信達思 (CTAS) 2008 Q1 法說會逐字稿

Good day, everyone.

Thank you for your patience in standing by, and welcome to the Cintas quarterly earnings results conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'll turn things over to Mr.

Bill Gale, Senior Vice President of Finance and Chief Financial Officer.

Please go ahead, sir.

Good evening and thank you for joining us tonight.

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

The Company reported revenues and net income in line with its plan for the year.

Revenues increased 6% over the first quarter last fiscal year to $969 million.

Earnings per share were $0.51 this year compared to $0.53 in the first quarter of last year.

Last year's numbers included a credit due to the adoption of FAS 123R with a change in the forfeiture rate.

This year's results include a more normalized expense related to share-based payments as well as higher legal and professional services.

Additionally, as we have explained previously, Cintas has adopted a new sales organization that in the short run will have an increased investment in selling expense but should result in higher growth in all business segments.

Net income was $81 million representing 8.4% of revenue.

Rental gross margins were approximately the same as last year while Other Services gross margins continued to improve as the emerging businesses of First Aid and Safety and Document Management continue to grow at very exciting rates.

In fact, we have expanded our segment data to give more visibility to these newer businesses as they are having a larger impact on our results.

As you review the supplemental data included in our release, please note the split of Other Services to the following: Uniform Direct Sales, which also includes our catalog business sold on a rental route, First Aid, Safety and Fire Protection and Document Management.

Mike will talk more about these in his comments.

Organic growth in our Rental business did improve modestly from the fourth quarter last year.

We expect that organic growth should continue to improve as we move throughout the year barring any significant economic downturn.

As mentioned in the release, we are excited to announce that Cintas has made a modest entry into Europe with its acquisition of an outstanding document management company based in the Netherlands, Certo Information Management.

While this company is small it provides us with an excellent opportunity to expand in Europe potentially not only with document management services, but also with some of our other service offerings.

Our current guidance of revenues and earnings per share for the fiscal year-ending May 31, 2008 remains unchanged and calls for total revenues of $3.9 billion to $4.1 billion and diluted earnings per share of $2.15 to $2.25.

With the end of our quiet period in conjunction with this earnings release and with our strong balance sheet, we will be able to resume share repurchases under the parameters provided to us by the board of directors under the remaining $420 million authorized amount.

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

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

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

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

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

We will then be happy to answer your questions.

Thanks, Bill, and good evening, everyone.

Total revenues were $969.1 million for the quarter, a 6% increase over that reported in the prior year.

Internal growth was 4.2% during the first quarter which is comparable to our internal growth rate for the fourth quarter of fiscal 2007.

Weakness in our direct sale business was offset by improved internal growth in our repetitive service businesses including our Rental Uniforms and Ancillary Products operating segment.

As a reminder, our first quarter had 66 work days, the same number of work days as the first quarter of fiscal 2007.

For the remainder of fiscal 2008 the work days will be as follows: For the second quarter 65 work days which is the same as the second quarter from fiscal 2007, third quarter will have 65 work days which is one more work day than the third quarter of fiscal 2007, and 65 work days in the fourth quarter which is one less work day than the fourth quarter of fiscal 2007.

As Bill mentioned, we now report our results in four operating segments as well as a corporate segment.

The largest of the operating segments is our Rental Uniforms and Ancillary Products segment.

Previously titled Rentals, this segment reflects the rental and servicing of uniforms and other garments, mats, mops, shop towels and other related items.

We also provide restroom and hygiene products and services within this segment.

We are the largest provider of both corporate identity uniforms and facility services in North America.

No change has been made to this segment other than we have renamed the segment to more properly describe the services provided within it.

Uniform and Ancillary Product revenues were $710.4 million for the quarter compared to $687.7 million in the first quarter last year, a 3.3% increase.

Factoring out acquisitions made over the last 12 months our Rental organic growth rate was 3% for the first quarter which is an improvement over the 2.5% internal growth in the fourth quarter of last year.

This growth is in line with our internal first quarter projections.

The organization of the new sales structure is complete and we are seeing positive results.

All positions under the new structure have been filled at all levels and our new sales representatives are gaining experience and expertise.

New business leading indicators continue to be positive with sales force turnover continuing to remain below historical levels.

Sales representative productivity continues to improve as new sales professionals gain experience and build their sales pipeline.

Communication across the sales organization has improved and cross selling activity has strengthened.

External economic pressure exists as traditional uniform wearing industries continue to experience declines in employment levels.

We would characterize the current economic conditions as being fairly consistent with that experienced in our fourth quarter of last year.

In spite of this external pressure, we continue to grow our Rental Uniform and Ancillary Products operating segment.

