信達思 (CTAS) 2006 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 joining us to discuss our third quarter results.

We are very pleased to announce increased sales and profits for the quarter ending February 28, 2006.

Revenue grew at a rate of 10.7% to $836 million; the third quarter in a row of double-digit revenue growth.

Net income rose to $77.7 million, an increase of 9% over the third quarter last year.

Earnings per share were $0.46 versus the $0.41 a year go, a 12.2% increase.

Energy costs continue to remain at levels never before seen at Cintas.

In fact, during the quarter energy costs as a percent of revenue reached 3.75%, compared to 2.98% for the third quarter last year, and 3.49% for the second quarter of this year.

We expect the moderation of natural gas costs will help this metric in coming quarters, however; energy prices continue to be very volatile, and will have a bearing on our results into the future.

We continue to pursue the recovery of business interruption claims associated with the hurricanes last fall.

At this point we have not offset any losses associated with the hurricanes' damage to our business in the Gulf Coast areas, especially those impacted by Hurricane Katrina.

We hope to resolve these amounts with our insurer in the next few months, but we are uncertain at this time as to the amount and the timing.

Our financial condition continues to remain strong.

At February 28, net debt to cap was 15%, despite the expenditure of over $300 million for acquisitions this year, and the repurchase of approximately $115 million of our stock so far in fiscal 2006.

Earlier this week the Company also paid its annual dividend of $0.35 per share, a 9.4% increase over the dividend paid last year.

As mentioned in the release, we are narrowing guidance for the year.

For the entire year we expect revenues to be in the range of $3.38 billion to $3.42 billion, and earnings per share to be between $1.92 and $1.96.

With me today is Karen Carnahan, Cintas' Vice President of Corporate Development, and Mike Thompson, Cintas' newly appointed 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 the call over to Karen and Mike.

As Bill mentioned, Mike Thompson and I are going to tag team on explaining the financial statements this evening.

Let me begin with the revenue reported for the third quarter.

Total revenues were 836.4 million for the quarter, a 10.7% increase over that reported in the prior year.

In this quarter we had 64 workdays, the same number of workdays as the third quarter of fiscal 2005, but one less workday on a sequential basis from the second quarter of this fiscal year.

As a reminder, our fourth quarter has 66 workdays, which is the same number of workdays as the fourth quarter of fiscal 2005.

Total organic growth for the Company was 8% over the previous third quarter of last year.

Rental revenues were 631.3 million, an increase of 8.4% compared to 582.6 million last year.

Organic growth for this segment of our business was 7.5% this quarter.

Approximately 60% of our rental revenue represents uniform rentals and the remaining 40% is from primarily facility services, which is the rental of entrance mats and other mat products, restaurant supply services, including their fresheners, hand soaps, paper towels and other hygiene products.

We're constantly expanding our product line to accommodate our customers' needs.

Today we are announcing an expansion of our facility services to include a complete restroom cleaning service, which we started testing about one year ago.

Although we're still in the initial stages of building this new business service, we are extremely pleased with the success and positive customer feedback we are experiencing.

We are branding our restroom services under the name, Sanis by Cintas.

And this particular restroom cleaning service is named Sanis Ultra Clean.

This is a great growth opportunity for us.

This service is already rolled out across the country and growing nicely.

To explain the service a bit further we use a pressure washing system to spray all the surfaces in a restroom with a solution that kills bacteria and sanitizes the restroom.

Then we do a pressure rinse followed by vacuuming the water off the floor and the other surfaces.

Our Ultra Clean routes will also perform the other comprehensive restroom supply services, such as restocking paper towels, replenishing hand soaps or updating the air fresheners in the restrooms.

Customers are outsourcing their entire restroom supply and cleaning services to us.

The continued growth and success we are experiencing in this restroom cleaning service caused us to reevaluate the continued reporting of detailed metrics of organic growth in terms of new business, lost business, add/stops and price increases.

For example, as we rolled out the Sanis Ultra Clean restroom cleaning service, given the fact that it is an entirely new service, we would characterize this as new business, even if it is offered to an existing customer.

However, some may think it should be called an add-on to an existing account.

Our customers initially contract with us to clean their restrooms, usually on a weekly basis.

And as I mentioned, we would define as new business.

However, as we build his new service and fine tune it along the way, some customers may decide to change the frequency of the cleaning service to every other week.

This is not lost business per se, nor does it fall into our definition of a stop order.

So neither of these metrics capture this change in the frequency of performing the cleaning service.

This dilemma caused us to look at all the organic growth metrics.

In fact, as we have accelerated the cross-selling of all our business services across division lines, we're finding that many times our increased business from an existing customer should be categorized as new business, while at other times it should be categorized as an add-on.

