信達思 (CTAS) 2008 Q2 法說會逐字稿

Good day everyone, and welcome to the Cintas quarterly earnings results conference call.

Today's call is being recorded.

Att his time, I would like to turn the call over to your host, Mr.

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

Please go ahead.

Good morning, and thank you for joining us to discuss our Company's results for the second quarter of fiscal 2008.

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

After some brief comments, we will open the call to questions.

We are pleased to announce increased sales and profits for the quarter ending November 30th 2007.

Total revenue increased 6.6%, and earnings per diluted share increased 3.9%.

We had continued strong growth in both our document management division, and the first aid side of the first aid and safety business.

We also showed improved organic growth in both our rental and uniform direct sale businesses.

Net income was $82.9 million, up slightly from last year's $82.5 million.

This year's results were negatively impacted by a higher effective tax rate of 38.3% versus last year's 37.3%.

With the adoption of the new rules on tax accounting, companies must be more precise on a quarterly basis in the recording of the tax provision, versus the old rules which calculated taxes on an effective rate for the entire year.

Thus, this quarter's higher tax rate should be the highest of the year.

By the end of the year we expect our annualized rate to be at 37.3%.

Shortly, Mike will provide you further details regarding growth by segment, as well as a discussion of margins.

During the quarter, the Company purchased 5.2 million shares of its stock in open market purchases.

Since the initiation of the buyback program in May of 2005, Cintas has purchased 19.4 million shares, representing about 11% of the outstanding shares at the inception of the program.

We currently have $228 million remaining under the authorization from the Board to purchase Cintas stock.

Subsequent to the end of our quarter, Cintas also issued $250 million in 10-year bonds.

These proceeds were used to pay down commercial paper.

As Scott Farmer stated in the release, our results are in-line with the plan for the year.

Our current guidance of revenues for the fiscal year ending May 31st, 2008, remains unchanged.

That guidance calls for total revenues of $3.9 billion to $4.1 billion.

Earnings per diluted share are still expected to be in the range of $2.15 to $2.25.

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 recently filed Form 10-K.

I would now like to turn the call over to Mike Thompson.

Thank you, Bill.

Good evening, or good morning, rather.

Total revenues were $983.9 million for the quarter, a 6.6% increase over that reported in the prior year.

Internal growth was 4.8% during the second quarter, which is an increase from our first quarter internal growth rate of 4.2%.

While general economic conditions worsened as compared to our last two quarters, our new sales organization continued to gain strength, and provided us with the improved new business results, most notably, in our emerging business units.

All of our businesses are growing, but our emerging business services continue to grow at accelerated rates.

Our transformation into a more well-rounded service provider continues.

At the end of fiscal 2007, revenues from our first aid, safety, and fire protection, and document management segments, represented approximately 13% of total company revenues.

Through this year's second quarter, these segments represent 14.4% of total Company revenues.

As a reminder, our second quarter had 65 workdays.

The same number of workdays as the second quarter of fiscal 2007, but one less workday than our first quarter of this fiscal year.

The number of workdays does impact quarter-to-quarter comparisons.

For the remainder of fiscal 2008 the workdays will be as follows.

Our third quarter will have 65 workdays, which is one more workday than the third quarter of fiscal '07, and 65 workdays in the fourth quarter, which is one less workday than the fourth quarter of fiscal '07.

Our rental uniforms ancillary products is our largest operating segment, accounting for 72% of total Company revenues during the second quarter.

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.

Uniform and ancillary product revenues were $708.8 million for the quarter, compared to $684.5 million in the second quarter last year, a 3.6% increase.

Year-to-date revenues for this segment are up 3.4% over last year's first six months.

Factoring out acquisitions made over the last 12 months, our rental organic growth rate was 3.25% for the second quarter, which is an improvement over the 3.0% internal growth in the first quarter of last year.

We continue to see improvement in our new business results within our uniform and ancillary product segment, resulting from our new sales organization, and we are encouraged by these results.

The new business generated was more prominent toward the end of the quarter.

While we have not seen a significant change to our overall customer base, our combined lost business and add/stop ratios have worsened, as compared to the previous two quarters.

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

During the second quarter, uniform direct sales revenue growth improved to 5.1%, up from 1.5% in the first quarter.

Second quarter organic growth for this business was also 5.1%.

As we mentioned last quarter, this business tends to be a choppier business quarter to quarter.

