信達思 (CTAS) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to the Cintas third quarter 2003 results conference call.

Today's call is being recorded.

At this time I'd like to turn the call over to Mr. Bill Gale, Chief Financial Officer and Vice President of Finance.

Please go ahead, sir.

Good morning, everyone.

Thank you for joining us.

Karen and I are pleased to present further information on our third quarter.

We're pleased to again announced increased sales and profits for the quarter that ended February 28, 2003.

Our rental business grew at a rate of 23%, excluding the impact of acquisitions including Omni Services which Cintas acquired in May 2002, our rental business grew approximately 4.5%.

Other service revenues which consist primarily of direct sale items increased 17%.

This quarter included one extra workday than the comparable quarter one year ago.

Excluding that one extra workday, the rental business grew approximately 21%.

Net income increased 6.2% to a $59.1 million while diluted earnings per share were 34 cents versus 32 cents last year.

As indicated in our press release issue on February 18, 2003, this quarter's revenue was below expectations as many of our customers continued to postpone new hirings or reduce their work forces.

However, all divisions continue to run well, and the disappointing revenue in earnings are a result of external factors.

New business activity continues to be brisk, thus helping Cintas to continue to grow organically.

We also are pleased with the Omni integration although their customers too continue to reduce work forces.

The integration activities are now primarily complete.

Our current guidance of revenues and earnings-per-share for the fiscal year ending May 31, 2003, remains unchanged from that presented in our February 18th, 2003 press release.

That guidance calls for total revenues of $2.675 billion to $2.725 billion and diluted earnings per share of $1.43 to $1.50.

Yesterday a class-action lawsuit was filed against Cintas alleging that our service sales representatives were improperly paid.

We believe this lawsuit is another tactic by the Union engaged in a corporate campaign to pressure Cintas into interfering with our employees's rightful freedom of choice in making decisions about whether they wish to have union representation.

Our legal counsel is reviewing the lawsuit in detail and we can make no specific comments regarding the suit.

However, we can say that we believe that all of our employees have been and continue to be paid properly and fairly.

We also can say that when a new paid plan in compliance with the stricter interpretation of California law was implemented in several cities earlier this fiscal year, there was no appreciable increase in our costs.

With me today is Karen Carnahan, Cintas's Vice President and Treasurer.

After some brief comments 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 the discussion on these points contained in our most recent filings with the SEC.

I would now like to turn the call over to Karen.

Good morning, everyone.

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 website with our third-quarter financial results.

You may want to go to that section of our website 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, and the last three pages will be the income statement, cash flow and balance sheet.

Now I will first start by commenting on the income statement.

Total revenues were $664 million for the quarter, a 22% increase over that reported in the prior year.

This third quarter of fiscal 2003 had 65 work days, which is one extra day compared to the third quarter of last year.

Excluding that extra day, our revenues would have increased by 20%.

Rental revenues were $523 million compared to $425 million last year.

This was an increase of 23%.

Our internal or organic growth rate excluding those acquisitions made in the past 12 months and that one extra workday was about 4.5%.

The sluggish economy has continued to impact our organic growth rate.

However, even with the sluggishness, we still grew at a rate of 4.5%.

This rate is comparable to the rate we have experienced in our rental business over the past four quarters.

Employment numbers continue to be very weak and we see a lot of this weakness in our customers's work forces.

This attrition hurts in us two ways: first, our uniform business with existing customers is shrinking as the number of uniform wearers shrink, and secondly; when our customers don't fill those job openings we cannot earn the additional up-front revenue of preparing uniforms for those new workers.

Let me go into some further detail on sales performance for the rental side of our business for the quarter.

Our new business which has been booked over the past four quarters contributed close to a 17 percentage growth in our top-line rental revenue this quarter versus a quarter a year ago.

Many of you ask, well, how has this new business trended during each of those past four quarters.

It's been quite steady.

We did see healthier trends during our November quarter which did weaken in this third quarter.

But in the third quarter new business that was written, actually increased about 18% over the third quarter of last year.

So we are obviously encouraged with the fact that our new business continues to be very healthy in this tough economic climate.

The other positive metric for the quarter was price increases which contributed 1/2 of 1% in growth during the quarter.

This figure is consistent with the second quarter.

The measure of business we do with our existing customers known as add--ons and stop orders, that measurement turned negative in this third quarter.

You may that recall we were somewhat encouraged by this metric in the second quarter.

