信達思 (CTAS) 2004 Q1 法說會逐字稿

Good day everyone. Welcome to the Cintas first quarter 2004 results conference call. Today's call is being recorded. At this time I'll turn the call over to Mr. Bill Gale, Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Good morning and thank all of you for joining us today. We're here to talk about our first quarter fiscal '04 earnings release. Despite the continued weak employment environment and the uncertainty facing our customers and prospects, we are pleased to announce that revenue increased approximately 2% to $678 million and profits increased approximately 3% to $63.3 million. Included in the profits was a one-time pre-tax charge of $4.3 million due to a write-off of a receivable from a garment manufacturer. As noted in our release, we provided capital to this manufacturer a few years ago to help improve his operations and increase capacity. Based on some recent developments with the supplier being able to continue as a going concern, the collectability of our receivable became doubtful. Without this write-off, pre-tax profits increased 7%, reflecting the progress made on reducing costs and improving productivity.

Our rental business grew at a rate of 3%, almost all of which was internal growth, while other service revenues, which consist primarily of direct sale items, decreased 2%. Earnings per share grew approximately 3% to 37 cents per diluted share. Despite the continued weakness in employment and our success in selling new business, which pressures margins, as well as continued higher energy and employee medical costs, Cintas continued to improve its profit margins. Operating margins have improved to 42.4% in the current quarter versus 41.3% in the fourth and third quarters of fiscal 2003 demonstrating the commitment made to cost control. We believe we will continue to see an improving margin as we move through this new fiscal year. Our current guidance of revenues and earnings per share for the fiscal year ending May 31, 2004, remains unchanged and calls for total revenues of $2.75 billion to $2.95 billion and diluted earnings per share of $1.52 to a $1.64. This guidance continues to assume increased levels of employment in the second half of our fiscal year. We are still not seeing clear signs yet that the economic health of many of our customers has improved.

With me today is Karen Carnahan, Cintas's 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 the discussion on these points contained in our most recent filings with the SEC. Now I would like to turn the call over to Karen.

Good morning everyone. I will now take you through our income statement, our cash flow statement, and our balance sheet in a little more detail. We've updated our website with our first 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 first 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.

I will first start by commenting on the income statement. Total revenues were $678 million for the quarter, a 2% increase over that reported in the prior year. Rental revenues were $538 million compared to $524 million last year. This was an increase of 3%. Only a very minor amount of revenue, less than $100,000, was contributed by acquisitions in this current quarter. So our internal growth was substantially the same as our reported growth. The sluggish economy has continued to impact our organic growth rate.

Employment numbers continue to be very weak, nd we see a lot of this weakness in our customers' employment levels. During the month of August employment declined by another 93,000 jobs. This attrition hurts us in 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 upfront revenue of preparing uniforms for 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 14% growth in our top line rental revenue this quarter versus the quarter a year ago. This rate of growth is slightly lower than our normal new business growth rate of 16%. Due to less than satisfactory performance from some of our sales people we needed to replace about 10% to 15% of our sales force. As a result of these changes in the sales force, the total number of sales people has only increased by single digits over last year. We plan on increasing the sales force throughout the fiscal year, and we expect to have a double-digit increase in the number of salespeople by May 31st. We also expect to see continued improvements in sales productivity throughout the course of this fiscal year.

In February of 2003 we announced that we were increasing our book prices on new business back to the levels we had charged in early 2002. During the quarter we continued to monitor the pricing on new business, and we can report that prices being charged to new customers have increased 5% to 6% over the more aggressive levels we had been charging in 2002. This increase is consistent with what we saw and reported in the fourth quarter. We are confident that our higher-priced growth strategy is working.

The other positive metric for thew quarter was the price increases for our existing customers which contributed 8/10 of 1% in growth during the quarter. The major business we do with our existing customers, known as add-ons and stop orders, reduced top line growth by approximately 2%. This decline in business with our existing customers is showing some early signs of reversing direction. In 5 of the 13 weeks during the quarter this metric was actually positive. This is an improvement over the last two quarters. However, without a pickup in employment levels in our country, we don't want to overestimate the significance of this positive trend.

As customers continue to delay hiring replacements for the people they terminate, then we do not have the ability to collect additional upfront 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 person. The inability to collect that revenue has reduced our top-line growth rate by approximately 1.5%. The amount of business that we lost during the quarter clipped our top-line growth by about 8.5%. This statistic still reflects some higher lost business from the Omni acquisition. However, just like the add/stops statistic, this lost business metric is also showing some initial signs of improvement. So to reconcile our organic growth, it can be broken down as follows: New business caused our top line to grow by 14%, price increases added .8%, lost business subtracted 8.5% from our growth, add/stops took off another 2%, and our current inability to get one-time revenue from our customers subtracted another 1.5%.

Now we would like to move on to discuss our other services revenue. Other services revenue decreased 2% from last year. On an organic basis, this segment of our business declined 5% without the benefit of acquisitions. Our uniform sales business had suffered due to the pressure on hotel business, our gaming customers, and our airline accounts. As an example, we had over $2 million of revenue from casino rollouts in the first quarter of last fiscal year but less than $200,000 of new rollouts this first quarter. Additionally, all of you have read about the sluggish hotel occupancy and rates which have impacted the hotel's willingness to open new hotel properties or roll out new programs. The first aid and safety business in this segment grew 7% on an organic basis year-over-year. This business continues to hold up remarkably well in this tough economic climate.

