信達思 (CTAS) 2002 Q3 法說會逐字稿

Good day everyone and welcome to the Cintas First Quarter 2002 earnings release.

Just a reminder, today's call is being recorded.

At this time I would like to turn the call over to Mr. Bill Gale, Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning and welcome to our third quarter of fiscal 2002 conference call.

We are pleased to announce increased sales and net income for the quarter ending February 28th, 2002 despite a difficult economic environment. Our rental business grew at a rate in excess of six percent while other service revenues, which consist primarily of direct sales items declined by 12 percent. Those customers who purchase uniforms continue to be very cautious in their spending, due to the impact the downturn has had on their business. We continue to believe that these delays will result in pent-up demand that will be satisfied in later periods when economic conditions begin to improve.

Despite the continued weak economy impacting our existing customers, Cintas was able to maintain its target net margins and is reporting a modest increase in net income. We continue to be aggressive in reducing expenditures in all areas, except in sales and marketing. As Karen will share with you shortly, new business and our rental business continues to be strong as a result of the investment in sales and marketing.

In early February, we provided updated guidance for the quarter just completed and the fiscal year ending May 31st, 2002. Our current guidance of revenues and earnings per share for the fiscal year ending May 31st, 2002 remains unchanged from that presented in that release. That guidance calls for total revenues of $2,225,000 to $2,260,000 and diluted earnings per share of $1.36 to $1.39. We are not in a position to provide any guidance for next fiscal year due to the uncertainty regarding the economy. We plan to provide, in conjunction, with that guidance in conjunction with the reporting of our fourth quarter results in July.

On March 4th, Cintas announced that it is negotiations with Angelica Corp. to acquire contracts with customers who purchase

from Angelica, as well as the associated accounts receivable and inventory pertaining to those customers. As we stated at that time, we will ultimately service those customers from our Chicago-based national account sales division. Due diligence is proceeding and final terms are subject to the completion of the due diligence. We anticipate closing on the transaction some time between April 1st and May 15th.

With me today is Karen Carnahan, our Vice President and Treasurer. After some brief comments from Karen, we will open the call to questions.

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 a discussion on these points contained in our most recent filings with the Securities and Exchange Commission.

Now, I'd like to turn the call over to Karen for more details.

Good morning everyone.

I would now like to take you through our income statement, cash flow statement and balance sheet in a little more detail. We have updated our Web site with our third quarter financial results. You may want to go to that section of our Web site and have the financial statements in front of you as I explain those numbers. When you pull up the third quarter news release, the first few pages will be the announcement itself. The last three pages will be the income statement, cash flow and balance sheet.

I will first start by commenting on the income statement. Total revenues were 545 million for the quarter, a two percent increase over that reported in the prior year. The breakdown of those revenues is as follows: Rental revenues were 425 million, compared to 400 million last year. This was an increase of 6.3 percent. Our internal growth rate, excluding acquisitions for the quarter, was about five percent. The slowing economy continues to have a negative impact on our top line growth. Many of our existing uniform 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, the growth rate in the uniform side of our business has been impacted the most by this recession. However, I want to emphasize that our uniform rental business is growing, in total, because of our success in writing new business, which I will discuss in a few minutes.

On a more positive note, about one-third of our revenue is from the rental and sale of what we call ancillary products, which include entrance mats, hygiene products and first-aid products and services. This side of our business continues to hold up extremely well in light of the recession. Let me go into some further detail on our top line performance for the rental side of our business during this third quarter.

From the perspective of our existing rental customers, we look at three factors when evaluating total rental revenue. First, a measurement of 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 layoff or terminate a person. We call that a stop order. We also quantify the amount of add-ons and stop orders for our other rental products, including our entrance mats, shop towels, mops and hygiene services. Secondly, we look at price increases and thirdly, we look at lost business.

Our total add-ons and stop orders turned negative right after September the 11th. All of the negative trend can be attributed to our uniform rental business, which is dependent on employment levels. Again, I am addressing our existing customers only. I will talk about our new business in a few minutes. Since September the 11th, the uniform adds and stops statistic has been a net negative number. In other words, our uniform rental business within our existing customer accounts has declined. That decline continued in the third quarter.

