信達思 (CTAS) 2002 Q2 法說會逐字稿

Good morning everyone and welcome to the Cintas 2nd Quarter 2002 Earnings Release. Just a reminder, today's call is being recorded and at this time I'd like to turn the call over to Mr. Bill Gale, Vice President, Finance and Chief Financial Officer. Please go ahead sir.

Good morning and we'd like to thank all of you today to discuss our results from the 2nd Quarter of 2002. . Despite a very difficult environment during our 2nd quarter, which began on September 1st, we are pleased to report improved sales and profits for the period ending November 30, 2001. Our rental business grew at a rate in excess of 8%, while other service revenues, which consist primarily of direct sales items, declined by 11% due to many of our customers delaying the purchase of uniforms because of the impact brought on by the September 11 attacks on their business and the overall economy. We expect these delays to result in demand that is satisfied in later periods, when the economic conditions begin to improve. Despite the abrupt decline in the business enviroment experienced in the quarter, Cintas was able to show an increase in net income and eps. Steps were taken to reduce cost, in order to better match the lower revenue growth until the economy improves. We will continue to aggressively invest in sales and marketing in order to increase market share and position our company to maximize the return to our shareholders once the econonmy begins to improve again. Our current guidance of revenues and eps for the fiscal year ending May 31st, 2002, remains unchanged from that presented in our release of November 14, 2001. That guidance calls for total revenues of $2.32 billion to $2.36 billion, and diluted eps of $1.39 to $1.43. We believe that the economy should begin to show signs of stabilizing in the first quarter of calendar 2002 and begin to grow again in the second quarter of calendar 2002. The timing and extent of the economic recovery, coupled with acquisition opportunities, will directly impact the revenue growth rate with less impact on our ability to attain the eps guidance. With me today are Karen Carnahan, Cintas' VP and Treasurer. After some brief comments we will open the call to questions. (safe harbor statement) Now I would like to turn the call over to Karen.

Good morning, I would now like to take you through our income statement, our cash flow statement and balance sheet in a little more detail. We have updated our web site with our second quarter results, you may want to go to that section of our website and the financial statements in front of you as I explain those numbers. When you pull up the second quarter news release, the first few pages will be the announcement itself, and the last three pages will be the income statement, the cash flow statement, and the balance sheet. I will first start by commenting on the income statement. Total revenues were $557 million for the quarter, a 3.4% increase over that reported in the prior year. The breakdown of those revenues is as follows: rental revenues were $433 million compared to $399 million last year. This was an increase of 8.4%. Our internal growth rate, excluding acquisitions, was about 7.5%. The slowing economy continues to have a negative impact on our sales growth. Many of our rental customers continue to reduce employment levels, and our customers who buy their uniforms are delaying their purchases of new uniforms until they have a clearer picture on the direction of their business. So our growth rate in the uniform's side of our business is definitely taking the brunt of the recession's impact. Our uniform rental business is growing because of our success in writing new business, which I will discuss in a few minutes. But our uniform sales are less than last year due to the delay in purchase decisions. On a more positive note, about 1\3 of our revenue is from the rental and sale of what we call ancillary products, which include [interest mats] hygiene products, and first-aide products and services. This side of our business is holding up extremely well in light of the recession. Let me go into some further detail on sales performance for the rental side of our business for the quarter. From the perspective of our existing customers, we look at three factors when evaluating total revenues. First, a measurement in the change in billing. Which we call add-ons, versus stop orders. In other words, when a customer hires a person, we call that an add-on, and when they lay off or terminate a person, we call that a stop order. We also quantify the amount of add-ons or stop orders for our other rental products, including our [interest mats], shop towels, mops, and hygiene services, and then secondly we look at price increases, and finally we look at lost business.

For the second quarter, our total add-ons and stop orders turned negative after September the 11th. All of the negative trend can be attributed to our uniform rental business, which again, is dependant on employment levels. Again, I am addressing our existing customers only. I will talk about our new business in a few minutes. From a positive standpoint the rental of ancillary products to our existing customers performed just the opposite from our uniform rental business. In other words, the rental of those ancillary products to our existing customers continued to expand during the second quarter, and the demand for those ancillary products continued to increase. But the negative trend in the uniform rental business continues. Throughout the quarter we have observed what we thought were positive signs of this trend stabilizing, but they proved to be false starts as customer's continued layoffs, or just did not fill open positions in their companies. And so the decrease in employment levels is hindering our ability to show an acceleration in growth. Now let me address price increases. Price increases have declined compared to last year, but they are still fairly healthy at around 2.5% this year. Our price increases are dictated by contract terms that specify that we can raise prices automatically each year by either the consumer price index, or 5%. Raising prices by the consumer price index is actually automatic on the anniversary date of the contract, but each of our General Managers has the latitude to go as high as 5% if they see a need to recoup some higher costs of serving that customer, which could include many things such as fuel costs or garment costs. The last key measurement of sales relative to existing customers is lost business. Our lost business has historically run around 5 to 6% of our weekly volume. Our lost business percentage is approximately 6.5% this year. So that statistic has also fallen outside our normal range in light of the week economy that we are facing today. Before we leave the discussion on rental volume, the largest component of growth to be addressed is new business. We continue to be very successful in writing new business.

