Cintas CEO Discusses F1Q2011 Results - Earnings Call Transcript

| About: Cintas Corporation (CTAS)

Cintas Corporation (NASDAQ:CTAS)

F1Q2011 Earnings Call Transcript

September 21, 2010 5:00 pm ET

Executives

Bill Gale – SVP & CFO

Mike Hansen – VP & Treasurer

Analysts

Stephen Gregory – Mandalay Research

Andrew Steinerman – JPMorgan

Justin Hott [ph] – Robert W. Baird

Chris McGinnis – Sidoti & Company

Ashwin Shirvaikar – Citi

Bhupender Bohra – Oppenheimer

Gary Bisbee – Barclays Capital

Vance Edelson – Morgan Stanley

Greg Halter – Great Lakes Review

Operator

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

Bill Gale

Good evening and thank you for joining Mike Hansen and myself for our first quarter of fiscal 2011 earnings conference call. Cintas reported today growth in revenues and net income for the first quarter. We saw revenue growth in each of our operating segments. Overall revenue growth was 3.6% compared to last year. Revenues were also approximately 1.7% higher than the fourth quarter of fiscal 2010, a quarter with the same number of work days as this quarter.

Earnings per share were $0.40 this year compared to last year’s $0.35 per share. Last year’s first quarter earnings did include an $0.08 charge for a legal statement on wage and hour litigation.

During the quarter and continuing into September, the Company purchased 7.6 million shares of its stock. Most of these purchases were made under a 10b5 filing that went into effect when the Company entered quiet period in mid-August. The Company made these purchases from cash and did not incur any debt.

At August 31st, 2010, Cintas has $369 million in cash and marketable securities. Of this amount approximately $167 million is outside the U.S., resulting from cash flow from non-U.S. operating units, leaving about $202 million of U.S. cash and marketable securities and no short term debt.

In September, $72 million of the August 31st, 2010, cash was used for share purchases. This completes the authorization for share purchases by the board. The board will determine at its future meetings whether any additional authorizations will be given. As noted in our release, the share purchases had no impact on earnings per share in the first quarter, but will increase earnings per share by about $0.05 over the rest of the year.

As a result, while revenue guidance for the year remains unchanged from that provided in July, our earnings per share guidance is increased by $0.05 per share on both the lower and upper end of the range given in July. We are encouraged with the recent modest growth and we believe that the North American economy will continue to improve at a relatively slow pace.

As a result, Cintas will continue to focus on taking care of its customers by providing valued products and services. In addition, we will continue to enhance our existing customer relations by providing additional products and services as well as seeking out new customers in all of our business lines. Finally, we will focus on cost control and investment in acquisitions, our capital investment that meet the appropriate return criteria.

As a reminder, the Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigations for forward-looking statements. This conference call contains forward-looking statements that reflect the Company’s current views as to future events and financial performances. 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 flings with the SEC as well as in the press release issued today announcing our first quarter 2011 results.

I will now turn the call over to Mike Hansen who will discuss this quarter’s results in more detail. We will then be happy to answer your questions.

Mike Hansen

Thank you, Bill. Total revenue for the first quarter of fiscal 2011 was $924 million, representing a 3.6% increase from the first quarter of last year. Total company internal growth was 2.8%. As Bill mentioned, each operating segment’s revenue grew compared to last year, both in total and organically.

Before discussing the quarter in more detail, please note that our fiscal 2011 work days are the same as last year. That means there are 66 work days in the first quarter, 65 in the second quarter, 64 in Q3, and 66 in Q4.

We have four reportable operating segments

Rental Uniforms and Ancillary Products, Uniform Direct Sales, First Aid, Safety and Fire Protection Services, and Document Management Services. Uniform Direct Sales, First Aid, Safety and Fire Protection Services, and Document Management Services are combined and presented as Other Services on the face of the income statement.

The Rental Uniforms and Ancillary Products operating segment consists of the rental 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. Rental revenue was $657.6 million for the quarter, which is relatively flat compared to last year’s first quarter, but up 1.5% compared to – ended May 31st. Internal growth was 0.1% over last year, which is also an improvement from last quarter’s internal growth of negative 1.1%.

