Cintas Corporation F3Q09 (Qtr End 02/28/09) Earnings Call Transcript

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 |  About: Cintas Corporation (CTAS)
by: SA Transcripts

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 introduction I would like to turn the program over to Mr. Bill Gale, Senior Vice President of Finance and Chief Financial Officer. Please go ahead sir.

William Gale

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 U.S. economy is experiencing a significant and widespread recession.

Since the recession officially began in December of 2007, the U.S. 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 U.S. companies are reducing headcount 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 and restroom supplies, and less opportunity for ancillary catalog sales such as shoes and jackets.

Facility closures impact our volume of entrance mats, shop towels and linens, restroom cleaning 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 to maintain our improved 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 zero 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 a $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 third quarter Cintas expanded its presence in the document management business in Europe by purchasing Aktenmühle. Headquartered in Munich, Germany, Aktenmühle provides document shredding service to most of the major cities in Germany.

We are pleased to bring the Aktenmühle 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 complemented further on wavering focus and taking care of the customer and making Cintas the strong company it is and we'll 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 current view as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC.

I'd now like to turn the call over to Mike Thompson.

Michael Thompson

Thank you, Bill. Total revenues were $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 earning release and by Bill, the current economic environment continues to impact our revenue.

This year's third quarter had the same number of workdays 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 nine-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 will have the same number of workdays as last year’s fourth quarter.

Accordingly, fiscal 2009 will have 260 total workdays, one less than the 261 workdays last fiscal year. The number of workdays does have an impact on both revenue and income. Total company internal growth was -7.4% for the quarter. Year-to-date internal growth was -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 classify 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 as other services on the face of the income statement. Detail for these operating segments is provided in the supplemental data included with the release.

The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of the uniforms and other garments, mats, 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 workforce 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 -4%. The difficult business conditions significantly impacted our rental results. The U.S. 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 U.S. economy lost approximately 4 million manufacturing jobs mainly due to offshore and consolidation. This job reduction and the economic ripple effect of these job losses also impacted our rental growth rates.

However because of this job loss occurred more gradually overtime, we were able to react and growth through the significant reduction. Proactively addressing and marketing to 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 in the last four months alone has been too fast and widespread to offset on a short-term basis.

We have four significant metrics that we track internally as key revenue indicators. New business, lost business, add over stops and price increases. Our add stop ratio continues to be the most difficult metric in this environment. For the third quarter, approximately two-thirds of our rental negative internal growth rate is attributable to the decrease experienced in our add stop ratio. Given the significant job loss it is not surprising that this ratio is running negative.

The breakdown within the add stop ratio is a little surprising and that the stops are running about where they have historically. The issue is that the adds are down significantly, in effect turnover to 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 we affected by this net reduction in headcount, but our rental revenue is also impacted by the reduced amount of churn at customers, lowering revenue from loss replacement, makeup 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 historical levels remains in double-digits and our close rate are the number of new accounts we are selling is being maintained.

However, the average size of the new accounts has declined reflecting reduced customer headcount as well as new customers being cautious on the extent of these new programs. Our lost business ratio has increased over last year, but 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, continues to be very high.

Our strong customer retention, which is driven by customer satisfaction, provides us a 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 -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 related products to local customers who typically also rent products from us including the items sold through our direct sale catalog.

Within this segment, our global accounts and strategic markets division has a significant amount of business with the 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 headcount, it is also impacted 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 in 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 in total and internal was -23% for the quarter. As with customers of our rental division, we are doing a good job with customer retention but 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 defibrillators to our customers and provide safety training to their employees. We install, inspect, repair and recharge portable fire extinguishers and sprinkler systems.

We also provide service to emergency lighting 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 -12% and internal growth of -14%.

The First Aid portion of this business is relined on customer employment levels as much of the revenues based on product usage within the first aid cabinets. Training revenue has also been impacted as customers have less employees requiring training and in some cases are reducing or delaying training programs. Fire service internal growth continues to be negative primarily due to continued difficulty in the fire installation business reflecting continued weakness in commercial construction and expansion.

