rental segment’s third quarter gross margin of 33.9% was also an improvement from the 42.9% in the second quarter. Energy-related costs were about 30 basis points higher than the second quarter, but improved route efficiency and fixed cost leverage were more than enough to offset the impact and drive margin improvement.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms and other related products to national and regional customers. Uniforms and other related products are also sold to local customers, including products sold to rental customers through our direct sale catalog. Uniform Direct Sales revenue accounted for 10% of company revenue in the third quarter and totaled $107.7 million. In comparison to the prior year quarter, revenue was 14.6% lower. The nature of this business is that the revenue can be quite choppy based on the timing of large national account program rollouts.

As we have discussed on previous calls, we had several very large national account rollouts during the second half of last fiscal year, which will not repeat this year. This prior year activity included the largest customer rollout in company history in the third quarter of last year. Uniform Direct Sales gross margin was 27.5% for the third quarter, down from last year’s third quarter gross margin of 29.2%. The prior year third quarter margin benefited significantly from the revenue from our largest customer rollout ever.

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 third quarter was $126.7 million. This represents an increase of 12.3% over last year’s third quarter revenue. Organic growth was 9.2%. The severe winter weather’s impact on this segment’s growth rate was 1.3 percentage points.

The segment’s gross margin was 43.5% in the third quarter compared to 44% in last year’s third quarter. The severe weather negatively impacted margin. Also the margin fluctuates from time-to-time depending upon the mix of products and services provided. The gross margin of 43.5% is slightly better than the second quarter gross margin of 43.4%.

Our Document Management Services operating segment includes document destruction, storage and imaging services and it accounted for 8% of third quarter total company revenue. Document destruction or shredding comprised about 80% of segment revenue for both the third quarter and fiscal year-to-date and about 70% of segment operating income. Please note that we allocate all of our corporate overhead to each segment. At this time, we are not able to quantify the amount of the overhead currently allocated to the document management operating segment that will need to be absorbed by the other operating segments after the closing of the transaction with Shred-it. We will provide more clarity in July when we provide fiscal year 2015 guidance. A gain or loss on the transaction will be recognized in the period in which the transaction is closed, which we expect to occur in our fourth quarter of fiscal 2014. Going forward, our investment in the partnership will be recorded under the equity method of accounting and we will record our share of the partnership’s net income or loss into our earnings.

Switching to selling and administrative expenses, SG&A was 29.1% as a percentage of revenue in the third quarter, which was up from last year’s third quarter figure of 28.7%. The change was due to a number of relatively minor items, including payroll tax increases imposed by various states, slightly higher bad debt expense and professional and legal fees related to the document destruction transaction previously mentioned. In the second quarter of this fiscal year, SG&A was 28.3%. The increase in the third quarter is due to the resetting of payroll taxes at the beginning of the calendar year.

Our effective tax rate was 36.8% for the quarter compared to 36.1% last year. Last year, our third quarter effective tax rate reflected the favorable impact of a change to certain tax regulations. We had no similar items in this year’s third quarter. We expect the effective tax rate for the full fiscal 2014 year to be 37.3%.

Turning now to the balance sheet, our cash and marketable securities were about $354 million at February 28, an increase of $41 million from the $313 million at November 30, despite the $93 million dividend paid within the third quarter. Accounts receivable increased about $9 million since November 30. DSOs were 41 compared to 40 in last year’s third quarter. Total inventory, including new goods inventory and in-service inventory at about $755 million at February 28 was relatively consistent with amounts at November 30. Accrued liabilities at February 28 decreased from the November 30 balance primarily due to the payment in December of our annual dividend. Long-term debt was $1.3 billion comparable to the amount at November 30 And net cash provided by operating activities for the third quarter was about $386 million, an $18 million improvement over last year’s third quarter.

CapEx for the third quarter was about $37 million. Our CapEx by operating segment was as follows: $25 million in rental, less than $1 million in Uniform Direct Sales, $3 million in first aid, safety and fire protection, and $8 million in document management. We expect CapEx for fiscal 2014 to be in the range of $150 million to $180 million.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Hamzah Mazari from Credit Suisse.

