信達思 (CTAS) 2009 Q1 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 call over to Mr.

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

Please go ahead, sir.

Thank you for joining us this evening to discuss Cintas's first quarter fiscal 2009 earnings results.

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

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

Revenues increased 5% on a comparable work day basis over the first quarter of last fiscal year to $1 billion.

This year's first quarter had one less work day than last year.

Earnings per share were $0.51 this year, the same as last year's first quarter.

Net income was $78.6 million versus $81.1 million in last year's first quarter.

As Mike will explain shortly, in addition to the impact of one less work day in this year's first quarter, we experienced significantly higher costs for energy and other supplies, such as hangers, as well as weakness in both customer base and with new prospect conversions.

We saw slightly lower organic growth in all of our segments which we believe is an indication of economic weakness in the general economy.

However, we still did post an overall organic growth of almost 4% as I stated earlier we met our plan for the quarter.

Our current guidance of revenues and earnings per share for the fiscal year ending May 31st, 2009 remains unchanged and calls for total revenues of $4.1 billion to $4.2 billion and diluted earnings per share of $2.22 to $2.30.

We believe the guidance remains appropriate given the current economic conditions and the potential impact of the recent weather events.

As a result of hurricanes, we had several operations that while physical damage was minimal to the facilities, they either had no power or are still out of power.

This has occurred at operations in Texas, Louisiana, and even in the Midwest.

We are also experiencing issues with providing services to our customers in these areas as they are not able to operate.

At this time, we are unable to quantify the impact on our results: but we do not believe it will be material to the company in total.

We will pursue business interruption insurance recovery according to our policies in effect.

Our financial condition is very strong and we continue to generate strong operating cash flow and maintain conservative financial policies.

During the quarter, the company acquired about 900,000 shares of its common stock.

We continue to have about $200 million available for additional Cintas share purchases under the amount authorized by our board of directors.

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

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

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

I refer you to the discussion on these points contained in our most recent filings with the SEC, as well as in the press release issued today announcing Cintas's first quarter fiscal 2009 results.

I will now turn the call over to Mike Thompson who will discuss this quarter's results in more detail and then we will be happy to answer your questions.

Thank you, Bill.

Good evening.

Beginning with the income statement, total revenues were $1 billion for the quarter, a 3.4% increase over the $969 million reported for the first quarter of last fiscal year.

However, as Bill mentioned, this year's first quarter had one less work day than the first quarter of fiscal 2008.

When adjusted for the one less work day, revenue growth was 5%.

Total company internal growth was 3.9% for the quarter.

As a reminder, the remaining three quarters of fiscal 2009 will each have 65 work days, which is is the same number of work days of each of the last three quarters of fiscal 2008.

As such, fiscal 2009 will have 260 work days, which is one less than 261 work days in 2008.

The number of work days in the quarter does have an impact on both revenue and income.

We classify our business into four reportable operating segments, rental uniforms and ancillary products, uniform direct sales, first aid safety and fire protection services, and document management services.

Uniform direct sales, first aid safety and fire protection services, and document management services are combined and presented as other services on the face of the income statement.

Details for these operating segments is provided in the supplemental segment data included with the release.

The rental uniforms and ancillary products operating segment consists of the rental and servicing of uniforms and other garments, masks, mops, shop towels, and other related items.

Our restroom and hygiene products and services are also included within the segment.

Rental revenues were $721.4 million for the quarter, compared to $710.4 million in the first quarter last year.

When adjusted for one less work day, this represents a 3.1% increase over the first quarter of last fiscal year.

Rental organic growth was also 3.1%, down from 3.6% in fiscal 2008.

The difficult economic environment continues to affect our customers and we continue to experience increased lost business and stops as they reduce head count and close locations.

Also, unlike our fourth quarter of fiscal 2008, we have now seen our new business results begin to suffer.

While we continue to be successful in demonstrating the value of our products and services to prospects, many of our customers and new business prospects have become more cautious on spending, causing our new business rates to slow.

Our other services revenue, which includes uniform direct sales, first aid safety and fire protection, and document management segments, grew 10.2% on a comparable work day basis and had internal growth of 6.1%.

Our uniform direct sales operating segment incorporates our global accounts and strategic markets division, which direct sales 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.

