Cintas Corporation
Q1 2010 Earnings Call Transcript

Published: 24 Sep 2009

[Operator:]

Good day, everyone and welcome to the Cintas quarterly earnings results conference call. As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Mr. Bill Gale, Senior Vice President of Finance and Chief Financial Officer.

[William C. Gale:]

Good evening and thank you for joining us as we discuss the first quarter of fiscal 2010. Joining me this evening is Mike Thompson, Cintas' Vice President and Treasurer. The company today reported revenues and net income in line with its plan for the year. Due to the severe economic downturn that began about one year ago, we believe comparisons to last year's first quarter are not as meaningful as they would be in a more normalized environment, therefore in addition to providing comparative data to the same quarter last year, we also have shown comparative information in the release to our fourth quarter of last fiscal year. We believe this provides investors a better understanding of the trends in our various business units. While revenue declined 11% from the first quarter last year, it increased 1.5% from the fourth quarter. This year's first quarter had one more workday than both the first and fourth quarters of last year. Adjusting for the workday difference, this year's first quarter revenues were flat with the fourth quarter. Earnings per share were $0.35 this year, but when you exclude the previously announced legal settlement on wage and hour litigation, earnings per dilute share were $0.43. This compares to the $0.51 in last year's first quarter and $0.38 for the fourth quarter, excluding the various special charges. The fourth quarter charges amounted to approximately $0.35 per share. While job losses have moderated recently, they still remain negative. In the past 12 months the U.S. economy has shed approximately 6.0 million jobs, including about 1.0 million jobs during our first quarter. These job losses have impacted our customers' business activity significantly. We believe that visibility remains unclear as job losses in the U.S. economy are expected to continue. As a result, we are unable to provide any meaningful guidance at this time. Until employment stabilizes, which government officials and most economists currently believe may not happen until mid- to late-calendar 2010, our revenues, adjusted for workday differences are expected to be comparable to the previous sequential quarter. We suggest that analysts be cautious with their estimates for the foreseeable future. We continue to proceed cautiously with discretionary spending and we are aggressively managing our cost structure. As a result, despite the top line pressures, our margins remain strong and our cash flow has been excellent. Our balance sheet has continued to strengthen, with a debt to capitalization ratio of less than 20% and we currently have over $350.0 million in cash and marketable securities and no short-term debt. Despite the most serious economic downturn since the 1930s, our businesses remain profitable and strong cash flow generators. We expect a resumption of revenue growth in all of our businesses once the economy stops shrinking. Acquisition opportunities remain plentiful and we believe activity could increase as valuations become more reasonable. Opportunities also exist to further expand our presence outside of North America. We appreciate all of the outstanding efforts our employees have made in taking care of our customers and controlling costs. The commitments made by our employees have helped Cintas weather this economic downturn better than most companies. Such actions have resulted in positioning Cintas for enhancing the long-term value for our shareholders. As a reminder, the Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC, as well as in the press release issued today announcing Cintas' first quarter fiscal 2010 results. I will now turn the call over to Mike Thompson, who will discuss this quarter's results in more detail. We will then be happy to answer your questions.

[Michael L. Thompson:]

Total revenues for the first quarter of fiscal 2010 were $891.0 million, 11% decrease from the first quarter of last year. This decrease was mainly due to the significant job loss and difficult economic environment over the last 12 months. However, when comparing to the fourth quarter of last year, as Bill mentioned, revenue increased 1.5%. There was an additional workday in the first quarter of this fiscal year. When adjusting for the additional workday, revenue for the first quarter was flat as compared to the fourth quarter. Also, while total company internal growth was negative 13%, it was the same rate as the fourth quarter of fiscal 2009. Market conditions remain difficult but we have seen some moderation in job loss and stabilization with our customers. This quarter had 66 workdays. As a reminder, work days by quarter for the rest of this fiscal year, are 65 in the second quarter, 64 in Q3, and 66 in Q4. Each quarter in fiscal 2009 had 65 workdays. The Canadian exchange rate increased slightly from May 31 to August 31. The negative impact on this quarter's revenue was minor. We classify our businesses into four reportable operating segments

[Operator:]

(Operator Instructions) Your first question comes from Vishnu Lekraj – Morningstar.

