信達思 (CTAS) 2004 Q3 法說會逐字稿

Please stand by, we're about to begin.

Good day everyone and welcome to the Cintas third quarter 2004 results conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Good evening everyone and thank you for joining us today.

We are pleased to announce increased sales and profits for the quarter ending February 29, 2004.

Revenue grew at a rate of 5%, to $697 million, and net income rose to $66.5 million, an increase of 13% over the third quarter last year.

Earnings per share were 39 cents versus the 34 cents a year ago.

Despite the continuing sluggishness in job growth, our rental revenue grew 4.6% on an organic basis compared to an internal growth rate of 4.2% in our second quarter and 2.8% in the first quarter.

Most of this improvement in the rental business internal growth rate continues to come from the increased business with existing customers with -- in other rental products, such as entrance mats and hygiene services.

As Karen will discuss shortly we do not generally see head count increasing at our customers.

While revenue increases continue to be below our goals we are pleased with the continuing progress being made in improving our margins due to the outstanding effort being performed by all of our partners whom we call our employees.

As they continue to improve their productivity and cost efficiency.

Despite higher energy costs, medical benefits, and state-imposed unemployment taxes our pretax margins improved by a full 1% to 15.1% while net margins as a percent of sales improved to 9.5% from 8.8% in the third quarter last year.

Also it is worth noting that our financial condition continues to strengthen, with our long-term debt as a percent of total capitalization falling to 21% from 27% last year and 33% at May 31, 2002, just after the acquisition of Omni services.

Cash and marketable securities were approximately $250 million at the end of the third quarter compared to $77 million just a year ago.

As we indicated we would do last quarter, we are now able to narrow the guidance for our fiscal year ending May 31, 2004.

For the entire year we expect revenues to be in the range of 2.78 billion to $2.82 billion and earnings per share to be between $1.55 and $1.59.

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.

Now, I would like to turn over the call to Karen.

Good evening.

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 the balance sheet.

I will first start by commenting on the income statement.

Total revenues were $697 million for the quarter, a 5% increase over that reported in the prior year.

Rental revenues were $547 million compared to $523 million last year.

This was an increase of 4.6% over the second quarter of last fiscal year.

In the past 12 months we have had a very minor amount of revenue contributed by acquisitions.

Therefore, our internal growth was the same as our reported growth for the current quarter.

The economy cooperated in a small way this quarter as we saw a slight improvement in our add/stops metric which is the measurement of business within existing rental customer accounts.

However, most of the improvement is in the cross-selling of other rental services like renting our entrance mats and installing restroom services.

We have not seen any measurable improvements in the uniform rental business in this third quarter because once again we did not witness any head count increase in our customer base.

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 13.5% growth and our top-line rental revenue this quarter versus the quarter a year ago.

This rate of growth is comparable to that experienced in the first and second quarter.

As we mentioned in our first quarter conference call we made some changes in our sales force over the past several months and we expect productivity to continue to improve over the course of this fiscal year.

As a result of these changes in the sales force, the total number of sales people has increased by approximately 7% this fiscal year.

We will continue to increase our sales force and expect a double-digit increase in the number of sales people by May 31.

During the quarter we continued to monitor the pricing on new business and continued to report the prices being charged to new customers have increased 5 to 6% over the more aggressive levels we had been charging in 2002.

We are encouraged with the sustainability of this new pricing policy.

Price increases to our existing customers contributed 1% in growth during the quarter.

We continue to see some improvement in this metric as the economy improves.

The measure of business we do with our existing customers, known as add-ons and stop orders reduced top-line growth by approximately 1.5%.

The trend in the add/stops metric was not as encouraging as the second quarter but this was not surprising as the holiday weeks are typically weak when measuring add/stop's.

Companies will temporarily lay off workers or close down plants during the Christmas and New Years holiday.

In the second quarter you may recall that we reported a positive add/stop's metric in 9 of the 13 weeks.

In this third quarter only 6 of the 13 weeks were positive, five of which occurred at the end of a quarter.

It is really difficult to say whether this signals a trend as I said earlier the positive signs are coming from our other rental services and not as a result of a pickup in employment levels.

All of us watch the government reports on employment levels.

In February the government reported a 21,000 increase in employment, much to the surprise of many economists.

Many of you ask whether we are seeing job growth yet.

The answer is no.

But we want to remind you that our business has always lagged in economic recovery.

We are not a leading nor a coincident indicator of economic growth.

We have always lagged in economic recovery by three to six months.