The uniform direct sales segment grew 0.4% for the first quarter on a work day adjusted basis.

As customers delayed or canceled new programs and reduced head count.

We maintained our revenue stream by retaining our customer base but economic conditions are causing head winds in this segment as well.

Our third operating segment is first aid safety and fire protection services.

In this business, we sell and deliver first aid products, safety products and automatic defibrillators to our customers.

We also provide safety training to their employees.

Within fire protection, we install, inspect, repair and recharge portable fire extinguishers and sprinkler systems.

We also provide and service emergency lighting systems and kitchen fire suppression systems.

During the quarter, revenues within our first aid safety and fire protection services operating segment, grew 7.8% on a comparable work day basis.

On an organic basis, this segment grew 5.6%, which was an improvement over the fourth quarter internal growth rate of 5.3%.

While general economic conditions continue to impact this business, we were able to improve our internal growth rate slightly.

After suffering through a difficult fiscal 2008, our fire protection business stabilized and improved, providing the increase in this segment to internal growth rate.

Our document management services operating segment is comprised mainly of document shredding services, although we do have storage and imaging capabilities.

Revenues within continue to grow at a rapid rate.

First quarter revenues for the document management operating segment grew 47.5% on a comparable workday basis.

Internal growth for this segment was 25%, down from 30% in the fourth quarter of 2008.

This deceleration occurred as the increased paper prices we experienced during fiscal 2008 have are now been lapped.

In fact, we experienced a reduction in recycled paper prices of approximately 20%, versus prices from the fourth quarter of fiscal 2008.

In addition, our new business as a percent of revenues has decreased due to the overall size of this fast-growing segment, and to a lesser degree, than our other business segments overall economic conditions.

First quarter total company gross margin was 42.4%, 70 basis point decline from last year's first quarter and 50 basis point decline from the fourth quarter of fiscal 2008.

Energy costs for the company increased to the highest level reaching approximately 4.4% of total company sales as compared to 3.4% a year ago and 4.0% in last year's fourth quarter.

The increase in energy costs along with other increased commodity costs were partially offset by improved leverage over infrastructure within our rental division and margin improvement in our other services operating segments as we continue to gain scale, especially in document management.

Additionally, there's margin impact across all divisions when comparing results to the first quarter of last year due to the one less work day in this year's first quarter.

Our rental gross margins were 43.5% of revenue for the first quarter, a 140 basis point decline from last fiscal year's quarter and a 40 basis point decline from the fourth quarter of fiscal 2008.

Energy costs increased 100 basis points over last year's first quarter and hanger expense increased 50 basis points.

The energy increase is mainly due to increased delivery gas expense, but there was also some impact from increased natural gas pricing.

Hange costs have increased significantly as the United States has imposed a significant tariff on hangers produced in China, which is where we source our hangers and also due to the volatility of steel prices.

we are are offsetting some of this increase by combining purchases and putting the blind to our new facility services distribution center.

We are also looking into alternative sourcing arrangements.

We also have experienced an increase in the costs of other commodities and supplies including wash chemicals.

We were able to leverage our infrastructure to offset some of these increases, mainly through leveraging labor costs across the organization.

The 40 basis point decline from the fourth quarter was due to the same issues, just not as severe given the shorter time differential.

Energy costs accounted for half of the increase, as they increased 20 basis points over last year's fourth quarter.

Other services gross margin was 39.5%, a 140 basis point improvement over the first quarter of fiscal 2008, but a 100 basis point decrease from last year's fourth quarter.

The improvement over last year's first quarter was mainly due to sales mix.

The document management segment continues to grow at very rapid rates.

This division, which is higher margins than first aid safety and fire protection, and uniform direct sale is driving other services gross margin higher as it continues to become a larger percentage of other services revenue.

Gross margins in the first aid safety and fire protection and document management segments were relatively flat as compared to the first quarter of 2008 despite significant increases in energy cost, which is mainly delivery gas for these divisions.

These divisions were able to offset these energy cost increases through additional leverage of their infrastructures, mainly in labor.

The uniform direct sales segments gross margins improved 110 basis points over last year, due to continuing improvement in sourcing operations.

The 100 basis point decrease in other services gross margin from the fourth quarter was a combination of lower revenues in uniform direct sale causing a lower coverage of fixed costs, and lower recycled paper prices in document management as discussed earlier.

