信達思 (CTAS) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the Cintas Corporation fourth quarter 2003 results conference call.

Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Bill Gale, Vice-President of Finance and Chief Financial Officer.

Please go ahead, sir.

Good morning and thank all of you for joining us today.

We are pleased to announce that Cintas achieved it's 34th consecutive year of growth in revenues and income, despite a difficult economic environment.

In the fourth quarter, adjusting for the one less workday this year versus last year, our rental business grew at a rate in excess of 16%, while other service revenues, which consist primarily of direct sale items, increased by 6%.

This resulted in total revenue growth of 14%.

Internal growth was comparable to other quarters this year, at slightly over 4%.

Net income grew approximately 2% in the quarter to a record $65.2 million, or 38 cents per diluted share.

Despite a very sluggish economy and our success in selling new business, Cintas continued to improve its profit margins over the year.

In addition, we made great progress from our third quarter net margin of 8.9% to 9.6% in this fourth quarter, demonstrating the commitment made to cost control.

We should continue to see an improving margin as we move through this new fiscal year.

Our current guidance of revenues and earnings per share for the fiscal year ending May 31st, 2004, calls for total revenues of $2.75 billion to $2.95 billion.

And diluted earnings per share of $1.52 to $1.64.

This guidance assumes a slowly improving economy during the year, with the weaker quarters being the quarters ending August 31st and November 30th, 2003.

The Cintas rental business has historically lagged in economic recovery.

And while we have seen some stabilization in lost business, we are not seeing clear signs yet that the economy has turned the corner.

Last Thursday, Cintas announced that Scott Farmer, the Cintas President and Chief Operating Officer for the past six years was elected by the Board of Directors as President and Chief Executive Officer of Cintas.

Bob Kohlhepp, who is turning 60 this October, has been named Vice Chairman.

Bob will focus on company strategy and investor relations while mentoring Scott, just as Dick Farmer did for Bob Kohlhepp when he became CEO in 1995.

By the way, Dick Farmer was also 60 years old when Bob Kohlhepp became the CEO.

Some people have questioned, why was the announcement made last week?

First of all, this is the beginning of our fiscal year.

Secondly, each quarter the company holds what it calls its Executive Committee, in which the top 40 people in the company meet for two days.

These meetings are scheduled a year in advance.

We wanted to announce the change to the members of the committee and then to all of the company.

We needed to be sure also that the information was shared publicly at the same time.

All of the management at Cintas expected this to happen at some point, and are very excited with the elevation of Scott to the CEO position and the fact that Bob Kohlhepp will be full-time in a very important and meaningful role.

Now I would like to address the issues with regard to the current Union campaign.

Cintas continues to be a target of a corporate campaign by a Union named Unite.

Recently, the teamsters indicated they would join Unite in its campaign.

Through allegations, publicity stunts, lawsuits and other tactics, the Union is attempting to pressure Cintas into surrendering our employees’ right to a government-supervised election.

We believe that people deserve the right to a government-sponsored election, but the Unions want to pressure companies to make agreements to take this right away, and we believe that is un-American.

Our philosophy towards Unions is straightforward.

We believe people have the right to say yes and the freedom to say no.

And we respect our employees' decisions and we hope the Unions will, too.

This campaign is not a dispute over Unionization.

Rather, this is an issue over how people are Unionized.

Cintas supports the rights of its employees to be represented by Unions.

Approximately 700 employees today are so represented, and Cintas routinely bargains with Unions like Unite and the teamsters.

As a final point, we do not think the Union effort is working, as our employees are increasingly speaking out against the Union and its tactics.

With me today is Karen Carnahan, our Vice-President and Treasurer.

After some brief comments, we will open the call to questions.

Let me remind everyone that the Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigations for forward-looking statement.

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.

Now I would like to turn it over to Karen for additional comments.

Thanks, Bill.

Good morning, everyone.

I would now like to take you through our income statement, the cash flow statement, and the balance sheet in a little more detail.

We have updated our website with our fourth quarter financial results.

You may want to go to that section of our website and have the financial statements in front of you as I explain those numbers.

When you pull up the fourth quarter news release, the first few pages will be the announcement itself, and the last three pages will be the income statement, cash flow and the balance sheet.