Hamzah Mazari - Credit Suisse

Good afternoon. Thank you. Just a question on the proceeds out of the JV of the document shredding business, I realize you want less exposure to OCC and ONP, but could you give us a sense of what you plan to do with the proceeds? And then also as you look to sell the imaging and storage business, what do you expect out of proceeds for that, maybe uncertain, but just give us a sense do you buyback more stock here? Do you reinvest in the business?

Bill Gale

Well, Hamzah I would say, first off the transaction has not closed. So it’s premature to discuss what we are going to do with the proceeds. Secondly, the board will certainly evaluate the utilization of the proceeds in the best way possible, but it’s really no different than what our current position has always been and that we will utilize our cash to grow our businesses by investing in those businesses with capital expenditures as appropriate. We will certainly look for good acquisitions. We are open to acquisitions in any of our businesses if they make economic sense and we have demonstrated that we certainly will be willing to repurchase stock if warranted. I will remind everyone that we purchased over 3 million shares of stock at the beginning of this fiscal year. With regard to your comment on the storage and imaging business, we have not made any decision yet on whether we are going to sell that business or not. We said that, that business will continue to be operated as Cintas’ businesses. We will look at opportunities for value creation, but nothing has been decided at this point.

Hamzah Mazari - Credit Suisse

Okay, thank you. And then maybe if you could give us a sense of how to think about the incremental margins you are currently generating, you mentioned better fixed cost absorption. Just give us a sense of where incremental margins are and where they could go given the current pricing environment, the additions on route capacity and just what you are hearing from your customers?

Bill Gale

Well, I would say we have – I think we have done an outstanding job with our margins in a difficult economic environment over the course of the last couple of years. Again, we are creating much of our growth through new business, which is more costly, but I think with the utilization of our assets, our facilities, our routes have really paid dividends and you have seen the improved margins in the businesses quarter-over-quarter especially within the rental segment and the first aid and safety and fire segments. So where can margins go? Certainly we think that they can continue to improve. We would love to have some opportunity to get some of that from pricing, but pricing remains very competitive as it has been for several years. And so what we’re doing is just making sure we’re running our operations as efficiently as possible utilizing our assets appropriately and we’ve seen some benefits from that.

Hamzah Mazari - Credit Suisse

Okay.

Mike Hansen

Keeping in mind Hamzah at the beginning of the year we signaled that there maybe a need for some additional processing capacity and that we’re still evaluating that but that may occur more than likely not this fiscal year but maybe in for the next fiscal year. And so they’re probably will come a time in the near future when some additional capacity is needed.

Hamzah Mazari - Credit Suisse

Got it. That’s very helpful. I appreciate it and I’ll turn it over. Thanks.

Operator

We’ll now go to Sara Gubins from Bank of America.

Sara Gubins - Bank of America

Hi, thanks. Good afternoon. Could you give us an update on the trends that you saw in the quarter in add-stops?

Bill Gale

Add-stops we’re still positive in the quarter, Sara but they were less so than they were in the first and second quarter of this fiscal year or even in comparison to the third quarter last year. However, I will remind everyone that those of you who monitor the jobs reports will also note that jobs added in this most recent quarter were less than they were in the first half of our fiscal year as well as in the third quarter of last year. So we would have anticipated more add-stops if the employment level had increased and yet that did not happen.

Sara Gubins - Bank of America

It makes sense. Could you give us an update on trends in different verticals within rentals particularly manufacturing but I’d be interested to get your broader comments as well?

Bill Gale

What we’re seeing is of course what we’re seeing is stable workforces among our customers and we’ve been seeing that for sometime, we’ve talked about it. Growth is coming from pretty much our traditional type of rental customers. I would say there is no one segment that really stands out. You mentioned manufacturing, well manufacturing is a segment, a part of the growth, but it’s really the service business that we continue to see which has the bulk of our wares and we continue to see opportunities for new customers in that particular vertical. So I don’t think anything really sticks out at this time, it’s generally just we’re selling more business to customers either no programmers or currently with other competitors that we really follow our traditional type of uniform ware.

Sara Gubins - Bank of America

Okay, great. And then just last question. It looks like there wasn’t any share purchasing in the quarter although I know you did quite a bit in the first half, any comments on that and how you are thinking about it for the rest of the year?