While our national account direct sales business improved as compared to the first quarter, the more significant improvement came from revenue generated from our direct sales catalog, which focuses on local customers that also rent products from us.

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.

We provide safety training to our customers and their employees.

We install, 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 13.4%.

On an organic basis, this segment grew approximately 6.2%, as compared to 8% in the first quarter.

As in the first quarter this decrease was due to lower than anticipated installation sales.

Within fire protection, we sell and install certain fire suppression systems.

The timing of the sale of these installations is closer to a direct sale business, than to the repetitive nature of most other sales within the segment.

This business is also dependent on new business construction.

The continued weakness in this area of fire protection is causing our overall internal growth rate for first aid, safety and fire to suffer.

Given their size, a relatively small dollar shortfall in our emerging businesses can have an impact on internal growth results.

Excluding this installation business, our first aid, safety is and fire business is growing approximately 10%.

We continue to evaluate and make strategic acquisitions within this segment, with a particular focus in expanding the geographic coverage of our fire protection service business.

As with our other businesses we believe a full national presence will provide us 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.

Revenue within this operating segment continues to grow at a very rapid rate.

Second quarter revenues for the document management operating segment grew 77.4%, as compared to 78.1% in the first quarter.

Internal growth for the segment was 43%, the same as our first quarter, and comparable to the 44% internal growth achieved during the fourth quarter of fiscal 2007.

Paper prices continued to be very strong, and do play a contributing factor to these internal growth rates.

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

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

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

As we announced last quarter we expanded our document management business beyond North America, by acquiring a document management company in the Netherlands.

While still fairly new to Cintas, this acquisition is meeting our expectations.

We are gaining valuable experience in running this international operation, and we continue to actively evaluate other international opportunities within document management, as well as our other lines of business.

Total Company margins of 42.7% declined 40 basis points as compared to first quarter margins, but improved 30 basis points as compared to the 42.4% in the second quarter of 2007.

The decline from the first quarter was due to a slight reduction in rental margins, and the margin impact of the fire installation revenue shortfall.

The 30-basis-point improvement over last year's second quarter was due to a slight improvement in rental margins, and the continued improvement in the overall emerging business margins.

Our rental uniform and ancillary products gross margin was 44.7% of revenue for the second quarter, which is a slight 20-basis-point decrease from the 44.9% gross margin achieved in the first quarter, but a 20-basis point improvement over the 44.5% gross margin in the second quarter of last year.

The second quarter had one less workday than this year's first quarter which impacted margins.

The margin improvement from last year was due to improved material costs.

Energy costs, as compared to the first quarter and to last year's second quarter, were flat.

Other services gross margin declined 30 basis points from the first quarter, but improved 150 basis points as compared to last year's second quarter.

The decline from the first quarter was due to pressure on margins within our first aid, safety, and fire protection segment, due to the shortfall in installation sales within fire protection, despite being staffed for growth.

Despite this pressure, other services margin improved 150 basis points over last year's second quarter, due to improvement in the uniform sales segment and document management segment.

Improved sales within uniform sales enabled us to cover more overhead, while increased scale and strong paper prices drove document management prices higher.

The significant total growth within first aid, safety, and fire protection services and document management services is allowing to us gain scale in these businesses, driving margins higher.

Given the current size of these businesses, there is the potential for margin movement on a quarter-to-quarter basis.

However, we expect other services gross margin to continue to generally trend upward, as these businesses continue to grow and achieve scale.

Selling and administrative expenses were 28.0% of revenue for the quarter, as compared to 26.9% for the second quarter of last year, and 28.6% for the first quarter of this year.

The increase over last year was primarily due to the increased investment in our sales organization.

Additionally, increases in legal and professional fees and other small increases were offset by an improvement in medical costs.

The selling and administrative 60-basis-point leverage achieved from this year's first quarter, was due to a decrease in professional service fees and medical costs.

Payroll taxes also decreased on a percent to sale basis, which is typical for our second quarter as we are in the later stages of the calendar tax year for individuals.

This improvement in selling and administrative costs provided for an overall operating margin improvement of 30 basis points over the first quarter of fiscal 2008.

Net interest costs were 1.1% of revenue this quarter, a slight improvement from 1.2% in the first quarter, as well as last year's second quarter.

Our effective tax rate increased to 38.3% for the quarter, which is a 100-basis-point increase over last year and last quarter.

This increase was due to second quarter reserve requirements under FASB Interpretation No.

