G&K Services CEO Discusses F1Q2011 Results - Earnings Call Transcript

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G&K Services, Inc. (GKSR) F1Q2011 Earnings Call Transcript November 2, 2010 11:00 AM ET


Shayn Carlson – Director, IR

Doug Milroy – CEO

Jeff Wright – EVP and CFO


Andrew Steinerman – J.P. Morgan

Chris McGinnis – Sidoti & Company

Alek Gasiel – Barrington Research


Good morning. My name is Philip, and I will be your conference operator today. At this time, I would like to welcome everyone to the G&K Services fiscal 2011 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Carlson, you may begin the conference.

Shayn Carlson

Good morning. I am Shayn Carlson, Director of Investor Relations for G&K Services. Thank you for joining our call today to discuss fiscal 2011 first quarter results. With me today is Doug Milroy, our Chief Executive Officer; and, Jeff Wright, our Executive Vice President and Chief Financial Officer. After a discussion of first quarter results, we will open the call for questions.

Before we begin, all statements made on this call concerning our intentions, expectations, or predictions about future results or events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations or beliefs and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which could be material and adverse. You are cautioned to not place undue reliance on these statements and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Information concerning potential factors that could affect G&K and its future financial results and operating performance are included in our annual report on Form 10-K for the fiscal year ended July 3rd, 2010. A replay of this call will be available starting today at approximately 1:00 p.m. Central Time, continuing through December 2nd. You may access the replay by visiting the Investor Relations section of our Web site.

At this time, I'll turn the call over to Doug.

Doug Milroy

Thanks, Shayn. Good morning, everyone. Thanks for calling in today. As always, we appreciate your interest in our company. As has become my practice, today, I'd like to touch on three things, recap our first quarter and talk a little bit about the trends we see on the business; briefly remind you of our game plan, I think everybody's got that clear in their heads by now; but I'd touch on it briefly, and then, provide a little update on our progress with our game plan.

So if you look at the first quarter, we reported revenue of $200 million versus $208 million in the prior year. Previously, we disclosed an accounting change that added about $4 million. So if you exclude that accounting change, revenue was more like $196 million versus $208 million.

On the earnings side, we reported $0.49 versus $0.18 in the prior year. Again, the accounting change added in this quarter, it added $0.14. You'll recall a prior year charge for some cost reduction activities last year subtracted $0.04. So if you're trying to get to more apples and apples, it's – comparable earnings would be $0.35 against $0.22, or a 59% increase year-over-year in earnings.

Jeff will, as always, take you through the details in a couple of minutes. What I'd like to do is just step back from those quarter numbers and talk about the trend a little bit. If you look at revenue, and we talk on a sequential basis, take out foreign exchange, take out divestitures, Q1 was down only slightly from Q4, $196 million versus $198 in the prior quarter. That's our fifth consecutive quarter of stabilizing rental revenue, or essentially flat. So in other words, we have largely stopped the multi-year decline that we've been seeing in our rental revenue.

At the same time, direct purchase was down just slightly sequentially. So I think when you look at those trends, it's very significant that, in short, we can see real growth right around the corner. If we talk then about it in terms of growth rate, and you look at rental organic growth rate for the quarter, was negative 3.5%. That's up from a negative14% same quarter prior year, or it's up from negative 6.25% sequentially, which again is our third quarter of consecutive improvement in our rental organic growth rate after eight quarters of decline. So we're continuing improving trends on the revenue side.

If you'll look at margins, again, you see an improving story for the quarter. We reported adjusted operating margins of 7.2%. That's almost 200 basis points of year-over-year improvement, 50 basis points of sequential improvement, our fifth quarter of establishing a new positive OI trend line since we introduced our game plan five quarters ago.

And then last, in our last conference call, we started talking about or 10/10 [ph] goals. So we'd like to add a brief discussion of returns in this call and in future ones. If you'll look at our Q1 return on invested capital, it was 4.9%. Now that's essentially flat with 5% last year Q1. But obviously, that's going to trend up a little slower because that includes trailing four quarters of income. So if however you did choose to annualize the first quarter just to get a sense of what it looks like, this quarter, annualized, would be 5.4%, same quarter prior year, annualized would be 4% return. So in whichever way you choose to look at it again, it's moving clearly in the right direction.

