信達思 (CTAS) 2007 Q1 法說會逐字稿

Good day everyone, and welcome to the Cintas first quarter fiscal year 2007 earnings conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you.

Good evening and thank all of you for joining us.

With me this evening is Mike Thompson, Cintas' Vice President and Treasurer.

We are very pleased to announce that revenue increased 11% to $914.2 million, and earnings per share grew over 15% to $0.53 per diluted share from the restated $0.46 per diluted share last year.

The prior year restatement was due to the Company's adoption of FASB 123 R, requiring the expensing of stock options where we utilized the retrospective method and we will explain that in more detail later in the call.

Net income was $85 million representing 9.3% of revenue.

Our net income included an additional $5 million of interest versus the prior year due to the additional borrowings for acquisitions and the share repurchase program.

Additionally, energy costs were about 60 basis points higher than we incurred in the first quarter last year.

The 11% revenue growth for the quarter is our fifth consecutive quarter of double-digit revenue growth.

This revenue growth was achieved with an 11.8% increase in earnings before interest and taxes, despite the higher energy costs versus a year ago.

As we explained in our investor and analyst meetings, Cintas has become more than the uniform people.

We are the service professionals delivering a broad array of services that enable us to serve just about any business in North America.

We believe that the strategy we have employed over the past several years of adding additional products and services with a combination of internal growth and key acquisitions will reward our shareholders by delivering consistent growth in both revenue and profits.

Cross-selling these multiple services to our 700,000 business customers will also enhance the growth rate.

The new sales structure announced last July by Scott Farmer, our CEO, is continuing to be rolled out in our organization and should enable us to continue to deliver excellent results.

This growth strategy also enabled our employee partners to take advantage of numerous career opportunities across any of our product and service offerings.

Our current guidance of revenues and earnings per share for the fiscal year ending May 31, 2007, remains unchanged, and calls for total revenues of 3.77 billion to $3.85 billion, and diluted earnings per share of $2.10 to $2.20.

As previously reported, the Company did purchase approximately 2.7 million shares of its stock during the early part of the first quarter, essentially completing the $500 million authorization provided by the Board of Directors in May of 2005.

At its July 25, 2006 meeting, the Board of Directors authorized an additional purchase of up to $500 million under certain parameters.

During August, the Company issued $250 million of 30-year debt, and subsequently paid down a similar amount of commercial paper.

With the end of our quiet period in conjunction with this earnings release and with our renewed balance sheet flexibility, we will be able to resume share repurchases under the parameters provided to us by the Board of Directors up to the $500 million authorized amount.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements.

This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance.

These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we may discuss.

I refer you to the discussion on these points contained in our most recent filings with the SEC.

I will now turn the call over to Mike who will discuss this quarter's results in more detail.

We will then be happy to answer your questions.

Thanks, Bill.

Total revenues were $914.2 million for the quarter, an 11% increase over that reported in the prior year.

Our first quarter had 66 work days, the same number of work days as the first quarter of fiscal 2006.

In fact, the work day break down for each quarter of fiscal 2007 will be the same as the quarterly break down in fiscal 2006.

Internal growth for the Company was 6.2%.

This is in line with the Company's plan for the year.

As Scott Farmer, our CEO, mentioned in our year end earnings call, we are currently change the structure of our sales organization.

Internally known as Project One Team, this change to the organization has been designed to drive future internal growth through increased cross-selling opportunities and a more focused approach in selling all of Cintas' products and services.

We continue to see positive results from the regions where this organization was originally tested.

These markets have been experiencing increased revenue growth as well as a significant reduction in turnover.

We believe this new organization will also have a positive impact on our operations as our general managers will now have more time to run their day-to-day businesses without the additional responsibility of running a sales organization.

This new structure continues to be rolled out with the expectation that the new organization will be in place by the end of this calendar year.

While we are on schedule for this time line, we fully understand that this new organization will take some time to get to full speed, especially early on as individuals begin to understand and execute in their new roles and responsibilities.

Our fiscal 2007 revenue guidelines of 3.77 billion to $3.85 billion, which we provided in July take these changes into account, and we reiterate that guidance today.

We are excited about our future growth potential under this new structure.

Rental revenues for the first quarter were $688 million compared to $628 million last year.

This was an increase of 9.5% over the first quarter of last fiscal year.

Factoring out acquisitions made over the last 12 months, our rental organic growth rate was 6.2%.

We have not seen job growth in the sector which is have historically rented uniforms.

Our rental new business continues to be solid.

However, we have not seen job growth within existing customers and certain segments continue to be affected by off shoring and outsourcing activity.

Our new sales structure is designed to generate additional growth opportunities and in order to offset these trends.

Other services revenue of $227 million increased approximately 15.9% from last year's $195 million.

On an organic basis, this segment of our business grew 6.4% for the first quarter.

As a reminder, the other services segment includes the direct sale of uniforms to national account customers, the sale of uniforms to our catalog's local customers, primarily customers who rent products from us, our first aid and safety division including fire protection services and our document management division.

Our uniform direct sale business, which includes both our national accounts sales division and our rental division catalog sales, in total decreased approximately 3.5% on an organic basis for the quarter.