While we continue to reduce our installation business it continues to impact our fire protection services results. Customer facility closures in 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 this operating segment increased 3% for the quarter. Internal growth was -3.5%. Both growth rates were impacted by significant reduction and recycle paper prices. As we look many commodities, paper prices rose dramatically last fiscal year, reaching a high mark 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've in some customers postponing and/or reducing purge frequency and volume for economic reasons. Our overall demand remains healthy and customer retention has been 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 would discuss margin by segment, but a couple of total company margins 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 cost for the quarter were 3.1% of total revenues. A 60 basis point improvement from the third quarter of last year and approximately 40 basis points better that this year's second quarter. The weaker Canadian dollar reduced total operating margins by approximately $1.5 million.

We are actively managing our cost structure and eliminating all non-evaluated work. During our second quarter call, we mentioned through these efforts we had reduced our total company workforce by over 5%. Now through the end of February we've reduced our workforce by total of over 9%.

We've suspended hiring throughout the organization significantly raising a prevalent analysis levels for any new or replacement higher that is required. We have also instituted a wage fees 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 years 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 benefitted from an 80 basis point improvement in energy cost as compared to the third quarter of last year, and a 50 basis point improvement versus this years 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 reflects the impact of lower revenue. While higher costs were higher than last year due to the new U.S. imposed tariff discussed on our last call.

We do get some release as compared to the second quarter. Other rental margin improvement is compared to both last year’s third quarter and this year’s second quarter, came through active cost management in 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 $1.5 million as compared to the second quarter.

We continue to challenging consolidate our local route structures, which historically we’ll maintain for an expanding economy. We also continue to analyze better production process as an equipment, which we believe we'll 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 recycle paper prices always heavy on margins. In addition to our operating cost structure we are aggressively challenging our SG&A spend, we've reduced SG&A cost 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 and administrative expenses were 28.3% of revenue as compared to 28% for last year’s third quarter and 28.9% in this year’s 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 cost which were higher our last quarter two quarters did come back inline with historical levels. Medical costs were 30 basis points higher than last years third quarter but flat on the dollar basis. These cost decrease 50 basis points from our second quarter again back to more historical levels. Net interest costs this quarter was $12 million the same as net interest for our second quarter 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 FIN48 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 is 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 the current ratio of 3.2:1 and over $150 million in cash and marketable securities, the 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 and we acquired the German Document Management Company. Our DSO on 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 of 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 our purchasing power for facility service products and to provide a better inventory management solution for us local operations. Uniforms and other end service inventory decreased $13 million versus last February, due to lower new business sales and reduction rental revenue. The reduction and acquisition activity has allowed the balance of both service contracts and other assets to amortize low as compared to last February.

Other assets consists mainly of non-competition agreements obtain 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 to finding quarterly estimated tax payments are computed and remitted which went into effect this fiscal year.

Long-term debt at February 28, 2009 was $787 million a reduction of approximately $85 million since November 30. Total debt as 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've 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 a decrease in net income. To offset this reduction we have aggressively challenged all capital expenditures and remained very selective on acquistion opportunities ensuring that valuations are appropriate. We have spent a combined $162 million on capital expenditures and acquisitions to the first nine months of this fiscal year as compared to $247 million to the third quarter of last year.

While a significant reduction this does not tell the full story, as we have spend approximately $40 million this fiscal year on certain IT infrastructure capital projects including the implementation of SAP ERP financial system. Without these expenditures our year-to-date CapEx and acquisitions spending would have been approximately $125 million or 50% of the amounts spend through February of last fiscal year.

We continue to invest capital and growing our document management business purchasing vehicles and expanding 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 and 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 evaluations.

Finally, we've 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 to 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'll be prepared to take advantage of the opportunities they lay ahead.

We appreciate your time and thank you for being on this call. So, I'd now be happy to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). And we'll take our first question this afternoon from Andrea Wirth with Robert W. Baird.

Andrea Wirth – Robert W. Baird & Co., Inc.

Good afternoon.

William Gale

Hi, Andrea.

Andrea Wirth – Robert W. Baird & Co., Inc.

One of you could first start by addressing the margins, the EBIT margins within the Rental division. I think your margins are up about a 130 basis points year-over-year something about 80 basis points of that was due to lower fuel costs. So you are still up above 50 basis points year-over-year despite the volumes being down 4%. Just wondered if you could put this in terms of your cost cutting because I’m wondering you feel at this point you maybe cutting a little bit too deeply. Just given that the fact that the margins are still up despite lower volumes or do you feel like you’ve actually cut in anticipation of what we are expecting to be even worse volumes next quarter and therefore maybe your headcount reductions are fairly well taken care of at this point?