As we have mentioned in the past, while paper prices impact revenue and internal growth results they have a bigger impact on margins as the change in price falls to the bottom line.

In addition, energy costs were up in the other service operating segments.

Selling and administrative expenses were 28.7% of revenue, a slight increase over 28.6% in last year's first quarter, 100 basis points higher than the fourth quarter of fiscal 2008.

As compared to last year's first quarter, a 60 basis point increase in medical costs and a 20 basis point increase in bad debt reserve were offset by a reduction in G&A labor, lower payroll taxes associated with the labor leverage obtained throughout the company, and lower legal and professional fees as compared to last year.

We were also able to leverage some of our selling costs, and we expect more leverage in the future.

The 100 basis point increase from last year's fourth quarter was due to the increase in medical costs and the increase in our bad debt reserve.

As a reminder, our bad debt reserving policy is conservative in that we require building a reserve on receivables that increases to a 100% reserve for most balances over 90 days.

We have seen increased aging within our receivable balance during the first quarter, and our DSOs have gone from 41 at the end of last fiscal year to 44 as our customers stretch their working capital.

We were also able to leverage some of our selling costs as compared to the fourth quarter of fiscal 2008 and again expect more leverage in the future.

Net interest costs this quarter was $12 million down slightly from the $12.1 million in the fourth quarter of fiscal 2008.

Our effective tax rate was 37.5% for the quarter as compared to 37.3% for the first quarter of last year, reflecting reserve requirements under FIN 48.

We expect our effective tax rate for fiscal 2009 to be approximately 37.1%.

Under FIN 48, the effective tax rate will fluctuate with reserve requirements on a quarterly basis, which impacts quarterly net income and earnings per share results.

For the quarter, net income was $78.6 million, and earnings per diluted share were $0.51, both of which are in line with the plan we used in providing fiscal 2009 full year guidance.

Our balance sheet continues to be strong, our current ratio improved to 3.75 to 1 at August 31st.

We have approximately $181 million in cash and marketable securities, with the majority of the marketable securities are invested in short term Canadian government securities -- and we expect use of these funds.

As I mentioned earlier our DSOs and receivable as improved as far as accounts receivable balance to grow.

Our inventory levels have increased approximately $6 million over August 31st of 2007, due to the opening of our new facility services distribution center.

This distribution center consolidates our corporate purchases, allowing us to better leverage our purchasing power and control location inventory requirements on these items.

Our accrued liabilities increased $52 million over August 31st, 2007, mainly due to the elimination of our VIVA account which historically have been used to fund our employee medical costs.

A change in tax code has essentially eliminated the benefit of having a VIVA in place.

As such, the VIVA trust was terminated and claims are now paid directly out of cash.

Long term debt at August 31st, 2008 was $951 million.

Total debt as a percentage of total book capitalization was 29.3%.

The majority of our debt is in long term fixed public debt.

At August 31st, we had $170 million in outstanding CP, which is included in our long term debt.

Using our credit facility, we have been able to receive regular funding under our programs.

Our cash flow remains strong with cash provided by operations of $88 million in the first quarter.

Our capital expenditures for the first quarter were $54 million.

CapEx has increased from the prior year, as we are in the process of implementing a corporate ERP system.

We continue to expect CapEx for the year to be between $180 million and $200 million.

We spent $12 million during the quarter acquiring a few small business, mainly document management.

We are being very selective in our approach to acquisitions, ensuring that the required investment is appropriate.

The acquisition pipeline continues to remain active, but it is mainly with smaller businesses and our emerging business units.

During the quarter, as Bill mentioned, we purchased approximately 900,000 shares of our common stock at an average price of $28.60 for a total cost of approximately $26 million.

We continue to have $202 million remaining under our current share buy back program.

In summary, we believe we are uniquely qualified to provide value to our existing customers and new prospects.

Our businesses continue to grow, generate solid, consistent cash flow and are supported by a strong balance sheet.

While cautious due to the current economic environment and recent weather conditions, we reiterate our full year fiscal 2009 guidance of 4.1 to $4.2 billion in revenue, and fully diluted earnings per share in the range of $2.22 to $2.30.

Thank you.

Now Bill and I will be happy to answer any questions you may have.

Thank you.

(OPERATOR INSTRUCTIONS).

