信達思 (CTAS) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Cintas second 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, Vice President of Finance and Chief Financial Officer.

Please go ahead, sir.

Good evening, and thank you for joining us tonight to discuss our Company's results for the second quarter of fiscal 2007.

We are pleased to announce increased sales and profits for the quarter ending November 30, 2006.

Total revenue increased 10.5% and earnings per diluted share increased 10.9%.

Strong performance both with organic and acquired growth in our First Aid & Safety and Document Management businesses helped offset weaker results in the Rental Division.

The weaker results in the Rental Division were caused primarily by a shrinkage of wearers in the traditional uniform rental job group.

Direct sales of uniforms improved from the first quarter and are showing good momentum as we enter calendar 2007.

That income increased to $82.5 million, despite an increase of $5 million in interest expense over the same quarter last year.

This increase in interest expense is due to the additional borrowings due primarily to the Company's stock buyback program.

Since the initiation of the buyback program in May 2005, Cintas has purchased 12.8 million shares at a cost of approximately $524 million.

We purchased 660,000 shares in the most recent quarter and we currently have an additional authorization to purchase $476 million in Cintas stock.

We plan to continue to purchase our stock under the parameters provided to management by the board of directors.

These parameters include consideration of potential acquisition opportunities, debt to capitalization levels, prevailing interest rates, and the price of the stock.

The rollout of the new sales structure is continuing on plan.

We are seeing the expected benefit of the new structure in those groups where it has been in place for sometime.

These benefits include higher productivity, lower sales force turnover, and improved cross-selling results.

On the cost-side, energy costs did improve over the prior quarters to approximately 3.2% of total revenues.

However, we had a significant increase in our cost of providing medical benefits to our employees, which Mike will further discuss in his comments.

Our current guidance of revenues for the fiscal year ending May 31, 2007 remains unchanged.

That guidance calls for total revenues of $3.77 billion to $3.85 billion.

Earnings per diluted share are still expected to be in the range of $2.10 to $2.20.

We would also caution you to factor into any estimates you may make that our third quarter will have 64 work days while the fourth quarter, historically our highest quarter, has 66 work days.

With me today is Mike Thompson, our 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'd like to turn the call over to Mike for further discussion of the results.

Thanks, Bill.

Again, with total revenues were $923.3 million for the quarter, an increase of 10.5% over that reported in the prior year.

Our second quarter had 65 work days, the same number of work days as the second quarter of our fiscal 2006.

As Bill mentioned, the workday breakdown for each quarter of fiscal 2007 is the same as the quarterly breakdown in fiscal 2006 which means our third quarter, which will end February 28, 2007, will have only 64 work days.

Internal growth for the Company was 6.1%, which is a slight decrease from the 6.2% achieved in the first quarter.

As mentioned in our earnings release, we are currently implementing our new sales structure.

We continue to experience positive results including improvements in sales representative turnover and sales representative productivity from the regions where this organization has been in place longer.

In addition, by freeing our location general managers from their responsibility of running a sales organization, they can now devote more time to customer service and improving operational efficiencies and execution.

Rental revenues for the second quarter were $684.5 million, compared to $631.6 million last year.

This was an increase of 8.4%.

Factoring out acquisitions made over the last 12 months, our rental organic growth rate was 5.2%.

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

The U.S. manufacturing sector of the economy and those businesses which serve the manufacturing sector continue to experience employment reductions mainly through the continued offshoring of manufacturing operations, foreign competition, technological advancements and industry consolidation.

Over the last two years, millions of jobs have been lost in U.S. manufacturing and the various service businesses that support that sector.

The manufacturing sector has historically been a strong market for uniform customers and growth.

A large percentage of workers in these industries were either in the uniform program or were a potential future customer for a uniform rental program.

While we have continued to grow both our uniform business and the Company as a whole through these economic pressures, there has been and continues to be difficulty in this area.

As the manufacturing market has been shrinking, and is expected to continue to shrink, we have targeted and will continue to target other areas within the economy that are growing such as service companies and food and gaming establishments.

We have been able to successfully grow our business in spite of the significant shift in the economy and believe that our new sales structure will enhance future selling opportunities.

Other services revenue of $238.8 million increased approximately 16.9% from last year's revenue of $204.2 million.

On an organic basis, this segment of our business grew 8.9% for the second quarter.

As a reminder, the other services segment includes the direct sale of uniforms to national account customers, the sale of uniforms through our catalog to local customers, primarily customers who rent products from us, our First Aid & Safety Division, which includes our fire protection services business, and our Document Management business which is primarily document shredding.

