信達思 (CTAS) 2004 Q4 法說會逐字稿

Good day, everyone and welcome to the Cintas fourth quarter and year end 2004 results conference call.

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.

Please go ahead, sir.

Good evening.

Thank you all for joining us tonight so we can talk about our fiscal year '04 final numbers.

We are pleased to announce that Cintas achieved its 35th consecutive year of growth in revenues and income despite a sluggish economic environment, related primarily to slow employment growth experienced throughout most of the year.

In the fourth quarter, adjusting for the one additional workday this year versus last year, our rental business grew at a rate in excess of 5% while other service revenues, which consist primarily of direct sale items, increased by over 14%.

This resulted in total revenue growth of 8% adjusting for the additional workday this year.

Net income grew over 11% in the quarter to a record $72.7 million or 42 cents per diluted share.

Despite cost increases with energy and employee benefits, Cintas continued to improve its profit margins over the year, rising to 9.9%.

We are also pleased with the excellent cash generation during the year.

Cash from operating activities exceeded $0.5 billion.

Our current guidance of revenues and earnings per share for the fiscal year ending May 31st, 2005, calls for total revenues of 3 to $3.2 billion and diluted earnings per share of $1.70 to $1.80.

This guidance assumes a slowly improving economy during the year.

The Cintas rental business has historically lagged in economic recovery, but we are seeing stabilization with our customers at this time.

Cintas continues to be a target of a corporate campaign by two unions, Unite and the Teamsters.

Despite their ongoing allegations, publicity stunts, lawsuits and other tactics; we do not see that the union has made any progress.

The union's continued strategy appears to be to pressure Cintas into surrendering our employees rights to a government-supervised election.

As we have said before, 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 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 would hope the unions would too.

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

Approximately 600 employees today are so represented and Cintas routinely bargains with unions like Unite and the Teamsters.

In summary, we continue to be excited about our prospects in the markets we currently serve as well as becoming an even more valuable resource to our customers.

We applaud the efforts of all our employee partners in continuing their focus to enhance the long-term value of Cintas for our shareholders and themselves by exceeding our customers expectations.

With me today is Karen Carnahan, Cintas' Vice President and Treasurer.

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

Let me remind you that 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.

Now, I would like to turn the call over to Karen.

Good evening.

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

We have updated our website with our fourth quarter financial results and you may want to go to that section of that website and have the 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 statement and the balance sheet.

I will first start by commenting on the income statement.

Total revenues were $738 million for the quarter, that's a 9% increase over that reported in the prior year.

Rental revenues were $567 million compared to $529 million last year.

This was an increase of 7% over the fourth quarter of last fiscal year.

This fourth quarter had one extra work day compared to the fourth quarter of last year.

That is we had 66 work days this fourth quarter versus 65 work days last year.

In addition, during the quarter, acquisitions contributed $1.6 million of rental revenue.

When subtracting out the extra work day and the acquired revenue, our organic growth for the fourth quarter was 5.3%.

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

Our new business, which has been booked over the past four quarters, contributed 13.3% growth in our topline rental revenue this quarter versus the quarter a year ago.

This rate of growth is comparable to that experienced throughout the entire year.

As we mentioned in our first quarter conference call, we made changes in our sales force this year and we expect productivity to continue to improve as our new sales reps become more seasoned.

As a result of these changes in the sales force the total number of sales people increased by approximately 9% this fiscal year.

We continue to add to our sales force and have projected to increase the sales force by a double-digit rate next year.

Price increases to our existing customers contributed 1% in growth during the quarter.

Sales growth from price increases was consistent throughout the year.

The measure of business we do with our existing customers, known as add-ons and stop orders, reduced topline growth by approximately 1.2% in the quarter.

The trend in it metric was positive throughout the year.

As a reminder, we began the year with a negative add/stops metric of negative 2.0%, so this fourth quarter sales impact of negative 1.2% reflects the improvement throughout the course of the last four quarters.

In the fourth quarter, only three out of 13 weeks were a net positive but the details behind that information are more meaningful.

The add/stops in uniforms came very close to offsetting each other in the quarter.

We believe this reflects a couple of things.

One, there is some positive seasonal impact of summer jobs coming on and the associated add-ons for those new positions.

Secondly, the government's reported increase in employment levels is just starting to show up in our uniform accounts.

During the quarter our stop orders exceeded add-ons as our customers returned the jackets that they rent from us.

This is a normal seasonal pattern and the opposite will occur in the second quarter when jackets go back into service.

Like wise, in the quarter, we also saw a small decline in the add/stops metric for our ancillary rental products, which include the entrance mats and hygiene services; but this is also a seasonal event because institutions, such as schools, stop renting these ancillary products until the fall season.

So we expect this to return to a positive metric in August.