We are also asked about the impact of an increase in temporary workers and whether that has a major impact on our business.

Unfortunately our uniform business does not get a big boost from an increase in temporary workers.

For the most part the demand for uniform services is more closely correlated to permanent job growth.

However, as we have experienced, as companies hire temporary workers and start seeing positive signs in their businesses we are more successful in cross-selling our other services and we have a better opportunity to increase prices for our services as well.

The last component of our organic growth rate is the amount of lost business.

The amount of lost business over the past 12 months clipped our top-line growth by about 8.4%.

We continue to see improvement in our lost business numbers as we get further beyond the Omni integration and as a healthier economy kicks in.

So to reconcile our organic growth it can be broken down as follows.

New business caused our top line to grow by 13.5%, price increases added 1%, lost business subtracted 8.4% from our growth and add/stop's took off another 1.5%.

That was a total organic growth of 4.6% in our rental business.

Now we would like to move on to discuss our other services revenue.

Other services revenue increased 6.3% from last year on an organic basis.

This segment of our business was flat 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.

This business declined 2% on an organic basis, compared to the third quarter of last year.

Our customers tell us that they see some positive signs of improvement in business conditions but that has not translated to a pickup in demand for uniforms yet.

We believe it is just a matter of time before demand picks up.

The first aid and safety business grew approximately 6% on an organic basis year-over-year and consistent with the first and second quarters' growth.

This business has held up well during the sluggish economic climate.

Now I would like to address the margins.

Our rental margin was 44.6%, this is 80 basis points better than the third quarter of last fiscal year and 30 basis points better on a sequential basis from the second quarter of this year.

As expected the margin improvement reflects the productivity improvements in many of our operations, especially those that absorbed business from the Omni acquisition.

Material costs decreased 50 basis points as a percentage of sales compared to the prior year and we anticipate these costs will continue to decline as we get the additional costs from the Omni conversion behind us.

Production costs decreased 40 basis points reflecting efficiencies from automation and better utilization of plant capacity.

We also have reduced our supply costs in the production area.

Energy costs increased approximately 30 basis points this quarter compared to last year, and 40 basis points from the second quarter.

The gross margin in our other services revenue was 34.6% or 250 basis points better than last year and 170 basis points better than the second quarter.

Other services revenue is primarily derived from the sale of uniforms in our national account sale division.

The margin generally falls in the 30 to the 35% range, but fluctuates from quarter to quarter due to the change in customer mix each quarter.

This division continues to do a great job in managing its costs relative to the weakness in top line revenue.

The margin improvement is primarily reflective of improvements in sourcing our fabrics and finished garments in this division.

Our selling and administrative expenses were 26.5% of revenue, or 30 basis points higher than last year's third quarter.

The cost of healthcare benefits and other payroll costs, including state unemployment and Workers' Compensation benefits all contributed to this increase.

Net interest costs were eight-tenths of one percent of revenue down 20 basis points from last year, and reflective of the lower debt levels this year as a result of paying down the debt from acquisitions. our effective tax rate was 37% for the quarter, comparable to last year.

For the quarter net income of $66.5 million increased 13% over last year's third quarter earnings per share increased 15% to 39 cents per diluted share.

Our balance sheet is very strong.

Accounts receivable balances are in great shape with DSOs equivalent to last quarter at 36 days.

Inventory levels continue to decline and decreased $9 million on a sequential basis from the November level.

Our long term debt to cap stands at 21% compared to 27% last February, and this reflects the continued strength in cash flow from operations.

Looking at our cash flow statement in further detail, capital expenditures for the quarter were approximately $28 million, and we expect our cap ex to be between 120 and $130 million in fiscal '04.

Acquisition activity picked up in the third quarter, primarily in the first aid and safety division and the document management business.

Acquisitions in the uniform side of our business continue to be very small.

In conclusion our business is on solid ground.

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 their 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.

The question-and-answer session will be conducted electronically.

If you would like to ask a question you can do so by pressing the star key followed by the digit 1 on your touch-tone telephone.

If you are using a speakerphone please make sure your mute function is turned off, to allow your signal to reach our equipment.

Once again, it is star 1 on your touch-tone telephone to ask a question.

If you find that your question has been answered you may remove yourself from the queue by pressing the pound key.

We'll pause a moment.

Our first questions come from Kartik Mehta with Midwest research.

Good afternoon.

I had a couple of bigger picture questions.