We will go first to Andrea Wirth at Robert Baird.

Good evening, gentlemen.

Good evening.

Just wanted to start with the quarter itself.

It looked like you were saying you had met your own internal plans but with the high cost of fuel and hangers and also the new business piece starting to fall off just wondering what actually made up or was better than what you expected in the quarter?

Well, Andrea the energy costs and some of the commodity prices if you recall, we talked about in July that we had begun to experience in May and even in June.

And we had pretty much built some of that into our plan.

The new business really began to trail off I would tell you in the latter part of the quarter, and we don't know whether it is just a short term summer phenomenon or what but it is something we are going to keep our eye on very closely.

What we are doing to anticipate that we may continue to have these higher operating costs going forward and perhaps even slightly lower revenue is the company is very, very aggressive on looking at ways to reduce costs, maintaining a strict control over headcount additions, looking at ways to consolidate our purchasing power with our vendors and I think we have done a lot of things to help offset some of this.

And I guess just along those lines when you look at the full year guidance and given the fact that you know, the new business is starting to trail off a bit and fuel prices I guess have come down a bit now, as of late, but just curious, what are your expectations and have your revenue growth expectations changed and your actual energy costs changed in that guidance, and I guess I'm surprised that you're able to hold that guidance flat given the scenarios.

Well, the energy costs, we feel pretty good that our plan is probably correct for that.

we gave you a guidance revenue between 4.1 and $4.2 billion so right now we see no problem with meeting that guidance, you know, given that range and obviously as we are at the lower end of that range, we will have to be more aggressive on cost control and strive to maintain our margins but as we have looked at our forecast for the rest of the year compared to our plan and what's going on in the business we feel pretty good about it.

Now with that said, obviously, with all of the turmoil that seems to be going on right now, I don't know what impact that is going to have on the general economy.

We anticipated, kind of a gradually improving economy as we went through our fiscal year.

Hopefully, that will still be the case and we are expecting it to be the case modest improvement.

But if we go into a deep recession, obviously we will have to relook at that and and monitor the results going forward.

We don't think that's going to happen but that is, there is that risk out there based on the upheaval that is going on right now.

You had mentioned with the core uniform rental growth rate, that you had thought that 3 to 3.5% rate kind of was sustainable and thought you had seen some improvement actually throughout the year as new business does continue to pick up and gain momentum.

Is that still a possibility and does that lean to your comments about what happens with the overall economy, and just curious on what your thoughts are on the core rental business.

Is as you summarized that is correct.

We still believe that our core rental business will show modest and gradual improvement as we go throughout the rest of this year, and I have no reason to believe that that won't take place right now, barring a very deep recession-type environment.

Then just last question on the ad stops, I think you had mentioned on the last conference call that at least the last six weeks before the call that at least the rate of deterioration had seemed to stabilize.

Is that still the case or are you seeing a reacceleration in rate deterioration in those?

No, that's still the case.

We are not seeing an improvement but we didn't see any significant deterioration.

Great.

Thanks so much, guys.

We will go next to Ashwin Shirvaikar at Citi.

Hi, Bill and Mike.

Hi.

Nice performance on the operating cash flow, but on a year over year basis, that number did seem to be driven by the accrued liability and accrued comp lines.

Is there anything unusual going on in those lines?

What drives the fluctuation and I guess what I am trying to quantify is the impact on operating profit due to maybe a lower bonus accrual and things like that.

Well, Ashwin I would tell you that there was nothing really that happened.

The accounts payable, or accrued liabilities thing is really offset by the taxes because of the item that Mike mentioned on the VIVA.

The accrued compensation line is more the result of probably just the timing of when payrolls are made and how many days you have to accrue versus when payments are actually made.

For example August 29th this year was on a Friday.

That's our payday.

There's really that, the accrual was probably down.

But I would say there's really no significant change in the cost elements of it.

It is just really more of a matter of the switch between, on the VIVA between approved liabilities and income taxes and then just the days on compensation.

Just a little more color on that, at the end of May, we certainly have a larger bonus accrual for year end bonuses.

At the end of August it is smaller buildup so the accrual is much lower.

Okay.

Got it.