I will first start by commenting on the income statement.

Total revenues were $676 million for the quarter, a 12% increase over that reported in the prior year.

This fourth quarter of fiscal 2003 had 65 workdays, which is one less day compared to the fourth quarter of last year.

Including that extra day, our revenue would have increased by 14%.

Rental revenues were $529 million compared to $462 million last year.

This was an increase of 14%.

Our internal growth rate, excluding acquisitions made in the past 12 months but including the one extra workday, was 4%.

The sluggish economy has continued to impact our organic growth rate, which has hovered around 4% for the past five quarters.

Employment numbers continue to be very weak and we see a lot of this weakness in our customers’ work forces.

This attrition hurts us in two ways.

First, our uniform business with existing customers is shrinking as the number of uniform wearers shrink.

And secondly, when our customers don't fill those job openings, we cannot earn the additional upfront revenue of preparing uniforms for those new workers.

Let me go into some further detail on sales performance for the rental side of our business for the quarter.

Our new business, which has been booked over the past four quarters, contributed 16% growth in our top line rental revenue this quarter versus the quarter a year ago.

Many of you know that over the past ten years the majority of our new customers are companies who never had a uniform program before.

This fiscal year was no exception.

55% of our new customers were first time users of uniform rental programs.

In a small number of cases, these companies previously bought uniforms, but the vast majority of these companies' employees wore street clothes prior to renting our uniforms.

In February 2003, we announced that we were increasing our book prices on new business back to the levels we had charged in early 2002.

During the quarter, we monitored this pricing on new business, and we can report that prices being charged to new customers have generally increased 5 to 6% over the more aggressive levels we had been charging.

We also can report that our productivity per sales person held up, even with this change to higher prices over the past four months.

For the year, our productivity per sales person increased approximately 2%.

We believe that our pricing strategy for new business is working.

Our sales people have been trained to execute it and have embraced it effectively.

The other positive metric for the quarter was the price increases for our existing customers, which contributed .6 of 1% of growth during the quarter.

The measure of business we do with our existing customers, known as add-ons and stop orders, reduced top line growth by approximately 2% during the quarter.

As customers continue to delay hiring replacements for the people they terminate, then we do not have the ability to collect additional upfront revenues for the new employees.

When a customer adds a new uniform wearer to his business, we charge the customer a fee for preparing the new uniform for that person.

The inability to collect that revenue has reduced our top line growth by approximately 2%.

The amount of business that we lost clipped our top line growth by about 8 1/2%.

Most of the increase can be attributed to business that we have lost due to customers going out of business.

The statistic has also increased due to the loss of about 10% of the Omni business that we acquired in May of 2002.

So again, to reconcile our 4% organic growth, it can be broken down as follows: New business caused our top line to grow by approximately 16%.

Price increases added .6 of 1%.

Lost business subtracted 8 1/2% from our growth.

The add/stops metric took off another 2%, and our current inability to get one-time revenue from customers subtracted another 2%.

Now we would like to move on to discuss our other services revenue.

Other services revenue increased 4% over last year.

Or 6% including an extra workday to compare to last year.

This segment is predominantly the revenue from sale of uniforms.

The first aid and safety division and the sale of disposable products in our clean room business are classified in this segment.

Excluding acquisition, the organic growth in this segment was flat.

Uniforms sales were down approximately 3% on an organic basis, primarily due to weakness in hotel business and large national accounts, who continue to delay purchases.

In our clean room business, our disposable products sales suffered due to continued facility closures in some of our high-tech accounts.

This disposable product business was down approximately 15% year over year.

On a brighter side, our first aid and safety business achieved double digit organic growth rates for the quarter.

In total, our fourth quarter revenue of $676 million increased 12%, or 14% on a comparable workday basis.

Organic growth without acquisitions was 3%.

Now addressing the margins.

Our rental margins were 43.7%, comparable to the third quarter and 200 basis points below last year.

Energy costs were 70 basis points higher than the fourth quarter last year, primarily due to increases in natural gas costs.

Our material costs also increased versus last year, as we converted the Omni product line over to ours and installed new garments for those customers.

This increased our material cost amortization by approximately 60 basis points, which will taper off over the next few months.

