Cintas Management Discusses Q4 2011 Results - Earnings Call Transcript

| About: Cintas Corporation (CTAS)

Cintas (NASDAQ:CTAS)

Q4 2011 Earnings Call

July 19, 2011 5:00 pm ET

Executives

J. Hansen - Vice President and Treasurer

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

Analysts

Andrew Steinerman - JP Morgan Chase & Co

Sara Gubins - BofA Merrill Lynch

Dave Brinkman

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Justin Hauke - Robert W. Baird & Co. Incorporated

James Samford - Citigroup Inc

Scott Schneeberger - Oppenheimer & Co. Inc.

John Healy - Northcoast Research

Gary Bisbee - Barclays Capital

Operator

Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Bill Gale, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

William Gale

Thank you for joining us this evening to report our fourth quarter results for fiscal 2011. With me is Mike Hansen, Cintas' Vice President and Treasurer. After some commentary on the results, we will be happy to answer questions.

We are pleased to report that our revenue for the fourth quarter grew 11.3% from last year's fourth quarter to a record revenue of $1,012,000,000. Net income increased by 27.6% to $70.8 million, and the earnings per share were $0.49, a 36% increase over last year. As noted in the release, total year revenue of over $3.8 billion was 7.4% higher than last year, and total earnings per share of $1.68 was 20% higher. Stabilization of revenue at existing customers, excellent new business results and cost control measures, as well as improved productivity within our organization, were all factors in these very good results. We want to express our sincere appreciation to all of our employees, who we call our partners, for their contribution to this successful year.

On May 18, we issued $500 million of public debt spread in 2 tranches, $250 million with a 5-year maturity and the other at 10 years. We found the rates to be very attractive, and demand was strong for our bonds. Given the price of our stock and the positive outlook for our company's performance, our Board of Directors authorized management to use these funds to pay off short-term debt and to purchase Cintas stock under parameters established by the board. The $500 million expenditure resulted in total purchases of 15.8 million shares, of which 7.7 million shares were purchased as of May 31, and the remaining 8.1 million shares were purchased between June 1 and July 6. Coupled with the share purchases made earlier in fiscal 2011, Cintas purchased 23.4 million shares since last July. The impact of the share purchases in fiscal 2011 added about $0.05 to our earnings per share from what we would have reported with no share purchases.

Our guidance for fiscal 2012 revenue is to be in the range of $4 billion to $4.1 billion and earnings per diluted share to be in the range of $1.97 to $2.05. This guidance incorporates the impact of the recently completed $500 million share buyback program, which equates to about $0.12 a share, when also factoring in the additional interest expense from the debt offering in May.

Let me address some assumptions used in developing this guidance. While recent economic news, including the Bureau of Labor announcements for May and June were not as bright as we would like, we expect that the North American economy and employment picture will moderately improve in the next 12 months. We expect that we and the other companies in industries in which we operate could face input cost headwinds in the next 12 months, particularly related to cotton, energy and oil-related products, such as polyester. These rising input costs will add negative pressure to our industry's cost. While this will create some margin pressure for Cintas and our competitors, we expect the margin pressure will also ease the extremely aggressive pricing environment that we have experienced over the last several years.

More specifically, for our guidance, we have assumed that energy-related cost would continue at our fourth quarter level of 3.5% of sales. This was the highest level we have seen since our fiscal 2009. As many of you know, the price of cotton significantly increased last fall and has remained at relatively high levels but has declined significantly in recent months. Many factors contribute to the effect that cotton has on Cintas, certainly the price of cotton, but also Cintas' fabric inventory, as well as finished goods inventory levels, sourcing decisions and manufacturing lead times, as well as amortization periods of in-service inventory and the overall uniform industry pricing environment. We have been managing and analyzing each of these areas to minimize the impact on our results. We expect that the fiscal 2012 impact will be less than $15 million on our cost of rentals and other services, and as mentioned, this impact is incorporated into our guidance. Due to the amortizing effect of in-service inventory, the cotton impact could be heavier in our fiscal 2013 by an amount around $5 million. However, as noted, many factors contribute to the cotton impact, and we will continue to monitor and analyze this throughout fiscal 2012.

We also believe that the improved environment will lead us to being able to obtain higher prices for our services. 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.

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

J. Hansen

Thank you, and good evening. As Bill mentioned, total revenue increased 11.3% from the fourth quarter of last year with total company organic growth being 8%. Total company gross margin for the fourth quarter was 42.8%, which is up from last year's fourth quarter gross margin of 42.4%. Before providing you with details about Cintas' fourth quarter performance, please note that there were 66 workdays in our fourth quarter, which is the same as last year. As a planning note for fiscal 2012, our workdays will be as follows: 66 in the first quarter, 65 in the second quarter, 65 in the third quarter and 66 in the fourth quarter, for a total of 262 workdays in fiscal 2012.

