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Cintas Corporation (NASDAQ:CTAS)

F2Q2011 (Qtr End 11/30/2010) Earnings Call

December 21, 2010 5:00 pm ET

Executives

Bill Gale - SVP, Finance and CFO

Mike Hansen - Treasurer

Analysts

John Healy - Northcoast Research

Gary Bisbee - Barclays

Scott Schneeberger - Oppenheimer

Ashwin Shirvaikar - Citi

Vance Edelson - Morgan Stanley

Andrew Steinerman - JPMorgan

Greg Halter - Great Lakes Review

Justin Hawk - Robert W. Baird

Chris McGinnis - Sidoti & Company

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.

Bill Gale

Good evening and thank you for joining us. With me today is Mike Hansen, Cintas' Vice President and Treasurer. After some comments on the quarter's results, we will open the call to questions. For the quarter ending November 30, 2010, total revenue was $936.6 million, an increase of almost 6% compared to the second quarter last year. Organic growth was 4.2%.

As noted in the release, revenue in all of our business segments grew over last year, with rates even better in Rental, and First Aid, and Safety and Fire than what we saw in the first quarter of this fiscal year. We also saw improved revenue per work day of 3% compared to our first quarter results. Net income was $55.9 million and earnings per diluted share were $0.38.

Our tax rate in the second quarter was 38.3% versus 30.8% in our first quarter. The first quarter tax rate reflected the release of certain tax reserves, resulting from the resolution of several tax audits. As we mentioned in our first quarter call, we expected the tax rate to be higher in the second through fourth quarters.

While unemployment continues to be stubbornly high, we are encouraged that business confidence has appeared to turn the corner. We have seen the third consecutive quarter of increased wears in our uniform rental business and our direct sale business posted another good growth quarter. Our emerging businesses are First Aid, Safety and Fire Protection and Document Management had good revenue increases also.

We continue to reiterate the guidance we've provided at the beginning of the fiscal year and updated at the end of the first quarter for the share buyback. We expect our revenues to be between $3.55 billion and $3.75 billion and our earnings per share to be between $1.55 and $1.63. Our financial condition remains very strong, while we did use approximately $200 million of our U.S. cash to purchase our stock.

We still have sufficient borrowing capacity, as well as sufficient cash outside the U.S. to fund our growth initiatives. The board of directors also gave us another $500 million share authorization in late October, to be used as directed by the board if market conditions warrant. None of that authorization has been used as of this time.

Cintas paid its annual dividend of $0.49 per share on December 15, approximately three months earlier than our traditional March date. The dividend was increased from the $0.48 paid last year, the 28th consecutive year we have increased our annual dividend since we went public in 1983.

The last couple of years have been very difficult for the U.S. economy with the loss of millions of jobs, while it could take some time for employment to return to pre-recession levels. We are encouraged by some of the positive signs that are appearing. Generally speaking, our customers businesses have stabilized their work forces and appear to be on the verge of modestly expanding.

We also are very appreciative of the efforts of all of our employees, who we call partners, who made it their mission to take care of our customers and to continue to keep Cintas profitable and cash flow positive during the difficult past few years. We see growth opportunities with all of our business segments. We believe that with the growth as well as the ongoing productivity initiatives underway in the company, we will continue to see margin improvement and positive operating cash flow.

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 flings with the SEC.

I will now turn the call over to Mike Hansen.

Mike Hansen

Thank you, Bill. Total revenue for the second quarter of fiscal 2011 was $936.6 million, representing a 5.9% increase from the second quarter of last year. Total company internal growth was 4.2%, an increase from the 2.8% internal growth in our first quarter. 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 were 65 days in the second quarter and there will be 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 and 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 serving of uniforms, mats, towels and other related items. The segment also includes restroom supplies and other facility products and services. Rental Uniforms and Ancillary Products revenue accounted for 70% of company revenue in the second quarter. Rental revenue was $657.8 million for the quarter, which is up 2.2% compared to last year's second quarter.