This is being achieved by consistently expanding our served market and by providing rental customers with additional products and services such as entrance mats, restroom supplies and restroom cleaning services.

While we expect that the economic headwind will continue, we believe the continued maturation of our new sales organization will combine with our focus on customer service to result in improving revenue growth as we move through fiscal 2008.

Our Uniform Direct Sales operating segment incorporates our national account sales division which direct sales uniforms, brand-new promotional products and other related products to national and large regional customers, and our direct sale catalog which direct sales uniforms and related products primarily to local customers who also rent products from us.

During the first quarter this business grew 1.5%.

Organic growth for this business was also 1.5%.

Sales within our national accounts sales division have softened.

Unlike our prior two fiscal years there have been very few program rollouts with our existing customers in the hospitality and gaming industries.

This business tends to be a choppier business as customers decide when and how often to institute new image programs.

We expect the softness in this business to continue in the near-term.

Our third operating segment is First Aid, Safety and Fire Protection Services.

Within this business we provide on site delivery of first aid products, safety products and automatic defibrillators and we provide safety training to our customers and their employees.

We inspect, repair and recharge portable fire extinguishers and sprinkler systems and we provide and service emergency lighting systems and kitchen fire suppression systems.

We are the largest on site provider of first aid and safety products in North America and the second largest provider of fire protection services.

During the quarter revenues within our First Aid, Safety and Fire Protection operating segment grew 15.8%.

On an organic basis this segment grew approximately 8% as compared to approximately 10% in the fourth quarter of last year.

Within Fire Protection we sell and install certain fire suppression systems.

The timing of the sales of these products and the related installation, while intertwined with our Other Services within this space, are closer to a direct sale business than to the repetitive nature of most other sales within the segment.

A combination of a large number of these installations in the first quarter of last fiscal year and fewer installations in the first quarter of this fiscal year have caused the internal growth of this segment to decline.

While the internal growth for this segment was below our expectations for the first quarter, we continue to believe this division will reach our double-digit internal growth expectations for the year.

We continue to make strategic acquisitions within the segment with the particular focus in expanding the geographic coverage of our fire protection business.

As with our other businesses, we believe a full national presence will provide us with unique opportunities with large national customers and prospects.

Our Document Management Services operating segment is comprised mainly of document shredding services although we do have some storage capabilities.

Revenues within this operating segment continue to grow at a very rapid rate and we are now the third largest provider of document management services in North America.

First quarter revenues for the Document Management operating segment grew 78.1%.

Internal growth for the segment was 43% in the first quarter which is comparable to the 44% internal growth achieved during the fourth quarter of fiscal 2007.

Paper prices have been very strong and do play a contributing factor to the internal growth rates.

However, excluding these higher paper prices our shredding service revenue continues to be very strong posting internal growth rates in the high 30s.

We also continue to make strategic document management acquisitions in this business with an emphasis on gaining full national coverage in the United States and Canada.

As mentioned previously in the discussion of our Fire business, we believe a true national presence in all of our business services will provide us unique opportunities with large national customers and prospects.

As Bill mentioned in his opening comments, we have now also expanded our Document Management business beyond North America.

While the revenues from the Certo acquisition are not material to Cintas as a whole, this acquisition provides with us a very well run company in a fast growing industry.

In addition to focusing on operating and growing this business, we hope to gain valuable experience in running an international operation.

While we learn from operating this business we will also continue to evaluate international opportunities in document management as well as our other lines of business.

Total company margins of 43.1% improved 40 basis points as compared to 42.7% in the first quarter of 2007 and were comparable to the 42.9% in the fourth quarter of fiscal 2007.

The improvement over the first quarter of last year was due to the continued improvement in emerging business margins.

Our Rental Uniform and Ancillary Products gross margin was 44.9% of revenue for the first quarter, which is very comparable to the 45% gross margin in the first quarter of fiscal 2007 and a slight improvement over the 44.7% gross margin in the fourth quarter of fiscal 2007.

Other Services gross margin improved 230 basis points over the first quarter of fiscal 2007, but down 40 basis points as compared to the prior year fourth quarter.

The significant improvement in margins comes from the continued rapid growth in the First Aid, Safety and Fire and Document Management businesses.

Margins in these businesses continue to improve as they grow and cover infrastructure costs.

This improvement can be seen in our new segment data with First Aid, Safety and Fire Protection margins improving 200 basis points and document management margins improving 120 basis points over the first quarter of last year.

The 40 basis point decline in Other Services gross margin from last year's fourth quarter was due to lower revenues in our national account sales division.

The significant growth within Fire Protection Services and Document Management Services is allowing us to gain scale in these businesses driving margins higher.

