信達思 (CTAS) 2006 Q4 法說會逐字稿

Good day everyone, and welcome to the Cintas fourth quarter 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, and thank you for joining us tonight.

We are pleased to announce that Cintas achieved its 37th consecutive year of growth in sales and profits.

For the year revenues increased 11% to a record $3.4 billion, and earnings per diluted share were $1.94, an increase of 11.5% over the amount in fiscal 2005.

Our organic growth for the year was about 8%.

In the fourth quarter total Company revenues increased over 12%, and earnings per share of $0.55 increased 14.6% over the prior year.

Joining me today is Scott Farmer, Cintas' President and Chief Executive Officer, and Mike Thompson, Cintas' Vice President and Treasurer.

After Mike and I provide some additional commentary on the quarter, Scott Farmer will discuss some organizational changes that will enable us to accelerate our growth and positively improve our margins.

We will then open the call to questions.

Since we last updated you on the share repurchase program, the Company has essentially completed the amount authorized by the Board of Directors.

During the fourth quarter and continuing through June 19, Cintas purchased approximately 7.8 million shares, resulting in total purchases since May of 2005 of 12,134,000 shares.

The impact of these repurchases had very minimal impact on quarter Q4 EPS due to the weighted average method of computing earnings per share.

However, there will be an impact in fiscal year 2007, as there are now only approximately 162 million shares outstanding on a diluted basis.

Operating margins improved by 30 basis points to 17% from 16.7% in the fourth quarter last year.

This occurred despite a 40 basis point increase in energy costs, which were about 3.5% of total revenues.

Net interest expense increased by 50 basis points due to the impact of acquisitions and the stock repurchase program.

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 Mike for more discussion on our results.

Starting with the income statement, total revenues were 907.9 million for the quarter, a 12.2% 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 fiscal 2005.

In fact, the workday breakdown by quarter was exactly the same as the breakdown last fiscal year, and will be for fiscal 2007 as well.

Rental revenues were 678 million compared to $615 million last year.

This was an increase of 10.2% over the fourth quarter of last fiscal year.

Factoring out acquisitions made over the last 12 months, our rental organic growth rate was 6.7% for the fourth quarter and 7.3% for the year.

Other Services revenue of 230 million increased 18.6% from last year's 194 million.

On an organic basis this segment of our business grew 8.4% for the fourth quarter and 9.6% for the year, without the benefit of acquisitions.

As a reminder, the Other Services segment includes the direct sale of uniforms for national account customers, the sale of uniforms for our catalog to local customers -- that is primarily customers who rent read products from us -- our First Aid and Safety division, including Fire Protection Services, and our Document Management division.

First our uniforms sales business from our National Account Sales division and our Rental division catalog sales in total increased 4.5% on an organic basis for the quarter, and 6.7% for the year.

We continue to see strength in the healthcare, hospitality and gaming sectors in our National Accounts Sales division.

The first-aid, safety and fire protection business grew 35% during the quarter and 12% on an organic basis.

For the year this business grew 31% and 12% organically.

The core first-aid and safety business continues to have some nice momentum and organic growth.

We have continued to build our national platform in the fire protection business mainly through acquisition, however, the fire service business is also contributing to organic growth.

We are very encouraged by the value proposition we offer our customers and our expanded line of first-aid, safety and fire protection businesses.

We plan to continue to expand our products and services within this business.

Our document management business continues to build nicely, with total fiscal 2006 revenues over doubling the revenues of fiscal 2005.

Our end rate is now over $75 million in revenue.

While our focus continues to be on building a national footprint in the shredding business, this division is also growing very strong organic rates, achieving 31% organic growth in the fourth quarter and 38% for the year.

We are now servicing 115 markets in the United States and Canada, including over 60 of the top 100 markets.

As you can see, we're quickly closing in on obtaining a true national presence in this business, which will make us one of only three companies capable of providing national service.

To recap, our total Company revenues for the quarter of 908 million grew 12.2% with organic growth of 7.1%.

For the year Company revenues grew to 3.4 billion, with organic growth of 7.8%.

This represents a 150 basis point improvement over fiscal 2005's organic growth of 6.3%.

Now I will discuss our margins for the quarter.

Total Company margins have improved 50 basis points to 43.6% of revenue for fourth quarter 2006, as compared to 43.1% for the fourth quarter of fiscal 2005.

For the year, total Company margins were 42.7%, a 20 basis point improvement over fiscal 2005.

This margin improvement was achieved despite increased energy costs.

Like many companies we have seen a dramatic increase in the cost of energy over the last two years, and especially so over the last nine months.

Historically our energy costs, which include national gas natural gas, electricity and fuel for our fleet would run approximately 2.25% to 2.5% of sales.

In fiscal 2005 our energy costs increased to just under 3%, and for fiscal 2006 we approached 3.5% of sales.

While fuel usage has always been an area of focus for us, we have dedicated additional resources over the last nine months to evaluating ways to combat the energy increases.

We have increased our focus on fuel conservation, including additional rerouting of routes, and fuel consumption oversight in our plants.

We are working with consultants concerning the central coordination of our energy build and consolidating energy purchases by appropriate geographic regions to maximize purchasing power.

Where applicable, we are locking in utility rates on a market basis for a period time, typically three to six months.

To date we have not entered into a formal Companywide long-term fuel hedging program.

However, we will continue to dedicate resources to try to curb these fuel costs.

Our rental margins continue to be strong at 45.8% of revenue for the fourth quarter.

This represents a 10 basis point improvement over the fourth quarter of fiscal 2005.

This margin improvement was achieved despite the increased energy costs experienced in the current fiscal year.

For the year, rental margins were 45.2%, consistent with the prior year.