Internal growth was 1.9% over last year, which is an improvement from last quarter's internal growth of the 0.1%. Our revenue momentum of the last few quarters continued in our second quarter. The modest U.S. private sector job growth in the second quarter positively impacted our business.

In addition, the productivity of our sales force continued to improve. This improvement was due to the impact of new products and services like Carhartt and our tile and carpet service, and was due to improved rep tenure. As you may recall, we increased our investment in sales about a year ago and have seen steady productivity improvements since then as new reps become more efficient.

In addition to the productivity improvements, our account retention improved compared to last year and compared to this year's first quarter. The stabilization of the economy has certainly helped, but we have also been very focused at providing outstanding customer service.

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 12% of company revenue in the second quarter. Second quarter revenue of $180.8 million represents an increase of 9.4% compared to last year's second quarter. Internal growth was also 9.4%. Our Uniform Direct Sales business has shown a nice rebound over the past three quarters. As in the first quarter, this rebound continued to be broad improvement in which we saw large national account customers, as well as lodging, hospitality and gaming customers 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 second quarter. During the quarter, revenues within this operating segment were $93.3 million, an increase of 14.4% versus last year's second quarter. Internal growth was 8.4%, a strong improvement over the first quarter internal growth rate of 2.2%. Both First Aid and Safety and Fire Protection Services internal growth improved relative to the first quarter, and the Fire Protection Services internal growth was in double digits.

Fire benefited from an improving economic environment, growth in our national accounts business and greater sales team productivity.

Our Document Management Services operating segment includes document destruction, storage and imaging services. Document Management accounted for 8% of second quarter total company revenue. Revenue increased 27.9% over last year's second quarter to $76.6 million, with internal growth of 14.7%. While this is still very positive internal growth, it is a decrease from the first quarter internal growth of 23.2%. Much of this decrease in growth rate relates to recycled paper revenues. The price of recycled paper increased significantly during last year's second quarter, and has remained at historically elevated levels since that time.

As a result, we have started to anniversary that large increase, thereby reducing our recycled paper revenue growth rate. If the recycled paper prices continue at current levels into our third quarter, we will see some further slowing of the growth rate.

Moving on to margins, total company gross margin for the second quarter was 41.7%, which is in line with last year's second quarter gross margin of 41.8%. Energy-related costs were up 15 basis points, and as was the case in our first quarter, our maintenance expenses were up 25 basis points.

The gross margin of 41.7% decreased, compared to the 42.6% gross margin for the first quarter. This decrease is largely due to having one less work day in the second quarter compared to the first. An example of the work day impact is that our in-service inventory material cost is based on a monthly amortization schedule. So we essentially have the same expenses as in the first quarter, but one less revenue-generating day.

We experienced a similar decrease, in that case 110 basis points from last year's first quarter to the second quarter. Rental gross margin of 42.6% was down 90 basis points from last year's second quarter. Higher energy and maintenance expenses accounted for 50 of the 90 basis points. The remaining decrease is due to higher material cost.

As our wearers have increased over the past three quarters and new business results accelerate, we have injected more garments into our in-service inventory.

The rental gross margin of 42.6% was also a decrease from the 43.5% in our first fiscal quarter. As already discussed, this decrease is largely driven by one less work day in our second quarter.

Other Services gross margin was 39.6% for the quarter as compared to 37.3% in last year's second quarter. All three of the operating segments within Other Services improved, with Fire Protection Services improving the most due to the elimination of installation work. All businesses also benefited from higher volumes this year. Relative to the first quarter, the Other Services gross margin of 39.6% was a decrease of 80 basis points. This is primarily due to the Document Management Services gross margin, which decreased by 180 basis points from the first quarter for a few different reasons. Our European Document Management business, which now accounts for roughly 14% of our total Document Management business, had a decrease in its gross margin due to various initial expenses associated with our recent acquisitions.