The steady revenue improvement that we saw in the fourth quarter continued through our first quarter. The modest U.S. private sectors job growth continued in the first quarter. In addition, the focus of our sales of adding new customers and penetrating existing customer accounts positively impacted our first quarter rental revenue. Our wearers increased for the second straight quarter and our new business and net add/tops over the fourth quarter levels.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms, branded promotional products and other related products to national and regional customers. Uniforms and other related products are also sold to local customers, including products sold to rental customers through our direct sale catalog. Uniform Direct Sales revenue accounted for 11% of Company revenue in the first quarter.

First quarter revenue of $98.8 million represents an increase of 10.6%, compared to last year’s first quarter. Internal growth was also 10.6%. We are encouraged that our Uniform Direct Sales customers have shown a willingness to spend uniform dollars on new hires and new programs. Our revenue growth over last year for our global accounts and strategic markets division was a broad improvement in which we saw large national accounts as well as lodging, hospitality and gaming customer increase spending.

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 accounted for 10% of Company revenue in the first quarter.

During the quarter, revenues within this operating segment increased 3.9% versus last year’s first quarter. Internal growth was 2.2%. First Aid, Safety and Fire Protection revenue increased sequentially over the fourth quarter by 6.4%. This sequential improvement came in both first aid and safety and in fire protection.

Our Document Management Services operating segment includes document destruction, storage and imaging services. Document management accounted for 8% of first quarter total Company revenue. Revenue increased 30.7% over last year’s first quarter with internal growth of 23.2%.

Recycled paper prices remained at historically elevated levels during the quarter. Internal growth for Document Management Services excluding the recycled paper revenue was 10.6%.

Moving on to margins, total Company gross margin for the first quarter was 42.6%, a decrease compared to last year’s gross margin of 42.9%. This decrease is due to a 10 basis points increase in energy related costs and a 35 basis point increase in maintenance costs. As our volumes declined during the past two years, we reduced maintenance on certain equipments and trucks not needed for the declining capacity requirements. Consequently, as volume now increases, we have some higher maintenance requirements. We expect this increased level may continue into the second quarter as well.

The gross margin of 42.6% did represent a slight increase over e 42.4% gross margin for the quarter ended May 31st. First quarter energy related costs were down 15 basis points from the fourth quarter level. Rental gross margins of 43.5% were down 110 basis points from last year’s first quarter and the same as that of the quarter ended May 31st. Regarding comparison to last year, energy related costs were 15 basis points higher this year and as just discussed our maintenance cost increased 40 basis points.

Other services gross margin was 40.4% for the quarter as compared to 38.2% in last year’s first quarter, and 39.8% for the quarter ended May 31st. Compared to last year, the Other Services gross margin improvement was due to an improved document management gross margin, resulting primarily from the high paper prices and an improved First Aid, Safety and Fire Protection gross margin resulting from better sales mix in both first aid and safety and in fire protection.

Selling and administrative expenses were 31.8% of revenue, an increase from 29.7% for the first quarter last year. Selling expenses were up 110 basis points higher than last year’s first quarter. As we’ve discussed on the last few calls, we had a planned increase in our sales force during mid-fiscal 2010 as a result of the stabilization that we saw in the economy. Going forward, we expect our selling expenses to stabilize and start to come down as a percent of sales as revenue levels continue to increase.

In addition to the increase in selling, professional service expenses increased 20 basis points compared to last year due to our enterprise wide system conversion. And bad debt expense increased by 40 basis points due to a slight deterioration in our aging. Please keep in mind that our bad debt expense and allowance for doubtful accounts are based on a consistent application of our established accounts receivable policy, which includes specific reserve percentages for each aging category.

Sequentially, SG&A increased from the quarter ended May 31st, due to an 80 basis points increase in bad debt expense. Please keep in mind that last year’s first quarter included a legal settlement amounting to $19.5 million pretax net of insurance proceeds.

