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Operator
Good day, everyone, and welcome to the Cintas quarterly earnings results conference call.
Today's call is being recorded.
At this time I would like to turn the call over to Mr.
Bill Gale, Vice President of Finance and Chief Financial Officer.
Please go ahead, sir.
Bill Gale - VP-Fin., CFO
Good evening, and thank you, for joining us to hear the results for our third quarter of fiscal 2007.
We are pleased to announce increased sales and profits for the quarter ending February 28, 2007.
Revenue grew at a rate of 8.2% to $905 million.
Earnings per share were $0.48 versus the $0.45 a year ago, a 6.7% increase.
During the quarter, the Company purchased 1.4 million shares of Cintas stock under the authorized share purchase program.
Our financial condition continues to remain strong.
At February 28, debt to capitalization was 30.1% despite the expenditure of over $135 million for acquisitions this year and the repurchase of approximately $200 million of our stock so far in fiscal '07.
Last week the Company also paid its annual dividend of $0.39 per share an 11.4% increase over the dividend paid last year.
Due to the lower rental revenues, in the third quarter from what we had previously expected, as well as the recent trends in the growth components, we are adjusting our guidance for the year.
For the entire year we expect revenues to be in the range of $3.675 billion to $3.725 billion and earnings per share to be between $2.03 and $2.08.
With me today is Scott Farmer, our Chief Executive Officer and Michael Thompson our Vice President and Treasurer.
After some comments from both Mike and Scott, 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.
I would now like to turn the call over to Mike Thompson.
Mike Thompson - VP, Treasurer
Thanks, Bill.
As Bill mentioned, total revenues were $905.4 million for the quarter an 8.2% increase over that reported in the prior year.
Our third quarter had 64 work days, the same number of work days as the third quarter of fiscal 2006.
As a reminder the workday break down for each quarter of fiscal 2007 is the same as the quarterly breakdown in fiscal 2006 which means our fourth quarter which will end May 31, 2007, will have 66 work days.
Internal growth for the Company was 4.5% as compared to 6.1% in the second quarter.
Rental revenues for the third quarter were $665.6 million compared to $631.3 million last year.
This was an increase of 5.4%.
Factoring out acquisitions made over the last twelve months, our rental organic growth rate was 3.0% for the quarter.
As mentioned in our earnings release our revenue growth has been impacted by a few factors.
First, we experienced a mild winter season into early February.
Our third quarter is traditionally a slower growth quarter when looked at on a sequential basis.
This is due to the fewer amount of work days caused by customer closings around the holidays and the short month of February.
Typically increased volume from the seasonal injection of jackets and mats helps offset these items.
This year's delayed winter weather did not allow this to occur.
We also continued to experience external economic pressures especially in our uniform rental business.
Many traditional uniform wearing industries continued to show declines in domestic employment due to off-shoring and improving technologies.
Employment levels within our customer base continue to be negatively impacted, not only through the direct reductions in the number of people wearing uniforms in such businesses but also via the ripple effect this reduction has on numerous ancillary businesses that depend on those businesses for a portion to all of their livelihood.
These ancillary businesses include all types of companies, ranging from part supplier to distribution centers, to electricians and plumbers servicing these facilities to local restaurants and bars surrounding these facilities.
Unemployment levels in the overall economy have remained relatively low with offsetting growth occurring mainly in the healthcare, financial services, government, and until recently housing sectors.
These sectors have not been a large part of our traditional uniform rental base.
We continue to grow in all of our lines of business, but the leakage from lost business and stops continues to be higher than traditional levels.
There has also been a disruption in our new business from the continued implementation of our new sales organization.
Scott Farmer will provide an update on the current status of this initiative in a moment.
Other services revenue of $239.8 million increased approximately 16.9% from last year's third quarter revenue of $205.1 million.
On an organic basis, this segment of our business grew 9.3% for the third quarter as compared to 8.9% in 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 rank products from us, our our First Aid & Safety division, including Fire Protection Services and our document management division which is primarily document shredding.
Our uniform direct sale business which includes both our national account sales division and our rental division catalog sales in total increased approximately 5.3% on an organic basis for the quarter.
As a reminder, 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 sectors for our national account sales division.
The First Aid & Safety division which includes the Fire Protection business continues to expand at a rapid rate with 25% growth during the quarter and 11.4% on an organic basis.
Our First Aid & Safety business and our Fire Protection Services business each achieved double-digit internal growth rates again this 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, services, and geographic coverage of this business.
Our document management business is expanding at a rapid rate with total second quarter revenues growing 56% over the second quarter of fiscal 2006.
I am sorry, that's the third quarter.
After entering this space approximately four years ago, we have now grown to a business with an annual run rate of over $110 million in revenue.
We are servicing approximately 150 markets in the United States and Canada including approximately 80 of the top 100 markets.
Given our size and scope in this business, we now consider ourselves to have national coverage.
We will continue to fill in the remaining footprint with strategic acquisitions or greenfield start-ups as opportunities arise.
Our document management division continues to deliver strong organic growth rates achieving 27% organic growth in the third quarter.
I will now turn the call over to Scott for some additional comments.
Scott Farmer - President, CEO
Thanks, Mike, and good evening, everyone.
Before Mike takes us through the rest of our third quarter results, I felt it important to provide everyone with an update of our ongoing sales reorganization which we call Project One Team.
At Cintas we've always prided ourselves on having a top-tier selling organization.
In fact, Selling Power magazine recently identified Cintas as one of the top 50 companies to sell for.
This award is presented to companies with large sales forces based on various factors including compensation, training, and career mobility.
We believe that our new Project One Team initiative will take a great sales organization and make it even better.
As you may recall, historically our sales process was manage on a local level with individual sales reps and sales managers reporting through local General Managers within a specific line of business.
The Project One Team structure provides for a separate professional sales organization that reports up through the organization directly to me.
The new structure is designed to improve revenues, to increase sales rep productivity, improve cross-selling opportunities, and reduced sales rep turnover.