During the second quarter the add-ons and stop orders metric was positive in eight of the 13 weeks.

However, in this third quarter, that trend did not continue.

In fact, in 10 out of the 13 weeks of this quarter, the statistic was negative.

This statistic continues to reflect the weakness in the overall employment levels in our country, and this negative trend reduced our top-line growth by roughly 2.5%.

As customers continue to delay hiring replacements for the people they terminate, then we do not have the ability to collect that additional up-front revenue for those new employees.

When a customer adds a new uniform wearer to his business, we charge the customer a fee for preparing the new uniforms for that worker.

The inability to collect that revenue has reduced our top-line growth by approximately 2%.

The amount of business that we lost clipped our top-line growth by about 8.5% or about one percentage point higher than the second quarter.

Most of this increase can be attributed to business that we have lost due to customers going out of business.

The statistic has also increased due to the loss of about 10% of the Omni business that we acquired last April.

So let me recap and reconcile that 4.5% organic growth.

It can be broken down as follows.

New business, caused our top-line to grow approximately 17%.

Price increases added 1/2 of 1%.

Lost business subtracted 8.5% from that growth.

Add-ons and stop orders took off another 2.5%, and our current inability to get one-time revenue from our customers subtracted another 2%.

Now let me move on to discuss our other services revenue.

Other services revenue increased 17% over last year.

This segment is predominantly the revenue from the sale of uniforms.

The first aid and safety division and the sale of disposable products in our clean-room business are also classified in this segment.

Excluding acquisitions, the organic growth in this segment was roughly 2%.

Breaking that down a bit further for the three groups, our organic growth in the uniform sales business was flat for the quarter.

Our organic growth in the first aid and safety business was actually double digits and our organic growth in the disposable product lines and the clean-room business was down 7% reflecting the weakness in the semi-conductor and electronic sector of the economy.

In total, our third quarter revenue of $664 million increased 22% and organic growth without acquisitions was 4%.

Now let me move on to address our margins.

The rental margins were 43.8% which are comparable to the second quarter.

And 200 basis points below last year.

Our material cost have increased due to the tremendous amount of new business being written, and due to the conversion of the Omni product line over to our Cintas product line.

All of our new customers receive new uniforms when they first enter into a contract with us.

This growth in new customer accounts is very expensive especially in the first 18 months of a customer contract as the uniforms are being amortized.

This same thing is happening in many of the Omni contracts as those customers are being converted over to our product line.

So our margins are being pressured by these additional costs of amortizing new uniforms for these new customers.

And for those uniforms that are replacing the Omni product line.

In addition to this cost pressure, our fuel costs to run our plants and gasoline prices for our truck fleet have increased significantly year-over-year.

Healthcare costs are also rising, a trend seen by most employers.

This has had an impact on our margins as well.

The acquisition of Omni brought us 76 operations of which 46 were consolidated into existing Cintas facilities by November 30.

The other 30 Omni locations now service their customers from our AS 400 computer system.

All the billing and customer service systems are tied into this new system and those locations are now tied into our distribution centers so they can efficiently place orders for new uniforms.

Over the course of the next few months, the operating margins of those former Omni facilities will be brought up to our level of profitability.

Looking forward, we see the opportunity for rental margins to improve as we get beyond the Omni Integration and improve their profitability and as we get beyond the costly conversion of their uniform product line to ours.

The other services revenue margins were 32% compared to 29% last year.

These margins have improved as our business has picked up and absorbed the fixed cost of our manufacturing plants and our distribution centers.

With the acquisition of business from Angelica and folding the majority of that business into our Chicago distribution center, this acquisition has also helped to offset the fixed cost of running that facility.

Our selling and administrative expenses were 26.2% of revenue and 50 basis points higher than last year.

Our administrative costs include the amortization of acquisition costs.

With the Omni acquisition we have an additional $2.5 million a quarter in amortization expense or about 40 basis points of cost.

We've also increased the number of salespeople and sales promotions.

As long as we continue to experience success in writing new business, we will continue to grow the sales force and capture an increase in market share.

Our net interest costs were 1% of revenue reflecting the additional interest from the financing of the Omni acquisition.

The weighted average cost of our debt is still around 4 3/4% and as mentioned in our press release we've reduced our outstanding commercial paper debt by approximately $170 million or 65% of the peak amount that we had to borrow last May.

Our effective tax rate was 37%, the same as last year.

