信達思 (CTAS) 2009 Q3 法說會逐字稿

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

Today's call is being recorded.

At this time for opening remarks and introductions I would like to program over to Mr.

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

Please go ahead, sir.

Good evening, and welcome to the Cintas' third quarter fiscal 2009 conference call.

Thank you for joining us.

For the quarter ending February 28, 2009, total revenue was $909 million, a 7% decrease from the third quarter revenue of fiscal 2008.

Earnings per share were $0.47 versus $0.53 a year ago.

The US economy is experiencing a significant and widespread recession.

Since the recession, officially began in December of 2007, the US economy has lost 4.4 million jobs.

Over the last six months alone we have seen a historical level of job losses with 3.7 million jobs lost, and 2.6 million of these jobs were lost in just the last four months.

A significant number of US companies are reducing head count and closing facilities with approximately 800,000 business customers many of these companies are our customers.

Our business is directly impacted by this large number of job losses and facility closures.

From an employment standpoint fewer jobs means fewer uniforms, both rented and purchased.

Less usage of first aid andes are room supplies and less opportunity for ancillary catalog sales such as shoes and jackets.

Facility low sures impact our volume of interest maps, shop towels and linens, and other facility needs such as fire protection services and even document destruction.

Clearly this is a difficult economic environment.

We are aggressively managing our cost structure maintain or improve margins, we are pleased that despite such a dramatic drop off in revenue we remain profitable, generate strong cash flow and maintain a very conservative balance sheet.

During the quarter the Company reduced outstanding debt by approximately $85 million, reducing its outstanding commercial paper balance to 0 at quarter end.

Our ratio of debt to capitalization improved to 25% down from over 30% a year ago.

We continue to focus on generating cash by managing our cost structure, minimizing capital spending and working capital needs and being very selective in making acquisitions.

Because of our strong cash flow and confidence in our business last week we paid an annual dividend of $0.47 per share, continuing our practice of raising the dividend every year since going public in 1983.

While we continue to be very disciplined in making acquisitions as evidenced by the fact that we have spent approximately $29 million, in acquisitions versus $102 million, through the third quarter of fiscal 2008, we will make acquisitions that we believe bring long-term value to our Company.

In that regard I'm excited to report that at the end of the Q3, Cintas expanded its presence in the document management business in Europe by purchasing Aktenmuhle, headquartered in Munich, Germany, Aktenmuhle provides document shredding service to most of the major cities in Germany.

We are pleased to bring the Aktenmuhle management and employees to the Cintas family.

Combined with our prior European acquisition in the summer of 2007, we now have the ability to offer document management services outside of North America in both the Netherlands and Germany.

While this economic downturn is negatively impacting our customers and thus our Company, we believe that it is critical to continue to provide value added services to our customers.

All of our employees who we call partners are to be complimented for their unwavering focus on taking care of the customer and making Cintas the strong Company it is and will continue to be.

We thank them for their outstanding efforts.

All of us at Cintas will continue to adhere to our principle objective of exceeding our customer expectations to maximize the long-term value of Cintas for our shareholders and working partners.

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 that reflect the Company's views as to future reviews 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 the most recent filings with the SEC.

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

Thank you, Bill.

Total revenues $909 million for our third quarter, a 7% increase from the $976 million reported for the third quarter of fiscal 2008.

Our year to date revenue declined 1% as compared to the first nine months of last year.

As mentioned in our earnings release and by Bill the current economic environment continues to impact our revenue.

This year's third quarter had the same number of work days as the third quarter of last year.

However this year's first quarter had one less workday than the first quarter of fiscal 2008.

Therefore our 9 month year to date results reflect one less workday than the same nine month reporting period last fiscal year, on a planning note the fourth quarter of fiscal 2009 we have the same number of work days as last year's Q4.

Accordingly fiscal 2009 will have 260 total workdays one less than the 261 work days last fiscal year.

The number of workdays does have an impact on both revenue and income.

Total Company internal growth negative 7.4% for the quarter.

Year to date internal growth was negative 1.4%.

In addition to the current economic environment, revenue was negatively impacted by 1% due to a weaker Canadian dollar.

Let's discuss our revenue trends in more detail.

First, as a reminder, we classified our businesses 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 on the face of the income statement.

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

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

Restroom and hygiene products and other related services are included within the segment.

Our significant geographic coverage gives us the ability to reach approximately 95%, of the work force in the United States and Canada, from our existing infrastructure.

Rental revenues were $675 million for the quarter, compared to $704 million in the third quarter of last year.

