信達思 (CTAS) 2005 Q4 法說會逐字稿

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

Today's program is being recorded.

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

Please go ahead, sir.

Good evening, everyone, and thank you for joining us for our call reporting the results of fiscal year 2005.

We are pleased to announce that Cintas achieved its 36th consecutive year of growth in revenue and income.

In the fourth quarter, our Rental business grew at a rate of 8.5%, while Other Service revenues, which consist of direct sale items, first aid services, and document management services, increased by over 13%.

This resulted in total revenue growth of almost 10%.

Net income grew over 14% in the quarter to a record $83 million, or $0.48 per diluted share.

We are also pleased to report that our organic growth rate in the Rental business increased for the seventh consecutive quarter.

Organic growth in our first aid and safety, and document management groups were also strong.

Despite continued energy and employee benefits cost increases, Cintas continued to improve its profit margins over the year, rising to 10.3% in the fourth quarter.

Our current guidance of revenues and earnings per share for the fiscal year ending May 31st, 2006, calls for total revenues of $3.35 billion to $3.45 billion, and diluted earnings per share of $1.95 to $2.05, including the impact of our share buyback announced on May 2nd.

We will discuss more on the results of the share buyback later in this call.

This guidance assumes a slowly improving economy during the year.

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 also -- we will open the call to questions.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements.

This conference call contains forward-looking statements that reflect the Company's current 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 let me turn the call over to Karen.

Good evening, everyone.

Let me go through some additional detail on the income statement, balance sheet, and cash flow, and then we'll open up the call for your questions.

Total revenues were 809 million for the quarter, a 9.6% increase over that reported in the prior year.

In this quarter we had 66 workdays, the same number of workdays as the fourth quarter of last fiscal year.

Rental revenues were 615 million compared to 560 million last year.

This was an increase of 8.5% over the fourth quarter of last fiscal year.

Acquisitions that have been made over the past 12 months contributed approximately $3 million of Rental revenue in the current quarter.

When subtracting out the acquired revenue, our organic growth for the fourth quarter was approximately 8%.

As Bill said, this was the 7th consecutive quarter of improving organic growth in Rental revenue, the largest segment of our business, which accounts for 77% of the Company's total revenue.

This 8% organic growth rate compares to a 5.3% organic growth rate in the fourth quarter of last fiscal year.

Let me go through some additional metrics behind the continued improvement in this number.

Our new business, which has been booked over the past four quarters contributed 13.8% growth in our top-line rental revenue this quarter versus the quarter a year ago.

This rate of growth continues to improve.

At the beginning of this fiscal year, the rate of new business was contributing approximately 13% to our top-line growth.

The improvement in new business reflects the increased tenure of our sales force and improvements in their productivity throughout the year.

Price increases to our existing customers contributed 1.6% in growth during the quarter, a slight improvement from the third quarter level.

Our contracts provide for annual price increases of the higher of CPI or 5% at the discretion of our managers.

Add-ons and stop orders are approaching a break-even level, and reduced top-line growth by a modest 1/10th of 1%.

This measurement takes into consideration the increase or decrease in our business within our existing customer accounts over the past 12 months.

This metric has been as high as negative 3% in 2003, and has improved dramatically, primarily as a result of our success in cross-selling additional rental products to our customers, such as entrance mats, rest room supply products, and other miscellaneous rental items.

The addition of these rental items has offset the negative pressure from customers who are not increasing their workforce or who are just not filling open positions.

With that said, the employment levels within our existing customer accounts turned slightly positive at the end of fiscal 2005.

We can't predict whether this is a sustainable trend because the monthly levels have fluctuated around a break-even point for approximately five months now.

And there's really no clear signal which way the trend will go.

However, this would suggest that add/stops have stabilized at this point.

Lost business over the past 12 months clipped our top-line growth by about 7.3%.

So let me reconcile the Rental growth of 8%.

New business added 13.8%, price increases added another 1.6%, lost business subtracted 7.3%, and add/stops subtracted one-tenth of one percent.

I would remind you that all of these metrics reconcile the increase in Rental revenue for the current quarter compared to the same quarter a year ago on a comparable workday basis.

The metrics capture the cumulative effect of all of the new business, lost business, price increases, and add/stops over the past 12 months.

Now let me move on to Other Services revenue.

That revenue of $194 million during the quarter increased 13.4% from last year.

On an organic same-day work basis, this segment of our business grew 5.7% without the benefit of acquisitions.

This segment includes the sale of uniforms to national account customers, the sale of uniforms through our catalog to local customers, primarily those who rent products from us, the first aid and safety division, and the new document management division.

First, our uniform sales business from our national account sales division and our catalog division together increased over 3% on an organic basis.

We continue to see strength in the healthcare and gaming sectors and some increased demand in the hospitality sector.

As our lodging customers have seen improvement in their businesses, they have increased expenditures to upgrade their hotels in terms of accommodations and amenities.

We are starting to see increased demand for upgrading their uniform programs as well.

The first aid and safety business grew approximately 25% during the quarter and 9% on an organic basis.

As we mentioned in our last conference call, we have expanded our product line in the first aid and safety business to include fire protection services.