We have seen this trend throughout calendar 2001. And it continues to exceed our expectations in this top economic environment. The other bullish comment that we would make is that every region throughout the United States and Canada is successful in bringing in this new business. With the continued success in adding new customers, our growth strategy has not changed. We will continue to add to the sales force and capture this growth in new business and continue to increase our market share. We will continue to backfill the entire sales organization, making them more productive in writing this new business. And we will continue to aggressively roll out marketing and advertising programs. So that explains our internal growth rate in the rental business. We are getting a fairly healthy increase in new business and price increases, but those are somewhat offset by shrinkage of business in existing customer accounts and an up-kick in lost business from companies going out of business. Bottom line, our interal growth rate of 7.5% dropped from the first quarter due to an up-kick in lost business, a slight decline in price increases and further employment shrinkage in existing customer accounts. In summary, our total rental growth of 8.4% for the quarter which includes a very modest number of acquisitions was a respectable increase relative to other businesses in this tough economic climate. Now I'd like to move on to discuss our other services revenue. Other services revenue declined 11% over last year, primarily driven by our customer's delay in purchasing new uniforms. During this recession we have seen our customers push their uniform purchase decisions to the back burner, along with many of their other buying decisions. The uniform sale business has always been a very difficult segment to predict the timing of revenue. This recession is no exception, and our business with hotels and airlines has been more negatively impacted by the September 11th tragedy. Uniform sales for the quarter were down approximately 15% compared to the second quarter of last year. We would note this decline is more pronounced given a strong second quarter of last year, when we had a rollout of new uniforms to a major airline account. 00:011:00 In last year's second quarter this segment of our business was up more than 20%. Our first aide and safety business continued to grow, and we are encouraged by the relative resiliency of this business in a tough economic climate. Now let me address the margins in our business, and first the rental margins. Our rental margins were 45.8% representing a 190 basis point improvement over last year's margin. And a sequential quarter-over-quarter improvement of 70 basis points. These improved margins are the result of improvements in all levels of expenditures. Production costs, service expenses, and what we call the material cost area, which is the amortization of our rental products. Our ability to recycle uniforms and other rental items, such as entrance mats, shop towels, et cetera, is especially enhanced in a slower growth environment like we are in today. In addition to these productivity improvements we have also reduced our labor count to get our staffing inline with our trend in our business. Our labor costs as a percentage of revenue declined approximately 80 basis points year-over-year. Our other service revenue margins were 29.9% compared to 34.6% last year, at 32% in the first quarter. These margins are impacted by the higher fixed costs of our distribution centers which house new goods inventory and serve the important function of new business fulfillment for our company. Although the margin has declined from the prior year, the current margin is still within a historical range that we have experienced in the past, and it is quite healthy in light of the expansion in our distribution capacity over the past two years. We feel that a margin of 30% in this tough economic environment is evidence of our ability to absorb the adding capacity of three new distribution centers in the past 24 months, and as a positive sign of our ability to deliver excellent margins during this recession. Our selling and administrative expenses were 25.4% of revenue, and 130 basis points higher than last year, primarily due to an increase in sales people, sales promotions, and advertising. Again, as long as we continue to experience in writing new business, we will continue to aggressively grow the sales force and capture an increase in market share.

Our net interest costs were .03 of a percent of revenue compared to the previous year's .05 of 1% reflecting average interest costs that have dropped below 4%. With the majority of our debt priced at variable interest rates in the commercial paper market, we are fortunate to receive the positive impact of a declining interest rate environment. Our effective tax rate was 37% and which was comparable to the first quarter. We would remind you that we have restructured our organization along state lines, at the beginning of this fiscal year. This allowed us to reduce our effective tax rate from a previous level of 37.7% last year. For the quarter, net income was $58 million and compared to $56.5 million last year. Earnings per share increased 3% to 34 cents per diluted share. Our after tax margins of 10.4% were in line with last year, and a sequential quarter-over-quarter improvement of 40 basis points. Looking briefly at the cash flow statement there are a few items of note. Capital expenditures for the quarter were approximately $28 million. Total capital expenditures for the year will continue to be lower than what we have signaled in the past as long as the economy remains weak. We have cut back our spending wherever possible without sacrificing customer service or our ability to add top line growth. So we are stretching capacity wherever possible, but still adding approximately seven new operations in markets where our growth is exceeding capacity. To address the balance sheet we would make the following observations. Accounts receivable is in good shape, and actually flat compared to last year, with DSOs of approximately 40 days. Inventory levels, as we expected, decreased sequentially again from the first quarter by approximately $4 million. And year-over-year our inventory has leveled off. Our current ratio continues to stand at a strong 3.4 to 1, and our long term debt to cap level continues to decline to a current level of 13.5%. In summary, our company is very strong financially, and we are well poised to take advantage of many opportunities that we have for future growth. Now we would like to open the call to answer your questions. 00: 16:25

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing star 1 on your telephone keypad. Once again, that is star 1. We will proceed in the order that you do signal us and we will take as many questions as time allows. We'll pause just one moment to assemble our roster. Our first question today will come from Michael Schneider with R.W. Baird.