So in summary, it feels like another quarter of real progress. And I want to step back a little bit. If you recall, Q1 of last year was the first uptick as we introduced a new game plan. It was in fact a pretty good quarter. But we were very quick to say, and very explicit, that one quarter does not make a trend. But you know I'm at the point where I feel five quarters clearly does make a trend. What we've been calling stabilizing revenue has now essentially turned flat and we're right around the corner from talking about growth. And yes, there's been some modest market improvement, but a lot of that is our game plan taking hold and the programs and the focus that we put in place taking hold.

At the same time, as revenue stabilizes and begins to turn, margins continue to expand in returns, are improving, which is entirely consistent with what we said was the foundation of our game plan, earning our right to grow. So last quarter I alluded to long term. We were looking at infinity and beyond, while we're not quite there yet, but we're clearly turning in that direction. And I have no doubt that, on the way, we'll have some ups and downs. But if you draw the trend lines, you can see that that is where we're headed. And I've got to tell you up from our vantage point, it sure feels good.

So that's the quarter. If I take you through the game plan and our progress, I think you know and you're familiar with the four key elements that make it up. So what I'll do is touch on each one as I highlight a little progress. But let me just affirm very clearly, we're clearly sticking with our game plan in FY11. It's driving considerable progress across our business and we're seeing progress in all four fronts of the game plan. And as we've said in the past, some of the actions we took, you can see a more immediate impact. Some of the actions we've taken, as we put a new game plan in place, take a little longer time to see an impact. But unmistakably, it's all starting to come together and show up in our results.

Let me highlight a few examples. We talked about customer satisfaction first. We've been very clear. This is the key to our long term success. This is the foundation to driving profitable growth. Customers will stay with us. They'll buy more from us. They'll help us in the acquisition of new accounts. And I think importantly, the more the focus is on customer satisfaction and the more satisfied our customers are, the more it puts the whole focus on value and shifts the discussion away from price.

And this focus is clearly showing up in our results. If you look at the internal measure we introduced for customer satisfaction early last year, we're up 25% Q1-over-Q1 on our own measure. If you look at retention of customers, it was our best quarter in over six years for customer retention. So the focus we're putting on our customers is clearly showing up.

If you look at the second element of the game plan, better day-to-day execution, it's all about the basis blocking and tackling in our business, defining the critical systems and processes, and then figuring out where and how you want to improve them. The one example I'd like to highlight today is our sales process and our sales approach. You may recall we talked about this last spring as an area that we were working in and as an area that would take a little longer to show results than in some of the other things we were doing. But I think it's worth noting that it's clearly – the results are starting to show up here as well.

You'll recall that our focus was on productivity of each individual seller. And our sales productivity is up 15%, Q1 versus Q1 of the prior year. And we've been very open about our headcount being down a little bit as we raised our focus on productivity. And in spite of that headcount being down, we still had our best new account quarter in the last six. Now, not by a lot, but it's yet another example of the trend moving in the right direction. So in this area, I still think it's way too early to declare victory, but I did think it was a good example of progress in a really critical area for our long term success.

The third element of our game plan is cost management. I guess there I'd say just look at the first quarter income statement. And what we're seeing in that income statement is what we've tried to emphasize, that cost management isn't just about the restructuring that we've done. It's about ensuring we've got an ongoing ethos in our whole business around cost. That's where we'll really get the longer term impact.

So we continue to work at stripping out cost everywhere we can. Really focusing on what's value added and what's not value added for our costumers and making sure we're only spending money on the first, but always doing that in a way that never jeopardizes costumer satisfaction. And as result, we're seeing that cost focus across the board. I feel like if this quarter's income statement – better merchandise, better production, better delivery, and of course, consistent with the changes we made last year, a reduced level of corporate spending.

And then the last element to the game plan is addressing our underperforming locations. And here, too, this just continues to be a good story. We rejiggered the list a little at the end of the year given the progress we've made, the definition of what was the bottom had clearly moved up. In fact, a couple of businesses had moved out of the bottom quartile. But we think we got real mileage out of a very focused effort on a narrow set of businesses, and we absolutely plan to continue that in the coming year. And the results just continue to improve in that area.

So having touched on all four elements of the game plan, I think it leaves the question as you try to step back from that. What's the summary? What's our take? So I guess I'd leave you with these thoughts. One, the quarter undoubtedly confirms the positive trend that we've begun to establish in the business. Second, we're little more that a year into our game plan. We clearly like it and we're clearly sticking with it, and we're seeing progress on all four fronts of it across our business. Third, and I think the most important and the last thought I'd leave you with is it just feels great to the team here.