And so for the quarter net income was $59 million compared to $55.5 million last year.

Earnings-per-share increased 6% to 34 cents per diluted share.

Let me take a look at the balance sheet a few minutes and comment about a couple of those metrics.

Accounts receivable balances are in good shape with DSO's of 37 days an improvement from our typical 40-day period.

Inventory levels have increased 18% over last year's level.

This reflects the higher level carried for our new Omni customers and the conversion of their uniforms to our product line.

As well as the fact that we are manufacturing more of our uniforms for our clean room and flame resistant clothing customers.

Our debt to cap stands at 27% compared to 35% right after we acquired Omni and this reflects the continued strength in cash flow from our operations.

Looking at our cash flow statement in further detail we would say that capital expenditures for the quarter were approximately $29 million, total Cap Ex for the year will continue to be lower than in the past as long as the economy remains weak.

For the year we still expect Cap Ex to be approximately $110 million.

In conclusion, our business is on solid ground and our rental business is growing in a tough economic climate.

And that growth is expensive because of the new garments being purchased for our new customers.

When we start experiencing growth within our existing customers our profitability will improve.

At the same time, our margins will improve as we realize the expected synergies of the Omni acquisitions.

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

Thank you.

Today's question and answer session will be conducted electronically.

To ask your question on today's conference you may do so by pressing the star key followed by the digit one on your touch-tone phone.

If you are on a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment.

Once again star one.

We'll take our first question from Adam Waldo with Lehman Brothers.

Good morning, Bill and Karen.

How are you?

Fine thanks.

Good morning.

You've been busy so pardon me if I have a few more questions than normal.

If we could turn to the new and renewal business pricing side within rentals, could you give us a little more quantification of year-over-year trends and new and renewal business pricing during the quarter?

Well, again, the 1/2 of 1% price increase that we quoted in the calculation of organic growth rate is a reflection of the price increases for renewals of existing customer accounts.

Okay.

So about 1 1/2% increase on renewal business would be fair for rentals?

1/2 of 1%.

1/2, I'm sorry.

And that's on all business or just on renewal, Karen, I'm just trying to clarify?

Just on renewals, Adam.

Just on renewals, Okay.

Pardon me.

That's all we've ever reported.

Okay.

Fair enough.

Second question would be with respect to Unite, I know there's kind of a lot in the ways in the media and so on on this and you're fairly limited in what you can say, but is there any comment you can give with respect to the nature of the economic demands that they are targeting in their organizing effort?

Again I think it would be like you said it's premature could be talking about a suit that got filed yesterday and --

Adam, are you talking about the suit or about just--

Bill, just to clarify not talking about the suit filed in Northern California yesterday.

I think it's directionally clear what they're trying to achieve there but rather with respect to the increases in compensation benefits and so on, as well as, workplace safety?

Targets they may have with respect to their unionizing efforts in 15 U.S. and two Canadian cities?

Well, first off let me say that they have not given any specifics, Adam, because that's not what they're engaged in right now.

What they are specifically going after is a corporate campaign where they are attempting to avoid the election process and the -- then go right into a negotiation process with the company.

They do not want our employees to be given the right, their legal right to vote on whether or not they want a union.

They are engaged in a campaign to harass our company so that we will just give them recognition as representing our employees and Cintas will not do that.

So they are going to create a lot of false accusations, a lot of noise.

They're not getting into any specifics because all they're hoping for again is that we as a company will recognize them as the bargaining agent for our employees without letting our employees have their rightful choice to determine whether or not they want to be represented by Unite.

I would add to that, Bill, that unfortunately there's room for abuse in this system as organizations can file complaints called unfair labor practice claims against the targeted company which we're being targeted.

And while many of the complaints eventually may be withdrawn or dismissed our opponents can use the mere filing of those complaints to hurt our company reputation.

Then finally on the margins in the quarter, Karen, could you try to quantify for us the year-over-year impact on reported margins of the higher energy and other benefit costs in the quarter?

Yeah.

We believe it clipped our margins by 40 to 50 basis points.

Two factors combined or each?

Just energy.

Energy alone, Okay.

And then higher health and other benefit costs?

We don't have the quantification of that, Adam, at this time.

Thanks very much.

Thank you, Adam.

We'll go next to Michael Schneider with Robert W. Baird.

Good morning.

Good morning.

I was wondering if you guys could address the pricing issue again.