Our uniform direct sale business, which includes both National Account Sales Division and our Rental Division catalog sales, in total increased approximately 3.5% on an organic basis for the quarter.

This business does experience more volatility in its revenue base due to the timing of new account rollouts.

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, Safety, and Fire Protection business continues to expand at a rapid rate, with 30% growth during the quarter and 14% on an organic basis.

Our First Aid & Safety business and our Fire Protection Services business each achieved solid double-digit internal growth rates during the quarter.

We are very encouraged by the value proposition we offer our customers and 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 is expanding at a rapid rate with total second quarter revenues growing 66% over the second quarter of fiscal 2006.

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

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

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 businesses in order to increase coverage our Document Management Division also continues to deliver very strong organic growth rates, achieving 31% in the second quarter.

Now I will discuss margins for the quarter.

Total Company margins for the quarter of 42.4%, a 50-basis-point increase from 41.9% in the second quarter fiscal 2006, but down 30 basis points from the 42.7% gross margin achieved in the first quarter of this year.

While remaining high from a historical perspective, we did experience some relief in energy costs during the second quarter as energy costs improved approximately 30 basis points as compared to the second quarter of fiscal 2006 as well as compared to the first quarter of fiscal 2007.

Our rental margins for first quarter were 44.5% of revenue versus 44.6% for the second quarter of fiscal 2006 and 45% in the first quarter of fiscal 2007.

Despite the improvements in energy costs, Rental's gross margins decreased by 10 basis points as compared to the second quarter of 2006 and to the first quarter of 2007.

The decrease in Rental's gross margin is due to a combination of increased material costs and increased service labor costs.

Historically, our material costs tends to increase during our second quarter as more jackets and mats are provided to our customers as we head into the winter months.

In addition to this normal increase we have also experienced an increase in rest room supply material costs.

The introduction of our Sanis UltraClean rest room cleaning service has provided additional opportunities for our rest room supply business.

These products have a higher material cost component than the majority of our other rental products and services.

Our locations have increased their supply of these products in order to handle this increased volume.

Rest room supplies are not inventoried in our locations, but rather expensed once injected into a location.

With our further expansion in the rest room supply business we are evaluating the appropriate levels of products our locations require to be kept on hand.

As we discussed last quarter, we continue to experience an increase in delivery labor due to the introduction of our Sanis UltraClean service.

This is a more labor-intensive service and our current route volumes and densities are low.

We expect labor costs to come more into line as we further penetrate our geographic markets and increase route volumes.

The gross margin in our Other Services segment continues to strengthen reaching 36.3% for the second quarter versus 33.6% for the second quarter fiscal of 2006 and 35.8% of revenue for the first quarter of 2007.

We continue to experience positive results in our National Account Sales Division from our global sourcing strategies.

In addition, increased revenues are allowing us to better leverage our infrastructure within the production area.

As we have mentioned in the past, our First Aid & Safety and Document Management divisions continue to become a larger percentage of our Other Services revenue.

As these divisions grow in size and scale, they are achieving better margin results, driving margin improvements in the Other Services operating segment.

Our selling and administrative expenses were 26.9% of revenue as compared to 26.4% in the second quarter of fiscal 2006, and 26.7% in the first quarter of the prior year.

During the first quarter of this year, we adopted FAS statement 123R, share-based payments, which requires all share-based payments to employees including grants of employee stock options be recognized as an expense based on their fair values.

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

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

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

Stock option expense for the second quarter was in line with expectations of approximately $1 million.

This resulted in a swing of approximately $2.1 million in expense from the prior quarter.

Medical costs increased during the quarter.

We experienced a 70-basis-point increase over the second quarter of fiscal 2006 and a 50-basis-point increase over the first quarter of this year.

Medical costs have continued to grow at rates greater than our revenue growth rate.

While we had experienced a less significant rise in costs on a percent to sales basis over the last two plus years that experience changed during the current quarter.

Embedded in this increase was an increase in the number and severity of high-cost claimants as compared to prior years.

We continue to leverage our G&A labor.

G&A labor experienced a 20-basis-point improvement from last year's second quarter and a 30-basis-point improvement from the first quarter.

Income before net interest and taxes increased 10.1% over the second quarter of fiscal 2006, and is a healthy 15.4% of revenue.

Income before taxes for the Rentals operating segment was 17.2%, and income before taxes before the Other Services segment was 10.3%.