This includes the inspection, repair, and recharging of portable fire extinguishers, fire suppression systems for restaurants and kitchens, and emergency and exit lights at companies.

The need for these services is driven by the National Fire Protection Association standards, state laws, and insurance company requirements.

As with all of our other services, we are capitalizing on our expertise in route oriented repeatable business services.

This business is very fragmented as well.

We have made and will continue to make acquisitions in order to build a critical size and market position in this business.

In a short period of time, we are already the second largest fire protection services company in the United States, and now have these capabilities in 23 of the top 50 cities.

Our document management business is building nicely and growing organically as well.

This quarter, our organic growth and document management approached 40%, and the annual run rate of that division is approaching $45 million.

Over the next several years we expect to expand our coverage into many new markets.

Now let me discuss the margins for the quarter.

Our Rental margins were a strong 45.7% of revenue.

This is a 140-basis-point improvement over the prior year in spite of increased energy costs.

In total, our electricity, fuel, and gas costs increased approximately 40 basis points as a percentage of revenue from the prior year.

In total, these three expenses accounted for 3% of our total revenue, which is comparable to where we were in the third quarter.

This cost pressure was more than offset from productivity improvements and a reduction in our material costs as a percentage of revenue.

Material costs represent the amortization of our rental products.

When we made the Omni acquisition in May of 2002, we converted their uniform product line over to ours during the first year and a half after the acquisition.

The additional amortization expense that resulted from the changeover is now behind us.

In addition, with the acceleration in top-line organic growth in the Rental business, the material cost expense has declined as a percentage of top-line revenue.

In addition, our Six Sigma initiatives, which were instituted in our rental operations this fiscal year, are starting to have a positive impact on that group.

We are finding cost reductions from efficiencies in all areas of our Company.

Production, delivery, and material costs.

Now moving on to Other Services revenue margins, the gross margin in that segment was a strong 34.8% of revenue.

This margin generally falls in the 30 to 35% range, but it fluctuates from quarter to quarter due to the change in customer mix each quarter and the amount of sales volume in that particular quarter.

Along with the continued improvement in top-line growth, we are getting some positive leverage in this side of our business.

We are also seeing a favorable impact from the growth in our first aid and safety and document management businesses as well.

Our selling and administrative expenses were 26.3% of revenue, or 60 basis points higher than last year's fourth quarter, but I would say 70 basis points lower than the previous quarter of this fiscal year.

Medical costs account for a portion of this selling and administrative expense increase year-over-year.

Our sales and marketing costs also account for some of the increase, but here again, we are getting some leverage from a healthier top line as well as continued improvements in the productivity of our sales force.

We believe our sales organization has been right-sized for the $3 billion Company we are today.

And we will continue to build that organization to achieve our goals for top-line growth going forward.

Net interest cost were four-tenths of a percent of revenue.

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

And therefore, net income of $83 million increased 14% and earnings per share increased 14% to $0.48 per diluted share.

Now let's move on quickly to the balance sheet.

The balance sheet continued to strengthen during the quarter.

Our current ratio stands at 3.3 to 1.

Cash and marketable securities stood at approximately $310 million at the end of the year, a 22% increase over last May.

DSOs on accounts receivable were 37 days a slight increase from last quarter due to the improved sales growth as we finished out the year.

Inventory levels increased 15% year-over-year.

We mentioned the increased inventory levels last quarter when we rolled out a new catalog in our national account sales division.

In addition, we are manufacturing a new comfort flex pant in the rental division, which offers a more comfortable flexible fabric and fit than our previous work pant.

We believe this brings some additional competitive advantages to our rental sales force, with a broader more differentiated product offering.

Accrued liabilities include an extra day of accrued compensation compared to last May based on how our pay dates fell during the end of the quarter.

Our accruals at the end of May also increased due to an increase to fund our partners plan, which is our defined contribution retirement plan.

This increased accrual reflects the increase in our Company's profits for the year.

There were also increases in some other accruals including our medical benefits for our partners and some general insurance accruals.

Our long-term debt stood at 465 million at the end of May, which is predominantly made of the 450 million of debt that we incurred to purchase Omni in fiscal 2002.

Total debt as a percentage of capitalization was 18.3% at the end of May.

Now I'll make a few comments about the cash flow statement.

Operating cash flow of 126 million in the quarter and 414 million for the year.

CapEx came in at 40 million for the quarter and 140 million for the year.

Free cash flow for the year, after excluding capital expenditures was $273 million.

This did decline from fiscal year 2004's free cash flow, which can be attributed to the stronger sales growth we are experiencing this year.

This can be seen in the increase in accounts receivable balances at the end of the year and the additions to our inventory levels for the new catalog programs in the national account sales division and those product enhancements in the Rental operations that I explained before.

However, we would note that our free cash flow of 273 million this year represents a healthy 27% increase in the last two years.

During the fourth quarter we also paid a $55 million dividend to our shareholders, which was a 10% increase over last year's dividend.

In addition, we purchased $58 million of our stock or roughly 12% of that amount authorized by our Board of Directors at their April Board meeting.

We look forward to fiscal 2006 with the expectation that we will achieve our 37th year of uninterrupted growth in sales and profits.

I'd now like to turn the call back to Bill Gale before we open it up to questions.