Another benefit of the new sales organization is the additional time our local General Managers now have to devote to the operational side of their business.
By having the sales teams now report to a separate organization, we freed up approximately 20 to 25% of our General Managers time, time they can now use to address their service and production areas of the business as well as take better care of their customers.
Many projects are under way in these areas which are designed to reduce lost business and to become more efficient in our processing and delivering techniques.
While we're still in the early stages of this process, one encouraging sign is that our rental division customer satisfaction index has risen to its highest level in many years.
As we mentioned in our second quarter earnings call, the Project One Team organization was rolled out to all of our groups as of the end of December.
The new organization is now in place across the Company.
We're very encouraged by the early results of this new organization.
The transition to this new organization as expected, has led to some disruption in the amount of new business being sold.
During the process we promoted many high-performing sales representatives into managerial positions and then we hired or back filled a significant number of partners into the open sales territories.
These new sales representatives are not producing at levels comparable to those sales representatives who were promoted.
We expect the full benefit of the new sales organization to occur once the new sales managers and sales representatives have been properly trained in their new areas of responsibility and gain experience in their new positions.
For example, a new uniform sales rep typically takes nine to twelve months to become fully productive.
Even though it is still early in the transition process, we're already seeing positive signs from the new organization.
Our sales rep turnover is improving.
In fact, our sales rep turnover is now lower than it has been in many years.
We're also seeing some very positive results of our sales retraining effort.
The new training programs have been established in order to provide our salesforce with the tools necessary to properly identify and execute on cross-selling opportunities.
These new programs also are providing a more consistent approach to the fundamentals of the sales process along all lines of our business.
In the short-term this training has pulled our sales reps and our sales managers from the field thereby reducing the amount of time they have to sell new business.
However, these new training programs are providing a solid foundation for future growth.
For example, while we're still very early in the process, preliminary results have shown that we're now achieving better pricing on new uniform rental business being sold.
Our cross-selling results are improving.
Cross-selling improvement is currently being seen through the improved growth within our other services segment mainly due to the size of these divisions and the amount of customers versus the sheer size of the rental division.
As mentioned earlier our internal growth for our other services segment was 9.3% for the quarter.
While we're experiencing some economic head wind, we're excited about our future growth prospects in all lines of our business.
We believe that we're now better organized today to take advantage of these opportunities.
In fact, after seeing our preliminary results under Project One Team and the positive impact we believe it will have once it is fully in place, we wish we would have implemented this structure two or three years ago.
I will now turn the call back over to Mike for some additional financial information.
Mike Thompson - VP, Treasurer
Thanks, Scott.
I will now discuss our margins for the quarter.
Total company margins for the quarter were 42.6%, a 20-basis point increase over 42.4% in the second quarter of fiscal 2007 and a 40 basis point increase over 42.2% in the third quarter last year.
From an historical prospective energy costs remain high.
Energy costs for the third quarter were approximately 3.3% of sales versus 3.1% in the second quarter and 3.8% in the third quarter last year.
The 20-basis point increase in energy costs from the second quarter was mainly due to increased fuel costs or natural gas used primarily to run our rental plants.
Delivery gas and electricity were comparable with the second quarter.
We traditionally experience an increase in energy costs from the second to third quarter due to colder weather.
This year's quarterly increase in energy costs was not as significant as prior years mainly due to the milder weather.
The 50-basis point margin improvement in energy costs when compared to last year's third quarter was due to a decrease in fuel costs mainly to run our rental plants.
This was due to a combination of the milder weather this year and a reduction in the price of fuel.
Delivered gas and electric were comparable to the prior year.
We have not seen a sustained reduction in the price of gasoline or diesel.
Our rental margins for the third quarter were 44.2% of revenue versus 44.5% for the second quarter of fiscal 2007 and 44.5% in the third quarter of fiscal 2006.
The decrease in rental gross margin of 30 basis points from the second quarter was due to the increase in energy costs as well as an increase in service labor.
When comparing rental gross margin to the third quarter of fiscal 2006, the favorable energy benefit of 50 basis points was offset by increased delivery costs.
The additional reduction in rental gross margin was due to a combination of factors including increased depreciation on ultra clean trucks and some additional equipment maintenance.
As we have mentioned on previous calls, we are experiencing increased delivery labor costs due to the introduction of our Sanis UltraClean service.
This is a more labor intensive service, and our current route lines 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 38.1% for the third quarter versus 35.3% for the third quarter of fiscal 2006 and 36.3% of revenue for the second quarter of 2007.
Our First Aid & Safety and Document Management divisions continue to gain scale and become more profitable businesses.
Their high growth rates and related margin improvement are driving the overall margin improvement and the other services operating segment.
Our selling and administrative expenses were 28.0% of revenue as compared to 26.9% in the second quarter of fiscal 2007 and 26.8% in the third quarter of the prior year.
As a reminder, all employee benefits and costs -- I am sorry, all employee benefit costs for the entire company other than wages and bonuses are included in our administrative expenses.
This includes medical and retirement costs as well as payroll taxes and workers' compensation.
Medical costs increased by 10 basis points from the second quarter but were 50 basis points higher than last year's third quarter.
The decrease from the second quarter was a combination of a lower, more normalized high cost claiming figure than we saw in the second quarter.
Offset partially by an increase in the number of participants in our plan.
While our medical plan is especially self-insured we did switch administrators on January 1.
At that time we also had our annual open enrollment.
With a move to the new provider and plan, we experienced an increase in the number of partners that are on our medical plan.
When compared to the third quarter of last year, the 50-basis point increase in medical costs is a combination of rising medical costs and the increase in number of participants.
Payroll taxes were flat when comparing the third quarter of fiscal 2007's percent to sale as compared to the third quarter of 2006.
However, there was a 60-basis point increase in these costs from the second quarter of 2006.
This is an annual occurrence as the calendar tax year ends during our fiscal third quarter and payroll taxes reset.
Selling expense increased 30 basis points over the second quarter and 70 basis points over the third quarter of fiscal 2006.