The acquisition of Omni brought us 76 operations.

We have closed and/or consolidated 49 of those operations with existing Cintas facilities.

The other 27 Omni locations now serve their customers from our AS-400 computer system.

All the billing and customer service systems are tied into this new system.

And those locations are now tied into our distribution centers so they can efficiently place orders for new uniforms.

Over the course of the next few months, the operating margins of these 27 Omni facilities will be brought up to our level of profitability.

Looking forward -- we see the opportunity for rental margins to improve as the Omni operations of profitability comes in line with Cintas' during the year.

In the other service revenue margins, these margins were 32 1/2% compared to 30.7% last year.

These margins improved on a sequential basis from the third quarter, as revenue increased 5% on a sequential quarter to quarter basis.

This allowed us to show continued improvement in margins as we absorbed the fixed cost of our manufacturing plants and our distribution centers.

Our selling and administrative expenses were 24.9% of revenue and 40 basis points lower than last year, through cost reductions in about every area of our company.

Net interest costs were 1% of revenue, reflecting the additional interests from the financing of the Omni acquisition.

The weighted average cost of our debt continues to about around 4 3/4%.

And as mentioned in our press release, we have reduced our outstanding commercial paper debt by $190 million or 83% of the peak amount we had borrowed last May.

The effective tax rate was 37.1% for the quarter, slightly higher than last year's fourth quarter, but comparable for the full year.

For the quarter, net income was $65.2 million compared to $64.1 million last year, and earnings per share increased 3% to 38 cents per diluted share.

Our balance sheet is very strong.

Accounts receivable balances are in great shape, with DSO's at 39 days, which compares very favorably to the 40 day levels that we saw throughout the year.

As a result of our success in collecting past-due accounts in the fourth quarter, our reserve for bad debt came down slightly at May 31 compared to last year.

Inventory levels decreased on a sequential basis from February's level, and we expect to see continued improvement in inventory turns.

We continue to be very conservative in our accounting for obsolescence and have built an increase to a reserve this fiscal year.

Our debt to cap stands at 25 1/2% compared to 33% last May.

This reflects the continued strength of cash flow from operations.

Looking at our cash flow statement in further detail, capital expenditures for the quarter were approximately $35 million.

Total capital expenditures increased 7% for the year and were $115 million.

We expect our capital expenditures to be between $125 million and $150 million in fiscal 2004.

In conclusion, our business is on solid ground.

Our rental business is growing in a tough economic climate.

That growth is expensive because of the new garments being purchased for our new customers.

When we start experiencing growth within our existing customers, our profitability will improve.

At the same time, our margins will improve as we realize the expected synergies of the Omni acquisitions.

Now we would like to open the call to answer your questions.

Thanks.

Today's question and answer session will be conducted electronically.

If you would like to ask a question, press the star key followed by the digit one on your touch-tone telephone.

Once again, it's star one if you would like to ask a question.

We will take our first question from Adam Waldo with Lehman Brothers.

Yes, good morning Bill and Karen, how are you?

You all have been quite busy, so a couple more questions than normal.

Bill, as you look at the developments on the Unionization front, can you give us a sense for the milestones on which you are focused with respect to both the February 5th MLRB claims, as well as the on going lawsuit in Northern California as you look out over the next few months and few quarters?

Well, Adam, I would say we aren't really -- I wouldn't want to say we are focused on those things.

We are dealing with them.

With regard to the MLRB claims, there were approximately 100 of these claims filed by Unite, almost all at the very outset of the campaign and my information indicates that more than half of them have already been withdrawn or dismissed.

To date, there have been no complaints issued by the Nation Labor Relations board on any of these Union unfair labor practices.

So we are dealing with them and so far I would say that they have not had any basis.

With regard to the California lawsuit, our position is that we have always paid our service sales representatives competitively.

And in compliance with the law.

Our lawyers are certainly reviewing that claim, and this is one of these things that will probably be out there for many years to come.

But we are not concerned about it.

Karen, in your prepared comments, you made a couple of comments with respect to where the bad debt reserve account and inventory obsolescence reserve accounts stood at the end of FY '03 and where you were thinking about in terms of accruals in FY '04 on inventory obsolescence.