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 the ancillary products to our existing customers has expanded nicely throughout the third quarter.

Price increases have declined compared to last year but they are still fairly healthy and are slightly above two percent this year. Our price increases are dictated by contract terms that specify that we can raise prices each year, by either the Consumer Price Index or five percent. Raising prices by the CPI is actually automatic on the anniversary date of the contract but each of our general managers has the latitude to go as high as five percent if they see a need to recoup some higher costs of serving the customer.

The last key measurement of sales relative to existing customers is lost business. Our lost business has historically run around five to six percent of our weekly volume. Our lost business picked up during the third quarter and has stabilized at a level that is slightly above seven percent.

Before we leave the discussion on rental revenue, the largest component of growth to be addressed is new business. We continue to be very successful in writing new business. We saw this trend throughout calendar 2001 and it continues to exceed our expectations in this tough economic environment.

The other bullish comment that we would make is that every region throughout the U.S. and Canada is successful in bringing in new business and the trend just keeps getting stronger. With this 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 back fill the entire sales organization, making them more productive in writing new business and we will continue to aggressively roll out marketing and advertising programs.

So, before we move on, let me recap what we see in our rental business in total. First, we are getting a healthy increase in new business across all our product lines. This includes our uniform programs, as well as our ancillary services such as entrance mats and hygiene products. Secondly, price increases are still slightly above two for the year. Thirdly, we continue to experience shrinkage in our existing uniform rental customers but this is somewhat offset by expansion of our other rental business. And, lastly, we had an uptick in lost business primarily from companies going out of business.

In summary, our total rental growth of 6.3 percent 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, we would like to move on to discuss our other services revenue. Other services revenue declined 12 percent over last year, primarily driven by our customers 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 and this recession is no exception.

Uniform sales for the quarter were down approximately 15 percent compared to the third quarter of last year. We would note this decline is more pronounced given a healthy third quarter of last year. In last year's third quarter, this segment of our business was up approximately 15 percent. Our other services revenue also includes the sale and delivery of first-aid products and services and the sale of disposable clean room supplies, which are holding up relatively well in this recession.

Now, let me move on to address the margins. First the rental margins. Our rental margins were 45.8 percent of revenue representing a 180 basis point improvement over last year's margin. These improved margins are the result of improvements in all levels of expenditures, production, service and the material cost area, which is the amortization of rental products. Included in this margin improvement are labor efficiencies. Our labor cost, as a percentage of revenue, declined approximately 80 basis points year-over-year.

In the other service revenue margin area, our margins were 28.9 percent of revenue, compared to 32.1 percent last year. These margins are impacted by the higher fixed costs of our distribution centers, which house the 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 29 percent in this tough economic environment, is evidence of our ability to absorb the added capacity of three new distribution centers in the past 24 months and is a positive sign of our ability to deliver respectable margins during this recession.

Now, let me address our selling and administrative expenses. Those expenses were 25.7 percent of revenue and 160 basis points higher than last year due primarily to an increase in salespeople, 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 two-tenths of one percent of revenues compared to the previous year's one-half of one percent, reflecting average interest costs dropping below four percent. 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 for the quarter was 37 percent, comparable to the first two quarters of this year. We would remind you that we have restructured our organization along state lines and that happened at the beginning of this fiscal year. This was approximately a 60 basis point reduction in tax expense from last year.

For the quarter, net income was 56 million compared to 55 million last year and earnings per share were flat to last year's thirty-two cents per diluted share. Our after tax margins of 10.2 percent were line with last year.

Looking at the cash flow statement, there are a few items if note. Capital expenditures for the quarter were approximately $24 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.

To address the balance sheet, we would make the following observations. Accounts receivable is in great shape, declining four percent from February's levels last year and DSOs of 39 days at the end of the quarter.

Inventory levels, as we expected, decreased sequentially, again, from the second quarter by approximately $6 million and year-over-year our inventory has decreased $30 million or 13 percent.

Our current ratio stands at a strong 3.1 to 1, with cash and marketable securities of $239 million. A debt-to-cap level that continued to decline to a 13.1 percent level, however, netting out our cash and marketable securities, our net debt is now zero.

In summary, our company is very strong financially and we are well poised to take advantage of the many opportunities that we have for future growth.

