信達思 (CTAS) 2008 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Cintas quarterly earnings results conference call.

Today's call is being recorded.

At this time, I'd like to turn the conference over to Mr.

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

Please go ahead, sir.

Good evening.

Welcome to our third quarter fiscal 2008 conference call.

We appreciate you joining us this evening for the quarter ending February 29, 2008, revenue grew at a rate of 8% to $976 million.

Earnings per share were $0.53 versus $0.48 a year ago, a 10% increase.

Our financial condition continues to remain strong.

During the quarter, the Company sold $300 million of 10-year notes using the proceeds to reduce its commercial paper outstanding and thus freeing up additional capacity in our CP program if opportunities arise.

At February 29, our debt-to-capitalization ratio was 30.8%.

Also, last week, the Company paid its annual dividend, which was $0.46 per share an 18% increase over the dividend paid last year.

Given our performance through February, as well as the economic slowdown being felt by our customers and prospects, we are adjusting our revenue guidance for the year.

For the entire year, we expect revenues to be in the range of 3.930 billion, to $3.965 billion.

While the revenues are still within our original guidance range, it is in the lower quartile.

However, we are also anticipating continuing high energy costs.

These factors are causing us to reduce earnings per share guidance to be between $2.12 and $2.16, down from the previous total year guidance issued last July of $2.15 to $2.25.

The Company has implemented aggressive cost control measures in order to offset these lower revenues and increased costs.

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

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

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

This conference call contains forward-looking statements and 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'd like now to turn the call over to Mike Thompson.

Thanks, Bill and good afternoon.

Total revenues were $976 million, for the quarter, a 7.8% increase over the $905.4 million in the third quarter of fiscal 2007.

Our rental organic growth improved to 3.8% for the third quarter a 55 basis point improvement over the second quarter, when adjusted for the additional workday.

Total Company third quarter internal growth, however, decreased slightly to 4.5% from 4.8% in the second quarter.

Year-to-date, total Company internal growth was also 4.5%.

Our new business efforts continued to meet our expectations, but deteriorating economic conditions caused additional weakness in our existing customer base.

As mentioned on our second quarter call, we began to see weakness in our customer base in November.

This weakness continued through our third quarter.

As a reminder our third quarter had 65 workdays which was one more workday than the third quarter of fiscal 2007.

Our second quarter of fiscal 2008 also had 65 workdays.

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

Our fourth quarter fiscal 2008 will also have 65 workdays.

This is one less workday than our fiscal 2007 fourth quarter.

For forecasting purposes, please note that the number of works days for next year, fiscal 2009 will be 65 workdays for each quarter.

This will equate to one less workday in fiscal 2009 as fiscal 2008 will have 261 workdays and fiscal 2009 will have 260 workdays.

Rental uniforms and ancillary products is our largest operating segment accounting for 72% of total Company revenues during the third 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 corporate identity uniforms and facility services in North America.

Uniform and ancillary product revenues were $703.6 million for the quarter compared to $665.6 million in the third quarter of last year, a 5.7% increase.

Year-to-date revenues for this segment are up 4.2% over last years first nine months.

Factoring out acquisitions made over the last 12 months our rental organic growth rate was 3.8% for the third quarter, again which is a 55 basis point improvement over the 3.25% internal growth in the second quarter.

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

The new business generated through the quarter and year-to-date has met our expectations.

The weakness we experienced with existing customers late in our second quarter continued through the third quarter, causing our total uniform and ancillary product internal growth to be below our original expectations.

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

During the third quarter, uniform direct sales revenue declined 0.7%, as we experienced weak sales in both our national account direct sale business and our direct sale catalog.

During challenging economic conditions, these direct sale businesses tend to move with greater volatility than our rental business, as many of the direct sale customers will delay purchasing during economic downturns.

We expect to continue to experience weakness in this segment in the fourth quarter.

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 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 & 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 10.3%.

On an organic basis this segment grew approximately 5.3% compared to 6.2% in the second quarter.

Our First Aid & Safety business continues to provide double digit internal growth, however this growth was offset by a combination of lower than anticipated recurring fire service revenue and continued pressure on fire installation sales.