Our Storage business had several Greenfield starts this fiscal year. And lastly, our Imaging Services business is primarily a project-based business, which makes the margins more volatile from quarter-to-quarter.

Selling and administrative expenses in the second quarter were 30.8% of revenue. This is a 100 basis point decrease from the 31.8% of revenue in the first quarter. A number of different areas contributed to this decrease, including G&A labor and medical expenses. Selling expenses as a percent of revenue were similar to the first quarter.

The selling and administrative expense of 30.8% of revenue was an increase from the 29.3% for the second quarter last year. Selling expenses were 60 basis points higher than last year's second quarter.

As we have 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.

In addition to the increase in selling expense, Professional Service expenses increased 30 basis points due to our Enterprise Live system conversion, and bad debt expense was 20 basis points higher than last year due to a slight deterioration in our aging compared to last year.

Please keep in mind that last year's second quarter included a legal settlement amounting to $4.1 million pre-tax net of insurance proceeds.

Our effective tax rate was 38.3% for the quarter compared to 39.3% last year. Due to the timing of specific reserve bills and releases under FIN 48, our effective tax rate can fluctuate from quarter to quarter. We expect our fiscal 2011 effective tax rate to be approximately 37.3%.

Our cash and marketable securities were $285 million at November 30, a decrease of $85 million from August 31, 2010. As we discussed last quarter, we used $72 million in September for the execution of our share buyback program.

Accounts receivable increased by $18 million since August 31, primarily because of the higher revenue levels. DSOs on accounts receivable remained at 40, the same as at August 31.

New goods inventory at November 30 was $208 million, up $24 million from August 31. We will be converting our global supply chain to the SAP system in our third quarter as part of our company conversion to the Enterprise Live resource system.

In anticipation of this and as a precaution, we have intentionally built up inventory levels prior to the conversion. We have also built up our Carhartt and our flame-resistant clothing inventory levels.

Uniforms and other rental items in service increased by $17 million from August 31 to November 30 due to the higher volume levels throughout the second quarter. Accrued liabilities increased $101 million compared to August 31 due to the $72 million accrual of the dividend which was paid on December 15, and increased bondage risk and accrued profit sharing.

Long term debt at November 30 remained at $787 million. Any early retirement of this debt would require pre-payment penalty, and it is not currently attractive. Our average rate on the outstanding debt is approximately 6%. Total debt as a percentage of total book capitalization was 25%, while net debt or long term debt less cash and marketable securities as a percentage of total capitalization was 17%.

Turning to our cash flow, cash provided by operating activities was $74 million for the second quarter, a decrease from $149 million in last year's second quarter. Last year's cash flow benefited from lower working capital needs associated with our decreasing volumes and the accrual of the legal settlements. This year, the increasing revenue levels have increased our working capital needs such as increased inventory levels and higher accounts receivable balances.

The second quarter cash provided by operating activities of $74 million dollars was an increase over the first quarter's $35 million.

CapEx for the second quarter was $40 million. Our CapEx by operating segment was as follows; $27 million in rental, $1 million in uniform direct sales, $5 million in first aid, safety and fire protection and $7 million in document management.

We invested $41 million in the second quarter on strategic acquisitions. This includes a number of small acquisitions in 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.

Operator

(Operator Instructions) And we will take our first question from John Healy with Northcoast Research.

John Healy - Northcoast Research

Question for you about cost and input cost in your business. I have been reading a lot about rising cotton prices and I was wondering if you could talk a little bit about those and maybe how much they are as a percentage of sales and what you are seeing there, and as well as your thoughts on energy prices going forward. There is a lot of speculation there. Oil is going to have a big run up in 2011, and I wanted to get your thoughts on how you feel about the likelihood that you will be able to pass any sort of energy cost increases that we see next year through your business without that really crimping back the margins.

Bill Gale

Sure, as far as cotton prices go, they are less than 5% of our rental business. And the reason is because many of our garments are 65/35 Poly Cotton Blend. And then when you include the direct labor cost component, the overhead cost component, freight, to get in, the cotton content is not a significant piece of the garment's total cost.