The last component of our organic growth rate is the amount of lost business.

The amount of business lost over the past 12 months clipped our topline growth by 7.8%.

We continue to see improvement in our lost business numbers as we get further beyond the Omni integration and as a healthier economy takes hold.

So to reconcile our organic growth, it can be broken down as follows: New business caused our topline to grow by 13.3%; price increases added 1%; lost business subtracted 7.8% from our growth; and add stops took off another 1.2%.

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

Other services revenue of 171 million increased 16% from last year.

On an organic basis, this segment of our business increased 3.7% without the benefit of acquisitions and the extra work day.

Our uniform sales business from our national account sales division and our catalog division, in total, grew 3.3% on an organic basis.

This is also a positive trend but we wouldn't say that our large national accounts have shown significant nor clear signs that they are ready to start ordering replacement uniforms for their employees.

There are still mixed signs in this area of our business.

The first aid and safety business grew 8.3% on an organic basis year-over-year, compared to a 6% organic growth last quarter.

This business has shown its resiliency in tough economic climates and we are very bullish about this business.

Now addressing the margins.

Our rental margin was 44.3%.

This is 60 basis points better than the fourth quarter of last fiscal year.

As expected, the margin improvement reflects the productivity improvements in many of our operations, especially those that absorbed business from the Omni acquisition.

Material costs decreased by approximately 60 basis points as a percentage of sales compared to last year.

Last year our material costs increased due to the conversion of Omni's product line over to ours.

Those costs are now predominantly behind us.

Energy costs also increased slightly in the quarter.

The other service revenue gross margin was 34.2%, or 170 basis points better than last year's fourth quarter.

Other services revenue is primarily derived from the sales of uniforms in our national accounts sales division and this segment also includes our first aid and safety division.

With the growth in our first aid division, both organically and by acquisition, the improvement in gross margins reflects the higher profit margins in this division.

The margin improvement also is primarily reflective of improvements in sourcing our fabrics and finished garments in the national account sales division.

In addition, recent acquisitions are making a nice contribution to gross margins.

Our selling & administrative expenses were 25.7% of revenue, or 80 basis points higher than last year's fourth quarter.

The increase in the sales force and the relates the costs to accelerate sales growth have caused SG&A expense to increase.

In addition, as we noted last quarter the cost of healthcare benefits and other payroll costs also contributed to this increase.

Net interest costs were 0.7% of revenue, down 30 basis points from last year and reflective of the lower debt levels this year as a result of paying down the debt from acquisitions.

Our effective tax rate was 37% for the quarter, comparable to last year.

For the quarter, net income of 72.7 million increased 12% over last year's fourth quarter and earnings per share increased 11% to 42 cents better diluted share.

Going on to the balance sheet.

Our balance sheet is strong.

Accounts receivable balances are in great shape with DSOs equivalent to last quarter at 36 days.

Inventory levels decreased another $19 million on a sequential basis from the February level.

In total, inventories decreased $43 million for the year, a 19% decrease from year ago levels.

Accrued liabilities increased $25 million year-over-year due to an extra workday in our wage accrual and an increase in our medical insurance accruals, as well as an increase in our profit sharing contribution for the year.

Our debt to cap stands at 20% compared to 26% last May and this reflects the continued strength in cash flow from operations.

Looking at our cash flow statement in further detail, capital expenditures for the quarter were approximately $28 million and $113 million for the year.

In fiscal 2005, we expect our capital expenditures to be between 125 and $150 million, as we expect to build approximately six new uniform rental facilities.

Acquisition activity picked up in the fourth quarter primarily in the uniform rental division and in our first aid and safety division.

In conclusion, our business is on solid ground.

We expect continued improvement in our growth throughout fiscal year 2005.

As employment levels improve and as we add more sales people to our sales force and improve productivity at the same time.

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

Thank you.

The question and answer session will be conducted electronically. [Caller Instructions] And we will take as many questions as time permits.

And we will pause for just a moment.

Our first question comes from Adam Waldo of Lehman Brothers.

Good evening, Bill and Karen.

Congratulations on the nice end of the year.

Good evening, thanks, Adam.

Thank you, Adam.

Obviously your MD&A was very comprehensive on the income statement drivers but I wonder if I could ask a couple of balance sheet and cash flow questions.

First with respect to inventories, obviously a very nice job, 19% year-over-year decline but I wonder if you could give us some more color as to what specific activities within Cintas would have led to that kind of decline given the moderate rebound in revenue?

Adam, one of the major reasons is something we have spoken about before which is the Six Sigma initiative that we rolled out in this company about two years ago focusing on our distribution, manufacturing, and national account sales division.

And we have been very pleased with the focus that has been given to inventories enabling us to reduce levels down to the amounts that you see, while at the same time improving our service levels to our customers.

