信達思 (CTAS) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the Cintas third quarter 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, and thank you for delaying the start of your sport celebration and viewing the NCAA tournament to join us for our third quarter conference call.

We are please to announce increased sale and profits for the quarter end the.

Revenue grew at a rate of 8.4 percent to $755 million and net net income rose to 71.3 million an increase of 7.3 percent.

Earnings per share were 41 cents versus the 39 cents a year ago.

We are very encouraged by the increase in our rental revenue, which grew 7.35 percent on an organic basis when adjusted for the one less workday this year versus last year.

This 7.5 percent organic growth compares to an internal growth rate of 6 percent in our second quarter and 5.8 percent in the first quarter.

We have now shown organic growth improvement on a comparable workday basis in our rental business for seven consecutive quarters.

Other service revenues increased 15.9 percent or 5.7 percent on an organic basis adjusted for the one less workday.

We are very encouraged with the positive upward trend in organic rental growth that we have now experienced for almost two years.

Rental gross margins improved despite historically high energy costs.

This improvement came primarily from lower material costs and improved productivity with our route and plant facilities.

SG&A costs increased to 27 percent of revenue versus 26.5 percent for the third quarter last year.

On a percent-to-sale basis these costs were also impacted by the one less workday, but we also intentionally had an increase in selling expenses in order to improve our top-line growth in this improving economic environment.

G&A costs were also negatively impacted by approximately 20 basis points due to higher costs for providing medical benefits to our employees.

Also it is worth noting that our financial condition continues to strengthen with our debt as a percent of total capitalization falling to 18.5 percent from 21.8 percent last year and 34 percent at May 31, 2002 just after the acquisition of Omni Services.

Cash and marketable securities were approximately $370 million at the end of the third quarter compared to $250 million just a year ago.

Acquisitions will continue to be our primary focus to utilize this cash.

You should note that acquisition activity picked up in the most recent quarter, and we are expecting discussions to increase even further as the economy continues to strengthen.

As we indicated, we would do last quarter, we are able to narrow the guidance for our fiscal year ending May 31, 2005.

For the entire year we expect revenues to be in the range of $3 billion 50 million to $3 billion 70 million and earnings per share to be between $1.71 and $1.75.

We me today is Karen Carnahan, Cintas Vice press and Treasurer.

After some brief comments from Karen, we will open the call to questions.

The Privates 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 discussions on these points contained in our most recent filings with the SEC.

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

Thanks, Bill.

Good evening, everyone.

I'd like to take you through the income statement, the balance sheet, and the cash flow and some in some further detail.

First of all on the income statement total revenue were $755 million for the quarter and 8.4 percent increase over that reported in the prior year.

In this quarter we had 64 workdays compared to 65 in last year's third quarter.

One workday accounts for approximately $12 million in revenue on a comparable workday basis by adding in that additional $12 million, our growth would be 10 percent versus last year.

Rental revenues were 582.6 million compared to 547.5 million last year.

This was an increase of 6.4 percent over the third quarter of last fiscal year.

Again, one workday accounts for approximately 9 million in rental revenue.

Adjusting for this workday differential, our rental revenue would have increased by 8 percent.

Acquisitions that have been made over the past 12 months contributed approximately $3.4 million of rental revenue in the current quarter.

When subtracting out the acquired revenue and adjust for the work day differential, our organic growth for the third quarter was approximately 7.5 percent.

Now addressing the components of growth.

New business.

Our new business, which has been booked over the past four quarters contributed 13.6 percent growth in our top-line rental revenue this quarter versus the quarter a year ago.

This rate of growth has accelerated from that experience in the last six quarters when the rate approximated 13 percent.

We had built up our sales force by close to 11 percent compared to the prior year.

Many of you know in the past several months we have gone through a lot of changes in the sales force.

At the same time we were increasing the total force by double digit rates.

This had a negative impact on productivity until our people gained training, experience, and some success under their belts.

We are pleased with the productivity improvements and the positive momentum in new business.

Now addressing price increases.

Price increases to our existing customers contributed 1.5 percent in growth during the quarter.

Our ability to increase prices has strengthened recently.

Our contracts provide for annual price increases of the higher of CPI or 5 percent at the discretion of our managers.

And our customers are acknowledging the value proposition we bring to them.

Now I want to address the add-ons and stop orders.

Add-ons and stop orders, which is the measurement of business for all rental acts, both uniform and facility services.

