Cintas Corporation F1Q09 (Qtr End 08/31/08) Earnings Call Transcript

Sep.18.08 | About: Cintas Corporation (CTAS)

Cintas Corporation (NASDAQ:CTAS)

F1Q09 Earnings Call

September 18, 2008 5:00 pm ET

Executives

William C. Gale - Chief Financial Officer, Senior Vice President

Michael L. Thompson - Vice President, Treasurer

Analysts

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

Ashwin Shirvaikar - Citigroup/Smith Barney

Michel Morin - Merrill Lynch

Gary Bisbee - Lehman Brothers

Greg Halter - Great Lakes Review

Scott Schneeberger - Oppenheimer & Co.

Shawn Barnes - Edward Jones

Operator

Welcome to the Cintas quarterly earnings results conference call. (Operator Instructions) At this time I’d like to turn the call over to Bale Gale, Senior Vice President of Finance and Chief Financial Officer.

William C. Gale

Thank you for joining us this evening to discuss Cintas’ first quarter fiscal 2009 earnings results. Joining me this evening is Mike Thompson, Cintas’ Vice President and Treasurer.

Cintas reported revenues and net income in line with its plan for the year. Revenues increased 5% on a comparable workday basis over the first quarter of last fiscal year to $1 billion. This year’s first quarter had one less workday than last year. Earnings per share were $0.51 this year, the same as last year’s first quarter. Net income was $78.6 million versus $81.1 million in last year’s first quarter. As Mike will explain shortly, in addition to the impact of one less workday in this year’s first quarter we experienced significantly higher costs for energy and other supplies such as hangers as well as weakness in both our customer base and with new prospect conversions.

We saw slightly lower organic growth in all of our segments which we believe is an indication of economic weakness in the general economy. However we still did post an overall organic growth of almost 4% and as I stated earlier, we met our plan for the quarter.

Our current guidance of revenues and earnings per share for the fiscal year ending May 31, 2009 remains unchanged and calls for total revenues of $4.1 billion to $4.2 billion and diluted earnings per share of $2.22 to $2.30. We believe the guidance remains appropriate given the current economic conditions and the potential impact of the recent weather events. As a result of the hurricanes we had several operations that while physical damage was minimal to the facilities, they either had no power or are still out of power. This has occurred at operations in Texas, Louisiana and even in the Midwest. We are also experiencing issues with providing services to our customers in these areas as they are not able to operate. At this time we are unable to quantify the impact on our results but we do not believe it will be material to the company in total. We will pursue business interruption insurance recovery according to our policies in effect.

Our financial condition is very strong and we continue to generate strong operating cash flow and maintain conservative financial policies. During the quarter the company acquired about 900,000 shares of its common stock. We continue to have about $200 million available for additional Cintas share purchases under the amount authorized by our Board of Directors.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward looking statements that reflect the company’s current 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 as well as in the press release issued today announcing Cintas’ first quarter fiscal 2009 results.

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

Michael L. Thompson

Beginning with the income statement, total revenues were $1 billion for the quarter a 3.4% increase over the $969 million reported for the first quarter of last fiscal year. However as Bill mentioned, this year’s first quarter had one less workday than the first quarter of fiscal 2008. When adjusted for the one less workday, revenue growth was 5%. Total company internal growth was 3.9% for the quarter. As a reminder, the remaining three quarters of fiscal 2009 will each have 65 workdays which is the same number of workdays of each of the last three quarters of fiscal 2008. As such fiscal 2009 will have 260 workdays which is one less than the 261 workdays in fiscal 2008. The number of workdays in a quarter does have an impact on both revenue and income.

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 segment data included with the release.

The rental uniforms and ancillary products operating segment consists of the rental and servicing of uniforms and other garments, mats, mops, shop towels and other related items. Our restroom and hygiene products and services are also included within this segment. Rental revenues were $721.4 million for the quarter compared to $710.4 million in the first quarter last year. When adjusted for one less workday, this represents a 3.1% increase over the first quarter of last fiscal year. Rental organic growth was also 3.1% down from 3.6% in the fourth quarter of fiscal 2008.