As you see the company today, what's normal -- economy normal, whatever your definition is of that, what do you believe the long term revenue and EPS growth rate of the company can be?

Well, Kartik we still believe that we can achieve double-digit growth in both of those components.

Our stated goal -- continues to be in the mid to upper teens and we anticipate that that will still be able to happen in a normalized economy.

And as you, just to better understand the leverage in the business, can you provide some numbers or metrics as, you know, what happens once the economy returns as we get job growth?

Is there a way to maybe quantify what could happen to margins and what kind of impact you could have to the bottom line?

Well what you're going to see, one of the big impacts will be what happens with those components of growth that Karen alluded to earlier and that we report each quarter.

For example, the add/stop ratio currently this past quarter had a negative 1.5% on our growth rate.

In a normalized economy that would be 1 to 2% positive.

So there's a turnaround there of 2.5 to 4%.

Lost business traditionally would be more like 5% as opposed to the 8.4% that we're seeing today, so there would be another pickup of 3%.

Price increases generally would go up more like 1.5 to 2%.

It's very easy to see that we could get back to double-digit organic growth just by a -- a more normalized economy, and we would expect that to happen at some point down the road.

We can't predict when but obviously when it does that's going to have a nice impact on our growth rate.

Now, additionally, the thing to keep in mind is that as existing customers add employees to their work force that will allow our drivers to deliver more uniforms per stop than he currently is able to do today.

Obviously since we're already stopping at that location, taking the time to deliver uniforms, pick up dirty uniforms, the marginal profitability of those additional people in uniform at existing customers will have a nice impact on the bottom line.

One last question.

As you look at the last nine months and your results for the last nine months would you say the reason revenue growth hasn't been what it normally is, is strictly because of the economy, or have there been any market share issues due to pricing or due to any other factors that you might have witnessed?

Strictly economic, general economic conditions that have caused the lower growth rate.

Thank you very much.

And we'll take our next question from Michael Schneider with R. W. Baird.

Good afternoon.

Maybe you could focus on revenue for one moment.

The revenue guidance seems to imply about $725 million in the fourth quarter.

Bill, Karen, it looks like that would assume roughly the same organic rental growth rate in about the 4-4.5% range.

I'm wondering if it's being driven by the ancillary products what new programs have been put in place to drive even greater math sales or hygiene sales?

Is there a new training program, a new incentive program?

Anything that might explain the acceleration in that business and your confidence in it going forward.

Michael, I think the biggest thing is just the education of our sales force and the product that we're offering.

We've done a lot of work to find products that are something that our customers need and that they want and I think that we're able to bring those products to market and we've had success with them.

So I think it's a combination of product development and training our sales force on how to approach our customers.

We've been very bullish about the restroom supply business after our acquisition of Omni we learned so much from them, because they had a separate division called the Sanist division where they devoted a separate distribution network and delivery system for those products and services so we have expanded our product line in that same area and as Bill said we developed sales promotion material, different education pieces for our people on how to cross-sell those products and services, and we're very excited about the potential growth in that particular area of the facility services business.

Michael, I think you may recall I think Scott Farmer and Bob Kohlhepp have spoken about this before but one of the things that each one of our business groups does approximately every six weeks to two months is conduct an all-day marketing committee meeting, and one of the things that they're always asking themselves is what else can we do for our customers.

And I think that prompts to us find other opportunities where we can increase business with existing customers as well as maybe identify new customers that we can tap to take some of our services.

So this company continues to have a very strong market focus and we'll continue to seek out things that compliment our existing product line and provide additional support for our customer base.

Okay.

And then in terms of the add/stop metric, you mentioned, Karen, it's a tough quarter to read for this, each year at this period, so it's understandable.

Can you just look a little deeper, into either by SIC code or the new NACIS code as to what maybe two markets are growing best for you and what two markets are still deteriorating most for you, just to give us some color on the trends?

I wish we could do that.

We don't have that specific information for you but we are going to try to correlate that as we go into the future.

We have not converted our customer base over to the new NAICS data yet, but we are going to do that in this calendar year.

So I can't really answer your question except to say that I think that the add/stops-- as you said the add/stops metric is a tough one to read in this third quarter but the last five weeks were positive.

And so, obviously, that gives us a little more encouragement than we would otherwise have.

Let me say, too, it is in the facilities services area where we see the positive momentum.

It is not in the uniform side of our business.

So again it's coming from this cross-selling of restroom supply products, it's coming from our entrance mat services, some of our other facility services, but unfortunately I just can't tell you what sector it's hitting.