This reduced for top line growth by approximately .3 percent.

This metric has been as high as negative 3 percent back in 2002 and has improved primarily as a result of our success in cross-selling additional rental products to our customers.

Add-ons exceeded stop orders for 6 out of 13 weeks this quarter, which is not as bullish as an indicator as what we saw in the first and second quarters, but it was not surprising due to seasonal and holiday factors that we deal with each year during the third quarter.

During the months of December and January, certain businesses cut production, and as a result stop orders usually do exceed add-ons.

However, the last five weeks of the quarter were positive.

Lost business over the past 12 months clipped our top line growth by about 7.3 percent.

So to reconcile our organic rental growth of 7.5 percent, new business added 13.6 percent, price increases added 1.5 percent, loss to business subtracted 7.3 percent, and the add/stops subtracted .3 percent.

I would remind you that all of these metrics reconcile the increase in rental revenue for the current quarter compared to the same quarter a year ago on a comparable workday basis.

The metrics capture the cumulative effect of all of the new business, lost business, price increases and add/stops over the past 12 months.

Now addressing other services revenue.

Other services revenue of 172.6 million increased 15.5 percent from last year.

On an organic same workday basis, this segment of our business grew 5.7 percent without the benefit of acquisitions.

This segment includes the sale of uniforms to national account customers, the sale of uniforms through or catalog to local customers primarily those who rent productses from us, the first aid and safety division, and the document management division.

First, our uniform sales business from our national accounts sales division and our catalog division in total increased a healthier 3.7 percent on an organic basis.

Last quarter we mentioned the rollout of new catalog in the national accounts sales division, and those catalog sales started to kick in this quarter.

In addition, we saw strength in the health care and gaming sectors.

The first aid and safety business grew more than 40 percent on a reported basis during the quarter and 8.5 percent on an organic same day basis year-over-year.

In this first aid and safety division, we have broadened or product line to include fire protection services.

This includes the inspection, repair, and recharging of portable portable fire extinguishers, fire suppression systems for restaurants and kitchens, and emergency and exit lights at companies.

The need for this service is driven by the national fire protection association standards, state laws and insurance company requirements.

As with all of our other services we are captailizing on our expertise on route oriented repeatable business services.

This business is very fragmented.

We have made and will continue to make acquisitions in order to build a critical size and market position in this business.

In a short period of time we are already the second largest fire protection services company in the United States and now have these capabilities in 15 cities.

Our document management business is building nicely and growing organically as well.

Recently we made a couple of small acquisitions in the document storage business, because it is a natural fit with our shredding business.

Storage and shredding complement each other because all the boxes in storage eventually are disposed of by shredding.

This quarter or organic growth in document management exceeded 30 percent.

The annual run rate on the document management business is around $40 million today, and we currently have 22 locations serving 57 of the largest 150 cities.

Over the next several years we expect to expand our coverage into many new markets.

Now I'd like to move on to address our margins.

Rental margins in the quarter were 45 percent.

This is a 40 basis point improvement over the prior year in spite of increased energy costs.

In total our electricity, fuel, and gas costs increased approximately 35 basis points as a percentage of revenue compared to the prior year.

In total, those three expenses accounted for 3 percent of our total revenue.

This cost pressure was more than offset, however, primarily through improvements in our material costs coupled with our ability to get higher prices from our customers.

All of these factors helped boost gross profit margins.

In the other services revenue segment our gross margin was a strong 35.4 percent, which was comparable to the third quarter last year.

This margin generally falls in the 30 to 35 percent range, but it does fluctuate from quarter to quarter due to the change in customer mix each quarter and the amount of sales volume in the particular quarter.

We are also seeing a favorable impact from the growth in our first aid and safety division and the document management business as well.

Our selling and administrative expenses were 27 percent of revenue or 50 basis points higher than last year's third quarter.

The third quarter is always a period where higher costs are incurred for payroll taxes and workers' compensation expenses as we enter a new calendar year and the taxable base of everyone's compensation starts over.

In addition, as we commented earlier, we have increased the size of our sales force by approximately 11 percent and increased our marketing ask sales promotions in order to accelerate our top-line growth, which can be see in the higher organic growth rates this quarter.

Medical costs also account for a portion of the selling and administrative expenses as Bill mentioned, but the sales costs primarily increase the increase in this line item.

Net interest costs were .6 percent of revenue comparable with the first and second quarter numbers.

Our effective tax rate was 37 percent for the quarter also comparable to last year.