This investment is being made in the new sales structure in order to benefit growth in the long-term.
G&A labor was flat as compared to the second quarter and down 10 basis points versus last year.
Income before net interest and taxes increased 3.2% over the third quarter of fiscal 2006 and is a healthy 14.7 of revenue -- 14.7% of revenue.
Income before income taxes for the rental's operating segment was $105.2 million or 15.8% of revenue, and income before income taxes for the other services segment was $27.5 million or 11.5% of revenue.
Net interest costs increased 1.1% of sales from 0.6% of sales in the prior year third quarter.
This increase is due to additional debt taken on to fund acquisitions and the funding of our share buyback program.
We continue to hold approximately $157.5 million in cash and marketable securities rather than prematurely liquidating 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 February 28, we had approximately $170 million of commercial paper outstanding, an increase of approximately $93 million from the second quarter.
Our third quarter effective tax rate was 37.3% for the quarter which is consistent with the second 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 $76.7 million increased .2% over the third quarter of fiscal 2006 and earnings per share increased 6.7% to $0.48 per diluted share reflecting operational results and the impact of the share buyback program.
The balance sheet continues to be very strong.
Our current ratio stands at 1.7 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 this swap is included in our most recently filed 10-K.
Cash and marketable securities stood at approximately $157.5 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 40 days which represents a slight increase over the prior year.
We have noted our customers on average taking longer to pay their bills which is indicative of a more difficult economic environment.
We have not experienced a change in our level of write-offs but rather in the timing of collections.
Inventories have increased $29 million from may 31, 2006.
This increase reflects a build back to normalized levels after a significant reduction at May 31, 2006, as well as the introduction of new products and the result of revenue growth.
Our rental and national account sales divisions had strong revenues in the fourth quarter of fiscal 2006 especially in May.
Inventory levels have subsequently been replenished to more appropriate levels in order to properly support customer service.
Accrued liabilities increased approximately $46 million from May of 2006.
This increase was due to the dividend payable to shareholders of approximately $62 million.
Our total outstanding debt stood at $884 million at the end of February which includes the long-term debt due within one year.
Total debt as a percentage of capitalization was approximately 30.1% and net debt to cap was 26.1%.
As mentioned in our earnings release we purchased 1.4 million shares of outstanding common stock during the quarter at a cost of $57 million.
This increases the total number of shares purchased since the inception of our share buyback program to 14.2 million shares at a total cost of $580 million.
We have an additional $420 million of additional authorization to purchase our common stock under parameters established by our Board.
Since the inception of the buyback program we have purchased approximately 8% of our outstanding shares.
Operating cash flow for the nine months ended February 28, was $322 million, an increase of $11 million as compared to the $311 million generated during the first nine months of fiscal 2006.
This increase was mainly generated from an increase in net income.
Capital expenditures were approximately $129 million for the first nine months of the year.
We expect capital expenditures for fiscal 2007 to be approximately $160 million to $170 million.
During the third quarter, we spent approximately $140 million on a combination of acquisitions and share buybacks.
In addition, we accrued approximately $60 million for our annual dividend payment.
The $0.39 dividend was paid to shareholders in March.
This concludes our formal remarks and I would now like to open the call to any questions.
Operator
[OPERATOR INSTRUCTIONS] We'll hear first from [Scott Schneiberger] of CIBC.
Scott Schneiberger - Analyst
Good afternoon.
For -- a Project One question to start off.
On an absolute level, how has head count changed throughout the process, and where do you see that going from here?
Scott Farmer - President, CEO
Well, we don't typically report on the number of sales people that we have in our sales organization.
I think that what the benefits of this will be will be a more consistent salesforce as a result of lower turnover so that we'll have more people in their sales positions longer, and therefore see sales productivity go up.
Our sales head count is going to be based on the opportunities that we see within certain geographic markets and things like that, so the ideal head count will be designed around the number of prospects and the number of opportunities that we have in that market, but the one team organization is more designed to improve rep productivity, reduce turnover and improve our opportunities to cross-sell our various businesses.
Scott Schneiberger - Analyst
Thanks.
You had indicated in the press release that six months to a year is what it takes for new reps to fill the shoes of the reps that were promoted.
Where are we in that process?
Do we have to wait another couple quarters?
When do we see a turn there, would you say?
Scott Farmer - President, CEO
Well, the full organization went live by the end of the calendar year on the new organization, so in the third quarter we had a lot of training time, a lot of those people promoted into their jobs at the beginning of that quarter, so as every month goes by, we'll see their tenure and their expected productivity continue to improve.
The guidance that we want to give is through the end of this fiscal year, and we don't want to be overly optimistic about what's going to happen beyond that.
So although we're very excited about what the impact will be, I can tell you that I would like to get a couple more months under our belt of what the real activity is and we'll provide guidance for next fiscal year based on what we see.
That said, every month it goes by that these sales reps and sales managers are in their new position is going to generate improvement in their ability to accomplish their jobs.
Scott Schneiberger - Analyst
Thanks.
Just on the core rental business, you noted some verticals where you've been seeing decent performance overall with decelerating growth, though.
What are you doing within some of those verticals, healthcare, financial services, government, et cetera to continue to drive business?
Bill Gale - VP-Fin., CFO
Well, we're looking at some additional products that will be more conducive to a couple of those segments, but I would tell you that as far as uniform rental is concerned we're not going to be seeing much activity in the segments of financial services or government, but we are seeing some great opportunities with some of our other businesses, especially in financial services, and we're seeing a lot of great opportunities in the uniform business in the healthcare market, so as we continue to develop products and delivery techniques in those segments, I think that will help fund growth as we ride that economy -- that area of the economy that continues to improve.
Scott Schneiberger - Analyst
One more quick one, and then I will hop out.
You had foreshadowed that you were thinking of going international and wouldn't be a matter of a year or two but multiple years.
Does the slowing that you're seeing now speed up that initiative?
Thanks very much.