48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No.

109.

We expect the Company's effective tax rate to be below 37.3% for the remainder of fiscal 2008, and that our effective tax rate for the full fiscal year, will be approximately 37.3%, which is the same as last year's effective tax rate.

Net income for the quarter was $82.9 million, and earnings per diluted share were $0.53 per share.

As Bill mentioned, we are concerned with current economic conditions, that they have not deteriorated to the point where we believe a change in our fiscal 2008 guidance is warranted.

Therefore given our results through the second quarter, we are reiterating our fiscal 2008 revenue and diluted earnings per share guidance, which calls for total revenues for the year of 3.9 to $4.1 billion, and diluted earnings per share of $2.15 to $2.25.

Our balance sheet and cash flow remain strong.

Our current ratio is 3.4:1.

As compared to our August 31st balance sheet, cash and marketable securities increased approximately $16 million.

This is due to timing as excess cash is used to reduce outstanding commercial paper balances on a regular basis.

DSOs on accounts receivable were 40, which is the same as last quarter.

Accrued liabilities increased approximately $50 million from August 31st, mainly due to seasonal items.

Approximately half of this change relates to our VEBA funding.

We typically pre-fund a VEBA, which is a pre-payment vehicle for employee medical benefits during the first quarter of each year.

The remaining $25 million is mainly from increased bond interest accruals, and employer retirement benefits accruals.

As a reminder, we do not have any significant defined benefit plan.

Long-term debt at November 30th, 2007 was $949 million, an increase of $68 million from August 31st.

The increase related to $23 million of acquisitions, and $191 million of share buybacks, offset by cash flow generated during the quarter.

Total debt as a percentage of total booked capitalization increased moderately to 30.6%, from 28.2% at August 31st.

As of November 30th, our total debt consisted of $475 million in public debt, $464 million in outstanding commercial paper, and $10 million of other bank debt.

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

On December 7th, subsequent to quarter end, we refinanced $250 million of our commercial paper into 10-year 6.125% public debt.

This refinancing allowed us to take advantage of current long-term rates, maintain the flexibility to continue to pay down remaining commercial paper levels, and restore some dry powder.

As Bill mentioned, we bought back approximately 5.2 million shares during the second quarter.

Our total outstanding shares as of November 30th were 153.7 million shares.

Since the inception of our buyback program, we have bought back over 11% of our outstanding shares.

Year-to-date cash provided by operations was $271 million.

These strong cash flows allowed us to cover year-to-date capital expenditures of $93 million, and acquisitions of $56 million, and a portion of the share buybacks made during the quarter.

We expect capital expenditures for fiscal 2008 to be between $180 million and $200 million.

We continue to actively pursue acquisition opportunities.

Spending $56 million for businesses so far this year.

Focusing on opportunities in fire protection service and document shredding lines of business.

The acquisition pipeline continues to experience good flow.

We expect our balance sheet and strong future cash flows, to allow to us continue to invest in our business and make strategic acquisitions.

Thank you, and I would now like to open the call up to any questions you may have.

Thank you very much, Mr.

Thompson.

(OPERATOR INSTRUCTIONS) Our first question in the queue from Ashwin Shirvaikar with Citigroup.

Hi, thank you for taking my question.

I would like some clarification on the first aid side of the business.

How much is installation versus the recurring revenue, and is the profitability different in the two parts of the business?

We don't disclose the components of the first aid and safety business, Ashwin, for competitive reasons.

So we are not going to get into that at this time.

I can tell that you the reason we are in the installation business though, is as much to attain the services businesses down the road as anything.

We find that as an opportunity for us to do more for our customers, and then enable to us get the ongoing revenue streams of the fire, of the extinguisher servicing, and the various sprinkler system servicing on a recurring basis.

But during the dependence on new business construction, which doesn't seem like it is coming back in the near term, would you expect sort of a flattening of the margin levels at what you achieve in this current quarter, or would you expect a rebound?

Because you are doing better with the other part of the business?

And I know it is a small part of the business, but it is --

It is very difficult for me to give a precise answer on that.

That obviously, you are right that the new construction is going to impact the amount of opportunity in that business.

We will certainly adjust our cost structure going forward, if we anticipate that there will be a slow doctors down in that segment, so that we will try to maintain or improve margins from this point forward.

Okay.

And one last question, if I may.

