信達思 (CTAS) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Cintas quarterly earnings results conference call.

Today's call is being recorded.

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

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

Please go ahead, sir.

Good afternoon, and thank you for joining us to hear about Cintas's fourth quarter of fiscal 2008.

Despite the pressure of increasing energy prices and a sluggish U.S.

economy, we are pleased to announce that Cintas achieved its 39th consecutive year of growth in sales and profit.

For the year, revenues increased 6.2% to a record $3.9 billion, and earnings per diluted share were $2.15, an increase of 3% over the amount in fiscal 2007.

In the fourth quarter, total company revenues increased over 6% on a comparable work day basis.

Earnings per diluted share in the fourth quarter were $0.58 compared to $0.57 last year.

Last year's fourth quarter results included a $6.2 million pretax benefit from the termination of a forward interest swap that increased last year's earnings per share by approximately $0.025.

Excluding this unusual item, the earnings per share growth for this year's fourth quarter compared to last year was other 6%.

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

After we provide some additional commentary on the quarter, we will then open the call to questions.

Despite the continuing impact of rising energy prices, the company's total gross margin was 42.9%, the same as last year.

Energy costs for the fourth quarter were over 4% of revenues versus 3.4% in the prior year's fourth quarter.

For the total year, energy costs were approximately 3.6% versus 3.3% for the entire fiscal 2007.

We also did experience higher energy costs as we move through our quarter, which have increased even further so far this fiscal year.

We are also seeing increases in other costs such as in hangers and capital equipment.

While we are attempting to pass on these increased costs through price increases, the sluggish economy and the aggressive prices being offered by our competitors continue to make passing on such price increases difficult.

Our financial condition continues to be very strong.

We are generating substantial cash flow and keeping our debt capacity available for opportunities that may arise for additional acquisitions, share buybacks or more rapid expansion throughout the world.

Our view of fiscal 2009 is tempered by the continuing pressure of increased energy and of other commodity items as well as a deteriorating economy.

We anticipate that these conditions will persist throughout the year.

However, despite these difficulties, we believe that Cintas will grow both its top and bottom lines.

As a result, we are setting our initial guidance for fiscal 2009 to call for revenues in the range of $4.1 billion to $4.2 billion and earnings per diluted share of $2.22 to $2.30.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation from 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 filings with the SEC.

Now I would like to turn the call over to Mike for further discussion of our results.

Thank you, Bill and good evening everyone.

Total revenues were $1.01 billion for the quarter, a 4.7% increase over the $964 million reported for the fourth quarter of last year.

However, when adjusted for having one less work day in this year's fourth quarter as compared to last year's, revenue growth was 6.3%.

Total company internal growth was 5.2% during the fourth quarter and 4.6% for the year.

As a planning note for next year, each quarter in fiscal 2009 will have 65 work days.

As such, there will be one less work day in fiscal year 2009, 260 versus the 261 work days in fiscal 2008.

The first quarter of fiscal 2009 will have one less work day than the first quarter of fiscal 2008, which had 66 work days.

All other quarters will be the same with 65 work days in each.

We classify our businesses into four reportable operating segments -- rental uniforms and ancillary products; uniform direct sales; first aid, safety, and fire protection services; and document management services.

Uniform direct sales; first aid, safety, and fire protection services; and document management services are combined and presented as other services on the face of the income statement.

Details for these operating segments is provided in the supplemental segment data included with the release.

The rental uniforms and ancillary products operating segment consists of the rental and servicing of uniforms and other garments, maps, mops, shop towels and other items.

Our restroom and hygiene products and services are also included within the segment.

Rental revenues were $711.7 million for the quarter, compared to $696.8 million in the fourth quarter last year.

When adjusted for one less work day, this represents a 3.7% increase over the fourth quarter of last fiscal year.

Factoring out acquisitions made over the last 12 months, our rental organic growth rate was 3.6% for the fourth quarter and 3.4% for the year.

The fourth quarter internal growth rate represents a slight decrease from our third quarter rental organic growth rate of 3.8%.

The difficult economic environment is certainly affecting our customers.

Our lost business and [ad stop] metrics continued to deteriorate through the fourth quarter as we our customers reduced headcount and closed locations.

This deterioration caused our revenue results to be toward the low end of the fiscal 2008 revenue guidance.

On a positive note, new business results continue to be in line with our expectations.

Despite the difficult economic environment, we continue to have success in expanding our customer base as we demonstrate the value of our products and services.

In addition, to offset increased fuel prices, we were able to obtain some price increases from our customers during the second half of the year.

However, we continue to experience very competitive pricing pressure within our customer base, most notably as contracts reach renewal.

Our uniform direct sales incorporates our national accounts sales division, which direct sales uniforms, brand promotional products, and other related products to national and large regional customers.

And our direct sale catalog, which direct sales uniforms and related products primarily to local customers who also rent products from us.

The uniform direct sales segment grew 6.7% for the fourth quarter on a work day adjusted basis.

Organic growth for the fourth quarter was also 6.7%.

