信達思 (CTAS) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Cintas quarterly earning results conference call.

Today's call is being recorded.

At this time, I'd like to turn the call over to Mr.

Bill Gale , Vice President of Finance and Chief Financial Officer.

Please go ahead,

Thank you.

Good evening, everyone.

We appreciate you joining us this evening to listen to our fiscal 2007 year-end conference call.

Today we are pleased to announce that fiscal 2007 marked our 38th consecutive year of growth in revenue and earnings.

Revenue for the year was $3.71 billion, an increase of 8.9% over fiscal 2006.

Earnings per diluted share were $2.09, also an increase of 8.9%.

Our revenue results are within the guidance provided during our third quarter call while our earnings per diluted share results were $0.01 higher than the upper end of our range.

Revenue for the fourth quarter was $964 million, an increase of 6.2%.

Earnings per diluted share were $0.57 versus $0.55 a year ago, a 3.6% increase.

The transition to our new sales organization has taken longer and cost us more than we originally anticipated.

Given the nature of our rental business, the disruption that occurred in new business sales during this transition will have an impact into fiscal 2008; however, we expect internal growth rates to improve as we progress through the year.

Our financial condition continues to remain strong.

Net cash provided by operations was approximately $450 million for the year.

At May 31, our debt to book capitalization was 28.9% despite investing $180 million in capital expenditures and over $160 million in acquisitions.

During fiscal 2007, we also bought back almost $200 million worth of our outstanding shares and paid an annual dividend of $62 million.

The $200 million spent under the authorized share buyback program equated to 14.2 million shares.

No additional shares were purchased during the fourth quarter, but we continue to have approximately $420 million in remaining authorization under the program.

With me today is Mike Thompson, Cintas's Vice President and Treasurer.

After Mike's further discussion of our financial results, I will provide some final comments and then we will open the call to questions.

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

This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance.

These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we may discuss.

I refer you to the discussion on these points contained in our most recent filings with the SEC.

Now I would like to turn the call over to Mike.

Thanks, Bill, and good evening.

Total revenues were $964.1 million for the quarter, a 6.2% increase over that reported in the prior year.

Internal growth was 4.3% during the fourth quarter, and 5.3% for the year.

These results are in line with our revenue guidance.

Please note that our fourth quarter had 66 workdays, the same number of workdays as the fourth quarter of fiscal 2006.

As a note for fiscal 2008, the workdays will be as follows--For the first quarter, 66 workdays, the same as the first quarter of fiscal 2007.

For the second quarter, 65 workdays, the same as the second quarter of fiscal 2007.

For the third quarter, 65 workdays which is one more workday than the third quarter of fiscal '07 and 65 workdays in the fourth quarter which is one less workday than the fourth quarter of '07.

We classify our businesses into two reporting segments--Rentals and other services.

The rentals operating segment reflects the rental and servicing of uniforms and other garments, mats, mops, shop towels, and other related items.

We also provide restroom and hygiene products and services within this segment.

Rental revenues were $697 million for the quarter compared to $678 million in the fourth quarter last year.

This represents a 2.8% increase over the fourth quarter of last fiscal year.

Factoring out acquisitions made over the last 12 months, our rental organic growth rate was 2.5% for the fourth quarter and 4.2% for the year.

The implementation of our new sales structure has taken longer and cost more than we originally anticipated.

While the new structure was completely rolled out from an organizational responsibility perspective, by the end of December, the implementation of the new structure continued throughout our third quarter and into our fourth quarter.

This transition caused our new business results to suffer, contributing to our lower growth rate.

For example, during the transition to the new organization, we promoted many individuals into sales leadership positions.

Many of the individuals promoted moved from sales positions where they were very successful and productive.

Their vacated sales positions were then filled by new sales representatives with little to no experience who required training and further development.

Traditionally a new sales representative in our businesses can take up to 9 to 12 months in order to reach average sales representative productivity levels alone.

As we have discussed in the past, the time needed for this development has a lasting impact.

The effects of lower rental business sold during the quarter take up to one year to work through, as new business sold translates into weekly revenue which in turn is billed to annual revenue results.

Results from our new business efforts are improving and we expect this trend to continue as the new organization becomes further ingrained into our culture and our sales approach.

While the amount of new business we sell has been impacted by the implementation of our new sales organization, our revenues have also been impacted by external economic pressure.

Many traditional uniform wearing industries have experienced declines in domestic employment due to offshoring and improving technologies.

While this pressure continued in the fourth quarter, it was not as severe as earlier in the year.

One of the additional benefits of our new sales organization is that our local General Managers have been freed from their new business sales responsibilities.

This now allows them to dedicate more of their time on customer relationships and related service and production levels.

In fact, we tracked our customer satisfaction on a regular basis and our customer satisfaction index at an all-time high in fiscal 2007.

We expect the combination of our new sales efforts and the additional focus on customer service to result in improving revenue growth as we move through fiscal 2008.

Our other services operating segment incorporates several businesses which have similar economic and organizational characteristics.

The businesses included are--Our national account sales division, which direct sells uniforms, branded promotional products, and other related products to national and large regional customers.

Our direct sale catalog which direct sells uniforms and related products primarily to local customers who also rent products from us.

Our First Aid & Safety division, which includes the sale of van delivered first aid supplies, safety products and training and fire protection services, and our document management division which is predominantly document shredding services.