William Gale

You are talking about our rental margins?

Andrea Wirth – Robert W. Baird & Co., Inc.

Yeah, rental margins.

William Gale

I would say that we do not and I'll think whether we’ve cut too much. Some of the benefits certainly was energy as I mentioned. We are aggressively looking at our cost structure. We’ve certainly reduced headcount. We’ve looked at more controllable costs such as supplies and thinks of that nature. But given depreciation levels and given material cost that typically amortize over 18 months, you can’t adjust completely, I think the biggest component was we saw some benefit from the energy costs.

Andrea Wirth – Robert W. Baird & Co., Inc.

And then I guess just trying to understand a little bit more though even despite the energy, your margins are still up with volumes down 4%. I’m just trying to understand the disconnect between the two?

William Gale

Andrea, we are doing a lot of things. I guess your question is are we doing too much and your concern is are we going to hurt the company going forward. We don’t think so. We’re looking at efficiencies on consolidating some of the administrative functions. We’ve come up with some ways of doing that. I think heavy business needs to look at every activity that is performed to see and determined if it’s 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 add those routes back when business improves. So, 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 and 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.

Michael Thompson

Also in our business is where growth is pretty expensive and 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 some excess capacity that in the growing market you use up pretty quickly and we pull back on that route structure, given the realities of today. But we certainly built, we are nimble enough to the turn it the other way and we would love to be able to do if the market returns.

Andrea Wirth – Robert W. Baird & Co., Inc.

Fair enough. And then just as looking at your actual savings as far as it sounds like you said I think you said $15 million this quarter. What was the additional 4% in headcount reduction since last quarter? And given where fuel costs are today, what’s your expectation for savings in 4Q?

William Gale

Well Andrea, we really don’t know. We are going to watch our revenue line or 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 our existing stop ads ratios. And we hope that we will continue to see improvement in margins as we go forward, but it all depends on what happens with that top line and how quickly things happened with the top line?

Andrea Wirth – Robert W. Baird & Co., Inc.

Sure, okay. And then when you go to look at the Document Management segment margins just a little bit further about 7.7%. Would you expect that to generally be the floor at this point just given were scrap paper prices are currently assuming that there is really no change in general, which you are seeing on the revenue growth side. Would you think that’s the floor or is there still some potential that margin comes down just given where scrap paper prices are?

Michael Thompson

I think that the paper price did not move much during quarter. We don’t seen any of that going further now paper prices could move again, but we had a full quarter at the lower level.

William Gale

The other thing it could impact that on the negative side, Andrea would be of energy costs despite the gain a lot. So, the 7.7% is relatively low but we did have a little energy help there. So all of certain out gasoline where they should backup in this weak environment to $5 a gallon again then that could pressure those margins, but absent energy and I would say an absent is significant decline in the top line, I think we are looking at pretty low historically low margins for the infrastructure that we have in place today.

Andrea Wirth – Robert W. Baird & Co., Inc.

Thank you, that’s very helpful.

Operator

And our next question will come from Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar – Citigroup

Hi, Bill. Hi, Mike.

William Gale

Hi Ashwin.

Michael Thompson

Hi.

Ashwin Shirvaikar – Citigroup

My question is if we continue losing say 6, 700,000 jobs in the economy per month for the next three, four months. Can you keep in lowering your cost structure to maintain margins and what are some of the incremental things you can do. You already shutdown a couple of operating plants. You’ve taken out jobs in tool processes. So is there a level at which you kind of have to just say this is too much?

William Gale

Well first let me just clarify Ashwin. The plants we closed down were manufacturing plants where we produce carbon. So 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, taking some branches that we had setup and maybe converting them to a depot-type situation where we eliminate the administrative functions in the stock room and bring that back to a mother plant. We could also look at where we have multiple plans 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 our uniform rental routes because you got to re-tape every garment, and you got to re-route all of the customers and so there is a lot of effort there but that’s ongoing and we are going to get some benefits going forward on that. 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 our customers and doesn’t do anything that gives us a short-term gain at a long-term expense. So I think our management team feels confident that borrowing again, I’ll go back to same thing I used with Andrea, a significant jobs and some sort of costs like energy, these margins are attainable even in the declining revenue environment, which may or may not happen. I just I can’t predict it.