For example, many times one of our sales reps will call on an existing facility services customer in order to convince them to put their people into uniform for the first time.

Our operating people would view this as new business, whereas a service sales representative, who convinces the customer to add any additional services to an account that he or she is servicing, would view the increased business as add-on.

The bottom line is that we get increased revenue from companies, but the clear distinction of new business versus add-ons, or for that matter, lost business versus stop orders, is not as square cut anymore as we evolve into a broader-based business service company.

We are also concerned about comparability of our statistics to our competitors.

Chances are that we all have different definitions for these measurements, which makes comparisons irrelevant.

Due to the fact that the measurements of these activities have become less than scientific, we believe it is prudent to focus on total organic growth for our two business segments from this point forward.

As I mentioned earlier, rental revenue increased 7.5% on an organic basis.

This rate declined slightly from our second quarter results, but still healthy in light of a shorter 64 workday quarter due to holidays, and tough comparisons to our performance in the third quarter of fiscal 2005.

Last year our organic growth jumped 150 basis points in the third quarter.

So we are pleased with our ability to grow at a healthy -- at a continued healthy rate on top of that strong performance last year.

We have not fully recovered from the hurricane disruption in our Gulf Coast operations; however, we are pleased to report that except for our New Orleans operation, which is still operating around 65% of its prehurricane sales level, all other Gulf Coast operations have replaced most of their lost business.

In our national account sales division, there are a few Gulf Coast customers who are still in the rebuilding stage, and have postponed their uniform programs, which we expect will come through in fiscal 2007.

Our other services revenue of 205 million grew 18.8% over the third quarter of last fiscal year.

This segment includes the sale of uniforms, primarily to national account customers, as well as local and regional hotels, casinos and other high-profile businesses.

In addition, this segment includes our first aid, safety and fire protection services, and document storage and shredding businesses.

The latter two divisions are primarily growing through acquisitions, as we accomplish our goal of having a nationwide presence in all these other business services.

In total, the other services segment grew 9.5% organically, and all three divisions of that group, the uniform sales, the first-aid and fire, and the document management services are contributing to that strong organic growth rate.

The uniform sales business continues to grow nicely, as our hospitality customers have rebounded post 9/11.

We consistently win awards for our unique uniform design, and we believe we have several award winners again this year, especially for some of the new casino uniform designs.

Our first-aid and fire protection services, as well as our document management services, continue to build momentum through a combination of acquired and organic growth, which will continue to be our growth strategy until we have established that national presence in both businesses.

As I mentioned, all three groups are growing organically, and contributed to the 9.5% organic growth rate for this segment.

Now I'm going to turn it over to Mike to explain our margins further.

First, our rental margins were 44.5% of revenue, a slight decline from last year's 45% margin.

This spike in energy cost continues to turn our margins.

Energy cost increased 80 basis points as a percentage of sales versus the prior year.

This cost us $0.02 per share in the quarter.

The gross margin in our other services revenue was 35.3% of revenue, an 80 basis point improvement for the third quarter of last year.

We continue to see a favorable impact on our margins from the improved topline growth in our national account sales division, as well as the contribution from the higher margins in our first-aid, safety and fire services and our document management services.

Our selling and administrative expenses were 26.7% of revenue, or 30 basis points lower than last year's third quarter.

On a sequential basis, SG&A only increased by 40 basis points compared to last year's third quarter increase of 130 basis points.

This is a meaningful improvement in light of our third quarter bearing the brunt of higher payroll costs when Social Security taxes and unemployment taxes reset for the calendar year.

The improvement in our SG&A costs reflects the leverage of higher sales levels in all divisions.

Operating margins were 15.6% comparable to last year.

As I mentioned earlier, without the higher energy cost, our operating margins would have increased 0.8%.

We would contribute this to productivity improvements from Six Sigma, material cost expense reductions from sourcing efficiencies, and leveraging our G&A expenses through higher sales levels in all divisions.

Interest expense increased 11% to $7.2 million, which reflects the increased interest from financing the purchase of Van Dyne Crotty's assets.

We borrowed $173 million at commercial paper rates of approximately 4.6%.

Our effective tax rate is 37.3% on a year-to-date basis.

As we indicated in previous calls, we anticipated an increase in this year's rates due to state tax increases.

We expect this rate to remain constant for the remainder of this fiscal year.

Net income increased 9%, with EPS increasing 12% as a result of the lower outstanding shares due to the share buyback program.

Moving on to our balance sheet and cash flow.

Our balance sheet is strong.

Cash and marketable securities stood at $251 million at February 28.

Accounts receivable DSOs remained at 38 days compared to 39 days in the second quarter.