When you then think about that cost of the garment being amortized over 18 months, it almost acts like a natural hedge such that cotton costs need to be elevated for quite a long period of time before it has a significant impact on us. So we don't expect that big of an impact on us this fiscal year, but certainly we're keeping our eyes on it. And we are working with our vendors to minimize the impact to us. As it relates to passing those costs on, we feel pretty good about the ability to do so to our customers.

There is a lot of talk about this increasing cost, and I think it's a reasonable thing to do to pass that on at some point.

In the energy area, certainly, especially with gasoline, John, it's something that we are having to keep our eyes on. We believe that if the gasoline prices continue to increase, we will have the ability to pass along those increases through our price increases. Tends to be a bit of a lag, but we'll be able to recoup that as we go forward, we expect at this time.

John Healy - Northcoast Research

And then was hoping if could talk a little bit qualitatively about the environment that you're seeing out there on the new sale side, and what you are thinking more of on the rental business. Are you seeing any signs of life that the small business customer that you focus on is showing any better vital signs? Are you starting to see more free activity? I know the rental business continues to firm up a little bit. And we are just trying to get a better understanding of where the firming is taking place.

Bill Gale

We are seeing a much more, I guess, accepting attitude on the part of businesses to look at potential expansion of their own businesses. I don't want to characterize it as extremely bullish, but certainly, we have turned the corner on this given that it's our third consecutive quarter of increased wearers. Our sales people are getting a lot of presentations, a lot of interest on the part of prospects, both at our current programmers as well as no programmers.

So yes, it is a better environment than we have seen for the last few years. And we're cautiously optimistic that as we get into '11 we're going to see a reasonable growth rate in our wearers and continued expansion of all of our business lines.

Operator

And we'll take our next question from Gary Bisbee with Barclays.

Gary Bisbee - Barclays

I guess a couple of questions. Let me follow up that one on Rentals. I've seen a couple of press releases out there targeting what looks more like some of the facility services type stuff. There was one last week I think that had sounded to me like it had a health care angle to it, maybe was infection control or something, and I have seen a couple of others. How much is this whole facility services area contributing to the rentals growth? Should we think of that as one of the things that's driving the growth rebound, or I should say re-acceleration there?

Mike Hansen

Gary, it's contributing to it, but I don't want to leave the impression that the garment revenue wasn't growing also, because it is. If you look at our total rental business today, it's about 50/50, facility services versus garments. And so, I would tell you that we're seeing growth in both areas.

Gary Bisbee - Barclays

Okay, that's good to hear. I guess two questions on the Document Management business. You mentioned a couple of new storage facilities. I know a year or so ago you were sort of treading cautiously, maybe the right way to say, with that business. It seems to me that there is a fairly weak return on invested capital and it takes significant upfront capital investment to scale I guess given what seems like a pretty competitive business.

How are you thinking about the decision to scale the storage piece? And how are you trying to position yourself competitively to be successful in that business?

Bill Gale

We are continuing to be very cautious in the storage business. We have not, in the U.S. made any acquisitions of existing storage operations, but rather we have selectively picked out cities where we will have a base amount of business from a national customer and established a shredding business that we will then start up an operation on storage.

While there are some short term losses associated with these Greenfields, its nothing like the significant investment that needs to be made and then a lengthy return on the investment that might happen from being very acquisitive with storage companies.

So it is selective, it's very strategic and it's pretty much driven by customer relationships that we already have.

Gary Bisbee - Barclays

And I guess a follow-up question on that business. I think you mentioned, growth could slow a bit more if recycled paper prices continue to stabilize where they seem to have been recently. But I guess we lapped a big year-over-year increase. How should we think about the margins as we look over the next few quarters? You mentioned a couple of investments that have brought margins down a bit. Is that reasonable to expect you'll continue to make that level of investments and the margins could drift a little lower, or should we think of scale helping the margins in the document business overall?