Scott Farmer - President, CEO
Well, I guess the best way to answer that is that we are analyzing where our opportunities would be in our different business segments relative to opportunities internationally.
I think you all know we're in Canada and Mexico and the Caribbean, and with the hotel industry and the cruise line industry and things like that, but really offshore into Europe or Asia or something like that, we're looking at our opportunities and what might make sense while we have said in the past that we would look out into the future and it might be a few years out.
I would say if the right opportunity presented itself sooner than that, we would certainly take a look at it.
And so I think we're in that process right now of evaluating what would make sense for us.
Mike Thompson - VP, Treasurer
I think on top of that also, the other part of the question was because of our slowing growth rate, we would not look to international because of a slowing growth rate.
Here we see a lot of opportunity, we see a lot of benefit from this new sales organization.
We don't feel compelled to look for that growth elsewhere at this point in time although if opportunities arise as Scott indicated we would look at that.
Scott Schneiberger - Analyst
Thanks.
Operator
Next we'll hear from Michael Schneider of Robert W.
Baird.
Michael Schneider - Analyst
Good afternoon, guys.
Scott Farmer - President, CEO
Hi, Mike.
Michael Schneider - Analyst
Maybe first we can start just with Project One, Scott, and all of you are very optimistic about the ultimate returns from this.
Can you give us a sense, and sounds like you have got some data from the early field deployments to back this up.
Can you give us a sense of what new business growth is in some of the first territories to adopt Project One and who are presumably beyond the six to nine-month period versus some of the newest ones that are just being impacted by the disruption to give us some confidence and give us the basis for which you're confident?
Scott Farmer - President, CEO
Well, I guess that I can give you some generalities in this regard.
We have seen improvement in sales rep productivity.
We have seen a reduction in sales rep turnover which has the level of sales rep turnover we haven't seen in several years, so that's a big positive.
The cross-sell activity continues to improve in these markets, more so than the markets that we just rolled this out to, so that I think the experience and the tenure of these folks in these areas helps drive that, and I would say one of the big things from an overall company standpoint is the opportunity that our General Managers have now to spend significantly more time in their business is definitely showing an overall improvement in our customer satisfaction scores, and I think that that obviously bodes well for our ability to continue to cross-sell.
It is more likely for a happy customer to want to add one of our new products or services likelihood of renewing those customers, and reducing lost business is a benefit as well.
So I would say that those are the type of indicators that we have seen that we would expect to continue throughout the rest of the organization.
The biggest disruption and the biggest issue that Project One Team has had for us at this point is the time to take the reps out of the field to do the training and the fact that we are putting rookies in behind our most experienced and really some of our most productive, active sales reps who just got promoted.
You're replacing one of our more productive people with somebody who has really no production at the beginning of this tenure.
Michael Schneider - Analyst
And the first territory to be rolled out was in what quarter, was that Q1?
Scott Farmer - President, CEO
No.
We actually tested the program through the end of last fiscal year.
Bill Gale - VP-Fin., CFO
Latter part of fiscal 2006.
Michael Schneider - Analyst
Okay.
When you look at the organic growth in that so-called territory one, is organic growth today higher than it was a year ago?
Scott Farmer - President, CEO
Yes.
Michael Schneider - Analyst
So you've actually seen an improvement in the organic growth rate in that territory despite the economic deterioration.
Scott Farmer - President, CEO
Yes, an improvement over where the organic growth rate was for that, comparing that group prior to Project One Team to after Project One Team, yes.
Michael Schneider - Analyst
Okay.
That's great news.
Then just switching gears to acquisitions during the quarter, it looks like you spent by my quick numbers I think 80 some million in the quarter.
Can you tell us how that breaks down between the two division and what type of revenue you've actually purchased so we can model those acquisitions going forward?
Bill Gale - VP-Fin., CFO
Michael, I can't give you the exact details, but it was primarily in the document management and the First Aid & Safety divisions.
There was very little in the uniform rental.
Michael Schneider - Analyst
Okay.
And similar question.
How much was contributed in each segment by acquisitions this quarter?
Bill Gale - VP-Fin., CFO
We're not going to be disclosing that detail at this time.
Michael Schneider - Analyst
Okay.
And then final question, just on the earnings guidance for Q4 is actually at the mid-point at least down year-over-year and it is the first quarter in a long time, or frankly, that I can remember that it is actually going to be a negative comparison.
Is that something you would expect to spill over into fiscal '08 at least in the first half?
Bill Gale - VP-Fin., CFO
Well, a lot of it is dependent upon what happens obviously with the top line growth as well as what happens with interest expense.
Part of what you're seeing there in the fourth quarter is the impact of the additional interest expense also.
It is too early for me to give you a prediction on next fiscal year.
We're going to have to wait and do that in July when we talk about the call because we're just in the beginnings of our budgeting cycle right now.
Michael Schneider - Analyst
Thank you again.
Operator
Now we'll hear from Kartik Mehta.
Kartik Mehta - Analyst
Scott, I wanted to ask your opinion about uniform business.
As you look at the business, notwithstanding maybe the economy but some of the stuff you have talked about in the past, the offshoring, do you think the growth rate for this business has changed as we look out two to three years or do you think the growth rate is still the same, it is a matter of getting Project One completed and executing on that?
Scott Farmer - President, CEO
Well, first of all, let me say that I think we will be much better positioned to take advantage of whatever opportunities we have in these businesses as a result of Project One Team.
I think we will perform better as a sales organization under Project One Team than we have been able to in the past relative to whatever opportunities are out there.
As I look at the uniform business, I would say that one of the biggest problem areas that I see in that business is that when we take two steps forward by selling a number of new accounts and we take a step back with one of our existing accounts, eliminating a shift or moving an operation or a job offshore or something like that, that causes the head wind.
If that bottoms out, if it levels off, then I think that part of that head wind goes away, and we can improve our internal growth rate in that business as a result of that.
We faced this issue for many quarters in a row now.
It is nothing new that this has been going on.
I think that it is a matter of severity from time to time.