We are reallocating our sales resources within fire protection, with a focus on the recurring service business and away from the sale and installation of fire suppression systems.

The fire installation business is dependent on commercial construction which is facing difficult business conditions.

With additional deterioration expected in commercial construction, we are focusing on new business opportunities elsewhere in the fire protection space.

We continue to evaluate and make strategic acquisitions within this segment, but with a defined focus on 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, while we still evaluate -- while we will still evaluate other acquisitions in this space, the valuation would have to be compelling for us to move forward.

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

Revenues within this operating segment continue to grow at a very rapid rate.

Third quarter revenues for the Document Management operating segment grew 71.2% as compared to 77.4% in the second quarter.

Internal growth of this segment was 41% down slightly from 43% in the second quarter.

This division's growth continues to exceed our expectations and our current annual revenue run rate is over $185 million.

Our small document management business in the Netherlands which we purchased approximately six months ago continues to meet our expectations, while providing us a nice international proving ground.

We continue to make strategic acquisitions in Document Management.

While we now service customers in over 85 of the top 100 markets in the United States and Canada, we continue to emphasize obtaining additional coverage in significant markets in order to be a true, national provider.

Today, we have national coverage in our rental, uniform direct sale and First Aid & Safety businesses, getting national coverage in Document Management and Fire Protection Services would provide us still further opportunities with large national customers, and prospects.

Total Company margins declined as compared to last quarter's margins and last year's third quarter margins.

The main reason for the decline in margins is compared to both periods was energy costs, which increased to 3.7% of total Company revenues.

Energy costs increased 50 basis points as compared to the second quarter, due to an increase in delivery fuel costs and increased seasonal usage of natural gas.

Delivery fuel increased 50 basis points over the third quarter of last year.

The only other time energy costs reached this level was for our third quarter of fiscal 2006.

Energy costs at that time were related to a combination run up in natural gas and delivery fuel prices.

Current quarter costs are related to delivery fuel.

Our rental uniform and ancillary products gross margins were also significantly impacted by these high energy costs.

The increased level of lost business and stops has also caused our gross margins to suffer.

Profit from our customers who have been with us over 1.5 to 2 years are more profitable customers, as we get further away from initial inventory requirements and selling costs.

The softening economy has caused an increase in our loss business and stop ratios which has therefore hurt our returns.

Other services gross margins improved as compared to the second quarter and last year's third quarter.

While increased energy costs impacted margins within our First Aid, Safety and Fire business, the continued improvement in scale and strong paper prices within our Document Management business drove other services gross margin higher.

Selling and administrative expenses were 28% of revenue for the quarter, which is the same as our second quarter and the same as the third quarter of last year.

As compared to the third quarter of last year, selling costs were up 50 basis points as expected, given the additional investment in our one team initiative.

Improvements in medical costs offset this increase.

When compared to the second quarter of this year, payroll taxes were up 60 basis points, again as compared to the second quarter.

This is a seasonal event, as payroll taxes reset during our third quarter.

Payroll taxes were consistent with the third quarter of 2007.

Offsetting the payroll tax increase from the second quarter was a decrease in selling costs as we began to leverage, to gain leverage under the new sale structure.

We also had an improvement in lower bad debt write-offs and some improvement in professional fees.

Interest expense increased mainly due to additional level s of outstanding debt.

The additional debt related mainly to acquisitions made over the last 12 months and the share buybacks made in the second quarter.

Our effective tax rate decreased to 35% for the quarter and 36.9% for nine months as compared to 37.3% last year.

This decrease was due to third quarter reserve requirements under FASB Interpretation Number 48 accounting for uncertainty and income taxes and interpretation of FASB statement number 109.

We expect the Company's effective tax rate for fiscal 2008 to be 37.1%.

Net income for the quarter was $81.8 million an increase of 6.6% over last year.

Earnings per diluted share were $0.53, an increase of 10.4% over last year.

Our balance sheet and cash flow remained strong.

Our current ratio is 3.2 to 1.

We currently hold approximately $163.6 million in cash and marketable securities with approximately $136 million of that held in Canada.

The cash and marketable securities are held in short-term conservative governmental securities such as Treasury bills.