You've made it clear in the announcement in February that as of February 1 you would cease the aggressive pricing strategy.

In my conversations with tens if not over a hundred uniform companies nobody has yet seen that action hit the street.

Just wondering if you could explain if there is a backlog of effective quotes where you need to burn through the existing quotes before we start to see the new pricing strategy on the street?

And just any color you can give us as to why we haven't heard any change in the actual pricing strategy from your competitors.

Michael, I can't comment on why you haven't heard anything because certainly I am never in communication with our competitors as to what they're going to do with their prices.

What I can tell you is that we made a decision in the company as we indicated in that press release that effective February, the beginning of February, that we were going to return to a more premium pricing level for new business, and we have implemented that within our company.

And why it may not be out there I can't comment but I can tell you that our people are under new directives as to what the acceptable pricing levels will be.

Is it possible that the rule of 35, somewhat works against this taking effect before May because if you are a plant manager you're trying to make the Rule 35 bonus that you're kind of -- have a disincentive at this point to try and implement this new pricing right now at the risk of jeopardizing your growth target?

I can't imagine that that would have any impact at all, Michael.

Okay, so you don't believe that pricing then would impact the internal growth rate?

If we have set new directives to our management I think that they will follow the new directives and I don't think any other factor is going to have them deviate from that.

Okay.

Then in terms of the longitude for overtime pay, could you tell us how the pay structures changed in the other cities where you've adopted the California pay plan?

What we have done is go to a more incentive-based system and that's all the specifics that I can get into at this time.

Okay.

And then finally, just you mentioned or Karen mentioned that the Omni facilities would be brought up to core margins within the next few months.

Just wondering what is that -- what explains that stair step just in the next few months, what changes or what is relieved from the income statement of these plans?

Again it's getting some of the inefficiencies out of those plants in all areas.

And that along with this material cost pressure will over time be relieved as we get past the, you know, initial amortization of those uniforms.

So it's really just a matter of time as we implement many of our systems at Cintas into their plants, into the route delivery structure, into the overall way that the office is run and then as far as the material cost that will be relieved as time passes and those uniforms are amortized.

Okay.

And then just on the inventory, Karen.

The Omni inventories if I recall correctly were on a assignment basis and I don't believe you structured things that way so is that also a partial explanation as to why inventories have risen.

Yeah, Michael, they did have some inventories on consignment you are absolutely right.

That is not how we operate, but more importantly is the fact that we're converting over to our product line which we manufacture in house and we then distribute through our distribution centers.

So more than just a business practice of consignment or not consignment, it's really just a matter of the fact that their uniforms are now being converted over to our product line.

Okay.

Thank you.

Mm-hmm, thanks.

Go next to Greg Capelli with CS First Boston.

Hi, Bill and Karen.

Good morning.

I guess, and I'm sorry if I missed this but I wanted to ask what you're seeing so far in March, if you could comment for existing customer growth any better than February.

Just generally, Karen you said that the environment remains poor but wondered if there'd been any improvement there?

You know, quite honestly, Greg, you know, we really don't have a whole lot of evidence yet in March, just maybe a week and a half or so of data.

There's certainly has been no improvement and in light of the events that have taken place this week, I would say that I wouldn't expect any improvement until we see what kind of resolution we have over in Iraq.

Okay.

Bill, just on the legal side, would it be necessary for us to build in any meaningful increase in perhaps legal fees in the model or is that just something that you guys aren't certain about yet?

Are you saying legal fees relative to what?

Relative to perhaps, you know, what would have been included in expenses historically?

Yeah, I think that was part of the reflection the guidance adjustment in February.

I think as we pointed out in that press release that there would be additional cost associated with this campaign that we were going to have to incur and we've reflected that in our guidance.

I actually meant since that time.

It sounds like that's going to remain at about the same level.

Since we've reiterated our guidance based on what we've seen today we feel comfortable that we included that in those numbers.

Okay.

One more final question here on the acquisition fronts.

I can remember a couple quarters ago you talking about how activity had really kind of slowed down and it sounds like it pick back up.

I'm wondering if you can give me a sense of the seller right now or pricing in general?

I wouldn't think it's pick back up.

I think it's relatively the same as it's been.

We didn't make a lot of acquisitions this past quarter, it's relatively small amount.

And pricing has not changed from what it was.

Okay.

Thanks a lot.

Thank you.

We'll go next to Brant Sakakini with Deutsche Bank.