The automotive plants make a big announcement, and the timing of those kind of things could impact our growth rate one quarter or more than another, but, we also face the economies of our size in that business as well, but I think we can grow in that business, and I think we will grow better as a result of our new sales organization than we could without it, and we'll have to see what the economic conditions bring.
Kartik Mehta - Analyst
Then from an entire company's standpoint, Scott, do you feel that the way the Company, the businesses that you have now can still help you deliver double-digit organic growth as you move forward or are there changes you would need to make to get to that point?
Scott Farmer - President, CEO
Well, I think that the new businesses that we have are contributing very nicely.
They are growing double-digits, and as they continue to get bigger and become a bigger part of the Company, they're going to help the overall growth rate continue to improve, and in addition to that I think that we'll continue to be able to make acquisitions in a number of these different businesses.
We'll continue to look at opportunities for us to develop new products and services even within our core businesses and the rental business as an example the Sanis UltraClean is a great example of that which should give us continued opportunities to generate future growth within our existing customer base and to prospects, so I would say that those things being part of our arsenal of opportunities we should be able to continue to grow the Company.
I don't know in the short-term that double-digit internal growth as a result of the disruption that Project One Team has had is going to be there, but I would expect to see a -- as it takes hold, an increasing rate of internal growth as Project One Team evolves and matures and becomes part of our way of doing business.
Kartik Mehta - Analyst
And one last question for you, Bill.
If you look at the divergence between net income and free cash flow over the next one to three years, would you expect that to be similar to what it has been in the past or is there any reason for that to change either way?
Bill Gale - VP-Fin., CFO
Based on just kind of limited thought of what you just said, I don't expect there to be any significant change.
I would anticipate the relationship between net income and cash flow to be relatively constant.
There is going to be little differences with regard to how CapEx is spent because of the nature of some of the businesses that are growing faster, uniform, for example a Document Management business requires trucks that are more expensive than uniform trucks but doesn't require the processing of a rental plant.
Working capital requirements are less in the First Aid & Safety and the Document Management business than they are in the uniform rental business because of the lack of in-service inventory.
Just thinking it through, Kartik, I would think that it shouldn't change dramatically.
Kartik Mehta - Analyst
Thank you very much.
Operator
Moving on we'll hear from Chris Gutek.
Chris Gutek - Analyst
Not to beat a dead horse here with the growth outlook and I know you don't want to give guidance, and I won't ask for it but can you talk generally about the organic growth rate outlook for the core rental division over the next couple quarters and specifically what I am getting at is do you think that the growth rates have bottomed net of all these moving parts and based on the year-over-year growth you've seen in the last couple months and maybe even the first couple weeks of the fiscal fourth quarter, are you seeing signs of stabilization or are we not even necessarily close to stabilization yet?
Scott Farmer - President, CEO
I don't want to give internal growth guidance looking out too far into the future, but if you look at the guidance that we have for the fourth quarter, it would assume, at the low end of the range about flat growth in the high-end of the range, one to six internal growth, so that's about where we are, and I would say that would therefore predict that we're at least close to the trough if not working our way through that.
Chris Gutek - Analyst
Given that the growth rates have decelerated though, kind of taking a longer term view and in the context of the Company not needing access to capital, in fact, aggressively buying back stock and also potentially in the context of having some valuable real estate, is there any reason or advantage to the Company being public?
Bill Gale - VP-Fin., CFO
I think that's a very speculative thing to talk about, and we're not really at liberty to discuss that, Chris.
Chris Gutek - Analyst
Let me try a completely different question if I could, then.
There was apparently an unfortunate death at a Tulsa plant recently, and I am curious if that was in your view sort of a freak one off accident or if in fact the Company is behind some mandated safety upgrades at some facilities?
Bill Gale - VP-Fin., CFO
Well, this event that happened in Tulsa was first and foremost a very tragic accident, and we are personally saddened by the death of one of our fellow partners.
The investigation of this accident is continuing, and we have determined based on the preliminary results that the machinery was operating properly, that the partner did not follow established safety rules which would have prevented the accident, but at this point because it is under investigation by OSHA, we don't believe it is appropriate to make any further comments, but I will go on -- I will tell you that we have been using this equipment.
It is standard industrial equipment, it's used by companies throughout the world, and it has approximately been in existence for 15 to 20 years, and we've never had an accident in the past anywhere near to this extent.
Chris Gutek - Analyst
Okay.
I am curious given Aramarks recent going private transaction if you've seen change in their competitive behavior and particular, maybe less focus on growth and potentially more focus on profitability?
Have you seen any change from your prospective out in the field?
Scott Farmer - President, CEO
Chris, we haven't seen any change yet, but I think it is important everyone understands that transaction was just completed not too long ago, so I think to see any dramatic change this early in the process would have been unlikely, so it is really too early to tell.
Chris Gutek - Analyst
Okay.
Finally a quick one, Bill, what's the target capital structure as you guys have been aggressively buying back stock?
Where do you think the optimal capital structure currently lies?
Bill Gale - VP-Fin., CFO
Well, I think that's under review because I think at one point in time we've always told people that we thought a 35 to 40% debt to cap was a good rate to go with, but we've been listening to a lot of interested parties, shareholders, we've been to several conferences, we'e had a lot of visits.
There is different sets of opinion, and we're evaluating all that internally to determine what we believe would be in the best interests of the shareholders, so I would say that it is under review, and we will continue to assess what makes sense.
Chris Gutek - Analyst
Okay.
Thanks, guys.
Operator
Gary Bisbee has our next question.
Gary Bisbee - Analyst
Hi, guys, good afternoon.
Wondering if you would be willing to tell us what the revenue impact approximately was year-over-year of the warmer winter?
Bill Gale - VP-Fin., CFO
No.
We're not -- we don't have the details of that, Gary, but it was a factor in the lower revenues quarter to quarter.
Gary Bisbee - Analyst
Let me ask it differently.