This growth represented a significant improvement from the third quarter, when uniform direct sales growth was actually a negative 0.7%.

The revenue improvement in the fourth quarter brought uniform direct sales revenue growth for the year to 3.2% for both total and organic growth.

The fourth quarter revenue improvement was in both national account division sales and in our direct sale catalog, with both achieving similar growth percentage results.

As we have mentioned in the past, our direct sale business is a choppier business than our other services, which have a more regular delivery cycle and buying pattern.

Customers within the direct sale business have the ability to accelerate or delay purchases based on economic conditions.

Through the current difficult economic environment, we have done a good job of retaining these customers and being flexible to their needs.

As we mentioned in a recent press release, our national account sales division is beginning to focus more on international opportunities.

In the past, we have assisted certain global customers in our opening of certain hotels and cruise lines around the world.

As more and more of our customers expand operations internationally, the opportunity for the direct expansion of our direct sales business has grown.

Given our size and global sourcing capabilities, we are now in a position to provide support to these current customers in strategic international markets and to expand our customer base in those markets as well.

In conjunction with this expansion, we have changed the name of the national accounts sales division to global accounts and strategic markets.

While we believe there are significant long term uniform direct sale international opportunities, the short term expected revenues and the initial investment required to drive those revenues are not yet material to Cintas in total.

Our third operating segment is first aid, safety, and fire protection services.

In this business, we sell and deliver first aid products, safety products and automatic defibrillators for our customers.

Within fire protection, we install, inspect, repair and recharge portable fire extinguishers and sprinkler systems.

We also provide and service emergency lighting systems and kitchen fire suppression systems.

We are the largest on site provider of first aid and safety products in North America, and the second largest provider of fire protection services.

During the quarter, revenues within our first aid, safety, and fire protection services operating segment grew 6.7% when adjusted for work days.

On an organic basis, this segment grew 5.3%, which was the same as third quarter internal growth.

As with our other businesses, general economic conditions continue to cause a head wind in this business.

For the year, first aid, safety, and fire grew 11.4% in total and 6.1% on an organic basis.

The first aid and safety portion of the segment provided double digit organic growth for the year.

However our fire protection business suffered throughout the year due to pressure on fire installation sales, lower than anticipated recurring service revenue, and difficult year-over-year comparables.

Overall, our fourth quarter revenue results in this division were comparable to those for our third quarter.

We continue to evaluate and make strategic acquisitions within this operating segment with a focus on expanding the geographic coverage of our fire protection service business in order to become a national provider of this service.

Our document management services operating segment is comprised mainly of document shredding services, although we do have storage and imaging capabilities.

Revenues within this operating segment continue to grow at a rapid rate.

Fourth quarter revenues for the document management operating segment grew 53.8% as compared to 71.2% in the third quarter on a comparable workday basis.

Internal growth for the segment was approximately 30%, down from approximately 40% in the third quarter.

As mentioned in prior earnings calls, organic growth over the past year has been positively impacted by increased shredded paper prices, which began to climb in January 2007.

The price of recycled paper stabilized over the last few months, which caused a slowing in our fourth quarter organic growth rate.

Excluding the effective paper prices, our shredding business grew approximately 30% during fiscal 2008 on an organic basis.

Despite current general economic conditions and the size of our shredding business, we expect to continue to grow over 20% on an organic basis, excluding any effect from paper prices.

In addition, we service customers in over 85 of the top 100 markets in the United States and Canada and have become a national provider of this service.

We continue to focus on acquisitions within the segment in order to gain access to the remaining large markets and also to supplement existing operations.

We continue to be pleased with results of our document management business in the Netherlands.

While small, it is meeting our expectations and we are gaining valuable experience in running this international business.

Over the last ten years, Cintas has undergone significant change, transforming from predominantly a uniform rental company to a full-fledged business services conglomerate.

Ten years ago, total company revenue was less than $1 billion, and approximately 70% of that revenue was from uniform rental.

From fiscal 2008, our revenue breakdown is as follows -- uniform rental is 39%.

Dust control, which is mainly entrance mats, is 15%.

Restroom supply and cleaning is 7%.

Shop towels are 5%.

Linen, which is not tablecloths and bedsheets but rather is mainly garments such as lab coats and aprons, is 6%.

This brings total uniform rental and ancillary products to 72% of total company revenues.

Uniform direct sale is 13%.

First aid, safety, and fire protection services is 10%.

Document management is 5%.

As you can see, uniform rental is now only 39% of our total revenue and uniforms in total.

Both rental and direct sales are only 52% of our $3.9 billion of revenue.

In fact, today over 50% of our customers do not rent or buy uniforms from us.

We expect this trend to continue as our emerging businesses grow at a faster rate than our uniform business.

We will continue to evaluate and implement new business products and services when appropriate financial and strategic parameters are met and also to create the foundation for international expansion.

Fourth quarter total company gross margin was 42.9%, the same as last year's fourth quarter and an 80 basis point improvement over this year's third quarter total company gross margin.

The total fiscal year 2008 company gross margin of 42.7% was the same as that for fiscal 2007.