This business does experience more volatility and is revenue-based due to the timing of new account roll-outs.

The reduction experience in the first quarter is partially attributed to difficult comparables to the first quarter of fiscal 2006 which was the strongest growth quarter for this business in fiscal 2006.

We continue to see strength in healthcare, hospitality and gaming, which are key sectors in which our national account sales division operates.

The first aid and safety fire protection business continues to expand at a rapid rate with 36% growth during the quarter and 15% on an organic basis.

The core first aid and safety business continues to provide strong organic growth and internal growth and fire protection services is improving as we continue to build our national platform.

We are very encouraged by the value proposition we offer our customers in our expanded line of first aid, safety and fire protection services, and we continue to expand our products and services within this business.

Our document management business continues to expand at a rapid rate, with total first quarter revenues growing almost 70% over the first quarter of fiscal 2006.

This business now has an annual run rate of over $90 million in revenue.

We are now servicing in excess of 130 markets in the United States and Canada, including over 70 of the top 100 markets.

As you can see, we are quickly closing in on obtaining a national presence in this business and expect to achieve this in the next 12 months.

While we continue to acquire numerous small business in order to increase coverage, our document management division continues to deliver very strong organic growth rates, achieving 33% organic growth in the first quarter.

I will now discuss our margins s for the quarter.

Total company margins for the quarter are 42.7%, down from 43.2% in the first quarter of fiscal 2006.

The acquisition of Van Dyne Crotty in February 2006 provided us with many benefits, including obtaining several nice new uniform rental plants.

This has provided us with the opportunity to close one of our Detroit, Michigan plants, which we had acquired in the [Unitard] acquisition in 1999 and move the volume to a more modern and efficient plant which had excess capacity.

We incurred $3.7 million in expense during the first quarter in conjunction with the closing of this Detroit facility.

Like many companies, we have seen a dramatic increase in the cost of energy over the last two years.

Historically, our energy costs, which include natural gas, electricity and fuel for our fleet, would run approximately 2.25 to 2.5% of sales.

Our energy costs increased dramatically during our second quarter of fiscal 2006 as hurricanes devastated the Gulf region of the United States.

These increases forced our energy costs to approach 3.5% of sales for fiscal 2006.

For the first quarter of fiscal 2007, our energy costs remained at this level, which represents a 60 basis point increase over the prior year first quarter.

We have now reached a full 12 months since these significant fuel cost increases, which should make future quarter results more comparable.

While we have not entered no a formal energy hedging program, we are continuing to dedicate significant resources to evaluating and implementing fuel conservation and efficiency programs.

Our rental margins for the first quarter were 45% of revenue versus 46% for the first quarter of fiscal 2006.

This decrease includes $3.7 million in costs related to the closing of the Detroit plant as discussed earlier.

Additionally our rental business is our largest energy consumer due to its size as well as its large plant operation and route based delivery structure.

Rental energy costs increased approximately 60 basis points versus the first quarter of last year.

Partially offsetting these increased costs was an insurance recovery of approximately $1.9 million, representing receipt of the final settlement of our claims related to the hurricanes which occurred in fiscal 2006.

Excluding these three items, our rental margins are comparable to our first quarter of fiscal 2006.

We have experienced an increase in delivery labor as a percentage of rental sales mainly due to the introduction of our Sanis Ultra Clean restroom cleaning service.

While this service is more labor-intensive, once it reaches critical mass in a particular market we expect to achieve margins at or above those of our traditional uniform business.

However, during the initial introduction of this new service, route volumes and route densities are low in which turn drive labor costs higher as a percent of revenue.

We expect these costs to come more into line as we quickly expand into this business.

During the quarter, we were able to offset this increased labor through other efficiencies within cost of rental.

The gross margin in our other services segment continues to be strong at 35.8% of revenue for the first quarter versus 34.2% for the prior year first quarter.

We continue to experience positive results in our national account sales division from our global sourcing strategies.

In addition the first aid and safety and document management divisions are becoming more profitable as they grow and gain critical mass as well as becoming a larger percentage of our other services revenue.

Our selling and administrative expenses are 26, were 26.7% of revenue, a 60 basis point improvement overt 27.3% of revenue in the first quarter of the prior year.

As Bill mentioned during the first quarter, we adopted FAS statement 123 R., share-based payments.

This statement requires all share based payments to employees including grants of employee stock options to be recognized as an expense based on their prior values.

We adopted this statement using the modified retrospective method, which included the restatement of prior periods.

This adoption lowered earnings per diluted share for the first quarter of fiscal, 2006, from $0.47 to $0.46 per diluted share.

As required in conjunction with the adoption of FAS 123 R, a detailed analysis of all factors and assumptions including forfeiture rights was performed.

This analysis resulted in an increase on the assumption on the percentage required for forfeitures.

A reduction in expense was required to effect this change in forfeiture percentages resulting in a reduction to selling and administrative expenses of approximately $1.1 million.

Going forward we estimate the quarterly impact of stock option expensing to be about $1 million during fiscal 2007.

Amortization increased 20 basis points as compared to the first quarter of fiscal 2006, representing the amortization of certain intangibles associated with acquisitions completed in fiscal 2006.