We expect Other Services gross margin to continue to improve as these businesses continue to grow and achieve scale.

Selling and administrative expenses were 28.6% of revenue for the quarter as compared to 26.7% for the first quarter of fiscal 2007.

On a percent to sale basis approximately 75% of the increase was increased selling expenses resulting from the additional investment in our sales force.

In reviewing our new segment information you will notice the large amount of investment we are making in our management infrastructure and our sales efforts within the First Aid, Safety and Fire Protection and Document Management emerging businesses.

As our new sales organization gains momentum over the entire organization, we expect selling costs to begin to trend back to more traditional levels.

The majority of the remaining 50 basis point increase in selling and administrative expense related to an increase in legal and professional service fees.

Also, as a reminder, in last year's first quarter we adopted FAS 123R share-based payments and performed a detailed analysis of share-based payment factors and assumptions including forfeiture rates.

That analysis resulted in a cumulative adjustment that benefited the first quarter of last year by approximately $2.2 million.

Going forward we expect to have more comparable year-over-year results.

Selling and administrative expenses were 28.6% in the quarter versus 26.8% for the fourth quarter of fiscal 2007.

Selling costs were up 30 basis point due to the investment in new sales structure as we expected.

During the fourth quarter of last year we booked $6.2 million of miscellaneous income when we exited a forward starting swap.

An increase in reserve for accounts receivable, which traditionally increases during our first quarter due to slower collections and the increase in legal and professional service fees, were the other factors contributing to the increase.

Net interest costs were 1.2% of revenue this quarter consistent with both the first quarter and fourth quarters of last year.

Our effective tax rate was 37.3% for the quarter, again, consistent with last year.

Net income for the quarter was $81.1 million and earnings per diluted share were $0.51per share.

While these figures represent a decline from last year they are in line with our projections for the year.

Moving on to our balance sheet and cash flow, both remain strong.

Our current ratio is 4.5 to 1.

This ratio increased significantly since May 31st mainly due to changes required in conjunction with our adoption of FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.

109 which I will discuss in a moment.

Cash and marketable securities decreased approximately $17 million as we used maturing marketable securities to prefund our VEBA account for medical benefits.

DSOs on accounts receivable were 40 which is slightly higher than at May 31st, 2007.

Accrued compensation and related liabilities declined approximately $28 million as four less work days were required to be accrued at August 31st versus May 31st.

Short-term accrued liabilities decreased due to the annual prefunding of our VEBA medical account, our annual profit sharing and 401(k) matched funding and timing on bond interest payments.

Long-term debt at August 31, 2007 was $881 million.

Total debt as a percentage of total book capitalization was 28.2%.

Our long-term debt consists of $475 million in public debt, $393 million in outstanding commercial paper and $13 million of other bank debt.

Throughout the first quarter we were able to issue commercial paper at attractive rates experiencing solid demand.

We suspended our share buyback program throughout the first quarter while we considered various alternatives to enhance shareholder value.

We have approximately $420 million of authorization under our share buyback program and we intend to be back in the market moving forward.

As I mentioned, we adopted FIN or FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.

109 effective June 1st, the beginning of our fiscal year.

Upon adoption an entry was made to decrease opening retained earnings by approximately $14 million, and a corresponding increase was recorded in the tax liability.

Also as a result of adoption, our short-term deferred tax liability at May 31st was separated into a deferred tax asset component and a FIN 48 reserve.

The total FIN 48 reserve on the liability side of the balance sheet is separated into its long and short-term components within accrued liabilities.

Cash provided by operations was $57 million for the quarter.

When combined with the net marketable securities that matured during the quarter we are able to finance $45 million in capital expenditures and $33 million in acquisitions without taking on additional debt.

We continue to expect capital expenditures for the year to be between 170 and $190 million.

During the quarter we spent approximately $33 million acquiring mainly fire protection service and document shredding businesses.

Going forward we expect operating cash flow to remain strong.

With that, we will now open the call for any questions.

(OPERATOR INSTRUCTIONS) And first with JPMorgan we go to Mike Fox.

Good afternoon.

Just a couple quick ones.

When you look at the Fire Protection business and the Document Management business, you talked about the margins should increase as you gain national scale.

Can you talk about how big of a geographic presence you guys have today and how long you think it'll take to get national?

Certainly.

In Document Management we are in approximately 80 of the top 100 markets, obviously, expanding very quickly in that space.

Fire [went] approximately 60 of the top 100 markets.

So as we continue to expand we'll look at further acquisitions to enhance that and then also greenfield startups where there's not an acquisition opportunity available.

Okay.

And with regard to the Document Management business, have you noticed any increase or decrease in the multiples that you guys have been paying?