Bad debt reserves stood at 16.8 million, or 5% of our AR balances, which is a higher level than our May 31st reserves when DSOs stood at 36 days.

We believe our operations will continue to work down our receivable balances by year end.

Inventory levels are in good shape, and we have pared back levels by 4% since May 31 through sourcing efficiencies and product consolidation.

From a debt standpoint, as I mentioned earlier, we borrowed 173 million in connection with the Van Dyne Crotty acquisition.

Federal debt to cap stood at 22.6% as of February 28.

Accrued liabilities were up 50 million from May 31, which reflects the declaration of our annual dividend, which was paid out earlier this week.

Operating cash flow was up 8% on a year-to-date basis.

CapEx is up slightly for the year, approximately 1%.

We have two uniform rental operations under construction at the present time, and six facilities in the design phase.

With the acquisition of Van Dyne Crotty we have added 12 processing plants and eight branches.

However, it is premature to comment about rationalizing capacity and consolidation of facilities.

We may be able to comment on that further on our next conference call scheduled for July.

We expect CapEx for the fiscal year to be in the range of 130 to $140 million.

We would now like to open the call to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Kartik Mehta with FTN Midwest Research.

I am curious, Bill, I realize you don't want to give some of the metrics that you used to do in the past, but maybe to wean us off a little bit slower, could you talk about directionally how they did, maybe what improved, or what stayed the same, and what deteriorated?

I appreciate your need or your desire to have that information, but we debated this long and hard.

And due, in fact, to many of the issues that Karen raised in her comments, we are going to just adopt the reporting from this point forward on the organic growth rate for each of the reported segments that we have.

So we're not going to be able to provide any information on those metrics at this time.

If we move to pricing, I know you have placed surcharges in place because of what has happened in energy costs.

Have you increased those surcharges, or is it about the same?

And as you look at the pricing in this industry, is this something if the energy costs do stabilize, do you think the pricing has to come down, or is there an opportunity to get the annual prices as used in the past?

First off, let me clarify.

We do not put surcharges.

We have not done that on our business.

What we have is though we have been utilized the provisions within our contracts to provide for the price increases on the anniversary dates of those contracts.

Since those are driven by either the CPI or a 5% factor basically at our manager's discretion, we have just followed those contractual terms.

Now as we have mentioned on numerous occasions, what often will happen is that a customer will be asked in the third, fourth, fifth year of those contracts to enter -- to renew that contract for another five years.

At that time we may forego the price increase.

Or conversely, we may go to a customer sometime in the contract and convince them to add another department of uniform wearers or add more facility services product.

And perhaps then at that time we may change the pricing, or forego the price increase that we will be contractually allowed to do, in return for additional business.

These are other factors that have caused the metrics to basically been I think misinterpreted by the investing community.

And as a result, I really can't even give you that information, because I don't think it is really clear as to what is happening.

Suffice it to say, that the Company is taking its contractual terms into consideration in light of additional price or cost increases, and where appropriate we are increasing the prices for our business.

One last question.

The Van Dyne Crotty acquisition, can you talk about if it will be over the next 12 months accretive or dilutive?

And if you could also talk about maybe how much overlap you have in terms of customers and facilities?

We are very excited about the Van Dyne Crotty acquisition.

It is tremendous company that we have acquired.

We're very impressed with the way that company operated, with the people that worked there.

We hope to attract the vast majority of those partners to become Cintas partners.

The overlap is basically fairly consistent with -- their footprint is fairly consistent in the Midwest with our footprint.

And they go down into Florida.

In almost every city where they have an operation, we have an operation or a branch, or vice versa.

So what we're going to be able to do is do a lot of consolidation of operations between their facilities and our facilities.

They're going to provide us with capacity that we needed, and thus will enable us to avoid building new plants.

We expect the acquisition to be mildly accretive over the next 12 months.

For the results for this fiscal year there will not be much of an impact because of the duplication of costs and the effort we're going through in consolidation process.

But it will be accretive in the first 12 months of the consolidation.

Michael Snyder, Robert W. Baird.

I am wondering if you could give us the first, just operating income by segment, if you have it this quarter?

Yes, I do.

The operating income for the rental segment was 109,523,000.

Other services group was 20,178,000.

Can you give us, as you did in pricing, Bill, can you give us any color commentary on the status of the employment economy, just basically headcount and where you sense we are?

Is business actually sequentially improving as you discussed about the month of November?

I don't know if I can specifically answer your question with regard to the employment.

We continue to see growth in all of our business areas.

Things continue to improve.

The third quarter for us is always kind of a little bit of a toss up with holidays and weather and that sort of thing.

But generally I would say all of our businesses are healthy.