Bill Gale

Well I think yes keep in mind we bought 3 million share over 3 million shares in the first part of the year but we also were in the midst of this transaction which precluded our ability to be as active in the market as we might have been able to have the transaction not been occurring.

Sara Gubins - Bank of America

Thank you.

Operator

We’ll now go to Shlomo Rosenbaum from Stifel.

Shlomo Rosenbaum - Stifel

Hi, thank you very much for taking my questions. Hey Bill, who dictated or what dictated the equity split over there? Why would you guys not want to own that business? I understand there is some volatility but just based on the leverage that is possible from a bigger business and also the capacity utilization from your off-site shredding plus the fact that at some point in time the paper prices are going to come back. I would think that the contribution right now is at a point in time in the cycle that it’s probably not necessarily as good of a price as you could have valued the whole equity at in a few years?

Bill Gale

Shlomo it really comes down to what’s being contributed by both sides to this venture. So the fact of the matter is that Shred-it is contributing more revenue and more EBITDA than we’re at this point given the relative size of the destruction businesses. We think by retaining our ownership in this thing we see a very good opportunity for value creation by the combination of these two very strong organizations. And we think it is a very appropriate time to do this and we’re very pleased with the establishment of the relationship with Shred-it and the fact that we’re not a majority owner, it does not bother us given our confidence in the combined management teams and businesses of the two companies.

Shlomo Rosenbaum - Stifel

Just to be clear I think it’s a good deal, I was just hoping you would have done more equity on that deal based on where we are in the thing. I understand you’re saying based on the EBITDA and revenue contribution that’s what you came out with. So, why the $180 million payment, can you give us an insight into that?

Bill Gale

That’s primarily driven by the fact that we’re not contributing any debt to the operation, whereas the partnership is going to actually leverage themselves up with debt and in order to maintain the appropriate equity split we received cash at closing as a result of that transaction.

Shlomo Rosenbaum - Stifel

Okay, I understand. And then do you have any kind of estimate in terms of the weather impact to the overall business in general? Is there some way to quantify that or it just seems to me and when I’m going with this is the Uniform Rentals business I thought did particularly well despite the weather issues. So I’m just trying to figure out how well it really did underline?

Bill Gale

Well I think the Uniform Rental business was able to overcome some of the weather issues because many of our locations we have four day – four days route weeks. So in other words our operations have an extra day if needed to makeup when they have these types of conditions they have to operate in, whereas if you look at our other businesses we don’t have that extra, that flexibility and being able to overcome the loss of revenue on days when operations were required to be shutdown or customers were shutdown. So I think that was one of the main reasons. As far as quantifying it it’s difficult because we looked at it in a number of different ways and I think Mike mentioned it in his comments in the First Aid Safety segment we calculate that we probably have an impact to our growth rate of about 1.5%.

I would say we probably saw a similar if not little greater impact in the Document Management business and the Uniform Direct Sale business is very hard to predict. We know we had lower revenue from our catalog business which is sold by our route drivers due to the fact that they’re focusing making sure that could deliver and pickup the rental products and services and probably did not have as much time to spend with their customers and trying to sell products out of the catalog. The Uniform Direct Sale business much of our – that businesses in the hospitality sector and obviously they experienced some issues associated with the weather, that mean they slowed down some of their buying, I can’t say that for sure, I suspect that might be part of the case. But certainly weather did have an impact but with all that said I really think our people did a great job I mean we – I thought the results were very well, very good for given those conditions and so I feel very good about it.

Shlomo Rosenbaum - Stifel

And just one more just to clarify, the accounting on the JV, you guys are going to take the profitability of that business on to the P&L below the operating line? Is that how that’s going to work?

Bill Gale

Yes, that’s correct, Shlomo. So just to reiterate what Mike said basically after the transaction is completed there will be the recognition on a quarterly basis of our 42% share of the net income or loss of that JV, of that partnership. Now that partnership’s net income is going to be impacted in the first 12 to 18 months by some one-time cost as they’re attempting to gain the synergies that are going to be very good for this venture. And then we’ll see the benefit of those synergies as – coming forward as we move through the relationship. Obviously the leverage that will exist on that partnership will also be reflected in their net income, the interest expense. So we’ll be picking that part up in that recognition of the investment in the partnership. But it will be separately reported within the income statement and as you – you know and just for everybody else’s benefits, we will not be consolidating any of their revenue, it will be strictly an investment line.