[Vishnu Lekraj:]

Looking here at your margins, they seemed to have improved over the quarter, and over the past half year. Looking at your uniform rental division, how are you going to approach that currently? Do you plan on keeping consolidating stops or do you plan on keeping them as they are so when the economy turns around you will be in a position to increase stops?

[William C. Gale:]

We will intend to keep our routes operating very efficiently but we have a lot of flexibility. So in a particular location, if we get a major new customer, we can very quickly adjust our route structure to handle any increased new business. So at this point in time, I would say that due to the way that we have basically structured our current route system, the fact that we have so many routes in every particular geographic area, we are able to fairly quickly respond to changes in business environment and keep the routes fairly efficient.

[Vishnu Lekraj:]

One more question related to your customer base. Given the deep struggles of certain industries during this recession and the reduction in employment levels for these industries, how has the mix in your customer base changed, if at all, in the last year or so?

[Michael L. Thompson:]

It has certainly become less concentrate manufacturing, but again, you haven't seen a significant change in the percentages, just because the timing's been too quick and relative job losses has impacted all of our customers to some degree. Certainly more of the industrial, heavy-soil-type customers have been hurt a little more, although in certain areas like energy and utilities they've still done okay. So, it's kind of a mixed bag but certainly manufacturing is a lower percentage than it was.

[Vishnu Lekraj:]

So if you expect manufacturing to come back a little slower than the rest of the industries, how do you plan on growing your revenue in pace with GDP, I guess, with an increase over the next couple of years.

[William C. Gale:]

Well, we're going to do it two ways. First off, we are very aggressive on trying to take additional market share from our competition and we believe that our dedication during this downturn to continuing to take care of our customers will benefit us as we go forward and allowing us to take some of that market share. But the other thing we're doing, and we have been doing this for the last couple of years, is developing products that are desired by the sectors of the economy that will probably resume growth in the not-too-distant future, primarily in the service businesses. And so we believe that product development will be appealing to those wearers and in addition to that, we've mentioned this a couple of times, we have been aggressively producing garments that are like and more suitable for women and we have been very successful in converting many non-uniform women wearers to the new products that we have. So I think all those things together will enable us to probably be the highest grower in the uniform business in the long term going forward.

[Vishnu Lekraj:]

How about flat wear? Do you plan on maybe moving more into that area at all?

[William C. Gale:]

I'm sorry, into what?

[Vishnu Lekraj:]

Bed sheets and napkins and things of that nature.

[William C. Gale:]

No. No, we do not intend to move into what we call the linen business, that we really aren't interested in. We do some linen—we classify some of our products as linen but it's primarily aprons and towels and that sort of thing that are used in the restaurant industry. But as far as like tablecloths and sheets and stuff, we have no interest in that right now.

[Operator:]

Your next question comes from Nathan Brochmann - William Blair & Company.

[Nathan Brochmann:]

I was wondering if you could expand a little more on some of the trends, intra-quarter. Certainly you seem to be bucking the trend a little bit and you're starting to see some stabilization. Your numbers align with some of the macro trends, but what are you doing in terms of some of those 4 points—if you could provide any specifics—that's helping you produce some pretty solid numbers in the rental business. In terms of new customers, adds, and pricing.