Other services revenue of $267 million increased 16.2% from last year's $230 million.

On an organic basis this segment of our business grew 9.6% for the fourth quarter and 8.6% for the year.

Our uniform direct sale business which includes our national account sales division and our rental division catalog sales grew 4.2% on an organic basis for the quarter and 2.9% for the year.

Within our national account sales division the hospitality and gaming sectors continue to show strength and we're seeing preliminary results from our greater focus on the healthcare industry.

The first aid, safety, and fire protection business continues to grow at an attractive rate.

During the fourth quarter the business grew 19% in total and 10% on an organic basis.

For the year this business grew 27% in total and 13% organically.

While we have a national presence in First Aid & Safety, we continue to fill in our geographical footprint and fire protection services, primarily by making strategic acquisitions.

After entering this business less than five years ago, we expanded rapidly and now service approximately 75 of the Top 100 markets in the United States.

We also entered the document management business less than five years ago.

This division posted very strong revenue results in the fourth quarter with total growth of 81% and internal growth of 44%.

For the year this division grew 68% in total and 34% organically.

This division now services over 150 sizeable markets in the United States and Canada, including over 80 of the top 100 markets.

Our current annual revenue run rate is now in excess of $130 million.

We will continue to focus on expanding into the remaining open markets, via strategic acquisitions when available or through Greenfield start ups.

As these growth figures suggest, Cintas has undergone a significant change over the last ten years.

Over this time frame, we have transformed from a predominantly uniform rental company to a full fledged business services conglomerate today.

To give you a better understanding of how significant this transformation has been, let me share with you some revenue data.

For our fiscal year ended May 31, 1997, ten years ago, our total revenues were approximately $840 million.

Of this, 69% was uniform rental, 10% was dust control which is primarily entrance mats, 6% was shop towel rental, 4% was linen rental, and 11% was the direct sale of uniforms and related products.

In comparison today, for our year-ending May 31, 2007, 41% of our total revenue is derived from uniform rental, 15% is dust control, again, mainly entrance mats, 5% is shop towels, 6% is linen, and 13% is the direct sale of uniforms and related products.

Together, this amounts to approximately $3 billion in revenues and equates to a compounded annual growth rate of 13.5%, however that represents only 80% of our total revenues today.

Over that ten year time frame we also introduced new products and services such that today, first aid, safety and fire products and services represent 10% of our total revenues.

Restroom supply and cleaning services represent 7%, and document management services represent 3%.

In total these new businesses now represent approximately 20% of our total revenues, adding $720 million in fiscal 2007 alone.

We will continue to evaluate new business products and services for future expansion when appropriate financial and strategic parameters are met.

I will now discuss our margins for the fourth quarter.

Total company margins of 42.9% declined 70 basis points as compared to 43.6% in the fourth quarter of 2006, but improved 30 basis points from 42.6% in the third quarter of fiscal 2007.

The increase over the prior year fourth quarter is primarily due to increased delivery costs and material costs, partially offset by improved margins and other services.

Energy costs for the fourth quarter were 3.4% of sales consistent with the fourth quarter of fiscal 2006.

Our 30 basis point margin improvement as compared to the third quarter of fiscal 2007 reflects the seasonal improvement in material cost in our rental division, and the improving margins in other services.

Energy costs in the fourth quarter were 10 basis points higher than in our third quarter, reflecting increased energy pricing.

Traditionally, energy costs would remain flat or decrease from the third to the fourth quarter due to lower consumption levels reflecting the movement out of the winter months.

Our rental gross margins were 44.7% of revenue for the fourth quarter, a decline from 45.8% of revenue for the fourth quarter of fiscal 2006.

Delivery costs have increased due to the introduction of Sanis Ultra clean restroom cleaning service.

This service is more labor intensive and current route densities and volumes have not yet reached scale.

In addition, rental material cost increased as sales of flame resistant garments increased at a more rapid rate than other garment sales.

Material costs related to the flame resistant garments represents a larger component to these programs than garments and traditional uniform programs.

Material costs also increased as a result of the Van Dyne Crotty acquisition made late last year.

Traditionally when we make a large acquisition in a rental division material costs will increase as we upgrade garments to many of these new customers.

Rental gross margin of 44.7% for the fourth quarter is a 50 basis point improvement over the 44.2% reported for our third quarter.

As mentioned previously, this improvement was primarily due to the seasonal improvement in material costs.

Income before income taxes for the rentals operating segment was $115.3 million for the fourth quarter and $462.4 million for the year.

Other services gross margin continues to improve.

Gross margin for this segment was 38.5% in the current year fourth quarter as compared to 37% in the fourth quarter of last year, and 38.1% during the third quarter of this year.

For the entire year gross margins have improved over 200 basis points from 35.1% in fiscal 2006 to 37.2% in Fiscal 2007.

The significant growth within our fire protection services and document management services is allowing us to gain scale in these businesses driving margins higher.

We expect other services gross margin to continue to improve as these businesses continue to grow and build infrastructure.

Income before income taxes for the other services operating segment was $34.3 million for the fourth quarter and $108.8 million for the year.

Selling and administrative expenses were 26.8% of revenue an increase of 20 basis points over last years fourth quarter.

Selling costs increased 80 basis points reflecting the increased investment being made in additional sales representatives and our new sales structure in order to benefit growth in the long term.