Gross margin improvements in uniform direct sales and first aid, safety and fire throughout the year overcame margin pressure caused predominantly by increased energy costs.

Energy costs reached a historical high, hitting 4% of revenue for the fourth quarter.

This was a 60 basis point increase over the fourth quarter of last year and a 30 basis point increase from the third quarter.

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

The significant increase in energy pricing did not allow this to happen in this year's fourth quarter.

Our rental gross margins were 43.9% of revenue for the fourth quarter, an 80 basis point decline from the fourth quarter of fiscal '07 but a 50 basis point improvement over this year's third quarter.

The 80 basis point margin decrease from the prior year was predominantly a result of 70 basis point increase in energy costs over last year's fourth quarter.

Our cost of hangers has also increased as a result of large commodity cost increases.

Rental gross margin improved 50 basis points from the third quarter, despite rental division energy costs increasing 50 basis points.

Leveraging of service and delivery labor, improvements in sourcing and logistics costs, and the flow-through benefits of cost increases were the main drivers of the margin improvement.

Other services gross margin improved to 40.5%, a 200 basis point improvement over the fourth quarter of last year and 160 basis point improvement over the third quarter.

Other services margins continue to improve as the higher margin first aid and safety and document management businesses become a larger portion of the base.

Additionally, despite increased energy costs, both of these businesses continued to better leverage their cost structures as they gain scale.

During the fourth quarter, a combination of sales mix and improved revenue generation in uniform direct sale also margins higher, covering more fixed costs.

Selling and administrative expenses were 27.7% of revenue, an increase of 90 basis points over last year's fourth quarter but a 30 basis point improvement over this year's third quarter.

During the fourth quarter of last year, we exited a forward starting swap we have put in place in anticipation of a debt refinancing for a new issue of debt with a 30 year maturity, when the decision was made during last year's fourth quarter to refinance this debt through the issue of commercial paper.

The swap was terminated and a credit of $6.2 million or 65 basis points was made to administrative expense.

Improvements in workers compensation costs in this year's fourth quarter were offset by an increase in medical costs.

Selling expense increased 30 basis points over the prior year fourth quarter, reflecting the investment in the new sales organization.

We have now reached the one year anniversary of the full investment and expect to see leverage and selling costs on a prospective basis.

The 30 basis point improvement from the quarter was due mainly to an improvement in administrative labor as we aggressively managed our overhead cost structure in an improvement in receivable collections.

An increase in medical costs was offset by the seasonal improvement in payroll taxes, as payroll taxes reset during our third quarter each year.

Net interest cost of $12.1 million or 1.2% of revenue remained relatively flat as compared to both the prior year fourth quarter and this year's third quarter.

Our effective tax rate was 36.5% for the quarter and 36.8% for the year.

The improvement was due to a reduction in reserve requirements, as required in FASB Interpretation #48, Accounting for Uncertainty in Income Taxes, and Interpretation of FASB Statement #109, or more commonly called FIN 48.

For the quarter, net income was $89.7 million, and earnings per diluted share was $0.58, reflecting operational improvements and the impact of share purchases made earlier in the fiscal year.

Our balance sheet continues to be strong.

Our current ratio was 3.5 to 1 at May 31, and our equity has improved to a record $2.3 billion.

Our cash increased $31 million from May 31, 2007.

The majority of the increase is due to a balance sheet reclassification we made during the current quarter.

In the past we have netted outstanding checks at our depository bank.

Due to a transfer of certain cash holdings, we no longer have a complete rate of offset within cash and cash equivalents on the balance sheet, as the cash and the outstanding checks are with different depository institutions.

This reclassification increased cash and cash equivalents on the balance sheet by approximately $28 million and likewise increased accounts payable $28 million for the outstanding checks.

When adjusted for this amount, cash and market securities in total increased $8 million.

Cash generated in excess of daily needs is used to pay down outstanding commercial paper.

Our marketable securities are all held in Canada.

These funds, which were generated from operations there, are held in short-term conservative government investments and currently being held for investment opportunities outside the United States.

DSOs on accounts receivable were 41 days, which is a slight increase over last year.

We are actively managing our accounts receivable in order to lesson an impact from current economic conditions.

New goods inventory levels increased $7 million over May 31, 2007.

The increase is due to a combination of increased inventory requirements for the roll out of our direct sale catalog and the opening of a new facilities service distribution center.

This new facility has been designed to improve logistics and enhance the cost structure of our facilities service business.

Long term debt at May 31, 2008 was $944 million.

Total debt as a percentage of total book capitalization was 29.5%.

Our cash remains strong with cash flow provided by operations totaling $545 million and free cash flow of $354 million.

Capital expenditures were $190 million for the year, of which $141 million was invested in our rental division, $31 million was invested in document management, $12 million in first aid, safety, and fire, and $6 million in uniform direct sales.

Approximately 30% of our CapEx is considered maintenance CapEx.

For next year, fiscal 2009, we expect capital expenditures to be between $180 million and $200 million.