And just to follow up on the prior question, to clarify, you are expecting modestly improving economy and were you also expecting the fuel prices to stay at the current level or --

Our guidance pretty much assumed fuel prices at generally the current level that we experienced through the quarter\ within 10 to 20 basis points.

Okay.

So where we are is really not a surprise?

No.

Okay.

Okay.

And you did say just to confirm that barring a very serious downturn you can make the numbers?

Yes.

Okay.

If you could remind me what the profit contribution is from the as a percentage from the paper sales in the document segment?

We don't disclose that level of detail.

As Mike said, the contribution from the recycling of our paper from document shredding did decline in the quarter but that was again anticipated in our projections, in our plan.

Okay.

Got it.

And last question, M&A, surprised you are not seeing more of a selling environment by the smaller laundry owners?

You are not seeing that and not at prices that are reasonable, no.

Okay.

Got it.

Thanks.

We will go next to Michel Morin at Merrill Lynch.

Good afternoon, guys.

Hi.

Just sorry to come back to this but on the margin in the document management segment, we look at things sequentially, there's a I'm not sure here, 160 basis point decline.

Did you, you didn't say it was entirely due to recycled paper.

No, energy, energy also.

Energy also.

Okay.

And was there also an impact from the, from the one fewer day there?

Well, yes, yes.

That's true throughout all of our segments.

Okay.

All right.

That's fair.

And then on the first aid fire protection side, good performance there.

Is, I think over the last six months or so, you had talked about having seen some impact from reduced new builds, new commercial construction.

Has that changed or what has allowed you to see an improvement there?

It is really that we have essentially gotten past a year of in fiscal 2008 we had each quarter that we were comparing to a more difficult quarter in 2007.

We have now lapped that, and we've seen some improvement in our service component within the fire protection business.

Okay.

So the kind of the one time part of that business is still under a little bit of pressure, but at least you have easier comps?

That's right.

Okay.

And then is there anything that is moving the needle from a profitability of that segment in terms of the new installations, is there a meaningful difference in terms of driving the profitability, because you also had a nice bump up in profitability this quarter.

I think part of it is as you are able to, most of this business, a lot of this business came through acquisition, and as you are able to synthesize those acquired companies, put in our practices, look at opportunities for improving the margins of those acquired companies, you are going to continue to see that happen.

Right.

Improved purchasing power.

Okay.

And just finally, you mentioned the weather a couple of times and the impact of the hurricane.

It sounded from your description that this might be a more severe impact than what you saw from Katrina.

Maybe because you've got more population density.

Am I thinking about that right?

No I think we just wanted to indicate that again none of the impact that the quarter we are reporting on.

It began for second quarter.

We want to make sure people understand we did have weather issues, it was not as severe as Katrina.

The issue with Katrina is many of those customers never came back.

We don't expect that to be the case here, but there was an impact in that we had plants shut down for a period of time especially in southwest.

But the damage in that part of the country is not as severe as during Katrina, so we hope that it's not as severe.

Okay.

Thanks very much.

We will go next to Gary Bisbee with Lehman Brothers.

Hey, guys, good afternoon.

Hi, Gary.

Wonder if you could remind us, every once in a while I feel like a rough break down of the energy costs, what percent comes from what.

I am trying to think about with gas and diesel prices likely falling sequentially in the next quarter how much of a benefit sequentially that might be, is it still like 40% of that, of that number you give us is gas and diesel or is it a little different than that.

For total company now it is almost half that is delivery gas.

Okay.

And the rest is mostly natural gas for the laundry plant but a portion electric.

A portion of electric there as well.

Okay.

All right.

The, you know you talked about the new business being impacted be I the economy, how did that go trend during the quarter, get worse throughout the quarter and is that something that has gotten worse as we are early into next quarter or was it just a modest down tick that sort of staying at that same level?

It was more of a a down tick that began in August and kind of just was below our expectations in August and has carried a little into September but we only have like the first week of September, that level of detail.

Okay.

And are you seeing any given the continued challenges in the credit market, any issue at all with the commercial paper or your funding at all or has there been no problems to date?

The issue we had with the one day event.

The two issues, one day apparently it was pretty much impossible to get any commercial paper sold.

We saw a slight up tick in the rates.

We have gone from RCP rates were running around 2.2%, now up to about 2.8%.

But we are able to sell our paper as things roll.