In addition, the adoption of FAS 123R share based payments and the related expensing of equity compensation increased administrative expenses by 20 basis points.

Offsetting these increases was a 30 basis point improvement in bad debt expense as our locations executed well in the collection of accounts receivable at year-end.

In addition, in May of 2007, we exited our forward starting swap which provided miscellaneous income of $6.2 million.

This amount has been included as a credit to administrative expense.

The termination of the swap will be discussed in a moment when changes to the balance sheet are discussed.

Selling and administrative expenses improved by 120 basis points from the third quarter of fiscal 2007.

The improvement resulted from the termination of the forward starting swap and the accounts receivable collection effort.

Payroll taxes decreased 30 basis points reflecting a normal event due to the annual resetting of payroll taxes during our third quarter.

As a reminder, all employee benefit costs for our partner employees other than wages and bonuses are included in our administrative expenses.

As compared to both the fourth quarter of fiscal 2006 and the third quarter of fiscal 2007 our employee workers compensation cost had increased.

This increase which was a result of several high exposure claims incurred or settled during the current quarter was offset by an improvement in employee medical cost during the quarter.

Net interest costs were 1.2% of revenue this quarter reflecting the increased long term debt levels taken on to fund acquisitions and share buybacks over the last 18 months.

Our effective tax rate was 37.3% for the quarter down slightly from 37.4% in the fourth quarter of last year, but consistent with that of our third quarter.

For the quarter, net income of $90.3 million decreased 1.3% over the fourth quarter of fiscal 2006 reflecting increased interest expense on higher debt levels.

Earnings per diluted share increased 3.6% to $0.57 per diluted share reflecting operational results and the impact of the share repurchase program.

Our balance sheet continues to be strong, despite a reduction in cash and marketable securities used for acquisitions and our stock buyback program, our current ratio was 2.9 to 1 at May 31.

Cash and marketable securities was approximately $155 million a reduction of $86 million from May 31, 2006.

When available, cash and marketable securities were used throughout the year to fund acquisitions and purchases under the buyback program.

DSO's on accounts receivable were 39 days which is a slight increase over last year but a slight improvement from last quarter.

New goods inventory levels increased $34 million over May 31, 2006.

The increase is due to a combination of the replenishing of low inventory levels at May 31, 2006 caused by significant uniform direct sales in May of 2006, and increased inventory requirements at May 31, 2007 required for the rollout of a new direct sell catalog and our new line of rental cargo pants.

Long term debt at May 31, 2007, was $881 million.

Total debt as a percentage of total book capitalization was 28.9%.

Long term debt due after one year includes $225 million of debt that had a maturity date of June 1, 2007.

This debt was subsequently refinanced through our commercial paper program and therefore was classified as long term debt at May 31.

The decision to use our commercial paper program for this refinancing centered on the current interest rate environment and the favorable interest rate and flexibility afforded by our CP program.

As mentioned earlier, we previously entered a forward starting swap in anticipation of refinancing this debt into new debt with a 30 year maturity.

When the decision was made in the fourth quarter to instead refinance this debt through the use of commercial paper, the swap was terminated resulting in a $6.2 million gain.

Our cash flow remains strong with cash provided by operations totaling $449 million.

Capital expenditures were $180 million for the year, of which $133 million related to our rental segment and $48 million related to other services.

Capital expenditures in the fourth quarter were higher than originally planned due to the accelerated timing of certain Real Estate purchases for future planned construction.

In comparison to capital expenditures, depreciation and amortization totaled $176 million with $135 million in rental and $41 million in other services.

We also spent $161 million on strategic acquisitions, mainly of fire protection service and document shredding businesses.

As we evaluated the refinancing of the $225 million in long term debt coming due on June 1, the current interest rate environment and our A-rating with our rating agencies, a determination was made to employ the flexibility and favorable interest rates of our commercial paper program to refinance that debt, while leaving sufficient dry powder for growth in acquisitions.

By the time the extensive analysis was completed alternatives were evaluated and a final determination was made on this financing, we've entered a quiet period and were thus precluded from purchasing any additional stock.

We continue to have approximately $419 million of authorization under the program which does not have a specified expiration date.

Since the inception of the buyback program, we've bought back approximately 14.2 million shares.

Finally, we also paid our $62 million annual dividend that we announced and accrued during the third quarter.

With that I'll turn the call back over to Bill.

Thank you, Mike.

Our guidance for fiscal 2008 calls for revenue between $3.9 billion and $4.1 billion, which equates to total company growth of 5.2% to 10.6%.

To achieve these results, we expect internal growth to improve as we progress through the year.

Based on this revenue range, our earnings per diluted share for fiscal 2008 are expected to be between $2.15 and $2.25.

We will now be happy to take your questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS) And we'll take our first question from Mike Fox with JPMorgan.

Good afternoon, guys, and congratulations on another year of growth.

You talked a lot about the growth that you guys have had over the last ten years and if you look at I think the stock over the last seven or eight years, you haven't I guess been rewarded for the growth.

I was wondering if you can talk about how you guys look at that internally and if you guys have looked at any possibilities of a management buyout or a leverage buyout given the liquidity in the marketplace right now for those types of transactions and if you can give us any type of perception that the Farmer family has on a possibility of that?

Well, Mike, to answer the latter part of your question first, I would tell you that as we have stated in the past, we cannot comment on matters of that sort, so we are not going to make any comment on that in this call or at any other time.