Good morning Karen, good morning Bill.

Good morning, Michael.

Two questions on the rental side. First, just in terms of the prior guidance, if you look back to November 14th, you said that rental revenue would be up approximately 10%, and indeed it came in at about up 8.4. Is this just approximation or did something change in the last couple weeks of the quarter materially?

well, Michael, I would say that--- you know Karen mentioned there were some false starts in the quarter. We did approximate on the November 14th press release with data that we had available to us through the month of September and into October. And we thought that things were beginning to stabilize and therefore we rounded to that 10%. We also in polling our operations, had some operations be giving us data that really gets classified as direct sale because of some of the catalogue business. And we saw some improvement in that as we went forward. I think what we ended up seeing as we got through Thanksgiving and through the end of November, however, was though, the strengthening or at least the stabilization that we thought was occurring as of the end of October, really did not come forth, and therefore, there was a slight disappointment in the overall --- and again it gets back to existing customers, but the overall stops in excess of adds, that coupled with the fact that our direct sales business was slightly stronger than we expected, because of the classification as we were pulling our operations.

Okay, so if maybe there was a false start that was imbedded in your guidance, it seems to me the base of what you're starting now is somewhat lower than you anticipated when you gave guidance in November. What gives --- what's changed on the positive side that gives you comfort in maintaining the guidance you gave back in November?

Well, I would say we're watching our current trends right now, and in looking at--- talking to our operations with new business, which is continued to be very strong as Karen mentioned, there are still a lot of prospects. We've talked to our sales group throughout the country, and they're very bullish. And therefore we think that going into January we're going to see a stabilization of this whole stop over adds situation. The new business is very strong and we feel very comfortable going forward, assuming the economy continues to improve as we think it will.

Okay, and then the second question. As you mentioned new business bookings are up to a record level. Can you put that in terms of sales force productivity though, and let us know, yes, you're booking in absolute numbers a record amount of business, but in terms of revenue per week per sales person, is that actually trending higher?

I don't have the sales productivity for the second quarter, but I can tell you in the first quarter and what we saw in the fourth quarter of last fiscal year, those were the two highest quarters that we've ever seen in the productivity of our sales force. And I have to believe that trend has continued in the productivity because we are watching the head count additions, we're looking at --- of course each operation is responsible for watching that. I just don't have a total number for you for the whole corporation, but again, the fourth quarter and the first quarter were the two highest quarters in the history of this company.

That's amazing. Congratulations.

Thank you.

Next we'll take a question from Adam Waldo with Lehman Brothers.

Yes good morning. Bill and Karen thanks very much for taking my questions. A couple questions on the cost side in particular in your direct cost items in the quarter. Can you give us a sense for the trends you were seeing in direct wages, benefits, and energy inflation during the quarter and how that compared with trends you were seeing in the prior couple of quarters?

Sure, Adam. As far as the fuel costs and energy costs are concerned, we actually had a slight decline on a percent to sales basis from where we were in the quarter --- the first quarter of this year, and very comparable to where we were last year. So we have seen fuel cost certainly back to the level that we saw a year ago, which are again, around 2% of our overall revenue.

Okay.

We have definitely had an up-kick in medical costs. We've seen increases in our medical costs on a comparable sales basis about 10%. So our medical costs continue to rise, however; our wages themselves, we see a slowdown in the rate of wage growth, some of which really was intentional on the part of Cintas. As we mentioned back in the first quarter, we knew that we were in for some tough times coming ahead with the looming recession which we're now in, of course. So we started taking actions within the company where we have basically set a maximum amount for wage increases. We've eliminated certain jobs by eliminating the job itself, so we're really controlling costs much better on the wage front and our availability of labor is as good as I've seen it in years because of what's happening in the overall economy. So I think that has certainly helped our situation.

Bill, is it fair to say that wages and benefits are still on the 40 to 50% of total revenue range?

Um ---

--- across the enterprise?

I would associate with probably --- I would say 35 to 40 probably.

Okay, across both direct and indirectly?

Yeah, that's a rough number, but that's what I would guess.

Okay, great. A final question on the inventory side, either Bill or Karen. I know that you all are continuing to deverticalize the supply change and use more garment sourcing from outside of the U.S. continent. As you continue to do that, obviously there's cost in margin benefits in return on capital benefits, but an offset is rising inventory days. Can you give us a sense for where we should see inventory days stabilize as we sort of go back into a sort of more normalized economy?

I think you'll see --- you know, we have made significant progress in our inventory levels over the last few quarters, and as our business picks up, which we know it will, you're going to see even a better situation relatively speaking of inventory as a percent of the sale. What we have done, Adam, is, yes while we have moved sourcing outside of the U.S., we've only move it to places like Mexico and Honduras.

Right.

And we've established excellent mechanisms of getting that product back and forth on a relatively quick basis, so I would tell you that I think our full sourcing area is going to be in very good shape as we move forward here when the economy picks up.

Okay, but at this time it may be a little too early to give us more precise guidance in terms of margin and inventory day impacts?