A 4% decrease.

Internal growth for the segment was also negative 4%.

The difficult business conditions significantly impacted our rental results.

The US seasonally adjusted unemployment rate increased from 4.8% a year ago to 8.1% at the end of February 2009.

These job losses have a direct impact on our rental business.

You may recall that from 2000 through last fiscal year the US economy lost approximately 4 million manufacturing jobs mainly due to offshoring consolidation.

This job reduction and the economic ripple affect of these job losses also impacted our rental growth rates.

However because this job loss occurred more gradually over time, we were able to react and grow through the significant reduction.

Proactively addressing and marketing too the growing service economy and expanding our line of services.

This has not been the case in the current recession.

The swift reduction in jobs with 2.6 million jobs lost if the last four months alone has been too fast and widespread to offset on a short-term basis.

We have 4 significant metrics that we track internally as key revenue indicators.

New business, lost business adds over stops and price increases.

Our add stop ratio continues to be the most difficult metric in this environment.

For the third approximately two-thirds of our rental negative internal growth rate is attributable to the decreased experience in our add stop ratio.

Given the significant job loss it is not surprising that this ratio is running negative.

The breakdown within the in stop ratio is a little surprising.

In that the stops are running about where they have historically.

The issue is that the adds are down significantly.

In effect turnover at our customers is remaining at historical levels, but once turnover occurs, either through involuntary terminations or voluntary the customer is not replacing these positions.

Not only are we affected by this net reduction in head count but our rental revenue is also impacted by the reduced amount of term at customers, lowering revenue from loss replacement, make up and other charges.

As we mentioned last quarter our new business results are also being pressured.

Approximately one-third of our rental negative internal growth is due to a decrease in new business dollars.

While the environment is difficult we do continue to sell new business.

In fact our percentage of new business growth while below the historical levels remains in double digits and our close rate or the number of new accounts we are selling is being maintained.

However, the average size of the new accounts declined reflecting reduced customer head count as well as new customers being cautious on the extent of these new programs.

Our loss business ratio has increased over last year, that decrease has largely been offset by price increases.

In addition, the weakening of the Canadian dollar impacted rental revenues by approximately 1%.

While our growth metrics continue to suffer we are encouraged by our customer retention results.

Customers are reducing staff and locations.

But overall they continue to retain our services.

Understanding and appreciating the value of the products and services provided to them.

Our customer satisfaction index which tracks current customer satisfaction levels continue to be very high.

Strong customer retention which is driven by customer satisfaction provides us the solid business foundation for when economic conditions improve.

Our other services revenue which includes uniform direct sales, first aid, safety and fire protection and document management declined 14% for the quarter.

Internal growth was negative 16%.

This reduction is better understood by addressing each segment within other services separately.

Our uniform direct sales operating segment includes the direct sale of uniforms, branded promotional products and other related products to national and regional customers through our global accounts and strategic markets division and the direct sale of uniforms and related products to local customers who typically rent products from us including items sold through our direct sales catalog.

Within this segment our global accounts and strategic markets division has a significant amount of business with a lodging, hospitality and gaming industries.

As with most recessions, these industries have been hit especially hard during this downturn.

While our uniform direct sale business is directly impacted by head count it is also impact by more discretionary spending.

Revenues generated from new property openings or expansions as well as refresh programs which occur when customers change the uniform design of the property or throughout the organization.

During economic downturns, these more discretionary types of spending tend to slow or even stop.

The impact of the downturn especially over the last six months has caused our uniform direct sales segment revenues to decline significantly.

Uniform direct sales growth both total and internal was negative 23% for the quarter.

As with customers of our rental division we're doing a good job with customer retention, where customer purchasing levels have declined significantly.

Within first aid, safety and fire protection services we sell and deliver first aid products, safety products and automatic defibrillator to our customers and provide safety trends to employees.

We install, inspect, repair and recharge portable fire extinguishers, and sprinkler systems.

We also provide service, emergency light systems, and kitchen fire suppression systems.

Revenue within the first aid, safety and fire protection services operating segment was also significantly impacted by the economic environment.

With total growth of negative 12%, and internal growth of negative 14%.

The first aid portion of this business is reliant on customer employment levels as much of the revenue is based on product usage within the first aid cabinets.

Training revenue has been impacted as customers have less employees requiring training and in some cases reducing or delaying training programs.

Fire service internal growth continues to be negatively impacted primarily due to continued difficulty in the fire insulation business reflecting continued weakness in commercial construction and expansion.