We are still very optimistic that we have a lot of growth left in all of these areas into the future.

And the trends are good.

What is the penetration rate today of these other services into your uniform accounts?

Again, the vary significantly, depending on how long we have been doing these services.

For example, the longest additional service that we would provide to like a uniform customer would be the entrance mats.

And I think we have an incident rate of somewhere near 60% where our customer -- our uniform customers are renting at least one entrance mat.

I have always contended that there probably are ten more entrance mats that many customers could buy, so we just are measuring if there is an entrance mat and there are not.

It goes as low as -- in this newest service that we just rolled out that we're talking about for the first time today publicly, the incident rate of this Ultra Clean service is probably less than 4 or 5%.

It really varies depending on how long we have been involved with it.

One of the exciting things that we are seeing is as we have broadened out to more business services, the opportunities are really starting to present themselves now for cross-selling first-aid and safety products with shredding customers; shredding business with uniform customers; facility services business with first-aid customers.

And so this is one of the strategies that we have going forward is how do we effectively utilize all of these salesforces and all these customer relationships to take advantage of broadening our offering and what we're providing to these customers.

It begs the question about the salesforce then.

If you look at, for example, Iron Mountain they have gone through different phases and are now going to a unified salesforce.

Is that the ultimate, I guess, structure that is coming for Cintas where you meld all these salesforces together?

I don't think we have made the decision yet.

I am not familiar with what Iron Mountain has really done.

But one of the things that we are doing is that we are educating our salespeople to be a far more effective representative for all of Cintas' businesses.

Now will that ultimately result into a unified salesforce, I can't say right now.

But I can tell you that there will be far more sharing and collaboration among the different sales groups than there have in the past, because in order for us to take advantage of these things.

On the guidance, just finally, the reduction I guess at the low end of the guidance by a penny, suggests that even the midpoint did move down a bit.

Is that primarily because you backed out the hurricane settlements, or is there some message to be read in there about the status of the business?

No, it is basically two things.

I think Scott alluded to this in his comments.

It really is more or less the hurricane settlements and the energy costs that caused us to probably take a little bit more conservative view at the low end.

But why is energy a reduction?

Natural gas has come down dramatically since you last talked to the Street.

Why would that be an incremental negative when natural gas has actually improved?

It may have improved on the futures market, but we are not seeing a significant improvement in our operations yet.

As we look at it, there tends to be quite a lag effect as the utilities pass through those cost reductions in natural gas.

You've got to be very careful that you just don't -- one doesn't read the headlines and assume automatically that $13 gas is now $7 gas, so it is going to flow right through to us.

What we find is that many of utilities have anywhere up to a 30 to 90 day lag as they pass through those cost reductions.

That is one issue that we are seeing.

Gasoline and diesel prices continue to ratchet up and down all over the place.

Right now, right here in Cincinnati, they are running $2.50 a gallon again.

And there is talk of being close up to $3 again.

We're taking a view -- we don't want to disappoint the Street.

We have looked at what the impact of energy has and what we can do to offset that through price increases and other things.

But we thought it was prudent to at least put in the low end of the range now at $1.92.

And then on revenue, I presume it looks like about 120 million annualized increase in the revenue.

Is that just VDC at this point?

Absolutely not.

The VDC number, we're not able to talk about the exact revenue dollars yet.

But the indications of 100 to $120 million are overstated as far as what VDC is going to contribute.

Michael Moore with Merrill Lynch.

Two questions.

First on the SG&A line you pointed out there is some good cost control there.

In fact, in absolute dollar numbers it looks like it has been kind of flattish for three quarters now.

But organic growth is also kind of plateaued on the rental side.

So I'm wondering are you still expanding the salesforces overall?

And I know that you have not usually given numbers, but if you can give us some sense of whether or not you are, and how that has progressed.

And then secondly, on the Sanis Ultra Clean, I am wondering if you can expend a bit on that.

Are you basically hiring -- is this the same person -- basically the same account representative who would normally serve the client who's doing this work, or are you hiring janitors basically to perform this service?

I guess a related question to that would be is it the same truck?

Thank you.

Let me answer the latter question first.

Sanis Ultra Clean is -- we're not hiring janitors.

These are services sales representatives who have been given the opportunity to work in this particular business because of the opportunity that will provide them to sell additional products and services, not just the restroom cleaning aspect, but the actual other facility services products and services.

I have been on these routes, and this is not a process that you would think of in cleaning a restroom.

We have come up with a piece of equipment that is very technically advanced that enables an SSR to clean these restrooms without having to touch them themselves because of the nature of this equipment.

It is a very efficient piece of equipment.

It does an outstanding job.