Bill Gale

You know, it's difficult to project when an acquisition might make itself available. But I would tell you that we believe that you should see margin expansion in those businesses. We are not going to pass up on a great acquisition opportunity if it becomes available. But I think that at this point, my expectation is that the new acquisitions that we made and specifically the European ones are going to continue to show improved margins going forward. And certainly our U.S. operations have done very well and we'll continue to do so. So I think you'll see improvement there.

Gary Bisbee - Barclays

And then just one last one on the SG&A. Can you give us any sense how you're thinking about that trending. Nice to see it down a bit this quarter as a percent of revenue, but now that we're starting to lap that sales hiring, should we expect that you might begin to get some leverage on that if we continue to see this modest sales reacceleration, or are you still investing heavily there?

Bill Gale

Mike and I both talked about the fact that we expected leveraging of our SG&A line as we went through the year. So I think it is clear that what we said is starting to happen and you could see it in the second quarter. And as long as that revenue continues at the growth rates that we have seen and even accelerate some, I think you'll continue to see even more leverage in that line.

Mike Hansen

Something to keep in mind, our third quarter has 64 work days, so one less than the second quarter and to some payroll taxes reset, so the sequential movement of SG&A will likely reflect some impact of that. However, as Bill said, we do expect some leveraging going forward.

Operator

And we'll take our next question from Scott Schneeberger with Oppenheimer.

Scott Schneeberger - Oppenheimer

I'm curious in the press release and your discussion, you guys mentioned that customer penetration, could you speak a little bit about what you're seeing there and perhaps just ability to cross sell as well?

Mike Hansen

Well what we're seeing is, it kind of goes back to the comments we've made on businesses now realizing that the economy is generally beginning to improve. There is some more visibility with regard to what's going to happen. Now that the tax changes have been resolved, I think that our existing customers are more confident on their ability to grow their businesses.

And as such they are more willing to talk about other products and services that we may have to offer, as well as expanding their own work forces. It's a modest type of growth, but it's certainly a much more positive development than what we saw 12 months ago.

Bill Gale

As we increase that investment in sales, we did focus some of sales team on improving penetration. So that's been part of the momentum that we've seen in the last year.

Scott Schneeberger - Oppenheimer

And along these lines mention of retention improved, could you speak a little bit to as well as new business. Could you speak to the competitive environments specifically the pricing, primarily in rental but also across other businesses?

Bill Gale

Pricing continues to be aggressive and I think that what we have seen for the last several quarters has continued. And our competitors and all of our business lines are looking to grow their own businesses. And as such they have been aggressively going after our customers as well as customers who are looking for the service from a number of different providers.

So the competitive environment has not really changed. In terms of aggressive pricing, I would say it has not gotten any more aggressive. But certainly there's not a lot of ability to get increased prices on new business at this time any different than what we've seen over the last several quarters.

Scott Schneeberger - Oppenheimer

And then finally, I think you mentioned $41 million in M&A, primarily in document management and some for safety and fire. Could you give a little more color on geographically where these were and were they predominantly document management? And then just kind of a prioritization of use of cash from here, a bit of buybacks recently, a sizable authorization, but just kind of the (inaudible) there?

Mike Hansen

We did make an acquisition in document management in the U.K., the acquisition we made last summer, the rest of the acquisitions in document management, first aid and safety, and some in-facility services were located here in the United States and they were all pretty much small acquisitions. Some were tuck-in, some opened up into some new markets with some of their products, but nothing was very big during the quarter.

As far as use of cash, I think the attitude is that we will continue to use our cash to grow our businesses. We are going to look for good acquisitions and have the appropriate internal rates of return that we require. But the Board did issue another authorization on the share buyback. And depending upon what the availability is of acquisition opportunities as well as the market conditions of our stock, they'll direct us in how they want us to execute under that buyback, if at all.

Operator

We'll take our next question from Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar - Citi

My first question is with regards to the topline growth. Congratulations, by the way, a very good rebound there in the internal revenue growth.