Our effective tax rate was 30.8% for the quarter compared to 38.1% last year. This rate was impacted by the closure of various tax audits in the quarter. Due to the timing of specific reserves builds and releases under FIN 48, our effective tax rate can fluctuate from quarter to quarter. We still expect our fiscal 2011 tax rate to be approximately 37.3%.

As Bill mentioned in his opening comments, we completed our authorized share buyback program by purchasing 7.6 million shares of our common stock at a cost of $202 million. And we did not incur any added debt as a result of these purchases. Since the purchases began at the latter part of the first quarter, these share buybacks did not impact our first quarter diluted earnings per share.

As a result of completing our authorized share buyback program, we have now acquired 27.9 million shares since May of 2005 for a total cost of $1 billion. Primarily as a result of the completion of the share buyback program, our cash and marketable securities decreased $197 million to $369 million at August 31st. We also increased our capital expenditures and acquisitions during the quarter. The steadily improving economic conditions provided some incentive to begin returning to historical levels.

Accounts receivable increased by $18 million since May 31st, primarily because of the higher revenue levels. DSOs on accounts receivable were 40, a slight decrease from last quarter’s 42. However, we did have a slight deterioration in our aging since May 31st, which caused the higher bad debt expense mentioned earlier. Our August 31st aging though is consistent with the aging of a year ago.

New goods inventory at August 31st was $184 million, up $15 million from May 31st, mainly due to planning for the increased volume levels and the fall season. This balance is relatively consistent with the total at the end of last year’s first quarter.

Uniforms and other rental items in service increased by $15 million from May 31st to August 31st due to the higher volume levels throughout the first quarter. Accrued liabilities decreased $24 million compared to May 31st due to the payment of our annual profit-sharing contribution and other benefit related accruals and scheduled bond interest payments.

Long term debt at August 31st was $787 million. Any early retirement of this debt would require a pre-payment penalty and is not currently attractive. Our average rate on the outstanding debt is approximately 6%. Total debt as a percentage of total book capitalization was 24% while net debt or long term debt less cash and marketable securities as a percentage of total capitalization was 14%.

Turning to our cash flow, cash provided by operating activities was $35 million, a decrease from $145 million in last year’s first quarter. Last year’s cash flow benefitted from lower working capital needs associated with our decrease in volumes and the accrual of the legal statement. This year the increase in revenue levels have increased our working capital needs such as increased inventory levels and higher accounts receivable balances.

CapEx for the first quarter was $48 million including $15 million for our SAP conversion. Our CapEx by operating segment was as follows

$23 million in Rental, $2 Million in Uniform Direct Sales, $8 million in First Aid, Safety and Fire Protection, and $15 million in Document Management. The CapEx associated with the SAP conversion was largely in Document Management and First Aid, Safety and Fire Protection operating segments.

We invested $48 million in the first quarter on strategic acquisitions. This includes the Document Management business in the U.K., which we announced in July and also several other smaller acquisitions in our Facility Services business, our Document Management business and our First Aid, Safety and Fire Protection Services business. We will continue to evaluate acquisition candidates as opportunities arise.

That concludes our prepared remarks and we will now take any of your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Vance Edelson from Morgan Stanley.

Stephen Gregory – Mandalay Research

Hello?

Bill Gale

Hi, Vance.

Stephen Gregory – Mandalay Research

Hi, this is Stephen Gregory actually from Mandalay Research. A couple of questions, Bill. Congratulations on a good quarter. In 2011, you are talking about earning – ecommerce is going to be the number one driver of the businesses and articles in The Wall Street Journal about two months ago on how companies are going to look to ecommerce to transform their businesses. Can you provide some color on the call today as what you think or believe your ecommerce vision will look like over the next couple of years and how you plan to get Cintas 2011 [ph]?

Bill Gale

Well, ecommerce for Cintas is primarily driven by some of our large national customers who have requested that they do ordering, inventory checking and other various reporting through an ecommerce platform and our IT, our information technology group works closely with our global accounts division to help these national customers do that. It is not going to be an appreciable part of our business though given the fact that most of our customers are small businesses or small operations of big businesses.

Operator

And we will go next to Gary Bisbee with Barclays Capital. Mr. Bisbee, please check your mute button. And as there is no response, we will move on. We will go next to Andrew Steinerman with JPMorgan.