Probably they've come down a bit, Mike, as we have basically I think established, you know, the presence in the major cities that we wanted to be in and bought, some of the better companies.

Now as we look for other acquisition opportunities, we can take a little harder line and I think you would probably see the multiples down slightly from what they had been initially.

Okay.

And then with regard to the international acquisition, can you give us an idea of kind of a time frame what you guys are looking at as far as when you might grow that business or start to make more acquisitions there?

Well, we're going to certainly be opportunistic in looking at when things become available.

You know, I would say we don't have a definitive plan that we want to be a certain size at any particular period of time, but we are very aggressive in trying to understand the market over there.

The management team that came with this acquisition is very well known on the continent in this business and therefore will be very helpful to us as we expand.

And I would say it's just a matter of time and the right opportunities presenting themselves because we are committed pretty much to moving forward with this business over there.

Okay.

Can you talk about, you know, you guys have been in a lot of businesses for a long time and this is certainly one of your newer businesses and venturing to Europe.

Can you talk about why you chose to go into Europe with the document management business as opposed to some of the other businesses that you're in?

Yes, the primary reason, Mike, is the fact that the laws in Europe regarding privacy are just slightly behind what the laws in the U.S.

and Canada have been.

Therefore, we believe we're really in the forefront as this industry really starts taking hold in Europe.

The other reason for doing document management is that as evidenced by what we've been able to achieve the last couple years in document management here, we believe that is a very rapid growing company, or a very rapid growing industry that we can take advantage of, doesn't require significant capital investment and it's a pretty quick startup as far as, you know, the ability to obtain enough business to start making profits pretty quickly.

Okay.

Great.

Thanks a lot.

Next we move on to Mike Schneider with Robert W.

Baird.

Good evening, guys.

Hi, Mike.

First I guess you had mentioned you were suspending the share repurchase program as a result of the strategic review.

I guess that's news to me.

Can you tell us what you were exploring and indeed what you concluded?

Mike, as we've stated in the past, I really can't get into any details or any specifics.

What I can tell you is that we did spend time looking at various alternatives and now that we have finished that we are ready to re-enter the market in our open purchases like under the organization that we have.

So the review is complete and presumably no actions that would interfere with buying back stock?

Well, at least for right now it is and, you know, I think when you say complete, obviously, it's come to a conclusion that enables us to get back into the market but our board is always committed to looking for ways to enhance shareholder value.

Okay.

And on the organic growth in the Rental division, it ticked up slightly sequentially.

Can you give us a sense when you look at the components of growth was that primarily driven by new sales account growth accelerating sequentially?

Yes, yes, Mike.

I'd say that the other drivers, you know, we take lost business, add stops and price increases, I'd say those are very comparable to the fourth quarter in nature and I'd say that the growth is predominantly from the new business increase.

Okay.

And looking forward now, this project one team as it relates just to the Rental division, what of those factors do you expect it to have the most impact on because I presume it could impact certainly attrition rates and new business sales, but I'm curious as to what you're targeting to experience the biggest benefit from project one team.

I think it is going to affect all of the components.

I think the first one that we're targeting, obviously, is the new business side because that's where the focus one with the new sales organization, but certainly as we've talked in the past, a significant reason to go to this organization was to allow our local management teams to focus on the servicing of customers and looking at ways to lower the amount of lost business and stops that are occurring.

So we hope to see it across the board, but I would say if you had to rank them that new business would be the first driver there.

Okay.

(Inaudible) a different way, when you look at your different product lines now, what product line do you think stands to benefit most from project one team?

I think out of the gate first is the Other Services, the emerging businesses, because you're bringing a lot of customers to that with Fire and Document Management, especially Fire as you have a lot of customers that we have that can use that service when you have 800,000 business customers, most of those are in a rental division as you know.

So I think out of the gate those emerging businesses should have the best opportunity, but we also believe this new sales organization, for the facts that we talked about previously, are going to benefit all of the divisions.

Okay.

Then final question on Rental.

You mentioned the sales force attrition or turnover was below historical levels and that productivity was improving, but is productivity actually back to historic norms or above or below it?

Productivity is I would say slightly above historical levels but you got to look at, depends on how you cut it with the tenure of the sales force.

You know, you can't look at sales reps within their first year of hire and really get a good feel because they're just building their base over nine to 12 months, as you know.

So in other words, Mike, you're saying that the more tenured salespeople are achieving productivity levels today that are higher than what they were historically.

Right.

But because of the mix of our salespeople, you know, we have a lot of newer salespeople, so it's hard to draw a conclusion on the total sales.

Yes, especially when we promoted a lot of those sales reps into managerial type positions.