Well, yes, I don't really --- I think the margin impact is there, and you're going to continue to see lower sourcing cost as we have more or greater percentage of our product made outside of the U.S., and I don't have a specific for you on the inventory, but I would say if you go back two or three years ago probably before the [Unitog] acquisition, you'll find that the comparable amount of inventory we had relative to the sales at that point in time should become commonplace for us going forward.

Thank you.

Our next question will come from Chris Gutek with Morgan Stanley.

Thanks, good morning Bill and Karen. BILL & KAREN: Good morning.

I wanted to follow up on the first question. I think the revenue guidance for the full year does seem a little bit high. I guess it does imply a pretty significant pick up in the organic growth rates in the second half of the year. And, I certainly appreciate the detailed comments on how the sales force productivity's tracking. I know you guys don't like to discuss the numbers of sales people, but is there anything you could say about maybe the year-over-year growth in the sales people or year-over-year growth in the advertising and marketing spending that's driving that higher growth production of new customers?

The growth is in the high teens in the sales force, and that pretty much is a formula that we've always used in order to get to our growth pool of 14 to 16% internal growth rate. So we have continued to stay with that formula, and the guidance for the rest of the year is again based upon what Bill had said, and that is, we poll all of our rental operations, we get their feel for what they're seeing out in the field. They have a better pulse on the productivity of their sales force, and they're plans for adding additional sales people, and so that --- the numbers the guidance right now is really based upon their guidance to us, and we have anecdotal stories of how they're seeing an improvement in some of the --- in the prospecting that they're doing. Also, Chris, we would say that --- and this is anecdotally because as you know, we only measure the percentage of our new business that comes from no programmers versus competition once a year, and that's at the end of May. But anecdotally we're hearing that our operations are also having a lot of success in getting business from the competition and increasing market share. So we are pretty much going with their guidance along with we're tying the sales growth performance with what we see out on the horizon and what we read in papers just as the rest of everybody on this call, and we feel that a rebound is pretty much the consensus sometime in the early part of next calendar year. It will probably be mostly in our fourth quarter, and certainly our guidance proves that or shows that right now.

Okay. It sounds as if the add and stop ratio is relatively weak and it wasn't totally clear if it was still declining a bit in the quarter, or if it stabilized or started to improve, but historically I think we would expect --- at least based on historical precedent, a bit of a lag between the bottom in the economy and then hiring of full time workers and therefore an improvement in the add stop ratio. Is there anything that you're seeing in the current trend of the add stop ratio that leads you to believe --- I guess Bill did say that you're expecting it to recover in January. Why would you expect less of a lag to the overall economy in the hiring of workers this time around? Any data to support that?

Well again, we're not sure we lag the economy as much as we used to. We used to say that we lagged it about six months. We would say that we're, although we're probably not coincident indicator, we do think that companies reacted much more quickly in their employment levels this time than what they had in the past. So we don't necessarily think we're going to lag the recovery as we did back in the early '90s. The other thing is, Chris, I'm not sure that anything we see right now we would hang our hats on as a trend. Indicators that we get on a weekly basis at times show us that things have stabilized, and other times the direct opposite will occur the following week. So again, maybe there is some glimmer of light in the fact that you do see some false starts which are usually what happens when an economy starts turning around. But we don't see the dramatic drop that we first saw when this recession started.

Okay, great. And one more question if I could. Regarding the garment amortization expense in the rental business, Karen, in the last couple of calls, you guys have talked about the poll ratio rising and that contributing to an improvement in the gross margin.

Yes.

Talk about that and maybe quantify the impact on the gross margins.

Actually the material cost did still have a positive impact on the margin, but I believe that the labor as a percentage revenue had more of a contribution to the improvement of margin in the current quarter than what we saw in the first quarter which was a lot more weight toward the material cost side.

Okay. So less than the 70 basis points year-over-year impact.

Right.

Okay, great. Thank you.

And next we'll take a question from Bruce Simpson with William Boyer & Company.

Hello, good morning. BILL & KAREN: Good morning, Bruce.

Did you quantify the drop add measure?

We said it was negative. We said it was negative in total entirely attributed to the uniform side or based upon the employment data, but the add stops in the other ancillary products is still very positive. But net- net overall, if you include the uniform side and the ancillary product side, it is negative. And it probably went down sequentially quarter-over-quarter by an additional--- had an impact of an additional 1% reduction in top line growth.

Okay, quarter-over-quarter 1% negative from the prior --- is that year-over-year or sequentially from the first quarter?

Sequentially from the first quarter.

Okay. So for those of us trying to back out the total new business written number, do you have that in the same terms as you measure annual price increases or annual loss business?

You know I don't. I don't, Bruce. It would probably --- if I had to just mathematically back into it, it would get you in the mid to higher teens. But I don't have that number exactly. But that's mathematically where it would end up.

Mid to higher teens, Karen, in terms of new business written?

That's correct.

Okay. And then I've got a question just about the cost side of the business, if I could as you to drill down on that a little bit. At a pretty substantial reduction in SG&A as a percentage of total revenue 40 basis points sequential and you talked about some positions being eliminated as well as a cap on labor costs. Moving forward, if we continue to see a soft hiring environment instead of a stagnant revenue environment, where do you go with that? Is there room to lower that as a percentage of revenue or do you feel like you sort of--- you're running at --- as far as you can push or stretch your capacity right now?