It is something that is able to be done without really any of the negative aspects you might associate with that.

We have actually been very successful in attracting relatively high-quality people within our organization.

And that is typically what we're doing, is we are transferring people from other parts of our Company to take on this role.

The truck is -- we're not putting it on the uniform truck.

The piece of equipment is something that takes up a little bit of room on the truck and needs a special ramp to load it and unload it.

What we have done is we have come up with an alternative truck that also carries a lot of facility services products.

As we focus on selling this business, we're focusing on customers that we currently either have business with or a good potential for this thing.

And then this leads us to sell -- to expand our customer base often, and to sell other products along with it.

We're keeping a very tight route structure so that we can make these people's jobs very efficient and we can get a lot done with it.

With regard to your first question, we continue to expand the salesforce.

We are expanding it at a rate necessary in order to achieve our growth rate.

The flattening, as you mentioned, of the rental organic growth in the quarter is nothing that we're concerned about.

There always is a little bit of volatility caused by the third quarter.

And we're very optimistic as we go forward that you will continue to see that organic growth rate ramp up.

[Pete Carillo] with Citigroup.

A couple of questions for you.

Karen, I guess you are in a new role here.

Congratulations on your move by the way.

Thank you.

A question for you in the new role that you are seeing over there.

Are you starting to see any kind of competition from the private equity people out there changing evaluations, or how easy it is to acquire some of the companies you are going to acquire?

Again, I've only been in the job for about 30 days.

What I would tell you is I am more bullish and excited about the opportunities for acquisitions in all of our business services than I have ever been before.

As far as commencing about competition, we see a couple of private equity firms getting into some of these areas; however, we are so disciplined in the amount of money that we pay for these deals -- we do a lot of due diligence, a lot of analytical work.

We take our time in making sure that we're paying the right amount and getting the right business, and kind of have ignored those other entrants in that space.

To be honest with you, I don't see a lot of private equity firms yet.

One of the things to keep in mind that private equity firms will have a difficult time achieving anywhere close to the synergies that we can do because of the infrastructure we already have in place.

And as a result of that, they'll just never be it was to get near the returns that we can get.

I guess I was thinking is -- you are right -- I guess initially you're right.

But if they really decided they wanted to be in this business they could start doing it -- with all the money being raised, they could start doing it pretty quickly around the country.

Not that they want to compete with you directly as a business, but they certainly could buy up (technical difficulty) if they could find them.

You've got to keep in mind, the thing that they would have great difficulty doing is the sourcing of product.

We have an extensive sourcing process now.

You would be astounded at the price differentials that we can get with the sourcing that we do versus what our competitors can get from a vendor who is providing that type of product.

I am not saying -- I'm not discounting that private equity firms wouldn't get involved here, I'm just saying that there are significant barriers to entry that I think they would probably go after other types of businesses before they would come after ours.

Okay.

On document management just can you give us a little bit of color on how that went this last quarter, and what you see these days?

Is it the same as before, are you're still growing it aggressively?

Any update on how many you've done in the last quarter or so?

I don't have a number on the number of deals that we have done, but we continue to be aggressive in making acquisitions in that space.

The organic growth approached 40% again this particular quarter.

And with acquisitions we have doubled the size of that division in the last 12 months.

I believe that recycled paper prices actually came down almost 10% over the last several months.

Has that affected you at all?

Yes, by a certain extent.

But again, we are seeing so much organic growth opportunities out there that we're able to offset that to some extent.

One quick last one.

This new Sanis Ultra Clean product, I sense an excitement talking to a couple of your drivers here and there at one point several months back.

Is it actually -- how does the profitability of that thing look versus say document management, or just versus the corporate average?

Well, the profitability of the Ultra Clean business is very comparable to the overall rental business.

And we do have some startup costs in there, and we're trying to get our route volumes to a level that will make it even more profitable.

But we're very pleased with the profit margin contribution so far.

I guess when Bill was describing it, the guy is not actually getting involved in it.

Can you just give us -- is it a machine that sort of runs itself; you shut the door and let it drip clean? (multiple speakers).

Are you standing in there with it?

You are in there with it.

I think we are all sitting here curious as to how does this thing works.

Well, I will have to show it to you some time.

In fact, I think next week at Investors Day we're going to be demonstrating that so that people can see it.

Are you going to do it yourself, Bill?

I could.

I could if you want me to, Pete.

I would like to see that.

All right.

We know what size uniform you wear, so you are really -- you're going to demonstrate it for everyone.

I know.

I've got a couple of them.

Thanks a lot.

Michael Fox with JP Morgan.

Could you talk about the services and how much overlap there is with Van Dyne Crotty?