Now I would like to address the margins. On the rental margin side, our rental margins were 44.6% this quarter. This is a 60 basis points less than the first quarter of last fiscal year but 90 basis points better than the fourth quarter we recently reported. Energy and labor-related costs account for the entire 60-basis point decline from last year. Material costs were stable compared to the prior year, and we anticipate these will start to drop as we get the additional costs from the Omni conversion behind us. As expected, margins improved versus the fourth quarter, reflecting productivity improvements in many of our operations that had absorbed business from the Omni acquisition. The 90-basis point improvement from the fourth quarter reflects the synergies we are starting to realize from that acquisition.

Our other service revenue margins were 33.9%, or about 200 basis points better than first quarter of last fiscal year and approximately 140 basis points better than the fourth quarter. This improvement in margins is due to improved efficiencies in our distribution center operations as well as lower sourcing costs. Our selling and administrative expenses were 26% of revenue or 60 basis points lower than last year's first quarter. Net interest costs were 9/10 of 1% of revenue, down slightly from last fiscal year and reflective of the lower debt levels this year as a result of paying down the debt from acquisitions.

As Bill mentioned, the one-time charge of $4.3 million was to write off a lone receivable to a garment manufacturer. We had identified this manufacturer a few years ago as a company who could help us secure some additional uniform sale business. The strategy was a good one, but the manufacturer was not. Although we have a chance of recovering some of this receivable, we decided to write off 100% at this time.

Going down further in the income statement, our effective tax rate was 37% for the quarter, comparable to last year. So for the quarter net income was $63.3 million compared to $61.6 million last year. Earnings per share increased 3% to 37 cents per diluted share. Our balance sheet is strong. Accounts receivable balances are in great shape with DSOs at 37 days, which compares very favorably to the 39- and 40-day levels seen throughout last year. Inventory levels decreased on a sequential basis from May's level, and we expect to see continued improvement in inventory turns. Our long term debt to cap stands at 24% compared to 31% last August. This reflects the continued strength in cash flow from operations.

Looking at our cash flow statement in further detail, capex for the quarter was approximately $31 million; and we expect our capital expenditures to be about $150 million in fiscal 2004. As we noted in our discussion about sales growth, acquisitions were very small during the quarter and mostly in the nonuniform areas of our business. In conclusion, our business is on solid ground but it is negatively impacted by the weakness in employment. We expect continued improvement in our growth throughout the fiscal year as employment levels improve and as we add more sales people to our sales force and improve productivity at the same time. Throughout the year we expect our margins will improve as we continue to realize the expected synergies of the Omni acquisition. Now we would like to open the call to answer your questions.

Thank you. If you would like to ask a question at this time, please press the star key followed by the digit 1 on your touch-tone telephone. Also, if you are on a speakerphone, please make sure your mute function is off so your signal will reach our equipment. Again, that's star 1 for questions. And we'll begin with Adam Waldo with Lehman Brothers.

Good morning, Bill and Karen. How are you all?

Good morning, Adam.

Good morning, Adam.

Turning back to the comment around sales force head count growth plans for the balance of the year, if I heard you right we should be [Inaudible] around low double digit head count growth year-over-year in the sales force; is that accurate?

That's correct.

Okay. If we were to assume that add/stop ratio were not to improve and pricing not to improve from current levels, what would be your best estimate as to where your organic uniform rental growth rate might be in the May quarter? I know that's hard but I thought I'd take a shot at it.

Adam, I'd let you draw your own conclusion.

All right.

We give you all the components, and I can't speculate on what's going to happen with employment levels. We just believe that, again, our new business growth will continue to help our overall growth; and then the other part of our business is basically based on macrosituations that we don't control. So you have -- you probably have a better view of the future than necessarily we might.

Nice of you to say. We struggle with that as well. Turning back to the cost structure, we were surprised by the levels improvement sequentially both in the uniform rentals, or I should say the rental segment gross margin, and also the significant sequential increase in actual SG&A expense dollars and SG&A expense ratio. Karen, I know you made some prepared comments about this, but I wonder if you could flesh out in particular a little bit more why the SG&A expense dollars jumped so much sequentially and also in terms of the SG&A expense ratio?

No, the SG&A expense always does jump sequentially from the fourth to first quarter because we always front-end load our marketing programs, the sales programs for the fiscal year. So that would be the reason for any jump going from 4Q to 1Q. Does that help?

That helps. Thank you.

Go next to Michael Schneider of Robert W. Baird.

Good morning, Bill and Karen. How are you?

Good morning.

Hi, Michael.

First just focusing on the new business growth rates. Are you able to quantify just how much impact the turnover impacted the new business in the quarter? Because the way I would suspect this unfolded is you're trimming people probably lower in the seniority scale or not as productive, so it surprises me that the new business rate was impacted as much as it was because you are eliminating, presumably, less senior people and the more senior people are certainly your most productive.