Note that all of our divisions -- that of all of our divisions, the Rental division has the most exposure to energy costs.

Not only because it is our largest division, but also due to its large plant operations and its route-based delivery structure.

Improvements primarily in material costs and production expenses offset the energy costs.

Productivity improvements were driven by increased efficiencies and utilizing our rental inventory, as well as efforts in research and development and Six Sigma.

Gross margin in our Other Services revenue was a strong 37% of revenue for the fourth quarter versus 34.8% for the prior year fourth quarter.

For the year, Other Services gross margin improved 140 basis point to 35.1% for fiscal 2006 from 33.7% for fiscal 2005.

We continue to see a chemical impact on our margins from the improved topline growth in our National Accounts Sales division, as well as the contribution from our First-aid and Safety division, and our Document Management division, as these businesses continue to gain critical mass and become a larger percentage of Other Services revenue.

Our selling and administrative expenses were 26.6% of revenue, or 30 basis points higher than last year's fourth quarter.

For the year, selling and administrative costs also increased 30 basis points to 26.7% of sales versus 26.4% of sales for fiscal 2005.

The increase was mainly due to increased bad debt expense, legal costs, medical costs and professional fees associated with our outsourcing of certain human resource functions.

Net interest costs were 0.9% of revenue this quarter.

Our interest expense increased due to a combination of increased variable interest rates and additional outstanding debt.

In connection with the purchase of certain assets of Van Dyne Crotty Inc. and our stock repurchase program, we decided against prematurely liquidating some of our investment portfolio.

Rather, we borrowed money throughout the quarter on our commercial paper program.

As these investments reach maturity our intention is to use the proceeds to pay down commercial paper borrowings, depending on current cash needs and acquisition opportunities.

As of May 31, 2006 we had 334 million of commercial paper outstanding.

Our effective tax rate was 37.3% for the quarter and for the year, which is up from 37% last year.

The increase was predominantly due to income tax changes enacted by the state and local tax jurisdictions.

For the quarter, net income of 91.9 million increased 10.3% over the fourth quarter of fiscal 2005, and earnings per share increased 14.6% to $0.55 per diluted share, reflecting operational results and the impact of the share repurchase program.

Our balance sheet continues to be very strong.

Despite the reduction in cash and marketable securities used for acquisitions and the stock repurchase program, our current ratio stands at a strong 2.9 to 1.

Cash and marketable securities stood at approximately 241 million.

As marketable securities mature, we currently anticipate using these funds to pay down debt, depending on operating and acquisition needs.

DSOs on Accounts Receivable were 38 days, which is comparable to the prior year.

Inventory levels decreased 8.5% year-over-year.

The prior year inventory levels were higher due primarily to a new catalog rollout in our National Accounts Sales division, new products in the Rental division, and the timing of increased sourcing outside of the United States, which increased -- our safety stock needed to increase on these products as well.

These levels have been brought back in line with traditional levels.

In addition, improved inventory management procedures have allowed us to improve inventory turns requiring reduced inventory levels on increased sales volumes.

Accrued liabilities include an extra day of accrued compensation compared to May of 2005, based on how our paydays fell.

Our long-term debt stood at 794 million at the end of May, which is predominantly made up of the 450 million of debt we incurred to purchase Omni in fiscal 2002, and additional 334 million of commercial paper borrowed for the Van Dyne Crotty acquisition and the stock repurchases.

Total debt as a percentage of capitalization was 27.6%.

With our cash-flow statement, operating cash flow improved approximately $50 million to 462 million per year as compared to 414 million last year, reflecting increased net income and improvement in inventory levels.

Capital expenditures were $156 million for the year.

As Bill previously mentioned, we have essentially acquired all of the shares authorized under the stock repurchase program, having expanded 496 of the $500 million authorized amount.

We also made numerous acquisitions during fiscal 2006, the largest of which occurred in February of 2006 when we acquired certain assets of Van Dyne Crotty Inc.

Van Dyne Crotty was a regional competitor in the uniform rental business, who also had a small portion of first-aid revenue.

We anticipate annual revenues generated from the acquired customers to be between 85 and $90 million for the year.

We have been very pleased with this acquisitions to date, and are at ahead of schedule on the conversion process, including completely assimilating Van Dyne Crotty corporate functions into our Cintas corporate headquarters.

I would now like to turn the discussion back to Bill for further comments.

As we finalized our plans for the coming fiscal year, we have taken a mildly conservative view of economic growth, with no improvement in the energy markets from what we saw in the fourth quarter, as well as higher interest and legal expenses.

Our current guidance of revenues and earnings per share for the fiscal year ending May 31, 2007 calls for total revenues of $3,770,000,000 to $3,850,000,000, and diluted earnings per share of $2.10 to $2.20, including the impact of our share buyback and the adoption of FASB 123R for the cost of expensing stock options.

The stock option expense is estimated to be approximately $0.04 on an annual basis.

When we report our results beginning in the first quarter of fiscal 2007, we will also be restating prior year.

This will impact fiscal 2006 earnings about $0.01 per share per quarter.

Prior to answering your questions, Scott Farmer would like to provide you with some exciting organizational changes that we believe will help Cintas increase its sales growth even more.

This evening I would like to share with you an overview of an exciting new initiative at Cintas, known internally as Project One Team.

As you are aware, back in the fall of 2004 we changed our corporate tagline from "Cintas, The Uniform People" to "Cintas, The Service Professionals'.

This change was made to better reflect the broad spectrum of products and services we have added over the past ten years.

We are quickly developing into one source for all of the products and services that we provide to our customers.

Cintas is a growing and thriving Company that is always looking for ways to maximize cross-sell opportunities, and to bring new products and services to the market quickly and efficiently as possible.