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

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

We continued to hold approximately $172 million worth of 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 paper borrowings contingent on cash needs and acquisition opportunities.

As of November 30, we had approximately $90 million worth of commercial paper outstanding, a reduction of $60 million from the first quarter.

A portion of this reduction was due to the timing of quarter end and approximately $30 million in CP have been reissued to cover payroll and other needs subsequent to quarter end.

Our second quarter effective tax rate was 37.3%, which is consistent with the first quarter.

We expect the effective tax rate to remain at 37.3% for the remainder of this fiscal year.

For the quarter, net income of $82.5 million increased 7.4% over the second quarter of fiscal 2006.

And earnings per share increased 10.9% to $0.51 per diluted share reflecting operational results and the impact of share buyback program.

Our balance sheet continues to be very strong.

Our current ratio stands at 1.8 to 1.

This ratio includes $225 million of debt currently included in current liabilities as this debt comes due in June of 2007.

As previously disclosed, we 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 $172 million.

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

DSOs on accounts receivable were 39 days which represents a slight increase over the prior year.

Inventories have increased $20 million from May 31, 2006.

This increase reflects a build back to normalized levels after a significant reduction at May 31, 2006.

Our Rental and National Account Sales divisions had strong revenues in the fourth quarter of fiscal 2006, especially during the month of May.

Inventory levels have now been replenished to more appropriate levels in order to properly support customer service.

Accrued liabilities decreased approximately $62 million from May of 2006.

This decrease was mainly due to the current pre-funding of our VEBA account for medical payments and a reduction in commission and retirement plan accruals which are higher at year end.

Our total outstanding debt stood at $791 million at the end of November.

This includes the long-term debt due within one year.

Total debt as a percentage of capitalization was approximately 27.4%.

As mentioned in our earnings release, we purchased 660,000 shares of outstanding common stock during the quarter at a cost of $27.5 million.

This increases the total number of shares purchased since the inception of our share buyback program to 12.8 million shares at the total cost of $524 million.

We have an additional $476 million of authorized repurchases in our common stock program under parameters established by our board.

Operating cash flow for the six months ended November 30 was $227.3 million, an increase of $22.6 million, as compared to the $205.9 million -- excuse me -- generated during the first half of fiscal 2006.

This increase was mainly generated from a combination of increased net income and positive cash flow impact from changes in working capital balances.

Capital expenditures were approximately $81 million for the first six months of the year and we have acquired approximately $54 million in businesses through the first six months of this fiscal year.

We continue to expect capital expenditures to be between $150 million and $170 million for fiscal 2007.

We would now like to take this opportunity to open the call up to questions.

Thank you.

This question-and-answer session will be conducted electronically today. [OPERATOR INSTRUCTIONS] We'll take our first question from Mike Schneider from Robert Baird.

Good afternoon, guys.

Can you hear me okay?

Yes, Mike, we can.

Sorry, I'm in an airport.

In looking at the organic growth rate you mentioned at the outset, Bill, that basically the add stops have deteriorated during the quarter.

Can you give us a sense of how new account growth is going, though, and maybe just juxtapose that to the Project One initiatives and what impact you think you've had that's had short-term?

First off, I believe that the new business -- new account growth has been pretty robust, especially in those groups where Project One has been in place now for at least six months. one has been in place now for at least six months.

As we talked in the last couple of quarters, the plan was to have all of the regions rolled out to Project One by the end of the calendar year, and that's pretty well place.

There's been a lot of training and reorganization, restructuring of people's positions going on over the last few months in those other regions, so we would expect there to be additional improvement going forward from the results of Project One Team, similar to what we have seen in those regions where it has been in place for awhile.

Again, the new business growth is very good, very strong, and the cross-selling opportunities are very strong in those areas where it's been in place.

I think you can see that when you look at the organic growth in some of the other businesses.

So I would anticipate that we should see a improving organic growth rate in the Rental Division throughout the rest of this year.

And what type of ramp do you have built in to reach the revenue guidance that you maintain today?

A modest improvement, Michael, in the organic growth.

And depending on how significant would depend on where we end up in that range.

But is it fair to say, though, that the Rental -- your organic expectations have probably been trimmed a bit but supplemented by some acquisitions you must have done during the quarter in the Rental Division?

Yes, that's a fair statement, as well as supplemented by improved organic growth in the other businesses.

I see.

Fair enough.

Then just specific on the energy tail wind now, 30 basis points in the quarter, you probably saw a recent note, it looks like this quarter is probably the biggest tail wind you're going to have in the calendar year.