For the quarter net income of 71.3 million increased 7 percent over last year's third quarter.

Earnings per share increased 5 percent to .41 cents per diluted share.

Now addressing the balance sheet.

The balance sheet continues to strengthen.

The current ratio stands at 3.1 to 1 compared to 3 to 1 last February.

Cash and marketable securities reached 368 million, a 48 percent increase from last February.

Day sales outstanding on accounts receivable reached 36 days, also comparable throughout the year.

Inventory levels increased 4 percent year-over-year.

We increased our stock for the rollout of a new catalog in our national accounts sales division, as I mentioned before, and in addition we are introduced a New Comfort Flex Pant in the rental division, which offers a more comfortable, flexible fabric and fit versus or previous work pant.

We're very excited about the competitive advantages of this new pant which is rolled out currently in our rental division.

Accrued liabilities on the balance sheet include an extra date of accrued compensation compared to last February based on on you our pay dates fell during the end of the quarter.

Our accruals at the end February also included the $55 million dividend payment that was paid this past Tuesday.

Our annual dividend of 32 cents per share increased 10 percent over that paid last year.

Now addressing the cash flow statement.

Operating cash flow of $92 million in the quarter reflects a build up of inventory as previously explained and tax payments which we make in the second half of our fiscal year.

Capital expenditures we $27 million for the quarter and we expect, total CapEx for the year to be, in the $130 to $140 million range.

So inconclusion we are on plan for the fiscal year and we're looking forward to continuing improvement in top line and bottom line growth for the remainder of the year.

Yes, ma'am.

Thank you.

To ask a question, please press the star key followed by the digit 1 on your touch-tone telephone.

If you're using a speaker phone, please be sure that your mute function is turned off to allow your signal to reach our equipment.

Once again, that's star 1 on your telephone, and we'll pause for just a moment to give everyone an opportunity to signal for questions.

We'll take our first question from Michelle Moran[ph], Merrill Lynch.

Please go ahead.

Good afternoon.

Couple questions.

I was wondering if you could update us on energy costs perhaps quantifying how much this represents now as a percentage of your total cost of revenues.

And then secondly, you mentioned in the press release that acquisition activity had picked up, and I was wondering if you could maybe quantify that a bit in terms of overall amounts that might be spent on acquisitions in the current quarter?

Thank you.

Michelle, on energy costs as Karen mentioned our energy costs for the quarter was approximately 3 percent of sales, representing about a 35 basis point increase from what we experienced in the same quarter last year.

Energy costs increased both with natural gas as well as in the gasoline and diesel to power or vehicles.

So that is a historical high for us.

I don't recall it ever being that high.

Typically it has run between 2 1/4 to 2 1/2 percent, although in the last couple quarters it was a little over 2 1/2.

As for acquisition activities, I think if you'll at the cash flow statement, you'll notice that we did increase acquisitions in the quarter, and it was approximately $48 million of expenditures on acquisitions.

Most of them occurred in the other service revenue categories of first aid and safety and document management, although we had some minor amounts as Karen mentioned in the uniform side.

As I indicated in my comments, I believe, as we see this economy starting to strengthen, as I predicted earlier, we would begin to see more interest on the part of sellers to discuss the potential sale of their businesses to Cintas not only in, you know, the rental business but also in the other areas that we're in.

I can tell you that there is a step up in activity in that area.

Nothing is eminent, but I believe that you will see more acquisitions going forward in the next 12 months, assuming the economy picks up that you saw in the prior 12 months.

Perfect.

Thank you.

We'll take our next question from Peter Karilo [ph], Smith Barney.

Please go ahead.

Hi, guys.

I have a couple questions for you.

First one SG&A, any idea what you expect to happen for the rest of the year, the calendar year?

Historically, Pete, the SG&A tends to come down in the next couple of quarters as a percent of revenue or in the next quarter.

But I would say for modeling purposes, you know, I would plan between 26 and 27 percent.

Okay.

We're going to continue to invest in the selling side of the business, because we believe that we are going to get some great results from that as the economy is improving.

Okay.

One on other quick one.

On intrest income, sort of is that going to continue in the range it is now?

It sort of came in a little higher than I was expecting.

Again, that is going to be dependent upon the usage of cash for planned acquisitions, but that will continue to go forward, Pete, I think pretty much comparable to this third quarter with the rates going up as they are.

In terms of new uniform, the new Flex Pants you're talking about, are these cheaper to manufacture?