Is it possible to parse out, maybe size, the various components, how much is coming from new clients versus same-store sales versus pricing? You mentioned pricing stability a bit here. But is it still negative on a year-over-year basis?

Bill Gale

Ashwin, we used to break that out many, many years ago, and that was when the business was much simpler and we had a better ability to make sure that the information we were being provided from our operations was consistent.

At this time, I am not comfortable in breaking out the details of the growth in specifics. I would tell you that most of the growth though has come from new store fronts, that is new customers or new products at existing customers. We have not really seen a significant amount of growth like wearers within a customer. There has been some of that, but not a significant amount. What we have seen is no further deterioration.

Right now, it's mostly new store fronts that we're seeing the growth from. Pricing, we are not getting a lot of growth from pricing at all. The CPI is basically flat. So on our existing contracts at this point, it has been relatively minimal about price increases. So it's pretty much at the new store fronts.

Ashwin Shirvaikar - Citi

When you think of target margin by segment, and the reason I ask this is obviously the business has changed a bit as you've gone through this downturn with regards to your own cost structure as well as a little bit in the competitive environment, how do you think of target margin by segment?

Is it possible in the core rental business to get back to the levels that you used to have? What should we think about for the paper destruction business?

Bill Gale

Let me answer the paper destruction business. Assuming stability in the recycled paper price, the margins in the paper destruction and shredding business should certainly be at levels that we see in kind of traditional rental type margins.

The rental margins themselves, I would be little too optimistic to say we could get back to pre-2005, 2004 levels, because it is difficult to assume that all of the cost increases that we now have incurred is the result of much higher medical cost, higher energy cost, expensing of stock options, Sarbanes-Oxley. I am not sure we can ever overcome all of those expenses.

But however, I will say that we are optimistic that we will see improved margins from what you're seeing today in the rental business as well as the other businesses and borrowing again a spectacular increase in some component of costs like energy or medical expenses or something along those lines.

Ashwin Shirvaikar - Citi

With regards to the buyback that is announced in October, I was a little bit surprised to not see any of it used in the remainder of the quarter. Is there not a time limit to use it within two years, three years? Is that how you're thinking of it or is it purely use it only if the stocks below a certain price or something like that?

Bill Gale

Well, I think it certainly is driven to a degree by the stock price, but it's also driven by the other cash needs in the company. We are always looking out into the future of what we are going to do and what we are going to need for our cash.

As I mentioned, we did pay the dividend here just last week. So we knew we had $70 million-some that we needed to do for that. We had some acquisition activity. We have this working capital build-up. So we balance all of that out and we also look at what's coming down the road here in terms of growth initiatives, capital requirements, potential acquisition opportunities, et cetera.

We've got borrowing capacity. If the market condition and our stock warranted it, we would certainly look at the opportunity to execute under that buyback. But it's a very complicated evaluation of what we expect to happen and what we see happening with our valuation. And the Board helps us figure out what they think we should do for the benefit of our shareholders.

Ashwin Shirvaikar - Citi

What are your free cash flow expectations for this year?

Bill Gale

Ashwin, we really don't give that out as guidance at this point, because it becomes of a little bit more specific in terms of evaluating the working capital needs and the capital. So we publicly have decided not to disclose that. We'll let you guys figure that out based on your expectations. We give the sales and the EPS and capital spending, and that's about it.

Operator

We'll take our next question from Vance Edelson with Morgan Stanley.

Vance Edelson - Morgan Stanley

First, just a follow-up on an earlier one on the level of competition. Is it strictly in the form of pricing aggression or is anyone out there trying anything new or exciting in terms of service, quality or anything else, or is it more like all they can think of is price?

Bill Gale

I wouldn't characterize our competition is just being on price. We have some very good competitors in all of our businesses, and I think they are always attempting to do things to help distinguish themselves in front of our prospects and customers.