Shlomo Rosenbaum - Stifel

Right. So in terms of the way you’re going to look at the business, you’re going to – looking at the business absent this investment basically go on a go forward basis, that’s what it sounds like after the sale?

Bill Gale

I am sorry I don’t understand your question.

Shlomo Rosenbaum - Stifel

In other words, on an EPS basis when you guys go ahead and give it, you are going to be talking about the operations of the business that you are actually controlling as opposed to this JV?

Bill Gale

There will be an EPS impact from this investment. It will fall into our net income and therefore be part of our EPS.

Shlomo Rosenbaum - Stifel

And you are going to give us guidance based on that as well, you are going to give us guidance next year?

Bill Gale

Well, we are going to give you to the extent we can Shlomo. You got to understand there is a business plan that’s being, going to be developed. We may not have all of the ability to really predict exactly what’s going to happen in the first year or so, but we will give you guidance to the best of our ability in July when we provide our first look at fiscal ‘15.

Shlomo Rosenbaum - Stifel

Okay, thank you very much.

Operator

Our next question comes from Justin Hauke from Robert Baird.

Justin Hauke - Robert Baird

Yes, good evening guys. I guess one more question on the transaction. Can you talk about what have any impact on the capital intensity of that business? And I guess the reason why I ask that is you are talking about doing more offsite shredding as opposed to onsite and our understanding has been that, that over the long run that’s less capital intensive, you need less trucks? And I guess the second part of the question would be just in terms of your M&A strategy, the document management has really represented the lion’s share of where you have been focused over the last few years and so now that this is part of the joint venture, I am just wondering is there still the same level of transaction capital that’s needed within that venture from you?

Bill Gale

The new partnership will fund its own capital requirements. So, we will not be injecting any capital to that partnership or we don’t anticipate injecting any capital in that partnership to continue to fund their growth. We still are running and operating storage and imaging businesses although that as Mike said, that’s only 20% of that segment. And I have some capital needs although they tend to be more stair step type needs as you fill up a facility then you have to purchase another facility and build the racking appropriately for that. So I would say that the capital expenditures will be lessened by the result of us not funding the document shredding business. On the other hand, as Mike said, we are going to have some capital expenditures needed over the course of next few years for production capacity in our rental business. We also are continuing on our implementation of an ERP system and that will consume some capital needs over the next year and the year after as we start moving into some of our other bigger businesses to put into SAP.

Justin Hauke - Robert Baird

Okay, that’s helpful. And I guess just are you going to continue to at least in the Qs where you have the consolidated contribution of the venture? I mean, are we going to have any more insight other than just the equity income contribution that comes to you, in other words…

Bill Gale

That is yet to be determined, Justin. There is a lot of very complex accounting rules and disclosure rules and we don’t have enough details yet to know exactly what we are going to be required to disclose or not.

Justin Hauke - Robert Baird

Okay. And then just the last one just a clarity, so there was no divestiture of any control of your operations to Shred-it. So in other words, I think you said the $180 million cash infusion was just to balance the capital structure of the two ventures coming together as opposed to you divesting any part of it as their direct ownership?

Mike Hansen

Right. You keep in mind the $180 million is coming to us and secondly we owning 42% of the new partnership, we will not have control of that partnership. It will be a minority interest.

Justin Hauke - Robert Baird

Okay, that’s helpful. Thank you very much.

Operator

Our next question will come from Nate Brochmann from William Blair.

Nate Brochmann - William Blair

Good evening gentlemen.

Bill Gale

Hello.

Mike Hansen

Hi, Nate.

Nate Brochmann - William Blair

Hey, why didn’t you talk a little bit in terms of just the overall pricing environment, obviously I know that everything kind of remains competitive, but it feels like it’s pretty rationale and stable right now. I was just wondering if you could talk about the pricing environment both in terms of kind of winning new business as well as some of the existing retention stuff?