And I just want to take the opportunity to acknowledge the hard work and the high level of engagement we've had across the company as we've headed down a new path. And to see if turning up in our numbers the way I just walked you through feels great to the whole team. And it reminds me of one of my greatest mentors ever. Growing up in Wisconsin under Vince Lombardi, you grow up understanding that success breeds success. And we're driving that feeling through the whole company and it will continue to build our momentum. And I guess I'd glam that summary with just two words, stay tuned.

So that's our take on the quarter, and now Jeff will take you through the financials in a little more detail. And then we'll be happy to take any questions you may have.

Jeff Wright

Great. Thanks, Doug, and good morning, everyone. This morning I'll cover two areas in more detail. First, I'll review our first quarter financial performance. And then secondly, I'll provide an outlook for fiscal 2011.

So to start, let me provide you an overview of our first quarter performance. For the quarter, revenue totaled $200.4 million compared to $208.1 million in the prior year period. This lower level of revenue resulted from lost revenue due to continued difficult economic conditions and divestiture activities completed during the past year. As you may recall, during the past fiscal year, we divested non-core businesses that generated approximately $9 million of revenue on a full-quarterly run-rate basis.

This lower level of revenue was partially offset by a previously disclosed accounting change related to certain in-service merchandise items and a stronger Canadian dollar. The accounting change accounted for revenue of approximately $4 million, and the stronger Canadian dollar accounted for revenue of approximately $2 million.

First quarter revenue from rental operations was $186.4 million compared to $195.7 million in the prior year period. On a sequential basis, as Doug mentioned earlier, rental revenue was essentially flat with the fourth quarter after adjusting for foreign currency translation, divestitures and the accounting change.

For the quarter, our rental organic growth rate improved to -3.5%, compared to -14% in the prior year period. Within our core rental business, customer employment levels improved over the prior year period, and were fairly consistent with last quarter. Our add quick wearer metric has been essentially neutral for two consecutive quarters as we're not yet seeing robust hiring within our customer base.

Customer retention improved over the prior-year period and reached levels we've not achieved in at least six years. Obviously, a great result. And as further evidence, our focus on redoubling efforts around customer satisfaction is taking hold.

On a sequential basis, our rental organic growth improved 275 basis points, and our rental organic growth rate improved each month during the quarter. We're encouraged by our progress in improving rental organic growth and expect to move in to positive territory in the next few months.

Turning to direct sales, first quarter direct sale revenue was $14.0 million compared to $12.5 million in the prior year period. While direct sale volume continues to be impacted by soft overall economic conditions, we have sold a number of new accounts which drove the year-over-year increase in revenue.

Now, shifting to profitability, first quarter net earnings were $0.49 per diluted share. This compares to a prior year period of $0.18 per diluted share. Our first quarter included a benefit of $0.14 per diluted share due to the accounting change in the prior year period, included a charge of approximately $0.04 per diluted share related to cost reduction activities.

So, on an adjusted basis, first quarter earnings increased 59% to $0.35 per diluted share from $0.22 in the prior year period. The increase in adjusted earnings was due to improved execution across the entire business in virtually all areas. This includes lower merchandise expense, production cost efficiencies, lower delivery costs, reduced administrative spending, and increased earnings from specific location profit improvement actions.

Interest expense was also down $1.1 million due to the lower debt levels as a result of our strong cash flow. And finally, our tax rate was also slightly lower than the prior year. So despite lower overall revenue, we continue to improve our profitability. This is another testament to the progress we're making in our game plan.

So now, shifting to operating margins, first quarter operating margin was 9%, up from 4.7% in the prior year period. The first quarter adjusted operating margin was 7.2% after excluding the benefit from the accounting change. The prior year period adjusted operating margin was 5.3% when excluding the charges related to the cost-reduction activities. So this accounts to 190-basis point expansion in adjusted operating margin and is driven by reduced merchandise expense, lower production and delivery cost, and again, continued specific location profit improvement actions. So again, despite lower overall revenue, our focus on improving execution and profitability is showing up in the results.

We continued to generate strong quarterly cash flow despite the revenue decline and the impact of annual incentive payments, which are paid during the first quarter. For the quarter, we generated cash flow from operations of $13 million and free cash flow was $7.6 million. With the continued focus on improving profitability and targeted capital spending, we expect to continue to generate strong free cash flow throughout fiscal 2011. We continue to utilize our strong cash flow to pay down debt and to fund our quarterly dividend. Debt net of cash is now down just shy of $70 million over the past 12 months.