We have 4 reportable operating segments: Rental Uniforms and Ancillary Products, Uniform Direct Sales, First Aid Safety and Fire Protection Services and Document Management Services. Uniform Direct Sales, First Aid Safety and Fire Protection Services and Document Management services are combined and presented as other services on the face of the income statement. The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms, mats, towels and other related items. 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 fourth quarter.

Within rental, based on our fourth quarter revenue levels, uniform rental accounted for approximately 51% of the revenue. Dust control, which is mainly entrance mats, accounted for 20%. Hygiene, which is mainly restroom supply and cleaning was 12%. Shop towel revenue was 6%. And linen and other, which is mainly nonperson-specific garments such as aprons and butcher coats was 11%.

Rental revenue was $711.9 million for the quarter, which is up 9.9% compared to last year's fourth quarter. Organic growth was 7.2% over last year, which is an improvement from last quarter's organic growth of 4.3%. Sales rep productivity, particularly as it relates to new accounts, continued to be strong, and our new business sold during the fourth quarter was up over 20% compared to last year's fourth quarter.

We are pleased with the increase in uniform wearers and the growth generated by our newer product lines. During the fourth quarter, we noted no significant changes in the pricing environment, although pricing at contract renewal and for large national accounts remained very competitive. As Bill noted though, we expect the current input cost pressures faced by competitors and us to result in some easing of the pricing pressures and in fact, will likely lead us and our competitors to increase prices in the coming fiscal year.

Our Rental segment gross margin was 43.6% for the fourth quarter, an improvement of 10 basis points over last year's fourth quarter gross margin of 43.5%. Energy-related costs were 20 basis points higher than last year. Improved capacity utilization from higher volumes more than offset the higher energy-related costs and higher material costs due to the injection of in-service inventory associated with new accounts. While we are pleased with our new account performance and increases in wearers, we have yet to see impactful hiring within existing customers. The add-on wearers associated with hiring at existing customers allows us to take advantage of our stockroom inventories.

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 fourth quarter. Fourth quarter revenue of $109.1 million represents an increase of 5.7% compared to last year's fourth quarter. Organic growth was also 5.7%.

Uniform Direct Sales gross margin was 30.9% for the fourth quarter, which is relatively consistent with last year's fourth quarter gross margin of 31%, and an improvement from the third quarter gross margin of 29.5%. The improvement from the third quarter is primarily due to better capacity utilization at our distribution centers due to the higher volumes.

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 fourth quarter.

During the quarter, revenues within this operating segment were $99.6 million, an increase of 13.4% versus last year's fourth quarter. Organic growth was 9.7%. We are pleased with the revenue momentum in this business as organic growth for the last 3 quarters has been 8.4%, 9.3% and 9.7%. Sales rep productivity, particularly in the First Aid and Safety side, continued to be strong in our fourth quarter. This segment's gross margin was 41.7% for the fourth quarter, a very solid improvement over last year's fourth quarter gross margin of 39.4%. This improvement was equally strong in both First Aid and Safety and in Fire Protection Services, and was largely due to better capacity utilization due to higher volumes. The improvement also came despite a 40 basis point increase in energy-related cost compared to last year.

Our Document Management services operating segment includes document destruction, storage and imaging services. Document Management accounted for 9% of fourth quarter total company revenue. Within Document Management, the European business accounted for 13% of total segment revenues during the fourth quarter. Revenue increased 29.5% over last year's fourth quarter to $91.6 million with organic growth of 16.5%. Recycled paper prices increased throughout the quarter and contributed to the organic growth rate. Excluding recycled paper revenue, organic growth was 11.3% during the fourth quarter. Because the recycled paper prices are so high, pricing for service has been very competitive.

Document Management's gross margin for the fourth quarter was 51.4%, a decrease from last year's 53%. Energy-related costs increased by 60 basis points compared to last year. In addition, our Storage business had several greenfield starts earlier this fiscal year. These startups are running as planned but do have a drag on overall gross margins in the early stages. The fourth quarter gross margin of 51.4% is an improvement over the 49.4% in this year's third quarter.

Moving to selling and administrative expenses. The fourth quarter consolidated selling and administrative expenses were 30.1% of revenue, a decrease from 31.5% in last year's fourth quarter. As expected, our selling expenses continue to be lower as a percent of total revenue due to greater rep productivity. Administrative expenses as a percent of total revenue also decreased due to cost control initiatives and lower medical expenses. Our effective tax rate was 39.5% for the quarter compared to 38.2% last year. For the full fiscal 2011 year, our effective tax rate was 37.1%. We expect our effective tax rate for fiscal 2012 to be approximately 37.3%.