The direct sales, a nice uptick in that part of your business, whatever you assigned in the quarter, is that a multi-quarter event where it is large client and you have, you are ramping up a program for a couple of quarters, or is it a single quarter event?

Well, as Mike pointed out, in his comments, a lot of that growth did come from our catalog business, which is basically sold off of our uniform and facility services routes.

So that is more of a one-time sale, as opposed to a recurring sale going forward.

Okay.

Thank you.

Thank you.

We will take our next question from Gary Bisbee with Lehman Brothers.

Good morning, guys.

Hi, Gary.

I guess the first question, you know, with the document management business, can you give us sort of an order of magnitude sense, or any guidance on how we should think about the revenue contribution, and also the margin contribution, from the service fees you are charging versus the sales of paper on the back end?

Is this, you mentioned two quarters in a row that this is a driver of growth, the top line and the margin, and that that may not persist if paper prices fall, but is that a really big piece?

Is it just on the margin?

From a growth standpoint, we indicated that the internal growth of 43% this quarter, we would have been in the high 30s without the impact of paper prices.

We have not talked about or provided detail from the margin side.

Essential there is benefit there, and the reason for the improvement in other services margins is two-fold.

Certainly paper prices are playing a part of that, but also just the increased scale and the amount of document business, services business that we have, and revenues that we have in total are driving that.

So we haven't provided the detail on the margin side, but I think you can kind of back into it from the sales side.

Okay.

Then just looking at that, the last couple of quarters, even if you assume that the paper had a part of it, there has been a substantial increase, like the last three quarters.

Is it safe to say that the year-ago period and the first half of last year were sort of low single digits, as a level you are unlikely to ever go back to at this point, even if paper softens somewhat?

I don't know what you mean by low single digits.

We have never been low single digits in document management internal growth.

No, no, I was talking about the pretax margin.

No, we expect that to continue to be at the higher levels.

The only difficulty would be if you had a severe reversal of paper prices.

Obviously this being a benefit if it goes negative, but we expect margins to be pretty healthy.

Alright.

Can you give a little more color on your comments about the economy weakening this quarter, I guess you said add/stops weren't as strong, and lost business might have ticked up.

Any other commentary, or what you are hearing from customers that you can give us?

Gary, I think, you know, we are seeing, what you are generally reading in some of the press, is that businesses appear to be cautious.

I know I read something recently that talked about that the number of companies hiring in the first quarter of next calendar year is going to be less than it has been for some time.

And so what I sense that our customers are doing, is they are being cautious also, waiting to see what happens with the consumer going forward, and as a result of that, I think that there has been a reluctance to replace workers as they leave various companies, and that impacts our stop/add ratio, and then I think companies are also tending to struggle a bit, and our lost business has ticked up a little.

So it is not significant, but it is enough to give me some caution that says there is a little bit of concern out there.

So we still anticipate that we will meet our guidance, but obviously if the economy takes a turn for the worse, it is going to be at the lower end of the guidance, and it will be in the mid to upper end of guidance.

One last one following on that.

A quarter ago you made the comment that you were confident that the organic growth in rentals, just due to the salesforce reorganization going better new, could accelerate sequentially throughout the year.

I don't think I heard you say that again.

Is there some sense that maybe if the economy did, you know, did get worse in the second half, that it would potentially more than offset the progress you are making with the sales force, or does it still seem likely that that improves sequentially from here?

Thanks.

I have said as I have always said, is that our guidance always has assumed a cooperating economy, you know, at least a modestly improving economy.

We still believe that the project one team with the sales restructuring, is continuing to provide us benefits.

You can see it, you know, in the other business services especially, but even our rental business organic growth has improved.

Turnover of our sales people continue to ratchet down, productivity increases.

So I still expect that to be a contributor going forward, and improved productivity on the new business side.

With that said, obviously, if the economy took a significant downturn, selling new business becomes more difficult also.

I don't see that happening, but it is hard to predict what might take place over the next six months.

But right now we are very happy, and pleased with the way Project One team is going.

It is meeting our expectations with regard to new business, and we don't see anything to say that that is going to change.

Great.

Thanks for all the color!

Thank you.

We will now move on to Mike Schneider with Robert W.

Baird.

Maybe first sticking with Project One team, can you address, I guess, the interplay between the economy and Project One team?

It seems as though the economy maybe is a notch lower than you expected.

Is it then an equal offset there, that Project One team is actually ahead of your internal projections, or are things just on plan?