In August, we increased our quarterly dividend by approximately 77%. This was the fifth consecutive year we've increased our dividend. This move signals the confidence in our game plan and our commitments to returning capital to shareholders. Without question, our financial stability and flexibility remains strong and allow us to fund capital expenditures, pursue acquisitions, and increase our dividend.

Now as noted in our press release, we're returning to providing annual guidance. But before jumping into the numbers, let me just give you a little reasoning behind this change. First, you may recall that we discontinued providing specific financial guidance, including revenue or earnings expectations back in August of 2009. Since then, we have only been providing what we called directional insight, where we describe the general direction of revenue and earnings.

At the time, we were in a severely downturned [ph] economy, and we were just underway with a new game plan for G&K. This new game plan included a number of moving pieces like divesting on profitable businesses as one example where the exact timing and impact of those actions was uncertain. So for these two primary reasons, we move to quarterly directional insight to assist the investment community.

Since that time, we've been executing our game plan. And quite frankly, we strengthened our business. As we highlighted, customer retention is at its sixth year high. Operating margins have continued to trend higher. Cash flow remains strong. Debt has been paid down significantly and our dividend was increased substantially. These results, driven by the execution of our game plan, give us increasing confidence.

In addition, the economy has continued to stabilize. And while the economy is certainly not growing robustly or significantly adding new jobs, it seems to at least be more predictable than it was a year ago. So as a result of our strength in business and a more stable economy, we're reinstating annual guidance. And returning to annual guidance also appropriately reflects our focus on longer term trends in our business rather than just the next quarter. So in doing so, we'll focus on driving long term profitable growth, shareholder returns, and achieving our 10/10 goals.

Accordingly, we are providing the following guidance for fiscal 2011. We anticipate revenue to be in the range of $800 million to $820 million and earnings to be in the range of $1.40 to $1.60 per diluted share. This guidance does not include any impact from the accounting change. This guidance assumes continued stabilization in the economy, energy prices that remain within a range to 4% to 4.5% of total revenue, and cotton prices that don't rise further. We expect the full year effective tax rate to be approximately 40%.

The midpoint of this guidance implies the following fiscal year results. We will exit the fiscal year with a quarterly rental organic growth rate around a positive 2%. Our fiscal year 2011 adjusted operating margin will expand by approximately 100 basis points, compared to the 2010 adjusted operating margin. And our adjusted earnings per diluted share will increase by $0.37 or 33%. All of these represents significant year-over-year improvements and are a testament to our team and our focus on the game plan that we're executing.

Now, let me give you – also give you a few points of information related to various quarterly implications to help you with the quarterly modeling of our business. First, the accounting change will have a positive impact to revenue and operating income of approximately $2 million in the second quarter. And again, this was not included in our fiscal 2011 guidance.

Next, due to the extra week this last fiscal year, there will be three holidays as compared to the two holidays that normally fall into fiscal second quarter. While the New Year's holiday normally falls in our fiscal third quarter, it will fall on the last day of our second quarter this year. This results in one less productive work day in the second quarter and one more productive work day in the third quarter when compared to last year. In addition, we generally see some seasonality related to map volume in our second and fourth quarters. In our direct sales business, our annual outer work promotion runs primarily during the second quarter. Both these areas generally provide a lift in revenue when comparing the second quarter to the first quarter.

Finally, you may recall that our operating margins are generally impacted by approximately 100 basis points due to the annual reset of payroll taxes when comparing our fiscal third quarter to the second quarter. Again, we hope this insight is helpful in working through the quarterly details of your models.

We continue to be confident in the path we're on and our ability to further improve our performance. We look forward to reporting our progress in the quarters ahead.

So that concludes our prepared remarks, and we'll be glad to take your questions at this time.

Question-and-Answer Session


(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Andrew Steinerman with J.P. Morgan.

Andrew Steinerman – J.P. Morgan

Hi, gentlemen. You were very good to provide us with some drivers to the profitability increase. When you focus in on sequential improvement in rental or gross margin, you mentioned merchandise amortization, lower productivity deliveries, and profitability improvement and specific locations. And I think I'm missing one. My question is, is that the order of magnitude that each of them had, and if you could call out how much merchandise amortization in particular help in the quarter, and where you think merchandise amortization will head as we move through the year? Is it continuing – will it continue to be a tailwind or does it turn into a headwind at some point?