Okay.

That's helpful.

And then switching to Other Services and thank you for the detail in the segmentation, very helpful, when you look year-over-year the First Aid and Safety margins have basically been flat just over 10% on an operating basis, yet Document Management has nearly doubled say from 5 to 11.

Can you give us a sense as to what that'll look like going forward?

Is there some reason structurally that First Aid has yet to really gain leverage or is there some reason that Document Management would maybe experience less leverage going forward?

I would say that really the movement within the First Aid, Fire and Safety business you've got a lot of fire locations that are coming online and we hope to increase the profitability there.

I think as you can see, we believe that the Document Management business is a very strong business both from a growth and a profitability standpoint.

Will it continue to skyrocket each year?

No.

There's going to be an upper limit obviously but we've been able to gain scale a lot quicker in that business just because of the type of business it is than we have in the Fire Protection Services business.

Okay.

Thank you again.

Move on to Brandt Sakakeeny with Deutsche Bank.

I've got a couple quick housekeeping items.

First do you have the stock comp for the quarter?

I'm sorry, I missed that.

Could you repeat?

Yes.

Do you have the stock compensation charge for the quarter?

Stock compensation?

Yes, please.

It's about $2 million.

Okay.

Great.

And then obviously done a good job in cost control, particularly given, you know, what we've seen in fuel prices.

Any color there?

Are you able to pass those fuel price increases onto customers through better pricing or absorbing it or just sort of managing that better?

You know, the fuel prices themselves are about comparable to the first quarter of last year.

We were at about 3.4% both in the first quarter of last year and the first quarter this year, so we haven't seen any appreciable change from what we've experienced.

In fact, it was about 3.4% in the fourth quarter of this last fiscal year.

So as a result, I would tell you that we were able a year ago to pass on, a year to 18 months ago, to pass on some of these cost increases through to our customers and that's why our price increases were a little bit higher as we talked through in fiscal '06.

Right now, though, the cost of fuel are basically comparable to what they had been so there really hasn't been a dramatic change there.

Okay.

Great.

And then I think you talked to the (inaudible) ratio being flattish I think relative to the prior quarter.

Did you see any behavior either in the months that might make you think that either things were improving or perhaps eroding a little bit at all in the numbers or is it even possible to get that granular?

You know, we look at it every week and I would tell you based on my review there is not enough fluctuation to really say that, you know, there was a directional change in any one month versus the other.

Okay.

Great.

Finally, I guess any potential impact or color on the GM strike?

I know obviously autos are a big percentage, although it's not necessarily the OEMs.

Do you expect anything favorable to come out of that or potentially unfavorable?

We had very little business with General Motors.

I'm sure we had some business with some of their suppliers, but the impact is negligible to Cintas.

Going forward I guess the health of the auto industry if it's improved is a result of this settlement will certainly help our business here in the U.S.

and Canada.

Okay.

Great.

I'm sorry, finally can you remind us what you have left on the authorization?

$420 million.

Okay.

Thank you.

Now we'll take a question from Scott Schneeberger with CIBC World Markets.

Just a question on the pricing environment out there for uniform rental.

Are you seeing -- you said it looked like solid sequential improvement in the organic growth.

What are you seeing on the pricing front there?

I'd say it's a very competitive marketplace, especially with large national type customers.

Okay.

Thanks.

And I guess looking now at the cost line you'd cited that tightened legal expenses had an effect in the quarter.

Is that union related, perhaps related to your incident in Tulsa?

Is that something that, I guess, bottom line question here, is that something that's going to persist?

How should we think about that going forward?

Good question, Scott.

It's basically all of the above.

There were some costs associated with the incident in Tulsa as well as these lawsuits that we've disclosed in our 10-K.

You know, there was a heightened period of discovery this past several months, so I think that that could have had some impact on it.

However, I would say that legal expenses are going to continue to be high as these cases move themselves through the court system.

And then we had some other professional services that we incurred that would probably not be repeated.

So I would hope that overall we would see an improvement in the SG&A as we move forward through the year.

All right.

Thanks.

And one final one, if I could.

It sounds like a little bit of a slowdown in uniform sales.

Could you just give a little bit more color?

You mentioned, you know, it could be lumpy year-to-year and I think you indicated you think it's going to be a little soft for the foreseeable future.

Just kind of a little bit bigger color picture there.

Thanks.

We certainly are a little disappointed in the results in the direct sale of the uniforms.

That is the one area that surprised us a little bit coming out of the gate here this fiscal year.

It looks like that many of the large lodging and casino gaming type businesses are not doing as aggressive of rollouts as we initially had planned.