And if their penetration rates are similar to yours, or if that is a revenue opportunity for you?

It is a significant revenue opportunity for us.

Van Dyne Crotty did -- pretty much was a Cintas back about twelve years ago, in terms of the product offerings.

They have a lot of uniforms and some minor amount of entrance mat business.

They had a few first-aid and safety operations that were totally separated from their uniform rental operation.

So we believe that we have a much broader offering, both in all our business as well as additional products and services in other businesses, that will lead us to increase the revenue with their customers over time fairly significantly.

I don't know if you can talk about this at all, but on the margin side can you talk about the profitability levels of Van Dyne Crotty compared to you guys?

Van Dyne Crotty was a very well-run company, but we're finding that with the purchasing power that we have, with the ability to consolidate overhead type items together that we're going to be able to improve their margins fairly quickly up to our level.

One last final one.

Good you talk about the trend during the quarter in organic growth, whether it was accelerating or stayed about the same, or any color that you can give will be great?

We really can't offer up anything there because it is a very difficult measure on a month-to-month or we two-week basis.

Again, we really look at it and really audit it more on a quarterly basis, because that is the number that we know everybody will be looking at as we report it.

Thanks.

Thanks a lot.

I appreciate it.

And, Karen, congratulations on the new position.

Thank you, Mike.

Gary Bisbee with Lehman Brothers.

A couple of questions.

Did you consider breaking out these nonuniform businesses as a separate segment as opposed to just giving us two numbers?

It seems to me that might have been the better solution than not giving the number.

Obviously, the fear that we all have is that you're doing this to hide something.

And after two years of accelerating organic growth, now we've got a third quarter with basically the same.

I think that conspiracy theory, whether it is true or not, is certainly going to ripple through the markets, and probably your stock price tomorrow.

So I just wondered how -- give us more color on how you decided to just collapse all of the organic growth?

We always fight the dilemma that the competition is constantly watching everything we do; is looking at all of our numbers; are listening to these calls.

We have a very difficult time staying ahead of them because of the need to the offer up full disclosure, so what we say to the investing community basically is available to the general public.

And we made a determination that the information that we were providing was basically causing us difficulty in terms of staying ahead of the competition.

Now, you talk about could we break out our business into other segments.

We don't run the business that way.

Essentially we're following the SEC reporting rules with regard to what constitutes a segment.

That may change over time as businesses grow and get bigger, we will probably start breaking those things out separately.

And we will provide that information as we need to to comply with regulations, as well as to comply with the law of FD.

But as long as we are under this situation, we always have to balance our competitive situation with making sure that we are in compliance with the law.

I do appreciate your problem associated with this, but we believe that the business is healthy.

People will realize that.

We don't anticipate there to be any long-term detrimental impact by changing the amount of information that we're disclosing.

Thanks for that.

Looking at the 7.5% number this quarter, I think last quarter you had expressed some confidence that over the next year you could get to double-digit organic growth in the rental business.

Is that still a reasonable goal?

I shouldn't say goal.

Do still think you can do that?

Absolutely.

On the other services business organic growth, with the exception of the blip in August it, like rentals, has been in a pretty aggressive up trend over the last 12 to 18 months.

Can you give us any sense how we should think about that?

Has there been -- there continue to be some more onetime stuff in the national accounts business, or is this acceleration largely driven by just document and first-aid and stuff becoming a bigger piece of the pie, such that we should --?

That is part of it, but national accounts is actually doing very well.

It has a great trend upward.

We're very pleased with what we are seeing there.

The hotel industry, the casino industry are fairly robust right now.

There is a lot of projects being done.

I think this trend is going to continue.

Is it safe to assume that thinking about high single digit growth is not unreasonable as we think out over the next few quarters there, potentially even better than that?

Yes, even better potentially.

Last quarter you quantified the revenues you thought you had lost in the hurricane at around 6 million.

Do you have number for that this quarter?

It is about 2 to 3 million for this quarter.

Most of that in the rentals business?

Most of it, yes.

The majority of it is associated with our facility in the New Orleans area, but also there are some other business in the Gulf Coast areas.

Thatcher Thompson with CIBC World Markets.

This Sanis Ultra Clean business, can you give us an idea of what it costs, what you charge a client to clean a bathroom?

And is your sales mostly on -- you are cheaper than your competition, or you already have an existing relationship?

Why do they decide to buy your service?

We charge on a per restroom basis, and roughly that equates to about -- for each restroom right around $35 a restroom.

For any company that has two restrooms, you're looking around $70 for the cleaning service.

We're finding great success in cross-selling this to existing customers.

But we are also getting some brand-new accounts that have never used a Cintas service before.

Why would they use us?