In fiscal 2008 we spent $112 million on strategic acquisitions, mainly on first aid, safety and fire protection services and document management businesses.

Historically, during more difficult economic environments, acquisition opportunities have increased.

Our current pipeline is healthy and we have maintained our liquidity in order to be flexible if opportunities arise.

We did not purchase any shares under our share buyback program during the fourth quarter as we continue to balance purchases with cash flow general ration and usage.

Given the current environment and the potential acquisition opportunities, we have been maintaining liquidity and debt capacity for dry powder.

For the year, we purchased 5.2 million shares of stock.

Since the program's inception, we have bought back 19.4 million shares.

We continue to have $228 million in remaining authorization under the existing program.

During the fourth quarter we paid a $71 million annual dividend that we announced and accrued during the third quarter.

This represented an 18% increase in our dividend and demonstrated our continued commitment to our shareholders.

This is our 25th consecutive year of increasing our annual dividend payment, which is every year we have been public.

As mentioned by Bill and in our earnings release, our guidance for fiscal 2009 calls for revenue to be between $4.1 billion to $4.2 billion and earnings per diluted share to be between $2.20 and $2.30.

We expect earnings to improve as we progress through the year as we gain additional selling cost leverage and receive the impact of recent cost containment initiatives.

Also please note that for fiscal 2009, there is one less workday in the first quarter for the total fiscal year.

Also included in this guidance is our expectation that our effective tax rate will be approximately 37.1% for fiscal 2009.

Please note that as required under FIN 48, income tax reserve requirements will vary quarter to quarter.

We expect our effective tax rate to be higher in our first and second quarters and then come back in line during the third quarter, mainly due to the timing of state and federal tax reserve requirements.

Thank you, and now Bill and I would be happy to answer your questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from Kartik Mehta with FTN Midwest Research.

Good afternoon, Mike and Bill.

I wanted to get your thoughts on the organic growth assumptions you have for the uniform business for FY '09.

Would you anticipate they'd remain the same as it was in fourth quarter, or would you anticipate any type of changes for FY '09?

We would anticipate right now based on our plan and our view of the economy that it will improve slightly but not significantly over what we experienced in the latter half of '08.

Now what about energy costs?

Obviously it seems as though energy costs have increased, at least in this quarter.

Does your guidance assume energy costs stay stable or are you anticipating an increase there as well?

The guidance that we provided assumes that energy costs that we have experienced pretty much in the latter part of May and June will remain at that level throughout fiscal '09.

are continuing to see this, the impact of our traditional uniform rental customers being relatively significant and our people don't see that changing at all for the next nine to 12 months.

So as a result of that I think the guidance we gave you in the mid single digit growth as we go forward, we believe our strategic as we look out the next few years that we can get back up to the high single digits without any question.

And last question, Bill, if you could maybe look longer term, maybe over the next couple of years, is this -- is the uniform business in your opinion, could it get back to high single digits, organic growth, or are we in a situation where you think organic growth is more mid single digits?

At this point, Kartik, I still am of the belief and I think our management is too that ultimately it can get back up to the high single digits.

However, in the short run, I think the mid single digit growth is probably what we're going to expect.

We're continuing to see the impact on our traditional uniform rental customer as being relatively significant, and our people don't see that changing at all for the next nine to 12 months.

So as a result of that, I think the guidance we gave you assumes that we will achieve somewhere in the mid single digit growth in the rental business as we go forward, but we still believe on our strategic plan basis that as we look out the next few years, that we can get back up to the high single digits without any question.

And last question, Bill -- I want to know if you could maybe talk about trends you witnessed during the quarter and from a big picture standpoint what you witnessed the first two months of this quarter.

Do you believe things are improving, staying the same, or deteriorating from an overall economic picture for the business?

Looking at our customers, we saw deterioration beginning last November.

But it accelerated I would say as we move through the fourth quarter which ended May 31.

It has remained at that level throughout the first six weeks of this fiscal year.

I don't think it has got significantly worse, but it hasn't gotten any better in the garment business.

Are we still -- on the other hand, I would tell you that our emerging businesses still seem to be performing very well, and we haven't really seen any deterioration there to speak of.

Thanks so much, Bill.

I really appreciate it

Thank you.

We will go next to Andrea Wirth with Robert Baird.

Good afternoon, guys.

Hi, Andrea.

If you could maybe talk about your view of the cycle in general?

I mean it sounds like things did deteriorate throughout the quarter, maybe -- or at least maybe paused here, but one of your peers recently mentioned they saw -- just given the deterioration, they were saying that this may be approximating 2002 to 2003.

Just curious what your views are in this current cycle and and is it looking like others we've seen in the past?

I think it looks more like probably what we were seeing in the early 90s.

The 2002 to 2003 situation was a pretty quick down and then right back up.

I don't anticipate we are going to go right back up.

This is a little more prolonged, and so therefore I'm anticipating that we're going to have a relatively sluggish economy throughout our fiscal 2009.

Thank you.

Then just more in terms of your ability to actually maybe see some improvement in fiscal '09 in the rental growth despite seeing some deterioration in the unemployment market.