Okay.

And final question.

Just the sales force additions.

Are they being concentrated in the facility services group?

No, they're across all the entire rental division, both the facility services side and the uniform side.

Okay.

Thank you.

And we'll move on to Brandt Sakakeeny from Deutsche Bank.

Thanks.

Good morning, Karen and Bill.

Couple questions.

One is do you have any comments just in terms of the first two weeks of March how the business has been doing, particularly the add/stop ratio and whether or not the strength continued from February?

No, Brent, we just don't have that data right now.

We have up through week 39 which was the last week of February.

Okay.

Great.

And I guess the second question is, as long as sort of cap ex running below D & A and you're spending, and spending off a fair amount of free cash flow.

Can you just talk to the uses of that free cash -- would you anticipate looking perhaps to increase the dividend or to, perhaps, increase share repurchases versus paying down debt?

Thanks.

Our first objective would be to look for acquisition opportunities.

However, I would tell you that given the stock price and where it's at I'm sure our board is going to be looking at the opportunities that might be available in share repurchases at some point in the future, so to say that -- you know, you mentioned would we increase our share repurchases.

Well, we have nothing to increase from because we have never done them.

But I would say that we're getting now to prices levels that might make a lot of sense for our shareholders.

Okay.

Great.

Thank you.

Next we have Chris Gutek with Morgan Stanley.

Thanks.

Hi, Bill and Karen.

Couple questions.

First on the gross profit being very strong or the gross margining very strong for the core rental division, Karen you mentioned the garment cost being down about 50 basis points, does part of that relate to the amortization expense being low versus the prior year because of some of the Omni customers' new uniforms now being fully amortized?

Or is that a non-issue at this point?

No, you're right, the amortization of those garments that we infused for the Omni account will start rolling off about this time frame and over the course of the next six months.

So that is definitely a part of that.

Okay.

So sort of a temporary boost there to the gross margin, as that flows through?

Right.

But you know what we would say is as the -- as our business rebounds with employment increases, those increased revenues will also be serviced out of our stockroom and for the most part those uniforms have already been amortized as well, so that would provide a temporary boost in gross margins when that happens.

Right.

Okay, great.

If the SG&A margin line, recognizing there's only 30 basis point year-over-year increase but off of the relatively high levels in the prior year versus where you were three, four years ago we're looking at close to 26% G&A as a percent of revenues.

Based on the very cost pressures that you are feeling at the G&A line do you expect that to come down meaningfully over the next couple of years or are we permanently at this higher level?

No, no, I think it is going to come down, I think it will come down, Chris, as revenues get back to more normalized increases year-over-year.

And I think -- because we'll have greater utilization of our existing capacity in our existing G&A structure I'm hoping to see a moderation in some of our medical costs and some of the other, you know, cost pressures we've seen for employment related costs that are in there.

So we expect the rate to fall as we reach a more normal economy.

Is there anything unusual in the G&A regarding the hiring of the new sales people to fill in that hole in the sales force?

No, not really.

Okay, and the final question.

You guys mentioned the Six Sigma, the new Six Sigma effort.

Is it possible to quantify either the short-term costs and/or the long-term cost savings associated with implementing this program?

Well, Chris, we are tracking that very closely, and we are making sure that we understand exactly what benefits those are providing.

I'm not at liberty to get into that at this point because we're still early into the process but I can tell you that some of the improvements you're seeing in our working capital usage as well as in some of the margins are the result of some of the efforts of Six Sigma and we are only becoming more and more excited about what some of those projects can do for us as we roll this out across the company.

So it is having an impact on us, all positive, and it is certainly an initiative that we're very excited about.

One of the first divisions that we implemented the Six Sigma effort was in the national account sales division and also at the same time took a look at our manufacturing and our distribution networks and as you can see the impact on the gross margin in that particular division was substantial this quarter.

Okay.

Great.

Thank you.

We'll move on to Bruce Simpson with William Blair.

Hi.

Good afternoon, Karen and Bill.

Hi.

I wanted you to address a little bit the sequential increase in SG&A and following up on the prior caller's question, trying to understand if that looks like it went up about $8 million sequentially, is that primarily from the cost related measures that you talked about, healthcare and Workmen's Comp and so forth, or is that mostly from new head count in sales people and then if could you just kind of address whether for modeling purposes that absolute dollar amount is likely to come down.

I remember in the fourth quarter of fiscal '03 we had kind of an unexpected contraction in SG&A.

Thanks.