Is it not just a new comfort and better pant but actually lower costs as well?

Actually we're going to manufacture them at comparable costs to what our sourcing was before.

We think this is a home run, but it is such a dramatic change, and we're getting such great feedback on it.

So we are pleased to be able to offer this new pant to our customers and still have no change in our cost structure.

Okay.

Great.

Thanks a lot.

Thank you.

We'll take our next question from Chris Gutek, Morgan Stanley.

Please go ahead.

Hi Chris

Hi Chris

Thanks.

Hi Bill and Karen.

Couple questions, you guy's have seen a nice pickup in the organic growth rate in the rental business obviously you have been putting alot more resources into the sales and marketing effort.

I'm kind of curious.

Are you seeing any changing in the competitive landscape.

Specifically I was surprised to hear on Airmark call just couple months ago that their uniform rental sales force head count was up 20 percent year-over-year.

They have been putting more focus on growth and I think G&K and Unifers to a lesser extent, are also focusing on growth..

Are you seeing that from your perspective out in the field in terms of rising competition, or is it not much a factor?

You know, I would say that we see different things in different local markets, but overall it's been about the same competitive landscape as we've seen for sometime.

We all are believers that the potential market size is three times the existing size.

That's why we're building our sales staff to go after that potential market.

Just for an example in the first six months of this fiscal year, 60 percent of our new business came from first-time users.

That's up compared to what we had seen in the last several quarters ranging anywhere from 52 to 55 percent.

So we're all participate not guilty that growth in the industry, and that's why we believe that we should continue to increase our sales forces to go after that.

Okay.

Looking at some of these new lines of business, storage business in particular, would you say that you're in the Beta testing stage for the storage business versus the shredding or is it full speed ahead for the storage as well as the shredding?

we're out of the BETA phase.

We're convinced this is a good business for us.

I think that we will approach it cautionly in terms of making sure we don't get over-extended, but we are very pleased with what we've seen so far.

We've made two acquisitions in the storage side.

We're going to look for some other acquisitions to get into some other markets, and we think it compliments the shredding business, which has been very successful for us very well.

So we're very pleased with what we've seen, and as Karen mentioned, we have a run rate of about $40 million and we'll continue to grow on that as we go forward with that both organically as well as acquisitions

Can you give us a sense for what the margins are roughly in document management business

They were very comparable if not better than our uniform rental side

Okay and then one more on the fire extinguisher opportunity.

You said you were number two in the market.

What roughly do you think is the size of the market there and can you give us some sense of the margins on that product as well?

Yes, the fire market is potential size of $2 1/2 billion.

Its very comparable to the potential sides of the first aid and state of the business, which we estimate at around 2 billion.

Now that division is going after $4 1/2 billion potential size.

Again we would tell you the margins are comparable if not better than the core uniform rental business.

Thank you.

Thank you Chris

We'll take our next question from Gary Bisbee Lehman Brothers.

Please go ahead.

Hi.

Thanks.

Couple questions.

Were there any -- it doesn't sound like it, but any anomalies that drove the 7 1/2 percent organic growth in the rental side?

Another way to ask it is do you believe this is a level you can maintain given the current economy or even expand from over the next couple quarters?

Gary, our hope is we will continue to show improvement in each quarter going forward until we get back up into our targeted goal of double digit growth.

Okay.

Given the preference for acquisitions rather than concerning share purchases or other uses of cash, can you give us a sense as to what maybe the factors keeping you from being more inquisitive at this point?

It's sellers being willing to sell.

I just don't think they're ready to sell yet, and it's not really a dry of price.

I think a lot of it they would rather sell on an uptick, and that's why I think we're beginning to see some increased level of interest.

Okay.

And then just to clarify on the increase within the SG&A line in selling expense, is this primarily just continuing to aggressively grow the head count, or is there anything else you're doing in terms of training differently or anything like that that you're spending on right now?

No.

It's primarily a headcount play.

We obviously continue to train our people and compensate them well, but there's no substantive change in those programs.

It's really just increasing the headcount.

You know, there might be some increase in some of the promotional activities and marketing activities, but it's primarily head count deal.

Okay.

And then if you're right and we continue to see acceleration in the organic growth and total revenue growth in the next years, is it reasonable to believe that the SG&A in general can come back towards maybe the 26 percent level?

Oh, yeah.

Yes.

It's reasonable to assume that going forward.

Okay.