Income before net interest and taxes increased 11.8% over the first quarter of fiscal 2006 and are a healthy 16% of revenue.

Net interest costs increased 1.2% of sales from 0.7% of sales in the prior year first quarter.

This increase is due to additional debt taken on from acquisitions in late fiscal 2006 as well as the funding of our share repurchase program.

During the first quarter we issued $250 million in new, 30-year debt, and used the proceeds to pay down a significant portion of our outstanding commercial paper.

We continue to hold approximately $175 million in cash and marketable securities rather than prematurely liquidating these investments and taking a loss.

As investments reach maturity, our intention is to use the proceeds to pay down remaining commercial paper borrowings contingent on cash needs and acquisition opportunities.

As of August 31, we had approximately $150 million of commercial paper outstanding.

Our effective tax rate was 37.3% for the quarter, which is lower than 37.4% effective tax rate in the first quarter, fiscal 2006.

For the quarter, net income of $85 million increased 8.3% over the first quarter of fiscal 2006.

And earnings per share increased 15.2% to $0.53 per diluted share, reflecting operational results and the impact of the share repurchase program.

Our balance sheet continues to be very strong.

Despite the reduction in cash and marketable securities used for acquisitions in the stock repurchase program, our current ratio stands at 1.9 to 1..

Please note that our current liabilities now include $225 million debt originally related to our acquisition of Omni Services in May, 2002.

This debt comes due in June of 2007.

As previously disclosed we have entered into a forward-starting swap which we intend to exercise in conjunction with an anticipated $200 million debt issuance in 2007 in order to offset the majority of the debt coming due in June.

Additional information regarding the swap is included in our most recently filed 10(K).

Cash and marketable securities stood at approximately $175 million.

As marketable securities mature, we currently anticipate using these funds to pay down debt depending on operating and acquisition needs.

DSOs on accounts receivable were 38 days, which is comparable to the prior year.

Accrued liabilities include an extra day of accrued compensation compared to May of 2006, based on how our pay dates go.

Our total outstanding debts stood at $857 million at the end of August, which includes long-term debt due within one year.

Total debt as a percentage of capitalization was approximately 29%.

Operating cash flow decreased approximately $30 million from May 31, 2006, due to a reduction in accrued liabilities.

As mentioned earlier, this reduction was due to the funding of the Company's defined contribution retirement plans and pre-funding of the Company's medical expenses through Aviva.

Capital expenditures were approximately $36 million for the year, and we continue to expense capital expenditures to be between 150 and $170 million for fiscal 2007.

We would now like to open the call up to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS].

We will take our first question today from Mike Fox from JP Morgan.

Good afternoon, guys, I just had a couple of questions.

With regard to the Van Dyne Crotty acquisition, do you plan on consolidating any more plants, and how soon could that be?

And then second, given that energy has eased a little bit as of late how quickly if that persists, could that positively impact your results?

Thanks a lot.

Mike, regarding the Van Dyne Crotty acquisition I would say that the majority of the consolidation activity has been completed.

There might be a few additional things we are still working on, but with the closure of the old Detroit facility and the movement into the new Van Dyne Crotty facility, that was the biggest piece that just happened in August.

I would -- so the majority of that's done.

I think we told you before the corporate headquarters were shut down back in May.

So we pretty much view the Van Dyne Crotty acquisition complete.

Now, with regard to energy I think that's obviously gotten a lot of attention recently and I'm glad you raised the question because we do want to talk a little bit about that.

As Mike mentioned, our energy costs as a percent of sales were about 3.5% in the first quarter, and that's very comparable to what it was in the fourth quarter of last fiscal year.

The recent reduction in energy costs that we are seeing both in terms of natural gas as well as in gasoline really have become much more rampant here in the last several weeks.

If those rates were to continue, obviously that's going to have a positive impact on our results.

Now, how big an impact I think is always dependent upon what's going to happen with the prices.

I think people need to keep in mind that while it, let's take natural gas, while it is running at a rate that is significantly below where it was a year ago, there is talk that it's going to increase as the winter months approach and we will have to bear that additional cost.

But suffice it to say, if there's no more hurricanes or no more supply disruption we should see a benefit from that.

Gasoline has come down but diesel has not come down.

About 70% of our fleet is diesel operated.

So you are not going to get a full benefit if gasoline drops a significant amount unless diesel also pulls through.

But just looking at back of the envelope, if you assume that our cost of energy were to decline approximately 10% from the levels we saw in the first quarter, and remain that way through the rest of the fiscal year, we are talking of an impact of about $0.03 to $0.04 per share in the company.

And that would be for all energy, electric, included in that as well, so.

Okay.

Good.

Thanks a lot.

Congratulations on the quarter.

We will take our next question from Kartik Mehta from Midwest Research.

Bill, I know you don't want to give out numbers.

I hope you could help us out directionally until the two things that you said that have been a add and lost business.

I wonder if you could talk directionally, if you've seen an improvement or stabilization or decline in notice two metrics compared to last quarter.

Kartik, you're right, we are not getting into the detail components of that, but looking at the data based on our analysis I would say there has not been any improvement in those categories.