Monday was about the only day that did not happen, but after that, the market seemed to have stabilize and with that we have certainly supporting under our credit agreements that we have support behind that.

So.

Well, I guess I will take the blame then, it was a Lehman issue it sounds like.

It is good to hear you are on the call though, Gary.

That's great.

We will soon be Barclay's Capital I think but we are still in business but back in business.

That's good to hear.

Yes.

Thank you.

One last question I will ask.

You mentioned the cash in Canada again and specifically holding that for initial acquisitions.

Any update on how you're thinking about that?

Is the document management business in Europe going well?

Is that still an area you would like to do more?

Yes, we'd like to do more there.

As we mentioned in the last call we are looking at providing direct sale of uniforms to many of our US based companies as they expand outside of North America.

And we are working with them on that.

So, we are working on a number of opportunities, nothing that I can announce at this point, but we feel that there are several good things going.

Okay.

Great.

Thanks a lot.

We will go next to Greg Halter with Great Lakes Review.

Good afternoon, guys.

Thanks for taking the questions.

Looking at the price side of things, is it still very difficult to get price through or are some of your competitors becoming less aggressive on their pricing front?

It still continues to be difficult.

We are still getting some price increases but not out of line of where they have been historically.

I would say overall new business pricing continues to be pretty aggressive.

Okay.

And Bill I think on the last call you had indicated some parts of the country were still okay and others weren't so good.

Could you give us a brief rundown?

Just wonder, I know it is a big country but how are you doing in areas of the country as well as Canada?

What's good and what's bad?

Canada is pretty solid.

I would tell you Canada looks good and we really haven't seen a lot of impact up there.

Throughout the US, I am seeing generally the greatest weakness continuing to be in the Midwest and you know, in the areas that really seem to be kind of very sluggish like the southeast now with Florida, and all of the problems that are going on out there.

The west continues to be a little bit difficult to do business in.

The northeast has, has held up pretty well.

And the Northwest has been good.

But it is really, it continues to be a Midwest issue primarily.

And you mentioned the ERP implementation, can you mention how long that will take, how you are phasing it in and whose system you are using?

I do not want to disclose the system at this point but we are still in the early stages but we are going to, it is going to be a multiyear project, the way these things work, you pay a significant part up front.

I don't want everybody to think we are going to be incurring big charges every quarter but we are going to Phase I is a relatively safe phase in that we will be looking at our financial systems and we would hope to have a conversion of that here within 12 months and then we will phase in the other pieces of the business with over the next couple of years.

Any idea on total cost for that implementation.

I had rather not say at this time because you know how those things go.

It varies.

We are still in the scoping phase and stuff.

It is hard to say that right now.

Okay.

And there was a interesting intriguing win I guess last week relative to Unite and wondered if you could speak about that.

Glad you brought that up, Greg.

What happened on the Unite front, the Unite union front, is that a federal appeals court sent back to a lower court and reaffirmed that Unite was going to be held liable for privacy violations impacting I think approximately 2500 of our partners in the northeast, and has affirmed a penalty against Unite of about $5 million as well as asked the lower court to reconsider that punitive damages might be in order.

So it was a win for our partners who filed this suit against Unite indicating that Unite did violate their privacy rights.

Okay.

That sounds like it is very favorable there.

On the energy side, we are here in Cleveland as you know you are in Cincinnati.

We did see the gasoline prices and diesel come down to maybe $3.50.

Since the hurricane, we are back at about $4, which is our peak.

Really there has not been much relief from gasoline prices here at least in the Midwest, I don't know if you can speak to that relative to your business around the rest of the country.

I think that's prevalent throughout the country, Greg.

Again, it is something that we kind of anticipated in our plan and when we gave you our guidance.

We would hope that prices would come back to where we saw they were going to before the hurricanes hit.

That can present a little bit of an opportunity for us the rest of the year.

So, it is so hard to predict that.

This whole oil market and gasoline and diesel and natural gas are just unbelievable in the volatility.

So we are prepared for it and I think our numbers anticipate a high degree of cost and there will be a little upside opportunity if we can get a break here.

If you remember at our year-end call, prices were just starting to come down and we felt there might be an opportunity going forward because the way we projected using May and June levels but as you indicated, we agree the levels have come right back to those May and June levels.

okay.