[William C. Gale:]

I think it goes back to a couple of the things I was talking about just previously to Vishnu. I think that we have been very focused with all of our service providers to ensure that they take care of their customers, even though they may have fewer wearers than they did a year ago. And one of the things that we didn't want to do was have, in a spirit of trying to reduce costs, to the point where we hurt our customers by not replacing uniforms when they were needed, by not being consistent on delivering the right product at the right time. So I think that has helped us. I think it also, given our broad spectrum of products and services, we've been able to identify other cost-saving measures for our customers by providing them items from maybe our facilities services business that would be cheaper than them doing it themselves or perhaps another provider that they may be using. So I think those actions have enabled us to basically retain business to the extent we could, in a very difficult environment, and even in some cases increase the amount of business we had with certain customers. I won't downplay the fact that I think a lot of the products that we're offering, as I said earlier, to employees in the service business into female workers, have also helped us to continue to penetrate our customers' business and have helped the top line.

[Nathan Brochmann:]

And how about pricing? I mean, it seems pretty unique in terms of starting to get a little pricing back, in terms of one of the four things you mentioned. Could you talk a little bit about that?

[William C. Gale:]

Pricing is still a difficult environment but I think that we have selectively found opportunities to convince customers when prices need to go up and we've been able to do that. But there is no question that we still are in a very competitive situation and will most likely continue to be that way for the foreseeable future. But I think if you treat your customers right, you can demonstrate, when you need a price increase that you can get it.

[Nathan Brochmann:]

And maybe turning to the margin side a little bit, obviously you have been very aggressive in terms of kind of right-sizing your business for the current environment. Do you feel that that's pretty much over and we're right size for the current trends and kind of, as you alluded to, not providing specific guidance but in your initial remarks saying that assuming that the environment were to continue to stabilize, that we should see similar sequential results, a.k.a kind of the margins being maintained as where they are in the first quarter?

[William C. Gale:]

As we have said before, if we could just get stabilization—we felt that stabilization in the workforce in the is country and in Canada—that we would begin to be able to achieve more consistency in our margins and obviously better results. And I feel that as long as that continues to happen, if the trends that we saw in the latter part of our first quarter continue to get just a little bit better, so that we're at a point where we're not losing jobs, yes, we believe we have right-sized the organization for that. Now, we're going to still always work on ways to improve our efficiency and we still have the opportunity in front of us that when employment starts growing again and as a customer adds one employee to their work site—instead of delivering seven sets of uniforms, we're not delivering eight sets of uniforms—that additional uniform wearer is going to be very profitable for us because there's really not a lot of added cost. So our expectation certainly is going to be tempered by what happens in the overall economy, but I feel much better today than I did, say, six to nine months ago.

[Operator:]

Your next question comes from Andrew Steinerman - J.P. Morgan.

[Andrew Steinerman:]

I need some clarification on thinking about the four components of internal growth, year-over-year versus sequentially. Internal growth year-over-year in the fourth quarter for rental was 9% and year-over-year in the first quarter I heard you say 10.5%, so the year-over-year internal growth got worse year-over-year as you compare sequentially. But you said that pretty much all four metrics got better. Could you pull that all together for me?

[Michael L. Thompson:]

Just remember that when you talk about current metrics, those metrics affect you from this quarter forward, and really what your revenues are doing are going back four quarters. So, when you play that through the cycle, we certainly had an improvement in this quarter but that doesn't completely play through your financial statements because you still have a lot of weekly volume going back a year, so to speak. Those metrics are covering weekly increases.

[Andrew Steinerman:]

Right. But when you said the four metrics improved sequentially, did you mean the fourth quarter versus the third quarter or did you mean year-over-year there was improvement.

[Michael L. Thompson:]

First quarter versus the fourth quarter.

[Andrew Steinerman:]

Right. And usually when we talk about those metrics we usually talk year-over-year, right?

[Michael L. Thompson:]

No, we talk sequentially typically for those measures.

[Andrew Steinerman:]

On shredding, or document management business overall, I think you gave internal growth with paper. Could you give us the trend if you looked at the service business by itself there?

[Michael L. Thompson:]

The service business internal growth was 13%. That excluded the paper, versus 17% last quarter.