DSO's on accounts receivable were 40, which is the same as last quarter, accrued liabilities increased approximately $78.8 million from November 30, mainly due to the accrual of our dividend to shareholders of record on February 6.

The dividend was paid on March 12.

This year's dividend represented an 18% increase over the annual dividend paid in fiscal 2007.

Long term debt at February 29, 2008, was $965.4 million, an increase of $16.6 million from November 30.

The increase related to $46 million of acquisitions and $52 million of Capital Expenditures offset by cash flow generated during the quarter.

Total debt as a percentage of total book capitalization increased to 30.8%, a slight increase from 30.6% at November 30.

During the third quarter we refinanced $300 million of outstanding commercial paper and a 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 of February 29, we had approximately $180 million in outstanding CP.

As we work through these refinance solutions, we worked closely with our agencies and maintained our current investment grade ratings.

We did not buyback any of our outstanding shares during the third quarter, however we continue to have approximately $228 million in authorization under our existing buyback program.

We continue to balance our current cash needs and acquisition activity as we evaluate future buyback opportunities.

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 $369 million.

These strong cash flows allowed us to cover year-to-date capital expenditures of $145 million, acquisitions of $102 million, and a portion of the share buybacks made this fiscal year.

We continue to expect capital expenditures for fiscal 2008 to be approximately $190 million.

The $102 million spent on acquisitions has been mainly spent in our Document Management and Fire Protection Services business.

We expect our balance sheet and strong future cash flows to allow us to continue to invest in our business, make strategic acquisitions, and continue purchases under our buyback program if warranted.

Thank you, and we will now answer any questions you may have.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Kartik Mehta with FTN Midwest.

Hi, good afternoon, Bill and Mike.

Hi, Kartik.

I wanted to get your thoughts on the performance of the Company I guess in the last recession versus this recession, how you think it might be similar or different, since the Company is a little bit different today than it was probably in the previous recession.

Well, I guess what the difference today are the Document Management business and the First Aid & Safety business appear to be less sensitive to the recession.

We also, though, are probably because of our size in uniform rental and in direct sale rental, we're subject to that having a big impact on us, and therefore, I think it is going to keep our growth rates down probably for some time in the mid to upper single digit levels, because I just feel like that the drag on the economy that is impacting the rental business is going to continue for some period of time.

I think the thing that we as a Company are recognizing the need to do is that this slowdown does not appear to be something that's going to go away quickly.

We feel because of that coupled with the high energy costs that are going to continue and probably get worse, we are have got to do some things to really hone in some of our other costs so we're becoming very aggressive and looking at opportunities to reduce costs by consolidating some of our back room operations, perhaps, by looking at our suppliers and trying to make sure that we can withstand this and continue to post nice profit increases even though our revenues are going to be growing at the rates that we would like to see.

Well, Bill, I guess then the second part of that question would be, in this environment, considering that you're going to have some cost cuts, you obviously have a fairly strong balance sheet, what kind of earnings growth do you think you could sustain in this type of environment?

Well, that's a very difficult question because I don't know what's going to happen but our expectation is that we should be able to get back up into double digit earnings growth even if our revenue growth are in single digits.

So I guess maybe a better way to phrase it, if the environment stays the way it is and kind of revenue growth stays kind of what you just said, mid single digits, do you think that you could leverage that to double digit earnings growth?

Over time, yes, I think we can.

All right and one last question.

Would there be a change at all, I know you talked about reduction in cost, any change at all in your ability to grow your salesforce?

Will you contract that or will you continue at that pace as it is, even if we go into a little bit of an economic slowdown or we remain in this slowdown?

Well, no.

I think we'll have to watch that salesforce.

Right now, I would tell you that the sales, the new business efforts have met our expectations in all the business except for the direct sale of uniforms.

Therefore, we feel like we're getting the value out of that salesforce, but if we see things get much more difficult, we certainly can scale back on some of that sales effort and probably need to do so if things got very difficult.

Thank you very much, Bill.

I really appreciate it.

Next we'll hear from Mike Schneider with Robert W.

Baird.

Good afternoon, guys.