I think we are at the forefront in many of our businesses and the things that we do, as evidenced by our ability to provide the Carhartt uniforms and some of the other comfort uniforms that we have that many of our competitors don't have. Some of the services that we have in the imaging and shredding side I think distinguish us from some of the competitors. And certainly in first aid and safety, and fire services, we have really provided lot of new things and a lot of interesting approaches to providing those services.

But our competitors are aggressive. They look for their niches also, and we respect them very much. So they're keeping us on our toes.

Vance Edelson - Morgan Stanley

I want to make sure I heard you correctly. The bad debt was higher due to a change in methodology. Can you share with us what the change was?

Mike Hansen

No, we did not change our methodology. We had a slight deterioration in our aging compared to last year, but no change in the methodology.

Vance Edelson - Morgan Stanley

Just on the geographic expansion initiatives within the U.S., is that ongoing, is there anything new to share there in terms of efforts to expand greenfield or otherwise within the U.S.?

Bill Gale

The primary expansion greenfield-wise that we've had was in document storage. And our document management shredding business and fire service business continue to expand in different markets throughout the U.S., because we still don't have the same coverage that we have in our rental business.

So we are finding opportunities to expand into cities where we might have a rental operation, but we don't have fire service or document management at this time. And that's where that expansion takes place.

Operator

We'll take our next question from Andrew Steinerman with JPMorgan.

Andrew Steinerman - JPMorgan

Could you give us a sense of what rental gross for the second half of the year is implied within the revenue guidance? We just did 1.9%. In the first quarter we did basically zero. And so I'm asking in the second half of this fiscal year, what would be the organic rental growth implied in the overall revenue number that's guided for.

Bill Gale

The revenue guidance we gave you is still relatively broad. So for us to break that out is a little difficult, because I still got a pretty broad revenue guidance there. Let me just say it from my expectation is that assuming things continue as we've seen so far and the trend that I would expect organic growth in all of our businesses to improve from what you saw in this last quarter. I can't really give you any more details on that at this time.

Andrew Steinerman - JPMorgan

When you're looking for organic revenue growth acceleration in uniforms, do you think it would be the same drivers that drove the second quarter? I think you called it new store fronts being the biggest driver.

Bill Gale

Yes.

Andrew Steinerman - JPMorgan

When you're saying new store fronts, do you mean new business? I didn't quite catch what store front meant.

Bill Gale

Well, what I mean by that, Andrew, is basically a new customer renting uniforms as opposed to an existing customer increasing their workforce.

Operator

We'll go next to Greg Halter with Great Lakes Review.

Greg Halter - Great Lakes Review

Looking at your cash and securities, how much of that is held in the U.S. and how much is outside?

Mike Hansen

Roughly about $160 million is outside and the remainder is in the U.S.

Greg Halter - Great Lakes Review

And capital spending, I think you've had been talking levels around $150 million for the year. Is that still in line?

Bill Gale

Yes, we're going to be certainly at that high end of the range that we talked about.

Greg Halter - Great Lakes Review

How much of that is for the SAP installation?

Bill Gale

It is likely going to be somewhere in the neighborhood of $10 million per quarter.

Greg Halter - Great Lakes Review

And talking about SAP, any issue so far that you've run across that would cause any problems in deliveries and billings and so forth?

Bill Gale

No, not at this point. We have not run into any problems. We have fairly extensive testing and re-testing underway. So we don't expect there to be any problem when we convert over the supply chain early next year.

Greg Halter - Great Lakes Review

I missed the figure you provided on SG&A due to selling expenses in terms of the increase year-over-year.

Mike Hansen

It was 60 basis points.

Greg Halter - Great Lakes Review

I don't believe you specifically addressed the add/stop metric. I think you have directionally, but I presume that figure was a positive.

Bill Gale

Likely positive, yes, similar to what we saw in the first quarter.

Operator

We will take our next question from Justin Hawk with Robert W. Baird.