So I think that would be first and foremost the most important factor in the decline.

Secondly, we do have the benefit now that Omni is about two years behind us, last year we had a little bit of inventory as a result of the Omni acquisition, additional SKUs.

We've integrated their product lines, now, into ours and eliminated certain duplicate offerings and that has allowed us to have a modest decline also in inventories but it is primarily the Six Sigma initiative.

And so, Bill, are these kinds of inventory levels relative to your cost structure sustainable or would you expect to start to see inventory ramp back up a bit back in fiscal '05 as you start to build the new sales activities that much more aggressively with the sales force head count adds?

Adam, I would think that the inventories would go up modestly at a proportion to what sales are increasing.

So that, hopefully, as the economy improves and as our sales improve you're going to see a modest increase in inventory levels but I think you're going to still be very pleased with the management of those levels going forward.

Okay, then final quick question on pricing.

Obviously all in business pricing, new and renewals, has been bouncing around that 1% range now for about four quarters and I wonder if you could just give us any commentary, either quantitatively or qualitatively, around what kind of trends you're seeing recently in new business pricing changes year-over-year relative to renewal business pricing?

Well now Adam, keep in mind that the price increase that we mentioned here is strictly the renewal business.

Right.

As far as new business pricing, the increases that have incurred over the past year have probably been in the 2-4% level over that year and probably up in the 6-7% level from where they were a couple of years ago.

Maybe 18 months ago.

Yes.

So 2-4% year-over-year in the latest quarter on new business, Bill?

Correct.

Okay.

That's a difficult one for me to be totally precise on because it's just very difficult to gather all that data in -- and, you know, with all the different product offerings; but that's generally my sense of what's happening.

Thanks very much.

Next we have Kartik Mehta with Midwest Research.

Yeah, good afternoon.

Hi, Kartik.

Hi.

Hi.

Couple questions.

This quarter the revenue growth was 5.3 and, obviously, overall revenue growth more.

Any reason why that might not have translated in a little bit better operating margins?

Was there anything unusual in the quarter that maybe abated the operating margins?

No, you know, we talked a lot about the material costs now have come down as a result of integrating Omni, that we've consolidated the vast majority of the duplicate facilities that we acquired through the Omni acquisition.

There's not anything that is an over hang that would have caused the margins to be better.

We just need to see, you know, a little bit stepped up in the organic growth rate and we'll see some margin improvement as a result of that.

But no, Kartik, there wasn't anything -- we commented about the energy costs, they were slightly higher in the fourth quarter than the third quarter; but not substantially.

So pretty much the margins are solid gross margins, do reflect the improvement from the Omni integration and, going forward, there's some room for additional improvement as sales growth rachets up.

Kartik, one of the things that I think you'll also see is as our existing customers begin to add people to their employment and, therefore, increased uniform utilization from us at existing customers; you'll begin to see the improved margins going forward also.

We are beginning to see some signs of that.

Hopefully that will continue as employment continues, but that's our most profitable business, obviously, is when we can add-on to an account that we're already servicing.

So, in that light, where do we need to see that number go to for you to get to maybe the higher end of the estimate guidance you've given?

I can't relate that to, you know, what the employment levels will be because remember we lag and it depends on where the employment is coming from, but we would certainly feel that, given what we've seen over the last few months, the trends are starting to appear to be in our favor and I'm cautiously optimistic that you're going to begin to see that impact us.

And the last question.

Any thoughts on rollout of your other services such as paper shredding and fire safety?

I know it is not a big part but, maybe, what type of rollout we might see in fiscal 2005 from those services?

Well, the paper shredding, document management business is still in its infancy as far as Cintas' ownership is concerned.

We have open operations in approximately ten cities now through acquisition.

We are very pleased with what we're seeing so far.

We're continuing o to study the business.

We would hope to make more acquisitions going forward and start to grow that thing even internally and I feel good about it.

But it's still going to be a relatively minor amount of our overall revenue.

The fire service business is really an additional product and services--service being offered by the first aid and safety division.

I think you're going to begin to see more activity by Cintas in this area as the year goes forward as we roll that thing out.

But, again, it is not a, you know, a major item like the rental business at this point; but I'm very pleased with what I've seen and I think there is a great opportunity for us going forward.

Thank you very much.

Michael Schneider of RW Baird has the next question.

Good afternoon.

Hi, Michael.

Hi, Michael.

Just want to focus on two issues.

First, add/stops obviously a hot topic.

We saw the government data in March, April and May nicely strong, in June it fell off.

Just curious if you could comment how your figures, your data for add/stops reacted to that trend late in the quarter or actually after the quarter end?

You know, Adam -- I'm sorry, Michael, as I look through these numbers I think it's too early to really relate in, you know, these gross numbers that the government puts out in terms of employment levels and reflect that on a week-to-week basis for Cintas.