Hi, Mike.

Maybe first we could just focus on rental.

The organic growth rate you mentioned was slightly below your expectations but was still up sequentially, about 55 basis points.

Given what you know about add stops and kind of the rolling effect of that now looking forward over the next 12 months, is it possible to sustain this growth rate near 3.5 to 4% organic growth based on your new business wins?

Just any color on your expectations, or knowing what you know about, again the lagging effect of these metrics.

Mike, we've really looked at that a lot especially over the last month or so, and I think we feel confident that we can do what you just said, that is maintain this organic growth rate in the rental division despite the headwinds of the add stops and the lost business, and again the reason I feel confident in saying that right now is because the new business efforts are yielding the results we expected, and we only expect that to get better as tenure improves and as productivity improves.

There are pockets of the country where things are continuing to go well.

Canada continues to do very well for us.

So we think that that is certainly an achievable situation to get that kind of rate of growth.

And have you been more or less or equally aggressive on trying to recover price now especially with energy surging?

We're trying to recover price.

I'd say we are being more aggressive.

We are finding our competition continues to be extremely aggressive in their pricing, so it's a very competitive environment, but we are going to our customers and we're attempting recover as much of these cost increases as we can, but of course our customers are facing problems of their own and therefore, they're pushing back quite a bit.

But I would say that we're taking the opportunities to get price increases when we can and contractual and under the terms of our contract, but being realistic in meeting competition as we have to.

Okay, and then within the growth rate of rental, given that the uniforms are obviously the vast majority of that segment, presumably uniform is growing call it 2 to 3%.

At what rate are the ancillary products growing and I ask just to get a sense of what element of the business project is really benefiting and what type of growth rates it's driving?

Well, Mike, 2 to 3% is probably too high.

It's really more in the 1% level in garments, so a lot of our growth is coming from the ancillary products.

And presumably it's double digits then just to get to the weighted average?

I'm not sure of that.

It wouldn't be that high.

It wouldn't be that high.

I'd have to go -- we'd have to look at that number in more detail but just off the top of my head and Mike's head, I don't think that would be the case.

So then Project One Team as of now is benefiting the ancillary products far more than it is the garments?

Actually, the big benefit of One Team is the emerging businesses where we've been able to leverage those sales territories by adding additional reps in the Document Management and First Aid & Safety businesses.

But yes, I would say going back though that because of Project One Team we also have been able to add additional headcount in certain markets that have been able to push some of the facility services type products.

Right.

Okay and then final question just on gross margins and rental.

Mike you mentioned that energy was up 50 basis points sequentially.

If I heard that correct then, that accounts for 50 of the 130 basis point deterioration sequentially.

What else would explain the deceleration in margin sequentially?

The main thing from our standpoint is the additional lost business and stops that we've been seeing.

That is very profitable business for us, that is going away, as these stops increase, and the additional cost factors because of that lower margin business has put some pressure on us.

Can you put the add stop rate at least in some historical context I know you don't discuss specific numbers but if you look back to the last recession, are we at the same rate you saw midway through that decline or are we at the same rate at the trough of the employment cycle?

We haven't really given that detail.

I would say that it is certainly worse than we've seen in the last couple of years and the trend is getting worse.

Really to go back to the profitability, if you think about what happens when we have a stop in an account, we go from a 10 man account and they stop two individuals to get to eight, we still have to cover the truck, we got all of the delivery costs still stopping that truck, we have material costs coming back in certainly but still amortizes and it just really puts a crimp really on your profitability within those accounts when you lose 20% of an account.

I'd say the stop metric has certainly been as well as the lost business has been the key issue for us over the last quarter.

And Mike, It's hard for us to compare one economic downturn to another, but I see no signs yet of things getting better.

I see signs of things continuing to get a little worse, so we're still early in our fourth quarter but that was what prompted us really to adjust the guidance down.

We're not going to recover in the fourth quarter, that's for sure.

Right, okay.

Thank you again.

Our next question will come from Michel Morin with Merrill Lynch.

Yes, good afternoon, guys.

A few questions.

Document Management margins, is this all the recycled paper prices or is there something there that's been helping margins?