[Operator:]

Your next question comes from Vance Edelson - Morgan Stanley.

[Vance Edelson:]

You mentioned plentiful acquisition opportunities and possible international expansion. I'm just wondering what some of your parameters would be when you start looking over what might come along and what makes international an attractive avenue for growth, versus plowing money back into the U.S. And then a follow-up on that would be how much of your balance sheet are you willing to use for acquisitions, what do you consider a comfortable level of cash? I take it you would use the Canadian cash first, so the amount you have there, is that a good guideline for the amount that you might ultimately use for acquisitions?

[William C. Gale:]

You have a lot of questions in there and some of the things are so specific I couldn't give you an answer. Let me talk in some general terms. You know, our strategy has been, in the U.S. and in Canada, to always look for acquisition opportunities to help fill out our geographic presence in all our businesses. We are still doing that, filling out that geographic presence in our fire and in our document management business, and we'll continue to do so. We will evaluate opportunities as they present themselves to make sure that they meet our criteria for our various hurdle rates, etc. Now, we have also been, over the years, aggressive in determining whether there were some strategic acquisitions in our businesses that helped in markets that we're at. A good example of that was Van Dyne Crotty we did a few years ago, where we bought a very good company that had business in most of the markets where we were and it really enhance the profitability of those markets by picking up a lot of new business. And we will continue to look for those. Up until this point and time, over the last couple of years though, there hasn't been, I don't think, a reasonable expectation on the part of the sellers with regard to the value they were wanting to receive and therefore we haven't really made any acquisitions in that area. Now, with regard to overseas, you know, our focus has been to proceed cautiously. We bought our first document management company in Europe a couple of years ago. We followed it up with another acquisition in Germany this past winter. We are very happy and pleased with the results of those acquisitions and we are looking overseas to continue to expand that presence in that business, as well as look at opportunities for some of our other businesses. Surely the Canadian cash is going to be a big part of the capital that we use to acquire those businesses, but we're not limited by that. Because we also believe that with some of our borrowing capability and our commercial paper market that we can access, etc., that we can make a bigger acquisition if the right opportunity presented itself and we would do that. As far as our comfort level, we have always claimed, and we have demonstrated, that given the cash nature of our businesses, it's very easy for us to leverage up the balance sheet to go up to 35% to 40% on a debt to cap basis, because we can quickly pay that down through our businesses. So I would say if the right opportunity came along, we would have no qualms in borrowing the amount of capital necessary to make the right acquisition, you know, in any of our businesses, either here in North America or in some of the selected businesses outside of North America.

[Vance Edelson:]

Additionally, sort of a twist on a question already asked, regarding any additional cost cutting. Granted, you are always looking for improved efficiencies, but in terms of right-sizing for the current conditions, it sounds like based on the flexibility of the routes and so forth, you can continue to cut costs as needed and we're not going to get a point where you say, okay, we can't cut any more, or we don't want to cut any more, because the rebound is eventually coming. Does that sound fair?

[Michael L. Thompson:]

Yes, that's very fair. We can certainly right-size our organization in either direction. The nice thing is we've been at these various levels not too long ago because we have been a growing company in the past and expect to be again in the future. So we certainly are looking at our cost structure very carefully. We want to be able to exploit any opportunities that come available. Certainly, they've been fewer and far between over the last 12 months, but hopefully with the situation going from bad to not-as-bad, and with jobs hopefully it's going to turn to flat, and then positive, we certainly do not want to get behind and not have the ability to grow, and we believe we have sufficient capacity to do that in our operating plants and we can manage our route structure appropriately.

[Vance Edelson:]

On the medical costs, you mentioned a significant increase in plan usage. Is there anything that would explain that or is that just likely an aberration?