Thanks and good morning, Karen and Bill.

Actually I just wanted to clear up, did you say the organic 4 1/2% number that was stripping out the Omni acquisition and also accounting for the one additional day in the quarter?

Yes, that's right.

And it's not only the Omni acquisition but all acquisitions in the rental group that have been made in the past 12 months.

Okay.

Great.

And the figure you gave for the other services line, that also is stripping out that extra day as well, correct?

That's correct.

That's correct and so in total, Brant, the organic growth for the entire company on -- in total revenue is about 4% even.

Okay.

Now I guess the other question just is in terms of maybe one following from Gregs, is just a sense of how things progressed from February and into maybe the first week of March in terms of both the pricing environment and the EPS opt ratio and client attrition rates.

Did you see things either materially move one way or improve or deteriorate as the months progressed into March or just not enough data to conclude one thing or the other?

Unfortunately there's not enough data yet, like Bill said, we've only got a couple weeks under our belt and nothing has changed really dramatically from what we saw in February and I think that is just a reflection of the overall economy, keeps kind of limping along and it's further complicated by the other issues going on outside our country.

Okay.

That's fine.

Thank you very much.

Chris Gutek with Morgan Stanley.

Thanks, Chris Gutek, Morgan Stanley, good morning, Bill and Karen.

Good morning.

Hi, Chris.

Just a clarification on the status of this lawsuit.

A bulletin that was published yesterday by United suggests there's two different legal actions, I wanted to be clear.

It sounds like a national lawsuit covering about 3500 employees was filed yesterday but in addition their bulletin yesterday says that Cintas recently settled a similar claim in California for $10 million which covered 250 people.

Is that, in fact, true was there a settlement for $10 million recently.

There was a settlement in California, yes.

I'm not at liberty to discuss the amount.

Okay.

Has the -- if you can't say the amount has that been reserved for expense at this point.

Yes.

As we've always pointed out since we first started disclosing this in our SEC filings, the company had made adequate provisions for the pay off.

We still feel that way.

Okay.

And secondly, with the situation with Omni, it sounds like the integration is mostly done, but could you give us an update of what % of Omni's original sales force you have remaining.

I don't have those numbers.

It's less than 50%.

Yeah, I think it was around 25% at the end of the day.

Okay.

And I know you guys don't like to talk about the total number of salespeople but could you comment on the rate of growth in the sales force on a year-over-year sales basis?

Chris, It really tracks the metric that I gave out earlier.

It's in the high teens.

And that pretty much tracks with contribution that new business has on our top line.

Okay.

The garment amortization costs are up apparently quite a bit year-over-year.

Could you quantify that as a percent of revenue or in terms of basis point impact?

I don't have that, Chris.

I don't have that fine-tuned and ready to give to you.

It is sizable because last quarter we quoted about 60 basis points.

I think it's still roughly around that area.

And it's a combination of the new business, it's a combination of converting the Omni customers over to our product line.

And trying to get at that scientifically is little difficult but I would say roughly in that same neighborhood as what we quoted in the second quarter.

And then finally, just another follow up on the pricing situation, how much resistance are you getting as you push through higher more disciplined pricing policies from the customers?

It's again -- it's still a little early to say.

We do have antidotal stories from our field operations that say it is going well, but, again, to try to quantify that any further for you would be difficult right now.

Again it's still kind of early to get a good reading on how that's going, but, again, we're from the operations that we have talked to, it seems to be going very well.

Okay.

Thanks, Karen.

Thank you.

Let's go next to Kevin Monroe with Thomas Weisel Partners.

Good morning.

Good morning, Kevin.

Good morning.

I was wondering if you could give us an idea of what the gross margins are on the new rental business that you're bringing in and if you can't quantify the exact number how's it been trending?

Gosh, Kevin we don't have gross margins on just particular new accounts.

It's just --

Really?

We just don't have that.

Okay.

Again, you know I guess maybe the only thing I could help you in understanding the pressure that new business brings into our company on margins is when we -- let's say, for example, if we look at a brand new start-up location, a new Greenfield location that doesn't have any business and all of a sudden puts a number of salespeople on the street to sell new accounts, those start-up locations typically will lose money in the first two to three years, so it just tells you the tremendous amount of pressure that new business brings on to a company in a rental business.

The material cost can run as high as 50% of the revenue in that first year of the contract because, again, you're front-end loading the amortization of the uniforms once you write the contract.