As our new businesses grew, we added sales and support teams that were specific to these divisions.

For example, the First-aid and Safety and Document Management divisions had their own dedicated sales teams reporting up through their own separate divisions.

This siloed sales organization structure helped us stay focused on these new businesses as we built a geographic footprint and developed competitive advantages.

This strategy worked great for many years.

But now all of our businesses have grown to the point where we need to better co-ordinate our sales process with existing customers and prospects.

Given the 700,000 customers that we currently service, and the 14 million prospective customers that we could provide products to, we need to make sure that we eliminate any confusion that could be created by these separate sales teams and the customers in the marketplace.

With our broad spectrum of products and service offerings, we have a great opportunity to not only deepen our relationships with our existing customers through offering new product and services, but also to broaden a number of these relationships by adding new customers.

During the past several months we have developed the next evolution of our organization, one sales group that is coordinated, across all of our businesses, reporting up through one dedicated sales management team.

This new sales organization, transparent to our customers and service representatives, will also streamline the sales process, making it easier and more convenient for businesses to become users of many of our products and services.

Our vision is to have a team of world-class sales partners presenting one Cintas to all of our customers.

In addition, we have developed and tested a sales automation pool, unique to Cintas, that manages the sales prospecting process.

This new system allows all of our sales reps to see a complete Cintas view of each account within their territory, including all recent Cintas activity within the account for many of the different business divisions of Cintas.

It also allows them to forward leads to other sales reps in an automated manner.

The exchange of -- it has also improved the co-operation and automated the exchange of information among our sales representatives, and created a more effective sales process.

And we had begun testing a handheld PDA version as well, which would allow real-time updates to our sales reps while they are in the field.

As I mentioned, we have rolled out the new Cintas sales structure and support systems in certain geographic areas in the United States, and are very excited about the results.

Because of what we have seen in these select geographic territories, we're rolling out the new structure across the United States and North America, and closely monitoring the results.

We expect to have the new organization completely in place by the end of the calendar year.

Of course, we will experience certain startup costs during this conversion, including sales rep training and development, relocation costs, meeting costs etc.

In addition to increasing sales productivity, we believe the new sales structure will actually enhance our ability to become more cost-effective in the sales process as we automate our administrative processes, reduce turnover and streamline the flow of information.

We are quickly realizing many benefits from this new organization structure within our test markets.

For example, we are more successful with cross-selling our products and services to existing customers and prospects.

This new structure allows cross-selling to become more systematic and sustainable.

Our sales reps and sales managers from all of our individual business units are working together as they found that our business units cannot achieve individually what they can collectively.

Sales rep turnover has been reduced in the markets where we have tested the new sales structure as a result of the additional managerial support, the new resources offered to the sales reps, the training and development available, and the standardization of the sales processes that are the result of this new organization.

And sharing personnel and experience across business lines has also created an enhanced sales career path and also new career opportunities for employee partners and strengthened the talent pool in many of our markets.

I'm excited about what we are seeing here at Cintas.

We believe that this new organization is good for our employee partners.

It is good for our customers, and it is good for our shareholders.

And we will keep you posted as things develop.

Now I will turn it back over to Bill Gale, who will lead the question and answer session.

At this point I would like actually to advise you on how to ask a question.

And we will be happy to take them at this time.

(OPERATOR INSTRUCTIONS).

Michael Fox with JP Morgan.

I just had a couple of quick questions.

With regard to the Van Dyne Crotty acquisition, can you talk a little bit about what you guys plan for consolidation, and how many plants you're going to close, if any?

And how much cost savings that will come?

Then I was wondering if you can just give the trend during the quarter for organic growth, and then how is trending so far in the first quarter?

Thanks a lot.

With regard to the Van Dyne Crotty operation, we're moving forward relatively rapidly on plant consolidation.

We have completed the shutdown of their corporate headquarters and consolidated those operations into the Cintas corporate headquarters, so that is behind us.

As for the plants, right now we have closed down a couple of their smaller plants, and incorporated those revenues into various Cintas facilities that surrounded that operation.

We have also put a few of their plants into our systems as we continue to need capacity in certain markets as we addressed earlier.

And we're going to look at opportunities to expand their capacity even further.

I would tell you that at this point in time the administrative aspects of the acquisition are very well along.

The integration of the operational side are moving ahead at a pace to enable us to be sure that we take care of their customers as well as ours in an efficient manner.

Most of that will continue through fiscal 2007.

We are not going to specifically talk about the cost savings, because it becomes a very difficult factor to do as we keep moving volume around and shutdown operations and move other functions within Cintas.

But let me put it this way, that we expect this acquisition to be a very good acquisition for Cintas going forward.

We do expect it to be accretive, and it will be mildly accretive in the first year.

As far as the organic growth, I really couldn't see much of a trend.

March was probably the weakest month of the quarter.

It came back a little bit as the quarter when on.

So far for this fiscal year what we are seeing is pretty much what we saw in May.

Just one follow-up on the Van Dyne Crotty.

Are you -- is there going to be any job loss from any of their employees or yours where there was overlap?

And then if so, where are you in regard to that?

First off, this was an asset deal, so there will be loss of jobs, but it is not really us laying those people off, it is the fact that they never became our employees.

And Van Dyne Crotty and some of the facilities and the businesses it kept didn't need the same level of employees that they had on staff before.

Generally speaking, anytime we shut down a facility, obviously there's going to be the reduction in personnel because there's no longer a need for those people in the operation, but they were always Van Dyne Crotty people and never really came on the Cintas payroll.

Greg Cappelli with Credit Suisse.

I wondered if you might give us an idea directionally.