Thanks a lot.

And we'll take our next question from Bradley Safalow, JP Morgan.

Please go ahead.

Hi.

Good afternoon.

Hi Brad

Just a question on the pricing.

It certainly came in a little better than our expectations it sounds like from your comments that things have really firmed up meaningfully in the last couple of months and it sounds like you're getting back to pricing on renewals that you saw historically kind of the CPI pace type of frame work.

Is that the case?

Is this something that's really improved over the course of this most recent quarter?

I think the environment that we're in is conducive to customers understanding the need for price increases.

I also think that many times they look at the value proposition and how much we charge on a per change basis and say "I understand" that we haven't given you price increases and it's very timely.

So with other cost pressures that they're facing, whether it be interest or energy costs, it's just an environment that is more conducive to getting price increases right now.

So looking forward this 1 1/2 percent you got this quarter, it's been trending at 1 percent for sometime now.

Should we expect that to continue to improve getting back towards something that's more reflective of CPI?

Do you still think it will be a lot more gradual?

I don't think it will ever get typically up to CPI, but I would expect, based on what we're seating, that price increases of 1 to 2 percent should be very feasible in going forward.

Okay. .

And then just on the -- there's been a lot of talk about your acquisition strategy.

Take it a step further.

It sounds like you want to put more than a toe hold in this document management business and make a bigger I imprint and expand your geographic presence.

I understand most people are familiar with the largest player in the industry, Iron Mountain and there's Recall and it falls off a cliff basically in terms of size.

Would you look at mostly local I players?

Would you like at making a larger acquisition in that space?

How do you plan to expand going forward?

You know, the way we would look at it, Brad, any acquisition if it would meet our long-term objective of enhancing our shareholder value, we would look at it.

I would say that realistically speaking we're looking at probably the local players, it is regional players primarily.

Okay.

Thanks for the feedback.

I'll turn it over.

thanks, Brad.

We'll take our next question from Jeff Burt, Robert W. Baird & Co., please go ahead.

Good afternoon guys

Hi Jeff

If we could focus on SG&A again for a second.

It sounds like the Delta is primarily from the head count can we expect that to continue and how many quarters what inning are we in, in terms of that .

You know, Jeff, that' s a very difficult thing for us to say, answer specifically.

You're trying to tie down to a particular number, and I do understand what you have to do.

But I would be hesitant to tell you -- be that precise.

What I will tell you is this.

We will continue to invest in our sales efforts as long as we continue to see results, and we're seeing those results.

Part of that is a factor of what our turnover rates are in the sales force, how quickly their productivity goes up.

We will continue to invest as long as we believe that there is an opportunity there to, you know, get back up into our double digit growth rates.

Can you give us a little bit more color on what type of return you are seeing in that investment in terms of productivity?

You sound encouraged, but can you put any quantification around there?

Yeah.

I won't give you a dollar amount of the productivity on a per-sale basis, per salesperson basis, but I would say that their productivity today is roughly about 85 percent of where we think they can achieve their goals.

We established those goals based upon past history and our productivity per salesperson.

So we're, you know, close, but we still have about 15 percent gap there.

Okay.

Pricing sounds like it's firming up pretty well in terms of existing customers.

Can you spend a couple seconds on new business pricing?

Kind of give us a road map there Where it is your overyear or versus the trough of a couple years ago.

It's roughly where it was about a year ago.

If you go back two years ago, it's roughly about 5 to 6 percent higher than where we were when we had our aggressive pricing strategy.

But year-over-year we're about comparable to new business prices for, again, new customers.

And with that being -- with that kind of flattening off, do you sense that be everybody seemingly adding feet on the street that there's some new pressure on the new pricing?

I haven't seen that.

Now, I'm sure there are some cases.

We could give you some anecdotal stories about that, but overall we've seen the increase in productivity, and they're able to get the prices and they're able to, you know, cultivate those prospects that we're giving them.

Last question.

On add-stops kind of scraping along the bottom here, can you give us more color on what is being driven by garments at this point versus the ancillary products?

In the third quarter looking at the number of people in uniform, it did decline, so the stop orders did exceed add-ons in existing accounts for those who wore uniforms.

However, I would remind you that that is not unusual for the third quarter with holiday and seasonal factors.

What we did see was the most dramatic -- it wasn't large decline -- was in the month of January, and then when we got into the month of February, the number was only 10 percent of what it was in January.

So a dramatic change or improvement month to month, but it's still all three months were slightly negative.