I would tell you that in looking at it, it certainly is better to see those numbers and I believe that the trend is, you know, improving for us in terms of our add/stops, but it's going to take several months of this data to really flow through our business and our customers and I think we'll have a much better feel for it as we get through the first and second quarters of the next fiscal year and hopefully the numbers that we saw in the March through May time frame will continue at those levels and it would certainly impact us on a positive basis.

So did you see any discernible deceleration or downtick in add/stops in June like the government data?

Well, in June I think we've had three out of four weeks be positive.

But you know what, I can't tell you conclusively that that means that that's a result of the improved government data.

Okay.

And just a clarification or just more color on the add/stop rate.

You mentioned only 3 of 13 were positive, so that's actually deterioration from last quarter.

But, to be clear, if you back out just the jackets and the ancillary items, uniforms were actually neutral for the quarter?

Just about neutral.

Okay, so--

And that's a positive sign.

Yeah, that's very positive compared to what we saw in the second and third quarter.

And would you consider the third quarter a clean number because you don't have the winter jacket outflow nor do you have the inflow as you did this quarter?

It's pretty clean number.

Okay, so the five positive weeks last quarter versus, you know, some scrubbed, you know, what, 7 of 14 or 6 of 13 is actually a sequential improvement?

Yeah.

Yeah, but Michael don't draw too many conclusions on this.

Again, I think you gotta -- I think we feel good going forward that things are starting to improve and we're seeing our customers stabilize.

But I would be very careful to analyze this data to much in terms of week-to-week information.

Yeah, and that's why we also noted that there is some seasonal positive impact in the uniform side of our business in this fourth quarter as people ramp up for summer jobs; because we've seen a trend like this in the fourth quarter in the uniform side where it's not as -- just looking at last year, it wasn't as negative as it was in the third quarter and the second quarter.

So, you know, again, we think there's some positive impact from employment data.

We also think there's some seasonal impact and, as Bill noted, three out of four weeks have been positive in June; but is that going to be a sustainable trend?

We feel better the more months we get under our belt and can assure you of that.

But right now it seems a little early.

So it doesn't sound like you have that trend line extrapolated into your guidance?

I think our guidance is relatively conservative and assumes a modest improvement in the economy as we go forward through the year.

Okay.

And actually on the guidance, this year you did basically 5% revenue growth in total earnings per share was up 11%, so nice leverage there.

Although the guidance for fiscal '05, 10% revenue growth assuming the mid-point and EPS is up 11%, assuming the mid-point, which implies basically no leverage.

Yet to your comments, Bill, the most profitable business is yet on the horizon.

That is adds.

How can you reconcile or what should we we thinking about as to why there might not be operating leverage in fiscal '05?

Well, I think because growth is expensive and as we continue to ratchet up growth with new business, we're going to continue to add sales people, we're going to do more advertising and, therefore, we're going to give you expectations that we feel comfortable we can achieve.

Okay.

And again, though, if indeed you assume -- well, if there is upside surprise in that adds are better than you anticipate that would be where the real leverage comes in fiscal '05?

Correct.

Okay.

Thank you.

Now, from Morgan Stanley we'll hear from Chris Gutek.

Thanks.

Hi Bill and Karen.

Hi Chris.

Hi Chris.

I think at the end of each fiscal year you guys typically do measure the percent of new clients that come from the no programmer market.

Did you measure that this year in fiscal '04?

Chris, we have not confirmed that final number, but throughout the year it was consistently around 55%.

Okay.

So that's relatively consistent with the last couple of years.

Yes.

But if you look at the contribution to organic growth coming from the sales force production, it's been slowly trending down.

I think a couple years ago it was adding 16 or 17 percentage points, and even a couple quarters ago it was adding 14 and now it's getting closer to 13.

Is this slight downward trend a function of the new sales people not being fully productive?

Is it a function of getting somewhat closer to market saturation or Cintas' size relative to the market?

Or a combination of those factors?

We really believe it's the ramp up of the sales force.

As you recalled, about a year ago we did change out about 20% of our sales force and throughout this year we have hired a lot of new people, trained them.

We've had a little bit of turnover even in the new people.

So it is just regrouping, reorganizing that group, retraining and getting their -- them up to full productivity and getting them more seasoned and we expect that this contribution from new business to our topline growth will get back up into that 15-16% range going forward.

Now, it may not be fiscal year '05 because, as you know, the rental business comes on week-by-week and it is an annuity stream of revenue and so its impact on the topline really looks backward four quarters and has a delayed impact on topline growth.

But, again, we are managing the size of that sales force and the growth of that sales force and the training in order to get back to the 15-16% level and we're confident we can do it.

Okay, great.