Is this just more a function of the Project One, really just still gaining more momentum or maybe you will talk about why you think you should be able to at least hold that growth steady and prove it?

I think the major reason is that because of Project One team, we are seeing good new business.

That has not deteriorated.

As we anticipated, our new business results have continued to be pretty good and actually have improved over the course of fiscal '08.

Therefore, that will offset this sluggishness that we're seeing with existing customers and that's what gives us the comfort to say that we'll be able to grow the business next year, albeit at not as high a rate as we'd like it to be.

And then along the lines of the new business, just curious what you're seeing as far as interest from [no] programmers, or customers who don't have a uniform rental program at this time.

Is the economy impacting interest in general, or is there still relatively high interest from that level?

It is still high interest, it's still very good.

I think that the value proposition is even more compelling today than it has been in the past, because when you can talk about the fact that we can provide this uniform rental program to an employee of a customer for basically $1.25 to $1.50 a day, and they're paying -- these poor people are paying $4 to $5 a gallon of gas, it begins to look like a tremendous value.

And therefore that is why -- another reason why our new business efforts continue to be strong.

Also when you look at that it eliminates an initial investment on their part.

They will purchase uniforms upfront, versus a rental program -- they have a significantly higher investment day one, and if they're having difficulties with cash flow, certainly a rental program is advantageous to them.

Sure.

In terms of energy -- wondering if you could be more specific about what you did actually roll through in terms of -- is it actually price increase, is it a surcharge, and have you really already seen the benefit of that or is there still more to come in the next quarter or two from the recent action?

Andrea, as you may recall the way we handle our price increases in the rental business are primarily on the anniversary dates of the contracts.

We don't have a specific energy charge.

What we are doing is as those contract prices come up for the opportunity to increase prices, we are going to our customers and doing that because of the significant increase in costs that we have had.

So that is the rental business.

In the other businesses, such as document management, first aid and safety, we are going in as opportunities arise to offset our cost increases in energy with price increases with those particular businesses.

So I think you are going to continue to see some price increases rolling through just the way the nature of our businesses work and how contracts come up.

And obviously, if energy costs would stabilize, we would begin to see a little bit of margin enhancement on that.

Sure.

Just to push a little more, you had mentioned particularly on renewals is where you were seeing increased competition in terms of pricing.

Can you just address the difference there, because I guess are your peers also doing some energy things in terms of pricing, or I guess just trying to understand the contradiction there.

What's happening is we are seeing our competition be very aggressive at the end of our contracts to basically get our customers' business.

So they're coming in at very low prices and we're going to have to beat that competition at these contract renewals.

What they are doing with energy I don't really know because it seems to be somewhat different in different parts of the country.

I don't know if they have a consistent approach or not.

They're certainly -- especially the big players are being very aggressive and offering extremely low prices in order to get business.

Then just switching over to document shredding, the margin -- very impressive there this quarter.

I am wondering if there's anything in there making it higher than normal and is this rate sustainable?

It is sustainable as long as paper prices remain at these levels.

As Mike mentioned in his comments, we began to see an increase in the value of recycled paper back in January of '07 and it really peaked probably around December '07 or January '08.

Now it's moderated a little bit, but expectations are that it will probably stay at these levels.

Unless there's a dramatic falloff, these margins are fairly sustainable.

Great.

Thanks.

Nice quarter, guys.

Thanks.

Thank you.

We will take our next question from Ashwin Shirvaikar with Citigroup.

Hi.

Thanks.

Nice quarter guys.

My first question is you guys had a pretty good cashflow performance this quarter.

Could you go through again in terms of using your free debt capacity if you will -- the order in which you'd take a look at share buyback, international expansion, acquisition opportunities, and other things you might be doing?

I don't think I can tell you how they rate.

Obviously we factor all of those together as we look at the availability of cash and what our debt capacity is.

Acquisitions don't necessarily aren't just looming out there.

They come sporadically.

And so we will take an approach to look at our cash on a continual basis, look at our opportunities and put the money where we feel we get the best run long term for our shareholders.

It seems odd that you wouldn't be doing a buyback at $25 to $26 a share.

As I said, it is constantly being reviewed and we have amounts remaining under the program, but we will continue to keep you updated on a quarterly basis as to what we are going to do.

Okay.

Another question about -- in terms of the quarterly performance.

The stock compensation seems to be fairly low numbers in the quarter.

Is there anything worth noting there?

Not really.

You have to adjust your assumptions as you go forward.

There's nothing unusual.

There's nothing unusual.

Okay.

In terms of the first aid business, the fire protection side of it.

Are the problems there behind you, getting better, any update on what the strategic alternatives you're looking at might be?

We are a year out now from the difficulties with the year-over-year comparisons and we have been a year out.

That business is still suffering a little bit from the installation side.

But we believe at least from a comparable standpoint that it will be easier to see next year.

The fire protection business -- we look at the service and focus on the service side of the business versus the installation side.

So we are still going through changes within that division to insure we are focusing on the recurring revenue stream.