[William C. Gale:]

We're continuing to analyze it. I would tell you that our first quarter medical costs tend to be some of our highest quarter anyway, but the other phenomena that may be happening here is that due to the reduction in our workforce, we're finding that many of the employees who have left Cintas are continuing to remain on our medical plan, and we're self-insured. And under some of the new government inducements for people to remain on COBRA, where the government is providing some of the sustenance for that, we think that there may be an increased usage of the medical benefits on the part of former employees who are still within our plan. So we are going to keep analyzing that. I'm not sure if that's the total reason, but from a dollar perspective, that seems to be a logical explanation based on what we're able to tell right now.

[Operator:]

Your next question comes from Gary Bisbee - Barclays Capital.

[Gary Bisbee:]

The gross margin is up nicely, sequentially. Is part of that due to the extra work day or is that just more revenue and it flows through the same margin?

[Michael L. Thompson:]

A light bump for the extra work day but it's mainly from the cost-saving initiatives and the solidifying of the revenue.

[Gary Bisbee:]

And so now that you're sort of a full quarter past the big cost moves, should we expect any further incremental improvement or unless things get worse and you decide to keep cutting, is this sort of a good baseline level to thing about?

[Michael L. Thompson:]

No, we think our margins will get back to more historical levels if revenue stays stable. And also, a big component of that is job loss. Because when you lose existing customers or individuals at existing customers, it's pretty expensive. So until that becomes flattish, it's very difficult to improve margins. But, it was easier over the last three months than it was the previous six to that, because there was some stabilization. That certainly helps in that regard. Do we think there is certainly more to go? Yes, we think margins can improve from here, if revenue remains at these levels or goes up. But again, you've got to look at the mix. If there's a significant amount of job loss in there and a significant amount of new business, well then that's more difficult because you're losing a very profitable business and injecting expensive business. So it comes down to mix a little bit, but certainly this quarter was an improvement.

[Gary Bisbee:]

So if I think about the impact in November and then again in February, when I believe you have one less work day, sequentially, each quarter, can we maintain this type of margins based on the cost cutting you've done, or are they likely to fall because unless your organic growth changes dramatically, revenue likely drifts lower with the one less work day.

[William C. Gale:]

The point that you need to factor in is really the reduction in the revenue because of the less work day. So the impact on the margin percent isn't going to be all that significant, all else being equal, given what Mike said. Now, that's a very important factor, what Mike said. But I think the thing that we would caution you, those of you who put out estimates, is to be sure that you factor in the impact that that lack of revenue has in a 64-day work day quarter versus a 66-work day quarter. Because that basically falls almost all the way through to the bottom line. So just be very careful as you put your estimates together. I wouldn't worry so much about the percentage of the margins themselves. That's not going to be all that significant.

[Gary Bisbee:]

So is 42.9% consolidated gross margin a reasonable number, if nothing else changes dramatically, to think about over the rest of fiscal 2010?

[William C. Gale:]

Well, let's be realistic. Obviously it is an approximate number but things are going to change, because things do change. We have hanger price fluctuations, we have energy, we have utilization of various facilities. But generally speaking, it may improve, depending on what the mix of the business is. But it's probably a good basis on which to start.

[Gary Bisbee:]

I just wanted to probe the comments around the components of organic growth, but the one comment I think that Mike made was you've done a better job of identifying opportunities within customers. Can you give us some sense, are you trying to figure out which customers businesses are growing and focus on them, or is it much more hammering home, trying to get cross-sell? What's driving that improvement?

[William C. Gale:]

All of that. Basically, you go into a customer and you look for are there people working in jobs that should be wearing uniforms that maybe for one reason or another are not wearing uniforms. And just working on getting those people into the uniform. You look for the entrance mats, the hygiene services, bringing in potentially some first aid or fire business is always an opportunity. I think we are trying to help our service providers become sales people and look for the opportunities to enhance the business that they have with their customers by looking at the full spectrum of products and services that we as a company are not offering. And I think that as they are interested in taking care of their customers and making sure that their paychecks stay at levels that will sustain the life style that they want, that they're adopting that and they're realizing that customers will take on some additional products and services because it will benefit the customer as well as the service provider and Cintas as a company.