While we continue to reduce installation business it continues to impact our fire protection services results.

Customer facility closures and consolidation also impact our fire protection services.

Our document management services operating segment is comprised mainly of document shredding services.

We also have storage and imaging capabilities.

Service revenues within its operating segment increased 3% for the quarter.

Internal growth was negative 3.5%.

Both growth rates were impact by a significant reduction in recycled paper prices.

As with many commodities paper prices rose dramatically last fiscal year reaching a high market level in March of 2008.

Since that time, prices have come down significantly approximately 50% returning to more historical levels.

Excluding the impact of paper prices, our shredding operations third quarter internal growth was a positive 15%.

While we have had some customers postponing and/or reducing purchased frequency and volume for economic reasons our overall demand remains healthy and customer retention is being maintained.

Third quarter total Company gross margin was 41.4% a 70 basis point decline from the third quarter of fiscal 2008.

And a 70 basis point decline from this year's second quarter.

I will discuss segment but a couple of total Company margin comments first.

Energy pricing came down late in our second quarter and remained at these levels through our third quarter providing us a benefit.

Energy costs for the quarter were 3.1% of total revenues.

A 60 basis point improvement from the third quarter last year and approximately 40 basis points better than this year's second quarter.

The weaker Canadian dollar reduced total operating margins by approximately $1.5 million.

We are actively managing cost structure in eliminating all nonvalue added work.

During our second quarter call we mentioned that through these efforts we had reduced our total Company work force by over 5%.

Now, through the end of February, we reduced our work force by a total of over 9%.

We have suspended hiring throughout the organization significantly raising approval and analysis levels for new or replacement hire that is required.

We've also instituted a wage freeze, for all salary employees throughout the Company.

Our rental gross margins were 43.8% of revenue for the third quarter.

A 40 basis point improvement over last year's third quarter and a 20 basis point improvement over this year's second quarter.

We reduced our rental operating cost by $38 million as compared to our second quarter.

Rental margins benefited from an 80 basis point improvement in energy costs as compared to the third quarter of last year, and a 50 basis point improvement versus this year's second quarter.

The energy improvement was offset by similar amounts in both quarters by increased material cost and depreciation.

Both material cost and depreciation are more fixed in nature in the short-term and reflect the impact of lower revenue.

While hanger costs were higher than last year due to the new US imposed tariffs discussed on our last call.

We did get some relief as compared to the second quarter.

Other rental margin improvement compared to both last year's third quarter and this year's second quarter came through active cost management and various categories including supplies expense and temporary labor.

The weaker Canadian dollar impacted rental operating margins by over $1 million versus last year's third quarter and approximately $0.5 million as compared to the second quarter.

We continue to challenge and consolidate our local route structures which historically were maintained for an expanding economy.

We also continue to -- I'm sorry, we also continue to analyze better production processes in equipment which we believe will have a positive impact on our operational cost structure in the future.

Other services gross margin was 34.7% as compared to 38.9% last year and 38.4% last quarter.

Our margins continue to benefit from an improving sales mix with a greater percentage of revenue coming from the higher margin first aid, safety and fire protection service and document management operating segments.

However the revenue shortfall in first aid, safety and fire protection, the significant decline in uniform direct sale revenue and the dramatic drop in recycled paper prices all weighed heavy on margins.

In addition to our operating cost structure we are aggressively challenging our SG&A spend.

We reduced SG&A costs from $285 million during our second quarter, down to $257 million in our third quarter.

A reduction of $28 million.

Due to lower revenue selling administrative expenses 28.3% of revenue, compared to 28% for last year's third quarter and 28.9% in the second quarter.

Payroll taxes reset during our third quarter each year.

When compared to the second quarter this seasonal payroll tax increase was offset in the quarter by reductions in SG&A labor.

Medical costs which were higher our last two quarters did come back in line with historical levels.

Medical costs were 30 basis points higher than last year's third quarter but flat on a dollar basis.

These costs decreased 50 basis points from our second quarter, again, back to more historical levels.

Net interest cost this quarter was $12 million, the same as net interest for a second quarter of this year of last year.

Our effective tax rate was 33.2% for the quarter as compared to 35% for the third quarter of last year reflecting reserve releases.

Under FIN 48 the effective tax rate fluctuates with reserve requirements on a quarterly basis.

Impacting quarterly net income and earnings per share results.

Our year to date effective rate was 36.8%.

However we continue to expect our effective tax rate for fiscal 2009 to be approximately 37.1%.