Things are pretty much on plan.

It is not a significant difference, Mike Our new business projections are pretty much what we expected them to be.

A little bit higher in the Other business services, which is maybe offsetting a little bit of the sluggishness on the rental side, and in add/stops and lost business, but basically we would be nit-picking to get into the differences.

Okay.

And then just within the metrics that you follow for Project One team, the sales force turnover, maybe you can address sales force turnover, new business written, and you have mentioned that customer retention did erode a bit during the quarter, but the prior two metrics, can you give us some qualitative or quantitative feel for how those are trending?

Well, the trends are, I am not going to get into qualitative numbers at all, or quantitative numbers, but the trend is certainly improving.

Our turnover has continued to modestly improve, which then has a corresponding improvement in productivity.

Okay.

So the trend lines are going in the right direction.

And the productivity improvements, are they being driven primarily at the route level, or at the professional sales level?

No, I am talking when I talk about Project One team, I am talking the professionals sales level.

Yes, but take a step back.

Are you also making equal improvements at the route level?

In terms of what?

Productivity improvements among the sales force, or the route --?

Well, their route volume is probably improving somewhat, but I don't have that data with me.

Okay.

And then pricing what is that metric generally trending at this point?

Pretty much no change over the last 12 months.

It is generally a very competitive environment.

We are seeing a lot of pressure upon contract renewals to get pricing improvement, or avoid a pricing decrease during the term of the contract.

We are pretty much being able to exercise our CPI increases as needed, but certainly it is a very competitive situation, when the contract is up for renewal.

Okay.

And then a final one on Project One team, so the last quarter, or two quarters ago, you admitted that things were a little more challenging than you expected.

Last quarter you said you were back on track, this quarter we have shown some sequential improvement again.

I don't know if you want to put it in baseball terms, or however, but where are we in this trajectory?

Have you accomplished 20% of what you had hoped to, in terms of productivity improvements?

Just to give us some sense of the 12, 24, 36-month plan here, how much is left, or yet to be realized for Project One team improvements?

I don't have account exact data, Mike, but I would say we are in the middle of the game.

To expand on that, I would say from an organizational standpoint, we feel like the organization is in place, our reps are in place, we are fully staffed, but to get through and get it completely up, I would agree with Bill that we are in the middle innings.

And has the indoctrination or leverage period been longer than you expected?

We generally talk about six to nine months of delay, before a salesman truly makes an impact.

Has that timeframe stretched, or has the training program shortened it?

I don't think it has stretched.

I think we did indicate last quarter that it did take us longer than we thought, but I think -- again, we feel we are on-track, and that we should continue to see improved new business results through the end of this fiscal year, and into next fiscal year, barring a significant downturn in the economy.

And did I hear you correctly, Bill, that trends during the quarter, or Mike, I apologize, did trends in new business written actually improve through the quarter?

Yes.

They were strongest at the end of the quarter.

Okay.

Thank you again.

Thank you.

(OPERATOR INSTRUCTIONS) We will move on to Chris Gutek with Morgan Stanley.

Thanks, good morning guys.

A couple of follow-up questions.

So the first one, Bill, in terms of the increased lost business, or increased attrition rate of the customers, do you think that is primarily a function of the macro environment, or is there any change in the competitive landscape, in particular some of the growth initiatives at GNK, or maybe with Aramark not being private for a couple of quarter, maybe aggressively attacking the cost structure, but also being aggressive with pricing, anything you are seeing with those two, or any other competitors that are sort of changing the landscape?

Chris, to the best of my knowledge, it is more of a macro issue, than it is a competitive issue.

Okay.

Switching gears, so the CapEx budget, it looks like you guys have raised it by $10 million versus your guidance in the previous quarter.

In the context of the economists seeming to think there is a 50/50 chance of a recession, and therefore maybe a little bit slower growth, and a little bit less need for new plants in the short to medium term, is this really being driven by the emerging businesses, or what else, is anything else impacting that CapEx budget increase?

It is being driven primarily by temperature merging businesses, to continue to accommodate that rapid growth and the potential that exists there, we have increased the level of expected spending, primarily in the emerging businesses.

We really haven't reduced anything in the traditional businesses, but we are seeing opportunities to expand presence in the emerging ones.

Okay.

And in terms of acquisitions, could you elaborate a bit on the updated thinking regarding Europe, and starting with how your one acquisition so far is performing, I know it is early.