The difficult economic environment continues to affect our customers and we continue to experience increased loss of business and stops as they reduced headcount and closed locations. Also, unlike our fourth quarter of fiscal 2008 we have now seen our new business results begin to suffer. While we continue to be successful in demonstrating the value of our products and services to prospects, many of our customers and new business prospects have become more cautious on spending causing our new business rates to slow.

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

Our uniform direct sales operating segment incorporates our global accounts and strategic markets division which direct sells uniforms, brand of promotional products and other related products to national and large regional customers and our direct sale catalog which direct sells uniforms and related products primarily to local customers who also rent products from us. The uniform direct sales segment grew 0.4% for the first quarter on a workday adjusted basis as customers delayed or canceled new programs and reduced headcount. We maintained our revenue stream by retaining our customer base but economic conditions are causing a headwind in this segment as well.

Our third operating segment is first aid, safety and fire protection services. In this business we sell and deliver first aid products, safety products and automatic defibulators to our customers. We also provide safety training to their employees. Within fire protection we install, inspect, repair and recharge portable fire extinguishers and sprinkler systems. We also provide and service emergency lighting systems and kitchen fire suppression systems.

During the quarter revenues within our first aid, safety and fire protection services operating segment grew 7.8% on a comparable workday basis. On an organic basis this segment grew 5.6% which was an improvement over the fourth quarter internal growth rate of 5.3%. While general economic conditions continue to impact this business, we were able to improve our internal growth rate slightly. After suffering through a difficult fiscal 2008 our fire protection business stabilized and improved providing the increase in this segment’s internal growth rate.

Our document management services operating segment is comprised mainly of document shredding services although we do have storage and imaging capabilities. Revenues within this operating segment continue to grow at a rapid rate. First quarter revenues for the document management operating segment grew 47.5% on a comparable workday basis. Internal growth for the segment was 25% down from 30% in the fourth quarter of fiscal 2008. This deceleration occurred as the increased paper prices we experienced during fiscal 2008 have now been lapped. In fact we experienced a reduction in recycled paper prices of approximately 20% versus prices from the fourth quarter of fiscal 2008.

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

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

Energy costs for the company increased to their highest level reaching approximately 4.4% of total company sales as compared to 3.4% a year ago and 4.0% in last year’s fourth quarter. The increase in energy costs along with other increased commodity costs were partially offset by improved leverage over infrastructure within our rental division and margin improvement in our other services operating segments as we continued to gain scale especially in document management.

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

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

Energy costs increased 100 basis points over last year’s first quarter and hanger expense increased 50 basis points. The energy increase was mainly due to increased delivery gas expense but there was also some impact from increased natural gas pricing.

Hanger costs have increased significantly as the United States has imposed a significant tariff on hangers produced in China which is where we source our hangers and also due to the volatility in steel prices. We are offsetting some of this increase by combining purchases and putting the volume through our new facility services distribution center. We are also looking into alternative sourcing arrangements.

We have also experienced an increase in the cost of other commodities and supplies including wash chemicals. We were able to leverage our infrastructure to offset some of these increases mainly through leveraging labor costs across the organization. The 40 basis point decline from the fourth quarter was due to the same issues, just not as severe given the shorter time differential. Energy costs accounted for half of the increase as they increased 20 basis points over last year’s fourth quarter.

Other services gross margin was 39.5% a 140 basis point improvement over the first quarter of fiscal 2008 but a 100 basis point decrease from last year’s fourth quarter. The improvement over last year’s first quarter was mainly due to sales mix. The document management segment continues to grow at a very rapid rate. This division which is higher margins than first aid, safety and fire protection and uniform direct sales is driving other services’ gross margin higher as it continues to become a larger percentage of other services revenue.

Gross margins in the first aid, safety and fire protection and document management segments were relatively flat as compared to the first quarter of fiscal 2008 despite significant increases in energy costs which is mainly delivery gas for these divisions. These divisions were able to offset these energy cost increases through additional leverage of their infrastructures mainly in labor.