Can you disclose what those year-end balance sheet accounts look like at the end of FY ‘03, or do we need to wait for the 10-K in August?

I can give you the estimated amounts.

The AR reserve is $8 million.

And the obsolescence reserve is about $25 million.

Okay.

And then as you look at your FY '04 guidance, did the Omni-Culpepper Virginia headquarters shut down in January '03?

And if that's right, how much in op-ex energies have you built into your FY '04 guidance in picking up 6 months of timing benefit on that?

Adam, actually, the Omni-Culpepper headquarters was shut down in various phases from the point in time that we acquired that company until it was completed in January of '03, So we had cost improvements kind of coming into us throughout fiscal year '03 as a result of that.

Of course, now, offsetting that, obviously, were a lot of the integration costs, training costs, installation costs of new computer systems, transition to Cintas Garments, etc, that offset that.

So you know, as we had indicated at the time we made the Omni acquisition, there was not going to be a lot of accretion as a result of Omni in fiscal year '03, but you would begin to see some of that coming in, in '04.

It's difficult for me to say exactly how much that would be.

Because as you well know, with the shut down of our -- of their operations and incorporating them into ours, and vice versa, because we did shut down some of our plant operations, it's difficult to track what that is.

I would say that you will have a better impact -- a greater impact of Omni from a profitability standpoint in fiscal year '04, certainly, than we had in '03.

But I can't quantify it exactly.

Let me see if I can take a slightly different tactic -- and I apologize for this.

If you had to quantify how much of the op-ex base from the Culpepper shut down you picked up in FY '03, and how much you spent in incremental training and technology costs while you were integrating, can you take that apart for us a little more specifically?

No, I'm sorry Adam, I can't.

It's not something that we really tracked during the year.

It was not a focus for us.

We just knew what we had to do and what we needed to get done.

And I just don't have the ability to give you those numbers.

Okay.

And Karen, any material adjustments to the Omni closing balance sheet then at the end of FY '03 versus where you had closed at the end of FY '02?

No, there were no material adjustments.

Thanks a lot.

We'll take our next question from Mike Schneider with Robert W. Baird.

Good morning.

Could you give us a sense on add/stops during the quarter, I believe it was last quarter, only three of the 13 weeks were positive, in Q2 only eight of the 13 weeks were positive.

That would give us a sense at least of the momentum in add/stops.

Fourth quarter was similar to the third.

Didn't change dramatically at all.

Okay, and do you sense -- we heard out at Universe last week that at least in their numbers they have seen a material improvement throughout the quarter.

Do you sense any momentum during the quarter or change in add/stops?

No, I don't see any momentum one way or the other.

It seemed to appear to me that it had stabilized from the sense that it was still negative.

But it didn't appear to deteriorate or improve in either direction.

Okay.

Then switching to pricing itself.

Almost an imperceptible improvement from .5% last quarter to .6% this quarter.

Any comments on that and maybe just how the momentum built through the quarter?

No.

We just didn't see much of a change there either.

As you saw, the numbers were very comparable to the third quarter throughout all those metrics.

Again, we would just tell you that we would consider this kind of rocking along on the bottom, we hope.

And that we have not seen any indication that things have gotten any worse or better.

And then I guess can you comment on why Universe, which is the number four player, would be seeing at least seemingly materially better results or macro results than you are?

No, Michael.

I really can't explain that.

Might be something just inherent in their company and customer base.

But again, we didn't see much different in the metrics in our company between the third and the fourth quarter.

Okay.

And then I guess along those same lines, the guidance for fiscal '04 assumes, as you put it, a very slow recovery.

Where is the inflection point in add/stops, at least in your model?

Have you assume mid-year?

I would say some time toward the latter or toward mid-year, the latter part of our second quarter, is our anticipation.

We can't predict the economy, as you well know, Michael.

I would say from what our readings are of the experts in the economy, reading the same press that you all read, talking to customers, we would think that sometime toward the latter part of the calendar year we should begin to see an improvement, and we hope that happens.

Okay.

And then the Omni accretion, just to take a different slice at it than Adam, it's my sense the profitability of the Omni operations coming in were about 600 basis points below that of your rental business.