[Michael L. Thompson:]

A lot of that is certainly focus. When you are growing substantially your route professional is trying to take on a lot of new customers, balance out what he's doing. Well, in today's environment that taking care of the customer certainly means go in and make sure that we're doing everything we should be for them. And by rerouting and making sure people understand their customers and really have that focus of where is the rest of the business, that is a very important point. Versus in a heavy expansion mode you want to be able to do both but the reality is sometimes in these situations it gives you the ability to go in and focus on your customer, prove to them that you can continue to support them sufficiently, thanks to our balance sheet and cash flow, etc., but then also while you're there, identify those opportunities that sometimes you pass up in the past.

[Gary Bisbee:]

The comment on positive add/stop sequentially, obviously not year-over-year.

[Michael L. Thompson:]

It's year-over-year, too, because all of last year it was a stop ratio versus an add ratio.

[Gary Bisbee:]

And so how are you doing that in light of continued job losses for the economy?

[Michael L. Thompson:]

It's what we just talked about.

[William C. Gale:]

It's focus. And you make sure that you have the right product offerings.

[Michael L. Thompson:]

There are still job losses going on. The difference was that we've been more successful at finding other adds within our existing customer base to offset those losses that are certainly still coming through the economy.

[William C. Gale:]

And with that said, though, we are going to be very careful here. We don't want to predict that that's going to continue for the rest of the year. We hope it does, but it's just a very difficult—and continues to be a very difficult environment out there. And I think that we have to proceed very cautiously as we go forward, just to make sure that what we are sensing maybe as the beginning of a recovery, we hope that really will be sustainable going forward. So we just want everyone to realize that while we are somewhat encouraged by what we've seen in our first quarter, we're certainly not back to the growth that we saw a few years ago. And we just hope that maybe this trend will continue to expand across the country and go forward for the rest of our fiscal year and beyond.

[Gary Bisbee:]

I didn't hear what the Other Service, in aggregate, organic revenue growth was.

[Michael L. Thompson:]

Because I didn't give it. Other Services, internal growth, for the quarter was negative 18%.

[Operator:]

Your next question comes from Analyst for Ashwin Shirvaikar – Citigroup.

[Analyst for Ashwin Shirvaikar:]

I wanted to drill down on some of the ancillary segment. Saw some nice sequential improvement in margins in direct sales and in first aid. Do you think margins in those segments can improve sequentially without any notable revenue increase?

[William C. Gale:]

I wouldn't say without a notable revenue increase. I mean, there could be some slight improvement. But I think the opportunity we have is we are continuing to see the service and purge revenue in document management improve and increase. That is continuing to grow. And we've always said that as we fill out the size of these operations from around the country to have a bigger mass, they'll be able to absorb more of the fixed costs and thus improve the margins. So that will certainly help. Regarding the direct sale business, that's a tough business right now. It's still very much focused on the lodging and gaming institutions. I'm not sure yet whether or not we can see a lot of opportunity there without revenue growth, but when revenue growth comes back that will certainly help offset some of those fixed and semi-fixed costs. First aid and fire, we will continue to see improved margins on the first aid side. And the fire, as we expand around the country to develop the national footprint, you're going to have growth in some of the operations that are maturing, but some of the new operations are going to be a bit of a drag. So that one is going to be a little bit more neutral, probably, in the foreseeable future until we get the national footprint developed.

[Analyst for Ashwin Shirvaikar:]

On capex, do you have any projection for your capex?

[William C. Gale:]

We're not really providing any guidance at this point on capex either, although I would tell you that what you saw in the first quarter is probably the rate that we're going to spend throughout the rest of the year.

[Operator:]

Your next question comes from Andrea Wirth - Robert W. Baird & Co., Inc.