Turning now to the balance sheet. Our cash and marketable securities were $525.3 million at May 31. As mentioned in the press release, keep in mind that $259.9 million was used in June and July to purchase shares of Cintas stock. Accounts receivable increased by $12.8 million since February 28, primarily because of the higher revenue levels. DSOs on accounts receivable was 42, up from 40 at February 28, but the same as at May 31, 2010. New goods inventory at May 31 was $249.7 million, up $17.4 million from February 28. This increase is mainly due to higher demand levels, particularly in our Carhartt program, our Flame Resistant Clothing line and our womenswear. The SAP system has been performing as expected, but we also took a more cautious approach to our inventory levels during the quarter to ensure that all of our customer needs were met. We expect to see inventory levels decrease in fiscal 2012.

Uniforms and other rental items in-service increased by $19.8 million from February 28 to May 31 due to the higher volume levels throughout the fourth quarter. As mentioned earlier, our improved sales productivity, particularly related to new accounts, has driven the higher injection of in-service inventory. Accrued liabilities increased $22 million compared to February 28 due to $12 million of accrued bond interest and $9 million of accrued profit sharing, which build throughout the fiscal year. Long-term debt at May 31 was $1.3 billion. Our average rate on the outstanding debt is 5.1%. Total debt was 2x fiscal '11 EBITDA, and as a percentage of total book capitalization was 36%, while net debt or long-term debt less cash and marketable securities as a percentage of total capitalization was 25%. As discussed, $259.5 million of cash and marketable securities was used to purchase shares of Cintas stock in June and July. If we would have completed the share buybacks by May 31, our debt to capitalization would've been 39%, while the net debt to capitalization would have been 33%.

Moving onto cash flow. Cash provided by operating activities in the fourth quarter was $132.9 million, which is consistent with the $132.4 million from last year's fourth quarter. The growing revenue this year has resulted in increased accounts receivable and inventory levels compared to last year. CapEx for the fourth quarter was $40.3 million. Our CapEx by operating segment was as follows: $25.2 million in Rental, slightly less than $1 million in Uniform Direct Sales, $4.2 million in First Aid Safety and Fire Protection and $10.1 million in Document Management. We expect CapEx for fiscal 2012 to be relatively consistent with fiscal 2011 and in the range of $180 million to $200 million.

You may notice that our cash flow statement shows proceeds from issuance of debt of slightly over $1 billion and repayment of debt of $502 million. Keep in mind that accounting guidance requires us to separately show the ins and outs of commercial paper activity. The net of the 2 figures is the $500 million, which represents the financing that we completed in May.

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 Sara Gubins with Bank of America.

Sara Gubins - BofA Merrill Lynch

You mentioned seeing stabilization at existing clients. Could you talk about what their -- how the discussions with them are going around the next couple of months and into the fall?

William Gale

Well, I'm not sure they're -- Sara, they're really telling us a bunch of what they're plans are. We saw stabilization in our existing customers within the last couple of quarters. And I can just tell you, from reading what you read in the public domain that it seems like most businesses are cautious in adding new employees, and we certainly have seen that with our customers over the last couple of quarters. The good news though, of course, is generally speaking, they're not reducing headcount like they were last year. So we're hoping that perhaps once confidence builds, that we'll begin to see some hiring at existing customers.

Sara Gubins - BofA Merrill Lynch

Okay. And then, I'm hoping to get some more detail within the guidance for next year about how you're thinking about SG&A? How much more room there is for rep productivity?

William Gale

Well, we're certainly anticipating some improved productivity within our sales organization. We had a very good year this year with improved productivity, so we're thinking that trend will continue. Therefore, that will result in a lower SG&A as a percent of revenue, and that's embedded in our guidance.

Sara Gubins - BofA Merrill Lynch

Great. And then last question, could you give us the share count at the end of the year?

William Gale

Yes, it's about 130 million shares just like -- oh no, at the end of the year or as of right now?

Sara Gubins - BofA Merrill Lynch

Actually, as of right now would be even better.

William Gale

Yes, it's about 129.6 million shares.

Operator

Our next question comes from James Samford with Citi.

James Samford - Citigroup Inc

Just, I guess, now that we have the share count for -- potentially for next year, it seems to me that implies almost no margin expansion for the full year. Is that math correct?

J. Hansen

Well, the one thing to keep in mind, James, is that we do have the extra interest from our $500 million in debt. So there is margin expansion if you look at the EBIT levels.