I would say, Bruce, if there is not a significant increase in revenues that you're not going to see much in that number coming down. And the reason being is that a big chunk of that number is the sales and marketing side and we do not intend to lower our aggressive spending in those areas. There's always some room for improvement in SG&A, and we'll continue to monitor it very closely, but we're going to continue to aggressively expend money in the sales and marketing area because we know the economy's going to turn around. And we know this is a great opportunity for us to pick up market share. And we're seeing it happening today, so we want to stay very aggressive here.

Okay thanks, and just the last thing is I wonder if you can talk about --- you know that Bill has talked about potential new products, or products in data is always a part of the game plan and seeing what you can develop or add on to your product set, is there anything going on in that front that's more tangible than just what I mentioned? For example, is anything being tested in particular geographic markets? Thanks.

Yes, we have about three or four initiatives that are actually in test mode in various parts of the country. None of which we are gong to disclose publicly at this point, but we are continuing to look for other products and services that we can offer our customers, and we'll continue to do that.

Okay, thank you so much.

David [Raydell] with Salamon Smith Barney has a question.

Yes, good morning. BILL & KAREN: Good morning, Dave.

Good morning. A couple questions if I could, please. Do you have an estimate of what you imagine a direct sales normalized growth rate might be on the other side of this valley?

Normally our expectations for direct sales growth is in line with our targeted range for rental, which is 14 to 16%. Coming out of this recession though, we would say that because we've got pent up demand, I think it would be realistic to say it would be above that level.

Okay, and on the poll ratio, how do you imagine that benefit unwinding as the gross rate picks up? Do you think there would be a lag effect where there would be --- you would continue to enjoy it while growth picked up to a certain point? Would it take a certain number of quarters? I wondered if you had any insights into how you think that benefit might unwind itself?

Dave that's an interesting question. I'm not sure that I can predict that, but I would say that it --- as new business is generated in a healthy growth environment, the material cost of the percentage of revenue has to pick up and as far as the impact that it would have on margins, in the short term it would probably --- now again I'm talking off the top of my head at this, but I would say, you know, 50 to 100 basis points increase in that expense as a percentage of revenue as the new business picks up. And again, it would not be something that's immediate because again you're talking about amortization over, for uniforms it's over 18 months, and for some other products and services it's anywhere from 8 months to 36 months. So we're not talking about an expense that hits the P&L statement day one when you write the new business, so it doesn't --- you know, it has a more gradual affect on your margins as you start writing that new business.

Great, that's very clear. And one last question if I could, please. Do you see any up tick in external interest in uniform programs in the more security conscience world that we find ourselves in?

Yes, we do. One of our strongest areas of growth is the Northeast. And we attribute that for a couple of things. One is one of the areas of the country that we currently have the lowest market share, so there's a lot more opportunity up there. We've got some excellent management there, and that's helping. But we also, hearing from our salespeople have heard of renewed or increased interest on the part of employers in making sure they know that people who are in their operation should be there. And also for people who have employees that are visiting other businesses or homes et cetera, that the need to make sure those people are identified as part of that company seems to be more of a buying motive than it ever has been. So I think there is an increased interest because of the security aspect.

Thank you, very much.

Amanda Tepees with J.P. Morgan has the next question.

Hi, good morning. BILL & KAREN: Hi, Amanda.

I think there are few things left for me to ask. On your cash flow, it looks like, if I'm looking at it right, you had a positive swing in working capital in the quarter which is why your cash balance went up, and I'm wondering what was behind that?

Well, let me address that because there was a positive impact from working capital on pretty much across the board, and probably the most notable areas were in the inventories as we talked about the sequential reduction in inventory levels after we'd been kind of working those down after opening those three distribution centers. But the other two areas that I think are worthy of note, and I'm glad that you brought this up. The accrued compensation shows a pretty sizeable difference from the first six months of last fiscal year. Shows a decline of something like $15 million, and that's just in the difference in number of days accrued at the end of November versus the end of the previous November of last fiscal year. And also if any of you are looking at cash flow compared to May 31, we had nine days of accrued compensation at the end of May, whereas at the end of this current November, we only had five. We pay our people on a one week lag so there's that four days of difference in accrued compensation and it's really nothing more than where the quarter fell during the week and reflective of when we pay our people. Now the other area I would note is in the income taxes payable area which showed just the opposite. It showed a pick up in cash flow and a decrease in working capital on that income tax payable line. And that's because we have adopted some new methodology in making our estimated tax payments that allowed us to defer those payments until later in the fiscal year. So that's just a timing change that will catch up in the third and the fourth quarter of this fiscal year.

Okay, so the cash levels will normalize out. And then on share repurchases, can you talk at all about how much it looks like you ended up spending, a decent amount, maybe 50 or $60 million and anything you can comment on where you are in the share repurchase program going forward?

Actually I'm not sure where you're getting that 50 to $60 million because we actually did not repurchase any share.

I was looking at the securities line.