Okay.

Thanks for the color.

I appreciate it.

We'll take our next question from that Thatcher Thompson, CIBC World Markets.

Please go ahead.

Hi Thatcher

Hi Thatcher

Hi, Karen and Bill.

Two quick questions.

Client loss rate I think historically you would have been around a 5 percent level.

It's been trending down.

Can you tell whether you think you can get back there and how much is the environment and Omni working its way through the system?

Well, we've looked at that a lot that Thatcher, and Karen and I were talking about this this week.

In our opinion we can certainly improve from where we're at.

We're not so sure we can get back down to 5 percent, and here's the reason why.

We think that as we have expanded our offerings in the rental business to more than just uniforms but into these facilities services, products, hygiene services, dust products, et cetera, that we may find there's a little bit more loss in those categories of customers perhaps than there was necessarily in uniforms.

So our expectations are that our lost business rate will probably get back into the 5 to 6 percent level and depending on the mix of customers, you know, it may be closer to 6 as we continue to expand in the facility services area.

Okay.

Then with regard to the price increases, do you make these increases once a year on a client?

That's the primary thing, but, however, there are other opportunities that we'll have with a customer for certain products that are in the contract that we could allow for a price increase, you know, within the year.

But it's primarily driven by the annual anniversary date of the contract.

And so when did the -- this is a bigger price increase than we've seen in a long time.

When did it start?

Will we expect to see the revenue impact grow from price increases as we move through the next 12 months?

We've seen success in getting price increases throughout this fiscal year starting back to June 1, so knowing that those metrics we give you is a measurement over the last 12 months, that's why you're just now seeing a pop to from going from 1 to 1 1/2 percent.

All right.

Thank you.

You're welcome.

We'll take our next question from Brandt Sakakeeny , Deutsche Banc Securities.

Please go ahead.

Thanks.

Hi Karen and Bill.

Couple questions for you.

Karen when you were TAKing about the gap in the sales for productivity did that include both rental and other services or is there gap smaller or larger in one of the two segments?

That's the measurement for all of the rental sales people, whether they're selling the uniform rental programs or the facility services programs.

Okay.

And any additional color?

Are you finding productivity in one area better than the other?

Boy, you know, I don't know the answer to your question right off the top of my head.

I did not look at the detail of that between those two groups.

Okay.

That's fine.

Housekeeping item.

Did you say 140 million in CapEx expectations for '05?

We gave a range of 130 to 140.

Okay.

And then on your other income line interest and investment income, was there anything there out of the ordinary that might have inflated that number?

No, no.

Nothing unusual.

Perfect.

Thanks.

And we'll take our next question from John Heely, FTN Midwest securities.

Please go ahead.

Hi there.

Most of my questions have been answered, but I was hoping to get a little bit of color if you guys can provide some on how the month of March has started off for you guys?

Repeat that again for me John I'm sorry.

Most of my questions have been answered, but I was hoping to get a little color on how the month of March has started off for you guys

Oh Okay the month of March.

You know it is so early to tell.

We've concentrated so much on analyzing the first quarter we don't have a good feel or nor would it probably be indicative of the fourth quarter even if we could give you some color on March.

Sorry about that.

Okay.

Thank you.

Once again, as a reminder, if you would like to ask a question or if you have a follow-up question, please press the star key followed by the digit 1.

We'll take our next question from Greg Holter, LJR Great Lakes Review.

Please go ahead.

Good afternoon, guys.

Hi, Greg.

Last call I think you had mentioned that CapEx could be as high as 150 and now I think the number is between 130 and 140.

What has changed in the last quarter?

You know, Greg, we have fine-tuned that number only because we know when we're coming into the fourth quarter of a fiscal year the culture of this company is everybody starts tightening their belts and the CapEx in the fourth quarter will reflect that.

So knowing the CapEx for the third quarter came down approximately 10 million from compared to the first and second, we're just kind of annualizing that with the exception that will come in a little bit lower than what we originally gave you.

Any early figure for fiscal '06 at this point?

No.

We're going to talk about '06 in the July call, because we really have not even started our annual budgeting process, and that will begin now once we get through this earnings release.

Then we'll start focusing on that, so that's why we'll talk about it in July.

Okay, And was there a small reclass of items between categories in the inventory?

Yes, there was.

We did -- it was a small reclassification for one of our new business divisions, and I believe it was in the first aid and safety division.