Well, I don't have the details of that, Michael, so I really don't know. But I would say that you don't necessarily always assume that. Sometimes you have people that fall into bad habits that just aren't producing at the rates they used to produce. So I don't have the exact makeup of the tenure of the people we let go. I just feel like, though, that the improvement should get better as we go through the year with regard to productivity as well as the increased headcount.

And the hiring profile or the personnel profile of the salesperson, did it change along with your pricing strategy back in '02?

Well, I don't think the profile changed. The execution of that profile may have changed out in our field. And that's one of the things that we have to be sure that we don't do going forward, is that we're hiring the right people who can be successful in this position.

Okay. And then switching gears to add/stops. I'm sure you saw our September survey. I think it's up to 30 companies. Or 30 companies now have indicated no deterioration in add/stops and roughly half of them have shown some improvement. Seems like your numbers, at least early on, seem to confirm that survey. Can you tell us, at least throughout the quarter, where those five weeks of positive add/stops fell roughly? Were they front end loaded, back end loaded?

Really, Michael, they were kind of evenly dispersed. And that's maybe the first signs of the economy, some improvements, and some other economic indicators besides just employment. But because, of course, this add/stop statistic is not just measuring our uniform rental business, it's also measuring the rest of our rental business. And maybe that is just the early indications of starting to see some improvements in the overall economy.

Well, in fact, can you split just on two items, the new business and add/stops, how mats are performing versus uniforms?

Well, mats are performing much better than uniforms; because they're not directly correlated with employment.

And is the add/stop ratio still positive on mats?

Yes.

Okay. That's all for now. Thank you.

Go next to Greg Cappelli, Credit Suisse First Boston.

Hi, Bill and Karen. It's Greg and Clayton.

Good morning.

Good morning.

Morning. Just to follow on to that add/stop question, can you just refresh us where we are in terms of your exposure to the manufacturing sector of the economy?

Yeah. It's about 15% of our rental business is in the manufacturing sector.

Okay. And I'm just assuming that's where you're feeling it the most, in terms of difficulty, giving the latest data that came out in the report?

Well, not necessarily. I mean, it's not just isolated to that one sector.

Greg, we don't really track on a weekly basis where all these stocks, at least at Karen and my level, came from. So we can't really say for sure what the percentage is in the various segments. But I would say that to just assume that it's all out of manufacturing would be incorrect.

Okay. Understand. And just to follow up on the question on the sales force, is there -- the difficulty or that unusually high level of sales force headcount turnover that you guys put through, was price -- did I hear you right? I mean, was price the issue for that, or -- I mean, because it's harder for them to make their new sales, or they're just -- they're more pressured, they're not coming through on that? I just wanted to make sure I understood you right.

Some of it was productivity and some of it was the quality of the accounts that they were bringing in. Now, productivity can be just say a combination of price and just the amount of new accounts that they're bringing in all together.

Okay.

But we roll it into a productivity measurement, and so the turnover is a combination of productivity and the quality of the accounts that were being brought in.

Okay. Understand. And then just a quick question on the acquisition front. Not much activity going on there. Is that still just -- are you seeing expectations from sellers that are unrealistic at this point?

Greg, again, I don't think it's so much of an expectation on the part of sellers, it's really a willingness on the part of sellers. We are somewhat surprised also that in this economic environment that more sellers wouldn't be willing to -- or more companies wouldn't be willing to sell their business. And we're just not seeing the interest out there among people, at any price, to really sell. Now, that doesn't mean that if we didn't go to somebody and offer them some exorbitant price that they wouldn't have to think about it. Of course, we can't do that. We don't want to make a bad acquisition here. But there really is a reluctance on the part of most people in our industry to consider a sale.

Okay. And then just one final question. You guys mentioned the gross margins a couple of times. Outside of closing plants, what are the other things you can do to continue to see improvement in that number?

Well, I think there are certain things that we can control, such as the productivity of our people, technological advances within our facilities or within our functions, staff functions that we do here, reduction in costs from some of our suppliers. All of those things we work on continuously, so there are opportunities in each of those areas. Things that are kind of beyond our control are the energy costs, which we really can't do anything about; but, hopefully, we've peaked there and maybe we will begin to see some sort of reduction in energy costs going forward. The area of medical costs, while we're trying to do everything we possibly can, we also believe it's important that we provide an adequate benefit to our partners, so that while they need to share in the additional costs, there's not a whole lot that we can do there in the short run. So we are kind of somewhat at the mercy of inflation in the medical arena; and that has been an impact on us, there's no doubt, over the last couple of quarters.

Bill, could we see any new major technological innovation out of you guys in the next year or so? I know you've been working on a number of things in terms of certain kinds of chip technology, and I know it would require retrofitting plants and whatnot, but is that something that you continue to move forward with from a productivity standpoint?

Yeah, I think the biggest one out there would be the radio frequency chip that we are making good progress on and where we would be able to embed those into our garments that are out on rental programs. And I think there's some great opportunities there. There's going to be some prototypes that we're going to be testing in our operations here over the next year and, if successful, I think could have a big impact on us down the road.