We certainly are proud of the growth rates that this company has achieved over the last several years as we've broadened into a more of a business services company.

We believe that the opportunities continue to remain in our uniform rental business, but that these additional levers will also improve growth going forward, and certainly, it is frustrating to us that the Stock Market has not rewarded us but we have to keep in mind that we have come from a 58 PE back in 1999 to what is today about a 19 PE, so we continue to view that our growth opportunities are significant.

We're very pleased in the businesses that we're in, and we will continue to grow those businesses, make acquisitions, grow internally, and we're very confident in the future.

Okay, great.

And then with regard to the acquisition market, can you talk about just the pricing out there and the opportunities that you see, and when you look out over the next year, what types of, or what segments do you see that's the most opportunities for acquisitions?

Well, right now, our primary focus has been in document management and the fire service because we really are intent on building out a national footprint in both those businesses, but our corporate development group continues to remain active looking at acquisitions in any of our business areas, including uniform rental.

Unfortunately, there hasn't been many opportunities to make acquisitions in the uniform rental business over the last couple of years, other than the Van Dyne Crotty one which we made last year.

So these things come in waves, and we'll continue to look at it.

As far as pricing, pricing has been relatively stable in all of the businesses over the past year.

We continue to have very strict targets with regard to achievement of internal rates of return and we haven't deviated from that, so we'll continue to be active in the market but at reasonable rates.

Okay, and then with regard to the prices that, the pricing power that you guys have, can you give us an idea of what segments you have the most pricing power and which seem to be the most competitive right now and then just talk about how much pricing power you seem to have in the market?

I wouldn't characterize that we have a lot of pricing power.

We've got very active competitors in all of our businesses so we need to remain competitive and we traditionally are the premium pricer especially in uniform rental and I believe that many of our competitors just kind of follow our lead and always sell a little bit under us, but as far as existing contracts, we've been pretty much able to pass through price increases for our contract under the terms of the contract using the consumer price index, but we do take opportunities to work with our customers to have them extend their contracts if the conditions warrant by maybe foregoing a price increase late in the contract term if that makes sense, or working with our customers if they're facing economic difficulties or by adding additional products and maybe foregoing price increases, so as we broaden out, we think we've got a lot of different levers to pull and I think that the important thing is that you need to watch the whole business and see what's happening in growth rates not only in uniform rental but in some of the other businesses because we're beginning to do a lot more cross-selling.

Right.

With regard to the other businesses, do you have more pricing power or less pricing power in the fire and safety and document management type businesses?

No, Mike.

I wouldn't say we do.

We're number two in fire service and certainly I don't think we can go out and price things above what the number one competitor is going to do or the 3,600 local people are doing, so we've got to remain competitive there, and I'd say the other businesses are very similar.

Okay, great.

Thanks a lot.

We'll move on to Michael Schneider with Robert W.

Baird.

Good afternoon, guys.

Hi, Michael.

Maybe first we can just kind of walk through some of the implications and the guidance.

It looks like the guidance anticipates 5 to 6% organic growth, and based on the fact that you closed the year at 4.3, it does anticipate an acceleration.

I guess could you just give us a sense one, where you expect to start the year given that the quarter is half over or moreso, and then secondly, if indeed you even show flat organic growth at 4, it implies you end the year at 7 or 8.

Is that reasonable knowing what we know today about the economy and about Project One Team?

I would tell you, Michael, that this guidance was built upon a reasonable expectation of where we finished the year at and that all indications are so far this year that we are comfortably within that guidance level.

Do you expect Q1 organic growth to actually decelerate again or stabilize?

I don't expect it to decelerate.

I think it will stabilize or it might show a slight uptick.

Okay, and why would that be in light of the understanding of the uniform model is this rolling 12 month impact, both plus and minus, given that Project One Team you mentioned at the outset was still being implemented in Q3 and Q4, fiscal Q3 and fiscal Q4.

Wouldn't that imply then that the impact of that at least rolls through the first half or longer of fiscal '08?

Well, there are several components to growth, certainly Project One Team is the impact on new business and I would say to you that while I don't expect it to be an appreciable increase, I do think new business as these new sales reps begin to become more productive is it should be slightly better in the first quarter than it was in the fourth quarter.

The other phenomenon we're seeing is that our loss business rates and ad stops seem to be improving.

I think part of that is driven by the impact of Project One Team as our General Managers have been able now to focus on taking care of their customers and we're seeing, as Mike I think indicated the highest customer satisfaction rate that we've ever had in the rental division, and that bodes well for the future.

Businesses seem to be stabilizing somewhat in terms of their hiring or firing, so I'm hopeful that that will continue, but with all that said, I don't want to leave an expectation that there should be a dramatic improvement because you're absolutely right.

We've got a 12 month rolling impact that has to be felt through the business, and I expect moderate improvement and then steady improvement as we go through the year, assuming the economy cooperates.

Okay, and I guess just on ad stops, that's consistent with what we had written about last week based on our survey work.

Is there any particular region or call it employment vertical that indeed is driving the improvement on ad stops or is it broad based?

It's broad based, Mike.

It's been across-the-board.

And then just moving to margins.

If you look at the guidance again, it implies that you actually show another decline in margins which would mark basically the fourth year of flat to down flat to down margins, with Project One Team at least the rollout and training expenses behind you, energy really no appreciable change, why would margins be down in fiscal '08?