Am I looking at the data right [INAUDIBLE] and natural gas?

I think you're probably looking at it right as we monitor what's happening in the futures markets and looking at what's just happening at price at the pump these days, I think that this may be about the biggest amount we're going to get unless something dramatic happens between now and year end.

Great.

Thanks for taking my questions.

We'll take our next question from Michel Morin from Merrill Lynch.

Yes, good afternoon.

I just wanted to follow up on the Rental organic growth number.

I think, Bill, that last call you mentioned you would expect to end the fiscal year at a level above what you delivered in Q1.

Is that still a fair assumption?

Yes.

We still expect that to happen, Michel.

We knew that the rollout of Project One was going to cause some disruption in the short term, but because our plan was to have it all in place by calendar year end, which it is, we do expect improved organic growth as we go forward.

But it seems that something's changed a bit here, because the sales force reorganization wouldn't really be associated to what you've talked about in your prepared remarks, which is some weakness in the manufacturing sector.

Is that a fair comment?

I think it's a combination of both.

There's no question that the manufacturing and related service sector that services the manufacturing business has continued to show more weakness than I would have expected six months ago.

Okay.

And are there any -- is it just across the board, or are there any major noticeable differences, either from region to region, or was there a large client loss or something like that that would explain part of the weakness?

No large client loss, and it's pretty well prevalent across the country.

I'll give you an example.

We have found that the northeast was one of our fastest growing areas, you know, up until about six months ago, and it's now showing some decline.

Some specific things, the pharmaceutical businesses in New Jersey seem to be reducing workforces.

The food processing businesses in the northeast seem to be reducing workforces.

So this has kind of come on recently.

It's not just the automotive and heavy industry sectors in the Midwest that we're seeing.

Okay.

Then just on the medical costs, given that you mentioned that as a key issue and it has been something that has been a bit, not recurring, but you have mentioned it in the past, can you remind us how significant that is now as a percentage of sales?

About 3.8%.

It's 3.8% for this quarter.

Okay, great.

Thanks very much.

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

Hi, guys, good afternoon.

Hi, Gary.

A couple questions.

If I could just follow up on that last one and the healthcare costs, do you guys self-insure part of the Workers' Comp?

Is that what's going on here in terms of you said there were a bunch more claims that came through?

This is it not Workers' Comp related, this is our healthcare plan, our medical plan.

But we are self-insured through that, as well, but would it not be Workers' Comp related.

Okay, so do you self-insure the whole thing?

Can you give us any sense as to why you might have seen an increase in the claims there?

I would tell you there's two things going on there.

First, medical costs in total do continue to increase greater than our revenues, so we do continue to see slight increases on a percent to sale basis as we have over the last years.

They have just become more flat.

But this quarter we really saw an increase due to some high-cost claimants.

The number of those claimants, it's not a significant number when you think of the number, but as far as the impact of that because it's such high dollars it does have a significant impact in the quarter.

And are those the kind of things, I guess, in those cases that probably would persist for awhile so you're not expecting it to be a one quarter pop?

Not necessarily.

You can have anything from premature infants to liver failure.

It really depends.

It could be cancer.

So you can't make a rash statement that those are going to continue or not.

There's a combination of factors within there.

We can tell you there have been more of those very recently than we've had in the past.

Whether that continues, we would hope for everybody's sake, especially those involved, that it's not going to continue.

But we can't predict that, obviously.

Okay.

Great.

The option expense, that $1 million you were talking about, is that a pretty safe number to assume it will be at least close to there as we look forward over the next couple of quarters?

Yes.

Then, sorry to sound like a broken record, but the manufacturing, I remember two years ago at your investor day you gave us a big pie chart with all the breakout, and manufacturing, ex autos, was like only 17% of the mix, and at the time it was see how successful we've been in diversifying.

Is -- understanding that that segment is probably a smaller percentage right now is anything else going on, or have you seen like some segments that are now doing more purchasing and less renting or is there any other big picture trends, or is it literally just that manufacturing continues to be very weak?

I think it's the -- and Bill can talk to this as well -- but I think the key is it's not just the manufacturing sector, it's the businesses that are servicing the manufacturing sector.

It's a large plant, instead of being 1,000 people, it's 700, but then also the businesses around it, warehouses, electricians that service it, plumbers, et cetera, anybody that services that business is getting a decline as well.

So we're getting it not only through the manufacturing sector but those businesses that are supporting those businesses in the manufacturing sector.