A quick update there.

And what the next couple quarters or year or so would look like, in terms of maybe expanding off of that base in Europe?

To remind everyone, we made the European acquisition right at the end of July, and just announced, of course, in September.

It is a relatively insignificant acquisition but does it give us a presence over there.

At this point in time, we have no further announcements to make with regard to acquisitions, either having been concluded outside of North America or pending, but I will tell you that our corporate development group continues to be active in looking at opportunities.

But as we stated in September, we are going to approach this conservatively, and we are going to make sure that we understand the environment over there, before we put a lot of capital into Europe, or even in other parts of the world.

But we continue to be pleased with the results of our acquisition, albeit only for a couple of months in the Netherlands.

We are very pleased with the management team we have there, and they are being very helpful to our corporate development group here at corporate, in looking for additional opportunities, and I would expect there to be something concluded during calendar '08, as far as further acquisitions, but at this time it is hard to predict when that will take place.

My final quick question.

What interest rates were you paying on your old commercial paper program, now that you have got this new 250 million of senior debt?

The Commercial paper interest fluctuates on a day-to-day basis, but it was certainly less than 10-year rate we were paying, but we made a decision with the Board's concurrence and with our advisors, that it was prudent to lock in 10-year money at the rates that we obtained.

So it is built into our guidance that the higher interest cost that we would pay over the commercial paper, but it gives us more certainty, and it also helps, I think, with our ratings and making sure that we have adequate cash available, and credit line available to withstand anything that might come down the line.

Okay, great, thanks, Bill.

Thank you.

We will now take our next question from Bruce Simpson with William Blair.

Hi, guys.

Hi, Bruce.

Hi, Bruce.

Would you anticipate an increase in the dollar amount of your interest moving forward, given the aggressive stance on share repurchases, or is that kind of mitigated by free cash flow?

Well, what do you mean?

In our guidance we have assumed, obviously, a certain level of interest expense, and we never anticipate any further repurchases when we provide you guidance.

Okay.

Do you give us a full-year guidance expectation for the interest, the dollar amount of interest you will spend this year?

No.

We don't get into that level of detail, Bruce.

Let's attack it from this angle.

You posted about $13 million this quarter and the prior quarter.

Would you expect that to increase materially, given that you spent a couple hundred million in the quarter on share repurchases?

No, would it not increase materially.

And then again, kind of a nit on modeling for the tax rate, is that likely to be a situation we have kind of catch-up rate in the fourth quarter, that brings the full year rate down to the 37.3?

Actually you will have a catch-up, we expect more in the third quarter than the fourth.

Okay.

Mike, could you go over, I couldn't quite keep up with some of the puts and takes on SG&A on both a sequential an annual basis.

With specifics about medical costs.

Again, selling and administrative expenses on a percent to sale basis were 28% even, which was down from 28.6 in Q1.

So in comparing it to Q1, the 60-basis-point improvement was due to a decrease in professional service fees and medical costs, and also payroll taxes because we are later in the individual calendar year for taxes on individuals, it is a seasonal thing we get every year.

So those were the key pieces for the leverage for Q1.

If you go back to last year, there was about a 110 basis-point increase, which was primarily the investment in our sales organization.

The other piece last year if you recall, in Q2 we had a spike in medical costs.

That has come back down more in-line with where it traditionally is, although over the years it tends to increase, but as compared to last year it is a more traditional level, but increases in legal and professional fees and some other small increases, and administrative costs offset that improvement in medical.

So when you think about the absolute dollar amount of SG&A moving forward, typically it rises through the year, I think particularly in the fourth quarter, and now you have had kind of a flat level.

Integrating what you expect the impact of Project One team to be there, as you have your typical increase in sales as we head into the back half of your fiscal year, are you anticipating a little bit more leverage than you ordinarily get out of your SG&A?

That is to say, will SG&A be a little bit flatter, or even down from here?

We expect, and I am not sure on each quarter to quarter basis, but we expect SG&A to continue to be leveraged on a percent to sale basis.

The absolute dollars, as I think I indicated last quarter, I would model it more on a percent to sale basis, and show some improvement, versus trying to get the absolute dollars, because a lot of it is driven by top line.

Okay.

And then the last thing I have, just to return to the overall economic macro picture for a moment, can you give us just a little bit more color beyond saying customers are cautious?

Are there particular regions of the country?