And from an energy perspective, Bill, do you think you can give us a breakdown on how much electricity was in natural gas and gas and diesel like you've done in the past.

Ask.

I don't really have that right now, but gasoline and diesel I can tell you used to be a third, a third, a third, but gasoline and diesel because of the significant increase in those costs, is probably running closer to 45% or so of the total energy usage.

And, Bill, on the natural gas part and electricity part, do you have contracts in place so if the prices do come down there's a lag as to when you see a benefit, or is that not the case?

Well, the contracts that we have in place aren't really contracts as much as they are agreements with the various utilities that provide those services, so to the extent that they pass those reductions through, we will experience those.

So we really don't have forward contracts on any of this.

We pay pretty much whatever the spot price is for gasoline and diesel and whatever the local utilities have negotiated with us with regard to electricity and natural gas.

So if natural gas prices do stay where they are, you should start to see a fairly immediate impact on the income statement, then?

Well, we will see an impact on the income statement, sure, relative to last year.

Right.

Clearly, yes.

Thank you very much.

We will take the next question from Michel Morin from Merrill Lynch.

Hi, I was a bit surprised to see the SG&A being quite a bit lower than what I had projected, and I was wondering if you could talk a bit more about what's driving that?

And in particular given the changes going on with the sales force I would expect that maybe that would create a bit of a short term surge if anything.

Have you maybe stopped expanding the sales force during this transition or what's driving the decline?

Thank you.

What's driving the decline --

I'm sorry, not necessarily the decline but the lower than expected numbers there.

I think the answer to your question is its primarily the result of a stabilization in medical and other employee related costs and some of the legal expenses from, so we haven't seen the continued increase in that.

We've seen leverage in a lot of the G&A area.

The growth of the company, the initiatives in Six Sigma have also impacted G&A costs.

So our G&A labor as a percent of sales has declined.

It's a hodge-podge of other things could go in there but basically I would say it's more leveraging from a larger company as much as anything.

And then just to clarify, I think the number was $1.1 million related to the stock option forfeiture assumptions, is that just a one time event?

Yes, that's a cumulative cap shop based on the change in the forfeiture.

So as Mike indicated in his comments, going forward, you should model that there's about $1 million of expense in each quarter related to stock options cost.

Right.

All right.

And I was wondering, in your guidance for the full year, what share count are you assuming?

What share count?

Yes.

We are assuming right now no further repurchases at this time, just for simplicity's sake, so it's come down to about 161.5 million shares.

Approximately.

Perfect.

Thanks very much.

We will go next to a question from Brandt Sakakeeny with Deutsche Bank.

Thanks, hi.

It's Brandt Sakakeeny.

Two questions for you.

Bill, first question, you said about a million a quarter, do you have that exact number in the last quarter for option expense and was it in the cost of goods line or in the SG&A or sort of spread around those lines.

In the SG&A line and -- do you have the exact number.

It would be approximately $1 million for the stock option expense portion without the forfeiture.

We have an annual option grant which we take out over four quarters of the year.

Had there not been a forfeiture rate you would see $1 million approximately of expense for stock options.

Okay.

Got it.

Great.

And I guess I'm curious, on the service rep side, the driver's side, on the flip side of the layoffs and some of the bad news we are hearing out of the midwest, are we seeing more supply of potential workers coming in and potentially less pressure on wage rates as the supply improves or is that not really helping a whole lot?

I would say that hasn't helped a lot or hurt a lot.

Our wages have been fairly stable in that area and we haven't really seen any of that.

Thanks,.

Next , a question from Pete Carrillo with Citigroup.

A couple things for you.

Can you just give me the operating income break out between rental and services category in the quarter?

I don't know if we have it in front of us, Pete.

We will have to get back to you with that.

Okay.

Second thing is, let's see, any chance you have the percentage of revenue break out for the various uniforms, dental, hygiene et cetera.

Yeah, we pretty much, it's pretty consistent with where it was in the fourth quarter.

We are going tow look at that more on an annual basis because movements within quarters isn't that significant so I would still use what we gave in the fourth quarter.

In fact I can reiterate those numbers.

I have those numbers, that's fine.

Final question looks like organic growth inched down a little bit more from the fourth fiscal quarter, do you think it is stabilizing here now as we go forward the next quarter or two or any kind of view on that?

Well, I think operationally we believe that the restructuring, the sales force, the new structure of the sales force should show improvement in organic growth going forward.

And I would say by the end of the year it should be better than it is right now.

I can't give you an exact saying that it's going to be better next quarter.

I don't expect it to materially change one way or the other.

But we, as Mike said, our plan anticipated growth rates of around this level.

When we gave you the guidance and we are right on our plan so we are very comfortable that the strategies we are putting in place will improve the organic growth rate going forward.

Let's put it this way.

Assuming current levels of job additions to the economy, let's say the 120 level that we are at right now, 120,000 a month we are at now, would this quarter's organic growth, it would probably be reflective of sort of correlated with that type of job growth given everything else, holding everything else the same, I guess.

It depends where the jobs are coming from.

As we talked about last quarter, the job growth that has occurred in the economy has not been in our traditional uniform rental wearing type customers.