Ashwin Shirvaikar – Citigroup

Okay fair enough. And as you look at the first aid safety fire protection, look at the decline in the reserved debt, Mike that you provided some details with segment, but can you breakout 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. So I kind of want to separate out if you will just look out from what used to be a problem before as well?

Michael Thompson

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 are going to report it together. But 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. Now part of that is this 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 and again that will continue to be negatively impacted if employment levels continue to decline. But from a profitability perspective, I think again the fire business had a slightly more dramatic impact on the segment than the first aid and safety business.

Ashwin Shirvaikar – Citigroup

Okay, and my last question is with regards to Employee Free Choice Act. If it passes, what’s the likely financial impact on Cintas. We might checks seem to indicate that you guys pay a fair rate, so on those grounds you probably shouldn’t be much of an impact? Is it more you are opposed to it more from a philosophical standpoint or is it the cost?

William Gale

Our position has always been that we believe that with our employees right to the side whether or not they wanted to be represented by union or not through the secret-ballot election. And if this Employee Free Choice Act passes as it has been introduced into both houses of Congress, the concern we've is that it takes the right away from our employees to both in a secret-ballot election and could enable coercion on the part of Union Bosses to employees to basically create this union environment. And then additionally the other concern we've 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 proceed to be the appropriate work rules, benefit levels and wages for our company and our employees without any knowledge of our industry or competition et cetera. So the way the act is currently proposed is very concerning to us because of those issues.

Ashwin Shirvaikar – Citigroup

Got it. Okay, thank you.

Operator

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

Scott Schneeberger – Oppenheimer & Co.

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?

Michael Thompson

Yes Scott, this is Mike. I think it's relatively speaking it’s still the same. It has always been very aggressive in the marketplace as we mentioned in the past. Certainly here anecdotal stories in the marketplaces of people becoming more aggressive in different spots, but it's difficult to see that on a full basis. I think certainly as we continue through this, again this downward trend and economic triggers is really been over the last four or five months, six months or really telling off and I think as companies are hurt by that and become potentially more desperate especially smaller players that’s don’t have a capital lose standard. You could see some of that just to get funds flowing through. We haven’t seen a lot yes certainly because pricing has always been pretty aggressive in our marketplace, but we're certainly watching for it.

Scott Schneeberger – Oppenheimer & Co.

Sure, and two things. Did I hear you mention anything about pricing increases anywhere and also you did say that retentions have been fairly strong correct?

Michael Thompson

Retentions have been good and actually our customer satisfaction surveys that we put out indicate that our customer satisfaction is as high as it has been ever been. So that’s doing very well. Our retention levels are good really across all businesses. From a price increase standpoint, we're still getting price increases. It’s always a little easier sometimes when fuels increases, but when fuel cost increase we like it better this way that hurts us more when those things increase. So we still get on, but is it more difficult environment? Probably a little bit but we haven’t seen a material move there.

Scott Schneeberger – Oppenheimer & Co.

Thanks, you said last quarter, you're looking for about negative one from Forex in both three 3Q and 4Q. Still the same outlook based on what you've seen the dart aiming in that move?

Michael Thompson

We didn't indicate that last quarter.

William Gale

We had that impact this quarter 1% but I don't think we predicted what the exchange rates were going to be.

Scott Schneeberger – Oppenheimer & Co.

Yeah. 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%?

William Gale

No it would continue at that level.

Michael Thompson

We’ll see what happens.

William Gale

There is no movement really in the third quarter.

Scott Schneeberger – Oppenheimer & Co.

Okay, I'm clear. Now as you mentioned Mike there obviously, some of your competitors are seeing some weakness, the German acquisition obviously, but domestically how closer are we getting the consolidation? Are you seeing attractive multiples the way I read the press release? It seems like you are warming up there and obviously the balance sheets in pretty good shape given the state of the world?

Michael Thompson

Two things I would say the German acquisition was not a case where the company was in trouble at all that one was in and works for a while and we were very happy to get them. It’s a very good acquisition opportunity for us, the right valuation for us but it was 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 that adds to this point but again it has 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. So, we are going to keep a close watch on it and will stay close and we will keep an active department that will reduce all of that space and contact where we can with opportunities, so we will see what happens.

Scott Schneeberger – Oppenheimer & Co.

Thanks and share repurchase stocks or we have just other uses of cash coming up prioritization?

William Gale

I think as we stated in 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.

Scott Schneeberger - Oppenheimer & Co.