So we're kind of one step out, so to speak.

Gary, we're really analyzing this a lot trying to understand it because we do acknowledge that we've always stated that manufacturing by itself is less than 20% of our overall business, but there's a multiplier effect that seems to be taking place with other businesses that, as Mike said, that service the manufacturing.

We're still analyzing it.

We're looking at it, trying to determine, make sure that there's nothing that we're doing wrong, but it's basically, as Mike Schneider pointed out, it's a shrinkage of existing workers and customers that we have and there's just less business that they've got there, so we're going to have to figure out how to address the growing employment sectors in this economy with products and services that will be appealing and conducive to us to get that top line growing again.

Okay.

Then just one last one.

You've -- I guess at your last couple of investor days broken down the Rentals Division in a couple groups.

Is it safe to say that the floor mats business is getting closer to maturity and so no longer growing a lot faster than the actual rental of uniforms?

Then the second part of the question, how's hygiene doing?

For awhile you were giving us a growth rate there and for awhile it had been double digit, but I assume that must have slowed down as well?

We have not provided the details on that, but I would indicate that both dust control and hygiene are in excess of uniform rental.

Substantially so, or --

I would say the mats are not quite as much ahead of garments as the hygiene, but they are materially ahead of it.

Okay, great.

Thanks a lot.

You know, I'd like to comment, too, Gary, because I want all the listeners to understand that, you know, look at -- don't just keep focusing on this rental business now.

Let's also look at some of the growth that we've seen is in the First Aid & Safety, Fire Service and Document Management businesses, because part of our strategy has been to become the service -- the service provider to cross other types of businesses.

So we are focusing on that.

We're focusing on cross-selling, and we're going to continue to see very nice increases in growth rates, I believe, going forward in those other businesses.

And you can see, in our internal growth was 6.1% versus 6.2% despite the weakness in uniform rental this quarter.

Yes, no, congratulations on that.

That continues to be a great part of the story.

Thanks a lot.

We'll take our next question from Peter Carrillo from Citigroup.

Bill, you stole away my material there, I had some questions on Other Services and now I feel like I'm playing to you, but I'm not.

Gross margin in Other Services, why was it up so strongly, I guess both year-over-year and sequentially?

Was there anything one-time at all, or is that purely just the new businesses are doing that much better now?

I would tell you it was, as Mike pointed out, improvements across the board in each of the sectors.

But there's also an impact of the more rapid growth in First Aid Safety, Fire and Document Management, which have higher margins than the direct sale of uniforms continues to push up that margin in that Other Service sector.

Okay.

Trying to sort of weave in some of the seasonality stuff, as this business improves, not necessarily sequentially, but as it improves year-over-year for several quarters in a row now, are we finding, I mean, as we get into '08, I guess we're establishing a base somewhere that we're not going back down below, right?

Let's say last quarter was 35.8%.

Is this 36.3%?

We're going to continue seeing some improvement, 20, 30 basis points a year kind of thing year-over-year.

Or is that able to be estimated at this point?

Yes, as long as you factor in that the National Account Sales Division, direct sale of uniforms, is not always a straight line up.

You can get those quarter-to-quarter variations, and the revenue generation in those businesses really can help or hurt you in gross margin because you can cover a lot more fixed costs with increased revenues there.

As long as you factor that business in a little differently.

The trend though, I think, Pete, is accurate.

You can assume that over time the trend line will certainly be improvement in Other Service margins.

And then in terms of, do you have an operating margin -- I'm sorry, operating income in dollars for the two segments?

Yes, Rentals income before taxes, was --

Yes.

Was $117.8 million, and Other Services income before taxes was $24.6 million.

24.6.

Okay.

On the SG&A thing, I seemed to have missed part of what you were saying earlier.

Last quarter had, you said a $2 million -- can you explain that 1Q versus 2Q what happened to SG&A?

You're talking about share-based payments?

Yes.

We had a $1.1 million reduction in expense in the first quarter, and we add a $1 million expense in the second quarter.

So when you look at SG&A there's a $2.1 million additional expense in the second quarter as compared to the first quarter for the expensing of stock options and related forfeiture rates, thereon.

Okay, but in terms of going forward there shouldn't be much of a different --

Right, going forward we're saying it should be about $1 million, which is consistent with what happened in the second quarter.

Okay.

I think that's it for now.

Okay.

Thanks, guys.

We'll take our next question from Brandt Sakakeeny from Deutsche Bank.

Thanks.

Hi, Bill and Mike.