So I can't tell you that 120,000 growth in jobs is going to be, is going to reflect an improved organic growth unless it happens to be in the segments that are our customers that rent uniforms.

And also again as you look at the entire company, Pete, I think that one point we would still like to stretch and what job growth is an important metric for us as a total company six, seven, eight years ago, our composition is changing pretty dramatically as we grow such that we are going to tie it strictly to the employment.

When you look at our division there are a lot of products and services in there that aren't necessarily individual job growth related.

So I think you have to factor that in as well.

Okay.

Great.

Thanks a lot.

Gary Bisbee with Lehman Brothers has our next question.

Good afternoon, guys.

A couple questions.

I just want to make sure I got this SG&A thing right.

So the option expense would have been $1 million and that's pretax, you're talking about, per quarter, but it actually was $1.1 million negative, it was a cost reduction because you made this cash up change?

That is correct.

All right.

The, I guess digging down a little bit more on the organic growth if I could, you said a couple of quarters ago that maybe one of the reasons it had moved up somewhat was the addition of the Ultra Clean service but then customers thought they might have need to do use it less than they had thought and that's the reason it came down, is that still happening or is that sort of through the system and not a good factor?

I think it's still happening to a degree although probably not as big.

We still go out and sell new business in that line on a weekly basis and then we back down on that.

If the customer insists that he really needs it every other week or maybe even less often than that.

So it still happens and it still is having some impact but it's less than it was.

Okay.

And then do you think there was any real disruption to date or should we think about expecting some over the next quarter from the sales force realignment?

Oh, absolutely.

I think disruption as people take different jobs and have different bosses, there certainly has been an impact on that.

And again, we anticipated that when we put our plan together.

Can you give a little more color on exactly how many people are affected by that?

Because maybe I'm remembering this wrong but it sounded like instead of being done in the silos you were going to -- a lot of times change the manager and who they were reporting to, put all the salespeople in the same room type of thing but not that many would actual will be switching the product area and customer base that they were selling to.

Is that right?

No, we've had -- you're right.

Let's say for the typical sales rep, that individual is not seeing a dramatic change in their job per se, but what they are seeing is they've got a new reporting relationship so instead of reporting to the general manager of an operation they are now reporting to a sales manager who reports perhaps to a market director to a new VP of Sales and there's been a lot of shuffling around of moving people out of sales rep positions into these market manager positions.

There has been geographical transfers of people around the country.

We have taken some people that maybe were very good in uniform sales and we're putting them in other business lines.

So there's been that shuffling taking place.

There's been new systems being installed.

There's training that's taking place so we can train our sales reps to understand all of the products and services so that at least they can identify an opportunity perhaps in a customer.

Maybe they can't necessarily sell that customer on first aid safety if they are in uniform, but they will no enough about first aid safety to be sure they bring in the right person.

So you have a lot of that type of stuff that's been happening, and will continue to happen through the rest of this calendar year, as we totally roll this new structure out.

Are there any of them where it's been rolled out enough that you have any sense how it's going to impact sales or is it just too early for that?

No, no, we tested this in one of our 13 rental division groups earlier this year, and we came away after watching the metrics knowing that sales turnover had improved dramatically.

We saw that there was much better cross-selling activity in that particular group, under the new structure.

And it gave us enough of these type of metrics to tell us that this is something we wanted to do country-wide.

Got you.

Just two other ones if I could.

The -- I know you long talked about 30 to 35% gross profit margins for the other services segment.

Given what's going on there is it the right time at this point to raise that long-term goal?

It seems you've been above that recently and with the rapid growth you gave us for first aid and safety and document management, is it realistic to think it's going to go higher?

I think what we talked about is on one of the last calls that we really set a target of 32 to 37 made more sense right now.

All right.

As those, as first aid and safety and document management are growing, we've indicated that those businesses, the margins in those businesses will be more comparable to our uniform rental business where the direct sale of uniforms won't achieve that level long-term.

Got you.

Just a last question.

You mentioned the labor costs were up with the Ultra Clean routes due to the less density, but given that it seems to me it might take more time for someone to do that is it realistic that the density will ever get the same as maybe a traditional Sanis route or is that something you've worked into the pricing such that you are pretty confident a year, or two years from now?

We worked it into the pricing but also there's no material costs on those routes either but when you look at the profitability for that business it's obviously more labor-intensive, but in total the margins are still there.

Okay.

Great.

Thanks a lot.

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

Thanks, hi, guys.

Hi, Chris.

I just want to make sure I understand your thinking about the growth rate trends, just looking at the last couple of quarters, organic growth rates have been slipping a little bit and certainly well below the kind of double-digit longer term target.

From your perspective do you think that's really a function of the secular challenge with fairly mature labor markets for the portion of the market you are exposed to or tough comps or broader macro head winds or maybe even nearer term sales force distraction with the Project One Team?

Is there anything would you really point to specifically?

Well, I think question mentioned a couple of them on the call and you just talked about them, I think a little bit of distraction on the sales force.

I did talk about the secular trends with regard to employment.

We talked about that for the last couple of quarters now as we look at where employment is really being added, we have got to adjust our product offerings to take advantage of where the employment is growing in this country and couldn't rely on the traditional uniform-wearing rental type industry.