Well, because as your new business picks up, you're going to have the impact of material costs coming through, so that will be one part of it.

Selling costs will continue to remain high as we move throughout the year because we are going to continue to add salespeople, and that will have an impact, and I think the growth rates if you're talking about overall margins, the growth rates in the other services businesses are going to be faster than the rental business and they have slightly lower margins in the rental business.

Okay, and final question, then just on the organic growth rate guidance, is there an expectation in there that the other services business actually accelerates from this 8.5% organic growth rate?

I don't recall, I don't really have the specifics on that but I would say that we continue to be bullish on those businesses, so I would say that the growth rates will probably continue to be at or above the levels we've seen so far.

Okay, thank you, again, guys.

Moving on we'll take the next question from Michel Morin with Merrill Lynch.

Hi, guys, this is Dan Suzuki on behalf of Michel.

Hi, first off, can you just talk a little bit about salesforce retention and attrition and how that's going these days, and in terms of headcount, you said you'd like to increase headcount over fiscal year '08.

Any targets you have there?

Well, one of the opportunities that we saw with Project One Team and why we moved forward on it is that we saw in our test markets an improvement in our turnover rates among our salespeople and that continues to be the case, so we are pretty confident that turnovers will, turnover rates will continue to improve among our salesforce and thus that improves the productivity going forward.

With the new sales structure, we're going to be able to add more feet on the street if you will with more salespeople, and our plan calls for adding more salespeople as we move throughout the year in all of our businesses.

Any numbers you can put on the attrition levels that you guys are seeing now?

No.

We're not publicly disclosing that, Dan.

And then as you look, you finished fiscal year '07.

How was capacity utilization for your uniform business, and are there any areas for plant consolidation or closures?

No.

We really have no areas, in fact historically Cintas has very rarely closed a plant.

We've grown in all of our markets over time.

Our capacity, it's always a difficult number to define because it gets down to details of wash out capacity versus clean storage, et cetera.

We think we have sufficient capacity to continue to grow and continue to make investments like we have in the past in our CapEx, so we expect our CapEx to grow at about the same rate as historical levels, but other than that we don't see any spikes needed for increased growth opportunities.

Okay, last question, just on medical costs.

Can you update us on how that trended this quarter?

Yes.

Medical costs in the fourth quarter actually came down after two high quarters in the second and third quarter.

It's about 3% of our revenues, so we like the positives there.

We did change administrators in January 1, so we think that had some of the reasons for that, but really our claims experience improved as well, so we did see a decrease there, and that decrease is offset by a slight increase in workers comp as well.

Great.

Thanks very much.

Yes.

Move next to Gary Bisbee with Lehman Brothers.

Hi, guys.

A couple questions.

One thing you've referenced really fairly repeatedly over the last year or so has been this concept of external economic pressures and I think a lot of it has been manufacturing but also industries that service manufacturing.

It doesn't seem to me if you just take a future view of where the U.S.

economy that it is going, that those pressures are likely to subside a whole lot so I guess as you sit back and think about the five year plan, is there anything you're thinking about in terms of targeting new verticals or move to try to switch or adjust the mix of the business more aggressively?

Or do you think the steady as she goes trying to invest over time in the non-uniform businesses will be enough to generate the kind of growth that you'd like to do?

Well, Gary, I think that Cintas has embarked upon a number of things to take advantage of the changing economy by developing other products and services that will be more appealing to let's say some of these new areas.

I think the economy continues to be strengthened by a lot of small businesses and we're certainly getting our share of business with the small businesses.

It takes a lot of small business wins in order to make up for the big manufacturing plants that shut down, so it takes time to catch up with that.

We've developed new products that I think are going to help us in that regard.

We've targeted other industries that I think will be beneficial to us in the long run, and I think the Project One Team is going to improve our ability to cross sell our business services among our customers and I think that will be beneficial down the road so I think all of those things together will enable us to continue to grow into the future.

Okay.

On the rate of increase in the non-uniform businesses, are there any mid size to larger acquisitions that you could consider in those businesses or do you think it's more likely to continue to be this sort of moderate pace rollout?

In the other businesses, there are still some good size acquisitions available in First Aid & Safety and fire service, not as I don't think the predominantly though smaller businesses, but we would certainly be interested those, and we continue to look at those opportunities but I would, I believe that most of our growth is going to come from the type of acquisitions that we've been making in those areas coupled with the increased emphasis on organic growth in those new businesses and with the ability to now service national customers in our First Aid & Safety and very soon in document management and fire service, I think we will be able to offer these services on a national scale that very few other companies can do, and I think that will be helpful to us.

Have you, on that point, is there anything you're doing differently and now that you're gaining scale in those in terms of marketing those businesses, for example, in New York, and I understand it's a bit of an odd market, but I've heard like radio commercials for companies doing the document shredding and I don't think you're in New York yet, but we're sort of, it seems like with these businesses there's lots of companies in the Yellow pages and whatnot, now that you grabbed scale how do you really take advantage of that?

Is it just going to the large customer and trying to get multi-site contracts or can you in the marketing front do some things differently?