That is just in marketable securities where we invest our corporate cash.

Okay. So you haven't acted on the share repurchase program?

We did not act on the share repurchase. Our stock held up very, very well from the reopening of the market in September forward and while we were positioned to take some repurchases, we did not feel it necessary to do so.

Okay, so share count for the rest of the year ought to be around where it is now then?

Yeah.

Now, Amanda, let me go back one more time. The normalized cash --- last statement that you made was that that cash, this will normalize. Only in the income tax payable area. All other areas are pretty much an influx of cash that will not reverse. The only timing change will be on the income taxes payable side.

Okay. And then finally, your acquisition pipeline, it looks like you got a little bit gross from acquisitions than I had forecast and normally one would think in a downturn like this your pipeline of tuck-ins would increase. Can you comment on what you're seeing there?

Well, yeah, I will. As we have said before, the acquisition is historically in recessionary situations the acquisition pipeline does increase, and the number of acquisitions we make actually increases, but it takes awhile for that to happen. The recessions have to last longer than where we --- they've lasted so far. So we're not surprised that the acquisitions have not picked up because we really have not been in recession for that long a period of time. If this thing were to continue, though, for three to six more months, I think you would definitely see an up-kick in acquisitions. And I think Cintas will continue to play a very active roll in those, although we will not overpay. We will make sure that they are the right thing to do for our shareholders. So we're not surprised that it hasn't gone up any quicker, but we actually hope it won't go up much quicker because of the --- we hope the economy picks up, but we'll continue to be very active there.

Okay, thank you very much.

And our next question today will come from Alex Paris with Barrington Research.

Good morning. BILL & KAREN: Good morning.

My questions have largely been answered, however; I just had a bigger picture question. I wanted a comment from you on the latest census bureau figures for the industrial laundry industry. It looks like, unless the numbers are not clear, or not final, that revenues industry wide for industrial laundry fell during the 2000 calendar year.

Alex, we immediately saw that too, and we got a hold of our industry association right away and they polled some of our other members, and we and some of the other members of the industry believe those numbers are incorrect. It's impossible, and due to the nature of the way the government polled that information in, we believe they have made some pretty big [inaudible] with regard to compiling that data. So the industry association is going to be working with the census bureau to redo those numbers, and we would expect there to be better numbers, or revised numbers put out into the future. The government changed their whole methodology of compiling the data and all the classification codes, and we think that they made some mistakes in doing that.

Yeah, I was a bit surprised when I saw those numbers to, you know given the very steady growth of the industry over the years on the one hand. On the other hand, looking at the three major public companies with declining internal growth rates due to the economy and the fact that you three and your new publicly traded competitor Aeromark, make up such a large percentage of the total, you know I could see that the rate of growth might have decreased during 2000.

But the bottom line is that the growth was not negative. So if you take a look, even if you take a look at the top four companies in this industry that have about 60% of the market share, the average growth for those four companies was about 6%. So definitely not negative 4% like what the government reported. So there has to be an error in either the companies that they put into the survey, or secondly, the classification of the revenue between, and it still said they did a --- they made a change in the classification of companies that historically have been in our industry and has split them out between what they call linen companies, and what they call industrial laundry companies. And the growth that they showed in the linen component was something like 6.5% and the growth that they showed for the industrial laundry side was something like -4%. Well we just know, and the rest of our group in our industry, know that that absolutely cannot be correct. Linen companies have not grown at 6.5 and industrial laundry companies have not shrunk 4%.

Yeah, that makes sense to me too. Thanks very much for that. Good quarter in light of a real difficult economic time. We will continue to watch with interest.

Thanks, Alex.

Next is Greg Holter with LJR Great Lakes Review.

Good morning.

Good morning.

You talked about the capital expenditures broadly, but I assume you're still looking at 140 to $160 million?

No, Greg, we're not. We think now our Cap-X for this year is going to be closer to 130 to 150. So we're going to take that down by $10 million on both sides. It'll all be dependant again, on how quickly the economy picks back up.

Okay. And last question is, can you comment on the state of the catalogue, first aide, and cleaning room businesses within the last quarter and outlook going forward?

Well, the catalogue and the first aide business definitely grew, and continues to grow. But not at the rate that we saw when the economy was much more robust, but they are growing. The clean room business was relatively flat versus prior year because of the downturn in their markets which are heavily tech oriented.

Okay, thanks.

At this time we'll take a question from Kenny [Owe] with SAB Capital.

Hi. My question that I was going to ask was already answered by --- earlier on in the conversation. Thanks.

Thank you.

Thank you. Next we'll take a question from John [inaudible] with Viking Global.

Hi. Thank you very much. A quick question on the progression of the add stop ratio in the quarter. I think someone asked earlier about it but, if you could give us some color and kind of pre 9/11 and after, and also was the add stop negative in the core rental before this quarter.

At the end of August that statistic in total had turned positive, and then went directly the opposite direction after September the 11th. So through the rest of the second quarter, and through November 30th , if we just look at the add stops on that second quarter, it is negative. It is entirely attributed to the uniform side because of the employment levels in existing accounts. If we just measure the statistics for all the other core rental products, which are entrance mats, shop towels, linen which is a very small component, mostly it would be the what we would call the facility services side of our business, which is predominantly entrance mats, it was very positive for the second quarter.