So I think that's a lot of the initiatives that we've taken on or to try to address that particular situation.

We've seen a much higher degree of lost business in stock of existing customers than we had historically seen.

I think that's due to much of what's going on in American industry today with again shifting jobs away from the U.S. as well as improving productivity of existing companies.

I use the example the time of the car, automobile dealership which has far fewer maintenance people, mechanics than it used to have.

A lot of it's due to the way the cars are maintained these days.

We have to adjust to that.

I think we have adjusted to that in a couple of ways.

One is we recognize the need to broaden out into other services.

So we are glad that we got into First Aid and Safety seven, eight years ago.

We are glad we got into document management a couple of years ago, expanded into a lot of the entrance map business, the Sanis business, most recently the Ultra Clean.

So all of this was strategy to basically take advantage of other things that we could do and then now we are focusing on, well, how can we take advantage of where the growth in employment is coming?

Do we have the right products that people want to wear?

Do we have the right products for all the different types of jobs?

And that's our, one of our challenges is to make sure that we put the resources in there to figure out how to do that and we are very confident that all of those things coupled together will enable us to ultimately get back into double-digit growth.

I think you said a few minutes ago that you were relatively happy with the growth performance in fiscal one and you think the company is on target and reiterated the revenue guidance.

It looks like to me if the growth rate continues to slip a little bit the bottom end of the guidance could be a bit optimistic.

The assumptions stabilize or improve a bit or the pace of acquisitions pick up, I presume you are not assuming much improvement in the macro environment, are there some acquisitions there in the pipeline or are you assuming that the Project One Team kicks in the next couple of quarters or something else that can really stabilize or improve the growth performance?

I'm assuming, yes, that the Project One Team is going to have a positive impact.

I'm assuming that the, we get past this quarter, we just got past the anniversary date of the hurricane so that will be out of the picture.

Wewon't be comparing, having that in there.

That will be actually a positive for that.

I am assuming, look at the growth rates in some of these other businesses.

The growth rate in document management.

Over 30% organic growth.

The growth rate in first aid safety, 15%.

We know that the national account sales division had a down quarter because, that's due to the volatility of that particular business.

But we know there are things on the horizon there that should come forth this year.

You put all that stuff together Chris, it gives me confidence to feel very comfortable at the range that we are providing.

Bill, one more if I could, a totally different question.

I'm curious, the plant in Detroit that's being closed, is that one of the remaining unionized plants?

Yes, it was a unionized plants.

Is there any potential union push back or do you have total discretion to close that.

I know there's been a number of press releases back and forth.

Let me clarify that, we are moving that volume into another plant, the Van Dyne Crotty plant that was also a unionized plant and that closure was negotiated with the union.

Putting that issue aside, can you give a quick update on the situation with the union, you mentioned on the last call your legal costs were rising a little bit, you have had some press releases, you've had some progress, they've made some complaints about your proxy statement, any quick update you can provide on what's been happening?

The recent suit that they filed on our proxy statement, we are going to fight vigorously on that.

We believe that everything we have in the proxy is accurate and that litigation is ongoing so we don't expect that to be any issue going forward other than a few bucks that we are going to have to spend.

I would say the activity from the union continues to be relatively low.

They do show up at a few of our facilities every week touting certain advantages they feel that they have but our employees aren't paying any attention to that for what we can gather.

They are continuing to push forward on their sponsored lawsuits but again there's no new developments there other than what we've reported in our 10(K).

I think everyone is probably aware of a recent ruling in favor of several of our employees who filed suit against the union for privacy violation and there was just a ruling on that that the union is appealing but we believe our partners will prevail on that.

So all and all it's we are still spending money on it and they are making no progress.

Thanks a lot.

Next question, Gregory Halter with Great Lakes Review.

Good afternoon, guys, congratulations on the good results.

Thank you, Greg.

I think the last quarter we had some discussion revolving around the increase in the bad debt allowance and expense and so forth.

Can you give us an update on where you stand with that or what the allowance is for the quarter?

Actually it improved a little bit in the quarter.

There was a bit -- was there a big recovery on that?

Quarter to quarter there was not a big recovery but year to year it was essentially the same as it was from Q1 in the prior year.

There wasn't anything negative associated with it.

We didn't recover everything we hoped to recover, though, there's still some opportunity sitting out there.

And you made the comment about the insurance recovery and that is now finalized.

Is that correct?

Yes, we have finalized everything with the insurance company related to all three hurricanes last year.

Okay.

And regarding the ability to raise prices, has that gotten any easier or more difficult over the last quarter or year over year basis?

There has been from what I've been able to gather there has really been no change in the environment on prices.

We did experience a little bit better opportunity to raise prices last fiscal year, primarily I think due to the energy cost, but we have not seen any marketable change since that time.

You probably would have, we would have seen a little after the first first quarter of last year because the hurricanes hit after the first quarter but over the last 12 months going back from today has been pretty consistent.

Okay.

And talking about the hurricanes, I know you had some facilities down in New Orleans and so forth, are those all back up and running and has business returned to where it had been prior to the hurricanes?