Bill Gale

Well, Nate, I’d say it’s never rationale enough for us. We’d always like more. But with that said, I don’t think it’s improved a lot, but it certainly has been deteriorated. Our ability to win new business was still pretty good and retaining business, our loss business is very, very good and has been so for the last year or so, but it’s still tough. And I would say we are not able to get the kind of prices we like to have, because we have got some very good competitors out there who continue to price aggressively and we have to be able to meet them in the marketplace.

Nate Brochmann - William Blair

And are you seeing that more in terms of where you are running up against potential new accounts? Are you seeing that more on the retention side?

Bill Gale

When you say more, I think it’s not as bad as it was back in ‘09 and ‘10, but I’d say it’s been pretty steady. We are seeing at both places when a competitor knows that our contract with the customer is up, they are in there wanting that business just like we are in their customers when their contracts are up. And new business, it all depends on how competitive the buyer wants to be if they – that they want to get multiple bids, then it becomes more aggressive, but on the other hand, they are satisfied that our product offerings are better than what they can get elsewhere and they like the value of the business, which is one of the great things that we think we offer. Then often we can get closer to a book price on those new customers.

Nate Brochmann - William Blair

Fair enough. That makes sense. And kind of going back to the weather and the top line impact a little bit, you kind of gave a rough number of where you think that went and you clearly pointed out the overall macro jobs report number. In your kind of feel and talking to your customers, do you feel that there would be a little bit more momentum if it wasn’t for the weather out there in terms of just where the overall job growth is and your opportunity to win some new accounts or do you feel that it’s still sluggish at best?

Bill Gale

I think it’s still sluggish. I think the weather created a little bit more sluggishness than otherwise would have happened, but there is not a lot of momentum out there from what we can gather.

Nate Brochmann - William Blair

Okay, that’s great. I appreciate it. Thanks guys.

Operator

We will now move to George Tong from Piper Jaffray.

George Tong - Piper Jaffray

Hi, thanks. You talked earlier about excess capacity investments potentially for next fiscal year, where is your utilization currently and which segments do you think will require the most investment for growth?

Bill Gale

Well, it’s very difficult to utilization, George. It’s just, I mean, this is the local business and you got to look at every operation separately and every market separately, but we think the rental segment is 71% of our overall revenues they also are the ones that are going to require the largest amount of capital infusion in order to continue to grow on such a base. I think we have done a really nice job of continuing to utilize the existing capacity, but we are going to come to a point in certain markets and we have already started the process of looking for appropriate land to build the new capacity and that will be coming online over the course of the next couple of years. We always will have truck needs in both the rental business and in the first aid and safety and fire businesses. So that will be required. And then as I mentioned, I don’t want to overlook whether reiterate this, is the SAP ERP implementation looks like it will go forward and therefore it will consume some big capital in order to get that done, but we think the benefits of that are certainly justifying the expenditure in that – for that system.

George Tong - Piper Jaffray

And do you think the next round of capital infusion or investments will be similar to what you did last year in the second quarter?

Mike Hansen

Last year in the second quarter was primarily a route-based infusion if you will and we are going to – we have continued and will continue to add routes periodically as we need them and don’t expect another infusion if you will at any one point in time that is a significant amount from a routing standpoint, but as Bill mentioned there maybe some processing capacity CapEx.

George Tong - Piper Jaffray

Got it. Could you comment more on sales rep productivity in your Uniform Rentals business and specifically quantifying how much of the growth this quarter was driven by new business?

Mike Hansen

Sales growth continues to be driven by new business; our new business results are still good. We’ve been very pleased with the productivity levels. We’d like to see certainly more customer hiring but we just haven’t seen the momentum in the economy to be able to provide for that. So it’s continued to be driven by new business results.

George Tong - Piper Jaffray

Alright. And then lastly you noted a smaller positive add-stop metric this quarter, what assumptions for add-stops are you incorporating into your revised guidance?

Bill Gale

Well given the range of guidance it really could be anything from flattish to what we saw in the first half of this year. So it’s not going – we don’t see a significant change in the add-stops ratio over the course of the next three months. But I think the guidance allows for a variable from flat to a little bit more robust than we saw this quarter.

George Tong - Piper Jaffray

Got it. Thank you.

Operator

We’ll move to Scott Schneeberger from Oppenheimer.