You have -- the paper prices help a bit but also just establishing scale, we've been very aggressive in rolling these services out throughout the country by making small acquisitions and building up salesforces and you're starting to see some benefit that we anticipated would happen as we get scale in these markets.

Yes, these significant growth rates are really helping the local Operations begin to cover some of those costs.

And is there anything seasonal that might have boosted this quarter?

No, not really.

No, I think the trend has certainly been improving and that we expect that to continue.

Okay, great.

And then you made some comments about the competitors being aggressive on price.

Is that pretty much across-the-board, Bill, or is it specific to markets or to a specific competitor?

Actually, it's with the large competitors, the big companies, and from what I hear from our operating people, it's pretty much across-the-board, they're being very aggressive.

Okay.

And then just finally, on the buybacks, you said that you did not repurchase any shares this quarter.

Was there a specific to preserve capital knowing that the economy was worsening or was there any other reason that you mentioned that I might have missed?

There were several reasons.

First off, I think we wanted to get our balance sheet in order with the debt offering and so that was part of it.

We also met with the rating agencies and we were very careful to tell them we're going to maintain conservative financial policies.

We're not going to do something to deteriorate the balance sheet because we expected the downturn to start coming, because we started seeing that late in our second quarter.

We also believe, as has been the case before that there will be some great acquisition opportunities that may present themselves now that things are getting tougher, and so we want to be sure that we maintain some dry powder so that we can take advantage of those things.

All right, and the criteria that the Board has set has not changed?

We're in constant communication with the Board as to direction from them, and I would say that generally, their direction to us has not changed from what it has been over the last 9 to 12 months.

Great, thanks very much.

Next we'll hear from Scott Schneeberger with Oppenheimer.

Hi, Good afternoon.

This is actually Ella for Scott Schneeberger.

I have several questions.

First, just wonder if -- you mentioned that you will continue to do acquisitions in your other services business and how about -- how is the acquisition environment looking like in your core uniform rental business?

Is there something that you may be considering?

I would say we are always evaluating opportunities in the rental business.

At this point in time, we have found very few compelling opportunities to allocate part of our acquisition capital; however as I just stated that those opportunities tend to come along in the downturns and I would not expect anything to be any different.

We will be very careful though in making acquisitions.

We don't need a footprint in any particular area of the country.

We pretty well have that all covered, so an acquisition will have to make a lot of financial sense to us before we would be willing to be aggressive on pricing.

Okay, yes.

Actually, a follow-up on that is what would be a good target for the acquisition?

You mentioned that you may not be looking for geographic diversification then, what could interest you in that targeted market?

An acquisition such as the one we completed a couple of years ago which was a strong regional player, a Company by the name of Van Dyne Crotty would be very attractive to us, it was an extremely well run Company, good book to business, had some nice capacity that we were able to utilize.

Those are the types of acquisitions that make the most sense to us.

We have to be very careful that the business that we are acquiring is good business, and that's what we would look at most closely when we evaluate one.

Okay, thanks.

And the second question about margins.

So you see higher energy costs and you mentioned that you have not been using hedging.

Will you consider that going forward?

We will certainly consider it.

We haven't found a good reason yet to do that because I think energy has been so unpredictable, and obviously, when everybody thinks energy is going to go up, the value of a hedge becomes very difficult to justify, so but it's something that we look at and we just haven't found a compelling reason to do it at this point.

Okay.

And for other things within your cost, will you consider other measures like maybe (inaudible) accounts?

You said you won't do that in the salesforce but in maybe other corporate areas and also, regarding your recent battle with the Union, will that impact your cost structure in your near future?

Well, one of the advantages that Cintas has and we leave we will continue to have is that we are a growth Company and we'll be able to continue to grow, and we can do headcount leveraging by not adding people, and you have attrition that takes place and so what we're going to do is we're going to be very careful that when we lose an individual, that we don't necessarily replace them by making a new hire, and I think by doing that, we can keep headcount under control and actually show an overall reduction given just a normal attrition and continued growth.

Okay.

Just is there anything else that you can share with us within your cost of control project besides maybe considering hedging and the headcount addition?