[Andrea Wirth:]

Wondering if you could just talk a little about the guidance suspension and when we should expect you to reinstate that. Obviously things do look like they're getting a little bit better. I understand your caution, but Bill, you did say once the economy starts growing again, or stops shrinking, you should actually see some growth, and by all accounts the economy is expected to start growing next quarter. So again, I understand the caution, but what do you really need to see to get that confidence to reinstate the guidance?

[William C. Gale:]

First off, I'll take a little issue with you. I hope you're right on the next quarter that we'll see growth, but we'll see. I don't know. It's a big item of discussion here. Right now there is just obviously is a lack of visibility. I guess we will certainly give it consideration when we are more confident in our ability to predict the future. We got away, several years ago, from this quarterly guidance. We went to an annual guidance. We don't believe we'll ever resume quarterly guidance because we think that's there's just too much difficult in doing that and probably too much attention paid to it. So I would tell you that once we have a comfort level within the entire company, we will give it consideration to resume guidance. I can't guarantee when that will be but we will continue to look at it.

[Andrea Wirth:]

And looking at your overall headcount, I believe last quarter you mentioned it was down 12%. Is that still roughly where it's at?

[William C. Gale:]

Yes, it is.

[Andrea Wirth:]

And specifically your sales force headcount, is your sales force headcount up, down? How do we think about where your sales force is and have you started adding to that yet at this point?

[William C. Gale:]

We're adding in selective situations.

[Andrea Wirth:]

You had mentioned that one of our expectations to try to grow the businesses, you try to aggressively try to take market share. Can you address a little more specifically how you intend to do that? I know you did mention that you're trying to add specifically within existing customers but how do you really aggressively go after market share, aside from pricing? And do we need to worry that pricing is something that is going to weigh on margins going forward?

[William C. Gale:]

We don't to become an aggressive price gouger, to go out and try to do it that way. We look at it as opportunities when contracts come up for renewal, we make sure that we know when that is happening, that we are able to present our case to the prospect, demonstrate why Cintas' products and services are better than what their incumbent was. We meet price competition if it makes economic sense for us to do so. And I think we find that a lot of times that once the prospect understands our service system and the types of products we can get and our reputation, we win many more of those than we lose. So I think we'll just continue to do that.

[Michael L. Thompson:]

In addition to that, service is very important and certain competitors falter with service levels due to the economic times and having issues of upgrading garments, etc. We certainly are looking at the ability of taking over those customers, when it makes sense and those customers look for a change. So certainly service and reputation is very significant in this market.

[Andrea Wirth:]

On the direct sale business, just looking at the operating income, it was up about $6.0 million sequential, but revenue was actually down. Just wondering, want to understand specifically what happened there, and is it now the kind of sustainable level of operating income, in the direct sale business, assuming that revenues are able to kind of be sustained at this level?

[Michael L. Thompson:]

It's difficult to say for that business because it is so choppy and you do need some level of revenue on a monthly basis to cover those fixed costs that Bill talked about earlier. Certainly we did a lot of right-sizing within that organization and certainly are looking at inventory levels very closely to ensure we don't get ahead of ourselves with products on the shelves that then become obsolete due to downturns in revenue levels. And that certainly had some impact as we aggressively manage those inventory levels. So it's difficult to answer that question completely because that business is choppy. But certainly we have kind of gotten through the difficult couple of quarters with that. We hope that if the revenues remain at this level that our margins can stay where they are or go up a little bit.

[Andrea Wirth:]

So you would probably say sequentially that the majority of the increase is probably due to the cost cutting initiatives? Is that fair to say?

[Michael L. Thompson:]

Yes. For the most part, yes.

[Operator:]

That does conclude our Question & Answer session.

[William C. Gale:]

Thank you all very much for joining us today. We appreciate your interest. We're glad that we were able to report some better results than we had been the last couple of quarters. We expect to release our second quarter earnings sometime after December 15 and we look forward to talking to you then.

[Operator:]

This concludes today’s conference call.