One last one, I see Wyndham Hotels are using green uniforms made out of recycled polyester fibers I guess you guys are working on it and wonder if you can comment on that initiative.

I think that, certainly we are working with our customers on a number of different things.

That was one that Wyndham wanted to publicize.

I believe that release may have just gone out by them.

Green products and green servicing is a major point of several customers now, and to the extent we can help them with their initiatives, we are doing that.

We are also trying to do that internally with our own company.

We have modified our wash chemicals to be more environmentally friendly.

I think it is important that we do treat -- be good corporate citizens and to what we can do to help, help in these situations.

We are trying to do a lot of energy conservation which will not only help costs but also will help minimize the use of energy.

So I think every company needs to look at what they can do and see if they can do thing that is are economically beneficial.

Wyndham, I presume is a direct sale customer.

Yes.

They're, obviously as a hotel chain primarily they are purchase uniforms from us, but this new product that they're, we developed with them or are developing with them potentially has the capability of being laundered more in an industrial process as opposed to in a dry cleaning process.

It is one of the things that we are going for.

This could present more of a rental opportunity for us if we can get this thing rolling.

Any differential on the cost on this versus regular?

Greg, I really don't know.

I would, I'm not familiar enough with the details of that.

Okay.

Thanks very much.

We will go next to Scott Schneeberger at Oppenheimer.

Thanks, good afternoon.

Just a couple of quick ones from me.

It sounds like you said earlier in the call I believe that your bad debt, you felt comfortable that you were conservatively reserved there.

DSOs creep up a bit.

I guess could you just give us a feel of how confident are you there?

What are you hearing from customers?

60-90 day delinquent, how are those metrics tracking just so get a better feel there?

Thanks.

Well, Scott.

As some of you know and I think you do, we just we are very, very conservative and we require starting to reserve for a receivable once it is 30 days past due and once it is 60 days past due more to the point where most it is fully reserved at 90 days.

The reason is to keep the focus of the operating people that are spread of course all of the country on the need to collect the money for the work they're performing.

And so it is a focus that hopefully our operating people will do and continue to monitor the collections.

What we have seen over the last couple of months is certainly a, a tendency on the part of many of our customers to just be slower in the payment of their receivables.

And as a result of that, we are reserving accordingly.

Now, I will tell you that the vast majority of our customers are relatively small type companies.

We do not have any significant receivables sitting out there from a major customer that we need to worry about.

That's not the case.

I think what you, what you are, what you are seeing or what we are seeing is that all businesses, today are doing everything they can to try to figure out how to conserve cash, how to reduce costs, and they're using their vendors to the extent they can to try to help finance a little bit of their business.

Now we have got leverage on that and we are not going to allow a customer and continue to buildup a receivable and provide services if they're not paying.

So I have no concerns that we are going to see a significant increase in write offs and I would hope that as things stabilize a bit we will get back to our more traditional 40 day DSO outstanding.

So I think this is hopefully just a temporary situation.

Okay.

Thanks very much.

More broadly for the upcoming quarter, any one time items we should be thinking about that haven't come up?

No, not that I can foresee.

Okay.

Fair enough.

Then finally, just if you can give us an update on the international initiatives that you have going and just any progress there.

Is that something you are going to speed up perhaps just your overall take away.

Thanks.

As I mentioned earlier to the question activity has picked up because we, you know, we made the announcement that we were wanting to work with some of our North American customers, especially in hospitality industry to help them expand outside of North America, and we are continuing to discuss a way to do that with them.

We have picked up additional sales activity albeit it's relatively insignificant to the total in Macao and Hong Kong as we service our gaming customers that are, have now built facilities in Macao.

We also have looked at some opportunities in Latin America with regard to some direct sale efforts and we have some things going there.

We continue to evaluate acquisition opportunities and document management throughout the European area including the UK.

At this point we have nothing to announce but we are people working on it, looking at things and we just want to be sure that we don't make a bad investment.

So as we always have been, we are very cautious on that.

But I am hopeful that we will be able to expand a bit more outside of North America, that some of these things will come to fruition near the not too distant future: with that said, keep in mind that we are not, we do not anticipate having a material, a significant amount of revenue outside of North America in the near term.

This is going to be a gradual buildup.

Some of it will be being pulled by our customers and others will be initiatives like we did when we bought the company in the Netherlands a year ago.