So our hope is that the -- as we move throughout the year we'll be able to get some of that back, but it's one of those businesses that is very choppy.

We've talked about that over the years.

So, you know, we hope that we will see an improvement as we go throughout the year, but right now I can't say that for a certainty that that's going to happen.

Thanks very much.

And now we take a question from Bruce Simpson with William Blair.

Hi, guys.

Hey, Bruce.

First on SG&A you talked about that returning to a more predictable level and obviously it was real high as a percentage of sales in the quarter.

So when you talk about more traditional or more predictable levels where are we headed?

Is it reasonable to think that that's kind of back in the 27 range?

What we can tell you is we think it will improve as we move through the year just like when selling costs with the additional investment in that area, that doesn't come right back down you need the revenues to grow.

So we think that will improve as we go forward.

We also think, as Bill mentioned, that we think the administrative portion of SG&A will begin to trend down.

I think, you know, potentially down in the 27 range between 27, 28 I'd say as we progress through the year, but it's not a quick drop, as you know.

Yes.

And in terms of the absolute dollars typically sequentially as you progress through the year it's at least flat and usually going up quarter-to-quarter.

Would you still expect that or was there enough of this kind of one-time professional expenses that inflated it in this quarter that it's going to come out?

I would say there's not enough of that to say that you're going to see a significant decline in the absolute dollars.

Okay.

I would look at it more on a percent to sale basis.

Okay.

And then turning focus to the European acquisition, moving forward, I mean should we expect this to be a real foothold that you would relatively consistently look to acquire your way, you know, throughout geographically throughout Europe or is it rather this is kind of a just a toehold and you could let a half a year or even a year go by as you begin to understand the cultural and financial dynamics of working over there without doing another acquisition?

You know, Bruce, I would say we want to be sure that we don't make the mistake and get too aggressive over there, but on the other hand, I will tell you that we've got a list of potential candidates for acquisitions and if we can meet with the sellers at reasonable prices we're not afraid to acquire a few more operations because we have a lot of confidence in the management team that came with us with the acquisition in the Netherlands and we feel that if we find the right opportunities at the right prices, we'll certainly move forward.

Okay.

Now I think in the past you've always indicated that you really didn't think that Europe was particularly fertile ground for your uniform rental operations just because of the differences in economy and the cultural outlook to uniforms and opportunity and so forth.

Is that changing or should we expect the growth in Europe to be in your emerging areas rather than on traditional uniform?

Well, what excites us about Europe is things like document management, but also facility services.

So while we may not be as bullish on uniform rental in Europe, we are very bullish on the facility services opportunities that exist both in Europe and as well as in the U.K.

In fact, in some cases, in some respects the facility services business may have a little bit more potential over in Europe than it necessarily does here in the U.S.

and we're very happy about the opportunities we have in the U.S.

So we think that document management and potentially facility services will be the big opportunities for us in the short run.

Facility services still being reported in your Rental Uniforms and Ancillary Products and by that you mean like hygiene?

Yes.

Okay.

And then last thing, can you talk about the growth of the hygiene business that's kind of buried within that bigger segment and in particular the Ultra Clean that had been growing at pretty exponential rates and have you hit a certain level of maturity in that business?

Well, we certainly have, the rate of growth in that business has slowed somewhat as it has a bigger base, but it still continues to grow.

The hygiene and the Ultra Clean are growing faster than the uniform rental business is growing.

I mean we're still seeing the headwinds of the shift in the types of labor that exist in the U.S.

and therefore, it is having an impact on our garment rental programs, but the hygiene and the Ultra Clean businesses are certainly the faster growing pieces of it, albeit from a much smaller base.

So when you told us earlier, when you give us, now that we've got better granularity on the operating segments, when you earlier gave us the organic growth rate, is that strictly of uniform rental or is that include facility services in there?

That includes facility services.

That segment is exactly like it used to be including all this.

That's our old Rental segment.

One of the things that we have is that business operates from the same facility, the same management team.

There's a lot of intertwining of that business together.

So we do not believe in the near future we'll be breaking that segment out any finer than what you're seeing right now.

Can you tell us whether the uniform rental business alone is positive or negative growth?

Well, as I think as you could imply from any comments, it certainly is the slower growing or flattish part of that business right now.

Okay.

Is it possible, I promise I'll get off after this, are you going to be able to give us historic information restated along these segment lines or isn't it possible, so that we can compare year-on-year?

We're just going to be doing it for the prior fiscal year and going forward.

So we're not going back beyond fiscal year '07, but as we go through every quarter, we will show you not only the current quarter in fiscal year '08, but also fiscal year '07.

Okay.

But we'll wait till each quarter to get it.

You're not going to give us the full fiscal '07 now?