The uniform direct sales segment’s gross margins improved 110 basis points over last year due to continuing improvement in sourcing operations. The 100 basis point decrease in other services’ gross margin from the fourth quarter was a combination of lower revenues in uniform direct sales causing a lower coverage of fixed costs and a low recycled paper prices in document management as discussed earlier. As we have mentioned in the past, while paper prices impact revenue and internal growth results they have a bigger impact on margins as the change in price falls to the bottom line. In addition, energy costs were up in the other services operating segments.

Selling and administrative expenses were 28.7% of revenue a slight increase over 28.6% in last year’s first quarter and 100 basis points higher than the fourth quarter of fiscal 2008. As compared to last year’s first quarter a 60 basis point increase in medical costs and a 20 basis point increase in bad debt reserve were offset by a reduction in G&A labor, lower payroll taxes associated with the labor leverage obtained throughout the company, and lower legal and professional fees as compared to last year. We were also able to leverage some of our selling costs and we expect more leverage in the future.

The 100 basis point increase from last year’s fourth quarter was due to the increase in medical costs and the increase in our bad debt reserve. As a reminder, our bad debt reserving policy is conservative in that we require building a reserve on receivables that increases to a 100% reserve for most balances over 90 days. We have seen increased aging within our receivable balance during the first quarter and our DSOs have gone from 41 at the end of last fiscal year to 44 as our customers stretch their working capital. We were also able to leverage some of our selling costs as compared to the fourth quarter of fiscal 2008 and again expect more leverage in the future.

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

Our effective tax rate was 37.5% for the quarter as compared to 37.3% for the first quarter of last year reflecting reserve requirements under FIN 48. We expect our effective tax rate for fiscal 2009 to be approximately 37.1%. Under FIN 48 the effective tax rate will fluctuate with reserve requirements on a quarterly basis which impacts quarterly net income and earnings per share results.

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

Our balance sheet continues to be strong. Our current ratio improved to 3.75 to 1 at August 31. We have approximately $181 million in cash and marketable securities. The majority of our marketable securities are invested in short-term Canadian government securities and we expect to use these funds for future international expansion. As I mentioned earlier, our DSOs on receivables has increased and has caused our accounts receivable balance to grow.

Our inventory levels have increased approximately $6 million over August 31 of 2007 due to the opening of our new facility services distribution center. This distribution center consolidates our corporate purchases allowing us to better leverage our purchasing power and control location inventory requirements on these items.

Our accrued liabilities increased $52 million over August 31, 2007 mainly due to the elimination of our [VIVA] account which have historically been used to prefund our employee medical costs. A change in tax code has essentially eliminated the benefit of having a [VIVA] in place. As such the [VIVA] trust was terminated and claims are now paid directly out of cash.

Long-term debt at August 31, 2008 was $951 million. Total debt as a percentage of total book capitalization was 29.3%. The majority of our debt is in long-term fixed public debt. At August 31 we had $170 million in outstanding CP which is included in our long-term debt. Using our credit facility we have been able to receive regular funding under our programs.

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

Our capital expenditures for the first quarter were $54 million. Cap ex has increased from the prior year as we are in the process of implementing a corporate ERP system. We continue to expect cap ex for the year to be between $180 million and $200 million. We spent $12 million during the quarter acquiring a few small businesses mainly in document management. We are being very selective in our approach to acquisitions ensuring that the required investment is appropriate. The acquisition pipeline continues to remain active but it is mainly with smaller businesses and our emerging business units.

During the quarter, as Bill mentioned, we purchased approximately 900,000 shares of our common stock at an average price of $28.60 for a total cost of approximately $26 million. We continue to have $202 million remaining under our current share buy-back program.

In summary, we believe we are uniquely qualified to provide value to our existing customers and new prospects. Our businesses continue to grow, generate solid consistent cash flow and are supported by a strong conservative balance sheet. While cautious due to the current economic environment and recent weather conditions, we reiterate our full-year fiscal 2009 guidance of $4.1 billion to $4.2 billion in revenue and fully diluted earnings per share in the range of $2.22 to $2.30.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Andrea Wirth - Robert W. Baird & Co., Inc.