James Samford - Citigroup Inc

Got it. And anticipated interest expense, I guess, is the other question I could ask for that.

William Gale

Well, it's about $20 million pretax.

James Samford - Citigroup Inc

Pretax. Perfect. Have you guys been seeing any additional impact? I know we have another quarter behind us from Japan in terms of other manufacturing?

William Gale

No, we haven't seen any impact from that, not really.

Operator

Our next question comes from Gary Bisbee with Barclays Capital.

Gary Bisbee - Barclays Capital

If I can ask about the first -- of the organic growth, it was particularly strong, I guess, in rentals in terms of the change versus last quarter. Can you help us understand it all, against what looks like a somewhat, I guess, tougher comp? What exactly is going on there? Is it really the new sales activity? And if so, can you give us some examples of, maybe, the types of accounts you're signing up or sort of what's -- how that's going so well?

William Gale

Well, keep in mind, Gary, we've seen improving organic growth all year. Every quarter has been a little bit better. I'd say that what's driving it are 3 factors. First off, as we've seen in the last couple of quarters, existing customers, generally speaking, have been remaining stable, so we haven't had the drag from them reducing headcount. Secondly, we've got the prospects being more willing to take on the new program. Third, I would say that our lost business rates have improved from what we were seeing in late fiscal '09 and '10. And finally, we've been selective in selling business at good prices and making sure that it's good profitable business, and I think that's helped.

J. Hansen

And certainly within that Rental business, our new -- some of our newer product and services are helping too, the Carhartt business, the womenswear garments, the tile and carpet, our chemical business. So we've gotten a broad increase throughout that product line.

Gary Bisbee - Barclays Capital

And maybe I'm being a little cute with the numbers. But in the last few years in the fourth quarter, you've given that mix of business generically within rentals. When I plug those percentages in versus the percentages you gave a year ago, it looks like the Uniform Rental segment really didn't grow. It sort of indicates 1% revenue growth but sort of 14%, 15% for hygiene and dust control actually down a little bit, and then shop towels and linen up significantly, and maybe that's just -- can you give us rounded numbers, does that...

William Gale

That's all it is. We had very nice growth among all our products including the rentals. So I think it's just a rounding issue, Gary.

Gary Bisbee - Barclays Capital

Okay. All right. And then I was curious about the comment that you're confident that pricing will firm. And I think you said will and not has, so is that something you're expecting to help offset some of the commodity cost? How do you have confidence in that?

William Gale

Well, we have confidence in it because I think the impact of these higher costs in commodities, and some of the comments that had been made by some of the competitors in that they're going to have to do something with pricing to offset those cost increases because they're seeing margin deterioration, which we did not see, but they have seen, I think will result in the firming of pricing going forward. So it is an expectation that we're going to see that happening generally across the industry.

Gary Bisbee - Barclays Capital

And then just one last one, if I could. I guess, the revenue growth guidance looks like it's 5% to 7.5% generically for the year. Any willingness to comment on organic, is that mostly organic at this point?.

William Gale

It's almost all organic, Gary. We do not have any anticipated acquisitions in there. We've got a little bit of carryover effect from acquisitions that we made this year, but the bulk of that is organic growth. And we're not real bullish on the economy, we're just cautiously optimistic that we'll see some improvement, but it's not going to be robust. And we've been saying that for the last several quarters, and it's pretty well proved out what our expectations were. But even with a very modestly improving economy, we still expect, we think, nice organic growth.

Operator

Our next question comes from Andrew Steinerman with JPMorgan.

Andrew Steinerman - JP Morgan Chase & Co

I want to talk about the share buyback, obviously, it was pretty massive. My question is, what's your proclivity to doing additional share buybacks, meaning authorization? And does the large share buyback indicate anything about activity around acquisitions?

William Gale

The answer to your question, Andrew, is that is going to be certainly a topic of discussion at our board. And I know they will review the success that we had at this program, what we have accomplished this year, which is almost $700 million of buybacks this fiscal year. And I assure -- I'm sure if they are inclined to do so, they may provide us with another authorization and parameters on which to execute that. But that will be decided at the -- I'm sure, at the next couple of board meetings.

Andrew Steinerman - JP Morgan Chase & Co

Right. And, Bill, my other question was, does it speak to anything about acquisitions? What's the company's proclivity towards acquisitions? And obviously the choice of cash has been share buyback.