Yes.

Okay.

Thanks, guys.

Next with Merrill Lynch we'll hear from Michel Morin.

Hi, good afternoon, guys.

First a quick one, the corporate line in the new segment data, why did assets drop 21%?

That's cash.

Okay.

That's a good answer.

And then can you just on your Document Management plans I think in your comments you mentioned that the focus was really on shredding and I just wanted to touch a bit more on that.

Is that -- am I interpreting that correctly?

Is the focus really on shredding or do you still have also a significant interest in pursuing the storage business?

As I've said before, shredding is by far our immediate focus and our -- the one that we're most excited about.

The storage side is intriguing to us and we have acquired a couple of operations, but we have not expanded rapidly in that area as we have in the shredding side.

And the storage operations you're referring to are the ones in Ohio?

Correct.

We also have one right now in Indianapolis and a small one in Missouri, but yes, basically it's Ohio.

Great.

That's all I had.

Thanks very much.

And now we'll hear from Gary Bisbee with Lehman Brothers.

Hi, guys.

In the, Mike, in the segment detail commentary you gave you specifically mentioned the desire to make acquisitions in [first data] and in documents but didn't say that in uniforms.

Is that a signal of anything or is that just, you know?

I think as we mentioned in the past, we're being a little more conservative in the uniform rental space.

I think we still look at all opportunities that are in that space, but again, we have a full geographic coverage in the U.S.

and Canada for uniform rentals so we can be a little more selective, but as we've shown about a year and a half ago we bought Van Dyne Crotty.

We found a great opportunity and went after it and we still do make acquisitions this that space but I'd say that our focus right now is on those emerging businesses especially fire and document shredding, but again, we have a team that looks at all opportunities in all of our business lines and we'll continue to make acquisitions when they can meet the thresholds with our rate of returns.

Okay.

If you do go back to, it sounded like you will, repurchasing stock, how are you planning to fund that, further commercial paper borrowings or --

We'll evaluate that going forward.

I think, you know, the commercial paper worked well for us over the last quarter.

We had very attractive rates and had good demand for it.

It's something that we'll obviously address.

We have $600 million authorization in total in our CP line so, we'll have to do something at some point if we did a lot, but I think that's something that we'll just evaluate internally and obviously make a disclosure at that point in time when necessary.

Gary, also we do generate a lot of cash from operations and we'll certainly use some of that and the second quarter tends to be a pretty good cash generator for us, so that will help us also, but it's certainly our responsibility to look out for more permanent financing opportunities if they present themselves and I'm sure Mike and I will be doing that.

Okay.

So it's safe to assume, you know, this whole credit crunch that happened, you didn't see your commercial paper rates skyrocket or anything that was undesirable?

Not at all.

It was very, very consistent for the quarter.

Remember, we're pretty highly rated, so --

Yes, yes.

And then I guess just one question on the segment data and I'll echo my thanks to you for giving this.

You know, I guess when we look at the document management, obviously, there's been huge profitability gain over the last year and the gross margin it's far and away the highest in the business.

Can you give us some sense on a relative basis how you think about the composition of cost of goods sold versus SG&A?

And I know you're not going to tell me where you think the margins ultimately end up at maturity, but is there some sense that as you look at all the businesses there's not really that much structural difference in what costs go on those two lines?

I think you have two things.

One, paper prices have been very solid recently that helps, but then also you have to remember that in document shredding you don't have material costs.

You know, you're paying a driver.

You have a plant essentially that's on wheels if you're shredding it at the customer's location, so margins are improved but you're paying more in the SG&A lines to run the business from your operations, so to speak, from a management perspective and from a logistics perspective.

But not having the material costs and actually turning around and selling the paper makes a difference when paper prices are higher getting some benefit there.

So I think we see that the margins in that business over the long-term will be above what we have been experiencing historically in our uniform rental business, but we've not commented on how high they can go, but we do think it's very positive.

Okay.

And then just on that last point can you help me understand exactly how the economics of that work around, you know, selling the paper on the back end and how much of the profitability comes from that, you know, is the business nicely profitable without that or can you give me any metrics to help understand that?

We won't provide metrics on it obviously, but what we can tell you the way it operates is not only are you picking up a very salable commodity, so you're turning it back around either balling it at your own [set] or selling it to selling it to a recycler and when the demand for that product is very high like it is currently, you're essentially covering a lot of costs by selling that paper.

So it's positive at this point in time and we believe it will continue to be positive.

And then just one last question on this.

At any point would you consider giving us Cap Ex on this segment data in addition to assets and all the other numbers you're giving us?

Yes.

We're looking at that and I would say that we hope to provide more detail on the next quarter.