If you assume just even 10 basis points is worth a cent, or a cent and a half annually.

It seems to me we are looking at something in the neighborhood of 8 cents in accretion in '04?

Is that a ballpark figure we should use or think of?

Well, as I said to Adam, we just don't look at it, compute it that way.

Obviously, there's going to be accretion, so I will let you experts derive what that amount will be.

And the reason I ask that is I'm trying to figure out what it takes to get to the low end of the range, the $1.52 from the $1.45.

It seems to me between Omni, lower interest expense and even a minor improvement in pricing, you get there.

Without any acceleration in internal growth.

Again, Michael, I'm sorry, I can't break it out with any assurance as to what that amount is and I'm not going to be able to do that at this point.

Okay.

Thanks, again.

We'll go next to Greg Cappelli with Credit Suisse First Boston.

Good morning, it's Greg and Clayton.

I just wanted to touch on pricing first, one more time.

Bill, did you mention, or Karen, when you mentioned the improvement sequentially in pricing in the new business, can you give us an idea of perhaps what that's still down year over year at this point?

Actually, it's back to the same level we were at, at the beginning of calendar '02.

So it's not down at all any longer.

Okay.

And that would be your expectation in the guidance for '04?

Yes.

Okay.

Terrific.

And then maybe just touch on, you know, with being less aggressive on pricing and I'm sensing pushing on the sales force a little more in the new business, how is the sales force attrition trending so far this calendar year?

Actually, it's about the same that we have seen over the past year.

There is not really a remarkable trend.

I would say that in this past four months as we refocused on higher pricing and taking the higher ground on pricing, that we did change out some of our sales force in order to accomplish that.

But overall, the attrition, the turnover rate, has not changed dramatically over the course of the year.

Okay.

And then maybe one final question just to touch back on the inventory obsolescence that Adam mentioned.

Just, did you actually mention the percentage increase that you will be taking in '04, and then just a little bit more color on why the increase is necessary?

Well actually, I didn't mention anything about our forecast on the obsolescence reserve for '04.

I just commented that we had increased it in '03.

So we took the level up to reflect the increase in inventory levels that we had throughout the year.

And I'm guessing that we should just forecast it being at the same level in fiscal '04?

Do you have any color on that?

Yeah, I think that's correct.

We usually try to map it according to the growth and the inventory levels, which usually tracks the organic growth rate of the company.

Great.

One actually final quick question.

I would like to get some color from you guys on the acquisition environment and pricing at this point.

Well, the acquisition environment has not really changed too dramatically over what we have spoken about the last few quarters.

And pricing certainly hasn't changed.

We are seeing expectations on the part of sellers at the same levels that the industry has kind of experienced over the last couple of years.

Does that mean, would your expectation for acquisitions -- should we expect them to be going into fiscal '04 at about the same level as '03?

Or is it just take and see approach?

Greg, we never project for acquisition or budget for acquisitions because we don't know when they will happen.

And so I have no reason to believe that it's going to be any different than what it has been over the last year or so.

It's just so unpredictable.

I would say that Cintas takes the approach that we don't anticipate when they are going to happen.

We just are usually involved in any significant deal that might be taking place in our industry.

Bill, within the guidance, is there any acquisition level built into that?

No, none at all.

Okay, thanks very much.

Thank you.

We'll go next to Grant Sokachini with Deutsche Bank.

Thanks, good morning Karen and Bill.

Couple of quick questions for you.

Can you give us a DSO target for fiscal '04?

Should we assume with the slight acceleration of business that your DSO's might creep up another day, or should we use a constant 40?

I would use a constant 40.

That's typically where we have hovered around.

Now, we've gone as low as 37 and we have been as high as maybe 42.

But for forecasting purposes, 40 is a good figure to use.

Okay.

And use of free cash flow, obviously you've paid down debt.

Are you comfortable currently with the debt to capital ratio where it is right now or would you anticipate future free cash going to pay down debt further or perhaps the stock buybacks, or increasing the dividend or something like that?

Well Brandt, that will be a dilemma that we will have to look at going forward.

Because we certainly will generate quite a bit of cash, and if acquisitions do not present themselves we will have to figure out what to do with that.

Regarding the pay down to debt, we have to evaluate that as we go.