As Karen just mentioned, we did purchase some stock back on the authorization that was given by our Board, and I wanted to update you through today on where we stood with that stock buyback.

As you may recall, in April the Cintas Board of Directors authorized management to purchase up to $500 million of Cintas stock.

In compliance with the SEC and NASDAQ rules, we initiated the buyback program.

After entering the quiet period in mid-May, Cintas established a 10b5-1 plan to authorize a selected broker dealer to purchase stock at a preset formula price based on prior trading.

Since the inception of the program, Cintas has purchased 3.9 million shares at a cost of approximately $154 million.

Of the 3.9 million shares, as mentioned previously by Karen, approximately 1.5 million shares were purchased up to our fiscal year end on May 31st.

The impact of the purchase of Cintas stock on the EPS calculations for the fourth quarter did not change the results of either the quarterly EPS or full-year EPS, as the calculations are made using a weighted average shares outstanding by month.

And our guidance of $1.95 to $2.05 for fiscal year 2006 has factored in the impact of the purchased stock amounting to approximately $0.02 a share due to less shares outstanding, but higher net interest expense.

Now we will be happy to take your questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Brandt Sakakeeny with Deutsche Bank.

Thanks.

Congratulations on a good year.

Thanks, Brandt.

A couple questions for you.

One is, can you just give us the breakdown of the uniform growth in the year as part of your Rental segment?

We really don't want to get into any further detail other than what we've given on the call partially because it kind of tips our hand to the competition on how we're executing our strategy for growth in our different product lines.

So, Brandt, we'd rather just stick with the fact that we showed an 8% organic growth rate in the Rental group and all product lines are growing and contributing to that 8%.

Okay, that's fine.

You introduced a new line of uniforms.

I'm curious if that's helping to accelerate the growth, or do you think sort of the source of the acceleration is enhanced sales productivity?

My next question is, as you look out to FY '06, can you just give us a CapEx assumption, and also the rate at which you're assuming your capacity utilization will be in '06?

First of all, let's talk about the improvement in the new business up to 13.8%.

First of all, we would attribute that to the increased tenure in the sales force, the fact that they've become more productive.

We talked a little bit about that in the third quarter.

And they continue to improve their productivity in this quarter.

We also think that the new comfort flex pant has helped them to sell more new accounts.

They're still finding great success in getting no programmers into our business.

So, Brandt, really all of those factors are helping them improve their productivity, and I don't know there's any one thing that we would point to that would say why they continue to do well.

But it's tenure, productivity, new product line that they're offering to our customers, continue to have success in going after no programmers.

On the CapEx guidance we would tell you it's a range of $150 to $170 million.

We expect to build approximately eight to ten new plants next year.

And as far as percentage of capacity, we're running in the low 80% range right now.

Okay.

Now, did I cover all your questions?

You did.

That was great, thank you.

I'll let other people ask right now.

Next question comes from Gary Bisbee with Lehman Brothers.

Hi, guys.

Add my congratulations on a good fourth quarter and good outlook.

A couple questions if I could.

Can you quantify how much of the Rental gross margin improvement came from no longer amortizing the uniforms from the Omni switch-over?

Was that a material amount?

Well, I don't have a break down specifically for Omni.

But I will tell you the material cost improvement was approximately 50 basis points in total.

Okay.

Now, some of that, Gary, is just the fact that as top-line growth continues to accelerate and we continue to have success in writing new business, as you get that new business under your wing, you get the amortization started, you start to annualize that amortization, that will help the material cost comparisons from year to year and quarter to quarter as well.

Okay.

Is there anything else that you would point out, just in terms of the year-over-year change in the Rental gross margin, if energy was up 40 bips, but it sounds like sourcing was an improvement of 50, where did the other 130 basis points of improvement come from?

It comes from many areas, but we've talked before about as capacity -- as we continued to improve the level of business in our operations, we obviously gained some leverage there by increasing our capacity utilization.

We have also implemented -- we began -- we have begun the implementation of some Six Sigma efforts that have improved our cost structures in a number of different areas.

And it's a continual effort on the part of Cintas to constantly look at everything we're doing and see how we can do it better.

I think as we've demonstrated before, the -- just the attention that we pay to all the small details will result in improvements such as you're seeing right now.

Okay.

Thanks.

On to the Other Services gross margin.

Realizing that they're still fairly small, are the document and first aid and safety helping the improvement there?

And I guess at some point in the future, or maybe I should ask when in the future would you start to think that the low end of that 30 to 35% target range you've talked about would start to come up because of the growth of those businesses.

I think you're starting to see some impact of that now.

First aid and safety business has a run rate of about $230 million.

So it's not a small business anymore.

And the document management business, as Karen mentioned is growing fairly nicely.

And those are fairly profitable businesses.

So they're starting to impact that.

But in addition to that, we also saw improvement in our direct sale business late in the year, which helps -- as you get more volume going through there, that certainly helps spread some of those fixed costs over more sales dollars.

And as we saw in the Rental business, we're also implementing a lot of cost improvement programs that have basically resulted in improvements in a number of different areas from sourcing of products through the delivery of some of these services and some of the newer businesses.

Okay.