Also you mentioned organic growth, whether it be add, stop directionally with that through quarter to quarter.

Was that flattish?

We're no longer going to be breaking those components out.

Going back to what we talked about in the third quarter, the integrity of that information to the 10th of a degree that most people were looking at us for reporting that, just was not as accurate as we wanted it to be in order to give it to you.

From this point forward all we're going to talk about is just the total growth and the total organic growth.

As it relates to the Project One team, just clarify, does that mean that any individual salesperson is going to be able to sell any of the Cintas lines or products?

No, it doesn't mean that.

What it means is that we will still have specialist sales reps within a market.

Those reps will report up to a local market management team that oversees all of our businesses.

I do believe that we have an opportunity to develop our best reps to be able to do that sort of thing.

Our most experienced reps, those that have shown competence.

And that would be part of the vision for the future.

But initially, it would be our ability in a local market to identify key customers and prospects and the different opportunities or different businesses have within that customer or prospect, and then develop key strategies on a local market basis about how we are going to most effectively go in there to sell all those different opportunities.

And it has worked very well, but we do -- if you look at our customer base, we still have an awful lot of small businesses that may not have the need for all of our different products and services -- maybe one or two of them.

And we believe we will need sales specialists in each of our different categories to go in there and actively pursue those opportunities.

Got it.

The idea though is to really help promote cross-sell here though.

Exactly.

And then just one quick follow-up.

You guys mentioned the upfront costs that would be involved in it.

Any way to quantify for us what kind of upfront costs we're looking at?

It is not a material amount, but it is a few million dollars that would result from various training programs, relocation, moving people into new jobs.

I'm assuming we would see that this quarter?

You'll see it in the first 6 months of the year primarily, and that has been reflected in our guidance.

Peter Carrillo with Citigroup.

A couple of questions for you.

It looks like gross margin was actually the highest level it has ever been.

Is that correct?

It is not the highest it is ever been, but we did have a good quarter.

It the highest you have been since you have been reporting numbers, I think, at least going back to '97 or something like that.

Does that sound right?

We don't have that detail in front of us, but we will take your word for it.

What I am just trying to figure out, obviously the Other Services area sort of contributed more and more on the margin side.

Certainly.

That must be part of it as well.

But even on the rental side it was up as well there.

Also at a high for at least a couple of years.

What is behind some of that improvement?

Well, there are a few things behind it, but most notably our Six Sigma initiative continues to provide some good benefit to us throughout the year.

And we hope to continue that.

We have had various projects in place that we really rolled out Six Sigma through our Rental division about 18 months ago.

And we just trying to get some traction in that, as you know seem through our margins, be it through sourcing consolidations and things of that nature.

Again, I guess given -- I'm assuming about the option expense will show up more in the SG&A category, not so much in the cost of goods sold for you?

Is that correct?

Yes, all of our -- I would call it benefit type expenses, including option expenses, will always be reported as SG&A.

Then looking out toward '07 I guess we should expect some similar type of improvement in '07 as we saw in '06 in computing gross margin areas, right?

We certainly have continued to work on them.

I can't guarantee it.

But it is our expectation, as it always has been at Cintas, to continue to look at every line item of expense and try to determine a way to improve that.

And we have numerous programs going on that hopefully will result in such improvement going forward.

A couple of real quick ones.

Was there any hurricane insurance proceeds in the quarter at all or (technical difficulty)?

We didn't say it.

There was a minor amount that we did get from -- as an advance from the insurance company, but not nearly to the degree that we continue to fight and we claim that is our due.

We're continuing to have very significant discussions going forward with them, but it is too early to tell how much, if any more, we're going to get.

Where did that show up in?

That would just be in your SG&A line.

And then operating margins by rentals and Other Services, I don't think it is in the press release this time.

It usually is every quarter I think, or at least you give it each quarter.

For the gross margin?

The operating income for each (multiple speakers).

Mike has got that.

Just a second.

The income before taxes for Rentals was 471.2 million.

No, for the quarter.

For the quarter? (multiple speakers).

Let me pull it out.

We will have to get back to you on that.

We don't have it right here.

One last question is for last year -- for all of fiscal '06, if you add up the hurricane and fuel expenses, is that $0.055 effect, is that what we had in '06 that we would expect to occur in '07?

Well, first off I wouldn't say the energy costs are not going to be repeated.

The hurricane expenses were probably somewhere net $0.02 to $0.03 after-tax.

For '05 -- or for '06?

Yes.

Now the energy costs were a significant increase over '05, probably to the tune of $0.07 to $0.08.

But it is our expectation that much of that energy costs will continue in '07.

Just to clarify, the full year had about $0.09 to $0.11 of fuel and hurricane costs total.

Year-over-year.

We wouldn't expect it necessarily to occur in '07 unless things go up.

Right.

Our energy costs won't go up.

We, hopefully, will not have another hurricane.

You will still have an effect in the first quarter, because energy costs just started spiking in the second quarter.

So the first quarter a little bit still.

Yes.

Gary Bisbee with Lehman Brothers.

A couple of questions.

Any more color you can give on your organic growth.

Last quarter and at your Investor Day this past spring, you sounded pretty confident that double-digit within a year or so Rental organic was still pretty doable and possible.

And yet the number went down quite a bit quarter over quarter here.

I wonder -- first of all, any color on that.

And do you think the sales reorganization had any impact on new business wins in the last few months?

Were people more focused on potentially losing their jobs or restructuring than signing new business?

Any color on what is going on there would be helpful.

I would answer the latter part of your question by saying, I don't think that was the case.

As we look through the results, I don't think that there was that.

Obviously, people are excited about the new organization and are interested in where they will end up.

But I can't really believe it had much of impact on there.