Certainly you do get leverage from your existing fixed cost that are in your plants and your existing fixed cost of your route structure, but the material cost is by far and away the largest pressure that you feel when you write new business.

Next question is, what is Cintas doing basically to kind of ward off the unionization efforts?

What are some of the, I guess tactics that you guys are taking?

Well, we're not doing any tactics.

All we're doing, Kevin, is we're continuing to communicate with our partners throughout the country and they are looking for that communication.

And we're continuing to really just have business as usual.

Now, unfortunately, Unite is causing us to have to have to respond to some of these unfair labor practices that they're filing and obviously this lawsuit yesterday and some of the other false accusations they continue to put out through the press, through the investment community et cetera, and we're having to combat that directly as we can, but as far as really needing to do anything with our employees, we're not.

Have you changed your compensation structures anywhere, recently?

The only changes we are making, as we alluded to earlier is that we've gone to a more incentive based system in some cities for some of our route drivers, but that's about it.

Okay.

Thank you.

Bruce Simpson, William Blair.

Good morning, Karen and Bill.

Good morning, Bruce.

Karen, did I hear you right in saying that in general, the growth in new salespeople has largely tracked the growth in new business written.

Yes.

So then am I right in following that logic out and saying that in general sales force productivity levels are sort of constant?

Yeah, we usually get maybe one to two percentage points improvement in productivity year-over-year.

We've got that growth in the sales force but then taking into consideration turnover, promotions within that group, and in light of somewhere between usually around two percentage point improvement in productivity we net out to be about the same amount of growth on the top line.

Okay.

And then, different subject.

I wanted to take you talk a little about, I don't know if you were willing to quantify the pricing differential between new business that's going out and the general average price of the existing book of business.

It seems like we're talking a lot about kind of pricing, the pricing impact implicit within new business written.

But what I'm curious about is if I'm writing a new contract in general what does that price compare to, you know, the existing book that was priced over the last three years or so?

I can't give that for a couple reasons, Bruce.

One it's for competitive reasons I can't give out that data.

And secondly, I don't think it would be very meaningful because of the variety of things that have to enter into pricing regarding different customers, different types of businesses, different uniforms, et cetera.

Okay.

Well in that case I will shift gears and I do have a question about Omni business.

And, Karen, did you put kind of a timeframe on, did I hear you say over the next several months or four months or did you have a target?

I said over the next few months that profitability would continue to improve.

Okay.

We kind of look Omni's contribution to our bottom line on a annual basis, and in this current fiscal year we believe that they brought in three to four cents a share in additional EPS, and it'll be much better than that next fiscal year in '04.

Three to four cents in fiscal '03 you think?

I would have to back on that a little bit because that was what our original estimate was when we acquired Omni.

We certainly accelerated the integration but on the other hand, we've had a little bit higher loss in business than we expected so that's a rough number.

So you can't necessarily take that and just automatically assume that's what it was.

Well, then in terms -- I'm sorry, go ahead, okay.

In terms of looking forward, can you quantify generally as you look to bring that business up to the overall Cintas level, how much of a gap still remains or you know what is the potential impact on operating margins?

Bruce, that's a very difficult thing to do because we have integrated so much of this business now that all I can -- Karen and I can say with assurance, is that the accretion from Omni is going to be much better next year than this year but to be able to quantify specifically I think would not be a prudent thing to do because I don't think we could really calculate it that way.

I think when we give you our guidance for '04 in July we'll be able to give you a better feel for that.

Okay, thanks.

Just my last thing has to do with the direct sale business.

It looks like a sequential downtick, I understand that's common seasonality for February but does the size of that from nearly $155 million to $140 million indicate something more than that, or do you think that's just seasonal or are those things starting to be deferred because of the economy and the political situation?

I definitely think there was an impact in February and a little bit in the latter part of January due to external factors.

I mean, I think it's evidenced by -- all you have to do is read what's happening in the occupancy rate in hotel, the travel industry which is you know a big part of that business.

There certainly, has been an impact that I think will go away once the Iraq situation is settled.

Okay.

Thanks a lot.

Thanks, Bruce.

We'll go next to Michael [Hussey] with [Busca] and Rogers.

Mr. Hussey, your line is open.

Hearing no response we will move to a follow-up question from Adam Waldo with Lehman Brothers.

Again, Bill and Karen, thanks for the comprehensive MD and A today but a couple of quick cleanup questions if I may.