Then just lastly, looking at the SG&A expenses, it seems to be the highest annual rate we've seen in a long time, in fiscal '05.

Now that you're seeing the top line accelerate a bit, how comfortable are you that that will likely start to go down as a percent of revenues as we move through 2006?

Well, you know, when we're looking at the SG&A line throughout the fiscal year it's -- it did hit a peek in the third quarter of about 27% of revenue, and so this drop of 70 basis points brings it down to a level that we saw roughly in the first quarter.

We still think that we can make progress on, as Bill said, capitalizing on some fixed costs, generating higher top-line sales growth and leveraging the fixed costs.

So we think we'll continue to see some improvement going forward.

And remember, this is the area where the medical costs associated for all of our partners throughout the Company is located.

And we've seen -- as we've reported quarter after quarter, we continue to see, albeit a declining increase, we've seen a substantial increase over the last couple of years in medical costs.

So part of the reason you're seeing these higher numbers is due, in fact, to that.

Right.

Okay.

Thanks.

I just wanted to make one comment.

Brad Safalo who used to cover you at J.P.

Morgan, just e-mailed me and told me to congratulate you on the comfort of the comfort flex pants.

Apparently he got a pair and said they're great.

That's great to hear.

We're going to hire him as a sales person.

Thanks a lot.

Moving on to Michael Husku with Budka & Rogers.

Just a couple of quick ones.

The guidance that you issued of $1.95 to $2.05, that only includes the impact of the shares that have been purchased so far; is that correct?

That's correct, Michael.

Okay.

Could you repeat again the first aid total growth?

I got the 9% organic.

25%.

Okay.

Thirdly, the comment about assuming a slowly improving economy, that needs a little bit of clarification for me.

An economy growing 1% year-over-year could be deemed to have improved from one year to the next.

Are you talking about the rate of growth of the economy improving from current levels, or the way I expressed it the first time?

I would characterize it as what we saw during fiscal year 2005, if we could see that same kind of improvement in employment levels, slow but steady, in a generally expanding economy, we believe as long as that will continue that would enable us to make this guidance.

And lastly, if I can have another whack at the question that was asked about the uniforms, as to how they contributed to total Rental division growth.

I know you're not going to tell us exactly for the reasons you cited, but can you say whether or not uniforms contributed relatively more or less to the division's growth than was the case say for the previous year?

Michael, I admire your ability to ask that question again, but, we just don't really want to tip our hand to the competition on these product lines any further than we have to.

I understand you're interested in hearing more about the different product lines and how they contribute to growth, but really and truly all of them contributed to the improvement in the total organic growth of 8% during the quarter.

Thanks.

Very nice way to end the year.

Take care.

Thank you.

Next is Eric Sledgister with Credit Suisse First Boston.

Good afternoon.

It's Eric filling in for Greg.

Hi, Eric.

I'm hoping to dig a little more into the operating cash flow, which I believe lagged last year's levels throughout the course of the year.

Should we expect that to normalize in '06 and to grow going forward?

We show -- our expectations for free cash flow for next year are pretty much in line with sales growth.

So, we have an expectation of CapEx of around $150 million, $160 million.

Our working capital increase will be in line with sales growth, and so total free cash flow for the year is going to be pretty much in line.

Okay.

Great.

And I'm not sure if I missed this on the call, but did you comment on the percentage of new sales that came from non-programmers during the quarter?

I didn't, Eric, because I don't have the final number for the fiscal year.

Our marketing department is working on that.

In the third quarter, we were approaching the high 50% -- 50% plus range, almost 60%, as a matter of fact.

So we'll follow up with you and give you that as soon as that's been confirmed.

Great.

Thanks a lot.

We have Bruce Simpson with William Blair.

Good afternoon.

Hi, Bruce.

Hi, there.

Couple of questions about the sales force.

I know that you said during the call that you think you've right-sized the sales force.

So moving forward, would we expect sales force hiring growth rates to be sort of equal with sales growth?

Bruce, we're going -- we're changing our strategy on discussing sales force size, and we will tell you right now that we will grow the sales force commensurate with our need to grow the top line.

So I'm being very vague, but we're going to use a combination of increases in sales force and what we're doing in productivity, and we will do what we need to do to generate the top-line sales.

If I could just add to Bill's comment, we have so many different types of sales forces here, Bruce, you know that, we have people who devote their time and effort on building the uniform rental business, on uniform sales, document management, all the fire and first aid services, and so to really give you guys any meaningful information on sales force growth, we'd have to be giving you detailed information of how we're growing each one of those segments.

Again, as you can appreciate, it's a competitive business, and we just don't want to give out that information for competitive reasons.

Okay.

So we shouldn't expect to hear you quantify sales force growth per quarter moving forward?

That's correct.

okay.

Trying to push on that a little bit, Bill, can you say where the productivity of the sales force as a whole is today compared to either pre-recession or the bottom of the recession or a year ago or compared to any other place so we can sort of take a snapshot of where we are?

Yes, Bruce, we're continuing to make progress.

I'd say we're within 10% of where our productivity was prior to the recession.

Okay.

So it sounds like moving forward, you think there's more to be reclaimed in addition to the increase in the number of bodies there.

Yes, we do.

Okay.