What's great about the RFID chip is that it wouldn't require to us retrofit the operations like the automatic sortation system does. So we get some great benefits from that technology and that can be applied to a lot of our existing plants

So the large amount of capital you'd have to put into the other system you wouldn't necessarily have to do it in this case?

That's right.

Okay. Well, thanks very much.

Again, that's star 1 for question. If your question has been answered you may remove yourself by pressing pound. We'll go next to Brandt Sakakeeny from Deutsche Bank.

Thanks. Hi, Bill and Karen.

Good morning.

Hi, Brandt.

Just a follow-up question on the charge you all took. Are there any other loans out to suppliers, and do you anticipate making additional investments in other future suppliers? Thanks.

Brandt, we have a couple other investments in various ventures, none of which at this time are in jeopardy or do we have any concerns about. We are very selective in doing this. This was just a unique situation for us. At this time I don't expect there to be anything else.

Okay, great. Thank you.

Next is Michael Hussing with Suskin Rogers.

Good morning.

Hi, Michael.

Good morning.

I just want to return to the sales force turnover. You said you replaced 105 to 15% of the sales force. Was there additional attrition beyond that 10% to 15% figure?

There was some additional attrition beyond that figure, yes.

Okay. Can you give us some sense as to in a normal period of time, quarter, year, what have you, what percentage of the sales force you would be dismissing for performance-related reasons?

Boy, I don't know. I don't have that calculation off the top of my head. I think the normal attrition in the sales force runs around -- and, again, this is not performance related. So we do measure the turnover in all of our areas of the company, and in the sales force it typically runs in the high 20% range.

Okay. And so it would be fair to say that this 10% to 15% for performance- or productivity-related reasons is a much higher than normal figure for that type of dismissal, right?

Yes, it is. This was a concerted effort to look at the entire sales group and to look at productivity, to look at the quality of the accounts that were being brought in, to look at the profitability of those accounts, and, yes, it was a one-time reconfiguration, if you will, of the sales force.

How often do you go through that kind of a process?

Boy, I can't even recall the last time we did something like this, Michael. It's not very often.

Okay. Thank you.

We'll go next to Chris Gutek of Morgan Stanley.

Thanks. Good morning, Bill and Karen.

Hi, Chris.

Good morning.

Morning. Following with the theme of -- so the headcount reductions for the sales force, presumably this had at least a modest, positive impact on the profitability or the margins of the quarter net of any severance expenses. Is that true, and is it possible to quantify?

I would say it does not have any impact because what we try to do is immediately go out and hire additional people. And there's the cost of hiring them, and there's very little productivity for a uniform sales rep in the first six to nine months. So it did not have a positive impact on us at all. It may have had a slightly negative impact.

Okay. And a related question. In the context of the disappointment with the productivity of some of the salespeople, and it's recognizing that the 3 or less than 3% organic growth might be the lowest organic growth in the history of the company, I'm curious if that's true or not. But how much confidence you guys have in the target of getting back to 14% to 16% organic revenue growth in a stronger economy?

You are correct that that 3% organic growth rate is the lowest the company has ever experienced. And we are confident that we are going to get back up into those double digit growth levels, Chris; because we are confident as soon as the employment levels improve in the country that we're going to be able to participate in that upturn. So there is no doubt in our minds that we can get back to double-digit growth rates.

Okay. And even though it was a small acquisition in the quarter, could you tell us what type of a business that was?

That is was the First Aid & Safety Group.

Okay. And then, finally, does the EPS guidance include the effect of the $4.3 million charge?

Yes.

Okay. So you're effectively raising the guidance by a penny and a half, apples to apples?

Well, no. I'm still saying we'll end up $1.52 to $1.64.

On a GAAP basis, though, right?

Yes, right.

Okay, great. Thank you.

Go next to Greg Halter, LJR Great Lakes.

Good morning, Bill and Karen.

Hi, Greg.

Good morning.

Wondered if you could comment on that $150 million of capital expenditure plans that you have -- what types of things you'll be doing in the plants and so forth?

Well, the bulk of that is always new plants. And we're probably opening somewhere around -- planning to open at this time six or so rental plants this fiscal year. Now that can change as the year goes on, and we continue to monitor that very closely. But then in addition to that expenditure we always have additional routes, so they will need new trucks, replacement trucks. We have some computer expenditures, we continue to roll out our portable route computers within our rental division. We have equipment upgrades, to the extent that they show a good positive return, we will invest in our facilities; but the bulk of it is basically capacity expansion.

Okay. And any sort of computer conversions or ERP-type programs that you're planning on in the near or longer distance future?

Well, we have a program that's almost -- that's actually converted over in some of our facilities already. This impacts more of our direct sale business in our distribution center, which is an improved inventory control type system that you could classify as an ERP-type system. But in terms of like rolling out an SAP system across the company, we are not engaged in anything like that right now.

Okay. I think last time we spoke you were looking at depreciation and amortization of between 150 and 155. Is that still a good target?

That still looks to be a good target.

And looking at your debt, how much of that is at variable rates now?

That's about 30%.

And do you have any changes in the swaps and so forth derivatives hedging your debt since the annual report or 10-K came out?