Most of this that we are talking about are small businesses from a shredding standpoint or a direct sale business where it is more sourcing.

Okay.

Thanks very much.

Next to Shawn Barnes with Edward Jones.

Hello, gentlemen.

A quick couple of questions if I may.

First off, I was wondering, given the economic environment, in combination with the sales force initiatives, have you seen a change in your mix of business in terms of who you do business with customers from an industry perspective?

We have seen a change in our mix of customers over time mainly as manufacturing companies have moved offshore.

As we have sold more products and services across the breath of our company certainly the uniform base is coming down but as far as mix within that there's certainly more of a move to a service economy and customer facing consumer facing type customers.

But not dramatic over the last six months to a year.

You know, I don't think it is any different from what we have been seeing for the last four or five years probably.

Okay.

And headcount, controls, I was just wondering if you can give us a little more color in terms of where you are looking or to implement that plan.

We are looking across the board.

Of course at all of our G&A areas to make sure that what we are doing is a value to the company and so we are looking at initiatives there.

We are doing things in our IT, information technology area to improve productivity of our people and therefore reduce the overhead of G&A.

The sales structure I think we mentioned at the last call, the organizational structure we had in place for the new project one team initiative.

We reassessed that and tweaked that a bit such that we don't need to have as much of a management structure as we once thought we would have.

In all of our facilities, we are evaluating the jobs that people are doing to make sure that they continue to add value to our customers.

And so nothing goes unturned.

Everything is being looked at to insure that it has value added and that it is something that the customer sees and is willing to pay for or meets compliance criteria that as a company we are obligated to perform.

We have seen that leverage across all areas.

We haven't seen just, corporate overhead go down or delivery or what have you.

We have seen some improvement in most of our labor lines because of that.

Great.

And one last thing.

I might have missed this in terms of housekeeping.

In the direct business, what was organic sales.

Organic growth for the uniform direct sale was the same as their growth, which is 0.4%.

Great.

Thank you.

We will now take a follow up from Michel Morin.

Yes.

Just quickly on the DSO front, are we as close as the top or the highest that you have ever seen at 44 days?

It seems as though it might be.

Am I right on that?

In probably the last couple of years, since you have been monitoring us, you probably are right we are near the top but I can recall back in the five, six, seven years ago, it wasn't unusual to 44, 48 days DSO.

Okay.

So potentially could stay or maybe even increase a little bit.

What about bad debt is that when you look at the 20 basis point impact you just had, overall in terms of where your reserved today, how does that compare to kind of the worst of the last downturn?

I would -- I can't recall exactly but I would say it is better than the last big downturn.

That potentially it is reasonable to think these two things could still be a little bit of a drag if the economy remains a little soft here.

It can, absolutely, yes, if the economy remains soft or gets very, very soft, it is going to have an impact on us, but you know, again I think we are a little bit protected on that from many other companies in that we are providing a service that is necessary and needed and you know we often are able to use that as a clout to get paid maybe before some other people get paid.

Right.

Finally, in terms of the document management growth rate, which you know, it is organically it slowed from 30 to 25, is this just the law of large numbers starting to impact you or was the economy a factor here?

I think it is, I think it is mainly, the, the paper prices had an impact to some degree, we had one less work day and there's some law of big numbers and again that business is not significantly large at this point in time, it is certainly getting to be larger business but you do have fluctuations quarter to quarter that can occur, but when you take the other pieces into consideration we still feel very positive on that business and believe that the growth rates in the, you know, in the mid-20s to 30 again are possible and sustainable.

And just to clarify you said the work day, I thought the 25 day.

Would have been adjusted for it.

Okay.

Great.

thanks.

It appears that's all of the question we have at this time.

So I will turn the call back over to Mr.

Gale for additional or closing remarks.

Thank you again for joining us tonight, and we appreciate your interest, especially in light of this week's upheaval in the markets.

I just would leave you with a couple of thoughts though, is that Cintas is generating a lot of strong cash.

Our businesses are very solid and we have a great balance sheet.

So, we will weather this upheaval very well and I hope all of you all are able to do the same.

So, thank you again.

We will look forward to speaking with you during the week of December 15th.

We anticipate when we talk or report our second quarter results.

This does conclude today's teleconference.

You may now disconnect.

Have a great day.