Okay.

Great.

Thanks a lot.

Now we'll take a question from Chris Gutek with Morgan Stanley.

Thanks.

Hi, guys.

Hey, Chris.

Since your last call I guess it was July 18th, one could argue that the macro outlook has moderated a bit and I guess in that context I'm curious what is sort of embedded in the guidance to the extent that you're reiterating the full fiscal year's revenue guidance.

Have you, in fact, assumed that the economy softens a bit?

If so, how much and is there something else in the business and sales productivity or something else that's kind of ramping a little bit better or on a better trajectory that might offset a slight macro softening since your last call?

Chris, I would say that what we are, you know, our original plan that we put together and we talked about in July and that upon which guidance was based, assumed that there would be a modest continuing growth in the economy but that the real impact would happen to Cintas is that we would see accelerating organic growth as we moved throughout the year as the project one team became, you know, more productive with regard to its ability to sell, generate new business, do cross selling, but we still believe that is the case.

While the overall economic environment you say has moderated some it really hasn't changed our, you know, from what our expectations were.

It's certainly not a very rapid growth business, but we didn't expect -- or rapid growth economy, but we didn't expect that anyway.

So my only concern is assuming there's not a recession, where we start to see a bunch of people losing their jobs and there's certainly no indication of that yet, I think that we feel pretty confident that the guidance, as least as it stands right now, our guidance is solid and that we can achieve the guidance that we gave you.

Okay.

Fair enough.

And then just a follow-up on the notion of having completed a strategic review, it sounds like, if I'm interpreting your comments correctly, that there's no intention of doing anything aggressively in the short-term here from a strategic perspective, but I'm curious if there's anything still on the table short of what was considered as part of the strategic review, for example, trying to monetize some of the real estate assets or changing some of your sourcing to buy uniforms from Asia or anything else more from an operational perspective that could be incremental to margin improvement opportunities you talked about in the past shy of the strategic review?

Well, I think our job is always to look for opportunities and the board's job is always to look for opportunities to enhance shareholder value along with management.

So, you know, everything is always on the table and we're always looking for ways to improve things, but we got to look both long-term and short-term as to what makes sense.

So that's a continued activity that we're all involved with.

Okay.

Fair enough.

And then finally just a quick one.

Your press release mentions the FIN 48 and the creation of a tax liability.

Could you explain what's driving that or what the issue is around it?

Sure.

It's actually with FIN 48 you're required to essentially analyze your tax reserves and it has to be based on a technical merit as to whether or not you can have something in your tax return that is separate from what's on your financial statements.

Based on that review, we essentially took our deferred tax liability and if you look at the balance sheet, you essentially have that liability that was in place at May 31st and it was then broken out into a deferred tax asset and the accrued liability is mainly in the long-term accrued liabilities you'll see that -- the flip side portion of that come through essentially and there was a $14 million additional reserve that we established through retained earnings which was really based on the computation on technical merits of FIN 48.

So I think when you go through (inaudible) that you'll see that it's essentially just a move from that deferred tax liability as of May 31st up and to --

Got it.

Thanks.

(OPERATOR INSTRUCTIONS) We have a follow-up from Mr.

Morin with Merrill Lynch.

Yes, hi, again, very quick one.

Energy costs, how has that changed over the year?

Year-on-year?

Michel, you probably didn't hear it before, but I did say that it really has not changed at all over the last 15 months.

It's basically been about the same level of 3.4%.

Great.

And do you have any planned laundry facility either openings, you know, either greenfield openings or closings?

No closings.

We certainly have a few plants that will be opened this year.

I don't have the exact number but probably along the lines of last year, three or four.

Okay.

And then finally, there's been a bit of a crackdown on checking for Social Security mismatches and I was wondering if that's something that's affected you at all?

Well, that's been going on for a couple years and our operations periodically will receive a list from the Social Security Administration saying that there are some mismatches and we work with our partners at those locations, partners are our employees, to try to help them resolve that situation.

There certainly have been a few situations where the employee was using false identification and they are no longer with the organization as is required by law, but we certainly try to assist our partners if those things are identified and often we're able to work those things out with the Social Security Administration.

Great.

Okay.

Thank you and thanks again for the segment data as well.

And that is all the time we have for questions today.

I'll turn the conference back over to our presenters for any concluding or further comment they may have today.

Thank you all for joining us.

I hope that there were no more questions.

We did not put a limit on the time frame so usually it's more that there were no more questions, but we appreciate all of you being here and we'll look forward to talking to you for our second quarter earnings during the week of December 17th.

Once again, everyone, this will conclude today's program.

We thank you for joining us.

Please enjoy the rest of your day.