No.

They are up and running and they were up and running as soon as we were able to get utilities back in there, but the New Orleans facility is still only operating at probably about 50% of its pre-hurricane level.

It's all due to obviously to the lack of business that's returning to New Orleans.

We don't anticipate at this time that it's going to get back up to prehurricane levels in the next year or two.

That just doesn't seem to be happening.

As far as the other facilities from everything I can gather, we're pretty much back up to the levels that we were at, we still are having a few issues returning to the same levels of sales volume in our national accounts sales division that services the casino business down on the Gulf Coast but as those facilities continue to come back we are finding that we are picking up some business with them.

I know Harrah's is going to build a big facility down there.

Hard Rock was going to rebuild their facility that was supposed to open the day after the hurricane.

That stuff will come in time.

That's all I have.

Thank you.

We will go next to a question from Jeff Bourke with Robert W. Baird.

Good afternoon.

If we could go back to the rental segment and the organic growth there, the tick downs you've seen in the last couple of quarters, can you give us some comfort, maybe in terms of the sales force and the head count and productivity there, any kind of commentary that would say one way or the other that the business is not structurally changed, there is just kind of disruptions?

I'm not sure I understand your question.

Well, in terms of the, if you look at the growth from new accounts there are a couple of factors that could drive it, it could be headcount, it could be productivity.

It sounds like maybe productivity has taken a hit because of the Project One Team roll-out.

Is the growth in the head count any different than it's been in the past few quarters?

I guess are you still growing the head count, are you pushing the brakes on that at all?

Well, let me clarify a little bit on this organic growth.

Keep in mind that the organic growth is a function of several factors, new business but also lost business and changes of volume within existing accounts.

And I believe that the majority of what you're seeing is that we are just not seeing an improvement in the lost business and the change in business and existing accounts.

I don't think there's been a dramatic change at all in the new business, other than there's been a little bit of disruption here associated with the restructuring.

But I'd say the focus is more on what's happening with our current, with the traditional uniform rental wearing customers to a large extent, and that's really not a function of sales, new sales but a function of existing volume changes.

I guess I was misunderstanding your comments on existing accounts and retention then, when you talk about them not contributing positively, that's been the case for several quarters now.

So has it gotten worse?

It's not gotten any better.

We are talking about a change of, from 6.7 to 6.2 so there's a little bit of this here and lost business, probably a little bit in stops -- there's a little hurricane impact in that.

We haven't returned to full volume in the New Orleans facility so there's impact in there.

There's impact in other products and services that we have.

There's a little bit of impact of the sales organization disruption.

So it's a number of factors.

I think the bottom line is that we are comfortable that where we are is where we thought we would be and we still are very comfortable with our guidance for the whole year, which does assume, as I had mentioned to Chris Gutek that there will be an improvement in the growth rate going forward.

I am not going to predict that it's going to happen necessarily over the next quarter but over the course of the year it will improve.

If we could switch gears could you give us a post mortem on the Van Dyne Crotty acquisition, how that's gone, if it's met your expectations?

I would say it's exceeded our expectations.

It was a very good acquisition for us.

We were able to convert their locations and corporate headquarters extremely quickly.

Their culture was very comparable to ours so I would say it was one of the easier large acquisitions we've performed and we are very happy with the results to date.

Can you give me a sense of the acquisition pipeline or just the general acquisition environment out there right now?

Is it the case that these larger acquisitions, the good ones at least, may have been cherry picked or are there still some good ones out there?

I would say there are still some good ones out there.

Someone asked the same question two years ago and Van Dyne Crotty was sitting there.

There are good businesses out there, they just don't come along every day.

We are still trying to gain a national footprint in fire protection services and also document shredding and those are obviously smaller businesses and that's our focus but we are still going to look at strategic acquisitions in all of our businesses and there are still definitely some good operators out there in the uniform rental business.

Mike used to be in corporate about development and he knows that, those potential acquisitions targets very well and I think as he just said and I want to reiterate it, there are other Van Dyne Crottys out there.

We just have to get them to agree that it's time to sell to Cintas just like the Crotty family did.

Next to a question from Bruce Simpson with William Blair.

Good afternoon.

Two separate questions.

The first has to do with trying to drill down and understand better how the national accounts sales division posts negative year on year.

Bill, if you could give a little color as to whether that's due to fallout from one particular vertical niche or rearrangement of the sales force or how do you explain what's going on there?

I think that's just a normal situation that can happen from quarter to quarter depending on what happens with a roll out of different customers.

I don't have the specifics of maybe which -- there may have been some big casinos that rolled out during the year and we didn't get a repeat of that business in the first quarter.

There was, if you went back to the fourth quarter they had a tremendous fourth quarter.

So there was a lot of business that probably got booked and sold in the fourth quarter of our fiscal fourth quarter maybe at a bit of a cost to the first quarter.

I have no concerns about that going forward.

We have a lot of confidence in our sales group and our management team down there.

They have a tremendous amount of prospects going forward and a lot of activity.

So I think you are just seeing just a blip.

They have very difficult comps year over year as well.

Last year's first quarter was the best quarter of the full year and that's not attributable to anything other than that was the quarter.