Well, Bruce, it is driven primarily by payroll-related type costs such as medical benefits and various state and federal unemployment taxes, primarily state.

As everyone knows, the state unemployment taxes hit you most prominently at the beginning of each calendar year.

But medical costs certainly have had probably the most significant increase dollar wise between the two quarters, reflecting what every company seems to be going through now, and it's healthcare cost activities.

So we would expect the absolute dollars that you're seeing there, basically to continue going forward.

Now, there has been a slight increase in some of the people related costs in terms of hiring of additional sales people but the biggest part of that were the medical benefits and the unemployment taxes.

Okay.

If I could just follow up, you mentioned document management as one area where you've seen a little bit of increased acquisition activity.

Can you give us any more color on sort of how many acquisition you've done there or the contribution to revenue what your thought is about that business, how much capital you've put into it?

Yeah, Bruce, we are very excited about this document management business.

We've probably made about a dozen acquisitions at this point.

The revenue, the current run rate is still less than 1% of our total revenue, so it's still a relatively small piece of our company.

But the opportunities that we believe it presents to us going down the road continue to excite us.

We're continuing to study it very closely.

We've made some great acquisitions, brought in some really good operators into the organization, and I would tell you that we're bullish on it going forward.

But again, you know, it's less than 1% of ongoing revenue, it will continue to grow at a rate faster than our other businesses, but on such a small base, it's not going to have a tremendous impact on the bottom line for the next year or so.

Okay, and then just the last thing.

I was a little bit surprised at how well the direct sale revenue held up on a seasonal basis, and if you say that you did really zero organically there and the whole thing is acquired, seems like it's about 9 million better than the February '03 quarter.

Is that all?

Was there one large acquisition of a uniform seller done in the past year, or has that sort of accumulated?

No.

Bruce, what's in that number is not only the national account sales division and our catalog direct sales but also first aid, the first aid division, and document management business.

So you have about 25% or so of that line are for the first aid and safety and document management businesses.

And that's where the bulk of the acquisitions were at.

We did not make any acquisitions in the uniform sales side.

Okay.

Thanks, Bill and Karen.

Next we have Brad Safalow with J.P. Morgan.

Hi.

Good afternoon.

I just wanted to ask a couple questions on the sales force hiring as you get towards, I guess, a double-digit percent year-over-year increase.

Can you talk about the productivity of some of your new hires and how we should think about the trend that you've seen in the overall new account growth?

Well, for the most -- generally speaking productivity is not up to full speed on a new account rep until about 9 to 12 months out.

So you may recall that we did hire a lot of new sales people at the beginning of this fiscal year, so they're just now coming into full swing in terms of productivity.

The new ones that we hired, obviously, won't kick in from a productivity standpoint until the third quarter of fiscal '05.

Okay.

So in terms of looking at the new account growth, are you guys, you know, setting a benchmark that you would return to a 14% growth level as you write new business is that something we should think about as we model the company?

Well, yeah, the new account growth is one major component of organic growth rate, and as Bill said it would actually ratchet back up closer to a 16% level and then taking from that would be a more normalized loss business of about 6%, price increases of 2%, and add/stops that would hopefully be at a positive 2% instead of clipping us by a percent and a half.

So all told, that would give us about a 14% organic growth rate.

Okay.

As far as just the overall trend declining sequentially and if you look at the level of growth year to date in fiscal '04 versus last year, you know, it has come down, I know there has been turnover, is there anything else to read into that within your customer base, has there been a shift in non programmer conversions or anything along those lines?

No, the new programmer conversions are still over 50%, running around 55%.

It strictly is bringing up this new group of sales people up to full productivity.

And probably, you know, a little bit of a negative impact from the economy, the weakness in the economy that still is hanging over us.

Okay.

Last question.

Just in general on the acquisition opportunities you've seen in uniform rental.

I assume you guys are still out there looking, the balance sheet obviously is in a very strong shape to pursue acquisitions.

What do you see out there in the acquisition environment?

Brad, we see increased interest on the part of sellers but there's nothing significant at this time.

Okay.

So going forward should we expect continued smaller acquisitions in the other -- that would impact the other services line item and stay tuned on the rental side?

I think that's probably a fairly assumption.

We never can predict when acquisitions are going to happen but we are still bullish on the opportunities down the road, in both the -- all segments of our business.

Great, I'll turn it over.

Thanks a lot.

Thanks, Brad.

Once again, as a reminder it is star 1 if you do have a question.