And then just question on the balance sheet.

The balance sheet has strengthened quite a bit over the last year or so.

And it looks like there was a small--or actually a medium-sized acquisition in the quarter.

But, putting aside acquisitions, could you comment on what the company's intended use of cash would be?

In particular, is there any increasing desire to do a share repurchase or maybe to increase the dividend a bit more rapidly?

Chris, first and foremost, I think it's safe to say that our board's objective would be to utilize the cash for further acquisitions either within our core business or perhaps in some ancillary business; so that will continue to be our major focus.

However, with that said, the board is constantly reviewing the opportunities that would benefit our shareholders from either a share buyback or a dividend increase, but I would tell you that the primary desire is acquisition growth.

Just on that point what was that acquisition in the quarter?

It looked like about a $52 million deal.

What business unit was that in?

That was a combination of all the divisions.

It was the uniform rental division and the first aid and safety division primarily.

Just a lot of little acquisitions really, Chris.

It wasn't any big one acquisition.

There were many acquisitions made.

Great, thanks.

[Caller Instructions] We'll now go to Smita Vadlamoni with Credit Suisse.

Hi it's Smita Vadlamoni and Greg Capelli, how are you?

Hi Smita, hi Greg.

With longer term organic growth, are you still projecting in the mid-teens?

We -- that is our goal is to get back in to the historical range of low to mid-teens organic growth rate throughout our company.

I was wondering if you could break that down by the components of growth for me?

You know, same customer growth, new customer growth?

Yeah, let us give you the same breakdown as what we gave you earlier on the 5.3% organic growth.

New business would normally contribute about 16%.

Price increases normally would add 1.5%.

Our lost business would be somewhere in a range of 5-6% and add/stops would normally add 1-2%.

Okay.

That's great.

Thank you very much.

Thank you.

Now we have Bradley Safalow with J.P. Morgan.

Hi, good evening.

Hi, Brad.

Just a question on the gross margins from the other services division.

You touched on-- I'm just trying to understand where the growth actually came from year-over-year.

You obviously had some very sizeable improvement.

Was it all a mix shift issue-- because the organic growth, I guess, from-- on the uniform side in terms of sales was just under 3% which maybe would not suggest the kind of leverage you actuaIly saw?

Well, a lot of it is just the improvement in sourcing, as Bill talked about, the Six Sigma process in our national accounts sales division.

Not only were they able to get the inventory levels down, but they also were able to make improvements in sourcing of the fabrics and finished goods in that division; so that did I give it a boost in gross margins.

And then we made a comment that the first aid and safety division is becoming a more substantial division within that segment and its profit margins are higher than what we have in our national accounts sales division, so as that mix in revenue changes between first aid and safety and national accounts sales, there's more contribution of gross margin from that higher profit earning division in the first aid and safety division.

So looking to next year, these types of gross margins you feel are relatively sustainable?

Yeah, we believe that.

I think you look back over history, our margins in that segment have ranged anywhere from 30-35%.

Last year it was 32.7.

This year, 33.9.

They're actually fairly consistent.

Sure.

And then just on a longer term basis there have been some questions on the operating leverage in the model and if add/stops swing in your direction-- and Bill obviously in talking about the investment you guys are making in growth.

Look beyond '05 and assuming we have a more favorable employment environment, what type of earnings growth do you think you can achieve if you do indeed hit the organic growth metrics you're talking about?

Well, our goal is to grow the bottom line at the same rate as the topline.

But, in addition, we fully believe that we're going be able to get our after-tax margins up to the 10-11% range again.

Next year, we've taken a little bit more conservative approach as we rachet up the growth in the sales force and do some other things to boost sales growth but, long-term, our goal is to get to the 10-11% after-tax margins.

Okay.

Then just on the acquisition environment.

Has there been any meaningful change in what you see as the landscape there?

Obviously the cash balance continues to grow.

The debt-to-cap continues to shrink and, obviously, you want to deploy that capital in the most efficient way possible for shareholders.

Is there something you see that would suggest that maybe there would be more acquisition flow this coming year than there has been in the last 12 months?

Well, it's hard for me to predict that.

I believe that there should be more acquisition opportunities going forward because I think as the -- as we will see our business improve we're going to see our competitors' businesses improve and they believe it may be a better time for them to sell.

I also think that many of our competitors, especially the regional and smaller players, are going to find it more and more difficult to compete with the national companies because of the buying power that we have and some of the capital investments that we continue to make; and I think it's just a matter of time before they decide that it is a good opportunity to sell.

As I've mentioned before, there appears to be a reluctance on the part of many of these entrepreneurs to sell in the trough and until they begin to see their business stabilize they don't want to take a lower price than what they think they're entitled to.