Are you willing to tell us in order of magnitude rank the three things you mentioned, that warmer winter versus the Project One Team disruption versus I think what you call just general economic conditions?
Scott Farmer - President, CEO
Well, I would say that the winter effect was the least significant of that, but obviously -- but did have a noticeable and obvious impact.
One of them is an economic issue that we've been dealing with for some time.
The other is a timing issue, so I think they're just different categories and I am not sure how I would try and rank those.
Bill Gale - VP-Fin., CFO
It would be difficult to do that, Gary, with any degree of accuracy because it is hard to go through all of the components of that, but I think relatively speaking what Scott said would be something that makes sense.
Scott Farmer - President, CEO
The quarterly weather thing is a one-time occurrence.
The organization change is a significant operating organization change, so that's an intermediate term thing and the economic conditions have been a longer-term thing.
They're just three completely different sets of circumstances.
All three of them came to play in one quarter and had an impact.
Gary Bisbee - Analyst
It is a pretty dramatic sequential deceleration, so I was trying to see if we can parcel part what really changed from quarter to quarter.
From my viewpoint is I guess amateur attempt at being an economist is seems like the industrial economy has weakened somewhat, but maybe not that dramatically, so I was trying to figure out if there is anything else, but that's fine.
That's a fine answer.
Let me move onto the next question.
At what point do you accept that some of these what you're calling economic conditions are likely to persist for awhile and decide that you need to get more aggressive in pursuing acquisitions outside of the core uniform businesses and if so, are there even targets out there within the three nonuniform businesses that are of a scale that they would allow you to dramatically move that shift, that mix shift in the next -- the mix of business in the next year or two?
Bill Gale - VP-Fin., CFO
Well, I think there are acquisition opportunities in those businesses that would certainly have an impact on the Company, but I don't think we're going to do anything rash at this point because we certainly don't believe that what we have -- the businesses we're in today we still believe have a potential to provide good growth opportunities in the Company.
With that said, we are also though, very active in looking at acquisitions, we are still very disciplined in our approach to looking at companies, and we will continue to add business as we think is beneficial to the shareholder.
Gary Bisbee - Analyst
So I guess it is safe to assume you're not at the point where you think you have to be more aggressive to move the shift, the mix away from uniforms?
Bill Gale - VP-Fin., CFO
I think as Scott said before he and the rest of the management team here still believe that there are great opportunities in all of our businesses including uniforms, and we're confident at this point that Project One Team is going to help us take advantage of those.
Gary Bisbee - Analyst
Okay.
Great.
Then just a couple of quick clean-up ones if I could.
I think it is the second quarter in a row that you mentioned that you had some short-term securities that you would wait until they matured to consider paying off some of that commercial paper.
Over what time period is that stuff likely to mature?
Are we talking 30, 60 days, or several months.
Mike Thompson - VP, Treasurer
We have a few months left.
I would say it's decreasing balance as we move forward, but there are still some out there that go out to about nine months.
Gary Bisbee - Analyst
All right.
Then on the SG&A it was obviously up dramatically.
You did a good job of telling us some of the components there, but I guess as we think forward to the May quarter, are there any of those that you would expect a change in -- and I know you're not giving '08 guidance, but is there any reason to think that the Company could move towards seeing some leverage on that line over the next six to twelve months or is this going to keep rising?
I guess what I am wondering is within the three nonuniform businesses is it possible that you're seeing sort of higher gross margins but also higher SG&A such that that's helping the gross margin but maybe as you grow those could hurt SG&A or is that not accurate?
Mike Thompson - VP, Treasurer
Those other businesses are hurting SG&A a little bit because of the large amount of selling expense we have in there.
But as those businesses continue to grow and each location is of a size, the percent of selling expense to those locations will be reduced.
I mean we buy a lot of small or open a lot of small locations, for example, in document shredding and then we go ahead and dump in three or four sales reps into these new businesses.
It does have a significant impact.
That said, when you look at everything in total, it is not moving the needle dramatically, but it is moving the needle.
I would say in the other areas of G&A, there may be a little impact, but it is not dramatic, again it will be more from a scope perspective and a size and scale than it would be a long-term issue.
Looking at the different components for this quarter is what may trigger the other way, traditionally payroll taxes drop back down because you're out of the first quarter.
That's something I can tell you as far as the other pieces, it is difficult to say.
We wouldn't expect SG&A to continue to rise though in total.
But different components go different ways at different times.
You have pieces in there such as medical that are hard to quantify going forward.
Bill Gale - VP-Fin., CFO
But we wouldn't expect G&A to rise in percentage wise, but in dollars it will.
Mike Thompson - VP, Treasurer
Right.
Bill Gale - VP-Fin., CFO
As we grow the Company, but I think if you go back in time you'll always find that the third quarter SG&A number is traditionally one of the highest of all the quarters, and you would expect there to be some benefit as you go forward in other quarters.
Gary Bisbee - Analyst
Great.
Thanks for all the color.
Operator
We'll hear from Pete Carrillo.
Pete Carrillo - Analyst
This is actually really for Scott, I guess.
Looking for you to speculate into these -- LBO issue, but I guess I was surprised to hear Scott not come out and you guys come out and say absolutely not, we would not consider going private just given the history of the Company, or your involvement and et cetera.
Anything you can say to that at all?
Would you not rule it out?
Bill Gale - VP-Fin., CFO
Steve, we're not at liberty to discuss any issues surrounding that matter.
Pete Carrillo - Analyst
Okay.
Even conceptually you can't say you're against the idea or not?
Scott Farmer - President, CEO
You're asking a hypothetical question, and -- we're a public company, and there are certain things that we just can't respond to, and unfortunately this is an area that we just can't talk about.
Pete Carrillo - Analyst
Okay.
In terms of the SG&A line have you guys at all considered coming back to your partners and saying we need a, essentially a raise, healthcare co-pays or some sort of -- have the partners contribute a little bit more to some of the healthcare increases that are going on?
Is that something you considered at all or is that definitely not a possibility?
Scott Farmer - President, CEO
We look at it every year, Pete.