I think the important thing to look at is that the was an improvement in internal growth year-over-year.

And while the economy has strengthened in total, we have not experienced the same degree of strengthening in the uniform rental business.

Part of it is that we are continuing to see jobs -- jobs not really added at a very robust rate in the traditional uniform rental areas.

While there has been an increase in employment, it is certainly not -- it doesn't seem to be coming in these areas.

One of the charges that we have certainly is to continue to look at opportunities to expand the uniform rental offering into the nontraditional uniform rental wearing customers.

We have assigned some senior management in the Company to look into this in more detail to try to figure out is it a product issue?

Is it a selling issue?

What can we do in that regard?

While it is still our goal to achieve double-digit growth, I think it is clear that that may not be an opportunity that we will be able to get in the next fiscal year from an organic standpoint.

But from a total growth standpoint, we are going to be double-digit.

We are seeing very good growth in these other business areas, in document management and first-aid and safety.

Our National Accounts division had a very good year.

And I think we also should look at the Rental group in terms of its total performance for the year.

And while we are little disappointed it didn't get up to the levels that we hoped it would get to, it still did very good.

We think the momentum is there, and we see this new organizational structure helping us even achieve better results next year.

I would like to add to that just a little bit.

If you look at the quarter growth year-over-year by quarter, the first two quarters were above 8, and obviously the third and fourth were just below it.

So we're just below 8 for the year versus about 6.25 last year.

However, If you look at the comparables by quarter over quarter, you'll see that we had some tougher comparables for the third and fourth quarters.

We had better results in our third and fourth quarter last year.

We really look at it on -- as Bill indicated -- on a total year basis.

Would we would like to see it a little higher, certainly.

But we feel pretty good about being close to 8 and continuing to build on that success.

At the Investor Day two years ago I guess, and maybe not as much this year, you gave us a sense of the absolute revenue levels of the different -- the four businesses that make up rentals, and the four businesses that make up Other Services.

Are you willing to give us some ballpark updates as to what the different revenue levels were in '06?

And in particular, the core Rentals business, (multiple speakers), hygiene.

Sure.

I will give it to you this way.

Total Rental is about 75 to 76% of our total Company right now, as you can see from our segment reporting.

Of the total Company -- uniform -- I have got it broken out by total Company.

But total Company, uniform rental is about 42 to 43% of total Company.

Two-thirds of total rental is uniform rental.

Dust is about 16% of the total Company, and then you've got hygiene and shop towels and linen making up one-third, one-third, one-third of remaining 18, so to speak.

If you add up the 76, you would have about 42 in uniform rental, about 16 in dust control, and 6 for hygiene, 6 for shop towels, and 6 for linen, to get you to 76%.

Does that make sense?

That's great.

And then what about on the Other Services side?

On the Other Services, total uniform direct sale was about 14 to 15%.

First-aid and safety is about 8, and document management is just around 2.

Great.

Thank you.

That is very helpful.

CapEx guidance for '07, as the growth accelerated, it looks like CapEx is a bit higher this quarter.

Should we expect that the trend back towards some of the more historical higher levels as a percent of revenue?

Right now our plans are calling for CapEx in the neighborhood of 150 to $170 million.

And then I understood that the new sales organization plans are aimed at driving cross-selling.

Is there any plans to start to directly incentivize financially some of these salespeople to aggressively pass on the leads to others, or is the tact you are taking much more from a management angle, and the managers finding ways to incent these people to cross-sell?

We have always had sales incentive programs to past leads.

I think that the missing ingredient was the managerial part.

Because the sales rep reported up to a divisional hierarchy, and therefore there wasn't necessarily as much need or opportunity for that cross divisional communication.

I think what we have done now is given the opportunity to work much closer together in a local market, get to know them.

Their local market management team is coordinating these types of things.

We have given them an automation tool to allow them to do this.

I think these were the missing parts, not so much the financial incentive.

Great.

One last one, if I could.

The SG&A spend had dipped down a little bit year-over-year in February and then popped back up as a percent of revenue this quarter.

As we look to '07, is it reasonable to assume that you can start to begin to get some leverage consistently on that SG&A expense line item?

And if not, why not?

What issues are happening?

A quarter or two ago I got the sense that the Hewitt outsourcing deal was going to be one thing that would help there.

You mentioned bad debt and legal.

Anything particular changed at this two lines?

Any color in SG&A would be great.

Thanks a lot.

There are a couple.

I think SG&A is a complicated area.

We are getting leverage on the personnel side in terms of utilization of labor.

We are seeing improvement there.

The issues that we have on the SG&A are -- one thing to think of going forward is we now have stock option expense that will be in there.

We also adopted a restricted stock program last year that is rolling out, so those numbers will be in there.

We did not do as good a job in collecting our Accounts Receivable in the fourth quarter this past year.

We don't think that there's any issue associated with the receivables, but we just didn't collect them as well.

And therefore we had higher bad debt expense because of our very aggressive reserving policy that we got.

Medical costs tipped up again.

Not to the same degree as it did a couple of years ago, but it certainly inflationary again.

And so we're having to look at that very hard and see what other things we can do there.

And then the legal costs we have, as you will know, have a couple of lawsuits pending against us that we are very, very convinced that we're not guilty of.

But as a result of the way our legal system works we're having to expand an awful lot of money defending ourselves in these lawsuits.

There has been a significant increase in activity associated with discovery as these things that closer, and efforts that we have to go through to defend ourselves.

And therefore those costs have picked up here in the last few months and will continue.

We expect to be at a fairly robust level as in the first part of FY 2007.

(OPERATOR INSTRUCTIONS).

Michel Morin with Merrill Lynch.