Now, we would like to open the call to answer your questions.

Thank you.

The question-and-answer session will be conducted electronically today. If you'd like to ask a question, press star one on your touch-tone telephone. We will take questions in the order received and as many as time permits. Again, that is star, one to ask a question and we'll pause a moment to assemble our roster.

Our first question will come from

of Credit Suisse First Boston.

Morning Bill, Karen. Nice job on finding new business in the quarter.

Thank you.

Thank you.

I just wanted to get a little bit more clarity on the new business. In the past, I think you've talked about 50 or last quarter, 50 percent from new programmers, what's the split this quarter?

We only determine that on an annual basis,

; we do a study at the end of our fiscal year to really look at the distinguishing aspects of our new business. Based on feedback, we're hearing from our operating people, I would say it's still in that level but I don't have the exact numbers and won't have them until the end of the fourth quarter.

OK.

But your sense is, it hasn't really changed from the last time you mentioned it?

Our sense of it is, is that it has not changed from, you know, where we talked about it in the last quarter, couple quarters.

OK.

And, also, if you could provide a little bit more color on, kind of, momentum through the quarter, December through February, maybe from the perspective of new business as well as the add stop side of the equation.

Well, it was - I would say that we, basically, didn't see a whole lot of change. We saw some positive numbers, we thought, in mid to late January, but, that kind of went by the wayside as we, you know, monitor everything on a week-to-week basis. So, what I would tell you, is that things are really about the same as they were with our existing customers as well as with the new business efforts.

Now, we always have a little bit of a problem during the holiday period and that was a little more pronounced this year than I think it has been in the past because many customers just totally shut down operations for a few weeks around the holidays. We had a few places that didn't even come back. They're still out.

But, you know, I think, you know, everyone keeps asking us, do we see any improvement and I would have to say within our existing customer base we're not seeing it yet. It still seems to us to be a very sluggish economic environment out there and, you know, I'm some what surprised when I read things in the paper about the recession's over and the economic activity's picking up, we're not seeing it with our existing customer base yet.

OK. Right.

And then lastly, on the direct sales side of the business, do you guys have a sense of when the spigot turns back on there, is it, you know, two quarters out or just too hard to tell at this point?

You mean based on historical trend?

Right.

I don't think it necessarily lags as much as the rental business because what I think is going to happen in that business is the direct sale customers have been holding back for so long that once they begin to see a pick up in their activity, they've got to go out and start replacing uniforms that they haven't been replacing, or if they're starting to hire people again.

I was very encouraged yesterday or today, when I saw that United Air Lines is talking about needing to add more flights and starting to resume their schedules. So, maybe we're going to start to see, you know, some of those direct sale customers begin to increase, you know, their workforces and begin to spend some money again and, hopefully, we'll start seeing that right away on our numbers.

OK. OK. Great. Well thank you again, Bill, Karen.

Thank you.

Next we'll move on to

of Robert W. Baird.

Morning Bill and Karen.

Morning.

Morning.

Maybe you guys can elaborate for a second on the new business wins during the quarter. By my estimates, you're growing the new business side of the equation about 15 to 17 percent but that's got to be a function of the rate at which you're adding salespeople and, obviously, the pricing on the new business and, I presume, just given the growing size of the organization, you're adding more salespeople than ever, even though the percentage may be the same.

So, could you comment on, maybe, the productivity of the salespeople within the fold and, if indeed that's rising as well, or are the new business wins merely a function of the number of feet on the street?

Well, it is definitely a function of the number of salespeople we have out there, but we would tell you that with the additions to the sales force, it rakes them a period of time to ramp up and be productive. So, in looking at the productivity of the sales force, I'm very pleased with the numbers that have come in. It's not a record levels. Record levels were achieved in the fourth quarter of last year and held up very nicely in the first quarter of this fiscal year and it's come down a bit from that, Michael, but not much and I attribute that mostly just to the newness of the sales force.

OK.

And pricing on that new business, are you able to track it at what rate it's coming in?

Well, we do watch that very, you know, very closely and there's a lot of controls over that. I would say that the company is going to be - it has signaled that it's a little more aggressive on obtaining new business but it's not a significant difference from where our book prices have been before.