A couple of quick questions for you.

Actually, Bill or Mike, do you have the number of billing days this quarter?

65.

65, okay.

So next quarter we have one fewer billing day.

That's correct.

Okay.

And then, Bill, you had said that we should expect an acceleration of the Rental growth.

I presume that's a function of the impact of the new account growth and not the presumption that you expect the add/stop or some other dynamic to actually reverse and improve.

Is that fair?

That's a fair assumption.

Okay.

Great.

With respect to the SG&A costs also, so are we to infer that those costs, or at least the margins, should improve as productivity improves, so basically this is the low point of the SG&A expressed as a percentage of sales?

Barring an unforeseen situation, I would think this would be.

You know, we would never have expected or predicted these medical costs to have taken that big jump, you know, from what we had seen in the prior quarter, so we're hoping that's more of an aberration that an ongoing situation.

But I would say, then absent any significant legal expenditure that we might have to incur, I would think that this should be relatively the high point of G&A costs.

Okay.

And from a sales productivity standpoint, it sounds like what the organization in place that should start to show some gains going forward.

Is that true?

That is our expectation over the next six months that it should.

Okay, perfect, that's all I had.

Thanks.

We'll take our next question from Kartik Mehta from FTN Midwest.

Good afternoon, Bill and Mike.

Question, Bill, what about the pricing environment?

It seems like the environment is getting a little tougher on the add/stops.

You're having success on the new account growth.

Is that making it a little bit tougher to get the price increases you have in the past, or are the price increases about similar as they were over the last 12 months?

I would say they're probably a little less robust than they were, you know, six, nine months ago.

We are seeing increased activity among our competitors in terms of offering, you know, lower prices and we are making sure we meet that competition where it makes sense.

We're seeing obviously with the reduction overall in fuel costs, you're seeing less willingness on the part of our customers to accept the price increases as readily as they did before, so I'd say there was a modest down tick in the ability to pass along increases in prices.

From a big picture standpoint, Bill, trying to get Cintas back to double-digit revenue growth it seems as though, obviously, with what's happening in Rental this is a little bit of a step back.

I know Other Services are doing well.

But, I mean, do you anticipate that you could get back to double-digit revenue growth and will it take maybe more than 12 months, considering we're at 6.2% now?

First off, Kartik, I would tell you we just had our 6th consecutive quarter of double-digit revenue growth, so we are there.

Now, if you're referring to organic revenue growth, we still believe that we are -- we will be able to get back there.

We didn't anticipate as much of a difficulty with some of our rental business as we've experienced, but we would anticipate that with the combination of the rapid growth in the other businesses as well as the benefits coming forth on Project One Team, that we should be able to get back to double-digit organic growth rate at some point in the not too distant future.

Right.

I apologize.

I meant organic revenue growth rather than total revenue growth.

I always thought that when you referred to revenue growth that's what you had meant.

One last question.

How -- it seems as though you're having success with the cross-sell.

Is that -- I would think, isn't there a function of, as the add/stops get a little bit tougher, business gets a little tougher, it's tougher to get cross sales, or is it just the fact that you have been able to provide some very good value add products and that's what's really helping?

I definitely think it's the latter.

I believe that companies recognize the value of providing some of these Other Services either in the Rental Division through hygiene services or facility services or the -- in the First Aid & Safety, Fire, Document Management business they're realizing there's a lot of value to them to have Cintas provide these things.

So I think that you're going to see some real momentum over the next couple of years in the whole cross-selling effort because of the value proposition that we're offering.

Thank you very much.

I appreciate it.

We'll take our next question from Mike Fox from JPMorgan.

Good afternoon, guys.

Most of my questions have been answered, but I just have a couple of follow-ups.

How is the retention rate in the uniform rental space?

You're talking about from a customer standpoint, Michael?

Yes, your customer retention.

It has -- it's a little less than what it was back in probably seven, eight years ago, but it's still in the low to mid-90s area.

Okay.

I guess it's been about five years or almost five years since you guys were a little bit more competitive on price before you returned back to the value-based pricing.

Has that made it any more difficult to retain customers when the contract has been renegotiated?

Can you just talk about some of those contracts where, have you been able to get better pricing when you have renegotiated, or people have gone elsewhere, or what kind of experience you've had?

Our studies show that we have not lost any more business than we used to lose to competitors on price.

So I don't think it's caused us any difficulty there, but I do believe that we have had to be sure that we're more pragmatic in setting the price when we go for a renewal of a contract.