It is really an outsourcing method of relying on Cintas to do this work so that their employees can concentrate on servicing their own customers.

So generally you're replacing their employees rather then an outsourced janitorial service?

Yes, that is exactly what is mostly happening right now.

You introduced this about a year ago.

I think Bill mentioned already kind of 4% of your uniforms rental clients have adopted it, is that right?

That is our best estimate of how much we have cross-sold before up to this point.

And, yes, we did start testing it about a year ago.

And it has gone like gangbusters, and that is why we wanted to announce it today, and demonstrat it next week for you.

And then share repurchases, you announced the big half-million -- $500 million share repurchase I think in May.

It went like gangbusters in that first quarter, and it has really dropped off since then despite the stock price kind of hovering around the same price.

Can you walk through your logic for that -- continuing to be aggressive on buybacks?

Unfortunately, what happened to us is that we became very involved in this Van Dyne Crotty acquisition very early in our third quarter.

And as a result of that, we were advised that legally the Company could not continue to buy stock.

We had not entered into a 10-D5 filing because of the timing of this thing.

So we were precluded from doing any purchases in the market until after the Van Dyne Crotty acquisition was announced.

And then all of a sudden we were within three weeks of our earnings announcement.

So basically we're now able to resume our stock buying effectively beginning early next week, if we should so desire.

Chris Gutek with Morgan Stanley.

A couple of questions.

I guess to follow up with the Van Dyne Crotty acquisition, the $241 million of acquisition spending in the third quarter, was substantially all of that related to this large deal or were there smaller ones?

There were smaller ones.

Certainly a significant part of that was Van Dyne Crotty, but we're not going to tell you how much.

Could you talk to us generally about the multiple, and how that compares to past multiples?

Is this a more expensive deal, or are the margins higher, or something else that would justify a higher multiple?

Very comparable to what we have paid for other quality companies of this nature.

With the -- to follow up on Gary's question, with the reduced disclosure on the uniform rental side of the business.

I know you don't want to disclose explicitly, but could you talk maybe qualitatively about the growth rates by the different subsegments in that reportable segment?

Specifically what the uniform growth rate is roughly relative to mats and mopes, relative to what you're doing with hygiene side of the business?

I don't think I have that number readily available right now, but let me look into that, and perhaps we can talk about it next week.

And then finally, I know on the uniform rental sales side of the business I believe you are reluctant to talk specifically about growth in the salesforce headcount.

But could you talk more generally about the strategy there, any change in those growth rates, any change in the strategy from a sales and marketing perspective?

You're saying in the uniform sale side?

Uniform rental side.

No, there is no change in strategy.

We still continue to hire people, increase the salesforces as appropriate to meet our growth rates.

The only strategy difference was the thing I alluded to before, where we're trying to be sure our salespeople are educated a little bit more broadly than perhaps what they had in the past, and being very specific to certain product lines.

But I think other than that the strategy is pretty much the same.

Finally, any change or update with United or the lawsuit status, various lawsuits?

There is basically no change in either of those areas.

We, in the lawsuit side, I think the disclosures that were made in our second quarter 10-Q won't be too much different than our third quarter 10-Q.

There hasn't been a lot of development there.

As for you the Unite campaign, I would say that we view it as pretty much of a total failure on their part.

And they have made no progress with our employees whatsoever.

And they seem -- it doesn't seem to be having any impact on us.

Bruce Simpson with William Blair.

Can you give us an update on 123R adoption?

Is that already bundled in or do you still have to do that?

We will be adopting that in the first quarter of next fiscal year.

So the big quarter beginning June 1.

When we announce our fourth quarter earnings in July we will certainly talk about that and give you all the estimates that we have in our numbers for that.

It is our intention at this time to do a restatement, as we're going to be allowed to do under the rules.

But I think bottom line is it is roughly insignificant to Cintas, given that the amount -- the way our stock options work and the amount that are outstanding.

And then, Karen or Mike or whoever, maybe it is more appropriate for Bill.

Just anticipating interest expense moving forward, I think during the body of the call you were talking about having borrowed about 175 million at commercial paper rates.

Is that going to cost you a couple of million dollars incremental per quarter?

I think from a modeling standpoint you can factor in that $170 million might even increase it a bit for borrowings that we might have to make for the dividend payments this week.

Factor in an average rate of about 5% interest.

You might want to explain why we are having to borrow the CP, why we're doing the CP borrowing.

One thing that we did do in the second quarter, or shortly after the second quarter, was we locked in a thirty-year interest rate out to June of '07.

And that coincides with the maturity of the $225 million tranche of debt that was borrowed for the Omni acquisition in 2002.

So basically what we're doing is we are borrowing on a short-term basis until that time period.