For the quarter net income was $71.8 million, and earnings per diluted share were $0.47 per share.

When adjusted for the severance cost and earnings impact of the weaker Canadian dollar diluted earnings per share would have been $0.02 higher or $0.49 per diluted share.

Our balance sheet continues to be strong with a current ratio of 3.2 to 1 and over $150 million in cash and markable securities.

Most of which are invested in highly rated short-term Canadian government securities.

We continue to target our Canadian funds to be used for future international expansion as we did when we acquired the German document management company.

Our DSO and receivables stood at 41 at February 28.

Down from 46 at the end of the second quarter.

The second quarter ended on the day after Thanksgiving which created some timing issues on collection efforts.

The 41 DSO, is a slight increase as compared to the 40 DSO at February 2008.

Although viewed positively in light of market conditions.

Accounts receivable in total was lower than last February due to reduced revenue levels.

Our inventory levels increased $11 million over February 2008.

Due to the opening of our new facility services distribution center earlier this fiscal year.

This distribution center was opened in order to take better advantage of purchasing power facility service products and provide a better inventory management solution for our local operations.

Uniforms and other in service inventory decreased $13 million versus last February due to lower new business sales and reduction rental revenue.

The reduction in acquisition activity has allowed the balance of both service contracts and other assets to amortize lower compared to last February.

Other assets consist mainly of noncompetition agreements obtained through acquisitions.

Accounts payable increased approximately $11 million, as compared to last February as we extended many of our vendor payment terms.

Our current year income taxes payable is $20 million lower than last year's third quarter due to new federal requirements defining how quarterly estimated tax payments are computed and remitted which went in to affect this fiscal year.

Long-term debt at February 28, 2009, was $787 million, a reduction of approximately $85 million, since November 30.

Total debt is a percentage of total book capitalization improved from 27.2% at November 30, down to 25.3% at February 28.

As of the end of February, we have paid off all of our outstanding commercial paper.

We reduced our total debt level by over $155 million, since the beginning of this fiscal year.

We continue to focus on cash generation and preservation.

Our net cash provided by operations decreased by approximately the same amount as the decrease in net income.

To offset this reduction we have aggressively challenged all capital expenditures, and remain very selective on acquisition opportunities.

Ensuring that valuations are appropriate.

We have spent combined $162 million on capital expenditures and acquisitions in the first nine months of this fiscal year as compared to $247 million in the third quarter of last year.

While a significant reduction this does not tell the full story as we have spent approximately $40 million this fiscal year, on certain IT infrastructure capital projects including the implementation, of a SAP ERP financial system.

Without the expenditures our year to date CapEx and acquisition spending would have been approximately $125 million or 50% of the amount spent through February of last fiscal year.

We continue to invest capital in growing our document management business purchasing vehicles and infrastructure as required.

Because of these items we continue to expect capital expenditures for the year to be between 150 million and $170 million for total fiscal 2009.

We continue to evaluate acquisition opportunities and our pipeline remains active.

Mainly with smaller businesses in our emerging business units.

While interested in using our capital to make strategic acquisitions and expand our market opportunities, we will only do so at appropriate valuations.

Finally, we recently paid our annual dividend to shareholders.

The dividend was increased to $0.47 per share this year continuing our tradition of increasing our dividend every year since going public in 1983.

Our annual dividend provides shareholder value and demonstrates our confidence in the future success and cash flow of the Company.

In closing, under these serious economic conditions, our top priority continues to be take care of our customers.

We will continue to actively and aggressively manage our cost structure, maintain a strong balance sheet, and protect our cash flow.

When conditions improve we will be prepared to take advantage of the opportunities that lie ahead.

We appreciate your time.

Thank you for being on this call.

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

(Operator Instructions).

We'll take our first question this afternoon from Andrea Wirth with Robert W.

Baird.

Good afternoon.

Wonder if you could first start by addressing the margins, the EBITDA margin, looks like the margins are up about 130 basis points year-over-year, something about 80 basis points of that was due to lower fuel costs, so you are still up about 50 basis points year over year despite the volumes being down 4%.

Just wondering if you could put this in terms of your cost cutting, I'm wondering if you feel you are cutting a little bit too deeply just given the fact that the margins are still up despite the lower volumes or do you feel like you have actually cut in anticipation of what we are expecting to be even worse volumes next quarter, maybe your head count reductions are fairly well taken care of at this point.

You were talking about rental margins?

Yes, rental margins.

I would say we wouldn't at all thing that we've cut too much.