I was hoping to just follow up actually on one of the questions that Gary just asked in terms of the components within the Rental component.

It was very helpful.

Thanks for giving the percentage breakdown.

Could we do the same things in terms of breaking out that organic growth number, the 6.7, basically to try to understand where that growth is coming from?

Is it coming from uniforms?

Is it coming from the dust control?

Where's the growth predominately coming from, and has that changed of late?

I appreciate your desire to have that information, but from a competitive standpoint, we have chosen that we're not going to provide any more detail with regard to the internal growth by business line.

That's fair.

Was there still any lingering hurricane impacts impacting organic growth?

The lingering hurricane impacts are the result of two things primarily.

One is our New Orleans operation has unfortunately still not been able to return to the levels that it saw prior to the hurricane, due primarily to the fact that most of the businesses in New Orleans still have not come back.

We are running at a much, much lower rate than what we did prior to the hurricane.

Secondly, our direct sales business for all the lodging and casino business along the Gulf Coast has obviously not yet returned.

However, there's an awful lot of activity going on, and we expect to get some of that back in fiscal year 2007.

Whether New Orleans will ever get back to the same levels they were prior to Katrina is in doubt.

You talked about your progress on the document shredding side.

What is happening on document storage?

I think at the Analyst Day as of that date you had four facilities in Ohio.

I was wondering if there has been any change to that situation.

And should we still view that as more of a pilot than a real service offering being rolled out?

There has not been any change to that.

We still have the same number of storage facilities that we had announced, that we have talked about on the Investor Day.

I would not call it a pilot.

We got into that business with the desire to learn a lot more about that and how it integrates with the shredding side.

And we continue to actively look for other acquisitions in that arena.

But at this point in time we have nothing to announce.

We have focused an awful lot of our attention on the shredding side as we continue to roll out across the country in order to gain a national footprint.

But in the meantime, we continue to be very, very pleased with the results of our storage businesses that we did acquire.

I think that the process of identifying new acquisition opportunities in that area is not quite as easy as it is in the shredding side.

And then finally with the buyback largely complete, what are the updates in terms of how you're thinking about whether or not we might see another authorization?

Of course, you know that is a product of what the Board of Directors will decide.

I'm sure the Board will continue to evaluate our results, the Company's financial position and our share price to determine if additional repurchases would be beneficial to our shareholders.

Announcements will occur, if and when a decision is made.

Christopher Gutek with Morgan Stanley.

I have got a couple of questions.

First, a quick follow-up on the Van Dyne Crotty.

What are you seeing with the initial retention, the Van Dyne Crotty customer base?

We are seeing pretty good attention.

We are finding that it is -- you always are going to lose a little bit of business.

We are seeing some of that, but probably not to the same degree that we've seen in other acquisitions of this size, at least at this point.

Scott, I'm curious for your take on what could be two potentially large acquisition opportunities.

First if ARAMARK is taken private, it would seem plausible the new owners might be willing to break up the Company and sell the uniform business.

I'm curious if you think that would be doable for Cintas from an antitrust perspective?

And if so, if you would be interested.

Secondly, we have been hearing news reports that Brambles might be selling off its remaining business, Recall, the document management business.

I'm curious if you might be interested there.

I would say that the answer is -- first of all this is all hypothetical.

The answer today is that we would definitely be interested in looking at both of those.

We remain highly acquisitive in all of our businesses.

Whether or not we would be able to acquire ARAMARK's uniform business without having some form of government intervention or Hart-Scott-Rodino type problems, I don't know.

I don't think so.

But you see these big oil companies merging, and they seem to be able to get it done.

But I think the important thing is whether or not there's local competition or local companies.

I think that our experience up to this point has been that there is plenty of local competition available, and that we would be able to get that deal done.

But that is, again, speculation.

I don't know for sure, but we certainly would be interested in looking at it.

Scott, a separate question.

It is our impression, I guess my impression, that you guys have become a bit more receptive to international expansion.

I'm curious if my perception is correct, number one.

Number two, if you're currently looking anything in Europe?

I would answer that question this way.

We are more interested in international expansion.

I think we have plenty of opportunity on the North American continent to continue to grow our various businesses.

But I would say that we are of size now and have the resources to be interested in looking at opportunities off shore.

Where in the past I might have said that would be the kind of thing that will be looking out five years or more as a potential, I would say it is a three to five-year process at this point.

Unless we found something that excited us quite a bit, and if it did we would be ready to do it today.

But again, it is not our number one priority.

But it is something on the list.

By final question is for Bill.

With respect to the core uniform rental business from a pricing perspective, recognizing that you don't want to quantify specifically the pricing growth, could you talk qualitatively about what pricing is doing generally?

And also in that context about the competitive landscape, if there is any change there?

The pricing has been -- is a moderate improvement over where it was a year ago.

I think part of that is driven by the willingness on the part of our customers to accept the need to raise prices moderately to help offset some of our energy costs.

But I wouldn't call it a dramatic thing by any means.

It is still a tough sell.

We are back up to levels that we saw in the past, as opposed to what we saw over the last for three to four years.

Bruce Simpson with William Blair.

I was a little bit surprised in thinking about the relationship between your top line and bottom line guidance for fiscal '07.

If I take the midpoint of each of those, it looks like it is about a 12% topline and only about an 11% bottom line.

And that despite getting accretive benefit out of a lower share count, which I guess would begin immediately in the August quarter.

I realize you're going to take a $0.04 haircut out of 123R.

But can you talk about what is behind that?

And perhaps more importantly, what are your thoughts about long-term equilibrium of operating margin in this business?

Are we there, or is there opportunity for recapturing some of leverage that was lost with energy?