And then a couple more just -- can you talk about the average size account for new accounts that you're signing up?

Is one reason that the no programmer rate is rising to towards 60% and above, is that new accounts are coming on at smaller average sizes, or are they generally the same size that they've been through the recession?

The last time we looked at that, and we don't have current data, but the last time we looked at that, roughly the new accounts were at the number of people in uniform and new accounts was still about 10 to 15% lower than what they were pre-recession.

So our people, as you can imagine, that factors into their productivity, too.

They're having run faster and write more accounts in order to keep one that shrinkage in the average size of the workforce at our customers' places of business.

And from a revenue perspective, similar? 10 or 15%?

Smaller ticket per account?

Well, that's hard to say, because we also have additional products and services.

So to be totally honest with you, I don't have the exact numbers.

My speculation is, is that it would be less than what it was, but it wouldn't be all the way less because of some of the other things we're doing.

Okay.

And I guess just the last thing is, can you give us an update on the hygiene business?

What's the run rate there, and so forth?

On the hygiene business?

The Sanis product line?

Yes.

It's running slightly over $100 million in annual revenue, growing nicely.

As you know, we've been very bullish about that product line, and continue to devote a lot of resources to developing that product line.

That's a huge potential marketplace for us, and we just barely tapped that market so far.

So a lot of potential for growth.

Okay.

Thanks.

Congratulations.

Thank you.

Now with Smith Barney, we'll take a question from Pete Carilo.

A couple questions for you.

In terms of the organic growth components of the Rental business, when you look out over the next, say, four quarters, at some point we're going to hit up -- price increases have their limits and new business has its limits, et cetera.

How much more, if you can quantify it, or give sort of generally a qualitative answer, how much more room is there to improve the business in those various four or five categories there as we see the next four quarters roll along?

We've spoken about this at many conferences and over the last couple of years.

And I think the -- it's important for everyone to understand that we are very comfortable with the expectation that we could get an increase in the new business areas by at least two to three points from where we're at today.

Our price increases could probably have another room of a half to one point.

Our lost business could improve probably at least another one to two points, and our add/stops, if we can get back to pre-recession levels, generally we're adding at least a point to us.

So that would all take us back up into the double-digit arena for growth in the Rental business.

Yes.

That's good.

That's great.

I guess a similar question is, you mentioned this quarter that in the add/stops area you are a little offset -- I think you said something along the lines of, if you were to offset the lack of new uniforms being purchased by the selling of additional -- cross-selling additional products; is that correct?

That was part of the, yes, the improvement in the add/stops.

Karen mentioned that, yes.

Is there any way to give an idea -- this is something -- many people who talk about your stock positively talk about this concept.

Is there any way to give an idea a little more -- how detailed, I guess how much effect can you have?

Let's just assume for the next year or so that there's not a lot of increase in uniform demand by their sort of auto-related people, other people that use the rented uniforms.

How much effect can you have by cross-selling?

Is there any way you guys look at it a certain way?

We could not give that to you right now, and even if I had it, I'm not sure I would give that out and tip my hand to my competition.

Let's just suffice it to say that we are bullish about the opportunities that we have in front of us to increase product offerings to existing customers, as well as to attract new customers.

Okay.

Great.

One final little quick one.

Depreciation for the quarter?

I'm not sure if that's in the release or not.

Depreciation for the quarter was $30 million.

30 million?

$30 million.

I'm sorry, D&A together, sorry.

Oh, D&A together is approximately 38 million.

Great.

Thanks a lot.

You're welcome.

Now we have Michael Moran with Merrill Lynch.

Good afternoon.

Couple of questions if I may.

First, on the sales force, I won't try to get a year-on-year growth number from you, but can you maybe talk about any trends you're seeing on the turnover front in your sales force?

Are you experiencing any improvements there?

Have you made any changes in terms of perhaps how you're compensating people?

That sort of thing on the turnover front.

Then I have another -- second question after that.

Michael, we have seen improvements in our turnover.

As far as the -- no changes have really been made in the compensation program since the beginning of the fiscal year.

We've spoken about that before.

And basically, the change was to provide a more predictable level of compensation for our sales people as much as anything.

But turnover has improved at this time.

Is it quantifiable at all?

I'm not going to disclose that at this point.

And then on the Other segment, I was just curious if you could talk -- if you could break that out in terms of -- I think you've given us the first aid and the document.

What's happening on the direct sale of uniforms?

It would seem that that's -- organic growth there has not been all that robust.

Is it a question of overall market growth, is at question of market share?

What's happening in that part of the Other segment?

I think Karen mentioned that we had organic growth in the uniform sales side of about 3%.

And that's a -- that's a business that appears to me to be coming back.

We've talked a lot about the segments that we serve in that business being a lot in the hospitality-type industries that have been fairly depressed in the last several years, but we're starting to see an uptick there, especially in the lodging area.

The gaming area started a little while ago.

And you could -- it wouldn't be surprising, and I can't say for sure when this will happen, but if those industries continue to improve, and everything you read in the financial publications indicate that they are, we could see some substantial increase in demand in those areas going forward.

That has happened before.

And it is a lumpier type segment of our business.