That is something we just feel it appropriate for our partners to have an affordable healthcare program for them.
Obviously it is a balancing act, but we need to be fair to our partners.
They are the main reason this company does well every year, and we got to be fair to them, so we look at it every year, and you can see we're doing other things.
We just changed administrators January 1, for the second in probably three or four years, again looking for better networks but also to help reduce costs.
It is a balancing act.
I think every company has that across the country, but we intend to be fair to our employees as well.
Pete Carrillo - Analyst
Last quick question was in terms of the one winter effect, did it effect not only rentals, did it also effect some of the -- your catalog business or direct-sell business as well?
Scott Farmer - President, CEO
Yes, it did.
Again, more from a jacket and mat rental, but a large portion of our catalog is jackets or a good portion that time of year.
It had an impact through that as well certainly.
Pete Carrillo - Analyst
Okay.
Thanks a lot.
Operator
Moving on we'll here from Bruce Simpson.
Bruce Simpson - Analyst
Scott, I know that you no longer break out individual line items of the four components of organic growth as you once did, but when, just directionally, as you look over the last year and your organic growth has come down maybe on the magnitude of 400 to 500 basis points, what's the largest and the second largest impact there?
Is it primarily what you used to call the graph ed metric, that you're just seeing too much erosion shrinkage of existing wearers or is it primarily the Project One Team impact on the new business written?
Scott Farmer - President, CEO
I would say that all of it will have an impact, but the biggest issue boils down to us I would say not having as many sales reps -- sales rep selling weeks in the field as a result of these people going through training programs and time out of the field as we've rolled this out, and it was completed at the end of December, but we've been working on it through this fiscal year, so they just haven't had as many weeks in front of the prospects to sell and therefore it is impacting our new business.
It also means that we've taken an awful lot of, as we've said awful lot of our sales -- higher, most productive sales reps, our most experienced sales reps, many of them were promoted into sales management positions, and the people coming in behind them even after they get through their training program, are not nearly as productive in the first part of their sales tenure as the person that they just replaced.
That takes some time for them to build that back up.
That's had an impact as well.
I think it is new businesses is where we have had seen the biggest impact.
Bruce Simpson - Analyst
What about the pricing environment overall versus a year ago for new business accounts?
Is it more intense than it once was or is that pretty predictable.
Scott Farmer - President, CEO
I would tell you that, as I stated in my comments, one of the initial and early indicators of, I think a more coordinated training program and a sales management effort that is more focused is that we are seeing, for example, in our uniform rental business new business being sold at higher prices than they were before we had Project One Team in place.
Bruce Simpson - Analyst
Okay.
Switching gears, can you give us what the run rate is on the UltraClean business now?
Mike Thompson - VP, Treasurer
We have not provided that previously, and at this point in time for competitive reasons we're not going to provide that.
Bruce Simpson - Analyst
Okay.
On margins, the last time I heard an update on margin targets for the whole firm it was net income rather than operating margin, and this goes back a couple of years ago when, Bill, I know you used to talk about 10 to 11% is what you thought was sustainable.
Bill Gale - VP-Fin., CFO
Right.
Bruce Simpson - Analyst
Given the changes in the business and the investments in the business and the shift in mix, is that still really realistic or what is either a net income or an operating income that's realistic over the next couple of years given your current portfolio of businesses?
Bill Gale - VP-Fin., CFO
Well, of course net income given the change in the debt structure of the Company obviously has been impacted, so the old 10 to 11% has to be adjusted for the interest factor that's in there which means that you're looking at probably a preinterest number which is somewhere in the magnitude of 9 to 10%.
Bruce Simpson - Analyst
Okay.
So I guess what I am trying to get at is has there been through maturation of the business, through investments in growth year areas as an offset to try to create a favorable mix shift, have we entered an area of permanently lower profitability that's sustainable or is it realistic to think you're going to get back to 16% operating margins?
Bill Gale - VP-Fin., CFO
Bruce, I think we have said that -- and we know that these new businesses we've gotten into have operating margin potential equal to our core rental business.
We are confident that as they continue to grow and mature that they will be able to provide the same level of profitability that the rental business has.
Now, what have been the changes in the rental business?
Well, the most significant change has been the impact from a cost standpoint of energy costs, and it appears to me that based on what I am seeing is that energy costs may have reached a more permanent level of over 3% of sales, and that was traditionally more 2% line.
So while we'll continue to look for opportunities to conserve energy, use more fuel efficient vehicles, fuel efficient processes in our plants, there may be the impact of higher energy costs that -- some of which might be able to be passed through price increases, but certainly at this point in time not all of it.
So I am hedging the answer a little bit here because I have got a couple of wild cards I just don't know what are going to happen with, but I would say the basic fundamentals of our businesses are that the new businesses are as profitable as rental business is.
Bruce Simpson - Analyst
Okay.
And then, Bill, just focusing once again on the SG&A line, from a pure dollar amount, it looks like there is roughly a 4 to $5 million sequential increase in the number of dollars in that category from the November to the February period.
Just to make sure I understand that 5ish million increase even though it is over a shorter period, is that largely a factor of Project One Team and the change in sales or is the primary factor driving that sequential increase medical benefits or?
Bill Gale - VP-Fin., CFO
The sequential increase -- a big part of the sequential increase is payroll taxes, Bruce, because as you get to the first part of our first -- the third quarter includes the months of January and February, so the amounts have to start being accrued again and payed out for all the payroll taxes associated with all our employees.
That would be the probably the most significant sequential increase in dollars from one quarter -- from the second quarter to the third quarter.
Bruce Simpson - Analyst
Can you quantify what that largest piece represented?
Bill Gale - VP-Fin., CFO
I don't have that detail in front of me, Bruce.
Bruce Simpson - Analyst
Okay.
Then last question I have has to do with something we haven't talked about in awhile, RFID.
Is that something that is still on the plate or has the Company reached a conclusion that that's not really economically viable any longer?
Where do you stand with the adoption of that technology?