Has it been negative on the uniform side before this quarter in the past?

Yes. In August it had been negative, slightly negative, but the ancillary products have far outweighed the uniform side.

Okay. Thank you.

You're welcome.

[Oshish Pont] with Fairlong Capital has a question.

Hi guys, couple questions. First, on the labor cost front. You know you said a lot of the costs savings really arose from improved labor productivity and people you'd let go. Earlier there was a comment also on --- you know hitting some capacity constraints when you're going to invest in increased capacity. Sort of trying to reconcile the two comments, could you---

Overall for the company we made a comment that our labor costs have gone down as a percentage of revenue and we were explaining the margin--- rental margin improvement and much of that did come from labor saving increased productivity, but in seven markets we are at and above capacity and so we are going to build new facilities in those markets, and that would include market like Atlanta, Salt Lake City, Shreveport, Tacoma, Wichita Kansas. So our plans are once we are at capacity and we can't stretch it any further in certain selective markets we have no--- I mean we would not have any other choice but to build a new facility so that we can continue to capitalize on the growth opportunities there.

Could you give us the number of people that were let go?

Well, I don't want to use the term "let go." It was basically job elimination and we have normal attrition, so we were able to reduce our work force, let me put it this way, reduce the rate of increase in our workforce basically we're flat from where we were about a year ago through attrition and through some selective job elimination. So the absolute numbers are relatively small as far as people being let go.

Okay, can you give us a sense of in the rentals business, what was the growth in national accounts business versus other business?

I'm sorry, say that again?

Growth in national accounts, business versus other business.

In the rental business?

Yes.

No, I don't have that statistic. We don't provide that break out.

Okay. Just a question related to the industry. If you look at both the industrial association sort of forecast, in different segments, in terms of sort of employment growth amongst your customer basis, it seems like, you know, based on forecasts the obviously presently large sort of customer basis, the auto dealerships, repair shops, et cetera, that's --- you know, over the next few years, expected to sort of decrease and growth's really expected to come from health services, food stores, sort of be conventionally large consumers of the rental business.

You know, I'm not sure we have at our fingertips, the market share by segment. Of course we've got the percentage of our business that comes from this sector's. But as far as the market share by sector, we just don't have that at our fingertips right now, but a lot of our growth does come from nontraditional market like you mentioned. The non-automotive markets, the eating and drinking places, you know, just a broad category of service industries. Anybody that's out in the public eye is a prime candidate for a uniform rental program, and our ability to convince those companies that don't have programs right now to adopt them for the first time has been so successful, and that's been going on for the last ten years. So even though we don't look at necessarily the forecast of employment growth within each segment like you're mentioning right now, there is really just a myriad of well over a 1.5 million prospects that we've identified that are perfect targets for uniform rental programs and we don't necessarily get hung up in what business they're in and what the forecast is for employment growth in those businesses, if we know that there is a need for a program we go after it.

Okay. Last question, is also one of the reasons --- I know you gave a reason for why acquisitions weren't that many. Are you guys seeing a lot of the small mom and pop stores just shut down and get out of business so you don't really --- you know they contracts are going begging in some respects?

No. We haven't seen any of that at all.

Okay. Thank you.

Steve Jacobs with U.S. Bank Piper Jaffray has a question.

Good morning. I'll be real quick. Bill, could you relate the add stop ratio with your economic forecast for the first half of next year? In other words, does the add stop ratio in rentals have to turn positive in the second quarter?

We believe that the add stop ratio would have to turn slightly positive or at least be flat or slightly positive to meet the objectives that we have going forward.

Thank you. And then second question, Karen, lost business. Could you give a little color on how much was lost to competition versus customers going out of business, you know, bankruptcies and other things?

I think, Steve, it was about 50% both ways. About half of it was loss due to bankruptcies et cetera, and the other half I think was lost to competition, price competition especially.

Okay. And last question, in terms of the purchase market, could you make it equalitive statements about the pipeline? You know you've talked about deferrals and understandably so, some of your customers are deferring their decisions, but could you qualify it a little bit what kind of a pipeline you're looking at in terms of a purchase sight?

Well, Steve, we very much believe that we will be able to return to growth in that arena in the 15 to 20% range as the economy picks up. One of the things that makes us feel very confident in that is that, one, the travel industry, the food and entertainment industry are certainly showing signs now of coming back. They always are going to continue to wear uniforms, and we are fairly confident that our ability to provide those type of programs are going to be even more significant going forward than many of our competition because many of our competitors are just really suffering greatly right now and they are starting to scale back and cut back on their ability to provide quick turnarounds. So this is one of our beliefs that as their businesses continue to improve, those customers businesses improve, that we will be one of the few companies, if maybe not the only company, that can provide many of the uniform programs on a timely basis that these people will need to have.

Alright, thank you very much.

Mr. Adam Waldo has a follow-up question. He's with Lehman Brothers.

Yes, just a couple quick questions that haven't been covered, and this has been incredibly comprehensive, Karen, when you gave a figure of 7.5% internal revenue growth rate for rentals, was that just backing up the acquisitions that were closed during the most recent quarter?