Well, what our final -- we had a swap where we had swapped some variable rate debt back to the fixed that just expired here in September. So at this time, the only -- we don't have any more swaps outstanding. The only -- the portion of our debt that is variable based is the fact that we have 125 million of the fixed rate that was swapped back into variable.

It was from the Omni acquisition.

Okay, great. Thank you.

We'll go next to Bruce Simpson, William Blair.

Good morning.

Good morning.

Good morning.

I wonder if you can talk a little bit about whether your note program percentages is sort of where it is historically or if that's deteriorated at all [Inaudible] latitudes of growth here. And then on the other side of that, for the loss business components, if you could break that down between competitive losses and people going out of business.

We do not have the note program or percentage for you yet. We have requested that; and as soon as we get it, we can talk about that offline. We don't anticipate that that's changed any, because we hear from the field that they're still getting the majority of their business from first-time users; but we just don't that have percentage to give to you right now. On the lost business, it's still split about 50/50 between competitive losses and economic-related losses.

Okay. And I wonder if you can quantify a little bit the -- of the increase in your rental gross margins, how much of that, roughly, comes from the impact of Omni? And then looking forward what should we expect in terms of potential improvement throughout the fiscal year? How much more can be squeezed out of what was once the Omni operation?

Well, Bruce, it really is impossible for us to quantify the -- any impact on our gross margins from Omni at this time. As you know, we've integrated most of their operations into ours, we've taken business that was in some of our facilities and put it into there's, so it has really lost its identity, and we really can't address that. It's clear that some of the improvements in margins, though, was a result of Omni, there's no question; because as we've gotten more efficient and we've eliminated duplicate facilities, gotten their business into our programs, their suppliers are now our suppliers, that certainly has had a positive impact. And as we said back in the acquisition, we would continue to see improvement in the profit margins of Omni as we move forward. So as we go through the rest of this year, there would be an expectation that Omni would continue to become more profitable, Omni business, we just don't have any way of identifying it. All of that is taken into consideration in the guidance that we provide. So the guidance basically reflects our expectation of what's going to happen with the profitability of our business as well as our expectations of what's going to happen with the economy.

Okay. And then my last question has to do with what came up on the last call about the document destruction initiatives, and I think it was publicly acknowledged that you had made some investments in shredding businesses. And I wonder, can you give us any kind of can detail about where that initiative stands, how many companies you may have acquired or if it's contributing any revenue, and what amount of capital you've committed to that and so forth?

I really can't go into details at this time. Let me say that it is -- we made a couple more acquisitions in that area, we've got operations now in multiple cities, and it is still a very minor component of our overall revenue. We're continuing to study the business. So far we're encouraged by what we're seeing and the opportunities that this business may have. And it is just another one of the examples of another business service that we feel we can bring into our company and use some of our competitive advantages that we have with regard to running route-based businesses in something new and that we can offer it up to our existing customers as well as expand our customer base. However, it is still a very small piece of the company and we are continuing to look at it. It's still what we consider to be in beta test.

And, Bill, are you willing to give us some broad ballpark of how much capital has been chanelled into that business?

It's a relatively minor amount. I can't quantify it, Bruce, at this time. I will not be able to provide that information publicly right now.

Okay. Thanks.

We'll go next to Brad Safalow [Inaudible] with JP Morgan.

Good morning. Just a follow-up question on the acquisition environment. As we look at it, it sounds like the willingness among the attritional uniform rental-type of companies that you've acquired historically may not be there. Should we expect that perhaps you're going to see more acquisition activity on a relative basis on the ancillary product side or in first aid or in some of your other revenue streams?

Brad Safalow, not necessarily. I think as we look at some of these other business services there will be some acquisitions there, but they won't be that significant. The first aid business, there really aren't a lot of other companies that we want to acquire there. We're focusing now more on internal growth and that particular business service. I think still the vast -- the biggest potential on acquisitions will continue to be in our core business, the uniform rental. And I think that it's just a matter of time before that happens. For example, we talked about some of the technological advances. I think as we continue to do more in that area and get some more breakthroughs there, it's going to continue to give us an advantage over some of the smaller people where -- to the point where I think they may become more willing to sell.

And just in terms of how we perhaps look at it in terms of its growth contribution, typically these kind of smaller acquisitions have added 2% to 3% of revenue. Is that something we should consider for this year or do you think it may be lower or --

Well, Brad Safalow, I never can predict acquisitions. I can just tell you when we look at our plans going forward we believe that absent big acquisitions, which will happen periodically -- you can never predict those --but on average we should get 2% to 3% of growth from acquisitions in any given year; however, that's going to vary depending on what the environment is.

Okay. And then lastly, just if you could provide us with an update on the Unite effort and perhaps, particularly on the issue of the card check process versus a formalized election. I have noticed that Senator Schumer [ph] has brought a bill to the floor that would effectively authorize -- or if passed would authorize the car check process. I would love to hear what your thoughts would be on that, and perhaps what its impact could be.