And then watching interest rates between now and then as well.

At the same time, we're watching our investments, which we have set up -- all this cash we have on the balance sheet in marketable securities, a lot of it is invested in very safe instruments that if we can liquidate those investments economically beneficial as opposed to borrowing the money, we're doing that.

But if we can borrow the money at rates better than what it cost us to liquidate the investments, we're basically keeping those out there.

So we're using the CT kind of as a short-term funding mechanism in order to avoid liquidating investments.

And then stepping back from the concrete to the more conceptual, Bill, earlier in the call you talked about you were still very confident that you were going to get to double-digit rates of organic growth in the uniform rental business.

I just wonder, as it feels like we have had three or four quarters in a row of just around 8%, what would be the driver to get there?

Would it be an increasing add/stops through the cumulative effect of more people working, or would be primarily accelerating the rate of growth within the salesforce, or is it sort of surrounding your customers with newer products?

How do we get from 8 to 10, 11, 12?

I think you could get to it all those ways.

But I think the thing that we're going to focus on the most is probably trying to expand business with existing customers, as well as expanding our customer base.

We certainly are going to increase the salesforce.

We certainly are going to improve their productivity.

But we're also providing more product and services to existing customers.

I would say to you that, assuming that the economy improves, continues to improve -- not that it improved any greater than what it is doing right now -- barring another Katrina impact that we had like last year, I don't think there's any question that we're going to continue to ramp up to those double-digit growth rates.

Brandt Sakakeeny with Deutsche Bank.

Bill, I'm sorry, I just want to follow up on Bruce's question again around the financing.

Can you just talk again -- you have locked in 00 is it LIBOR plus a fixed amount.

And have you done that in the swap market?

And I guess why not just do a more permanent financing here, given the fact that you've done the acquisition plus the buyback, so that in '07 you don't have to refinance at a potentially higher rate?

Again, as Bill mentioned, we're trying to pull down the investments as they mature, plus we're generating a lot of healthy cash flow.

The short-term rate right now, the CP rate is 4.6%, is lower than either exiting prematurely out of those investments or borrowing the rates at long-term rates currently.

However, we did go into the swap market and we fixed us a thirty-year treasury -- flat.

But again, that won't be executed until a year from now.

So it is a forward rate.

You are protected on the forward rate from a year from now.

And so you're floating between now and a year later -- is that right?

That is correct.

Okay.

Got it.

How much cash do you generally need to run the business do you think?

We usually factor in somewhere around 50 to $75 million.

Any excess cash over that number is frankly excess cash then?

Yes, but again, as we said before, it is locked up into some investments that would have some penalties if we were to liquidate right now.

We don't want to incur those penalties which would make our effective interest over the CP rate that we are borrowing at right now.

Michael Moore with Merrill Lynch.

I wanted to just -- I think Karen you mentioned that you're very disciplined in your process on the M&A front.

I was just wondering if you can walk us through what the process was with the latest acquisition?

My understanding is that it wasn't something that was put out there for sale, and that it was a competitive bidding process.

I just wanted to see if you could give us a bit of background on that.

Thank you.

Our relationship goes back many, many, many years with Van Dyne Crotty.

Dick Farmer, out Founder, was good friends with Bill Crotty, who was the founding family of Van Dyne Crotty.

That company that is just in our backyard has had a great reputation for many, many years.

It was a company that we always said amongst ourselves we would love to merge with.

And from time to time we kept in contact with them.

And that is similar to the way we approach many of the companies who are in our database.

We want to continue those relationships that in the event they decide to sell, they come to us.

And we feel that we have built that reputation of having them come to us because we have created great jobs for people to come into our Company.

And we are fair in the process and it is a good experience for all involved.

So it was not a bid situation.

They came to us directly.

We negotiated the price, and they let us go in and do due diligence, justified the purchase price, and we are in the midst of consolidation now.

If I may ask another quick one, the press release talks about the dividend, and particularly since '83 it has grown at a 21% CAGR.

I know that usually you have, I think you have targeted a 20% payout.

Is there any talk about maybe raising that at all?

Yes, there is.

It is one of the things that the Board continually valuates in addition to share buyback and acquisitions and international expansion and other things.

And it is certainly something that could happen in the future.

That does conclude the question and answer session.

Mr. Gale, I will turn the call back over to you.

Thank you all very much again for joining us tonight.

We appreciate your interest in Cintas.

We're having an investor Day here next week.

I'm sure most of you have been invited to that, and hopefully most of you will attend.

And so we're looking forward to that.

We will also then be announcing our fourth quarter earnings in mid-July.

That concludes today's conference call.

Thank you for your participation.