That is what we have always wanted to begin with and so we expect improvement going forward.

Okay.

In terms of the operating margin range that you expect for fiscal '09, would you say that there's enough going on in terms of cost control and things of that nature that you can offset any pressure you might have on the gross margin side because of higher fuel and so on?

Well, I think as we pointed out, our assumptions right now are that fuel costs will remain at these levels that we've seen over the last six to eight weeks.

Obviously if fuel prices doubled we -- that would be a very difficult thing for us to overcome.

But I think -- we don't expect that at this point.

So, I would say that as long as it is modest, we probably could overcome it, but it the more substantial it becomes, the more difficult it is to do anything in the short run.

But I think it is important to keep in mind that fuel prices could go down too, and there could be an opportunity for us especially in light of all of the things I think we have undertaken to improve margins in other areas that we may see an improvement in the margins.

We believe that the cost containment initiatives we put in place over the last couple quarters will certainly provide us some additional leverage going forward.

It's certainly difficult to predict fuel prices.

But in terms of looking at the margin expectation, assuming things stay roughly where they are, you would think that operating margins would come in flat to slightly better?

Yes.

Okay.

Thanks.

Thank you.

We will go next to Scott Schneeberger with Oppenheimer Funds.

Thanks.

Following up on an earlier question, as far as new programmers, where, what category verticals are you seeing that in, just looking for the areas of strength now that you are pursuing?

Well, we are pursuing it primarily in the service sector, Scott.

We are looking at opportunities in any companies that do, that have their employees in the public view, be it retail environment, be it delivery, home repair or things of that nature.

So that is our primary focus at this time is trying to take advantage of where the economy is at least stable or growing.

Sure.

I assume usual or obvious suspects where you are seeing deterioration in lost business or at stop.

Any verticals or categories that would surprise us there?

No.

I don't think anything would surprise you.

It tends to be the manufacturing environment, the big distribution type of environments that service manufacturing operations.

We have seen deterioration in the restaurant and hospitality business.

That's impacted some of our facility services business because there has been more failures there.

That may be the only thing that maybe you wouldn't have picked up on.

Okay.

Thanks.

Sounds like you are hopeful that we get some improving comparisons on energy going forward.

Any updated thoughts on hedging or hedging strategy going forward?

We continue to look at it.

At this point in time, we really don't anticipate that it is anything we are going to go into in any big way.

Okay.

Thanks.

Finally, you have been -- in press release recently looking at going into global operations, global accounts.

Thoughts on that -- building or buying -- and it looks like you're looking at very disparate parts of the world to approach.

Can you give us a little bit more about the strategic approach there?

Thanks.

Sure, Scott.

Everyone needs to understand that we have always done a little bit of international.

It has been on very minor basis.

But for example, one of our big customers -- very high end hotel has utilized us throughout the world as they opened a new facility in Asia, South America, wherever, and we've often gone with them and put uniforms on their people there.

When the last big ship that was built in England, the Queen Mary, cruised down a few years ago from London, we were the ones who basically provided all the uniforms for those workers on that ship.

So we have always been doing that.

Now, I think that the thing that we are are ready and prepared to do is to respond to many of our customers' request that have been big customers of ours here in North America, people like Marriott, Starwood, Hilton et cetera who are being very aggressive in building facilities outside of North America and have asked us to help them with their uniform needs.

We now feel we are capable of doing that.

That is the main focus we have with this international expansion.

The other aspect of that would be in terms of the gaming industry.

In Macau, there has been a significant buildup of casino business in Macau.

I guess now they even surpass Las Vegas in gambling revenue.

Many of the big players there are major customers in Las Vegas.

So they've asked us to come over there and we are going to help them do that.

The other aspect of our international is what we have talked about throughout this year and that is the document management business.

In Europe we see a lot of opportunities there.

We did buy the company last year.

We have learned that business.

We are now looking at additional acquisitions and we see that coming about, assuming we can get things for the right price here over the course of the next 12 to 24 months.

Those couple of things I just mentioned are the main focus of international.

It doesn't require a lot of investment.

It doesn't require a significant amount of people, but it is going to enhance our presence throughout the world for customers that we have been servicing here in North America for many years.

Okay.

Thanks, just one quick follow up on that and thanks for all of the color.

Very helpful.

Understanding the global expansion with existing customers probably does not require extensive further investment, but perhaps the acquisition strategy in Europe.

Would that be sizable?

Is it going to be piecemeal here or there or are there sizable targets you are pursuing?

As far I can tell in Europe, the sizable, the targets we would be looking at are relatively small.

There are no significant sizable opportunities we would be interested in at Europe in document management at this time.

Thanks again.

Thank you.

We will go next to Michel Morin with Merrill Lynch.

Quick followup to an earlier one.

Specifically during the quarter, did the ad stop [in] loss business metrics worsen during the quarter?

Yes.

Okay.

And on direct sales front, was there anything unusual that either impacted the top line or the gross margins there?

The top line certainly was the driver of the gross margin.

As you cover more of your fixed cost in that business, your margins move up quite a bit.