William Gale

Well, I'd say that the actions give you some indication of what we thought was the best use of our cash and our debt capacity at this time. And that doesn't mean that we are out of the acquisition game, it just means that we felt that this was an opportune time to take advantage of what we thought were good debt markets and an attractive value of our stock. If any acquisitions do come to the table, we will certainly look at them, but they're going to have to meet our hurdle rates, and we're going to have to make sure that they would make sense for our shareholders.

J. Hansen

Andrew, when look we it, we bought the best available company in the last quarter.

Operator

Our next question comes from Scott Schneeberger with Oppenheimer.

Scott Schneeberger - Oppenheimer & Co. Inc.

Can I just jump back to a response on a prior question. With regard to -- you guys are anticipating gradual improvement in the economy, did you calculate if flat from here, what that would represent with regard to the guidance?

William Gale

It would be the low end of the guidance.

Scott Schneeberger - Oppenheimer & Co. Inc.

Okay. Do you have a margin target that you're targeting, longer-term type of question, at least intermediate term?

William Gale

We're certainly targeting improved margins. Each of our business units and the operations within each units have plans and expectations of what we want them to achieve. And we're not publicly talking about it, but what we have said is that we certainly are moving toward getting back to margins we used to have. And I think we have shown some success in that regard over the last several quarters, and we will hopefully continue that as we go through the next couple of years.

Scott Schneeberger - Oppenheimer & Co. Inc.

One more, if I could. With regard to cotton prices, and thanks for the quantification that you think incrementally, potentially an impact of $15 million. I was a little confused about the $5 million in fiscal '13, is that incremental on top of what you're looking for in '12? And could you just take us a level deeper in how you're thinking about that with regard to the $5 million or $6 million leverage you were thinking about?

J. Hansen

Well, to answer your first question, Scott, the $5 million for fiscal '13 is incremental on top of the less than $15 million in fiscal '12. So because we have that amortization effect, it kind of pushes the full impact of some of the higher prices that we've seen. As it relates to the different factors, we're going to continue to look at all of them. There's a lot that can happen in the next 12 months, particularly as it relates to cotton yields, the demand for cotton. And so we're going to be keeping our eyes on all of those different factors and working to make sure that we minimize the impact going forward.

Scott Schneeberger - Oppenheimer & Co. Inc.

Just curious, I'm going to follow-up there, have you made any major changes with regard to cotton synthetic mix, or anything on your end proactively that's been dramatic?

J. Hansen

We have not at this point. We certainly are always challenging the construction of our garments, but we have not made any significant changes at this point.

Operator

And our next question comes from John Healy with Northcoast Research.

John Healy - Northcoast Research

I wanted to ask about the new sales comment you made, up 20%, again another strong number. I was hoping I can get your thoughts on how much of that you feel is just the market opening up for you guys? And how much of that you think is really a result of activity in some of the initiatives you put forth to kind of stimulate some demand?

William Gale

I'm not sure we can quantify that. I think it's some of both. We've certainly been very successful in the introduction of some of the products that Mike mentioned earlier, the Carhartt products, the women's garments. Some of our standard uniforms are still of a quality better than what our competitors can obtain from their third-party sources, so we think that's helped. I believe some of the additional products that Mike mentioned that are within our Rental division have helped. But there certainly is an improvement in business attitude toward taking on these services. I think we've been able to demonstrate that we're able to provide value that is attractive to many companies as they look to reduce their cost, and they see the value they're getting from what we can do for them. And we've got a very good sales group that has, I think, become more tenured and therefore, have become obviously more productive with the vast array of products that we're offering, as well as the value we're providing. So I think it's all of those factors.

J. Hansen

And when we -- we've talked a little bit about our programmer versus no-programmer numbers. And in the recession, we saw that come down to about a 50-50 level. And we're encouraged that in the last quarter or so, we've seen a movement back towards 60% no programmer to 40% programmer. And I think it speaks to some of the success we've had with our new products and services in really selling the value of those to customers that haven't had a program in the past.

John Healy - Northcoast Research

That's great. I guess, along those same lines too, when you look at kind of the momentum in the business. When you look at it, I guess, maybe over the last 6 to 8 weeks or last 2 months or so, have you noticed any kind of change in tone from the customers though? Has there appeared to be any sort of feedback you're hearing from the sales reps in terms of willingness to spend by the small business customer recently?

William Gale

I don't want to leave that impression. I think, we had a good fourth quarter, it was pretty consistent throughout the quarter. But it really was just building on the momentum we saw earlier in the fiscal year. So we'll see how things go over the next couple of quarters and whether -- we're hopeful that, that trend can continue. And if it is, that certainly would indicate that some of this is caused by better business confidence.