Is that automotive driven, or Midwest driven, or housing driven, so that we can kind of understand where demand is ebbing and flowing?

We are very much seeing it as across the board, Bruce.

I don't want to overplay this, but it is certainly a little more sluggish than I would like to see, but it is not confined just to the Midwest any more.

It seems to be generally across the spectrum.

Okay.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) And we will move on to Scott Schneeberger with CIBC World Markets.

Following up on that economy question, you had mentioned before that the guidance for the year assumes gradual improvement in the economy.

And then you said subsequent to that, that you still feel pretty good.

Should we be concerned about the outlook changing if things continue to dampen going forward?

Just a little bit more color on those comments?

Well, I think all I am trying to signal is that we did not see the amount of activity we would like to have seen with our existing customers this past quarter, and so while I continue to expect the economy to improve, it is safe to say that if all of a sudden we start seeing a tremendous number of layoffs and companies just being very, very conservative, it is going to have an impact on our business.

And I just hope that what we saw maybe here over the last couple of months, is not indicative of what might be coming down the line, but it certainly makes me want to alert you guys that, okay, if this does happen, if we do go into a recession, that is going to have an impact on our business.

I think on top of that, I think also, when you look back, our Q4 and our Q1 lost business, and add/stop ratios had kind of solidified, so to speak.

They hadn't gotten much better, but they have not gotten worse.

This quarter they took a turn.

Again with the conversations we have had with customers, with investors, and analysts, et cetera, just the general mood is, you know, are we having a recession at this point, we haven't seen that in our numbers, but we have seen a slight downturn so we wanted to alert you to that.

Okay, thanks.

That is helpful.

Turning now to some of the cost lines, legal fees have been bouncing around 40 recently.

You mentioned that that was offset in the quarter by some positives in medical.

Could you speak about legal fees, how material they are, what direction they will go going forward?

Well, we are not going to get into that level of detail, Scott, but, you know, legal fees are erratic, because you know, depending on where you are in particular cases, you can ratchet up your costs quite heavily in a particular quarter, if you are in a discovery mode, or getting ready for a trial, or what have you.

Our expectation is that we will have probably similar levels of legal fees for the next quarter or two, and then barring any new significant actions, we would expect the legal fees to start declining as a percent of sales.

Thanks.

That is helpful.

One final one for costs.

Could you speak a little bit to fuel, what you saw in the quarter, maybe as a percent of revenue, and how that is trending and looking into this second quarter?

Yes, we have analyzed that.

Mike has got it.

He will share it with you.

It is essential flat year-over-year, and quarter-to-quarter.

We did see some movement in November with some diesel prices coming up, so really we were looking at being slightly down for the quarter coming into the month of November, but diesel costs spiked up a little bit.

So overall, we were flat, and don't see any changes on the horizon, other than we are going watch that diesel costs.

The diesel fuel worries us a bit, because about 70% of our fleet is diesel.

And that did really take a spike up, you know, fortunately we saw a reduction in natural gas pricing, which helped offset it a little bit, but going forward, if we don't see a reduction in the diesel expense, that is going to have a little pressure on margin.

Thanks so much.

Thank you.

We will now move on to Brandt Sakakeeny with Deutsche Bank.

Thanks, hi.

Actually most of my questions have been answered, but I did want to ask you a little about the pricing environment on the renewals.

I remember just last cycle that was sort of a tougher environment.

Can you just give a little comment about how that has been so far?

As I mentioned earlier, maybe you didn't hear, we are continuing to see a very competitive situation on renewals.

Our competitors are very active in trying to convince our customers at the end of their contract terms to go with them, as opposed to stay with us.

And so they tend to be aggressive on pricing, and we are obviously going to be aggressive back, in order to maintain the business.

So it is a situation where I think everyone is going after share with the existing customers, and we are having to meet the competition in many cases.

Okay.

Great.

And just finally, with the add/stop and the lost business trends, did those deteriorate for the quarter, or were they just fairly soft throughout the quarter?

Did they behave in any specific way?

I think it is tough to really pinpoint, you look down the weeks through the quarter.

You will see ups and downs.

I would just say generally the trend line was slightly down.

Okay.

But I think you heard you right in saying that new business through the quarter actually accelerated and peaked in November.

It did, right.

Perfect.

Thank you.

Thank you.

And we will now take our next question in the queue from Greg Halter with Great Lakes Review.

Good morning.

Hi, Greg.