OK.

And then, moving on, the labor cost, Karen you mentioned you saved about 80 basis points on the rental side just from improved labor costs. Can you give us a sense of what's driving that because, I know, automation is certainly a contributor but that seems like an awful big number just from automation.

Yeah, it's a combination of automation and just intense focus on making sure that we're not going to add people unless we absolutely have to, we don't replace people, we have attrition, unless we absolutely have to.

So it's pretty much just watching every dollar that we spend in our organization and, as you know, labor is our largest cost in this company. It runs about 30 percent of revenue. So it's the one thing that you can keep your finger on to help margin improvements.

OK.

Now would that include all the marketing costs that you've incurred over the last several quarters as part of your radio and television ads?

The what?

The labor savings. I just wondered if ...

No.

Are you paring back on those costs during this tough time as well?

No, not at all.

The labor cost is merely in the production area and the service area in the rental operations and the office area. The one area that we have not cut back on, at all, is in the sales force, the head count nor for the sales promotion, the advertising programs, marketing programs, we are still giving tools to our salespeople to make them more productive.

OK. Thank you very much.

Next, we'll hear from

of Lehman Brothers.

Yes, good morning Bill and Karen for taking my questions.

A couple of questions on your updated guidance, Bill, which I guess is basically the same as last November, although, a bit of up and down along the way and, presently, what you're saying is that we should expect EPS in the fiscal quarter of thirty-seven to forty cents if I've done the math right and kind of three or four percent top line growth.

Can you give a sense for the leading indicators you're seeing in your business, particularly on the rental and direct side, which would suggest that sort of uptick and then I have a few follow ups?

Well, first off, Adam, I'm not sure that the guidance that I'm giving out is the same as back in November. I think the guidance I'm giving now is the ...

Pardon me, I'm sorry, back in February.

Right.

My apologies, Bill.

I want to clarify that.

No, you're absolutely right. My apologies.

So, you're asking - be a little more specific what you're asking for right now?

Sure, if I'm modeling through the current guidance, basically, which is the same as back on February 21st, what you're looking for is revenue growth of three to four percent in the fourth quarter as opposed to about two percent the longer on a reported basis in the third. You're looking for EPS of 37 to 40 cents versus 32 in the third.

Right.

Give us some color for what are the key leading indicators that you're seeing in your business turn up that would suggest, both, that kind of rate of revenue growth re-acceleration as well as operating leverage.

Well, first, on the profitability, I would tell you that one benefit that we is that the fourth quarter as two more work days.

OK.

So, we spread all these fixed costs over two more works days, so that helps profitability. So, if you go back in time, you'll always find that our margins are the strongest in the fourth quarter and that's largely the result of, you know, it usually tends to be one of the lengthier work days, but it also is the result of a lot of the initiative that took place early in our fiscal year are really starting to take hold.

The other thing that happens in the fourth quarter is the phenomena we call our spring selling season and it's a busy season for us. This is the time we see a lot of our customers, in either the direct sale business, or even sometimes in the rental business, the willing to step up and do some more purchasing, be willing to take on programs, perhaps in a rental customer for additional departments and we expect that to continue in this year as well.

I don't think we believe our loss business is going to get any worse than it is. We hope that it'll get a tad better as the economy

and we expect that the numbers that we are signaling for the fourth quarter, based on our historical trends, based on what we're seeing today, are achievable. Now, I will grant you they're a wide range and the reason that they're a wide range is totally dictated on what happens with the economy, which I cannot predict.

that's understandable.

On the cost side, if you take into specific cost reduction actions for the fourth quarter, as well, that might get your SG&A run rate down another five, six, $7 million to achieve that guidance.

I don't think we've taken any additional steps. We've taken steps that really took hold, primarily in the third quarter, you know, we started initiatives back in October and November, you know, we're not going to just throw people out on the street. We did a lot of this through attrition. So a lot of the lean and mean approach that we've got now is really in place and I expect that to carry it through the fourth quarter.

Karen, in your prepared remarks, you indicated that you were going to hold the line quite tightly on cap ex. Can you give us an updated '02 and, perhaps, an '03 sneak preview on cap ex?