Scott Schneeberger - Oppenheimer

Thanks. Good evening guys. With the guidance for fourth quarter and the full year, I’m just curious and we have a little incident that happened in the third quarter with an extra day, but with one less workday in the fourth quarter. Could you give us and help with our models with regard to perhaps top-line and operating income impact there? Thanks.

Mike Hansen

I think from a top-line standpoint you can simply take last year’s fourth quarter revenue divided by 66 days and multiply that by 65 days to get your base. From an operating income standpoint Bill and I’ve generally talked about a 50 basis point impact.

Scott Schneeberger - Oppenheimer

Great. Thanks for that. And then fiscal 2015 versus fiscal 2014 now, I think you gave 2014 over 2013 for full year date with – just allowing the theme, but is there going to be a difference?

Mike Hansen

They will be the same. There will be 65 work days in each quarter in fiscal 2015 for a total of 260, the same as to fiscal 2014.

Scott Schneeberger - Oppenheimer

Great, thanks. And then going back to the earlier questions guys obviously a lot of cash coming in, maybe a little you mentioned ERP might take up more CapEx, but probably less from the relationship now with Document Management. So we’ve got into now probably a lot of opportunity for buybacks. But I was just curious I think a lot of the acquisition activity historically has been in Document Management which did certainly leave the door open there. I was hoping to delve in a little deeper as to what type of opportunities you may explore may pursue on the acquisition front? Thanks.

Bill Gale

Scott, we’re going to pursue acquisitions in all of our businesses as appropriate. Now we’ve been making acquisitions in the fire business, we made a lot of acquisitions to establish our footprint in first aid. We’ve had some fairly significant uniform acquisitions although nothing significant since 2006, but we’re certainly open to that. Again you have to have a willing seller and you have to have appropriate valuation to make sense. And we will continue to look at those opportunities as they present themselves.

Scott Schneeberger - Oppenheimer

Great. And one final one if I could, obviously in direct sales a year ago, a big national customer would – want a progress report on how that’s going and how the big customer addition outlook is within that segment? Thank you.

Bill Gale

The big customer was the United Airlines Continental merger and that was the one that we were asked to provide all the uniforms for the new combined airline. And I would say it went extremely well, they were very – they’re very pleased with it. And I think it turned out to be successful for both sides.

Scott Schneeberger - Oppenheimer

Thanks, guys. Thanks very much.

Operator

We’ll now go to Dan Dolev from Jefferies.

Dan Dolev - Jefferies

Hey, guys. Thanks for taking my question. Back to the acquisition, it seems like it’s a fantastic deal. Per my math you’re sacrificing about $10 million of EBITDA getting paid $180 million. I mean back in September you said that you’re still pursuing a lot of Document Management acquisitions. So my question is really what has changed, was it valuation that was so attractive or were there any other bigger strategic decisions to maybe over time completely get rid of this business in the long-term that made you do this? Thanks.

Bill Gale

Well we really aren’t getting rid of the business. We still own 42% of a bigger entity. So I don’t think you should assume that there was – that was involved in this. I think it’s an opportunity to join two very good companies that will focus totally on document destruction and I think you’re going to see value creation as a result of those two entities coming together run by very good management teams and we’re going to share in that upside as well as having getting $180 million upfront on this thing?

Mike Hansen

Yes, Dan, one of the reasons we talked about really liking these small document shredding acquisitions over time. And this is very much like a large one where we have a lot of opportunities to put more volume into our plant-based shredding facilities to get efficiencies, to drive on to one IT platform. And we’ve got a lot of opportunities here that it takes a long time to accumulate many small acquisitions in order to get the synergies created by this deal. So that’s why we’re so excited about this deal.

Dan Dolev - Jefferies

Got it. Did it make more sense than just buying Shred-it?

Bill Gale

No, I don’t think Shred-it was necessarily for sale and they were bigger than we were. And I think that the combination of the two made more sense to our Board and to the management team than any other opportunity that was available.

Dan Dolev - Jefferies

Got it. Bigger you mean on a shredding size not on an overall size?

Bill Gale

Right. But that’s what this is focused on is the shredding side only.

Dan Dolev - Jefferies

Got it. Well thanks a lot. Appreciate it.

Operator

Our next question will come from Joe Box from KeyBanc Capital Markets.