Andrew Steinerman – JPMorgan

Hi, Bill and Mike.

Bill Gale

Hi, Andrew.

Andrew Steinerman – JPMorgan

I would like to talk about – hi, I would like to talk about pricing. I know there is sort of two pieces to pricing, what I will call kind of the ordinary annual pricing that will happen in the middle of a contract and I actually think during your fiscal first quarter that we just completed there might be kind of an aggregation of some of that typically in this season. And then of course there is prices that come into play when contracts are renewed. That’s usually the more competitive side the equation. If you could talk about kind of both sides of pricing, what I will call kind of the annual pricing versus the competitive contract renewal or new business, and when you put those tow together is net pricing still positive.

Mike Hansen

Andrew, the pricing that goes into effect is during the terms of a contract is primarily in our rental business and that has been driven – that is driven by the CPI, which has been basically flat to slightly positive. So we’ve had – we’ve got – we’ve had very little pricing improvement over the last year or so in our rental business due to the fact that there is basically no inflation.

With regard to renewals, we are finding that to be the most competitive situation that we are running into. Our customers, when they are at the end of their contract terms are vigorously approached by our competitors and it has resulted in a more competitive environment than we have seen. We have been talking about that for some time, and that has continued into and through this first quarter. I talked to our sales people with regard to new business, and while we have more competitive situations than we’ve had in the past, we haven’t seen the degree of pricing pressure on brand new business that we see in renewals of our existing customers.

So, overall, to answer your question, we had very little impact in our revenue during the quarter from increased pricing. I would say that basically pricing for our services in the rental business is probably flat compared to where it was over the last 12 months.

Andrew Steinerman – JPMorgan

And that’s flat all in considering both sides of placing, right?

Mike Hansen

It is – now, I will have to say to you it is very difficult to be given the number of products and the number of customers we have to be absolutely definitive on that, but as we look as trends, if we take out selected major products, that statement is true.

Andrew Steinerman – JPMorgan

Okay, very fast. Thank you.

Operator

And we’ll go next to Justin Hott [ph] with Robert W. Baird.

Justin Hott – Robert W. Baird

Good evening, guys. Thanks for taking my call.

Bill Gale

Yes, Justin.

Justin Hott – Robert W. Baird

So, just wanted to get a little more clarification on the guidance. I guess is it fair to assume that this quarter was kind of to your expectation and your guidance from here is still assuming employment remains weak and margins either hold flat to increase slightly?

Bill Gale

Yes, that is a very true statement. We were pretty much in line with expectations and as a result of that, we did not see any reason for us to increase our guidance for the year at this time. We still expect a very, very modest recovery over the rest of our fiscal year and into next.

Justin Hott – Robert W. Baird

Okay. And then just one more clarification on the pricing question. So were you saying in aggregate your pricing is flat, so including any benefit any benefit that you are getting from annual price escalators and then offset by any decrease in new business or were you saying that both of those in aggregate are flat?

Bill Gale

Basically, I am saying that in total that we are flat in the aggregate.

Justin Hott – Robert W. Baird

Total pricing is flat?

Bill Gale

Yes.

Justin Hott – Robert W. Baird

Okay. And then just the last question. One thing we’ve been monitoring is cotton prices have been elevated for a while and I am just wondering if there is any impact to your margins at this point from – as you are starting to source some new garments as the volumes are picking back up and if you’ve seen any pressure there, if you are able to pass that on to your customers?

Bill Gale

We have not seen any pressure from our suppliers that I am aware of. Therefore, we’ve had nothing to pass on to our customers. So the impact of higher cotton prices really has not impacted the cost of our garments that we are buying throughout the world.

Justin Hott – Robert W. Baird

Great, great. Thank you very much. Very helpful.

Operator

And we’ll go next to Chris McGinnis with Sidoti & Company.

Chris McGinnis – Sidoti & Company

Hi, thanks for taking the call. Can you talk may be a little bit about the acquisition environment you know I guess for all segments? And then may be talk a little bit about the Document Management and how that’s progressing for you?