Well, for '02, we think the number's going to come in somewhere between $120 and $120 million for the year.

OK.

We don't really have a good number for you yet for '03. We're still doing our review of our facilities, our capacity, if we've stretched our capacity too much, whether we're going to have to add on some additional facilities. We still think for this year we're going to add about seven facilities and that number has been consistent pretty much throughout the year.

So, the fact that our total cap ex guidance for the year has come down, means that we have just one incredible job of controlling costs in all other areas in the cap ex area without having to really put off building the necessary facilities that we need to service our customers and service our growth in selected markets.

OK.

So, is it fair to say that, sort of, the cost per copy of the new laundry plant hasn't changed, that you've held a lot on discretionary maintenance and other capital projects?

Exactly.

OK.

Final question is on the share buyback. After September 11th, you announced a share buyback plan. I wonder if you can just update us on your current thinking on that?

We are always going to be looking at it or Board will continue to evaluate it but we did not re-purchase any shares in the market and it just will be something that we'll monitor all the time.

OK.

So, none have been bought back since September 11th but it remains on the docket?

Yes.

Thank you.

Thanks Adam.

And next, we'll hear from

of J.P. Morgan.

Hi, good morning and thanks for taking my question, too.

A couple of questions, I guess, following up on the margin expansion that you're implicitly forecasting for the fourth quarter. I'm wondering whether this tighter management of labor that you've achieved in this down turn will be sustainable when your volumes start coming back and the drop adds turn positive, which will eventually happen at the some point on the other end of this recession. And then I have a follow up.

Well, I think that it's sustainable for a period of time but just like you say we will have to add people as we see our add stops turn positive, which we are looking forward to that period of time and but I can tell you that we won't add people without, again, some discipline in our actions because, again, we're all being held accountable for our head count and, so I can just reassure that it will be done at a calculated rate and in line with the improvement of our top line numbers.

But, I guess what I'm trying to get at is, will the margins expansion be permanent or not and, I guess, unclear is what you're saying.

Margin expansion cannot continue if we start adding to our top line growth.

Right.

So, would you go back to your previous margins on the

, you know, or.

Sure. Yeah, I mean, like we're looking at a rental gross margin today of 45.8 percent. I think that's almost a record level. Where as last year it was around 44 percent.

Right.

So, with the growth, will come some margin compressions?

Absolutely.

Right. OK.

And, Amanda, a lot of that margin compression just comes from adding new garments that have to be amortized.

Right.

Especially and I would expect that would be happening now, especially as your mix shifting so much to the new customers.

Well, that's true, but, again, we're able to recycle a lot of our used inventory that helps offset that margin pressure.

But you don't give used inventory to a brand-new customer, do you?

No, we don't.

Right.

But we do - we're making sure that we're managing that existing inventory level for existing customers extremely well.

OK. Great.

And if we could turn for a minute top the acquisition pipeline. You know, I'm wondering, you did give a little more detail, I guess, in terms of the timing on Angelica but, you know, I've tried to make some assumptions in the way I'm modeling out '03 and I don't know if you can respond or not, if it's fair, assuming the deal is going to close that you get say about 40 to 50 million in revenues from this and then also if you could just comment, in general, on what your acquisition pipeline is looking at, whether there might be another Angelica size deal to come or whether we should just expect more tuck ins.

Regarding Angelica, you know, it is very difficult right now to predict the revenue. You know, we believe it is reasonable to assume that we're going to pick up $40 to $50 million in revenue and so that will be determined as we get through the due diligence and as we really begin to establish the relationship with those the customers after the closing. We would anticipate that would be the case. It will take us about, we believe, three to six months to move the servicing of those customers from Angelica's facilities, which we are not acquiring, into our own facility in Chicago and, you know, we would hope to be able to retain all that revenue as we move that over and, maybe, even enhance that revenue.

Now, with regard to the profitability of that, obviously, it's going to be more profitable to Cintas once we get it into our facility than it will be early on but we do believe it will be accretive to our earnings in fiscal 2003.

And, presumably, you're going to finance it with all that cash you have on your balance sheet?

Yes.

Karen's already designated a little bit of that cash to be used for this thing.

OK.