Jeff Wright

Sure, Andrew. This is Jeff. I can give you a little bit more insight. Our gross margin improved just shy of two full points on a year-over-year basis. As we mentioned, the three main components, which are merchandise production costs and delivery costs all contribute to that. In the order of magnitude, merchandise contributed about a full point, and then production and delivery closer to 0.5 points each.

And maybe I can just give you a little bit of color on each one. Merchandise costs, it's a lot about controlling and managing replacements. We're doing a number of other initiatives to make sure that we control merchandise in the best way possible. This is one that as we do turn to more of a growth mindset here as we enter the second half of fiscal '11 and end of fiscal '12, there can be some pressure on merchandise because as you grow the business, it generally means having to invest more in both new accounts and existing accounts.

But with that said, I would tell you that our used stock rooms are full of garments because of the downturn of the economy in the last two years and all the jobs that had been lost throughout the customer base. So we got a lot of merchandise there. We want to put it to use. And that's our challenge to keep doing so to offset that potential rise in merchandise coming from growth.

On the production and delivery side, production costs, we've had a big focus on safety now for a number of years. And it's being reflected. Our worker's comp costs and our health costs are both down year-over-year, having a nice lift. And I would also remind you that we divested some non-core businesses, some linen businesses this last year, which tend to be higher in terms of their labor input in the production area. And so by divesting those, that's also helped the production as a percent of revenue.

And then finally delivery costs, continue just to manage that very closely, looking at productivity of our people as well as we've seen some of our vehicle costs down on a year-over-year basis. So hitting on a number of sonars [ph], I guess that would tell you, and hopefully that addresses your question.

Andrew Steinerman – J.P. Morgan

Mostly, Jeff. I actually technically asked you about it sequentially. As you know, rental gross margins went up 90 basis points sequentially September '10 versus June '10. Is merchandise amortization a significant tailwind sequentially speaking is also helpful?

Jeff Wright

Great. And I just – sorry I missed that nuance to your question there. But the merchandise clearly shows an improvement sequentially. Sequentially, production was more flat, and delivery improved as well.

Andrew Steinerman – J.P. Morgan

Okay, super. And just to clarify the plus 2% exit rate, is that what you're targeting for the fourth quarter of this fiscal year or is that where you think maybe the first quarter of the file in the fiscal year will be? What's the plus 2%?

Jeff Wright

I'm sorry, Andrew. Can you clarify your question? I wasn't sure what the question was.

Andrew Steinerman – J.P. Morgan

Yes. When you gave clarification on the guidance, I believe you said, "Our exit organic growth rate should be 2% – plus 2%." And my question is, when you say exit organic growth, do you mean that's what the fourth fiscal quarter of this year should be? Or maybe as you get into the first fiscal quarter of the following year of 2000 – the following year, that would be the plus 2%? Where should the plus 2% show up?

Jeff Wright

Thank you. That's helpful. I was still at my mind around margins, but we had turned to growth. We intended that comment to be around our fourth quarter being at a plus 2%.

Andrew Steinerman – J.P. Morgan

Super. Thanks for that.

Jeff Wright

Thank you.


(Operator Instructions) Your next question is from the line of Chris McGinnis with Sidoti & Company.

Chris McGinnis – Sidoti & Company

Good morning. Thanks for taking my question. I guess just been thinking about the strength and some of your end markets or geographies, can you into a little bit deeper on the new customer wins you're talking about?

Jeff Wright

Chris, this is Jeff. From a new customer wins perspective, I don't know if I have in front of me that geography perspective on that. But I guess one thing that I would reiterate is the – there were a number of geographies that were hit a bit harder than others in the downturn. And the ones that come to mind are the – some of the southern markets, the Florida market, Arizona market, Nevada market, et cetera. And certainly, some of the Rust Belt, the Michigan, and then Canada in the Ontario area were certainly hit harder than others in this downturn.

And as we mentioned in some of the prepared comments from a new account sales perspective, we're really focused on productivity. We've kept our headcount more flattish, if you will, and focused on really gaining the productivity out of the sales force and just focusing on some core training and core process types of initiatives there. And that seems to be having at least the early signs of some lifting of our performance in new account sales.

Chris McGinnis – Sidoti & Company

Anything on the end market and maybe some of these performing a little bit stronger than the others? I know oil and gas have been pretty strong. Can you give me a little bit color on that?