All right. Well, just for everybody's benefit, Cintas continues to be a target of a corporate campaign by two unions, Unite and the Teamsters. The unions are continuing with their tactics to pressure Cintas into surrendering our employees' rights to a government supervised election. Now as we previously have stated, we believe that people deserve the right to an election; but the unions are wanting to pressure companies to make agreements to take that right away, and they're now starting to turn to the political process, as evidenced by Senator Schumer's [ph] recent submission of a bill. Our philosophy towards unions is straightforward. We believe that people have the right to say yes and the freedom to say no, and we respect our employee partners' decision and we hope the unions would, too.

As for what's happening in the political front, just as I can't predict the economy, I can't predict what's going to happen in Congress. But I would find it highly unlikely that we would see any significant change reflecting Senator Schumer's bill at this time. Cintas will continue to try to treat our employees fairly as we have in the past. We do not view this situation as going to have any significant impact on our business. We can work with unions if need be. We've proven that in the past, and we're not concerned about that. And we really don't believe it will have an appreciable impact on our business. But as a result of the tactics being employed by the union, we will continue to aggressively fight those within the law.

Thank you very much.

We'll go next to Bill Freid with Geneva Capital.

Yeah, hi.

Hi, Bill.

You had a writeoff on that garment manufacturer. Are there any other such loans outstanding that we ought to be aware of or be concerned about?

As I mentioned previously, there are others, very minor amounts, that are outstanding in some different ventures, none of which should pose any concern.

Oh, I might have missed that. I'm sorry. Okay, good. Thank you.

We'll go next to Kurt Muller, [Inaudible]. Mr. Moler, your line is open. Please check your mute button. Moving on, we'll go next to Kevin Monroe of Thomas Weisel Partners.

Good morning.

Hi, Kevin.

I just wanted [Inaudible] getting back to the sales turnover issue with the new business down to 14% down from, I guess, the typical range of 16%, given the turnover and given kind of the time it takes to ramp the new sales people up, when do you think you can get back to your typical range? I mean, is that -- and is that kind of -- and is that typical range in your guidance?

The typical range -- well, the guidance reflects the -- this move that we made on changing the sales force. So that should be the top level answer to your question.

Okay.

But secondly, new business will probably be impacted for another quarter, but we're confident that we can hit the sales guidance that we gave you.

Okay. Second question is, you guys are showing some discipline on price, it sounds like. What's the competitive reaction to that?

The jury is still out. I think that sometimes we hear anecdotally that the competitors don't feel that we have really done a good job at raising prices. Now, of course, we've got the information that we look at at all the new business that is written, we do know the average praises, and we know for sure that they have increased this 5% to 6% over what we saw in early '02. But I think what we hear is on the anecdotal stories, Kevin, we'll always be aggressive on getting some pieces of new business. That will always be the case. And maybe that's what you hear filtering through the industry at times.

Okay. Thank you.

You're welcome.

We'll go next to Thatcher Thompson, CIBC World Markets.

Good morning, Bill and Karen.

Hi, Thatcher.

Good morning.

The last business number, down 8.5%, can you remind us what's normal there?

Normal would be around 5% to maybe 6%.

And you mentioned it's kind of 50/50, competitive versus economic-related losses, but also it sounds like Omni affected it. Can you give us a sense of how Omni impacted it throughout the last year, how clients left and why? Was it their choice or yours?

I think it was a combination of both but mostly our choice. We always do -- after we get an acquisition it takes us some time to go through the account, see what kind of profitability contribution they're making, and we also take a look at the geographic dispersion of the accounts and make a decision about those accounts that are not going to fit into our network, that are not profitable contributors to our company. And so we do kind of a purging of those unprofitable accounts. But there is -- there's some customers that we acquire that decide to go somewhere else. That's a minor piece of the whole attrition of the business that we acquire.

And did that purging happen quickly after you bought the company or throughout the year?

It was pretty much throughout the year; but I can tell you it did not happen in the first quarter, and that's why we're up against some tough comparables for the first quarter of last year. As you can imagine, it does take some time to get our hands around just the type of business that we've acquired. I would say it started in the second quarter of last year and then it continued to -- there were some continued attrition in the third and fourth quarter as well.

And would you venture a guess as to how much of that 8.5% is related to Omni?

Well, I -- if you want me to guess, I would say that if it weren't for Omni, I think that we'd be around our 6% level.

Okay. Thank you.

Back to Adam Waldo, Lehman Brothers.

Just a quick follow-up on a couple of dimensions. A number of your major private competitors continue to cite a fairly significant price gap between sort of spot market price quotes for new business on the uniform side and spot quotes for renewal business. Would you care to comment on the extent to which you're seeing that in your business?

I don't know that I can make a comment about that, Adam. I don't know that we've seen what you have noted. Certainly that some accounts do come up for renewal, and there's some pressure to forgo a price increase; but I don't know that I would make a universal statement that there's a sizeable gap between renewals and spot price for new.

Karen, so I understand that, probably, so across your book of business you wouldn't say there's any meaningful price gap; is that fair?

That's fair.

Okay. And then just switching back to the Unite situation, Bill, if I may. A couple of quick follow-up questions. If memory serves, you start incurring sort of elevated expense run rates primarily in the SG&A base in the January time frame in '03; is that fair?

That's fair.

So you haven't disclosed those amounts?