With regard to other acquisitions, I would comment to every one, that the amount of activity has increased, certainly from where it was three months ago. This was not unexpected. We expected activity to begin to increase the longer the recession or the economic downturn continued and it has increased.

We will be sure to signal to anyone or everyone, any big acquisition we make as soon as that transaction has been completed or letter of intent is resolved and we will continue to be very forthright in what our internal growth rate is each quarter as we, you know, review the results. So, acquisitions will be announced if they are significant and they'll be announced as soon as we are able to do so.

Would it be fair to assume, though, even an uptick in the tuck ins because, right now, I'm looking for about one-and-a-half percent just from tuck ins, which is about your historic run rate. Would that even be a little bit higher next year, perhaps?

Well, you know, that's so hard to say Amanda; I wouldn't want to signal to everybody that it would. I would say if the economic downturn continues, yes, it would be safe to assume that our tuck ins would increase about one-and-a-half percent.

OK. Thank you very much.

Next, we'll hear from

of U.S. Bank Corp.

Morning.

Morning.

Morning Steve.

Just observation on your SG&A growth. The last two quarters now, in the second quarter it grew at nine percent and this quarter grew at 8.4 and if I look at rental growth of 8.4 in Q2 and 6.3 in Q3, do you look at that as a metric in terms of determining how more rapidly or how more aggressive you want to become in hiring salespeople? Is there a trade-off here that you monitor? That you watch?

Well, Steve, you know, yeah, we watch this. We watch so many different things in our company but, remember, we manage the - one of the things that we manage this company at is on the net margin basis. So we look at what is our net margin and as they approach 11 percent we begin to re-invest more into the company and if they start declining closer to 10 percent we want to, you know, cut back on expenditures in various areas.

So, I don't think I could tell you that specifically we're monitoring the quarter-to-quarter growth in the total SG&A line. We're looking at all the components of that and watching it and make sure that it meets our strategic objective of achieving the 10 to 11 percent.

Sure, I can see that in aggregate in terms of SG&A, but, specifically with regard to new salespeople, do you tie that with what kind of revenue growth you're currently generating out of the rental side the business?

Steve, most of the decision is tied to two major things. One is the productivity. As long as they're productive, then we know our money is well spent and that productivity level has held up very nicely. It's, again, not a record high but it's close to it.

And the second thing is, is just making sure that we have enough qualified prospects for those salespeople to call on and that's one of the factors that makes them productive. So, our marketing department is constantly taking a look at the prospects, the quality of the prospects. Making sure that they're properly identified. That we understand that the information pertaining to them, you know, what size of an account it is? Do they have an existing rental contract? Are they a no programmer? Are they conducive to wearing uniforms?

All of that data goes into a prospect data system and as long as we can give these salespeople a critical number of prospects to call upon we know that we can pretty much assure their productivity. So, we watch those two metrics and that helps us decide if we need to add more people.

Sure.

As a follow up, on a qualitative basis, year-over-year, you know, March of last year versus March of this year, what are you finding in terms of the potential new hires for a sales position? Are there more of them and what kind of, you know, quality is you seeing in these people?

The feedback we get, Steve, is there certainly is a greater pool of potential partners for Cintas in that area, in fact, it's probably in almost every area. So, I would tell you that we are being able to attract better people than, perhaps, we were a year or two ago just because of the availability.

Sure.

Last question on Angelica, is there any new industry or new customer that they bring in terms of exposure to a customer or industry group that you didn't have before?

Well, certainly, there's lot of new customers so we're, you know, we're pleased with that. As far as a new industry, you know, I don't know if there's any specific new industry. I think that they were stronger, perhaps, in some of the, maybe, the retail environment that Cintas has historically been. They don't have much at all in the airline arena or the rental car arena. They were pretty good in some of the fast food arena. So, yeah, there'll be some industry expansion that we'll get and, certainly, a lot of customer expansion.

OK. Great. Thank you very much.

Next, we'll hear from

of Morgan Stanley.

Thanks. Good morning Bill and Karen.

Good morning.

Good morning.

I was a little bit surprised to see that the pricing environment there, that the pricing growth for you guys, is holding up, maybe, a little bit better than some of your competitors, admittedly the pricing growth has been declining to some extent, but is it your expectation that given the weak economy and given that your cost pressures have reduced to some extent over the last year in terms of energy and labor, that the year of your growth and pricing will continue to decline below the two percent level or do you think we've about bottomed out here with the pricing growth?