Some of the benefit certainly was energy, as I mentioned, we did -- we are aggressively looking at our cost structure, we'd certainly reduce head count, we've looked at more controllable costs such as supplies and things of that nature.

But given depreciation levels and given material cost that typically amortizes over 18 months, we certainly, I think the biggest component was we saw benefit from the energy costs.

I guess just trying to understand a little bit more though even despite that, despite the energy your margins are still up with volumes down 4%.

I'm just trying to understand the disconnect between the two?

Andrea we are doing a lot of things, I guess your question is are we doing too much.

You're concerned are we going to hurt the Company going forward?

We don't think so, we are looking at efficiencies on consolidating some of the administrative functions, we have come up with some ways of doing that.

I think any business needs to look at every activity that is performed to determine if its value added.

We are consolidating routes.

As volume declines, we will consolidate customers and have fewer routes but that doesn't mean that we won't be able to have those routes back when business improves.

We feel what we are doing is prudent.

I would not be concerned that we are cutting too deep and that we're going to hurt ourselves.

What we are probably doing is becoming a much more streamlined efficient Company and as business conditions improve whenever they do, we feel like we will be in great shape.

Also in our business, growth is pretty expensive.

When the growth pulls back a little bit you don't have the selling cost you don't have -- which is not in that line, but certainly the new material cost flows through that line.

Certainly you are maintaining those routes as Bill indicated where you have excess capacity that in a growing market you use up pretty quickly.

We pulled back on that route structure.

Given the realities of today.

But we certainly feel that we are nimble enough to turn it the other way and would love to be able to do it when the market returns.

Fair enough.

Then just looking at all your actual savings so far, it sounds like you saved $50 million this quarter, with a additional 4% in head count reductions since last quarter and given where fuel costs are today.

What's your expectation for savings in 4Q?

Well, Andrea, we really don't know.

We are going to watch our revenue line, as everybody noticed we didn't provide any guidance because we still feel the economic outlook is pretty uncertain.

So what we are doing is just managing things on a week to week basis and watching our revenue, watching our new business, watching existing stop ad ratios and we hope that we will continue to see improvement in margins as we go forward but all depends on what happens with the top line and how quickly things happen with that top line.

Sure.

Okay.

Then when you go look at the document management segment margins look a little bit further, just about 7.7%, would you expect that to generally be the floor at this point just given where scrap paper prices are, currently, assuming there is really no change in generally what you are seeing on the revenue growth side, do you think that's the floor or is there still some potential that that margin comes down just given where scrap paper prices are?

The paper price did not move much during the quarter.

We don't see any of that going further now.

If prices could move again.

We had a full quarter at the lower level.

The other that other thing that could impact that on a negative side, Andrea would be if energy prices spiked again a lot.

So the 7.7% is relatively low but we did have a little energy help there.

So all the sudden now if gasoline were to shoot back up in this weak environment to $5 a gallon again that could pressure those margins.

But absent energy, I would say, and absent a significant decline in the top line I think we are looking at pretty low historically low margins for the infrastructure we have in place today.

Thank you, that's very helpful.

Our next question will come from Ashwin Shirvaikar with Citi.

My question is if we continue losing say 600,000, 700,000 jobs in the economy per month for the next three or four months, can you keep lowering your cost structure to maintain margins?

What are some of the incremental things you can do?

You already shutdown a couple of operating plants.

You've taken out jobs in two processes, so is there a level at which you have to say this is too much?

Well, first off let me just clarify, Ashwin, the operating -- the plants we closed down were manufacturing plants where we produced garments, we have not shutdown any of our uniform rental facilities to date.

If job losses continue at a very rapid pace, we will be looking at potentially consolidating some of our operating locations.

Looking at taking some branches that we had set up and maybe converting them to a depo type situation where we eliminate the administrative function and stock room and bring that back to a mother plant.

We could also look at where we have multiple plants in the city and temporarily idling one of those to get some efficiency.

We also will continue to look at route consolidation, we really haven't been it takes a long time to consolidate uniform rental routes because you got to retape every garment and you got to reroute all the customers, so there is a lot of effort there but that's ongoing and we are going to get some benefits going forward on that.

So there are more things that we can do, we are going to make sure though that what we do doesn't do anything to jeopardize the services we are providing to customers and dun do anything that gives us a short-term gain at a long-term expense.

I think our management team feels confident that barring, again, I will go back to the same thing I used with Andrea, a significant jump in some sort of cost like energy, these margins are attainable in a, even in a declining revenue environment which may or may not happen.