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

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

William G. Gale

Andrea the energy costs and some of the commodity prices, if you recall we talked about in July that we had begun to experience in May and even into June, and we had pretty much built some of that into our plan. The new business really began to trail off I would tell you in the latter part of the quarter and we don’t know whether it’s just a short-term summer phenomenon or what but it is something that we’re going to really keep our eye on very closely. Now what we are doing to anticipate that we may continue to have these higher operating costs going forward and perhaps even slightly lower revenue is the company is very, very aggressive on looking at ways to reduce costs, maintaining a strict control over headcount additions, looking at ways to consolidate our purchasing power with our vendors, and I think we’ve done a lot of things to help offset some of this.

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

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

William C. Gale

The energy costs, we feel pretty good that our plan is probably correct for that. We gave a guidance on revenue of between $4.1 billion and $4.2 billion so t hat right now we see no problem with meeting that guidance given that range. And obviously as we are at the lower end of that range we’ll have to be more aggressive on cost control and trying to maintain our margins. But as we’ve looked at our forecast for the rest of the year compared to our plan and what’s going on in the business, we feel pretty good about it.

Now with that said, obviously with all the turmoil that seems to be going on right now I don’t know what impact that’s going to have on the general economy. We anticipated kind of a gradually improving economy as we went through our fiscal year. Hopefully that will still be the case and we’re expecting it to be the case be it a very modest improvement, but if we go into a deep recession obviously we’ll have to relook at that and monitor the results going forward. We don’t think that’s going to happen but there is that risk out there based on kind of the upheaval that seems to be going on right now.

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

And also along those lines, you had mentioned at least with the core uniform rental growth rate that you had thought the 3% to 3.5% rate was sustainable and actually you possibly thought you’d see some improvement actually throughout the year in that rate as new business does continue to pick up with projects continue to gain momentum. Is that still a possibility and does that kind of lean towards your comments about what happens with the overall economy or I’m just curious just what your thoughts are on the core rental business?

William C. Gale

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

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

Last question on the ad stops. I think you had mentioned on the last conference call that at least the last six weeks before the call the rate of deterioration seemed to stabilize. Is that still the case or are you starting to see a reacceleration in the rate of deterioration in those ad stops?

William C. Gale

That’s still the case. We’re not seeing an improvement but we really didn’t see any significant deterioration.

Operator

Our next question comes from Ashwin Shirvaikar - Citigroup/Smith Barney.

Ashwin Shirvaikar - Citigroup/Smith Barney

Nice performance eon the operating cash flow. But on a year-over-year basis that number did seem to be driven by the accrued liability and accrued comp lines. Is there anything unusual going on in those lines? What drives the fluctuation? And I guess what I’m trying to eventually quantify is the impact on operating profit due to maybe a lower bonus accrual or things like that.

William G. Gale

I would tell you that there was nothing really that happened. The accrued liabilities thing is really offset by the taxes because of the item that Mike mentioned on the [VIVA]. The accrued compensation line is more the result of probably just the timing of when payrolls are made and how many days you have to accrue versus when payments are actually made. For example, August 29 this year was on a Friday and that’s our pay date so the accrual was probably down. But I would say there’s really no significant change in the cost elements of it. It’s just really more a matter of the switch on the [VIVA] between accrued liabilities and income taxes and then just the days on compensation.

Michael L. Thompson

Just a little more color on that. At the end of May we certainly have a larger bonus accrual for year-end bonuses. At the end of August it’s a smaller buildup so the accrual is much lower.

Ashwin Shirvaikar - Citigroup/Smith Barney

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

William G. Gale

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

Ashwin Shirvaikar - Citigroup/Smith Barney

So where we are is really not a surprise?

William C. Gale

No.

Ashwin Shirvaikar - Citigroup/Smith Barney

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

William C. Gale

Yes.

Ashwin Shirvaikar - Citigroup/Smith Barney

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

William C. Gale

We don’t disclose that level of detail Ashwin. As Mike said, the contribution from the recycling of our paper from document shredding did decline in the quarter but that was again anticipated in our projections, in our plan.