Bill Gale - VP-Fin., CFO
Well, as we've stated, they -- we are still committed to the concept.
Our problem is that the chip that we were using could not meet the criteria of readability.
Therefore we are working now with some other chip suppliers to see if we can come up with a chip that can withstand the industrial laundry process and have the reliability that we need to have in order to make this more viable than just the barcode system that we use today.
We still have the software and the antennas in place in our test plant that we'll be able to -- we'll test with other suppliers chips, and we've got a few suppliers that we're working with, and we hope that we can come up with something that will make sense.
Bruce Simpson - Analyst
Okay.
Thank you.
Operator
Greg halter has our next question.
Greg Halter - Analyst
In the past I think you have talked about operating -- other operating margins, other service revenue margin of I think 32 to 37% is the goal and obviously you exceeded that at 38.1% in this quarter, and just wondering if you've given any reconsideration to where you stand in that area?
Mike Thompson - VP, Treasurer
We are reconsidering that, and we'll be providing more guidance on that at year end.
Obviously as those -- as the document shredding and First Aid & Safety businesses get to be larger components of other services, that is ratcheting up the gross margin, and also some improvements within our National Account Sales Division through sourcing activity has been a positive as well.
We're aware of that, and obviously at this point we think we'll be towards the upper end of that range.
But we'll give more guidance in our 10-K.
Greg Halter - Analyst
Okay.
Wondered if you had the rentals and other service revenues, the pretax income figures for those two segments?
Mike Thompson - VP, Treasurer
Yes.
I believe so.
Hold on one second.
On the -- I lost it now, I have got it here and I can't put my finger on the page right now.
Greg Halter - Analyst
That's all right.
I have got two other quick ones if you're still looking.
Mike Thompson - VP, Treasurer
Go ahead.
Greg Halter - Analyst
Just wondered in the past you had mentioned that your share repurchase was not in your guidance figures, and wonder if there has been any change in that?
Bill Gale - VP-Fin., CFO
No.
There has been no change in that concept.
We don't have that anticipated in the guidance.
Mike Thompson - VP, Treasurer
I found it, Greg.
Greg Halter - Analyst
Okay, thanks.
Mike Thompson - VP, Treasurer
Income before income taxes for rentals operating segment?
Greg Halter - Analyst
Right.
Mike Thompson - VP, Treasurer
Was $105.2 million.
Greg Halter - Analyst
Okay.
Mike Thompson - VP, Treasurer
Other services segment was $27.5 million.
Greg Halter - Analyst
That was up 35% year-over-year.
Okay.
And last question is what do you normally pay for the acquisitions, and again, I presume primarily in document management and first aid in relation to EBITDA for the Company you're acquiring?
Is it five times or ten times?
Scott Farmer - President, CEO
It really varies, Greg.
It depends on the acquisition.
I would say that we are paying today in the same range that we've been paying.
But I can tell you it really comes down to the quality of the underlying business.
In uniform rentals looking at the customer contract situation and their customer relationships and the inventory that you're getting, et cetera, and whether or not you're buying a plant, and you can follow that through every business that we're acquiring.
We really have a set parameter.
We are -- we obviously have made a lot of acquisitions in the past and think we're pretty astute at it.
We follow a very rigid approach to make sure that we're not overpaying and hold to that and look for strategic opportunities, so we don't provide those ranges, but I can tell you that it is a very stringent process.
Greg Halter - Analyst
Just wondering if it is above or below the 9.6 you're currently trading at now?
Thought I would try.
Scott Farmer - President, CEO
Yes.
Greg Halter - Analyst
Thanks.
Scott Farmer - President, CEO
Sure.
Operator
Now we'll hear again from Michael Schneider.
Michael Schneider - Analyst
Guys, just on the margin topic within other services again, you've been running, basically accelerating incremental margins within other services.
If you look back a year ago you were doing just 7, 8% incremental margins and now you're doing over 22 pretax incremental margins.
Is that a function again of just beginning to leverage the salesforce and sales initiatives that you've got in place?
I guess question one.
And then question two, does that number actually continue to accelerate or are you at a pace now of investment which will probably cap that incremental increase?
Bill Gale - VP-Fin., CFO
Well, I think the answer to your question is that we expect those margins to continue to improve because those businesses continue to become bigger.
We are working on ways of taking a lot of acquisitions and bringing them into the Cintas way.
We're looking at opportunities and sourcing in our direct sale business that are paying benefits, so our expectation, Michael, is that we would hope that that would continue to improve.
With that said you've also -- we keep buying other businesses, and we keep bringing those in and we wanted to establish the national footprint so you have got that investment aspect that's going on at the same time.
As Mike talked about before, there certainly is no question that our expectations and the contribution from those businesses will -- is higher today than what it was a few years ago, and we're going to maybe be updating that in our next 10-K.
Michael Schneider - Analyst
Yes, Bill, I understand that operating margins and other services are rising.
I am focused on incremental margins, and those have been running -- operating margins are in this quarter 11.5, incremental margins now on that increase in revenue are running at 21%.
What I am asking is that number has been rising now for four or five quarters.
Is that number prone to continue to rise because you're investing on the margin less or is the 21% incremental margin the theoretical cap for this business?
Scott Farmer - President, CEO
The timing of that really depends, Michael.
It doesn't necessarily indicate that that's going to continue to rise at a faster rate.
We can tell you that in total it is going to continue to rise, but from a sequential basis type of approach, I can't say that it is always going to continue to rise or we capped out.
I don't think it is capped out completely, but I can't say if next quarter is going to be higher than this on a sequential basis.
Michael Schneider - Analyst
Okay.
Thank you.
Operator
Gentlemen, that was our last question.
I will turn it back over to you for any closing remarks.
Bill Gale - VP-Fin., CFO
Thank you all for joining us.
We appreciate your interest.
We will be releasing our fourth quarter results sometime in mid-July, and we will be looking forward to talking to you at that time.
Operator
That does conclude today's conference.
We do thank you for your participation.