Well, I think advertising is something that you got to be very careful in how you spend your dollars because what you really need to do is get to the right decision maker on these different businesses and often a decision maker in document shredding on a national basis is not the same as a decision maker in some of the other businesses, but we are using our national sales organization who have contacts with many of these larger companies to begin to sell some of these other business services and introduce these to them, so I think that will enable us to do that, but keep in mind, in document management, as Mike said, we grew 44% organically in the quarter, so we are adding a lot of new business, as we go forward, and I think the national business will only just help accelerate that growth rate.

On top of that I'd add two things.

First, our top sales reps are selling all of our products and services today so when you talk marketing that is how we've handled some of that.

In addition to that, our new sales organization by having all of our representatives on the Street knowing about our different products and services and presenting those to customers is much more efficient in our mind than an advertisement on the radio.

When you have a personal relationship with a customer that you're seeing every week from a service standpoint and being able to recommend another service from a known quantity like Cintas, we think that's very effective.

We're finding our salespeople in the new organization are working together, we're developing technology to assist them in doing that, there's a lot more interaction going on than there ever was before when they were all in their different silos, so that's why we continue to be bullish on the future.

Just one last clean up one.

You mentioned last quarter that you had some marketable securities that you were waiting for them to mature before you might pay down some debt.

If we look at the next quarter or two is that something that's still likely to happen that that securities balance will come in but you'll still be in debt with that?

There's not a significant amount of that left.

We used most of that during this fiscal year.

Thanks a lot.

Next question comes from Chris Gutek with Morgan Stanley.

Thanks, guys.

I couple of follow-up questions to the previous ones.

First, maybe to dig a little bit more deeply into the salesforce productivity, I guess this is the second call in a row where you've talked about generally improving results.

Although clearly it will take some time.

Could you elaborate a little bit more on how difficult it's been to find new salespeople and the quality of the people, how well you have to pay them and how this class of new hires is ramping up versus previous groups?

Based on the information that I've received from our sales organization, Chris, I would say that we are finding pretty good quality people; however, it is still difficult to find the right type of individual who we believe will be successful at Cintas.

I think it takes a lot of review of resumes and a lot of interviews to get the right person in, but fortunately with the improved turnover rates, we believe that that will enable us to not have to hire as many people going forward as we have.

Productivity is certainly improving.

It's back to -- I would say it's improving at rates that we've seen before in the uniform business but it's accelerating in some of the other businesses because of a lot of the cross selling opportunities that are being made available to these other businesses, keep in mind that uniform rental is our biggest business and has the most customers, so you have probably the most opportunities to do the cross selling.

As far as compensation levels, we've tweeked the compensation plan, we talked about that before, that we're giving people a little bit more comfort in knowing what their compensation is going to be on a month to month basis than the way it used to be, but it still requires an individual to be successful at Cintas, that individual still has to be productive and there is still an awful lot of their ultimate compensation is based on their results, so they quickly find out if they don't sell enough that maybe this isn't the right job for them.

Fortunately, I believe that with the training we've got and with the management team that now is going to mentor these people that we should be more successful in the future holding on to them.

Okay.

And then I don't know if you guys measured for the full year in fiscal '07 what percentage of new client adds were no programmers?

And related to that, if you measured it, or if you didn't, if you have a sense for how the industry saturation or maturity level is playing out over time?

Chris, it is continuing to be about two-thirds of our new business are no programmers.

Okay so from your perspective, no sign of anything close to saturation yet?

Oh, no, no.

I think there's still the potential market is still three times the size of the served market.

Okay, and I apologize if you mentioned this in your prepared comments which were quite thorough so thanks for that, but relative to the lower guidance on the prior call, both the revenue and EPS for the full year were slightly above the lowered numbers.

Was there anything that was a positive surprise during the fourth quarter that drove that?

Well, Mike mentioned the swap, so that was certainly a positive that we didn't anticipate, so there was a little income from that, but sales came in a little bit above the mid point of our guidance, and I think it was just kind of spread around the number of different areas, the organic growth rate in document management was certainly very positive, our national account sales division finished up the year very well and lost business improved a bit in rental so just kind of a myriad of different things.

As far as margins they were pretty well in line with what we thought they would be, medical costs did come down a bit from what we had experienced early in the year so that helped somewhat.

You see anything different on the competitive landscape, again not to belabor the point but with Aramark having gone private, maybe a little bit less focus on growth and more on cash flow, so less competition there but potentially more competition from G&K especially for national accounts?

Well, we certainly respect all of our competitors and I think they've all continued to be very good businesses, but I can't tell you that I've heard any appreciable change in anybody's behavior over the last six to nine months from the way it had been.

And finally any updated thoughts on a new optimal capital structure?

We continue to evaluate it, continuously.

That was part of the analysis we did in structuring our debt payment this last quarter, but it's an ongoing situation as you well know.

The market is fluid with regard to the alternatives and we'll continue to assess it and get guidance from our Board and our advisors.

Okay, thanks, Bill.

Next we have Pete Carrillo with Citigroup.

Hi, guys, sorry I apologize for a couple of repeats, but the swap income was how much again, sorry?

It was a gain of 6.2 million.

Pre-tax.

Pre-tax.

Okay.

Now, you gave that ten year thing, '97 and 2007.

Could you just go real quickly through those numbers again for the full year '07.

Not the '97, but '07, the percentages?

Of '07, sure.

41% uniform rental, 15% dust, 5% shop towels, 6% linen, 13% direct sale of uniforms, 10% first aid, safety and fire, 7% restroom supply and cleaning services, and 3% document management.