Ashwin Shirvaikar - Citigroup/Smith Barney

And last question, M&A. I’m a little surprised you’re not maybe seeing more of a selling alignment by the smaller laundry owners.

William C. Gale

We are not seeing that, not at prices that are reasonable.

Operator

Our next question comes from Michel Morin - Merrill Lynch.

Michel Morin - Merrill Lynch

Sorry to come back to this but on the margin in the document management segment, if we look at things sequentially there is a 160 basis point decline. You didn’t say that it was entirely due to recycled paper?

William C. Gale

No. It was energy also.

Michel Morin - Merrill Lynch

Was there also an impact from the one fewer day there?

Michael L. Thompson

Yes. That’s true throughout all of our segments.

Michel Morin - Merrill Lynch

On the first aid/fire protection side, good performance there. I think over the last six months or so you had talked about having seen some impact from reduced kind of new commercial construction. Has that changed or what has allowed you to see an improvement there?

Michael L. Thompson

It’s really that we have essentially gotten past a year. In fiscal 2008 we had each quarter that we’re comparing to a more difficult quarter in fiscal 07. We’ve now lapped that and then we’ve seen some improvement in our service component within the fire protection business.

Michel Morin - Merrill Lynch

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

Michael L. Thompson

That’s right.

Michel Morin - Merrill Lynch

Is there anything that’s moving the needle from the profitability of that segment in terms of the new installations? Is there a meaningful difference in terms of driving the profitability, because you also have a nice bump up in profitability this quarter?

William C. Gale

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

Michael L. Thompson

Improved purchasing power.

Michel Morin - Merrill Lynch

Finally, you mentioned the weather a couple of times and the impact of the hurricane. It sounded from your description that this might be a more severe impact than what you saw from Katrina, maybe because also you’ve got more population density. Am I thinking about that right?

Michael L. Thompson

No. Again none of that impacted the quarter we’re reporting on; it all began for our second quarter. We just wanted to make sure that people understood we did have some weather issues. It was not as severe as Katrina. The issue with Katrina was many of those customers never came back. We don’t expect that to be the case here but there was an impact in that we had plants shut down for a period of time and still have a few of them down, especially down in the Southwest. But the damage in that part of the country is not as severe as during Katrina so we hope that it’s not as severe.

Operator

Our next question comes from Gary Bisbee - Lehman Brothers.

Gary Bisbee - Lehman Brothers

I wondered if you could remind us. Every once in a while I feel like you’ve given us the rough breakdown of the energy costs, what percent comes from what. I’m just trying to think about with gas and diesel prices having likely fallen sequentially in the next quarter how much of a benefit sequentially that might be? Is it still like 40% of that number you give us is gas and diesel or is it a little different than that?

Michael L. Thompson

For total company now it’s almost half that it’s delivery gas.

Gary Bisbee - Lehman Brothers

And the rest of it is mostly natural gas for the laundry plant but a portion of it energy costs?

Michael L. Thompson

You’ve got a portion of electric there as well.

Gary Bisbee - Lehman Brothers

You talked about the new business being impacted by the economy. How did that trend during the quarter? Did that get worse throughout the quarter? And is that something that’s gotten worse as we’re early in the next quarter or was it just a modest downtick that’s sort of staying at that same level?

William C. Gale

It was more of a downtick that began in August and kind of just was below our expectations in August and had carried a little bit into September but we only have like the first week of September at that level of detail.

Gary Bisbee - Lehman Brothers

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

William C. Gale

The only issue we had was a one-day event. Well, two issues I’d say. Monday apparently it was pretty much impossible to get any commercial paper sold. We’ve seen a slight uptick in the rates. I guess we’ve gone from [RFCP] rates were running around 2.2%. They’re now up to about 2.8% but we’re able to sell our paper as things roll. Monday was about the only day that that did not happen but after that the market seemed to have stabilized.

Michael L. Thompson

And with that we have certainly supporting under our credit agreement that we have support behind that.

Gary Bisbee - Lehman Brothers

Well, I guess I’ll take the blame then. It was the Lehman issue it sounds like.

William C. Gale

It’s good to hear you’re on the call though Gary.