Yeah, I think it could come down a bit more,

. I think it always - having the ability to get price increases a large extent depends on what's going in your surrounding environment and, obviously, your ability to negotiate that and convince somebody of the price increases.

And, so, yes, I think realistically we could say they could come down a bit more but historically our price increases have always been somewhere around the one to one-and-a-half percent range, so, let's say, you know, it could go down another 50 basis points. I don't think we're going to see a negative price environment. I think we're always going to have the ability to get positive price increases, but, yes to answer your question, it could down a bit more from now.

That would make sense.

Karen, the 15 million or so, that was spent on acquisitions in the fiscal third quarter, was truly on the rental side or were there some direct sales acquisitions there?

There were a couple - I'll answer that Chris. There were a couple of first-aid operations, which are other service revenue. The majority of the expenditures were in the rental business.

OK. Great.

And, then finally, do you guys have the operating profit by the two segments as you reported in queue?

Yes.

The operating profit for the rental segment came in at 19.5 percent for the quarter and for the other services revenue group came in at 5.1 percent for the quarter.

Great. Thank you very much.

You're welcome.

Next, we'll hear from

in the Salomon Smith Barney.

Hi, this is actually

standing in for

, just a couple of quick questions.

On the new business generation, I think you said you only measure this annually, but can you give a sense for whether the percent of new business from non-programmers is increasing or decreasing, I think you said it was about 50/50 last quarter?

Yes,

, as I reported earlier to a similar question, we don't have the exact data but the feedback that I'm receiving from our field people would indicate it's running about the fifty-fifty level.

OK.

And, also, can you give us an update on new product initiatives or are those on hold until the core business recovers or when can we expect to hear timing on any announcements in those areas?

There's certainly not on hold. We are continuing to look at various things and, you know, additions to our operations. However, we are being very cautious on announcing those and disclosing them because we have found that many of our competitors jump in as quickly as they realize what we're doing. So, we are going to continue to experiment and bench mark some of these activities around various operations in our network and only when it becomes a fairly sizable amount or it is obvious to everyone we're in that business, are we going to talk about it.

Now, we're constantly upgrading our existing product line, for example, like in the hygiene services area. We'll always seek out more and better products to offer our customers. We'll upgrade the types of soap that we have in our restroom services. So we're constantly improving the product line in all areas of our company, we just don't announce those initiatives on an ongoing basis.

OK. Thank you.

Next, we'll hear from

of William Blair.

Hi.

Any comment on regional strength or weakness around the country?

No, not any comments, Bruce. As we said in the new business effort it's been strong pretty much across the board in Canada and throughout the United States, so we're very encouraged with that.

OK.

I also wonder, Karen, in the cap ex that you haven't made, what projects other than maybe another DC or two, are being deferred? Are you not investing like in plant floor productivity investments, or what is it that isn't getting developed?

Actually, we're not really delaying any distribution centers. We have enough capacity, right now, to last us for the foreseeable future. The only thing that's really being delayed are some additional plants that we know we can hold off for six to nine months. We're not delaying anything from a productivity standpoint. Because any time have a cap ex project we look at the pay back and if the pay back right now is two-and-a-half years or less we go for it because we want to continue to improve the productivity of this company.

Bruce, if you're not growing at a overall rate of, you know, the mid-teens, you know, then we're not in a position to need to add as many trucks as we were before, you know, and then there's related computer equipment and the portable route equipment, so, all of that gets driven to a certain extent by the growth rate itself.

OK.

And, then lastly, could you just give us a little bit more detail about some of the promotions and advertisements that you mentioned as some of the investments outside or just more salespeople?

Yeah, we're advertising. Doing extensive radio advertising in four different markets in the U.S., the same markets we were doing in the fall, not the U.S. and Canada, because Toronto is one. We're doing New York, Toronto, Los Angeles and Seattle. So that is continuing. Also many of our local operations, for example, in your area in Chicago, continue to do some selected advertising, although not on the same basis that we do, of course, on these big city centers.