From a top line perspective, some of it was a little bit of timing, and just with the customers in that business, you're consistently in front of them, you're consistently selling to them.

As we indicated, it can be a little spottier business in that it can go up and down quarter to quarter.

We are a little lower in Q3 but made it up in Q4.

Again that business is harder to indicate on a quarter to quarter basis upfront.

In terms of thinking out to 2009, the gross margin level for the full year is probably the better metric to look at in terms of possibility?

Yes.

Okay.

Then can you remind us on the SG&A front what the cost containment initiatives are and what your expectations are there?

Cost containment encompasses a lot of things.

We are looking at every administrative expense that we incur in the company and trying to determine is it necessary.

Is it something we have to do, can we do it more efficiently?

That involves people as well as travel, supplies, housing, et cetera.

So that is where our major focus has been.

We want to free up as much as we can to increase the top line -- so put it to sales and marketing type efforts that will have a return, look at MIS or IT projects that could generate return down the road.

So those are the types of things we are looking at.

But it just goes back to the Spartan approach that CINTAS has always tried to follow is -- look at every cost and make sure it's necessary, and that it is something that is going to have some value.

The last few years your SG&A line has grown pretty consistently faster than the top line.

Should we -- based on what you are saying should we anticipate that maybe in fiscal '09 they're going to grow at the same rate perhaps or maybe you'll get some leverage on the SG&A?

Actually, they have grown over this period of time from the SI because of P1T and some of the regulatory costs we've had associated with stock option expensing, with restricted stock, with the union campaign, with other legal fights.

So barring anything unusual, we know we are getting leverage now in the Project One team on the sales side.

We think we are going to get -- we will continue to show improvement on the G&A side.

So when you factor out all of these additional costs that public companies have had to contend with and that Cintas has to contend with because of the union fight, I actually think it has been quite remarkable that we haven't had even a higher increase.

So as we look forward, we are now, we don't have any hopefully any of those additional regulatory costs.

We will have to see what happens.

But we certainly should get leverage because we will continue to grow that top line.

And when you, including in that SG&A -- you have bad debt I assume in there.

Is that something you have seen started to tick up at all?

As Mike mentioned, our DSOs ticked up slightly, but our actual bad debt expense declined slightly.

So we are seeing a little slower paying, but I don't think we are seeing any significant increase in the number of actual write offs we are having to incur.

Write offs were up just a little for the year, not dramatic.

I'd agree with Bill.

Nothing significant there.

Great.

Thanks very much, guys.

Sure.

Thank you.

We will go next to Gary Bisbee with Lehman Brothers.

You mentioned a couple of times that new business is sort of in line with plan and may have gotten better throughout the year as you are getting further and further away from the sales reorg.

Can you give us any, any better sense than that, quantify it or how much is it accelerated?

Well, Gary we really don't want to get into that level of detail.

But it has improved modestly as we went throughout the year, and it is pretty much at our expected levels.

I mean back in the day that used to be sort of mid teens, I take it is --

It is still double digits, I don't want to get into the specifics, but.

Okay.

Double digits.

Okay.

Is a lot of that coming from head count additions you've done, or can you now -- are you now further enough into it to say that the productivity on a per sales guy basis has actually begun to improve?

It is actually on a per sales rep basis because the head count we added was on the management side in that initial investment in the selling organization.

So it is in productivity and certainly you continue to add reps in the emerging businesses.

The one thing that this new organization gave us across the board was the opportunity to more aggressively add reps in our emerging businesses to take some opportunities in the new markets we're entering and adding where appropriate based on the market.

One thing you talked about just going back to the Project One team initiative a year ago was hopefully beginning to drive some more cross sell.

Is that working, or are the sales people feeling like you set up the comp policy right so that they get a referral that's meaningful to them.

Any update on how that is going, and maybe what else is driving the productivity improvement?

It is working very well with regard to the emerging businesses because it has now given the sales people in the emerging businesses this huge customer list of Cintas customers.

I would say it is working to a lesser extent as you go to our traditional uniform rental customers and try to convince them to use some of these other services.

They may or may not need them.

There have been some wins.

We continue to tweak our compensation programs to get the behavior we want and that is a learning thing as we go through.

But we are pleased with what we are seeing there.

Okay.

You said, I think in the prepared remarks that the marketable securities are largely in Canada and you are keeping it there for potential international acquisitions.

You commented that you didn't see anything big in Europe.

Should we think about anywhere else there might be more medium or larger size deals, or is it more of the same of what you have been doing over the last 18 months?

Well, I think we recognize that to just bring cash back into the United States from Canada is an expensive thing.

So we are looking at opportunities for using that cash, not just for acquisitions but also capital type investments as we see the opportunity in various parts of the world.

To bring back the cash to the United States is a taxable event.

and so it has been building up there with operations since we started investing in Canada.

We now have over $100 million in Canada that we feel we can use for international opportunities.

Now with the move in both direct sale and also what we are doing in document management in the Netherlands, we believe it provides us the capital without having to leverage the debt markets to do that.