So, I believe that as the economy improves, before it becomes real robust I think you're going to see some of these bigger companies perhaps come to the decision that they would like to sell the business.

There really have been very few opportunities over the last year or so for acquisitions.

And the ones that have been available primarily have been at, you know, with businesses that we really didn't feel were worth the levels that the owners were willing to sell them for.

So we are going to be very cautious that even though we have this tremendous cash horde sitting in the Company that we're not going to go out and make silly acquisitions or acquisitions that are not going to improve our performance going forward.

So we're going to approach the acquisitions with care just like we always have done.

Thanks for that color.

And in terms of--if the acquisition landscape, for whatever reason, doesn't change meaningfully would you consider share buybacks at that point?

Well, as I mentioned to Chris Gutek earlier, the board is constantly asking management to look at the economics of share buybacks and look at the alternatives of our cash and we will certainly take advantage of those situations that we feel would benefit our shareholders.

Okay.

I appreciate all the detail.

Thanks a lot.

Bruce Simpson with William Blair has our next question.

Hi Karen and Bill.

Hi Bruce.

Hi Bruce.

Two questions.

The first is, I'm surprised that the big sequential stepup in revenue in the other services division, and I think Karen that you told us that the organic growth rate in that division was around 4%?

Yes, 3.7.

So it seems like, figuring that out on a year-over-year basis and then adjusting for the fact that there's one more day; still seems like there is maybe, I don't know, maybe $15 million or so of revenue in the quarter above what I would have expected.

Is that all -- can you comment on where that comes from?

Is there sort of a major acquisition that flowed through the quarter on that?

No, like Bill commented earlier there was a number of small acquisitions and it primarily in the first said and safety division.

We're doing product extensions in that area and we have -- you are right, there were more acquisitions in that segment in the fourth quarter but it was just a number of small acquisitions that in total added up to about-- I think it was about $17 million in revenue contribution for the quarter.

Okay.

Thanks for that.

Then the second question has to do with where the sequential increase in organic growth rate within the uniform piece of of business was coming from?

Was it coming from the core business of uniform rental?

Or was it coming from like sanis and non-uniform things?

It was primarily coming from the uniform and the ancillary products which would be the entrance mats and the hygiene.

Unfortunately, I don't have the breakdown of all three.

But all three were contributing to that sequential improvement in growth.

We had a healthy amount of new business in the uniform side and in the bulk products and in the hygiene products and, as we said, the add/stops were almost zero for the uniform side and a slight decline in the bulk side.

So we saw revenue improvement in all three of those areas, but I don't have it broken down specifically, the growth rates within each product line, unfortunately.

Okay.

And then Karen, just a follow-up to that.

The -- I wonder if you're willing to give us any more color on the guidance for next year when you're looking at that revenue and that EPS?

What kind of organic growth rate in the rental piece of the business do you think we're going to have to get to by the May '05 quarter just in general?

I'm trying to sort of tease out where you expect the current 5.3% might get to by the end of next year in order to get to the numbers you're thinking about?

Bruce and, again, this is -- looking into a crystal ball and giving you our best estimate on that but it looks like the -- from a conservative standpoint it --probably in the fourth quarter going to get somewhere between 7 and 9%.

That's organic growth rate in the uniform rental piece in the May '05 quarter?

That is the organic growth in the total rental piece in the May quarter.

Okay.

That helps.

Thanks both of you very much.

Moving on we have Kurt Molar with Dresdner RCM.

Good afternoon, ladies and gentlemen.

Hi, Kurt.

Hi, Kurt.

I was just hoping to follow up on a few things.

In terms of next year, where would you expect gross margins and SG&A to be versus, you know, the fiscal year just ended?

Kurt, that is a -- we really don't want to get into that level of detail and sharing with the public our, you know, components of our budgets.

But, you know, suffice it to say that we are hopeful of getting back into our 10-11% range toward the latter part of the fiscal year and, you know, we'll tell you that the levels that you see in gross margins and in the SG&A are probably going to be what you are going to see going forward.

Okay.

And then you had mentioned earlier SG&A, one of the reasons for the increase was the increase in the sales force.

I believe this year, if you look at SG&A, it went from about 0% change in the first half of the fiscal year to 6% last quarter to up about 12% this quarter versus a year ago.

How much of that change would be attributable to the sales force and how much were other factors causing that?

Unfortunately, the way that the sales growth -- sales force growth goes is that there is a lot of placements of new sales people in the fourth quarter.

So it is not an even increase in the sales force over the course of the year.

There was a lot of hiring in the fourth quarter and, therefore, you saw some acceleration in that line item.

But in addition -- and that was probably the bulk of the explanation in the increase.

But there also is some increased costs in the healthcare area, and we've commented on that constantly throughout this year.

That is just a moving target unfortunately healthcare costs are increasing at a greater rate than sales increase.