Bill Gale

The acquisitions, as Mike indicated have picked up. You know, we told everyone on prior calls that we continue to be active looking for acquisitions, but we were very disciplined, we wanted to make sure we didn’t overpay in a declining economic environment, and it’s very difficult to predict exactly when things will develop, but we saw a nice quarter of closures and as a result of that we are very happy with these acquisitions. None of them really are large in and of themselves. The biggest one of course was the one we talked about in July and that’s still modest in size: the one that’s in the United Kingdom, the document storage business. So, right now, I would say that the acquisition pipeline is very active. We are continuing to pursue a number of targets, none of which though at this point are any significant size, but I would certainly expect there to be more acquisitions made throughout the rest of this year.

Regarding the Document Management Business, continues to be a very good business for us. We are working diligently on expanding our footprint across North America and into northern Europe. We are continuing to make all acquisitions in markets that we are not in as well as acquisitions in markets that we are in where we can tuck them in. And it continues to be a very good business. The environment is such that the – paper prices remain high. Therefore, a lot of little competitors are being very price aggressive with their customers because they are after the paper so they can get the recycled price, which was set relatively good level. So – but it’s a great business, continues to be small relative to our other businesses, but we have a lot of very positive feelings towards this business going forward in how it will continue to grow.

Chris McGinnis – Sidoti & Company

And I don’t know if you can break this down anymore since we do it in the Qs, can you just give a breakdown of what segments the acquisitions were for?

Bill Gale

Not at this time. We are – I am not prepared to give out that information.

Chris McGinnis – Sidoti & Company

All right. Thank you very much.

Operator

And we’ll go next to Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar – Citi

Hi, Bill, Hi, Mike.

Mike Hansen

Hi, Ashwin.

Ashwin Shirvaikar – Citi

So, just to start, I wanted to ask if you can provide a little more clarity on the sales environment where you have – where do you have success, is it primarily selling new clients or is it cross-selling new services to existing clients, where is the success coming in.

Mike Hansen

We’ve had – we’ve really seen the new business and the sales to existing customers improve this quarter over the last quarter and the last few quarters. And so we’ve – as the jobs increase, we get some benefit there as our sales force continues to focus on penetrating existing customers with additional products and services we were getting benefits. And we are seeing some pick-up in new business. So, we’ve seen some improvement in both areas.

Ashwin Shirvaikar – Citi

Okay. And with regards to the sort of your macro environment assumptions, I know you said they didn’t change, but could you sort of remind us with regards to what your assumptions are on employment trends, I know from manufacturing you had – except for the last month, you had some pretty good manufacturing employment data and that obviously helps you guys. So, at what point do you kind of call it a tipping point where you get more positive than you are?

Bill Gale

Well, Ashwin, it’s – I am not an economist, and I read everything that I can and trying to gauge what is happening, but our expectations are that we do not see a significant pickup in private sector growth, which is what is important to us. We do anticipate there will be some modest growth. And there we would expect as we go through the year the comparables become easier because we don’t have the significant drop-off that we’ve had – saw a significant drop-off last fiscal year and the year before. Then we’ll begin to see more of an impact of this revenue growth. So, I would say that as you look at our organic growth this quarter, our expectations here internally and our plan range from basically remaining at those levels going forward to slightly increasing them and that’s what drives you to the top end of the range. May be we get up to a revenue per day that’s modestly higher than it is now as we go through each quarter for the rest of the year.

Ashwin Shirvaikar – Citi

That’s very useful. So, if I take that and take your comments on pricing and look at the gross margin trend, I should probably expect gross margins to be flattish, may be a modest uptick. We could then still be 100-150 basis points lower than a year before and two years ago. Is that sort of a new normal for gross margins?

Bill Gale

No. No, I don’t think it’s the new normal, but I think your assumption is correct in that it is – there will be slight improvement. We will get back to those levels of where we were several years ago when we get back up to those revenue levels assuming that there isn’t a significant spike in energy cost or a significant deterioration in the pricing environment. But it’s not going to happen this year. And I am not even sure it will happen next fiscal year unless the economy really booms and we see a lot more top line growth, which I really don’t expect at this point.