John Healy - Northcoast Research

Got you. And just one last question, and this might have just been me noticing it. But I noticed you guys are marketing the chemicals business a little bit more there. And I was wondering, Bill, if you could shed some light on kind of the scale of that operation today? And is it -- has it been redesigned recently or redeployed or it's just that I'm maybe seeing new ads that I haven't seen before?

William Gale

No, you're right. It has been reinvigorated with a new relationship we now have with Diversey that has given us the ability and the credibility to get into a lot of the markets that Diversey has been successful in the past. And now that we have the service organization, our partnership with them is going to help us in that regard. So we have been increasing our marketing efforts in making it known. And I think that -- you're going to be very pleased with the results that you're going to see in that as we go forward.

John Healy - Northcoast Research

And is that a business that rolled out nationally now or available in most of your large markets?

William Gale

We just completed a rollout nationally within our own sales organization just within the last few weeks. So it's just beginning.

Operator

Our next question will come from Shlomo Rosenbaum with Stifel, Nicolaus.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

I just want to ask a little bit about some of the commentary in the press release about competitors competing on price, while you guys are focusing very much on value. Are you guys at all attempting to push through any pricing increases because of the energy and fuel increases, or how is that working? Are you having those discussions with customers? And are you aware from your discussions with customers if your competitors are having those same discussions?

William Gale

Well, we are certainly reviewing all of our book prices that our sales people use for new business. And we will be certainly making sure that we're covering our cost increases. We are approaching our customers on the renewal dates of the contract, which allows us to increase prices. And we're certainly talking to them about the cost pressures that we have had. And I think what you need to look at is what competitors do show up in their margins versus what shows up in our margins. So I would just advise you to compare among us and you can kind of see who's doing what.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Okay. Can you comment a little bit on the floor cleaning business that's kind of nascent is doing, and how's that grown over the quarter?

William Gale

That's the tile and carpet business, and it is growing very well as we continue to roll it across the country. It has a bit of a margin pressure on us, but even with that, you still saw a nice margins in the rental division but it is still relatively small. I mean, it's minuscule in comparison to our Rental business and even into our dust and hygiene business, but we expect it to grow quite nicely throughout the next couple of years. It's just coming from such a low base. It's not really going to impact the overall growth rate for a little while.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

And how many markets are you in there now?

William Gale

Shlomo, I don't know. But I would say, it's got to be close to 50 or so.

J. Hansen

Yes, actually, we're in about 90. We're going to be able to service about 90 of the top 100 markets.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Okay. And then, last question, in Uniform Direct Sales, we saw as an operating margin that was flat sequentially despite a nice uptick in the sales. Was there a particular infrastructure or sales investment that occurred in that unit in the quarter?

William Gale

No, there wasn't. We had a nice improvement over the third quarter mainly because of the volume. We had a nice fourth quarter last year, and there wasn't a lot of structural change.

Operator

Our next question comes from Nate Brochmann with William Blair & Company.

Dave Brinkman

It's Dave for Nate. I've seen, recently, cotton prices seemed to have fallen off pretty dramatically. Have you guys been following that at all? And if so, any color to add on that as to what you guys think that's causing it to fall off a little bit here recently?

William Gale

Well, we certainly follow it very closely. Our global supply chain group does that. And the things that we read and hear are that the yields from some of the cotton-growing regions, excluding perhaps Texas, which had a big drought but they're very, very good; expectations are high that yields are going to be good. And then secondly, there has been a diminishment of demand throughout the world. There may have been a little bit of hoarding going on back in the fall, but that appears to have dissipated some. And so you're right, the price -- the spot price of cotton has fallen pretty quickly. And we hope that it continues down at those levels. But we're prepared to handle it however it may present itself. Keep in mind, that just because the price drops down for a couple of weeks or a couple months, there's still was a lot of high-priced stock that was put into fabrics and then ultimately into finished goods that's got to work its way through the system.

Dave Brinkman

Right. So this would be more of a 2013 impact, if -- big assumption here, if prices were to stay lower?

William Gale

Well, it would help us as we got into late '12 and '13. And it even starts impacting '14 because of the lead time and the way costs are amortized.

Dave Brinkman

Okay. And then the only one other question I have was in terms of when we look at SG&A, I think in the past, you guys have said it, it takes a sales person anywhere from 6 to 12 months to kind of get on board and get up to speed and become productive. In terms of getting more leverage out of SG&A, what is kind of left in the toolbox there?

William Gale

Well, there's several things left. SG&A is driven by, obviously, improved productivity of our sales force, but also top line growth covers more of the fixed cost. And a lot of the SG&A, especially the G&A is generally fixed cost that will not increase proportionally with increases in revenues, so that will be a plus. We continue to invest in systems and other productivity initiatives within the company, that will be a plus going forward. And it's an area of focus throughout our organization to minimize any increase in our SG&A and yet continue to increase the top line.