I think looking at 2007, keep in mind not only the items that you did mention, but also net interest expense is going to be higher as a results of both the acquisitions and the debt incurred for the share buyback.

While we certainly will be paying that debt down as we go through the year, we also will be continuing to make acquisitions.

So there will be much higher interest expense next year than there was in the current year.

As Mike mentioned earlier, energy costs they really won't -- once we get to the end of the first quarter then it will start to anniversary, but we do have another quarter of much higher energy costs than what we did last year.

I had mentioned earlier the legal costs.

They are becoming more significant as a result of what we are doing in order to defend ourselves in these lawsuits.

And hopefully they will peak in 2007 and we will get those behind us.

Scott mentioned the new organizational structure.

There will be some minor costs associated with that.

I mentioned those earlier.

And that will be primarily in the first half of the year.

In addition to the option expense, I think as you may have picked up from what I said, we do have restricted stock now that is a cost that was in this current year, but also will be increased in the coming year as we continue to add to the restricted stock program.

All of those factors together, I think, are somewhat -- the diminishing of maybe the number you expected on the bottom line.

However, I would tell you that going forward we are still very optimistic that margins will improve.

You'll see more SG&A leverage as we go on.

We believe that it is still very possible that we will be back up into our stated goal of 10 to 11% after-tax margin.

What energy forecast is implicit within there?

I know you said not getting a lot higher.

But just as a percentage of your sales, would you say implicit within there is a year similar to fiscal '06?

If you annualized our fourth quarter, that is what we're pretty much assuming for fiscal '07.

And then one of your competitors, ARAMARK, just yesterday preannounced, largely laying the blame of weakness in its direct sale business.

Can you comment about whether you're seeing slowdown or weakness, particularly among hospitality and health care in the direct sale portion of the business?

We were somewhat surprised by that announcement also, but certainly I'm not familiar enough with the details of ARAMARK business.

But, Bruce, our business especially in the hospitality side is very robust.

I think we continue to be impressed with the opportunities that continue to be there, and the buying of those various type customers.

We don't do a lot in the health care.

The health care is a very minor piece of our business.

But certainly from what we are seeing, we're not having any impact such that ARAMARK was talking about yesterday.

Talking about legal expenses, we haven't talked about union a bit.

And I guess that is really tactic number one these days is to pressure you with lawsuits rather than kind of ongoing organizing activity.

First of all, do you agree with that statement?

And second of all, you are incurring more period expenses in legal but is that a vulnerability for a charge?

And if so, how do we quantify what a -- is there a particular dollar amount which you are on the hook for if you lose some kind of legal verdict?

First off, I think the union does continue other tactics, however, you're right.

I think they are focusing a lot on -- it appears to us -- on the legal side.

I think -- what I would like to do is refer you to the disclosures we have made in our SEC filings with regard to these legal cases.

That is a very sensitive area from the standpoint of really laying out the position of the Company and the vulnerability the Company has.

But I think as you read those disclosures, we make it very clear that in our mind we are innocent of these charges, and we have continued to defend ourselves against these charges.

But it is very, very difficult to quantify what the potential exposure, if any, would be to us because of the nature of the way these class-action lawsuits -- potential class-action lawsuits proceed.

They certainly haven't been designated as such at this time, and we hope that they will not be.

But it is very difficult for us to predict what the future holds on them.

I have to ask you to take another look at those, and I think it is pretty clear as to what our position is.

And then my last question is clarifying the project One Team.

I guess what I don't understand is, am my right in understanding that the change in role is essentially at the local managerial level, rather than at the local salesperson level?

Like, if I'm a guy that is used to selling let's say either shred or uniform in a local branch, how is my life changing?

Am I suddenly responsible for selling everything or is it the manager's job to do that?

No, it is -- in that local market, if you are the local document shredding rep, you will continue to do that.

The big difference is rather than report to a local General Manager in document shredding who reports up through the chain of command to the President of that division, you know report on a local market basis to a Sales Manager or a management team that is coordinating our efforts in the local market to sell all of the products and services that we have to all of the appropriate accounts in that market.

The big change would be the communication with the other reps, some of the training that we have provide them to look for opportunities in their customer and prospect base as they go about their daily activities.

Some of the sales tools now that we are going to provide them across that local market to help in that coordination.

It is really your day-to-day activities turn you in from being just one sales rep selling one product to part of a large sales team that does have the capability to sell everything.

Craig Holter with Great Lakes Review.

Congratulations on number 37.

I wondered if you could comment on your M&A activity in the quarter by type possibly of businesses that were acquired?

No, we're not going to break that down.

We made a lot of acquisitions in the quarter.

But they were relatively small acquisitions, primarily in the non uniformed businesses.

But we're not going to specifically cite where they came from.

That's fine.

Your Other gross margin at 37% is well above the 30 to 35 what has been discussed for years probably.

I wonder if we are at a new level where there is a 35 to 40% type variance going forward?

I'm not sure if it will be that high yet, but you will see improvement there, mainly because of the document management and first-aid businesses gaining a larger portion of that segment.

And as they do that their margins are higher than our direct sale uniform business.

You'll see improvement there, so I think you'll see a long-term movement.

I don't know if it will get quite to the level you indicated, but there is improvement there.

Regarding the facilities that you have to build, can you give us any update on what you're seeing there?

We actually have -- we've only got a few facilities in the construction phase right now.

I think we opened one plant in the fourth quarter, and we have got a couple of facilities in fiscal '07.

Part of that is because of the Van Dyne Crotty acquisition, quite honestly.

We're able to utilize some of the capacity we picked up there, which enables us to defer building out facilities.

But we're still looking for land in a number of areas around the country.

We have multi-year plans going out in demonstrating what our needs are going to be.