I can't predict it.

As you look at the first aid, safety, fire protection, look at the decline in the reserves there, could you -- can you break out how much is, say on the first aid side versus the others, because first aid was doing fine.

You had some issues in the fire protection and so on, I wanted to break out the cyclical from what used to be a problem before as well.

Well, I can tell you that the revenue drop in both of those, it is only one segment, and that's the only way we are going to report it is we're going to report it together.

I can tell you that the revenue drop was slightly more significant in the fire side quarter over quarter than it was in the first aid side.

Part of that is the installation business which we are basically not going to focus on as much as we thought we would before.

But the first aid business certainly has had the impact of the lower employment levels, again that will continue to be negative impact negatively impacted if employment levels continue to decline.

But from a profitability perspective, I think again the fire business will had a lightly more dramatic impact on the segment than did the first aid and safety business.

Okay.

And my last question is with regards to Employee Free Choice Act.

If it passes, what's the likely financial impact on Cintas?

My checks seem to indicate that guys pay a fair wage, so on those grounds it probably shouldn't be much of an impact.

Are you more opposed to it more from a philosophical standpoint or is it the cost?

Our position has always been that we believe that it was our employee's right to decide whether or not they wanted to be represented by a Union or not through the secret ballot election.

If this Employee Free Choice Act passes as it has been introduced into both houses of Congress, the concern we have is that it takes the right away from our employees to vote in a secret ballot election and could enable coercion on the part of Union bosses to employees to basically create this Union environment.

Then additionally, the other concern we have would be that if that were to happen, and the employee and the Company and the Unions could not negotiate a contract that a federal mediator could come in and impose what they perceive to be the appropriate work rules, benefit levels and wages, it, for our Company and our employees without any knowledge of our industry or competition et cetera.

The way the Act is currently proposed is very concerning to us because of those issues.

Okay.

Thank you.

We will take our next question from Scott Schneeberger with Oppenheimer.

Thanks, good afternoon.

Could you guys speak a bit to the pricing environment out there and just what you are seeing on the competitive front?

Scott, this is Mike.

I think relatively speaking still the same it's always been aggressive in the marketplace as we mentioned in the past.

Certainly you hear anecdotal stories in the marketplaces of people becoming more aggressive in different spots.

It's difficult to see that on a full basis.

Certainly as we continue through this again, this downward trend in economic figures has really been over the last four, five months, six months of really tailing off and I think as companies are hurt by that and become more desperate, especially smaller players that don't have the capital to withstand it you could see some of that just to get funds flowing through.

We haven't seen a lot of it yet though, only because pricing has always been pretty aggressive in the marketplace.

But we are certainly watching for it.

Sure.

Did I hear you mention anything about price increases anywhere and also you did say that retention has been fairly strong, correct?

Retention has been good.

Actually our customer satisfaction surveys that we put out indicate that the customer satisfaction is as high as its ever been.

So that's doing very well, retention levels are good across all businesses.

From a price increase standpoint we are still getting price increases.

It's always a little easier sometimes when fuel is increases but when fuel costs increase we like it better way this way because that hurts us more when those things increase.

We still get them, is it more difficult environment, probably a little bit.

We haven't seen material move there.

You said last quarter you were looking for about negative 1 from 4X in both 3Q and 4Q, still the same outlook based on where your seen the dollar, Canadian dollar move?

We didn't indicate that last quarter.

We had that impact this year.

1%.

But I don't think we predicted what the exchange rates were going to be.

Yes, you said, I'm reading from the transcript, We expect our revenue growth rates in the third and fourth quarters to be negatively impacted by approximately 1%.

That's what happened.

There was no movement really in the third quarter.

Okay.

I'm clear.

As you mentioned, Mike, obviously some of your competitors are seeing some weakness.

We had the German acquisition obviously, but domestically how close are we getting to consolidation?

Are you seeing attractive multiples the way I read the press release feels like you're warming up there and obviously the balance sheet is in pretty good shape given the state of the world?

Two things, I'd say the German acquisition was not a case where the Company was in trouble at all that one was in works for a while.

And we are very happy to get them, it's a very good acquisition opportunity for us.

The right valuation for us, but it was a good acquisition.

So, I don't think they were impaired at all.

The acquisition pipeline here is good, we haven't seen a significant outpouring of angst at this point but it's been fairly short in duration.

We typically do see some uptick as you get further into it.

But again, as I mentioned earlier, this has been a pretty quick turn in the employment levels.