Well, first -- yeah, Adam, you're correct. The [Inaudible] campaign started in January. I would say that we began to start incurring expenses sometime in the February/March time frame and have continued going forward. But I don't -- they aren't big enough to disclose separately. It's certainly had a pressure on our G&A cost as a result of these additional expenditures, but it's not significant enough that we would have to separately put that out as another item.

Okay. And, Bill, if you look at, again, without disclosing specific dollar figures which I understand are sensitive, but if you look at it, had it been sort of ticking up sequentially the last few quarters in terms of the dollars that you're spending? And, if so, do we think that's going to continue to rise a bit over the balance of fiscal '04? How might we think about that without getting into, obviously, the dollar specifics?

Well I can't, predict what the unions will try to do next; but based on what I am seeing, I cannot imagine that the costs are going to be much more significant than what we had in the fourth quarter.

Okay. And, finally, do you take as any barometer for the union's ambitions the recent compensation and benefit increases achieved in the Detroit contract agreement?

Ask that again, Adam.

I'm sorry, Bill. Do you take as indicative of the union's ambitions in other markets the rate of compensation and benefits increase achieved in the recent Detroit contract renewal?

Well, for everybody's benefit, just so you all understand, recently we did resolve a new contract for our -- one of our Detroit facilities, which is represented by Unite. And the employees at that facility overwhelmingly ratified a new three-year contract. Basically it was a 97% approval rate in a secret ballot vote. That contract gave them wage increases of approximately 3% to 3.5%, which was comparable to the last Unite contract. It should be noted that Unite came into these negotiations very aggressive with regard to their demands for high increases in labor and benefits; but as we have demonstrated, we can work with unions, and we were able to negotiate these down to what we believe to be very reasonable increases for our people. The wages and benefits at our nonunion facilities in the same area are still better than the newly negotiated package for these union workers. And as such, we feel very good about this contract, we feel it was good for the employees up at this facility, but it is also good for the company.

Thanks very much for the candor.

We'll go next to Kurt Muller [ph] [Inaudible].

Good morning, ladies and gentlemen.

Hi, Curt.

Could you give us the pretax profits for the two segments, please?

Boy, I don't have that, Curt, right now.

That will be disclosed when we do our 10-Q. We go through that process next.

Okay.

We'll get back to you on that, though.

Okay. Secondly, can you just help us understand a little better why the restructuring of the sales force now as opposed to some other time?

Well, I think it was the beginning of a fiscal year. As we made our plans going forward we began to see that there needed to be some improvements made, and our operating management decided to take on those challenges and did it basically at the beginning of the year.

When you make a lot of acquisitions like we have over the past few years, sometimes you need to take a step back and take a look at the organization from a macrostandpoint, look at the productivity, look at if some improvements need to be made, and that's what we did.

And you guys kind of reached this decision in what time frame?

Over the last couple of months. Actually, the last, maybe, four to five months.

It's not a decision that's made in one day. It's obviously a review of all of our operating plans among all of our facilities, and management made some steps to take action that spread over a period of time.

Right. Okay. Thank you very much.

We'll go next to Chris Gutek with Morgan Stanley

Hi, Karen. I had two quick follow-up questions regarding some of your prepared comments. The first has to do with the garment amortization expense. I believe you said that it had a neutral impact on the year-over-year gross margins comparison in the rental division and you expect it to have a positive impact going forward. I assume that has to do with the wave of new uniforms brought on for the Omni workers customers and those garments will become fully amortized shortly. But assuming that the labor markets improve in the second half of the fiscal year and the growth rates do improve, wouldn't you expect a new wave of new garments coming into service that would have a negative impact on the gross margins?

No, actually, if that improvement was within existing accounts, we would plan to serve that from our used inventory in our stockrooms first. Now you're right. I mean, at some point that would -- after we deplete that inventory to an extent we would have to buy new uniforms. But any type of improvement in the business within existing accounts will always initially have a positive impact on gross margins.

Okay. And then, secondly, you mentioned that you're see some tentative signs of improvement in the attrition rate. Could you elaborate on that?

Well, again, we're just looking at the performance in the first 13 weeks. And it does appear that in the first 13 weeks that we see some slight improvement in the add/stops and we see some slight improvement in the lost business. And then that, obviously, will carry forward to the top line over the next four quarters. Won't be seen in this first quarter necessarily; but if it is sustainable, you would see some improvement going forward.

Okay, great. Thanks.

We're back to Michael Schneider of Robert W. Baird.

Just some follow-up questions. First, in terms of new business, Karen, you mentioned that you would expect still some lingering impact from the sales force action in the second quarter. Would you actually expect new business growth rates to decelerate again in the second quarter?

No, I don't think so.

Okay. Well then -- I'm sorry. Then the overall rental internal growth, given that add/stops at least have shown one minor sign of improvement, pricing seems to be improving, would you expect that this quarter is the bottom in rental revenue internal growth?

Well, again, you're asking us to predict. I mean, we could have one more quarter where it might get a bit worse, Michael. Again, we're trying to pin us down on exactly when this thing would start to pick up; because as we said, we expect it to pick up in the second half. So, again, one more quarter, maybe it goes down a bit; but it's just difficult to say. We've got how many metrics here? Five metrics that all have to go together to decide how organic growth is going to play out in one particular quarter, and that's difficult to predict.