And we have reflected that, you know, in the expenses of the company.

But the acceleration of the SG&A line is primarily the sales force.

Also, would note that the acquisition activity in the fourth quarter would have caused an increase in the SG&A costs as well.

If I were to think about the process of hiring a new sales person and the compensation for that sales person.

How long would it take that sales person to be at, you know, the productivity that would I guess be typical?

I would say it's somewhere between 6 and 9 months.

And again, you know, we -- unfortunately, we had some turnover in the new people that we hired in order to fill those spaces that we created about a year ago.

But, typically it would take 6-9 months to train a new sales rep, bring them up to full productivity and -- and then go forward from there and as you -- as you know, Kurt, I mean we're constantly adding to the sales force so it's, again, a moving target.

Bringing up people to full productivity, replacing those who don't work out and increasing the sales force by double-digits at the same time.

Bill, you mentioned that growth was expensive.

Sales force being one of those things that's expensive.

Is there something else that causes growth to be expensive?

Sure, you have the cost of the new garments that are injected for a new customer.

You know, when we sign up a new customer we give them all brand new garments so you have that all coming in and that amortization beginning.

You have certain upfront costs of fitting the employee, making sure they're taken care of.

There is -- you know, some other transactional costs that are all expensed upfront associated with new business.

So all of that tends to cause us to basically not make any money on a new account for some time.

Right.

Thank you.

And just switching gears for a minute.

If we were to look at the most recent quarter in the rental segment, the uniform rental versus the non-uniform rental and compare it with the May of '03 quarter, which one would have grown faster?

Which division?

No, within the uniform rental segment, comparing versus the May of '04 quarter versus the May of '03 quarter would uniform rental have grown faster or would the ancillary services in that segment have grown faster?

I would say probably the ancillary services grew faster.

They're coming off of a smaller base.

How significant would that difference be?

We don't have those details, Kurt, that we could provide.

I would say that as we've reported throughout the year, ancillary business generally has been growing at a faster rate.

Thank you so much for the answers and thanks for letting me take so much time asking questions here.

You're welcome, Kurt.

Now we'll hear from Brandt Sakakeeny with Deutsche Banc.

Thanks, good afternoon.

Hi Karen and Bill.

Hi Brandt.

Let's see, I think most of my questions have been answered, but I did want to go after the CapEx numbers for this coming fiscal year.

What are your expectations on that and, I guess, if I could get a little more detail in terms of free cash flow expectations for the year.

Thanks.

The CapEx guidance for next year is 125 to 150 million.

The cash flow expectations for next year, I think we've got about a $25 million -- I mean a 25% increase in free cash flow projected.

And why the big difference between the free cash flow growth versus the net income growth next year versus this year?

Actually, you know, I'm sorry, Brandt.

I was looking at an incorrect number.

It looks like it's gonna just grow in line with our net income growth now that I look at it more closely.

Okay, great.

And that takes into consideration what Bill was explaining earlier, that inventory levels will probably increase in line with sales growth and so that will be about a 10% increase next year over this year.

Okay, perfect.

That's all I needed.

Thank you.

Greg Halter of LJR Great Lakes has our next question.

Hi, Bill and Karen, how are you?

Hi.

Fine, thanks.

A question for you regarding the medical costs.

You've talked about it obviously more than once here.

Are you doing anything different?

I know you had a VIBA trust awhile ago and some other things.

But is there anything else that you can do and are doing now?

Well, I think you do everything you can in trying to educate the employees to utilize their cost -- their medical benefits appropriately and I think that's probably the best thing that we can do right now.

We, of course, continue to use the VIBA trust and that's really a tax play that the IRS allows companies to do by funding your medical costs in advance the beginning of the year and being able to take the tax deduction before the expenditure's actually made.

So that's ongoing.

But the real--the important thing is to make sure that employees and their families utilize their health benefits prudently.

Now, we don't want to take the benefits away from our employees.

It's very important that they have that.

But we utilize preferred provider networks.

We try to make sure that employees are encouraged to participate in those, so we offer lower weekly costs to their medical benefits and if they want a full indemnity plan.

We have increased the weekly cost very, very modestly that an employee is charged for his medical benefits.

I think even with that, though, as all companies are facing, our costs as a percent of sales and medical benefits are higher today than they were a year ago.

Hopefully we're going to see the inflation in medical costs begin to come down from the levels--the double-digit levels that we've seen previously, but that we need to continue to provide this very important benefit to our employees and we will continue to do so.

Okay.

And also on the energy costs.

Given the increase in fuel in the last quarter, I was surprised that your costs weren't higher than they were.

Can you comment on that and what you are seeing currently?

Well, you know, what happens in the energy costs is that it does certainly spike and we saw a huge spike in the cost in the quarter but then it's come back.