Okay, a couple of quick little ones and then I got a couple real questions for you.

Rent, did you give operating income break out?

I thought I heard you say it but I (inaudible)?

I gave income before income taxes for the segment is that what you mean?

Yes.

That was income before income taxes for rentals operating segment was $115.3 million for the fourth quarter, so that totaled to $462.4 million for the year, and income before income taxes for other services operating segment was $34.3 million for the fourth quarter which totaled to $108.8 million for the year.

Great.

Then in terms of sorry, on to your CapEx looks like it finally got toward that 5% goal you guys have been talking about for a few years, and it looks, so I guess is that related to Sanis mostly for '07 and should that continue into '08 towards the 5% level or should we drop back to the mid 4.5% or so range?

I think part of what happened there, Pete, was the purchase of some land for some plans but there also certainly is the impact of Sanis, impact of document management when you grow 44% in document management you got to buy some shredding trucks but I would say for planning purposes, 4.5 to 4.75% revenue is probably about the right target.

Okay that's sort of the next couple years I guess, right?

Right.

And then for your guidance what is your sort of assumptions for fuel as you look out to fiscal '08.

How do you guys model that?

Do you assume flat from today or the last 30 days or what do you do there, because that seems pretty volatile right now obviously.

Well, we're kind of considering it to remain flat.

It was interesting throughout the year, our energy costs as a percent of sales remained around 3.2 to 3.5%, so that kind of the expectation going forward that it will be in that range throughout the fiscal '08.

Still no idea, no plans still of doing any kind of I guess hedging in the area?

No.

I think hedging is a situation where you could be right 50% of the time or wrong 50% of the time, and I believe that the situation that Cintas finds itself in is that we're probably as well off to continue to do what we've done before and just look at better ways to conserve energy as opposed to try to do financial maneuvering to hedge it.

Okay.

On the salesforce issue, real kind of bigger picture question is sort of how do you, what's your sense of how happy the salesforce is during a restructuring period?

Is that part of what's gone on the last year?

Everyone is not getting moved to supervisor, obviously, right?

You're not losing all your salespeople so overall what's the level of the mood or the tone or whatever?

Well, I think the best indication of the mood is if turnover rates are going down that means people are happier with the new organization, so we're confident that most of them like it.

Great.

Thanks a lot.

The next question comes from Scott Schneeberger with CIBC World Markets.

Hi, good afternoon.

Just a couple quick clarification questions.

In the revenue guidance, could you give a break out on internal versus acquisitive growth or should we just assume predominantly organic there?

It's predominantly organic although you have the carryover impact of acquisitions that were made in fiscal '07, and the acquisitions that were made in '07 were primarily in First Aid & Safety and document management, and First Aid & Safety being primarily fire, so you're going to have a little bit of carryover but the bulk of that growth is organic.

Fair enough and then similar to last year, should we assume that the EPS growth assumes no share repurchase?

Yes.

Okay, thanks.

And then haven't heard much the Union front lately.

Is there anything you can add updates on what you're seeing there?

Actually, no, there's really, they continue to try to cause a little problem now and then, but as we've stated before, they're having no success with our partners.

Our partners continue to resist any efforts that the Union has with regard to that, and they're going to continue to be a nuisance, they're going to continue to cause us issues now and then, but we're continuing to move on and run the business as we think it should be run.

Okay, thanks a lot.

That's all for me.

Next question comes from Greg Halter with Great Lakes Review.

Good afternoon and thanks for taking my questions.

Sure, Greg.

Looking at your other, the other services gross profit margin, you had talked about a target of 30 to 35 then upped that to 32 to 37 and now you're at about 38.5.

Any thoughts on where that can fall out going forward?

Well, it's obviously we're continuing to do well in that area, so I would say that our target of 32 to 37 is probably needs to be adjusted upward but I don't have a specific at this time to tell you, but it certainly is encouraging to see what's happening in those businesses.

It definitely is, no question.

The stock option expense I presume was only around $0.03 a share for fiscal '07?

It was about, it's about $0.02 a share I believe is what it ended up being.

Okay, and will it be approximately the same for fiscal '08 ?

Probably around that area, yes.

All right, and I know you made some brief commentary on CapEx expectations for '08 but do you have a dollar figure that you're targeting, a range?

A dollar figure for what?

Capital expenditures?

170to 190, and then Mike just informed me that the stock option expense will probably be more like $0.03 a share.

In '08?

Yes.

And I know there's been some rumblings and maybe more than rumblings about Wal-Mart in replacing their uniforms and dress code and so forth.

Are you participating in that or are you aware of where they stand or what they're doing and how Cintas fits in?

All I remember hearing is that we are, Wal-Mart is, we've got a good relationship with Wal-Mart and I think that we've reached out to them to assist them in this program, but I don't have any more specifics other than that at this time.

And would that be, if you were participating with them, would that be a sales opportunity or a rental opportunity?

Based on what I knew about what their desires were, they were looking more at a purchase program than a rental program.

Okay.

And there was some commentary I think Mike provided on capital, I believe it was capital spending by each of the two segments for fiscal '07 and I missed those two numbers or maybe it was depreciation and amortization.

I gave you both.

Could you repeat those since I missed them?

No problem.