We are going to keep close watch and we will stay close ask keep an active department that reviews and stays in contact where we can with opportunities.

We will see what happens.

Share repurchase thoughts or the other uses of cash kind of give a prioritization.

Our I think we -- as we stated last quarter, right now our objective is to continue to generate cash, keep the balance sheet very strong, position ourselves for whatever the economy deals us, and then be ready to really take advantage of opportunities that will present themselves.

Great, thanks.

We take our next question from an Andrew Steinerman with JPMorgan Securities.

Energy prices stay where they are how much would the fourth quarter benefit if terms of margin basis points sequentially year-over-year?

The last year's fourth quarter, Andrew our energy costs as a percent of sales were 4%.

This current quarter they were 3% roughly.

Basically there is 100 basis points difference there.

Right so you gave the quarter.

How about like last conference call you gave us the month of November, have energy costs changed much through the quarter like what was February as a month to give a number to last time?

It's been pretty steady through the quarter.

There has been a little fluctuation but not significant.

It's been fairly constant.

Last quarter we had the phenomenon where it happened in midterm.

So we wanted to let people know that a larger amount was coming in the next quarter if things stayed the same.

At this point if things stay the same it will probably be pretty consistent with Q4.

Okay.

Then also in thinking about route consolidation and I know you say it takes time, could you give us a little more color like beneath surface about whether route consolidation happens, whether that challenging, is it for some customers that changing the driver they've gotten used to?

There are several factors, that certainly is one.

Changing who the customer deals with, you want to be very careful with that.

There's the logistics of retaping all of those garments.

Remember, we have 11 sets of uniforms for every employee at a customer's location and if you change the route and the route day you got to change the label, the bar code on there.

So that takes sometime to go through.

But its not -- we've done these before.

We've always had some rerouting in our Company.

Primarily used to be because we were growing so much.

Now it's a little bit different in that we are trying to just make sure that our routes remain efficient and have enough volume on them to continue good margins.

So we are not this is not a new Phenomena for us to do it.

It's just something that is the reasons why we are doing it are different than what they used to be.

Okay.

Is the route consolidation also happening in the other service lines, shredding and fire and first aid?

Absolutely.

Every other -- every route based business is looking at opportunities to maintain a certain level of revenue per route and in the declining environment as is the case with everything other than shredding we are certainly doing that.

But even in shredding we are looking at ways to make those routes more efficient and if it means rerouting that's a pretty easy thing to do and we are doing it.

Any thoughts on making more hybrid route?

I know you like to keep separate trucks for separate businesses.

That would be difficult to do that.

We certainly do it in the rental car division with interest maps and things of that nature on some uniform.

To go across business lines we do on site shredding.

We can't have uniforms with it.

You can't put first aid supplies which has more inventory on the truck.

So it's really -- you really can't do that.

Thank you so much.

Gary Bisbee with Barclays Capital your line is open.

Good afternoon.

I guess let me ask a little about the uniform sales business.

Any sense how much further the sales could fall and I guess what I'm wondering is there an underlying part of this business within that that is -- that you feel pretty confident is repeat business that isn't getting postponed or is a lot more of that potentially at risk if they remain challenging over the next six months?

Gary, it really comes down to you look at the different segments that that business serves and what happens with those customers.

Let's break that down a little bit, the Las Vegas gambling industry is not going to go away.

They are going to, if they continue to have the problems they have in attracting people to come out to Las Vegas, they are going to continue to downsize their organizations.

Now the people that are left will still have to replace uniforms because they are also -- those large companies are very protective of their image and Caesar's Palace or the Bellagio are not going to let their employees run around in uniforms that don't look good.

There will be the underlying repurchase of uniforms for the employees that remain on site.

The problem is, is that many of those big properties though are going to postpone or delay any renewal, any big renewed renewal of their uniform program so we are not going to get that.

Hotels, same thing, as their guests, number of guests decline, they're going to have to reduce their head count but they will continue to replace uniforms because they don't want their employees again to destroy the image of the hotel.

We are not seeing a whole lot of new openings of hotels and that always has been a nice little steady stream of income as they open new hotels but that seems to have really been reduced so that will be an issue.

The other side we also have uniforms that we sell to large companies.

And it really comes down to what type of business they are in.

If they are in a business where they are hurting and reducing head count.

They are going to -- we are going to have the same experience with them as we do with the Las Vegas casino or the big Hotel.

If they are in industries that are doing well and take advantage of the stimulus money, and that sort of thing, they will be continue to be good buyers of uniforms.