So I would anticipate that as long as those industries continue to be healthy, as they seem to be, at least some of them, you'll see increased demand and we are the biggest supplier of uniforms for that -- for those segments.

Great.

Thanks very much.

We have Chris Gutek with Morgan Stanley.

Thanks.

Hi, Bill and Karen.

Bill, I just wanted to follow up, I hate to beat a dead horse here with your comments on the sales force, but try and clarify a little bit.

Is this a situation where you're simply saying for competitive reasons you want to cut back a bit on a disclosure that you're making about the sales force and the growth in the headcount?

Or conversely, is this a situation where there is actually a change in the Company's growth strategy or change in how the Company management thinks about the optimal trade-off between growth and profitability as a focus area?

No, I would totally diminish anything you said on the second point there.

There's no change in strategy, there's no change in our feeling of our opportunities that lie in front of us at all.

It is strictly a competitive situation due to the fact that we were finding that providing this information was hurting us in the marketplace.

And secondly, as Karen mentioned, and I think this is very important, is that with the different businesses that we're in and the different types of sales that are going on, it would become important for us, for this to have any meaning whatsoever, to provide you even more detail, which is something we do not want to do because of the competitive situation.

Right.

Makes sense.

As you know, Bill, Airmark has talked about in recent quarters pretty healthy growth in their sales force headcount within their uniform rental division.

I'm curious if you guys are actually seeing any impact of that in the field, either from them or from some of the smaller competitors as well, in terms of just change in competitive landscape, change in the growth focus by some of your top competitors?

No, we have not seen anything.

Pricing appears to be rational.

We don't -- we see a -- if anything, we see a little bit of increased emphasis on the part of the bigger players to go after some of this no programmer business, which is is fine with us.

We would love to see that.

And that's the only change that we've noticed over the last year or two.

Okay.

One more unrelated question, if I could.

In the document storage business, specifically putting aside shredding, I'm just kind of curious for your current thoughts on the strategy there.

Are you -- would you characterize the strategy as being in a relatively aggressive growth mode, aggressive growth or acquisition mode, specifically?

Or conversely, are you really more focused in the shredding business currently and document management is still more in the beta testing phase?

Document storage side of document management is still what I would consider to be in the more of the testing phase.

We've only made two acquisitions in that area and they were relatively small.

We're excited about some of the potential synergies, but our focus has been in the shredding, route-based shredding business.

That's where we've expanded significantly over the last nine months into many cities around the country now.

We've bought many little companies.

We're integrating them.

Our organic growth is very healthy.

And we're very excited about that aspect.

Now that's not to say we're not interested in the storage side, but I would say that our primary focus right now is on the shredding side with storage being something that is being tested in a couple of markets just to see what type of business really is it, how does it fit in with our strategies regarding our balance sheet, with our returns on assets, and our ability to grow that business going forward.

Great.

Thanks.

Next we have Michael Schneider with Robert W. Baird.

Hi, guys.

Hi, Michael.

I guess I want to dig into the guidance on the revenue line for a minute.

Bear with me on these numbers.

But if you look back over fiscal '05, organic growth basically went from, call it 5 to 8%?

Yes.

And you're projecting revenue growth at least at the midpoint of 11%?

5 to 8%, I think the 8% was in the Rental business.

Right.

Overall it was 7.5?

Right.

Okay.

So call it a 250 basis point improvement in organic growth through the year.

And then the guidance for fiscal '06 assumes 11% at the midpoint, 11% growth.

Correct.

So I guess what that -- at least I infer from that is you're expecting to go ,call it 8% Rental growth, 8% Rental organic growth in this quarter to something well into probably the 12% range by fiscal year end.

So that the average works out to, call it 10 to 11% organic growth for the year.

Can you just run that math back at me and tell me where I'm wrong or if it is indeed right?

Because the acceleration sounds more than just a modest acceleration in the economy.

Maybe there's something else you're embedding in there that you're optimistic about.

To answer your question accurately, we're going to have to go back and look at it in detail, but keep in mind that we've got a couple of those businesses that are growing probably a little faster, the document management and the first aid and safety, albeit they're smaller businesses.

But your assumption is, we are presuming that we are going to have improving organic growth rates in our Rental business.

Then we also will continue to see more rapid increases in the first aid and safety and the document management businesses.

The sales side of the business we certainly expect better improvement than what we -- or better growth rates than what we've had over the last couple of years.

Well, in fact, maybe that -- couple of questions.

The guidance definitely does not assume additional acquisitions, only those that you've acquired to date?

Our guidance never assumes additional acquisitions.

Okay.

Well then, just again, if you look at the components of the four elements to organic growth that you run through each quarter, where is the biggest slingshot going to come in fiscal '06?

Is it new business to give you three and four more points of organic growth?

Because presumably add/stops are at some point hit the wall, pricing hits the wall.

Is it all new business.

It's not all new business, but that has always been the major contributor to the organic growth.

Even in this quarter we saw that it's carrying the lion's share of the weight and in growing the top line in the Rental business, so you are right, but we do have improvements in every one of those metrics next fiscal year.

But to answer your question, the lion's share of the growth initiative has to be from the new business sector.

Okay.

Then you know I write a lot about disaggregation of the employment data and how it impacts the industry.