Operator

Our next question comes from Greg Halter with Great Lakes Review.

Gregory Halter

On the debt, the 2 pieces there, due in 2016 and '21, were there any swaps used to hedge any of that or convert or anything like that?

William Gale

We did put in place a, I guess, an interest rate block that we put into place in advance. And the cost of that will be amortized as part of the interest expense over the life of the bonds.

Gregory Halter

Okay. You discussed the CapEx, $180 million to $200 million expectations. Just wondered if you had any sort of break out in terms of new facilities for maybe your different segments and so forth?

William Gale

Well, no, we don't break that out, Greg, in detail. We will have new facilities. A lot of the capital expectation is really for growth within existing facilities more than brand-new facilities going forward.

Gregory Halter

Okay. I think this was maybe mentioned earlier on about the acquisitions and so forth. It looked like for the quarter, it was only about $14 million, if my math is correct, and obviously, there's always timing there and willing buyer and willing seller and all that. But just wonder if that was something that you may have not done as much as in the quarter given the buyback and possibly what you're seeing in the market these days?

William Gale

Well, I think, as we said earlier, we thought that we were buying the best thing available by buying ourselves. And so that was the focus that we had in the quarter.

Gregory Halter

Okay. And on the share buyback and the count, I think you mentioned it was just under 130 million shares as of now. And I know that your options between options and restricted stock awards total about $8 million, but most of them are at higher prices, probably $35, $36 and higher, so not many of those will be going into the share count unless the share price continues to do well, which we hope obviously, and I'm sure you do. But I just want to make sure that my take on that is accurate in terms of those exercise prices. And given your guidance, what kind of additional shares you're looking at in terms of going into that diluted share count?

William Gale

Greg, your assumption is correct. Let me ask you to hold off on that until -- we'll be issuing our 10-K, the end of next week. And included in that is a footnote disclosures with all the restricted shares and the option and their prices. But generally speaking, you're absolutely correct. The additional impact is not that significant.

J. Hansen

We will typically plan for, Greg, about 0.5 million shares with just everything that, restricted stock that gets issued and some stock options. But you're right in your assumptions.

Gregory Halter

Okay. And I know for your third quarter, I don't think there was any difference between basic and diluted share count.

William Gale

Correct.

Gregory Halter

Okay. And, Mike, earlier on when you were discussing the Uniform Rental business, and you gave those percentages of 51% in 2012, 6% in '11 for the 5 different areas within Uniform Rental. I believe you mentioned that was of the segment total, not of the company total. And I just wanted to make sure to clarify that.

J. Hansen

Yes, that's correct.

Gregory Halter

Okay. So those percentages would be less as a percentage of the total.

J. Hansen

Yes.

Gregory Halter

So there would not a shift or a big shift as maybe one of the callers may have asked about earlier.

J. Hansen

Correct, yes. So when I mentioned, I believe it was Uniform Rental of 51%, that's 51% of the 70% of the Rental segment.

Gregory Halter

Which works out to about 36% of the total?

J. Hansen

You're right.

Gregory Halter

Okay. And you've discussed the pricing, just wonder if you have any commentary on what percentage-type increase may be contemplated?

J. Hansen

No, we do not -- we're not willing to disclose that right now.

Gregory Halter

All right. I thought I'd give you a chance. Your European business looks like it's about $50 million on an annual basis now, if my math is correct. Just wonder what your goals and aspirations are for that particular area?

William Gale

Well, right now, our focus is to work with what we have. We've got presence in 4 countries over there. We've got very good businesses that we acquired, great management teams. And while we would not, not look at another acquisition, I don't think there would be anything significant at this time. It might be some fill-ins for some services that we may not be providing in one particular area that we'd like to have, to complement what we've got. But right now, I think the main emphasis in fiscal '12 is to improve the margins and to grow those businesses.

Gregory Halter

Okay. And one last one, if I could. I think though, a while back, maybe a year ago, you bought a door business. And I know you get into these businesses just to see how they're going to perform as maybe an incubator. Just wonder if you could provide any thoughts in regard to that particular area?

William Gale

Yes, it was more than just a door business, it's facility services, and it primarily services the retail and commercial industries. That acquisition was made last fall, late fall. It has performed very well. We're continuing to tweak it. And right now, we're very pleased with the results as we incorporate it into our other facilities service offerings.

Operator

Our next question comes from Justin Hauke with Robert W. Baird.