And so I would say that there has been certainly some downward pressure on renewals from maybe what it had been 10 years ago or eight years ago.

In conjunction with that I also think with the retention rates, the downward pressure has been with businesses going out of business, more so or -- than any change in our retention of existing customers, so to speak.

Okay.

Just to follow up, I know this has been talked about a lot, but it sounds like you do have some confidence that the organic rental growth rate is going to improve, and it sounds like it's mostly on the new business.

So is that just continuing the Project One and that kind of paying off or is there more there?

I think that's where our confidence comes from, is that what we're putting in place is going to have a -- an impact going forward.

Again, when we -- every time we report organic growth we're always reporting over the past 12 months, so it's going to take a little while for it to click in there, but I am very confident that based on what I hear and what I'm seeing that barring, assuming the economy continues at a level that it's kind of at, I would expect there to be improved -- improvement going forward.

Okay.

Thanks a lot.

[OPERATOR INSTRUCTIONS] We'll take a question from Peter Carrillo from Citigroup.

Couple quick ones real fast.

Energy as a percentage of revenue a year ago, can you give us that figure?

I think it was 3.2 this quarter?

Yes, 3.2 this quarter --

3.5.

3.5.

Right, okay.

And just sort of, I mean, in terms of, I'm sure there's some real weak pockets in the manufacturing pockets of the country.

Any thoughts at all, or any talks at all about closing down either a branch or plant in an area where there's particular weakness or you're much more exposed to manufacturing?

Overall, it's not a big part of the business.

The thing to keep in mind, Pete, is we're still growing.

So what you're seeing is probably less capital expenditure in some of those slower growth markets as opposed to shutting anything down.

So I wouldn't anticipate anything like that.

Now, we did have a closure of a facility in Detroit that we had acquired from Unitog but that really wasn't due -- the only reason we were able to shut that thing down was because we had acquired a plant in the Van Dyne Crotty acquisition that enabled us to do that.

But going forward, I don't know of any reason that we would shut down a plant because of lack of business.

We may shut down a plant because we want to get into something that's more modern, and that will happen.

I guess I asked the question for this reason.

As you think, and dig into what's in Scott's head a little bit as far as strategy going forward, it seems like -- we are impressed by the Other Services part of the business.

Clearly, that's the part that's distinguishing you from your competitors.

That part of the business has gone very well and it's a nice percentage of your overall revenues, but it seems like there's a little bit of a race going on here.

Obviously, the labor composition in this country is changing and more and more away from manufacturing, what I would call uniform wearing individuals or uniform wearing workers.

If that rate of -- if the composition changes such a fast rate, that it's such a fast rate that you aren't able to replace it with enough Other Services revenues then the overall businesses won't look so great anymore at some point.

Would you say it's fair that you're sort of racing to get the Other Services business fast and get margins up high enough that they can essentially down the road replace the rental business, so to speak?

I think we're certainly doing that in the Other Services because we see the great opportunities that are there.

But I would tell you that in the uniform side I think the challenges that we have and that we are attacking is we're looking at where the employment is at, the whole idea of a rental program still makes a lot of sense.

And we believe that we need to come up with the right type of products and the right service offerings.

Maybe we need to tweak our service offerings a bit from what the traditional approach had been, but there are opportunities out there.

The business is changing, and we just need to change with it.

Okay.

Great.

Thanks.

And we'll take our next question from Fred Speece from Speece Thorson Capital.

You made about $25 million of acquisitions this quarter and last quarter.

Can you give us some sense of where that -- those acquisitions were, which divisions?

Sure.

Predominantly, as it has been over the last year, we continued to expand in our Fire Protection Services and our Document Management business, obviously, taking out the Van Dyne Crotty acquisition last year.

So that's been the majority of our activity, has been in those two businesses

Okay.

And I don't have the organic sales for Fire -- First Aid and Document -- the previous quarter.

Are they up this quarter sequentially?

I think they're comparable.

I'm not sure if they were necessarily up that dramatically.

Okay.

Good.

Thanks.

Yes, they're very close.

Okay.

Good.

Thank you.

[OPERATOR INSTRUCTIONS] And we'll take our next question from Michel Morin from Merrill Lynch.

Yes, just wanted to know in terms of the organic growth again, presumably, as the sales force has been reorganized you haven't been hiring perhaps as aggressively as you have historically?

Is that a fair observation?

We are -- that's a fair observation.

I think it's a combination of, you know, focus on getting the existing sales force trained and reacclimated to their roles as well as just an availability of good sales talent.