Gary Bisbee - Lehman Brothers

Yes. We’ll soon be Barclays Capital I think but we’re still in business or back in business I should say.

William C. Gale

That’s good to hear.

Gary Bisbee - Lehman Brothers

Thank you. And one last question I’ll ask. You mentioned the cash in Canada again and specifically holding that for international acquisitions. Any update how you’re thinking about that? Is the document management business in Europe going well? Is that still an area you’d like to do more?

William C. Gale

Yes. We’d like to do more there. As we mentioned in the last call, we’re looking at providing direct sale of uniforms to many of our US based companies as they expand outside of North America. We’re working with them on that. So yes, we’re working on a number of opportunities. Nothing that I can announce at this point but we feel that there are several good things going.

Operator

Our next question comes from Greg Halter - Great Lakes Review.

Greg Halter - Great Lakes Review

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

Michael L. Thompson

I would say it still continues to be difficult. We are still getting some price increases but not out of line of where they’ve been historically. But I’d say overall new business pricing continues to be pretty aggressive.

Greg Halter - Great Lakes Review

Bill, I think on the last call you had indicated that some parts of the country were still okay and others weren’t so good. I wondered if you could give us just a brief rundown and obviously I know it’s a big country and so forth, but I wondered how you’re doing in areas of the country as well as Canada. What’s good and what’s bad?

William C. Gale

Canada’s pretty solid. I would tell you Canada looks good and that we really haven’t seen a lot of impact up there. Throughout the US I’m seeing generally the greatest weakness continuing to be in the Midwest and in the areas that really seem to be very sluggish like the Southeast now with Florida and all the problems that are going on out there. The West continues to be a little bit difficult to do business in. The Northeast has held up pretty well and the Northwest has been good. But it continues to be a Midwest issue primarily.

Greg Halter - Great Lakes Review

You mentioned the ERP implementation. Can you mention how long that will take, how you’re phasing it in, and then who’s system you’re using?

William C. Gale

I do not want to disclose the system at this point. We’re still kind of in the early stages but it’s going to be a multi-year project. The way these things work is you pay a significant part up front so I don’t want everybody to think we’re going to be incurring big charges every quarter. But Phase 1 is a relatively safe phase in that we’re going to be looking at our financial systems and we would hope to have a conversion of that here within 12 months. And then we’ll phase in the other pieces of the business over the next couple of years.

Greg Halter - Great Lakes Review

Any idea on total costs for that implementation?

William C. Gale

I’d rather not say at this time because you know how those things go. It varies. We’re still in the scoping phase and stuff so it’s hard for me to say that right now.

Greg Halter - Great Lakes Review

There was an interesting intriguing win last week relative to Unite and I wondered if you could speak about that?

William C. Gale

Yes. I’m glad you brought that up Greg. What happened on the Unite Union front is that a federal appeals court basically sent back to a lower court and reaffirmed a ruling that Unite was going to be held liable for privacy violations impacting I think approximately 2,500 of our partners in the Northeast and has affirmed a penalty against Unite of about $5 million as well as asked the lower court to reconsider that punitive damages might be in order. So it was a win for our partners who filed this suit against Unite indicating that Unite did violate their privacy rights.

Greg Halter - Great Lakes Review

That sounds like it’s very favorable there. On the energy side, we’re hearing Cleveland as you know, here in Cincinnati and we did see the gasoline prices and diesel come down. Gas was down to maybe $3.50. Since the hurricane we’re back at about $4.00 which is our peak. So really there has not been much relief from gasoline prices here at least in the Midwest. I don’t know if you can speak to that relative to your business around the rest of the country.

William C. Gale

I think that’s prevalent throughout the country Greg. Again, it is something that we kind of anticipated in our plan and when we gave you our guidance. We would hope that prices would come back down to where we saw they were coming or going to before the hurricanes hit. And that could present a little bit of an opportunity for us the rest of the year. It’s so hard to predict that. This whole oil market and gasoline and diesel and natural gas are just unbelievable and the volatility. So we’re prepared for it and I think our numbers anticipate a high degree of cost and maybe there’ll be a little upside opportunity if we can get a break here.