Well, I think every cost area is subject to review and scrutiny and we certainly have charged all of our management to take a look at every line item of costs that they have from the supplies they purchased to the travel expenditures they're incurring to deciding whether or not to make a capital investment, so it covers the whole gamut of the income statement and we expect our people to manage their particular operations to ensure that they control costs and conserve cash.

Okay, thanks.

And just want to clarify with you on your share repurchase, because you guys suspended it during first quarter '08, when you were trying to explore strategic alternatives.

Just want to confirm is that something that you will reconsider or is that totally not relevant for now?

I really can't make any comments on that at this point.

Okay.

All right, and last question then, you mentioned that you are losing some older customers and can you just give us more color in terms of like how much percent of older customers or new customers right now on your total customer pool.

No.

We don't disclose that level of information.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) We'll hear next from Gary Bisbee with Lehman Brothers.

Hi, guys, good afternoon.

Hi, Gary.

A couple questions.

First of all, the extra workday this quarter, am I thinking about this right, that this added like close to 2% to revenue growth?

It adds about 1.5 points but Mike adjusted that when he gave you the organic growth.

Okay, that's what I wanted to confirm so the 3.8% is adjusted for that?

That is adjusted.

Yes, whenever we give internal growth numbers we always adjust for workdays.

All right I guess just following up on one of the last questions or one of the last questions there about acquisitions in the core business, you've basically got a fully built out footprint in the U.S.

and Canada for uniform rental.

I guess would it make sense if -- do you have routes around the country where if you made an acquisition it would allow you to increase the route density and thus be highly profitable or is that not really the reason you do acquisitions?

I'm trying to understand it seems like if it's getting tougher for you it's got to be a lot tougher for the small and mid size companies, and so it seems like you would have a good opportunity if you wanted to, to buy other uniform rental companies but I'm trying to understand economically, if you can find one you pay the right price is it really accretive?

Or how should we think about that?

Well, we won't do it unless it's accretive, Gary.

I think the way you look at it, maybe you don't necessarily gain leverage on the routes but what you gain leverage on is in the plants and in the back room, the Corporate functions we certainly have demonstrated that time and time again, when we make an acquisition, we can consolidate it into our Company pretty quickly and very cost effectively.

The routes themselves, what with the opportunities we typically see on an acquisition is that we will be able to sell additional products and services to the customers of the acquired Company because they typically don't have the full gamut of service offerings that we have and some of the facility services and ancillary products so we do see some benefit there.

We see benefit in our purchasing power, we're able to buy things cheaper than our competitors are, especially the small to regional players, and the fact you pick up capacity, you're able to take and consolidate what maybe was one plus one becomes three, because you end up shutting down some of their plants and branches or some of our plants and branches, and consolidate them it into some of their operations and then not have to build them.

So acquisitions do make a lot of sense, but you just have to be very careful on what you're paying for, because of the fact that you're not really getting the presence in a particular area like we did when we were making acquisitions in the 80s and 90s.

So it's much more closed down either your plant or their plant, get the customers, increase the utilization of the plant that you keep and through that, drive accretion?

Right.

It definitely comes down to valuation and the benefit you get like Bill said if you moved into a new market you get the positives of the additional growth rate you'd have on a new marketplace but since we're everywhere today you're strictly looking at valuation and what you can drive out of the bottom line.

Just one other one on acquisitions.

You've done a great job over time of doing the small mom and pop every quarter sort of continuously.

Is there anything larger out there that makes sense in some of the non-uniform areas and I guess why have you not been more aggressive?

Is it a matter of price or is it just not the right assets or?

Well, the non-uniform areas, if you want to specifically talk about Document Management, the couple of other big players are Iron Mountain and Shred-it, neither of which I think have any interest in all at setting those businesses since they're growing very well for them.

In the First Aid & Safety there isn't anyone, and in the fire business, the big player is Tyco, and they, I don't think have any interest in selling their business, so there are regional players, but most of the, there really aren't any big players out there other than the things I mentioned that aren't actionable I'd say at this time.

Okay.

I think back to your Investor Day a couple years ago, one of the things that I remember being a focus is some new areas of opportunity and maybe some less cyclical end markets for uniforms and one was healthcare that I remember you talking about over the last few years.