Other things are, you know, other promotions that we have. We'll go out and we'll have - we have an NCAA mailer going out right now or went out a couple of weeks ago where we use the tournament to help, you know, increase awareness of Cintas, not that we're advertising on the programs, but we send out mailers to various prospects to help entice them to have appointments with our sales rep and in return for an appointment, you know, we may bring out, you know, a cap with a local team's insignia on it or something along those lines. So that is, we're continuing to be aggressive there. We're continuing to send out catalogues to prospects. We're participating in various trade shows where we believe that it would be beneficial to us. Those are the types of activities.

Thanks a lot.

Thanks Bruce.

Next, we'll hear again from

of Robert W. Baird.

Morning again.

Two questions. This one maybe too particular for the call, Karen and Bill, but could you comment on accrued liabilities? I noticed that sequentially they were up almost 66 million or over 66 million. First, I guess just address them and, secondly, if you compare that to the cash flow statement, accrued liabilities were only up 12 million, so, trying to account for the absolute change then the discrepancy to the cash flow statement.

Well, the increase sequentially was for the accrued dividends that we declared earlier this quarter and that was approximately $42 million and then just the flow through in the cash flow is just a timing difference - you may recall, Michael, that we had accrued compensation at the maximum number of days you can absolutely have in a quarter. That was at one extreme at the end of November. We're at the opposite extreme at the end of February because the payday actually occurred at the end of the third quarter. So most of that is just timing.

OK.

And then switching gears

, as you mentioned, most of the debt is variable in nature, I would hope that the risk to interest rate, at this point, is up now down, so what are your thoughts on that in terms of locking in a rate and re-positioning the debt structure?

Well, we have done a couple of interest rate locks but, quite honestly, as we look forward we're not great projectors on the direction of interest rate, so as long as we feel that we can cover the variable interest rates with the quality of our profits in the company, we're more leaning more toward variable interest rates and not locking in for the long-term.

The other thing, Michael that will dictate that is going to be what happens with acquisitions. You know if all of a sudden we do see the opportunity to utilize some of our cash for acquisitions instead of the strength of our balance sheet to increase debt, I think you would see us having a little bit different mix on maybe fixed versus variable but at the current time, you know, we have an awful lot of cash in the company and we just are making sure that we're watching the rates that we're earning on that cash versus what we're paying on the debt.

Well, you opened the question, Bill. You've got over 200 million in cash, is there anything big enough out there for you to run that dry and, actually take on additional debt?

Absolutely.

OK. Thank you.

And as a reminder, if you have a question, press star, one on your touch-tone telephone.

We'll hear again from

of Lehman Brothers.

Two quick follow-up questions.

One on the acquisition side, a few years ago you all articulated an interest to enter the European market in four or five years, which I think it would take it two or three years now. Is that still a reasonable timetable or is it possible given some of what's going in the deal market that that might be accelerated?

Adam, I can't comment on any specific ones. I'd say strategically our company continues to monitor every activity going on in Europe and if we feel that the opportunity is correct for our shareholders we will enter the European market.

Understood.

Second question is, obviously there's been a lot of discussion about SPEs and synthetic leases of late and given some of the contemplated things going on at the SEC and with the FASB, I wonder if you can just give us a sense for - I think in the past you've made periodic uses of synthetic leases, is that still going on and, if so, roughly how much in capital is tied up in synthetic leases at the moment?

The only synthetic lease we have ever had is with the corporate airplane.

OK. Really small.

And that's the only one we've got.

All right.

You mentioned we've had them in the past, I don't think that's true.

I thought at one point or another you were taking at using them for some of the plants but I may be mistaken.

We have never used a synthetic lease for one of our plants.

OK. Thank you very much.

And, Mr. Gale, there appears to be no further questions at this time. I'll turn the conference back over to you for any additional or closing remarks.

Well thanks everyone, again, for participating in the call. Hopefully we have been able to give you some additional information and insight into the numbers. We are disappointed that we are not at our historical growth rates but I can assure you that when the economy picks up Cintas will be back in to achieving those rates. So we're very bullish on the future of the company and we look forward to talking to you again in July when we announce our fourth quarter results.

And that does conclude today's teleconference. We thank you for your attendance and have a good day.