Michael L. Thompson

I think Greg if you remember back in our year-end call, prices were just starting to come down and we thought there might be an opportunity going forward because the way we projected using May and June levels. But now as you indicated and we agree, the levels have come right back to those May and June levels.

Greg Halter - Great Lakes Review

One last one. I see that Wyndham Hotels is introducing green uniforms made out of recycled polyester fibers and I guess you guys are working on that. I wondered if you could comment on that initiative?

William C. Gale

Certainly we’re working with our customers on a number of different things. That was one that Wyndham wanted to publicize. I believe that release may have just gone out by them. Green products and green servicing is a major point of several customers now, and to the extent we can help them with their initiatives we’re doing that. We’re also trying to do that internally with our own company. We’ve modified our wash chemicals to be more environmentally friendly. I think it’s important that we do be good corporate citizens and do what we can do to help in these situations. So we’re trying to do a lot in energy conservation which not only will help costs but obviously will also help minimize the use of energy. So I think every company needs to look at what they can do and see if they can do things that are economically beneficial.

Greg Halter - Great Lakes Review

And Wyndham I presume is a direct sale customer?

William C. Gale

Yes. Obviously as a hotel chain, they primarily are purchase uniforms from us but this new product that we’ve developed with them or are developing with them potentially has the capability of being laundered more in an industrial process as opposed to in a dry cleaning process. That’s one of the things that we’re going for. So this could present more of a rental opportunity for us if we can get this thing rolling.

Greg Halter - Great Lakes Review

Any differential on the cost on this versus regular?

William C. Gale

Greg, I really don’t know. I’m not familiar enough with the details of that.

Operator

Our next question comes from Scott Schneeberger - Oppenheimer & Co.

Scott Schneeberger - Oppenheimer & Co.

You said earlier in the call I believe that your bad debt you felt comfortable that you were conservatively reserved there. I saw DSOs creep up a bit. Could you just give us a feel of how confident you are there? What are you hearing from customers at 60, 90 day delinquents? How are those metrics tracking, just so we can get a better feel there?

William C. Gale

As some of you know and I think you do, we are very, very conservative and we require starting to reserve for a receivable once it’s 30 days past due and once it gets 60 days past due we even reserve more to the point where as Mike said most of it is fully reserved at 90 days past due. And the whole reason we do that is to keep the focus of our operating people that are spread of course all over the country on the need to collect the money for the work that they’re performing. It is a focus that hopefully our operating people will do and we’ll continue to monitor the collections.

What we have seen over the last couple of months is certainly a tendency on the part of many of our customers to just be slower in the payment of their receivables and as a result of that we are reserving accordingly. Now I will tell you that the vast majority of our customers are relatively small-type companies. We do not have any significant receivables sitting out there from a major customer that we need to worry about. That’s not the case.

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

Now we’ve got leverage on that and obviously we’re not going to allow a customer to continue to build up a receivable and provide services if they’re not paying. So I have no concerns that we’re going to see a significant increase in write-offs and I would hope that as things stabilize a bit we’ll get back to our more traditional 40-day DSO outstanding. I think this is hopefully just a temporary situation.

Scott Schneeberger - Oppenheimer & Co.

Just more broadly for the upcoming quarter, any one-time items or things we should be thinking about that haven’t come up?

William C. Gale

No. Not that I can foresee.

Scott Schneeberger - Oppenheimer & Co.

Finally, if you could give us an update on the international initiatives that you have going and just any progress there; is that something you’re going to speed up or perhaps just your overall take currently?

William C. Gale

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

We have picked up additional sales activity albeit it’s relatively insignificant to the total in Macao and Hong Kong as we service our gaming customers that have now built facilities in Macao. We also have looked at some opportunities in Latin America with regard to some direct sale efforts, and we’ve got some things going there.

And we continue to evaluate acquisition opportunities in document management throughout the European area including the UK. At this point we have nothing to announce but we have people working on it, looking at things and we just want to be sure that we don’t make a bad investment. So as we always have been, we’re very cautious on that. But I’m hopeful that we will be able to expand a bit more outside of North America, that some of these things will come to fruition here in the not-too-distant future.