Sean Egan - KeyBanc Capital Markets

Hi guys. This is Sean Egan in for Joe Box. I just have a quick question. I wanted to go back to the pricing environment you spoke of earlier. When you mentioned that pricing pressures were kind of creating an environment that wasn’t where you would like it to be, we’re hearing from our contacts that they’re getting quite a bit of pushback from a lot of their customers due to Affordable Care Act implications on their budgets. And they’re really sharpening their pencil and pushing back on their vendors and I’m curious to know how much of that pricing pressure are you seeing from competitive or new competitors versus an existing client coming back to you and pushing back?

Bill Gale

Sean I really don’t have the knowledge to really comment on that. Again we’ve got thousands and thousands of customers and locations. I’m sure there were some examples that exist of what you said. But for me to really say that that’s what we’re seeing, I really don’t know.

Sean Egan - KeyBanc Capital Markets

Okay, great. And then just a housekeeping item following up, regarding the transaction, are there any anticipated charges such as any write-downs associated with the deal possibly by the end of the fiscal year?

Bill Gale

All that should – there certainly are those things that could happen. As we said its very complex, accounting and tax transaction, all that will be a part of what a gain or loss gets recognized as we move forward on the deal. So I don’t – I’m not in a position at this time to be able to tell you what that is because there was a lot of work yet to be done on valuations and really looking at the details of the deal. And we will certainly provide color on that as we report our fourth quarter results in July. We do not anticipate providing any further guidance on that at this time. We will discuss it so with the fourth quarter.

Sean Egan - KeyBanc Capital Markets

Okay, great. That’s all from me. Thank you.

Operator

(Operator Instructions) We’ll now go to Manav Patnaik from Barclays.

Manav Patnaik - Barclays

Hey, good evening gentlemen. Just one question around the thought process with document management, I mean clearly Shred-it was purely shredding, you guys obviously kept shredding in the document management together. Just some can you just remind us sort of what the strategy there was and why that got left behind?

Bill Gale

Well, the original strategy years and years ago, Manav, was that we first got into document destruction, the document shredding. And then we wanted to – we had some opportunities to pickup some storage business and we thought that, that might be required in order to appropriately grow the shredding business. We have been happy with some of the storage businesses that we have purchased. And as we have studied this industry, you really don’t have to have both of them in all the markets in order to grow either one of them. So it became apparent to us and we started saying this a few years ago that we were going to focus more on the destruction side and we were just opportunistically going to look for places in which to grow the storage business, but not in a big way. Shred-it, on the other hand, has a very, very small storage business in Canada. They have focused primarily almost exclusively on the destruction side. And really it doesn’t make sense to throw our storage and imaging business into this deal, because the whole concept here is to focus on document destruction. And so that’s how this whole thing is transpired.

Manav Patnaik - Barclays

Okay, fair enough. And then just a quick point on the M&A pipeline, clearly you guys have slowed down the pace of the small M&A that you guys have done across the board. You mentioned obviously, I sort of understand that landscape in the uniform rental space, but can you help us understand the number of smaller players or midsize larger in the fire, safety area because I guess that’s the other area that you had been active?

Bill Gale

Yes. And we are still active, there are a lot of players in the fire business that we are in discussions with, but again it comes down to an expectation on the part of the seller versus what we are willing to pay in order to get the appropriate valuation for our shareholders. So there have been some small acquisitions and will continue to be. They will pick up when the meeting of the minds get closer together.

Manav Patnaik - Barclays

Okay, alright. That’s helpful then. Thank you, guys.

Operator

And it appears there are no further questions. I will turn the conference back over to you Mr. Gale for any additional or closing remarks.

Bill Gale - Senior Vice President, Finance and Chief Financial Officer

Well, I want to thank everyone for joining us tonight. I also wanted to thank you for moving it back like we moved back a day and being able to participate tonight. We are sorry for that bit of confusion, but a lot of that revolved around the timing of this acquisition, I mean this transaction I am sorry and so we appreciate that. We are very excited about forming this partnership with Shred-it. We think it’s great for the shareholders, for our customers and for our partners and we will look forward to talking to you more about it in our fourth quarter earnings release, which should occur sometime in mid-July. Good night.

Operator

This concludes today’s presentation. Thank you for your participation.

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