Justin Hauke - Robert W. Baird & Co. Incorporated

Just 2 very quick ones here. First, I guess was just curious, you talked a lot about the buyback, but how are you guys thinking about the dividend here with the authorization being spent? Is there a chance to maybe the dividend is going to become a more meaningful part of your shareholder returns going forward? And also, I noticed that you shifted the timing of when the dividend's normally paid. And just curious if it's going to continue to be end of calendar year dividend?

William Gale

Justin, my expectation is that the timing of the payment of the dividend will continue to occur just like it did last year, where we accelerated the payment from March into December. As far as the amount of the dividend, I think, again, that I have to differ is that will be a decision made by the board. Typically, now under the new time frame, that would be contemplated and made at the October time frame by the board. I would like to also tell you that we've increased the dividend every year since we went public in 1983. And so I'm sure the board will factor the share buyback, the expectations for future results, as well as the results from the previous year when they make the decision on what to declare.

Justin Hauke - Robert W. Baird & Co. Incorporated

Fair enough. And my last question is a little bit of a clarification, but with the numbers you gave, it would seem like your Hygiene business is actually the same size as your Document Management business? Something like $320 million in annual revenue. And just curious if there's any chance that we might start to see that segment broken out separately?

J. Hansen

Justin, one of the issues we have with breaking that business out separately is that much of it is on the same route as either a facilities services mat route, or in some cases, on a uniform route. And so we have some difficulty in coming up with the specific product line results, and so that's the difficulty right now. We will certainly continue to look at it. And if it becomes feasible, we'll think about breaking that out.

Justin Hauke - Robert W. Baird & Co. Incorporated

Sure. Is that correct though, that it's about the same size as the Document Management business?

J. Hansen

It's probably a little bit less than that, than the Document Management business.

Operator

Our next question comes from Gary Bisbee with Barclays Capital.

Gary Bisbee - Barclays Capital

Just one quick follow-up which is, within the Facility Services businesses in general, can you give us a sense of what your margin goals or targets are and what those businesses are doing? I know you'll say this is a bad comparison, but I look at something like ABM, which is in janitorial services and their margin is less than half what yours is. And so how do you think about the profitability of that business?

William Gale

Gary, the profitability of the Facility Services business is comparable to the overall profitability that we report in rental. It really depends a lot on different markets. But I think you can make the assumption that Facility Services business will have margins pretty similar to what we obtain in our Garment business, Garment Rental business.

Operator

[Operator Instructions] And we'll go back to Shlomo Rosenbaum.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

One more question. I just want to ask about your inventory. I know you guys have been stocking a little bit because of the SAP implementation. I want to know if there are milestones or times in the next year that we should be looking to, which afterwards you guys will feel comfortable if it goes well to bring the inventory levels back down a bit?

William Gale

We have a plan, Shlomo, internally that we hope to start reducing those inventory levels, all else being equal, as we proceed through fiscal '12. So hopefully, we'll be able to demonstrate that we can reduce those inventories back to more appropriate levels in line with our revenues as we proceed throughout '12.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

And is there an inventory DSO that you guys feel comfortable with? Or how should I think about that?

William Gale

Well, we certainly have targets, but it's very complicated because we have inventory that ranges from raw fabric to in-process inventory to finished goods in all of our different businesses. And we certainly have individual goals and expectations as a result of that. But for me to just give you a general number, there is so much different stuff in there. It wouldn't be meaningful, and I really would not want to start providing that on an ongoing basis.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Okay. So just in terms of the SAP milestones, are there any key milestones going on over the next, over the year that we should be looking towards?

William Gale

As far as the conversion to the global supply chain or SAP in general?

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Well, I understand that there's -- the SAP implementation, there are different aspects to it, so there are different points in time that you guys are going to be measuring success. And I just wanted to know because I know that those things tend to be complicated and can bring some repercussions throughout the rest of the business.

William Gale

Yes, we are working right now, Shlomo, on implementing SAP at a couple of our different business units. And we will begin converting those later this fall and through the winter on kind of a very measured basis. We'll do some of the operations each month. So as we get later into fiscal '12, we'll be able to report to you on how well we're doing with that, and is it going according to plan. We're still in the final testing and design phase -- or the final testing phase is right now. And hopefully, we'll start some pilot implementations here in the next few months. And then if those are successful, then we'll start rolling out on a more aggressive basis as we complete the year.

Operator

[Operator Instructions] And at this time, we have no other questions from the phones.

William Gale

Well, I want to thank everyone for joining us. We're very pleased with these results, and we are very happy with the momentum that our company has achieved here over the last several quarters. We look forward to an even better results as we move into fiscal '12, so we look forward to talking to you again in September, late September when we release our first quarter results.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!