With that said, keep in mind that we do not anticipate having a material or significant amount of revenue outside of North America in the near term. This is going to be a gradual build up. Some of it will be being pulled by our customers and others will be initiatives like we did when we bought the company in the Netherlands about a year ago.

Michael L. Thompson

And likewise we don’t see a big infusion of capital. Most of this that we’re talking about are small businesses from a shredding standpoint or a direct sale business where it’s more sourcing.

Operator

Our next question comes from Shawn Barnes - Edward Jones.

Shawn Barnes - Edward Jones

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

Michael L. Thompson

We have seen a change in our mix of customers over time mainly as manufacturing companies have moved offshore. Certainly as we’ve sold more products and services across the breadth of our company, the uniform base is coming down but as far as mix within that there’s certainly more of a move to the service economy so to speak and consumer facing type customers. But not dramatic over the last six months to a year.

William C. Gale

Shawn, I don’t think it’s any different. I think it’s kind of the trend that we’ve been seeing for the last four or five years probably.

Shawn Barnes - Edward Jones

You mentioned the headcount controls. I was just wondering if you could give us a little bit more color in terms of where you’re looking to really implement that plan?

William C. Gale

We are looking across the board. We look at of course all of our G&A areas to make sure that what we are doing is of value to the company. So we’re looking at initiatives there. We’re doing things in our IT, information technology, area to improve productivity of our people and therefore reduce the overhead of G&A. The sales structure, I think we mentioned at the last call. The organizational structure we had in place for the new Project One Team initiative. We’ve reassessed that and tweaked that a bit such that we don’t need to have as much of a management structure as we once thought we would have. In all of our facilities, we’re evaluating the jobs that people are doing to make sure that they continue to add value to our customers.

Nothing goes unturned. Everything is being looked at to ensure that it has value added and that it is something that the customer sees and is willing to pay for or meets compliance criteria that as a company we’re obligated to perform.

Michael L. Thompson

And we’ve really seen that leverage across all areas. We haven’t seen just corporate overhead go down or delivery or what have you. We’ve seen some improvement in most of our labor lines because of that.

Shawn Barnes - Edward Jones

One last thing. I might have missed this in terms of housekeeping. In the direct business, what were the organic sales?

William C. Gale

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

Operator

Our next question comes from Michel Morin - Merrill Lynch.

Michel Morin - Merrill Lynch

On the DSO front, are we as close as the top or highest that you’ve ever seen at 44 days? It seems as though it might be. Am I right on that?

William C. Gale

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

Michel Morin - Merrill Lynch

So it potentially could stay or maybe even increase a little bit. And what about bad debt? When you look at the 20 basis point impact you just had overall in terms of where you’re reserved today, how does that compare to the worst of the last downturn?

William C. Gale

I can’t recall exactly but I’d say it’s still better than it was probably in the last big downturn.

Michel Morin - Merrill Lynch

So it’s reasonable to think that these two things could still be a little bit of a drag if the economy remains a little bit soft here?

William C. Gale

It could. Absolutely. If the economy remains soft or it gets very, very soft, it’s going to have an impact on us. But again I think we’re a little bit protected on that from many other companies in that we’re providing a service that is necessary and needed, and we often are able to use that as a clout to get paid before maybe some other people get paid.

Michel Morin - Merrill Lynch

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

Michael L. Thompson

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

Michel Morin - Merrill Lynch

And just to clarify, you said the workday.

Michael L. Thompson

The workday would have been adjusted for.

Operator

And it appears that that is all the questions that we have at this time, so I’ll turn the call back over to Mr. Gale for any additional or closing remarks.

William C. Gale

Thank you again for joining us tonight and we appreciate your interest especially in light of this week’s upheaval in the markets. I just would leave you with a couple of thoughts. Cintas is generating a lot of strong cash, our businesses are very solid, and we’ve got a great balance sheet. So we’ll weather this upheaval very well and I hope all of you all are able to do the same. Thank you again. We look forward to speaking with you during the week of December 15 we anticipate when we report our second quarter results.

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