No, that would be for the last 12 months.

It would be? Okay. If I do back of the envelope math, it looks like you spent about $6 million on acquisitions during the quarter just looking at the cash flow statement. So if I use historical industry private market value range of 1 to 1.4 times trailing years revenue, that would mean you acquired annual run rate revenue of about 4 to $6 million in the quarter, which boosted your reported revenue by about 1% so I'm trying to sort of square those two calculations?

Well the only thing in that, Adam, that calculation that you do. You're picking up the cash outflow from the cash flow statement---

Right.

--and that includes paying for accounts receivable, inventories, and other balance sheet items.

Got it. Okay.

So it's not just a volume related calculation. 00:55:

Okay. I guess putting it another way, are you seeing private market values materially different than the historic range? I know that a major European competitor with sizeable U.S. operations has been bidding up private market values the last 12 to 18 months. Is that affecting your pricing on acquisitions or not at this point?

I haven't seen any real change at this point, Adam.

Okay, thank you very much.

Chris Gutek with Morgan Stanley has a follow up as well.

Thanks. Bill, I wanted to ask you about the companies capital structure. The company's accumulating cash as a fairly rapid rate, and I understand that there's some timing issues with the balance sheet, and certainly the Cap-X is below trend levels, but, having said that, the net debt to capital here is getting close to zero. What is the companies intended use of cash and optimal capital structure, meaning, would you intend to pay down debt or because the debt is such a cheap cost of capital or cheap source of capital, would you consider putting in a more formal share repurchase program at some point?

Chris, the first use of cash that we believe going forward, will be for acquisitions. We're accumulating it for acquisitions. If we believed that it would make sense to repurchase our stock and we don't need the cash for acquisitions, then we would do that, but I would say it's going to be primarily acquisition related.

And to the extent those acquisitions are fairly lumpy and hard to predict, you would likely just accumulate cash and the near term?

Yes.

Okay. And then secondly, on the cost reductions, is it fair to say that the primary source of the cost reductions were the head count reductions, or were there additional cost cuts as well? And then the follow up to that is, are those cost cuts, have they been completed or are there more benefits to be realized in the third and fourth quarters?

Most of the cuts would have been in the --- the impact would have been in labor and that will be better in the third and fourth quarter because those cuts were primarily made during the second quarter. So we haven't had a full quarter's benefit of that coming through. But with that said, I will tell you that there is an attitude on the part of every operating manager within our company that when times get tough you need to look at every expenditure that's being made. And we're finding that our people are being very creative on coming up with ways to save money. And when you put spread that over 3 hundred different operations, you know, it begins to add up. I mean simple things like forgoing a memo pad with somebody's name on it, just using generic memo pads. That in and of itself isn't much, but it's the attitude that it creates in the company. We've got a rule now that if you're going to a visit an operation that if it's less than 3 hundred miles you should drive instead of fly, just because of the time it takes to go through an airport anymore, the cost it saves. Again, it's an attitude type thing on the part of our people that everybody's pulling together to spend money as if it were their own.

Okay, great. Thank you very much.

And Bruce Simpson with William Blair & Company has a follow up.

Hi, this is a follow up to the question from the gentlemen from Piper when he asked you to quantify on the loss business about how much of that goes to competitors versus BK. And though you don't fully quantify the new programmer's rate this quarter, I wonder, in terms of new business one, if you can give us any detail on how much of that you think you're taking away from competitors?

Okay, now again, this is going to be a gut feel because we only measure this once a year. We're hearing from the operation that because of the deterioration in service in some of our competitor's businesses, and I'm mostly talking about the local competitors, the small family run operations that are really stretching their budgets, and we're seeing some deterioration in service. Our operations have said that they're getting a larger share of that market through taking business away from competition than what they were getting before, so if I just said my gut feel right now, Bruce, it would probably be maybe 50 - 50, whereas before we would have gotten maybe 60% from no programmers and 40% from competition, maybe that has swung now back to 50 - 50.

Thanks, Karen.

Mr. Simpson, is there anything further?

No, thank you.

And Greg Holter with LJR Great Lakes has a follow up question.

Just a quick one, the sheer count was down about 300 thousand shares in the quarter, is that due to just the share price more than anything?

Yes. That's all it's due to.

Okay, thanks.

And at this time we have no further questions in the Q, I will now turn the conference back over to Mr. Bill Gale for any closing or additional remarks.

Well, thank you all again. We had a very nice turnout for this call and we appreciate all of you taking the time to listen to our comments today. We are very satisfied I think, in light of the economic situation, with these results. We are pleased that we did achieve the 34 cents a share. It was through a tremendous effort on the part of all of our partners at Cintas and I would just want to leave you all with the attitude on the part of our company is that we are committed to taking advantage of the economic upturn when it happens, and which we expect to happen early in 2002. We think we are positioned very strongly to be a even greater market share as we go forward. I would like to thank you again, and on behalf of all the partners at Cintas, we wish you and your families a very joyous holiday and a prosperous 2002.

And that concludes today's conference call. Thank you for joining us today.