We'll move on to Greg Halter with LJR Great Lakes Review.

Hi, Bill and Karen.

Good afternoon for a change, I guess.

Hi Greg.

Regarding your capital spending plans what is your budget for the remainder of the year?

Well, we expect for the cap ex to fall in a range of 120 to $130 million.

We've spent year to date about $85 million.

We plan on completing about 7 new facilities this fiscal year and we'll probably have four to five in various stages of construction at May 31.

Okay.

Any early estimates for '05, fiscal '05?

We're not prepared to discuss '05 yet, Greg.

We're going to talk about that in our fourth quarter call in July.

Okay.

And regarding the -- that write-off you had in the first quarter, anything happen relative to the status with that?

No, there's -- we're still continuing to try to work through the various parties and we're still hopeful of maybe recovering some of it but we have not done any yet.

Okay.

So there's no recovery in your figures that were just put out.

No.

Okay.

All right.

Thank you.

We'll move on to Curt Moller with Dresdner RCM.

Good afternoon, ladies and gentlemen.

Hi, Curt.

One of the things you've talked about in the past is revenue that you did not get because people were not fluctuating the job as much.

The new employees at customers, is the change kind of fee.

Right.

How that had been negative toward revenue.

I was curious if that was still a negative in the February quarter or not and if so how much.

When we compare it back to last year it's basically about the same level, the total churn revenue, so really it does not add an impact either plus or minus on our top line at this point.

Okay.

Secondly, if we were to think about February of '04 quarter versus the year-ago quarter, and just kind of think about revenue on the rental business from uniforms, how would that compare over the year-ago time period?

Our uniform rental revenue still accounts for somewhere between 48 and 50% of our total revenue.

It's pretty consistent with the prior year.

Okay.

Finally, following up on an earlier question, over the past few years, SG&A as a percentage of revenues has increased, what kind of things, you know, would have to happen for that to decrease, and what kind of programs if any, are you working on in that area?

Well, I think the major reason it's increasing as a percent of sales is because of the much lower sales growth rate we've experienced over the last few years due to the economy.

So I think again as I mentioned earlier once you see us return to our expected double digit growth rates in revenue you're going to see SG&A as a percent of revenue fall.

And I think that's what -- that's what the impact will be.

So it's going to be basically the economy will drive it.

Right.

Other kind of -- you guys have been a very growth focused company and, of course, people are also paid on profitability incentives also.

Are there any kind of other programs to mitigate SG&A expense growth, by any chance?

All the time.

Yeah.

I don't want to discount that.

We're all under continued direction to lower our cost and our overhead type expenditures but the biggest component has been the payroll related type costs such as medical benefits and unemployment taxes, et cetera.

And we've got programs in place there but we also want to provide good benefits to our employees and we will continue to do that.

So, you know, we certainly are looking always for programs to help us keep costs under control and that will continue as long as I know I'm here and my boss is here.

Curt, you know, we do our best to try to introduce new automation in our facilities so that we can counteract what Bill's talking about.

For example, we have an initiative right now to test radio frequency chips, and I know you've heard us talk about that before, but on paper that -- RFID technology looks unbelievable, and we are testing that right now at one of our operations.

We're probably 12 to 18 months away from telling you whether it's going to in practice, give us the benefits that we see on paper.

But those kinds of things are going on all the time at Cintas in order to counteract some of these other increasing costs like medical costs where, as Bill said, we provide outstanding medical benefits for our partners and we want to continue to do so but we have an obligation to also increase the bottom line and we will do that through technology, automation, and other Six Sigma efforts to try to carve out costs in our company.

If we were to think about healthcare benefits and state unemployment tax and other kind of -- benefits that are non-cash to employees, and I were to estimate that's about 20% of wages and salaries, how accurate would I be?

You're probably pretty accurate.

Thank you very much.

I'll turn it over.

And as one final reminder, it is star 1 if you do have a question or comment today.

There are no further questions in our queue at this time.

I'll turn the conference back over to Mr. Gale for closing comments.

Thank you all again for joining us.

And we appreciate your continued interest in our company.

We're looking forward to hopefully an improving economy as we go forward and returning back to our double-digit revenue growth but as we've mentioned earlier we are pleased with the progress that we've made in our net income area and we owe that to our employees who continue to diligently work toward, you know, improving and continuing high levels of customer satisfaction.

We will be back with you in July to report our fourth quarter results.

And we'll look forward to speaking with you at that time.

And that does conclude today's conference call.

We do thank you for your participation.