It's not seasonally based.

And as Bill mentioned they had a very strong May.

They had a very strong May that could have easily fallen into June.

The tough comps wells that piece and knowing how this business operates is the real reason there.

How would you characterize the environment for that group overall?

I mean it seems like it took Al long time through the recovery while uniform purchase budgets were being deferred and there was some sense that it was beginning to accelerate, particularly in hospitality and gaming, I think.

So how would you say the overall environment for selling uniforms is right now, tying that into the macro picture?

It's good.

And the reason it's good is that there are -- let's talk about their different segments.

There's a tremendous amount of gaming activity going on.

Indian casinos are opening up in numerous states.

Oklahoma is one.

We are going to be right in there selling uniforms to.

California is another one.

Las Vegas has announced several big projects which we will be right there with the design and the implementation.

So gaming is strong.

The lodging industry, as most of you on the call probably know, has experienced a very good run here in the last couple of quarters.

They are doing a lot of refurbishing their rooms, their occupancy rates are high, their revenue per nights are up, they are talking to us about new programs and upgrading their uniforms and we see activity there.

We have made a nice inroad into the healthcare market that we think is going to pay some dividends down the road.

We are not seeing anything in airlines to speak of, so that's an industry that still continues to be somewhat depressed.

Car rental business is still good.

We are also seeing pick up in our promotional products business so that's really starting to pay some dividends down the road as we go forward.

So I think it's a healthy situation.

What's the run rate in that promotional products business?

I think it's around $20 million a year.

Between 20 and $30 million a year overall.

And then the other question has to do with the automotive sector and this is really meant to be more cross rental than into sale but you can generalize it into that as well, an awful lot of bad news in terms of the plant closings from both General Motors and Ford and just wonder what's Cintas exposure in this day and age to automotive?

Is it possible to pin that down as a percentage of rental volume and how do you think that's going to impact your ability to grow moving forward?

The problem -- I don't have the specifics there.

One of the issues that you have is that not only is it the big three automotive plants but it's the feeder plants also that are going to have an impact on that, the other companies.

And there's no question that we have business in those areas and we are going to be impacted by that as they shut these things down.

Now some of the shutdowns aren't going to happen for two or three years, but it's certainly not a great business to be relying upon.

I would say it's going to have an impact on us, it's not going to be material but it is going to have an impact on our lost business and obviously they are not going to be adding people in those plants so you tend to see stops in those particular facilities.

So we have some of the big three plants.

We certainly aren't a dominant player there, fortunately, no customer in Cintas accounts for more than half a percent of sales, and I can tell you the biggest is certainly not one of the big automotive companies.

So we will just have to be very careful and make sure that we continue to push for other growth in other areas so that we can offset any of the declines that might happen as a result of these.

In addition to that, Bruce, I think we ought to understand that we have to see where the new plants are coming off because as G.M. comes down, Toyota is going up and we are servicing a lot of Toyota plants and their feeder plants.

So we have to understand where the new factories are being built, et cetera, so that plays into it as well.

What percentage of all rental volume goes into the auto industry?

Well, the only way we track that is when we say auto industry is about 17 to 18%, but that includes automobile dealerships, tire repair facilities, oil change operations, mechanics operations, all of the after market plants, so it's a wide spectrum.

Actually the number is more 14 to 15%.

And then you in to shave that down actually to the manufacturers?

I don't have that number.

Did you say you have or you don't have.

I don't have that number but it's not that significant.

Okay.

Thanks a lot.

We'll take a follow-up question from Pete Carrillo with Citigroup.

Real quickly guys, just in the cash flow statement a couple of, just a couple of items I noticed that were sort of quite negative, inventories, accounts payable, accrued liabilities, is this more timing issues or is it actually something else behind some of the movements?

No, I think there are timing things, the inventories I know was one that we really delved into and that's the build up, a part of that is a seasonal issue that always happens but also it's part of the continued sourcing throughout the world as we do more and more of that.

There tends to be more work in process of raw material in the pipeline.

There is also some build up of some account roll-outs that are going to be happening here over the next six months so that's part of it.

Accounts payable is nothing more than a timing deal.

There's nothing of any significance there.

What else did you mention?

Accrued liabilities.

Well, I think as Mike mentioned, part of that was due to the additional workday -- not additional workday but additional day to accrue.

Okay.

Thanks.

We have a follow-up question now from Michel Morin of Merrill Lynch.

Thank you.

I was wondering will you be providing some restated financials, fiscal '06 financials for the other three interim quarters?

We hadn't planned on doing that until we reported.

Okay.

Well it would be helpful if you have them ahead of that, but I guess we can follow up off-line on that.

And then with respect to the buy back, I know that there is a set criteria.

Is that the same criteria that applied to the previous buy back?

No.

It's a new set of criteria?

Correct.

Okay.

Thank you.

And that concludes the question and answer session.

Gentlemen, I will turn the conference call back over to you for any closing remarks.

Thank you all for your participation tonight and your questions.

We appreciate that.

We will be releasing or plan to release our second quarter earnings during the week of December 18 and we will speak with you again at that point.

This concludes today's conference call.

Thank you everyone for joining us.