Can you quantify any unusual expenses during the February quarter associated with either higher legal costs or consulting costs around the Unite situation that we might expect might not be a recurring once that process winds down?

And secondly, would it be fair to say that with you having closed the Omni headquarters in Culpeper in January and integrated your target level facilities relatively early, actually before the quarter began, that you'd achieved in your SG&A expense base a relatively steady state level of synergies.

To answer your first question, it wasn't an appreciable amount.

Certainly not material in light of our numbers for the Unite cost.

It's a cost and that's all been factored into our guidance based on what we know today.

As to your second question, certainly, there will be the benefit going forward of no headquarters for Omni since those costs are now behind us.

So we should see that improvement or that value of that closure helping us going into the future.

So at the margin, Bill, the incremental synergy in the quarter was shutting down the Culpeper's the facilities, by and large, in the field have been rationalized in fiscal to Q '03 so if my train of logic is right incrementally, roughly what kind of pick up did you get in Cap Ex savings from shutting down Culpeper.

Actually, Adam, that took place over time and I am not prepared to answer that question.

Thanks very much.

We have another follow up from Michael Schneider from Robert W. Baird.

Could you address pricing in February.

You instituted the new pricing policy February 1 and you mentioned that the amount of new business written has maintained itself at about plus 17%.

I'm curious if in February you saw any meaningful impact in the new pricing strategy?

Again, Michael, we talked about this earlier.

I mean, I think it's too early to tell.

We certainly didn't see any real impact on our productivity of our sales force in February but I'm not sure that means anything yet because of the fact that, you know, the sales process isn't something that happens just day-to-day.

It's a lengths think type process that goes on.

We don't expect there to be any significant impact on the productivity of our sales force going forward but I don't have any quantitative measures right now to prove that to you.

Okay.

Regarding the overtime pay suit, you mentioned you've implemented a California type plan in other cities.

Why those cities and why not nationwide?

Michael, I said we had implemented a plan in several cities that are in compliance with the stricter interpretation of the California law.

And we don't do anything until we've tested things out and made sure that they're effective so we're taking it slowly, and we'll do what is best for the company and for our customers and our employees.

Okay.

Fair enough.

And then the fourth-quarter guidance supplies, 36 to 43 cents given your annual guidance, I'm just curious, I know you have some seasonal strength in the fourth quarter and presumably Omni gives you some incremental savings, what would drive dry you to the high end of the range and why not pull that down?

It's all driven by sales and again until we see what happens on these external factors with the economy and how the geopolitical issues impact businesses, we felt that it was imprudent for us to narrow that guidance because we don't know what's going to happen.

Okay.

Great, thank you.

We'll take another follow up from Chris Guteck with Morgan Stanley.

I'm curious if you guys have made any progress with the strategy of looking to expand into new unrelated lines of business?

We're beta testing several things, I wouldn't call them unrelated lines.

They're other business services and as we've spoken about on many occasions, we've got to set the criteria that we evaluate different business services, and we're beta testing a couple of them around the country, but we're not prepared to discuss those yet.

As a follow-up to the previous question from an internal budgeting perspective, could you share with us your thoughts in terms of what you're expecting or what your budget assumes in terms of the geopolitical macro scenario to be played out over the next year or so.

Would you say that, from an internal [INAUDIBLE] perspective, you're very, very conservative or have you been less conservative but have additional cost-cutting opportunities or contingency plans in place in case things don't play out as you hope?

We certainly always have contingency plans, but we're in the midst of our budgeting process right now for fiscal year '04, Chris, and I think given as I mentioned earlier, the wide variance in our fourth quarter estimate, we really don't know what can happen.

We can't predict the future so at this point in time I can't give you any thoughts on that.

We'll work on that over the next couple months and in July in conjunction with our fourth-quarter earnings release we would hope to give you our guidance for next year.

Okay.

Thanks, Bill.

And at this time there are no further questions.

We'll turn the conference back to you, Mr. Gale for any additional or closing remarks.

Again, I would like to thank everyone today for participating on the call.

I know today was a very difficult day for most of us in light of what's going on.

And I'm sure everyone's trying to keep an ear toward the news agencies and see what is happening.

But, again, thanks again for joining us.

We'll be announcing our fourth-quarter earnings in mid-July, and we'll look forward to speaking with you then again.

Bye.

That concludes today's conference call.

You may disconnect at this time.