But of course, one of the issues we will run into is that our bonds that we sold, the $450 million of bonds, basically are 5 and 10 year bonds that have made [inaudible] provisions in there that may not be economically beneficial to pay those down easterly.

Our Board of Directors certainly will be looking at ways to most effectively utilize the cash for our shareholders, and I'm sure they hill consider all of the alternatives that you mentioned.

Okay, great.

And one final question, I think you said in your remarks that about half your business -- I'm sorry, half your losses came from bankruptcies.

Can you give us just a sense as to how much I guess was lost to competitors, both either on the new business front as accounts to the price increases, or just in terms of the general loss of business.

The loss business, the 8 1/2% statistic, approximately 3 to 400 basis points of that is loss to competitors.

And the remaining is due to plant closures and bankruptcies.

And -- but we don't know how much of the new business that we would have quoted on went to competitors.

We never commented on that.

Of the 8 1/2%, the majority of it is bankruptcies and the weakness that we see in the economy and the impact on our customers.

Okay, great.

Thank you.

And we will take our next question from Thatcher Thompson with CIBC World Markets.

Good morning, Bill and Karen.

Good morning, Thatcher.

Typically in the fourth quarter we see your selling administration expense go up.

It dropped fairly dramatically this fourth quarter.

What causes that, and is it a permanent sort of change?

Well Thatcher, actually, I have to correct you on that.

I think historically you will see our SG&A typically drop on a percent basis in the fourth quarter.

On an absolute basis it tends to go up, and it dropped on an absolute basis this quarter.

It stands out as just a change in pattern over the last five years.

Well, we looked at that earlier and we think that the 24.9% is very indicative of what happens in the fourth quarter.

And typically what you see in our company is a tremendous push to collect accounts receivable, which is what happened this year again.

We have a big push to watch all costs that are being spent throughout the company.

There is a huge effort to try to rein in costs at every level of the company, and that's basically what happened this fourth quarter.

And then the range of guidance for revenue in '04, $2.75 billion to $2.95 billion, is kind of a 2 1/2% growth rate to almost a 10% growth rate at the high end of the range.

How much run rate revenue was purchased throughout fiscal year '03?

I saw there's roughly $37 million of cash used for acquisitions throughout the year.

We would have to get back to you on that.

Basically what we did in calculating the organic growth was pulling out roughly $54 million in sales for the fourth quarter in the rental side of the business.

Now some of that is Omni.

Omni was not purchased until the mid May of '02.

But we can get back to you with that answer.

But just to give you a rough feel. $54 million was pulled out to calculate organic growth in the fourth quarter.

Okay, and then one last question.

You mentioned there's 27 remaining Omni locations with lower margins than Cintas.

What is the difference between your typical operation and theirs as it stands now?

Don't really have that number for you, Thatcher, because that would be a misleading thing if I were to even give it because those facilities are in various stages.

Some are automated more heavily than other operations within Omni.

So all I can tell you is that generally it's still lower than Cintas and that will be some improvement we will see in '04, but I can't give you the exact number.

Okay, thanks, guys.

We will go next to Chris Gutek with Morgan Stanley.

Thanks, good morning Karen and Bill.

Just a quick follow-up question on the lost business, the customer attrition rate at 8 1/2% at historically high levels.

I'm curious with you guys now owning Omni for about a year.

It seems the attrition rate with their customers seems to be higher than for the non-Omni business customers.

By what point or how much longer do you expect it to take before you get that customer base fully locked down and attrition rates at more typical levels?

I think we are about there right now.

I think we will start to see some improvement in that level now going forward.

It typically is a 12 month process, maybe a little bit longer, to get the customer base in line with what we want to see going forward.

There's a lot of weeding out of accounts that might not have been profitable accounts for us to serve on a long-term basis, and we get through process in about a year.

So we expect to see that lost business percentage start moving down now.

And I don't know if you guys saw it, but there was a newsletter put out by Unite yesterday that referred to new lines of business that Cintas is getting into, specifically shredding and payroll processing.

Would you care to comment about those initiatives at this point?

Well, the comment I would give to everyone is that Cintas is experimenting with a number of things.