You also have included in our costs, of course, is natural gas and fortunately natural gas costs were less in the fourth quarter than they were in the third quarter.

So, all in all, there wasn't much of a change in energy costs as a percent of sales from quarter-to-quarter.

Going forward, who knows?

It's anybody's guess.

You know, we continue to invest in very fuel efficient vehicles and in machinery and equipment within our facilities that is, you know, hopefully will save energy costs and we'll continue to do that going forward; but we're kind of at the mercy of what the costs are and we'll do our best to operate within those.

Okay, and last question.

I think in the first quarter of fiscal '04 there was a garment manufacturer receivable.

Any update on the status regarding that?

No, that is -- we -- that basically that was the one that was fully reserved for back in the first quarter.

We continue to be fighting in the court systems for some recovery of that but, unfortunately, at this point I don't have any positive news to tell anyone.

Okay.

Thank you.

Thanks Greg.

Now, we will here flair Bruce Simpson of William Blair.

I just wanted to touch base.

Strikes my memory that in the May of '03 quarter you had a significant benefit in your SG&A from the recovery of bad debts or delinquent debts, that that was kind of a significant swing factor in limiting SG&A as a percentage of revenue and that that is kind of an intermittent function of your fourth quarter.

Can you talk about how that impacted this quarter, was that a piece in keeping SG&A lower, or didn't we get that this year?

We did not get that this year, Bruce, and the reason we didn't get that is because we had done a very good job throughout the year in managing the receivables.

I'm glad you brought that up.

Last year we did get a little bit of a help because that was a concerted effort put out by our operating people to collect receivables and, therefore, reduce the punitive reserve that we charge ourselves when we don't collect things.

But this year I think the operating people did a much better job of keeping our receivable investment at a good level throughout the year and we really did not have any appreciable increase or decrease in the reserve requirements during the year.

Thanks, Bill.

We will now take a follow-up question from Adam Waldo.

Bill and/or Karen, I wonder if you could just give us a little more color on the assumptions you've made in your fiscal '05 EPS guidance with respect to healthcare cost inflation, expected workers comp claims inflation and energy cost inflation?

Well, I would tell you that-- let me take the last one first.

Energy costs we're not really assuming much change from what we experienced in the last two quarters.

Which is essentially slightly over 2.5% of sales.

Which is at the higher end of what we have experienced over the last five years, but we kind of see that continuing going forward.

As far as medical costs and workman's compensation costs, we are projecting an increase at a rate greater than the standard inflation rate.

I would tell you medical costs we're probably assuming some where in the low double-digits, high single-digit level and workman's comp, probably in the mid to high single-digit level.

And that is cost per claim inflation in the latter case, Bill?

Yes.

Okay.

And then finally just any ability that you might have to provide ahead of your 10-K filing either business segment EBIT margins or inventory obsolescence account reserve balance at the end of the year.

I got the inventory obsolescence.

I knew you would.

The obsolescence balance is going to be 25.965 million.

Okay.

Versus 25.436 million last year.

Great.

Okay.

Okay.

On the operating margins by segment-- do you want by quarter for the fourth quarter Adam?

Just for the fourth quarter, Karen, because we have them from your Qs for the first three quarters.

Okay, for the rental segment, the operating margin for the fourth quarter was 17.9%.

Okay.

And the operating margin for the other services segment was 11.0%.

Thank you so much.

Thank you.

Now, a follow-up from Michael Schneider.

I'm sorry, Mr. Schneider, could you requeue?

Karen, Bill?

Yes, hi, Michael.

A question on the sales force.

You mentioned that you're up 9% year-over-year as of year end.

Do you just have a rough idea, though, of what you averaged during the year?

Because it seems to me, you're probably at best flat in head count for the year.

During the year?

Yes?

No, there was-- actually there was a positive increase at the end of each quarter.

I would have said it was probably closer to 5-7%, if I recall right.

Okay.

Okay.

And then just two other quick questions.

CapEx for fiscal '05.

Have you you assumed any acceleration in your RFID rollout or is that a fiscal '06 event?

It's more of a fiscal '06 event.

Okay.

And have you guys put any brackets around what the savings per plant or productivity increase per plant would be given your early experiment in Ohio?

We certainly have numbers but, unfortunately, I'm not willing to share those publicly because I know our competitors are listening.

Okay, fair enough.

Thanks again.

At this time there are no further questions.

I'll turn it back to you for any closing remarks.

Well, thank you all again for joining us.

We certainly are very pleased with the interest that you all continue to show in Cintas and the support you give us and we thank you for that.

We will hopefully see a very good economy as we move forward in 2005 and we'll look forward to speaking with you again in September when we announce our first quarter results.

That does conclude today's conference and we do thank you for your participation.