Yes.

Any progress there?

Is there any initiatives that you can take in a more challenging market like this to try to expand in less economically sensitive areas or is that something you've continued to do and that's benefiting growth to a certain extent already?

We have certainly focused on a few different areas.

Healthcare we're still just scratching the surface.

We're certainly putting more effort into that although that's not really uniform rental.

That's other products and services that we have.

We've certainly done that with things like flame resistant clothing, expanded our foray into those type of areas, we certainly have looked at additional niche opportunities and done well there, other food processing is another that's done well.

With healthcare I'd say that we are improving in that area but we're still a very small player at this point.

Gary, the Company has a very active ongoing strategic planning process looking at opportunities where the growth is going to be and what we think would make sense for us to be involved with, and we certainly are, we have a number of initiatives in place that we believe will benefit us down the road to take advantage of the higher growth segments, and some of which we really just can't talk about at this time.

Okay.

That's fine and then just one last question.

Can you give us any sense within the First Aid Safety and Fire business, how much of that has been these fire suppression systems or the stuff that's somewhat tied to construction?

I mean, is that a big piece or has that been a pretty small piece but it's just a piece that's probably shrinking right now?

Well, it's a significant portion of it.

It's not the majority but it's a significant amount of the business.

Okay so that could be a head wind for awhile here then?

Probably so.

Okay, all right thanks for all the color.

Again we'll hear next from Greg Halter with Great Lakes Review.

Good afternoon, guys.

Hi, Greg.

I wondered if you could provide any commentary on what's going on with the situation with Unite recently?

Actually, very little.

I think Unite is focusing as all the Unions are, right now primarily in the political front, getting behind their preferred candidates to push forth their agenda, so what we have seen here is just a continued lawsuit support they have for some of those suits that are out there, and they just create noise now and then, will show up to our plant periodically and hand out some literature but that's about it.

Okay, and you briefly touched on some of the cost measures, attrition and so forth.

Are there any other things that you're specifically focusing on in that area?

Well, as I mentioned to the prior questioner on that, we focus on everything, Greg.

I don't think any cost can go unlooked at in terms of what opportunities might exist.

You can always try to do things more efficiently, work with your suppliers to get costs reduced, look for opportunities in other parts of the world to get supplies and products, so it goes through everything.

Travel and entertainment, we talk to our people and do you really need to take that trip?

Can a phone call do?

You have to tackle all of the little things and then they add up to something more significant.

Okay.

And I know you've been successful in the Document Management , First Aid, Fire Safety and so forth and so on.

Are there any other new initiatives that you're continuing or

Yes, there are.

There are several things that we're experimenting with, none of which I can talk about at this point, but we are bullish on some things that might build up to something more significant down the road.

Okay.

And given the commentary about lost business and the increase in stops, what kind of, I guess I would characterize it as obsolete inventory risk do you run with uniforms that may not be used by someone at some point?

Very little, because in the rental business, you don't rent something that you couldn't utilize for another customer without a -- if somebody wants something so unique in a rental program, we require a guaranteed buyback of that inventory regardless of what happens and we won't even sign a contract with a customer unless we're comfortable with their credit to make sure that they can stand behind that commitment.

Most items, the vast majority of items in a uniform rental program are items that can be used on a multiple number of different types of customers.

Okay, that sounds good.

And your comment about the cash with a majority of it being in Canada, just wondered why that is?

Well, there are laws that prohibit you from bringing cash back in the United States without incurring some costs associated with that and so as our businesses have built up in Canada, we've accumulated some cash up there that has exceeded what we've been able to redeploy in acquisitions in Canada, and so we are looking for other opportunities to deploy that cash, perhaps as we seek out acquisitions in other parts of the world.

Okay, and obviously if you brought it back you'd have to pay some sort of tax on that repatriation of the funds?

Yes, it gets fairly expensive.

So it's accessible but at this point it's not necessary.

And there's been obviously concern over investments and option rate preferreds and just, I know Mike you made a commentary about T-bills and all that but just wanted to touch on that again whether there's any kind of wacky stuff in the portfolio.