We have always said that we will have various new businesses and beta tests, and those -- we don't deny that we were in those two businesses, but they are very minor piece of our overall business and we are still determining whether or not it's something that we will get into in a bigger way over time.

And then finally with the Cap Ex target for 2004, how many new facilities will that translate into?

That will be six new facilities next year.

Okay, great.

Thank you.

We will take our next question from Kevin Monroe with Thomas Wiesel Partners.

Thank you.

Just one question quickly on the SG&A, and maybe ask it a little differently than it was asked before.

Was down in the fourth quarter.

Below 25%.

Hasn't been that low I guess almost the past two years.

Is that sustainable below the 25% level on a percentage of revenue for SG&A going forward?

Actually, what you will see is that percentage will pop up in the first quarter as we launch new marketing programs, new advertising programs, new different types of selling promotions.

So you won't see 24.9% again starting out at the beginning of this new fiscal year.

But it's not abnormal to see something like that in the fourth quarter.

Okay.

Are you still expanding your sales force?

Yes.

Are there any targets in terms of how much you will expand them through '04?

No, I don't have a target.

Typically we keep that consistently increasing to accomplish the organic growth rate that we want to achieve for the year.

So we increase the sales force accordingly.

Okay.

Thank you.

And we will go next to Bruce Simpson with William Blair.

Good morning.

Good morning.

One thing just on the, to follow-up on a prior questions about SG&A, Karen, you said in particular it was a big push to cut costs and to contain costs.

Can you give specific examples of what it is that can be done there?

Are there any head count reductions?

Or is it just purely tightening the belt?

It's both, but in addition it's a big push to collect accounts receivable.

This is just something that we find in our company that our operations are very, very good at making more calls at the end of the year.

I think it goes back to how we structured our compensation programs.

And our general managers are compensated on the profits that they put to the bottom line.

They know if they can collect additional accounts receivable then we won't reserve for them through the bad debt reserve, because again, it goes back to our conservative accounting policy.

That's one specific example of what they really can do.

That's a trigger they can pull and really have a major impact on the bottom line.

But I would add, we recognize that the economic environment that we are in is very difficult one and we saw that during the year, during the fiscal year just ended.

Basically the message that went out to our operating people is that we need to do things to insure that we achieve a reasonable level of profitability and they were able to manage their areas more effectively, I think, as a result of that.

And therefore were able to improve our margins.

And we will see a lot of that continuing because people are very intent on making sure we continue to grow this company, and that we achieve the 35th consecutive year of growth and sales and profits.

Okay.

You confirmed that to target one particular area there had been some kind of head count reductions.

Can you quantify that or just kind of tell us in what parts of the firm that might have happened?

Basically, it was primarily in G&A areas where I wouldn't say it was head count specific target for head count reduction, but what all management was asked to do was to make sure they eliminate any unnecessary tasks that were being performed and eliminate any C players in their organization so they can improve productivity, and I would say that that's what they did.

Okay.

And if I could have two quick follow-ups.

One has to do with terms of the status of the Omni inventory.

Would you say at this point it's completely integrated so any kind of duplicate costs for that would mesh through that?

The only -- for all practical purposes all of the existing Omni inventory has been integrated into the company and it's currently being amortized as it was being put into service.

So that cost is there.

It's there because, as you know, once the product is put into service – it starts-- amortization begins and I would say has all been pretty much integrated.

We shouldn't be looking for any kind of steps either way in terms of like hitting a cliff level as to where that begins to stop being amortized?

I don't think you will notice it with all of the new business that we continue to sell, you have new garments coming into the process all the time.

I don't think you will have impact from Omni going forward other than what's in there.

Thanks, and just the last one is, with all the publicity and the talk of the Union, is it possible to quantify the incremental change in your expense as a corporation, just to have to deal with the campaign and whatever incidental costs you have generated?

We are not going to disclose how much we are spending in this area.

Suffice it to say, we will spend the amount of money necessary to fight this campaign, as we discussed earlier.

And while it is not something to be laughed at, it's not a material amount for the company.

Thank you.

And we will go next to Greg Halter with LJR Great Lakes Reviews.

Good morning, Bill and Karen.

Wondered if you could provide some comment if you could on the customer mix from the standpoint of any particular areas doing better or worse than anyone else?