Relative to energy costs, I know in the past you have discussed the fact that you haven't used any sort of formalized hedging programs.

Any change in that thought process?

At this time, Greg, no, there has been no change.

We continue to believe that the way we are doing it basically is the best way right now.

All right.

And relative to the share repurchase, I know you are back in the market, just wondered if you could provide some level of input there, given your average was I think $36.73, and with the stock lower than that now, what your appetite is on the share repurchase going forward, and if you were to use up the final 220 plus million, whatever it is, what the appetite is for the Board to increase that going forward?

Well, I cannot speak for the Board, so I will have to avoid that question.

Obviously we have direction from the Board on how they want us to fulfill the authorization.

I am not at liberty to discuss that.

But given our past history, I think you will see that we have been very conservative in our approach, and I don't see any reason to change that.

All right, and one last one.

New goods inventories were up about 10% on a year-over-year basis.

Can you get into the reasons for that increase, which is somewhat higher than your sales growth, or revenue growth?

I think a lot of that is due to a couple of specific customer roll-outs that are ongoing in our direct sales business.

And so you know, you build up a lot of garments for a big customer rollout, then it takes a while for the customer to roll that out.

The other thing is, is that we launched what we call the new big book in our direct sale business this past fall, early in the fall.

What that does is, that is done every couple of years.

And it is like the new product offerings that we are going to provide to the top end of uniform purchasers, the hotels, the gaming, et cetera.

There is always a buildup in anticipation of that big book being rolled out.

So that is being done.

And I guess the third thing is that we talked in the past about some of our new products, like the cargo pants, that we are now providing in many of our rental programs, and there has been a ramp-up in some of those offerings, and in order to make sure we have it, and then that obviously supports some of our new business efforts, as you can see, the new business was reasonably good.

So I would say those were the three major reasons.

All right.

And I did have another one.

Relative to the capital spending in technology and so forth, are you continuing to make any inroads on the RFID side, as well as installing additional garment sortation systems?

Garment sortation systems are generally becoming a rule of thumb in most of our new plants.

That is pretty much a standard requirement of new plants.

The RFID continues to be a series of pluses and minuses.

We are about ready to launch a new test with a new chip in one of our facilities here this coming year.

The old chip that we were using did not withstand the industrial laundry process, giving us the readability we needed, but we continue to believe in the technology.

We just haven't been able to prove it out yet.

Great.

Thank you.

Thank you.

We will now move to Michel Morin with Merrill Lynch.

Hi, Michel.

Couple of questions.

First, I just want to make sure I understand.

In terms of the fire protection installations, has that typically tracked commercial construction spending?

Is that kind of what has been impacting the business of late?

Yes, it certainly is tied to new business construction.

Okay.

Great.

And then secondly, I want to try to tie the softness that you have seen in the add/stop, and in the lost business with the strong catalog sales.

Is that an unusual development that you are seeing divergent trends there, or are they just simply not correlated?

I don't think they are really correlated.

Michel, maybe over a longer period of time there might be some correlation, but I wouldn't draw any conclusions with one quarter.

We can launch various marketing initiatives, incentive programs, et cetera, for those type of sales.

So I would hate to draw any conclusions from that.

Okay.

Just to be clear, those are the sales that are SSRs, or sales service representatives, our route drivers are making, versus our individual sales reps that are selling new business.

But these are sales that are being done to your existing account base, and they are cutting back workers, or they are churning out, so that is why I am a bit surprised to see that divergent trend.

Finally, just to follow up on the previous question about the buybacks and the appetite for further buybacks, I guess maybe spinning it another way, what is the thinking, or has there been some increased thinking around the dividend, and perhaps increasing the payout?

There certainly is discussion about our dividend policy, and I am not at liberty to disclose those discussions, but the Board is looking at that, as well as other ideas, and I would say is just, we will see what happens.

Great.

Thanks very much, guys.

Sure.

Thank you.

There are no further questions at this time.

Mr.

Gale, Mr.

Thompson, I will turn the conference back over to you for final or additional comments.

Well, thank you everyone.

I appreciate you all joining us this morning.

We did it this morning, knowing that many of you are looking forward to getting away for the Holidays, so on a final note, Mike and I and the entire Cintas team want to wish you and your families a very Happy Holiday, and a prosperous 2008!

We will look forward to speaking with you again in March, when we release our third quarter results.

And that does conclude today's program.

We thank you for attending, and have a great day!