I'm wondering if you could give us your thoughts.

You've got an add/stop rate basically of 0 now, and employment overall for the U.S. non-pharm economy at least is up 1.6% year-over-year.

What do you guys read into that?

Well, it doesn't necessarily mean that it's in the sectors that we service.

So I know you want to draw that correlation, but it doesn't always impact the segments that we have.

I think your correlation says something to the effect of it's about 25% overlap with the sectors we service?

Yes.

So, we don't participate one for one, and these numbers that are coming out from the government.

But what that said, we do think that it does signal that there's a healthier economy, do we know that we can predict it for the next fiscal year?

No, but we're assuming that, as Bill said, we have a continued modest improvement in the economy and we think we can achieve these numbers with a growing sales force and a more productive sales force and those who have more tools to get that new business.

Have you reconfigured the target market of your sales force to try and address this new economy as it were?

You mean going after new industries?

Yes.

We certainly look at that, Michael, but our primary focus are on the industries we're already in, which are not penetrated to the extent we believe they can be penetrated.

We still have a lot -- tremendous opportunities in many of the segments that have significant numbers of no programmers where we've demonstrated that customers in those industries are good uniform prospects.

And I would say that's really the greater focus of our marketing group is to try to figure out how to attack those underpenetrated industries and improve the incident of uniform rentals.

Okay.

Again, just your interpretation of a number.

The uniforms and service balance, Karen, was up about 2.4% --

Yes.

-- kind of year-over-year.

What -- yet organic growth in the Rental division is running at 8.

What's the reconciliation of those two numbers?

Well, I don't have a mathematical reconciliation for you, but it would just say that --.

Qualitatively.

Yes.

Qualitatively, again, it's streamlining some of the stockroom operations in our Rental division, as Bill mentioned, we've got some Six Sigma efforts that are happening in that group.

We've consolidated some of the product lines that we rent, and, therefore, improving the cost structure of those items.

So a lot of -- I would just, again, reiterate the productivity improvements, Six Sigma efforts consolidating the product line and getting that investment down.

And then acquisitions during the quarter, you spent about 27 million, according to the cash flow statement.

Were those new acquisitions, earn-outs?

Maybe give us some color on what did you acquire.

They were primarily new acquisitions.

The majority of which were in the first aid and document management businesses, although there was a small amount of uniforms, very small.

Okay.

Final question, just now that we're 45 days beyond the end of the quarter, Karen, do you happen to have the split of SG&A between divisions so we can drop down to operating income by division?

I don't have that yet, no, I'm sorry, we don't have that right yet.

Thank you.

Congratulations on a great year.

Thanks, Michael.

We have a follow-up question from Brandt Sakakeeny.

Hi, can you hear me, Karen?

Yes.

Quick question.

Just to step up in the amortization, should we use that as a new baseline for '06?

Yes, you should.

Okay.

Any guidance on just the interest expense and investment income line?

I noticed that despite the buyback, interest expense fell sequentially.

I want to make sure I'm looking at that right.

And what is your expectation for the full year on that given the buyback?

I don't have an expectation for net interest expense for next fiscal year '06.

It will go up, though, as Bill mentioned, because we've -- with the share repurchase, we were able to use about $100 million of cash and marketable securities and we did borrow on our commercial paper line by about $50 million.

Okay.

So, Brandt, it will increase somewhat as a result of that net change in the cash and marketable securities.

I don't know if you -- a rough figure might be where it would be pretax maybe $5 million, and after tax somewhere north of 3 million.

Can you just remind us the cost of that paper?

Is it LIBOR plus something?

It's -- yes, it's actually LIBOR -- approximately LIBOR flat.

Wow, okay.

And you plan to keep that variable, I assume, and not fix out any portion of that, or --?

Well, right now that's the game plan, but we'll have to evaluate that.

Things could change.

Great.

Thanks.

We have another follow-up from Pete Corilo.

Just a follow-up question actually.

A moment ago Michael Schneider asked a question regarding customer base and economy growth, et cetera.

To make sure I understand the strategy correctly, some of these new businesses, like the fire and safety, I guess even document management, even like the first aid kit area, isn't some of that intended to go and target some new type of customers as well, whether it's a strip mall, nonuniform type of customers?

Isn't it sort of an attempt to bring in new types of customers and then try and cross-sell them other things as well?

Yes, it is.

I was just addressing his uniform side.

First aid and safety business brings us a whole new realm of customers that maybe wouldn't necessarily be good uniform rental customers.

Professional services firms, technological firms, et cetera, are all big users of first aid in safety items.

The fire service business runs the whole gamut.

I mean, from all industry of any type within this country are basically -- could be serviced by fire.

And our strategy certainly are to have business services that can give us the ability to expand beyond our traditional uniform-wearing customer to our other businesses, such that we can get to the point at some point in the future where we can provide a business service to every business in the United States and Canada.

Right.

That's our big hairy audacious goal.

So then I guess as things go along, let's just say that some of the maybe midwestern type of manufacturing customers that make transmissions or auto parts, whatever, as those things outsource you can also move your sales force around, with not too much problem over to new types of customers and it's not a big long learning curve, correct?

Right.

I think we've demonstrated that over the last few years as we've branched in other services.