Justin Hawk - Robert W. Baird

First of all on the productivity upgrade that you guys have initiated, beyond the SAP upgrade, can you just remind us what all is included in that and I guess what hasn't been rolled out thus far and what run rate you have to continue to improve things on that side?

Bill Gale

We've got a long way to go, Justin, in terms of what we are going to do with SAP. All we have really tackled up to this point from a conversion is our financial system. So we have now all of our financial systems and financial reporting under SAP. We are very closely nearing the conversion of our global supply chain. And then you will begin to see some of our business units converted over, if everything continues to go well, over the course of the next couple of years.

Justin Hawk - Robert W. Baird

So when you were talking about the productivity upgrades, you were talking about the SAP upgrades specifically.

Bill Gale

I'm having difficulty recalling the context of productivity. So I am not sure.

Justin Hawk - Robert W. Baird

There were other initiatives that you guys did that are driving some of the SG&A improvement?

Bill Gale

There is a lot of other things that are going on in terms of leveraging our staffing. It's not just all driven by SAP by any means. There are a number of different areas that go back to this whole concept of value-added work and making sure that what we're doing makes sense and we're doing it efficiently. And it's certainly beyond just SAP.

Mike Hansen

When we were talking about productivity improvements, it may have been in reference to our sales rep productivity. So as those sales reps have been around the longer, as they get tenured, they become better sales reps and their productivity levels improve. That may have been also what you heard.

Justin Hawk - Robert W. Baird

On the acquisitions again, just curious if you could give us a sense on kind of what pricing looks like for deals that you're doing, especially since document management business seems that it's been pretty successful for you. And I would imagine there are other players out there looking at some of the same companies. Just a sense of what pricing looks like right now.

Bill Gale

Well, we don't disclose specific pricing in terms of multiples on our acquisitions. We tend to keep that confidential. What I would tell you though is that we have seen no real increase or decrease in the multiples that we have been paying for businesses over the past 18 months or so.

Operator

We'll take our next question from Chris McGinnis with Sidoti & Company.

Chris McGinnis - Sidoti & Company

I think the gross margin increased on the rental side. I guess just because of the pricing has been so aggressive over the last almost two years, how much of the growth rate do you need for that to start move in your favor. Is there another dynamic that I'm missing in terms of that improving from hereon now?

Mike Hansen

If the pricing remains at the levels that it's at, we're going to see some margin improvement because of the higher revenue levels that we're able to spread all the fixed costs over and the improved amount of volume that we have on existing routes and that sort of thing.

So price increases will only add to the speed of the margin expansion. But at this point, I still believe that margin expansion will happen even without prices.

Bill Gale

And really current customer hiring will be the best driver of gross margin improvement. So if we can see our customers and generally the job employment levels improve, that's going to be very positive.

Chris McGinnis - Sidoti & Company

Just in term of the new customers coming in, how many are new to wearer programs themselves?

Bill Gale

We only look at that on an annual basis, Chris. So we don't really have that data on a quarter-by-quarter basis.

Chris McGinnis - Sidoti & Company

Just the acquisition market for the industrial laundry segment, any lowering of valuations, any expectations you're looking for?

Bill Gale

Really haven't seen any change. Most our acquisition activity has taken place in the emerging businesses area, document management and fire service.

Operator

We'll take our next question from Gary Bisbee with Barclays.

Gary Bisbee - Barclays

Given one less work day this next quarter, it would seem reasonable that the rental gross margin will probably creep down a little bit more. Is that the right way to think about it or is there anything we should think about?

Bill Gale

You are absolutely right that there is a way to think about it and then an improvement in the fourth quarter.

Mike Hansen

From last year's second quarter to third quarter, we had a drop of about 80 basis points and same number of work days.

Operator

And at this time, there are no other questions in queue.

Bill Gale

Well, thank you all very much for joining us this evening. On behalf of all of the Cintas family, we want to wish you and your families very happy holidays and a prosperous 2011.

Operator

That concludes today's conference call. We appreciate your participation.

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