CapEx for the year was 181 million, 133 million of it was rental, 48 million was other services and in relation to that on depreciation and amortization there's 176 million for the year in total, it was 135 in rental and 41 in other services.

Great.

Thank you very much.

The next question will come from Bruce Simpson with William Blair.

Good afternoon, guys.

Hi, Bruce.

What was the CapEx number in the fourth quarter?

CapEx in the fourth quarter?

I have it right in front of me.

Let me get back to you on that because I don't have it right in front of me.

Okay, we talked a lot about the disruptive influence from salespeople being promoted.

How many people have been promoted or what percentage of the total salesforce?

Bruce, we're not disclosing those numbers but it was a substantial number of people were moved into new positions.

Okay, on the swap, I want to make sure I understand this, so because of the decision to change the financing structure over a particular obligation, you moved to a commercial paper program and that was a $6.2 million gain in the quarter which -- have I got that part right?

No.

We had in place a forward swap that we entered into last year that locked us into a certain interest rate if we should decide to issue 30 year debt in June.

We instead after a lot of analysis and discussions, we decided instead of doing that, we expanded our CP capacity and we borrowed sufficient moneys under the commercial paper program to pay off the $225 million debt that came due on June 1, and did not enter the 30 -- did not issue 30 year bonds, therefore we terminated the forward swap and because we were in a positive state at that time, we generated $6 million of pre-tax income and received cash as a pay off of that swap.

Okay, so by my calculation, that's, we're in the neighborhood of maybe 60 basis points of OI in the quarter and maybe $0.025 in quarterly EPS, do you think that's right?

That's correct.

Back on your question in CapEx it was $52 million in the fourth quarter.

52?

Yes.

And then with respect to the growth rate and the earnings projections for next year, there seems to be kind of an awkward sort of tacit understanding here that the rate of growth has come down to a level that seems to be fairly permanently below what you had last updated us on your long term thoughts about growth.

Maybe it's possible to say what you think organic growth would have been in the absence of having switched over to the Project One Team this year, in other words how much did that hurt for the full year or the quarterly program?

Bruce, that's a theoretical question that would be impossible for me to answer and I would just be speculating.

I take issue with your term permanently reduction of internal growth.

I think we have hit a low point, hopefully, and that we will begin to see it accelerate back up.

We made this decision to go to Project One Team with a lot of discussion and analysis but we felt in the long term it was the right thing to do for Cintas and we still believe that.

Unfortunately, it was more costly and more disruptive than we had expected it to be, but we are still very bullish that it is the right thing to do long term and we believe that it will give us the opportunity to get growth rates back up into the levels that we used to talk about being able to achieve.

So what are we looking at, just seizing on the last ten words of your response then, what do you think over the next 3 to 5 years what is a realistic sustainable top or bottom line growth rate for this company in this stage of its growth?

Low to midteens.

Is that really realistic given the record that's been posted the last five years and increasing growth makes the law of large numbers that much harder to overcome.

Well, Bruce, predictions of the future are always difficult to do because we don't know what will happen out there, but it is certainly the management's belief here that we can do that given the markets that we're in and given the businesses we're in.

Okay, thanks.

Next we have a follow-up from Michael Schneider with Robert W.

Baird.

Thanks.

Specifics on what the earliest territories look like, because presumably, they're over the experience curve and I think you mentioned last quarter that the first territory, was actually showing improving growth.

Can you give us what the first batch of five or the first batch of ten territories did a year ago and what they're doing today in organic growth?

Michael I'm sorry.

We're not going to get into that level of detail.

Suffice it to say that we are encouraged that the results indicate that this was the right decision to do.

Okay, and on the cost side, you mentioned it was more costly than expected.

What were the specific costs that were unexpected?

Well, I think the fact that our productivity levels dropped as much as they did, the additional training we had to do, the fact that we had to move people into some territories for relocation expenses, the effort to hire more people than we expected and the time it's taking to do this, has all contributed to being more costly.

Okay, and hiring more people than expected?

That seems to contradict the statement that turnover is lower.

Or was it just--?

Well, maybe that was a misstatement.

The fact that we're, we had to, we just had more disruption is probably the more correct way to say it.

More of the amount of sales representatives we had to hire initially when we ended up promoting a significant number of existing reps at management levels.

And last question again, Bruce had asked what number had been promoted and what percentage would you consider again disclosing at least what percentage?

No, I won't.

Okay.

And then revisiting the swap.

Can you give us just the underlying rationale and I understand you did a lot of analysis, but why make a bet on the interest rate curve at this point, commercial paper versus long term debt, I'm just curious?

Well, we decided that -- we just looked at a number of different alternatives and at this point in time we decided that the 30 year debt was probably not the right decision for us to make.

And the difference in costs that it ultimately came down to in terms of basis points?

Well, obviously it's cheaper right, for us right now to be in the commercial paper than it would have been to be in 30 year debt.

It also gives us more flexibility as we go forward-looking at our cash flows and just deciding on what we want to do in the longer term.

Okay.

Thank you, again.

Gentlemen, there are no more questions at this time.

Well, thank you all very much.

Appreciate everyone joining us this evening.

And we'll look forward to speaking with you again in just a couple months, we'll have our first quarter results out in probably the latter part of September and we'll look forward to talking to you then.

Once again, everyone this will conclude today's program on behalf of Cintas we thank you for joining us.

Please enjoy the rest of your day.