So all in all, though, in this environment, the decline that we've seen to these levels have been basically unprecedented and unless we see a pick up in the not too distant future, kind of the steady state of where we are at right now in that direct sale business is not beyond the realm of possibility or it could even decline a little bit further.

But it's safe to assume in this quarter there weren't a large number of these big upgraded programs so this would be a lot of the ongoing business?

That would be a pretty safe assumption, yes.

Then are there any cost to pull out here if it does continue to bleed a bit lower or could this business actually lose reasonable amount of money if it remains this challenged?

I'm not sure it could lose a lot of money, or I think there are other costs to pull out.

You just got to be careful before you start pulling those triggers to make sure you know how long the downturn is going to be.

Weve got a lot of investment in to people and training people and relationships, if we detect that we can't continue to be profitable in that segment we have to adjust the cost structure accordingly.

We have a very large distribution network that services those customers.

Obviously if we need to we can consolidate distribution centers that would be a fairly dramatic move because that would be dramatically costly, in a downturn we could take steps like that.

Can you give us since how much of the incremental cost savings you achieved in the quarter?

So going from 5% head count to 9% was that late in the quarter so we might have a bit more reduction in cost as we move in to next quarter or?

You will have some reduction in cost as we go forward because some of the activity actually took place throughout the quarter, there was some severance that was paid.

So some of those benefits will, there will be a greater benefit of that in to the fourth quarter.

Okay.

Just one, sneak one last one in, the $4 million of severance and other what sounds to me like one time charges and cost type stuff can you give us a sense what line item was that -- was most of it in rentals or was it more evenly spread?

It would have been probably more in the other services side.

Okay.

No I think it was--.

(Inaudible).

I apologize, Mike corrected me.

Would have been across all

All right.

Thanks a lot.

Sure.

Greg Halter with Great Lakes Review.

Good afternoon.

Hi, Greg.

Hello.

On the SAP system, just wondering if you could provide a status update there?

I know it's a multi year effort, but wondering how that's going so far?

It's going fine so far, it is a multiyear effort.

Our first conversion isn't going to take place for several more months.

It is obviously a complex project but we knew that going on.

We are still confident that it was-- is a project that is going to pay the benefits longer term than we need to have.

We are focusing on our financial system and our global supply chain initially.

Okay.

Would there be additional CapEx in fiscal 2010 related to that?

The majority of CapEx will have been spent in fiscal '09, there will be a moderate amount but it's much less than what we've incurred in '09.

Okay.

In your document management business, I think you had mentioned you had a floor on the recycled paper or used paper, or whatever you want to call it, pricing, is that still the case?

Yes, it is.

Okay.

We've actually noticed an increase in some of these sorted office paper and so forth over the last several months, a slight increase which at least there is something moving in the right direction there.

Right.

We were, fortunately the floor was above for us, the floor was above what the spot price was.

As a spot price picks up it's getting closer to where we are at anyway.

But certainly that will be a good sign if that continues to go up.

Would have to go above that floor for you to see a benefit on the pricing side?

Right.

If it goes above -- if it goes up it's just an encouraging sign that there is a demand out there and maybe that's a indication that things are going to get better, so.

Did the hurricane have any impact on the top line in this quarter as you had indicated last quarter?

No, not on this quarter it did not.

Okay.

And related to the German acquisition, is the management team led by [Mark Metslef] remaining in place there?

Absolutely, yes.

They are Cintas employees now, I met Mark, he is a great guy I think we are going to have a great relationship going forward with them.

When in the quarter did you buy the Company?

The last day.

Have no revenue for it.

All right.

And do they have any sort of CapEx needs that would be an increase over what you see here for your business in the US?

It wouldn't even show right now, they're pretty well capitalized.

As we continue to work with them to grow the business they will need to acquire additional trucks.

But this is a small business, Greg, it's probably in the neighborhood of 4 million to $5 million US right now.

Maybe around $4 million.

So we are talking relatively small.

We feel very excited about some of the opportunities.

So yes, we'll get some new trucks that will need to be purchased.

Okay, that $4 million is per year, correct?

Right.

That is all I have.

Thank you very much.

At this time, we have no other questions standing by.

I would like to turn the program back to our speakers for any additional or closing comments.

Thank you, all, again very much for joining us.

And we appreciate the continued interest in our Company.

We are going to plan on reporting our fourth quarter results in mid July.

We look forward to talking to you then if not sooner, thank you.

Thank you, everyone, for your participation on today's conference call, and you may disconnect at this time.