Ashwin Shirvaikar – Citi

Okay. And my last question on the cash flow and CapEx front, CapEx for the quarter seem a little bit higher as – when it relates to sort of the trend line. You might have mentioned this, but is missed it. What was the CapEx for and are you kind of implying an upper end of the range CapEx currently and then correspondingly cash flow was much weaker than we anticipated? Was that primarily CapEx and bad debt type of situation or was there something else going on?

Mike Hansen

Well, let’s start with CapEx. Yes, we – back in July we gave you a range of $125 million to $150 million for the year and we do expect that we’ll be at the high end of that range. We did have $15 million of SAP in the quarter, and that project is moving somewhat quicker than anticipated earlier and so we may have a little bit more spending on that front than we thought back in July.

From a cash flow perspective, as we – as our revenue has grown throughout the quarter, we’ve seen our accounts receivable come up, we’ve seen our working capital needs come up and that’s had some drag on our cash from operating activities. But nothing that we think is unusual.

Bill Gale

Nothing that’s going to change our strategies going forward. We will certainly continue to watch it and manage it. And as I stated in my remarks, we are being very cautious and only approving capital that makes sense or acquisitions that make sense. But certainly in the more positive environment, we want to continue to invest in the business and we will continue to do so.

Ashwin Shirvaikar – Citi

Okay. Thank you. Very useful. Thank you.

Operator

And we’ll go next to Bhupender Bohra with Oppenheimer.

Bhupender Bohra – Oppenheimer

Hi, this is Bhupender sitting in for Scott Schneeberger from Oppenheimer. My first question, can you give some color on competitive environment of your shredding business and especially related to pricing and volume?

Bill Gale

The shredding business is a business that is – there are a lot of players in it. There are three relatively good sized players, Cintas, Iron Mountain, and Recall, and ShredX, those four big players. And I would say that all four of the big players continue to aggressive go after national business. I think Cintas is a little bit more aggressive going after local business as we continue to develop our footprint around the country. Our biggest competitive situation right now though rests primarily with the smaller players in all the market that we are at. And as I mentioned, they are being very aggressive on their pricing because they are after the paper itself to sell it to the recycler. So, while we certainly are going to continue to pursue business growth, we want to cautious that we don’t destroy the market by driving prices too far down. So, we think some of this is short term competitive situation on the part of some of the smaller players.

But even with that you could see our margins were still very good. We’re still continuing to grow that business and we still have a long way to go to really fill out our footprint and grow the relatively small size businesses we have throughout the United States into much bigger entities within each of those markets.

Bhupender Bohra – Oppenheimer

Okay. Okay, and the next one – I have one more actually on your U.K. storage acquisition. Just wanted to know like as you mentioned in your previous call like you plan to launch some products and services, if you can just give some color on that like in future on that – ?

Bill Gale

Well, we’ve only had it for three months and so far everything is great. We have a terrific management team over there. We are still working on developing our strategies on how we want to launch additional products and services. We haven’t done anything at this point. But it’s – like I said it’s only been a few months. So, so far we are very excited with the potential that exists over there.

Bhupender Bohra – Oppenheimer

Okay, and if I can have the last one, if you can give some color on new product development, anything planned for fiscal ’11?

Bill Gale

Well, I think the – everything probably saw the announcement on our tile and carpet cleaning business, which is starting out very well. It’s very small right now. We are in about 50 markets, usually with just one or two trucks within those markets, but we are finding great reception on the part of many large institutions that have been looking for a provider that can take care of their carpets and tiles and refurbish them to the point where they don’t have to replace them as quickly as they need, primarily in the hospitality and in schools, colleges, convention centers, that sort of thing. So that’s – that is one big area that we are in and then I’d say the other one in our rental business, because we are not – we certainly don’t give up on the uniform rental business is we have now a relationship with a provider of garments called Carhartt, which is a very loyal customer base that is primarily serving outdoors type activities. We now have developed a rental garment that we are having some great success in penetrating new customers with – and as well as existing customers at higher prices and we think that this is – that will be a significant advantage going forward. We are chemical dispensing, which is doing very well. So, I would say all of our businesses are looking for opportunities, but those three that I mentioned seem to be – have quite a bit of momentum right now.