That's one of the reasons that we only provide annual guidance. Because we cannot with good conscience give guidance in a quarter because of all the different metrics. So while I know all of you try to come up with quarterly estimates, and that's what your clients are expecting, we just believe that, again, we're reiterating our guidance for the year. Obviously, you need to decide what you have to put in there for the quarter; but it's -- I think that it's our expectation that hopefully employment levels will improve. It takes awhile for that to filter through in our business, and it's probably going to be stronger in the latter half of the year than it necessarily will be in the second quarter.

Okay. And then acquisitions in total for the quarter. You mentioned less than 100,000 on the rental side. How about for the total company, though?

For the total company it was approximately $4.4 million.

Okay. And then along that line, I just want to address -- there was an analyst report yesterday put out that suggests that maybe the fourth quarter acquisition number was understated based on this analyst's assumption about acquisition multiples. Could you just address the comments that were made that the internal growth rate was possibly 1.5% versus your number of 3%?

Well, Michael, my comment would be that we have always been very straightforward with reporting organic growth, and the assumptions made by that analyst were his own assumptions based on his speculation as to what revenue was acquired. And all I would tell you is that we have never deviated from giving you the actual organic growth. So if an analyst decides to dispute our comments, that's his own point; and I don't think it has any basis from the company.

Yeah. Just like we just reported for this quarter, we said that on the rental side we had a contribution from acquisitions by about $100,000. And you guys can do the math as well as we can. That gives you about the same organic growth rate as what was reported. And then on the service revenue side we reported organic was down 5%, so that's taking out about a little over $4 million on that particular segment. So all together it's about $4.4 million. And by us giving you this information, you can calculate the organic growth rate yourself. I don't know how we could be any more straightforward than that.

Okay. Appreciate the comment. So then just as a follow-up, the Omni acquisition, are you able to quantify what that contributed during the quarter?

No. Again, as I told Bruce Simpson, it totally has lost its identity as far as Cintas is concerned.

Okay. So going back to Unitog acquisition back in fiscal '99, that would be what a -- what type of exercise to try and guesstimate what revenue is contributing --

It would be an impossible exercise. I can't do it.

Okay. I appreciate that.

Are you talking about profits? Are you talking about revenues or --

Anything. I mean, at this point is it possible to even identify client by client what belonged to Unitog and what does not?

No.

Yeah

So modeling it would be very tough?

It would be tough

Okay. Thanks again.

We're back to Greg Halter, LJR Great Lakes.

Hi again, guys. Just wondering if could you comment on how the new program on the -- I guess it's through your national accounts -- on the promotional product side of the business is progressing?

Well, it's -- we're still very interested in it and intrigued by it. As you know, we're only targeting some of our big national accounts in the promotional products area. I would say that it is still at a very infant stages. We have been very selective on which customers we're working with, so it's not a big contributor to our top line at this time; but we're still interested in moving forward with the program.

Okay. Thank you.

And we'll go back to Bruce Simpson, William Baird.

Hi, Karen and Bill. I just wanted you to clarify one thing on this. The number of weeks in a quarter in which the add/stop metric is positive and the -- ordinarily, I sort of slipped over that one. But this time, as I understand it, you think that that's one of the key indicators that is kind of buttressing this theory that perhaps the economy may be beginning to show positive science. So am I right in thinking that this is -- you keep track on a weekly basis of whether your clients have more or fewer people in uniform and that five times out of the 13 weeks in this quarter it was more, and eight times it was fewer, or am I misinterpreting that?

We track it on a dollar revenue basis. So we look at the additional revenue or lack thereof, from existing accounts on a weekly basis. So 5 of the 13 weeks they had -- we did more revenue, more business with those existing accounts and 8 of the 13 weeks we did less revenue with those existing accounts. Now if you recall, in the third and fourth quarter, only 1 out of 13 weeks was positive.

And when you say more and less revenue, Karen, that's in the year earlier period? Would that be right?

No. Within the account on a week-to-week basis.

Oh, okay. So more than the prior week or less than the prior week?

Correct.

I see. So even though it's still negative, in terms of it isn't 50/50, it's an improvement over the last two, which suggests maybe the tide is turning and that kind of gives you more hope for the third and fourth quarters of this fiscal year?

Yeah. But let's remember, in the second quarter of fiscal '03 we saw the same phenomena, about 5 of the 13 weeks were positive. Then we went over the course of the new -- we changed calendar years, and in January/February it became very weak again. And so, I guess, what we would say is we think you find it -- you and we find it interesting on how this metric tracks on a week-to-week basis, but we don't know that it bears any significance to drawing conclusions about the direction of the economy.

Okay. And just to finalize on this, then, when you say "total dollar amount," that includes uniforms, so it reflects the headcount changes as well as they may have signed up for a new mat program or any other piece of the rental business, right?

That's correct.

Thanks, Karen.

And at this time there are no further questions.

Well, thank all of you for joining us today. We appreciate your interest in Cintas, and we'll look forward to speaking with you again in late December when we release second quarter results.

And this does conclude today's conference. Thank you for your participation. You may disconnect at this time.