You're constantly working on trying to be prepared for the growth in those markets as you reach capacity.

Regarding the pretax income for the quarter on the Rental and the Other, were you able to track down those two figures?

No, we don't have it yet, but we can certainly provide that to you tomorrow.

That's fine.

I think the early part of the call, but the year-end share account, dilutive share account, was that 162?

162 million.

Yes.

On a diluted basis.

That is not the end of the year.

That will be the impact for fiscal year '07.

The end of the year, I don't know the exact share account that was the end of year, but of course your EPS calculation on a weighted average basis by month.

The number of shares that were outstanding -- Mike is looking it up right now.

The outstanding was 163 million at the end.

We had additional purchases in early June, so the 162 million is going forward based on the additional share repurchases that occurred in early June.

That is a diluted basis, the 162.

Right.

That is basically what your share count figure will be for fiscal '07, assuming there is not a large option grant.

Right, or significant more repurchase.

Or increase in the share price I guess as well.

That has a minor impact on it, but yes, that does factor in.

One last question I had, if you could provide us with the status of your RFID operation or experimentation.

It is still in the test phase.

I think as many as you know, we have been experimenting with RFID in one of our facilities here in Cincinnati for some time now.

That is embedding a multi-read radio frequency chip in our garments.

We ran into an issue with the readability of the chip from the original provider, in that they could not meet the criteria that we needed in order to make that work.

So we are now working with another chip provider to see if they can meet the criteria.

At this point in time we're still bullish on it, but we don't have anything we can roll out to any other facility, because it hasn't met the test yet.

[Jeff Ford] with Robert W. Baird.

If you could just -- first off one quotation.

When you talked about the energy cost head winds during the quarter, you said 40 basis points.

Was that for the total Company revenue base or without just in the Rental segment?

And if it was total Company, what was the head wind in just the Rental segment?

That was total Company.

We have not broken out for Rental.

But most of the energy cost is in the Rental segment though?

That is correct.

With the larger plants, when you factor in natural gas -- the natural gas as well as the fuel expense it is higher in the Rental division.

And then to ask again about the organic growth rate in the Rental business slowing again for the second quarter.

Bill, I can appreciate you don't want to talk in great detail about what is going on because of competitive reasons.

But I'm not asking you to give me the decimal points what has changed.

But directionally what has slowed down to cause that growth rate to go?

I'm sorry.

I really can't give you any more details on that at this time.

Am I correct that your guidance assumes the reacceleration in fiscal '07?

Our guidance assumes an improving -- a modestly improving economy.

But in terms of the growth rate in the Rental business you expect that to expand from here?

Yes.

And then another clarification dissecting the guidance, and maybe it would be helpful if you give us what you expect for interest expense in '07 given the change in the balance sheet.

But if I do the math right, it looks like you're expecting operating margins to be down next year after they were flat, even for the full fiscal year '06, and up in the fourth quarter.

And you went through the laundry list of what changes year to year, but am I right that you're expecting a lower operating margin in fiscal '07?

I actually don't have that specific number in front of me, so I can't -- I don't want to give you a guess on that.

Answering your question on interest expense though, we expect interest expenses to be 15 to $16 million higher in fiscal '07 than they were in '06.

That might be the delta.

I guess just last question.

The spike in CapEx in Q4, what went on there?

That is a very traditional thing that happens.

Our fourth quarter tends to be our highest capital spending.

What went on there was primarily a lot of retrofitting of some facilities -- in a lot of our rental facilities we are installing more automation in many of the facilities -- the older facilities.

We had some land purchases in there.

We have also purchased a lot, as we have continued to expand your shredding business.

We bought a lot of these shredding trucks.

We've got a lot of system projects, including the portable route computers that are being rolled out to all of our business units, and software development.

It was numerous factors, primarily items to improve margins or to assist in growth.

Just a quick follow-up, if I can.

You mentioned automation at the plants.

Can you give us a guessimate of what percentage of the plants at this point have auto sort -- auto sortation?

I think it is like 25 of our 175 plans have auto sort.

Brandt Sakakeeny with Deutsche Bank.

All of our questions have been answered.

Thank you.

Peter Carrillo with Citigroup.

A couple of quick questions.

First one is, if you guys were approached by a private equity group similar to ARAMARK, would you be required to put out a filing just to the fact that you were actually approached by somebody or would it (technical difficulty) get serious at some point for that to happen?

I really am not -- I don't know the answer to that question.

Have you been approached by a private equity group at all regarding taking the Company private?

I'm not aware of it, but that doesn't mean that we haven't.

I don't know.

When you say modest improving economy, if I can just get a little more specific on that.

Does that mean improving from where we are today?

Does that mean positive GDP?

Does it mean job growth of 150,000 per month?

How do you define modest improving economy?

Growth.

I would say not necessarily improving from where we are at today, but a growing economy at a modest rate.

For me to tell you that it is this many jobs being added, we don't really plan on that basis or make our assumptions.

What we're assuming is that GDP will be growing at a modest rate next year, enabling us to grow in all our business units.

Last question.

What was your average price you guys paid for stock repurchases in the fourth quarter?

You have given it in the past for prior quarters.

I really don't have that information right now.

We will be obviously -- I don't have it in front of me, but we will the publishing that as part of the 10-K.

Mr. Gale, there are no further questions in that queue.

I would like to turn the conference back over to you for any additional or closing remarks.

First off, I want to thank everyone for joining us today, and especially thank Scott for sharing the new news with us on organizational changes.

We look forward -- Mike and I will look forward to talking to you in September when we discuss our first quarter fiscal 2007 results.

Ladies and gentlemen, that does conclude today's conference.

We thank you for participating, and have a great day.