Bhupender Bohra – Oppenheimer

Okay. Thanks a lot, guys.

Operator

And we’ll go next to Gary Bisbee with Barclays Capital.

Gary Bisbee – Barclays Capital

Hi, guys, can you hear me this time?

Bill Gale

Yes, Gary.

Gary Bisbee – Barclays Capital

Yes, okay, alright. Yes, following up on that one, what – can you just give us just a sense of the scope of offerings and size of the Facility Services business right now? I have just noticed in the last couple of press releases and even one or two spots on your website that’s getting more play than it used to. So is it basically just what we’ve thought about historically is the hygiene business or is there a lot more going on right now?

Bill Gale

There is a lot more going on. It represents about half of the rental segment. So, it’s become quite large. I think the approach that we’ve taken now is instead of a bunch of individual products, we are coming up with solutions for our customers, floor care, restroom care, that sort of thing that I think it’s more of a package solution more responsive to what the customer needs as opposed to just renting them an entrance mat or renting them an air freshener. So, we’ve broadened it out to be more service oriented. Over the last few years, Mike Thompson who used to fill in on these call is now working with our COO Phillip Holloman on really trying to determine what’s the best strategic direction for that business and how to continue to grow it and add products and services and come up with solutions that are geared toward a customer and taking care of many different things as opposed to just one or two items.

Gary Bisbee – Barclays Capital

So, when you say half of the rentals business, that would include mats and mops and some of these other – ?

Bill Gale

Yes, when I used Facility Services, that includes all those.

Gary Bisbee – Barclays Capital

Okay. I guess the second question, can you just give us a sense of remind us of how the profitability compares on new business in the first year versus growth from existing and I know – and not adding an employee, which we know – customer adding an employee, which we know is really high margin, but like selling an additional service to a new customer, are those both profitability weighed down a lot by the sales commission initially or should we think of that as still being fairly profitable?

Bill Gale

It depends on the business. You know you are – if it’s a uniform program, there tends to be lower profitability in the first year because you are injecting all those new garments, you got all the sales cost, the fitting cost, et cetera. And so it takes a while for that account to become profitable. But on some of the other products and services, when you go in let’s say to a customer and we are going to add tile and carpet cleaning, that’s pretty profitable stuff from day one. So it really varies depending on what the product is, what are the services and how much material cost is associated with it, what type of selling commissions are we paying, are there any setup type costs, et cetera.

Gary Bisbee – Barclays Capital

And so I guess the new business sales how they are each trending would correspond pretty closely to the organic growth that you’ve talked about it. Is there anything that could really energize the rentals business in the near term other than a much brighter economic picture and I guess what I am really getting at here is how much revenue growth do you think you need in rentals for the margins to really start filling some of this gap down over the last year?

Bill Gale

I think we are – I think not much higher growth than what we saw this quarter if we – as we go through the rest of the year and into next fiscal year as we continue to see an uptick in each quarter, I think you are going to see some margin improvement because we have a lot capacity that can be used.

Gary Bisbee – Barclays Capital

And then I guess just the last question from me. I thought the buyback was – certainly was a good move and it was somewhat surprising given commentary over the last couple of quarters. Did anything really change because it – I have a sense from you that you’d much more likely want to follow revenue growth strategy. Was this just an acknowledgement that there aren’t enough big targets willing to sell or was there something else that drove that decision to do that now? Thanks.

Bill Gale

I think there were a number of factors that came into play. The large cash balances, the lack of executable, big deals at this point, the fact that many of our shareholders had been communicating with us on some of their thoughts. The price of the stock, the fact that we couldn’t earn – hardly anything on the cash that was sitting on the balance sheet, and I’d say our confidence in the future.

Gary Bisbee – Barclays Capital

Okay. Thanks for all the color.

Operator

We’ll go next to Vance Edelson with Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi, can you hear me this time?

Bill Gale

Yes. Somebody popped in on you last time.

Vance Edelson – Morgan Stanley

Yes, that was odd.

Bill Gale

Very odd.