That's why Mike said what he said.

Yes.

Tell him again, Mike.

Short-term very conservative, governmental type securities.

I just want to check, we've heard it before.

For me, it's a very valid question but we have not done anything exotic.

Would you expect your tax rate for fiscal '09 to be around this 37, 37.5 area?

We'll comment on that at year-end but we think it will be around that level.

Okay.

And I know you made, one last question here, a comment on the First Aid or Document Management that there's not a whole lot of public companies and in the past I think you've talked about or maybe there's been commentary about a Company called Brambles.

Just wonder if that would pique your interest.

That's Recall is the division that does the document shredding.

They're slightly smaller than Shred-it.

They would be the third of the larger companies.

There are a lot of business outside the U.S.

which would probably be a little bit bigger thing to swallow for us at this point, but we'd certainly be interested in talking to them if the opportunity presented itself on their U.S.

business.

Okay, and just I guess I lied, one last one.

I know your share repurchases, you've made buybacks as high as on an average $41.81 or almost $42 I guess it is and with a stock at 29 here, just a little interested your commentary and obviously you've provided some about powder dry and get your balance sheet in order and so forth.

With the share price where it is now, I would have to think that you'd be more willing to look at the share repurchase at these levels than in the 40s?

Well, we might be.

We'll tell you in July what we did.

Okay.

And next we'll hear from Brandt Sakakeeny with Deutsche Bank.

Thanks.

Hi, Bill and Mike, I'll try to keep it quick.

Could you just talk to the energy exposure in the Document Management business?

I think we're pretty comfortable with the risk obviously in the core business, but is that business less energy intensive at all?

The costs were up.

You do have fuel costs in that business as well, but it was not as dramatic as the other division.

I don't have exactly that number in front of me, but it's something we can maybe follow back up with you on.

And I guess just over time obviously given the growth and the margins sort of sustained success in that division can help offset weakness in your other areas on a blended sort of mix basis.

How comfortable do you feel about sustaining last quarters growth going forward in light of the environment offset by still a reasonably small business right now?

We're pretty comfortable with the long term growth rates there, certainly we're not going to stay in the 40s forever we don't believe but it continues to exceed our expectations and it could slow into the 30s potentially, but overall we feel very good about the growth opportunities in that business and it's been so far very resilient within the economy.

So we're keeping our fingers crossed a little bit because it's still a relatively new business for us but for right now it's been very positive.

Great.

And just finally on the salesforce productivity you mentioned obviously some successes.

How do you disaggregate sort of the same-store successes outside of the tougher ad stop and lost business numbers, and do you think there's risk that as things get worse, you start to see higher attrition and start to lose some of those productivity gains?

That's difficult to say.

I think we certainly are concerned about the trend within both the stop ratio and the lost business, but again, as we indicated the new business has been going pretty well and really allowed our internal growth rate within rental to improve, so we're certainly keeping an eye on that and it's a concern, but overall, we feel pretty good with where we are.

Yes, I'd say at this point, we're still confident in our ability to sell new business, given the number of people we have out on the street, the products that we have offering, the value proposition that exists, and I think the real risk that we have is more on the existing customer, attritions that the they're having, reduction in workforces, et cetera.

So as Mike said, we got to be very careful here and we monitor this stuff all, every week, and so we can tell if we start seeing too significant a slowdown in new business we'll have to make sure that our cost structure is adjusted a accordingly to compensate for that.

Okay, and I'm sorry just to follow-up, on the new business can you just give us a rough break down between or among the percentage that's come from folks who have never had a uniform program before, those from whom you're taking share?

It's still in excess of 60% of the new customers, are customers that have never had a uniform rental program before.

Okay, great.

Thank you.

Yes.

We have no further questions in the queue.

I'd like to turn the conference back to our speakers for additional or closing remarks.

Well, thank you all very much for joining us.

We hope you appreciated that we didn't interfere with those of you interested in the basketball for tomorrow evening.

But we wish you all a very good holiday coming up this weekend and then we'll look forward to speaking with you in July when we release our fourth quarter earnings.

That does conclude today's conference.

We thank you for your participation.

Have a great day.