We're now serving 700,000 different business customers and it's -- not every one of those are uniform-wearing customers by any means.

Right.

Great.

Thanks again and great quarter.

Thanks, Pete.

Next we have a follow up from Gary Bisbee.

Yes, just one quick follow-up.

Any change in the outlook or what you're seeing in terms of acquisitions, in terms of people out there, their willingness to sell?

And then I guess given that you've been fairly aggressive since the Board initiated or introduced the share repurchase authorization, what's your current appetite for further repurchases as we look through fiscal '06?

In the acquisition arena, things continue to be strong in the document management area, especially with shredding businesses.

And their moderate in the -- they've moderately improved in the small uniform companies.

This is kind of a new development that we've seen maybe over the last six months that there seems to be a bit more interest in the smaller size uniform companies.

We're still not seeing much interest in the regional size or larger uniform companies and we continue to attribute that to the fact that they don't want to -- they want to grow their business a little bit more before they consider a sale.

As for the appetite, the Board has given us direction on what they perceive to be the appropriate level of which to utilize our cash and our debt capacity to buy stock, and we will continue to follow that directive from them.

And we'll just see how the market reacts.

So if we look, I mean, in the past you've had a debt-to-capital ratio as high as, I guess, the low 30s maybe, after the Omni acquisition?

Would you be comfortable if the right acquisition opportunity came up and you were still repurchasing stock to get back towards that type of leverage?

We're absolutely comfortable to be up at the 35 to 40% debt to cap without any problem whatsoever, and we feel that the rating agencies would continue to provide us with the same levels that we have -- same levels we have today at those levels.

So when we undertook the stock buyback program, we did not want to ever convey the feeling out there that we were not interested in acquisitions nor would we be able to do acquisitions.

We still feel that way even though we've bought back a significant amount of stock which we think was a tremendous investment.

Great.

Thanks a lot.

We'll take a question from Greg Halter with Great Lakes Review.

Hello, guys, and congratulations on exceeding the results there.

Thanks, Greg.

Relative to the 10b5-1, I noticed it expires tomorrow would.

Would that be renewed or would you just buy on your own?

We'll be able to buy on our own after that.

We only were in that program because we were in the quiet period and we really couldn't direct, make decisions on a daily basis.

Karen, you made a comment about energy costs being 30% of revenues.

Was that total revenues or Rental revenues?

No, it was 3%.

Sorry, 3%.

Sorry.

And that's of total revenue.

The whole Company's revenues.

Correct.

Okay.

And relative to the FAS 123, have you figured out what impact that would have had if you were reporting that way?

Well, no, we haven't really figured that out.

We'll certainly have our footnote disclosure that you'll see when we file the 10-K here in mid-August.

We'll continue with that.

And it's -- it's always run $0.04 to $0.05 a share.

But we will not be adopting FAS 123 on expensing of stock options until our fiscal year '07.

We got the reprieve when the new rules came out for fiscal years beginning after, I think, what is it, June 15th.

We, fortunately now are -- we don't fall into the -- nothing will impact us in '06.

It will be '07.

That sounds good.

Have you changed any of your amortization periods?

No.

Okay.

That's good.

And on the document management side, I don't know if you commented on how many locations you have and how many cities you're in now?

We didn't comment.

It's approximately 25 facilities.

Can you bring us up to speed on any new developments in the RFID arena?

Really nothing new to report to you, Greg.

You were here in March on Investor Day and we told you at that time that we were continuing to test it at our facility out in Milford, Ohio, which is a suburb of Cincinnati, that that test would continue through the rest of this calendar year, because the big effort that we're going through right now is embedding those chips in all the garments that we have in service, and that's a fairly lengthy process that we're doing in this test mode.

So really I don't have anything new to report other than we continue to be optimistic that it will work.

However, it will take until probably well into this fiscal year before we can tell you that for sure.

Okay.

And two last ones.

We've gone about six weeks so far in fiscal '06.

Any comment on how things have shaked out so far in that time frame?

No, we're continuing to see results comparable to what we saw in the -- late in '05, so nothing has really changed one way or the other.

And the last one is, any new things to say regarding the UNITE situation?

No, fortunately I can tell you that there has been no -- certainly no negative events whatsoever have taken place.

UNITE continues to press on their corporate campaign against Cintas, but they continue to appear to have no traction whatsoever with our employees.

We have no taste for moving forward in the direction they would like for them to move.

And the Company stands by its position that we're not against labor unions.

We just want the employees to have the right to say yes and the freedom to say no.

Okay.

Thank you.

And again congratulations on a very good year.

Thanks, Greg.

And there are no more questions at this time.

I'll turn things back over to our speakers for any concluding or further comments they may have.

The only concluding remark I would have is to again thank all of our employees, many of whom who do listen to these calls now that they're available on the Internet.

We are very much indebted to them for giving us this year that we're very proud of.

I think, we find that the progress that we made this year has continued the momentum we started to build in '04.

We're looking forward to a good fiscal year '06.

We're excited about the future and all the businesses that we're in.

So thank you again for joining us today.

We'll speak with you again in September when we report our first quarter.

Once again, this will conclude this Cintas fourth quarter results conference call.

Thank you, everyone.