Vance Edelson – Morgan Stanley

Yes. So, the first question, just your thoughts on geographic expansion of the Greenfield variety for the core uniform rental business within the U.S., are there under penetrated regions, is this something we could see more of, could this be a potential growth driver going forward beyond acquisitions, beyond cross-selling opportunities?

Bill Gale

Vance, it certainly can be because there are markets that we are not – that we don’t have a large market share in very populated parts of the country, the northeast, California, name it, the southeast. So, I think there are great opportunities there. You take Chicago, we’ve got five or six uniform rental facilities within the Chicago area. There is no reason that we wouldn’t see similar or even greater numbers of opportunities in places like Southern California or the New York area or the Washington, New York, Boston corridor type situation. So, yes, there are still continued expansions. Just because we are in one city today doesn’t mean that we can't add two or three more facilities within that same geographic area. So, we will continue to look for that. You know I think we evaluate whether it makes sense just to – branch and plant spoke scheme or to look for a nice tuck-in acquisition like we did when we bought Van Dyne Crotty here a few years ago. So, there are a number of ways to do it. As employment has finally stabilized and now is beginning to show some life and some growth and we think that you’ll begin to start seeing some of those expansions in areas as we go forward.

There really aren’t a whole lot of cities in North America today though that we are not in. I think it will be primarily expanding within cities, regional areas where we are already present.

Vance Edelson – Morgan Stanley

Okay. That makes sense. And I may have missed it earlier. I was off the call for a minute, and I know you did address pricing, but you did you address the discipline or lack thereof on the part of your larger competitors. Have there been any changes on that front as the economy has improved some?

Mike Hansen

We hadn’t really seen a whole lot of change from the larger competitors from that standpoint, no.

Vance Edelson – Morgan Stanley

Okay. And just one more, if I may, regarding the share buyback, a long as you are going to do it or you have done it historically and there could be another one going forward, I am just curious, why purchase under the 10b5? A lot of companies indicate they are going to buyback opportunistically, in other words, they want to move in when the share price is low. Does the plan prevent you at all from having that kind of flexibility?

Bill Gale

No, we decided and the board advised us that they were comfortable with us establishing a 10b5 under certain parameters so that we could buy in the first quarter during the quiet period if the proper conditions warranted, which they did. So, that’s why we implemented it, otherwise we felt that we legally could not be buying our stock during the quiet period and we wanted to take care – take advantage of the opportunity if it presented itself.

Vance Edelson – Morgan Stanley

Okay, that makes sense. Thanks for the color.

Operator

(Operator instructions) And we’ll go next to Greg Halter with Great Lakes Review.

Greg Halter – Great Lakes Review

Yes, good afternoon, guys.

Bill Gale

Hi, Greg.

Mike Hansen

Hi, Greg.

Greg Halter – Great Lakes Review

I don’t know if you can provide any additional color between or behind the add/stops, but if you can I would appreciate it.

Mike Hansen

Well, as we mentioned, the add/stops did improve in the quarter and I would say that a lot of that improvement came in the uniform rental business, so we have seen our wearers pick up in the last couple of quarters, and we’ve also had some good performance on adding wearers at existing customers.

Greg Halter – Great Lakes Review

Okay. And I know you talked about energy cost and so forth, but I am not sure that you related that to your total revenue and what that increase or decrease may have been relative to a basis point change.

Bill Gale

It was about a – well compared to last year, let’s get the number, hold on just a second. Mike did talk about it. It was 3% for the quarter and that was for the rental business – there was a 10 basis point increase in energy cost – there was a 10 basis point decrease in energy cost in the first quarter compared to last year’s first quarter, is that right, Mike.

Mike Hansen

Yes, so it was about 3% of total revenue.

Greg Halter – Great Lakes Review

Okay. That sounds good. Thank you very much.

Operator

And we have no further questions at this time.

Bill Gale

Well, thank you, everyone, for joining us this evening. We are glad to have reported some positive results. We will – plan to release our second quarter earnings sometime in mid-to-late December. Appreciate it very much.

Operator

And this concludes today’s conference. Thank you for your participation.

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