Well, let's see.

I know one of the areas that's not doing very well right now is the hotel business.

And there seems to be a real reluctance on the part of hotel operators to open new properties and to replace garments within their existing facilities.

There seems to still be some pressure there.

The manufacturing sector, although we don't have a lot of business there, continues to be somewhat sluggish.

And I don't know of any other specific areas.

Karen, do you have any?

The only other area we commented on was the clean room business.

The disposable side of our business has a lot of pressure on it and that's more reflection of the high-tech business, the electronics companies; and now offsetting that, pharmaceutical companies have helped us out on our clean room business and we had healthy growth in that area.

The food processing area is a healthy environment for us.

We established a new niche to go after food processing companies awhile back and that has gone extremely well for us.

And you mentioned the capital expenditure budget for the year, upcoming year, what do you see on depreciation and amortization in total?

I don't have a number for you, Greg.

I will have to follow up on that.

That will increase in line -- it will be probably around 10% growth in depreciation and amortization, but let me get back to you on the specifics of that.

Okay, great.

Thank you.

And we have a follow-up question from Adam Waldo.

Please go ahead.

Bill, any thought process in your FY '04 guidance range with impact to margins with the Unionization effort, assuming you are building in undisclosed spending to fight the campaign.

But to the extent it's successful either on the laundering plant or the SSR side, have you factored any sort of risk adjusted margin hit into your FY '04 guidance?

Well, no, we haven't, Adam.

We don't think there really is any risk with regard to cost because we feel that our wages are in the vast majority of the cases are higher than the Union's typical Union wages and operations, where they represent employees in our industry.

And we know our benefit program is better.

So I don't really see that as an issue.

Again, we go back to the fact that we will continue to fight this because we do not believe that it is right to take away the right to choose from our employees as to whether or not they want Unionization or not.

And then this Detroit strike risk that the Unite newsletter talked about yesterday.

Any risk adjustment built in to your FY '04 guidance for that?

No, there is no risk adjustment because again, we feel we are fully prepared to continue operations and fulfill routes and maintain customer service, no matter what the circumstances are.

And the cost differential, again, would not be material to us and we would be able to absorb that situation, should it occur.

Thanks for the comprehensive discussion.

And we have a follow-up question from Greg Capelli.

Please go ahead.

Thanks Bill and Karen.

Just one quick follow-up.

Something that you mentioned earlier.

Are you now managing the sales process more on a free cash flow basis?

In other words, are you basically willing to give up margin on sales, I guess new and existing, if the DSO can be improved?

Is that responsibility now being put more on the sales person when the sale is being made?

No.

We are still managing the way we always have, Greg.

We focus on this book pricing, which as you know we have increased now 5 to 6% over where it was before.

And then we incent the people accordingly, if they can sell at that price they get a certain commission and if they sell below that price they get a lower commission.

That's how we manage the process.

Now, we also will monitor the type of accounts they bring into the company because we know the profitability that an individual customer given the industry that they are in can bring into our company.

We know low profit type of accounts and we know high profit type of accounts.

So we will monitor that at the local level.

But suffice it to say that the sales processes is still managed as it has historically been managed for many years.

Okay, so there is no direct incentive for DSO?

No, there is not.

Okay.

Thanks very much.

And we have a follow-up question from Chris Gutek.

Go ahead.

Hi.

Couple quick follow-up.

Acquisition spending in the quarter was around 12 or $13 million.

Could you guys comment on what you did buy in the quarter?

They were all just small acquisitions.

Some in both our core business of rental, as well as the new business lines that we are experimenting with.

Nothing significant.

And Bill, would you care to comment on whether or not Cintas is taking a look at Textile ease as a potential acquisition?

I can't comment on any specific acquisition, Chris.

Just as I said earlier, though, Cintas typically is involved in looking at any significant acquisition in our businesses.

Great.

Thank you.

And there appear to be no further questions at this time.

Well, thank everyone for joining us.

We appreciate the attention to our company and we hope that we were able to answer your questions today.

We are looking forward to entering this new fiscal year and as we all hope, that the economy will improve and that we will see it reflected in our results.

We look forward to speaking with you again in September as we report our first quarter call.