Okay, thanks.

Operator

And we take our next question from Andre Steinerman with JP. Morgan Securities.

Andre Steinerman – JP Morgan Securities

Energy prices stay where they are today. How much would the fourth quarter benefit in terms of margin basis point sequentially in the year?

William Gale

The last year’s fourth quarter Andrew our energy cost as a percent of sales were 4%. This current quarter they were 3% roughly. So, basically there is a 100 basis points difference there.

Andre Steinerman – JP Morgan Securities

Right. So as you gave the quarter, how about like last conference call you gave us the month of November. Has energy cost changed much through the quarter like what was February as a month to give in I will guess the number to last time.

Michael Thompson

It has been pretty steady through the quarter.

William Gale

There has been a little fluctuation but not significant. It has been fairly constant.

Michael Thompson

Last quarter, we had the phenomena, where it kind of happened in mid term, so we want to let people that larger amount was coming in the next quarter. At this point if things stayed the same, it will be probably pretty consistent with Q4.

Andre Steinerman – JP Morgan Securities

Okay and then also when thinking about route consolidation and I know you say it takes time. Could you just give us a little more color like beneath the surface about whether route consolidation happens? Is that challenging? Or is in for some customers they are changing, their driver who they have gotten used to?

William Gale

There are several factors that certainly is one. Changing who the customer deals with you want to be very careful with that. The logistics of re-taping all of those garments. Remember we have 11 sets of uniforms for every employee at our customer’s location and if you change the route and the route there, you got to change the label, the barcode on there. So that takes some time to go through. We've done these before. We've always had some re-routing in our company primarily used to be because we were growing so much. No now, it’s a little bit different and that we are trying to just make sure that our routes remain efficient and have enough volume on them to continue good margins. So this is not a new phenomenon for us to do it. It’s just something that is the reasons why we're doing it or different than what they used to be.

Andre Steinerman – JP Morgan Securities

Okay. And is the route consolidation also happening in the other service lines, shredding and fire and first aid?

William Gale

Well absolutely. Every route-based business is looking at opportunities to maintain a certain level of revenue per route and in the declining environment as this 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 re-routing that’s a pretty easy thing to do and we're doing it.

Andre Steinerman – JP Morgan Securities

Right, any thoughts on making more hybrid routes, I know you like to keep separate trucks for separate business?

William Gale

That will be very difficult to do that. We certainly do in the rental division with entrance mats and mops this is a nature on some uniform.

Andre Steinerman – JP Morgan Securities

Right.

William Gale

But the goal across business lines we do onsite trading. We can trade documents and have uniforms whether you can't put first aid supplies, which has more inventory on the truck. So it’s really you really cant do that.

Andre Steinerman – JP Morgan Securities

Okay perfect. Thank you so much.

William Gale

Welcome.

Michael Thompson

Thanks.

Operator

Gary Bisbee with Barclays Capital, your line is open.

Gary Bisbee – Barclays Capital

Hey guys good afternoon.

William Gale

Hi Gary.

Gary Bisbee – Barclays Capital

I guess, let me ask a little bit about uniform sales business. Any sense how much further the sales could fall and I guess what I am wondering is there sort of an underlying part of this business within that is, that you feel pretty confident repeat business that isn’t getting postponed or is a lot more of that potentially at risk if things remains challenging over the next six months?

William Gale

Well Gary, it really comes down to you look at the different segments of that business serves and what happens with those customers. So let’s break 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 an 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 those large companies are very protective of their image and Caesar’s Palace or the Bellagio are not going to led their employees run around in uniforms that don’t look good. So there will be that underlying repurchase of uniforms for the employees that remain onsite. The problem is that many of those big properties though are going to postpone or delay any renewal, any big renewed, renewal of their uniform programs. So, we are not going to get that. Hotels, same thing, as their number of guests decline, they are going to reduce their headcount, 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 opening 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. Now 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 business where they are hurting and reducing headcount, they are going to give us, we got the same experience with them as we do with the Las Vegas casino or the big hotel. If on the other hand, they are in some industries that are doing fairly well and maybe can take advantage of lot of this stimulus money and that sort of thing, they will 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 pickup in the not too distant future, kind of a steady state of where we at right now in the direct sale businesses is not beyond the realm of possibility or it could even decline a little bit further.