In your interest suspension it was higher than we thought, and I believe it may be fixed, but you have swaps.

Can you delve into that a little bit further?

Yes.

We do have 50 percent of our debt from the Omni acquisition swapped into variable rate debt.

So $225 million today is floating based upon LIBOR [ph]

Okay.

And rates have gone up some?

Yes, sir they have, about 50 basis points.

Okay and your interest expense is higher for that reason?

That's correct.

Okay and those end I think in '07?

That's correct.

We swapped in the first parts of June in '07.

Thank you.

We'll see you next week.

Thanks, Greg.

We'll take a follow-up question from Jeff Burt Robert W. Baird & Co.. please go ahead.

Guys just a quick follow-up on the CapEx question.

Did you cut any programs?

I think last quarter you talked about seven new plants that you were planning.

Is that still the target?

That is still on target, and Jeff, those are in progress and will be opened according to schedule.

Then switching gears to the guidance, the top-end of the EPS guidance came down by 5 cents, and just stepping back a second, it looks like that's about 14 million in pretax income.

If you could, give us a 30,000 foot view of what's changed over the past nine months that would make you think that the income run rate is $40 million less.

Obviously the top line came down some what too and the pull from that will be less.

Jeff, as we have done or we adopted this a couple years ago.

We provide -- we provided everyone annual guidance in July, and then basically we don't attempt to update it until this point of time.

So our guidance had been $1.70 to $1.80.

As we gained through the year, we saw that our revenue was not going to be at the upper end of our guidance.

The cost pressures that we're seeing, especially in energy and medical costs and then some of the additional selling expense that we consciously have decided to spend has essentially driven the P&L to be basically in the lower half of the original guidance range.

It's it's all very logical based on the performance to date coupled with some of the things that we've seen.

Would you say that you are spending more on the sales side than you thought you were going to just on seeing better trends?

I don't think it's substantially more, but it's somewhat more.

Okay.

Thanks.

We'll take a follow-up question from Chris Gutek, Morgan Stanley.

Please go ahead.

Thanks.

Two quick follow-ups.

Regarding first the garment amortization expense, I think this is something you mentioned in the last couple of conference calls with the garment expense spending favorably, I I know you don't typically break it out explicitly could you give us just a rough sense as to where that garment cost is as Percent to the rental revenue and whats driving it down and where you see that trending going forward?

Without going into the exact percent of revenue, it did come down about 40 basis points from last year, and it's a result of having the ability to get some price increases, which obviously helps the margin.

It also is utilizing more uniforms out of the stock room, and then it also is just the fact that as you -- we continue to write a lot of this new business and we get -- build upon that base each and every quarter, we start to get some improvement in margins from the material costs standpoint.

Not to push you too much on this Karen, but looking forward over the next year or two certainly as you bring on more brand-new customers that would tend to be negative for the garment amortization but if you sell new uniforms to existing customers that is certainly a big benefit.

Do you see this garment amortization increasing or decreasing going forward

That's a tough one.

Pull out a crystal ball.

As you said, certainly assist -- if employment continues to do well and recover and our existing customers add-on employees, those, as you mentioned, do get existing uniforms that are our stock room that are almost fully amortized.

This does help to offset the pressure of investing in new garments for new customers.

So without knowing how that mix turns out, that's a hard one to predict for you, Chris, but certainly in this quarter it did help our margins.

Finally, I don't think you quantified the year-to-year impact on gross or operating margins for all the labor costs, health care and workers' comp and state unemployment payroll insurance.

Is it possible to quantify it

The health care is about 20 basis points and on the payroll taxes it's about a 70 basis point increase from the second quarter but but 10 basis points compared to the prior year.

And then workers' comp

Workers comp is 20 basis points sequential and comparable to the prior year

Thanks.

Great, Karen

You're welcome.

as a reminder if you would like to ask a question at this time please press the star key followed bythe digit 1.

We'll pause for just a moment to give everyone an opportunity to signal for question.

At this time it apprears we have no further questions.

Mr. Gale, I would like too turn the conference back over to you for any additional or closing remarks.

Again, thank you all for participating in today's call, and we know there was a lot of competing events, so we do appreciate your interest in Cintas.

We would be announcing our fourth quarter earnings in mid-July, and we'll let you know the first part of July the exact date of those.

So thanks again, and hope everyone has a happy St. Patrick's Day.

That does conclude today's presentation.

We thank you for your participation, and you may disconnect at this time.