Doug Milroy

Chris, the only color would be what you probably already know, which is our business so closely mirrors what happens to GDP. If you think about it as local industries of growth, you're right. You're going to see some strength in the oil and gas and the service sector picking up more rapidly than, say, core manufacturing. So you're going to see those kinds of trends.

Certainly, in FR garments, given the changes, the reinforcements and some of the legislation that you've seen here recently would be another example. But for the most part, our business, where we see picked up or fall off, where we see strength or weakness largely measures what you see in the local economy.

Chris McGinnis – Sidoti & Company

And then just last, from the margin side, thinking about once you get over the merchandise benefit, what's – what drives more expansion in the operating margin? Is it just the measure of growing or are there still some more costs to squeeze out of the business itself, or productivity gains, either?

Doug Milroy

I think it's both. It's clearly both. There're some that's just inherent in the nature of the economics of our business that as you see new account acquisition and you put new garments in place, there's going to be costs associated with that. On the other hand, consistent with the focus of our game plan, better day-to-day execution, how you maximize the use of the garments and the merchandise you already have is a significant opportunity to improve your P&L and it requires very good day-to-day execution across the entire business system, starting all the way from the interactions you have with your customer and working all the way back to the end of the supply chain. So some of it is inherent, some of it is opportunity to better management.

Chris McGinnis – Sidoti & Company

And then just last question on the balance sheet, obviously it's improved dramatically since you guys have taken over. I guess thinking what's your target level of debt? And what do you do with the capital going forward? Do you think about acquisitions? I know you've talked about this right to grow, can you just maybe go in a little bit more about where you're thinking on the capital side going forward?

Jeff Wright

Sure, Chris. This is Jeff, maybe I can add some comments, and Doug can add to it. From a capital perspective, you're right. We've really significantly strengthened the balance sheet the last year-and-a-half or so. Our debt to EBITDA, if you want to use that as a – the major leverage and the major strength of the balance sheet is – I think migrated down now to about 1.6.

And historically, we've maintained an investment grade balance sheet. But we've been anywhere between a low of – in the 1 to1.5 range to a higher point of 3 to 3.5. And those are generally composed of a larger acquisition. But in the near term, we're certainly going to continue to focus on generating a strong cash flow, first and foremost funding capital expenditures and things that can grow our core business; secondly, paying down debt and keeping our balance sheet strong in what's still a tough economy; and thirdly, we are a steady cash flow generating company, so we think that steadily improving and growing dividend is important as well.

And finally, you mentioned acquisitions. Yes, we continue to look at acquisitions. We're going to maintain a pretty high hurdle, make sure they're the right deals, but – that we want to be participative in the ongoing consolidation of the marketplace as well.

Doug Milroy

Now, the only color I'd add is around – just the very last point, the acquisitions, absolutely continue to be something that is an integral part of our game plan. And we look at the hurdles that we – our sense of what we want to do or not do has moved up as Jeff described. The only part I want to add is the view of the sellers hasn't changed much through this recession. People's sense of what the value of their business is, is not materially different than their sense of value a couple of years ago when in fact the market has slid away considerably from a value point of view. And so, unless and until that gap of perception and market reality comes closer together, it's going to be tough to do attractive acquisitions.

Chris McGinnis – Sidoti & Company

That's it. Thanks again, and congratulations on a strong quarter. Thank you.

Doug Milroy

Thanks, Chris.


Your next question is from the line of Alek Gasiel with Barrington Research.

Alek Gasiel – Barrington Research

Hi, just a quick question. I'm sorry if I might have missed this. Concerning the $4 million accounting benefit, is that related to rental operation or was that split between the two?

Jeff Wright

Hi, Alek. This is Jeff. It was related to the rental business. And it was a previously disclosed item. It had some impact in Q4 of last year, the $4 million here in Q1. And then as I mentioned in the guidance, there'll be another $2 million of impact in Q2.

Alek Gasiel – Barrington Research

Okay. That would be it. Thank you so much.

Jeff Wright

Thank you.


And there are no further questions at this time.

Doug Milroy

Okay. Thank you, operator. Let me wrap it up then. First of all, again, thanks for calling in today. I'd go back to the summary we left you with a moment ago, which is we feel strongly that the quarter confirms the trend lines we're on and why it feels great from our vantage point. So we appreciate you calling in to hear about that. We appreciate your interest in our company, and look very forward to updating you in early February right around Super Bowl time for the Packers. And we'll talk to you then. Thanks.


That does conclude today's conference call. Thank you for participating. You may now disconnect.

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