Gary Bisbee – Barclays Capital

Okay. But it's safe to assume in this quarter there were a large number of this big upgrading of programs. So, this would be a lot of ongoing business?

William Gale

That will be a pretty safe assumption. Yeah.

Gary Bisbee – Barclays Capital

Yeah. Okay and then are there any costs to pullout here if it does continue to bleed a bit lower or could this business actually lose reasonable amount of money if that remains this challenge?

William Gale

I'm not sure we are going to lose a lot of money. I think there are other costs to pullout. You just got to be careful before you start pulling those triggers just to make sure how long the downturn is going to be, because we've got a lot of investment into people and train people and relationships but as we detect that we can’t continue to be profitable in that segment we have to adjust the cost structure accordingly. We have our very large distribution network that services those customers. Obviously, if we need to we could consolidate distribution centers that would be a fairly dramatic move because again that would be disruptive and costly, but in a protracted downturn we could take steps like that.

Gary Bisbee – Barclays Capital

Okay. And then just I guess, can you give us any sense how much of the incremental cost savings you achieved in the quarter. So that’s going from 5% headcount to 9%. Was that late in the quarter so, we might have a bit more reduction in cost as we move into the next one?

William Gale

You’ll have some reduction in cost as we go forward because some of that activity actually took place throughout the quarter. There were some severance that was paid. So, some of those benefits will, there will be a greater benefit of that into the fourth quarter.

Gary Bisbee – Barclays Capital

Okay. And just take one last point in, the $4 million of severance and other what sounds to me like sort of one-time charges and costs touched up, can you give us a sense what line items that was most evident in rental or was it more evenly spread?

William Gale

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

Gary Bisbee – Barclays Capital

Okay. All right. Thanks a lot.

William Gale

Sure.

Operator

Greg Halter with Great Lakes Review.

Gregory Halter – Great Lakes Review

Yes good afternoon.

William Gale

Hi Greg.

Gregory Halter – Great Lakes Review

On the SAP system, just wondered if you could provide us a status update there. I know it’s a multiyear effort but I’m wondering how that’s going so far?

William Gale

It’s going fine so far. It is a multiyear effort. Our first conversion of any part of it doesn’t going to take place for several more months. It is obviously a complex project but we knew that going in. We are still confident that it is a project that will pay the benefits longer-term that we need to have and that we are focussing on our financial systems and our global supply chain initially.

Gregory Halter – Great Lakes Review

Okay, and would there be additional CapEx in fiscal 2010 related to that?

William Gale

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.

Gregory Halter – Great Lakes Review

Okay, and in your Document Management Business I think you had mentioned you had a floor on the recycled paper or used paper, whatever I’m going to call it, pricing is that still the case?

William Gale

Yes it is.

Gregory Halter – Great Lakes Review

And we've actually noticed an increase in some of these like assorted 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?

William Gale

Right. We haven’t and we were fortunately before was above what the spot price was. So as the spot price picks up, it’s just getting closure to where we are at anyway but certainly that will be a good sign if that continues to go up.

Gregory Halter – Great Lakes Review

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

William Gale

Right. If it goes up it’s just an encouraging sign that there is a demand out there and that maybe that’s a indication that things are going to get better so.

Gregory Halter – Great Lakes Review

And then the hurricane, have any impact on the top line in this quarter? I think as you had indicated in the last quarter?

William Gale

No, not on this quarter. It did not.

Gregory Halter – Great Lakes Review

Okay, and related to the German acquisition. Is that management team, I guess led by Mark Metzlaff. remaining in place there?

William Gale

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

Gregory Halter – Great Lakes Review

And when in the quarter did you buy the company?

William Gale

The last day.

Gregory Halter – Great Lakes Review

Okay.

William Gale

We have no revenue for it.

Gregory Halter – Great Lakes Review

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 U.S.?

William Gale

It wouldn’t even show right now. There are pretty well capitalized, but 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 U.S.$4 million to U.S.$5 million right now. Maybe it’s around $4 million. So, we are talking relatively small, but we feel very excited about the some of opportunities, so it will be some new trucks that will need to be purchased.

Gregory Halter – Great Lakes Review

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

William Gale

Right.

Gregory Halter – Great Lakes Review

Okay, that’s all I have. Thank you very much.

Operator

And at this time, we have no other question standing by. I would like to turn the program back to our speakers for any additional or closing comments.

William Gale

Well I 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.

Operator

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

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