That's still a challenge out there.

However, with the recent announcement on all the pharmaceutical companies that they're reducing their sales forces we think that that opportunity may reopen and we may see a greater supply.

And is your sales force -- is the size of your sales force up year-on-year?

It's up, yes.

It's not up as much as we would like it to be.

And certainly not much -- as high as you would have had a year ago?

No, it's up over a year ago.

No, I mean in terms of the growth rate.

The growth rate has slowed presumably.

Specifically on the sales force, I don't have those numbers with me, Michel.

Okay, and then just a point of detail for the modeling purposes, what was your number of shares at the end of the period?

Would you happen to have that?

Well, the average numbers that were shown at the bottom of the schedule, we may have to get back to you with that one, Michel.

All right.

Thank you.

We'll take our next question from Greg Halter from Great Lakes Review.

Good afternoon, guys.

Hello, Greg.

Hello.

I hope I'm coming through.

We're getting some static here.

Some feedback there for a minute.

Question for you regarding the hurricane impacted areas.

I know in the past you have indicated that they're not up to speed and you don't expect them to be for years.

Are you still around 50% of pre-hurricane levels?

In total, what does that represent of the Company?

Is it 2% or 30%?

No.

It's much less than 30%.

It's down in the -- probably 1% or less.

Greg, I have to answer that question a little bit differently.

I mean, a little bit more than just yes or no.

We're finding that our uniform rental operations in the hurricane ravaged areas are getting back up close to where they were pre-hurricane levels.

The most significant reduction was in New Orleans, and I have just recently found that that has -- is getting very close to where it was prior to the hurricane.

So that's the good news there.

On the direct sales front, we're still waiting for the redevelopment of the gaming and lodging industry along the Gulf Coast, especially in the Biloxi, Gulfport, Mississippi areas.

We'll see some nice business coming out of that here over the next 18 months with some of these new properties open up bigger than what they were pre-hurricane.

Okay, that's helpful.

Have you implemented any sort of hedging program on the energy side?

I know you've indicated in the past you have not but just wondered if you've reconsidered that?

We did not implement any hedging program at this time.

We continue to evaluate and look at it, but we really haven't done anything on a look at it, but we really haven't done anything on a large basis.

Okay.

And given your Other Service margin at, I think it was 36.3%, which is actually, again, getting close to the upper limit that you had set, just wondering if you're willing to expand where you think that can go, especially in light of I think the pre-tax was up 44% year-over-year in that particular area.

It's so hard to say, because, you know, it's -- it depends on the mix in any one quarter.

All of a sudden, let's say we have a huge spike in direct sale of uniforms.

I don't want people criticizing us for the Other Services margin being done because of the positive impact of the direct sale.

But there's no question that the trend line will continue to go up.

I don't have a, I'm not prepared at this point to tell you what the new limits would be, but it's certainly going to improve, and we'll look at that as we go forward and perhaps we can give further color on that, maybe at the end of the fiscal year.

Okay.

Your receivable days have ticked up slightly, I think it was one day year-over-year and two days over the last two years.

Any comment on the lengthening there?

We really looked into it and we really believe it's more timing than anything.

Our bad debt expense is actually in line with the prior quarter and last year, so we don't see anything from a concerning standpoint, you know, that amount of receivables are growing, obviously, based on our revenue growth, it's been in excess of that for the DSOs to tick up a little bit, but our older receivables, so to speak, haven't really deteriorated.

We'd see that more from our conservative reserving policy that we'd see an uptick in the expense, and we haven't seen that.

So while we're looking at it and analyzing it and, obviously, we want receivables to be going the other direction in total it hasn't been anything that's been alarming.

All right, and one last one for you.

I think on the last call you had indicated that your guidance, the $2.10 to $2.20, did not include any potential from share repurchase, and I'm wondering if that is still the case today?

Yes.

All right.

Thank you.

And we'll take our final question from Elliott Schlang from Great Lakes Review.

I'm sorry, Greg just asked them, and I have laryngitis.

Congratulations on a good quarter.

Thank you, Elliott.

Good-bye.

And, Mr. Gale, there are no further questions at this time, sir.

Well, I'd like to thank everyone for participating in tonight's call.

I'm sure many of you have a lot of busy things needing to be done this time of the year.

Mike and I wanted to extend our best wishes to you and your family for a great holiday and a prosperous 2007.

We'll look forward to speaking with you again in March.

That does conclude today's conference call.

Thank you very much for your participation, and have a wonderful day.