I guess the reason I am asking the question that way.

You did $110 million or $112 million of acquisitions in year.

You have more than that in cash in Canada.

I am talking total company acquisitions.

Are you likely to step up the international acquisitions or is the money likely to sit there for a while?

It is very difficult for us to be too specific because we all have a lot of different things going on.

We don't necessarily want to show our hand yet on what we are going to do.

But we are going to find the right opportunities and obviously if we see the chance to make a good acquisition outside of North America, that Canadian cash is going to come in very handy to do that.

Or if we find the right opportunity to make an investment, not necessarily an acquisition but to start up adding some more infrastructure for a direct sale or expanding document management or something else internationally, those funds are available to do that.

It can be a combination of the two.

Okay.

Then just two last ones.

In terms of the document management business, it sounds like you are in most of the major markets, I haven't seen a truck in New York anywhere, but you're in most of the major markets.

But how much investment is left to sort of build out the route density and get more trucks into each market -- I am trying to understand how that $30 million of CapEx -- is that a number that has to keep growing for several years if you kept investing in the business, or are you getting to the point where you have reasonably good coverage?

We have a lot of opportunities, Gary.

Even though we may at 85 of the top 100 markets doesn't mean we are doing as much business as the potential that exists there.

And so what we would anticipate is that yes, the $30 million expenditure is probably going to grow over time because we are going to continue to see the revenue go up quite substantially.

You have to have the truck to do the revenue -- in order to generate the revenues.

So we anticipate that business is going to grow at very nice rates.

In order to support that growth we are going to have to invest capital in it and therefore it will go up proportionately.

Any major impact we should expect from the fire we have read about that happened recently at one of your facilities?

No major impact at all.

One of the real advantages Cintas has is because of our geographic coverage, we were able to shift the business for those customers very quickly into to adjacent facilities, and we were able to get uniforms out of distribution centers that were destroyed in the fire.

And obviously there was adequate insurance coverage for the physical assets.

Our customers did not miss a delivery.

So it just shows another good reason that customers do business with us because we are able to react so quickly when we have a problem like that.

Okay.

Great.

Thanks for the color.

Thank you.

We will go next to Brandt Sakakeeny with Deutsche Bank.

Thanks for taking the question.

On the tax rate again, you said the first half is higher than the second half.

Should we assume 38% for the first half and maybe 36% for the second half?

We expect it to be 37.1% next year for the year.

It will be higher -- I won't get into specification but I would trend it higher in those ranges for Q1 and Q2 -- and it will take -- as long as the reserve requirements under FIN 48 remain consistent with where they were this year, you would see a correction in Q3 fairly substantially to bring it down at that point in time.

Great.

Bill, the extra day you had in FY '08 -- did that fall in the fourth quarter?

It actually fell in the -- let's see.

It was in the fourth quarter -- and I think --

The extra day was in Q3 but we were one short in Q4.

The same number of work days for the year.

Okay.

Great.

So FY '09 will have one fewer work day.

In the first quarter.

Then the [3.8 to 3.6] sequential drop -- is that on a same-day basis or adjusts for the differential in the days?

That adjusts for workdays.

Back to the question around March and the new business growth, I remember back in '02 or '03, Karen was always talking about the fact that new business growth was more expensive relative to renewal growth and that in periods where you saw accelerating new business trends, you saw margin compression.

A, do I remember that right and B, as we look out to FY '09, if you do in fact assume new business acceleration, your flat margin assumption -- does that presume then that you'll get the added leverage on the SG&A line to offset for that higher new business cost?

You are absolutely right.

New business is the most expensive business as long as you continue to provide new garments for new customers, which we always do.

You have all of the expense of the new garments beginning amortization and you have the sales commission costs, et cetera.

So that is the most expensive.

But as when we put our plans together for the coming year, we are detail oriented.

We are -- basically as we look at margins and new business growth, et cetera, we've factored all that into the guidance that we've provided and to the answers to the questions earlier.

To answer your question is -- yes, we will have pressure of new business, but on the other hand you are getting additional leverage in your facilities, maybe a higher route capacities, and so it balances itself out to where as I said earlier, if energy costs remain constant, we could see a slight improvement.

So that tells you you're getting the leverage in some of the fixed cost areas.

Based on our plan, the increased revenues are not dramatic.

We're talking a lower growth rate next year.

Perfect.

Thanks.

Just finally on the balance sheet, I wanted to make sure I understood.

You said that sequential increase in the payables was due to the cash check payables being held.

The offset was the cash and equivalents.

Is that right?

In the past, you used to net the outstanding checks with a depository institution because you had marketable securities and other cash balances there.

Okay.

At the same institution?

Yes.

This year because we switched institutions, you don't have the right of offset.

So I have the cash.

I had to increase the cash balance, but now I have the outstanding checks as well.

It is strictly a balance sheet reclass.

Instead of netting it within cash and cash equivalents, I had to separate it back out and increase my payables and increase my cash.

Got it.

Okay.

Then just on one other item on the balance sheet, I noticed that inventories had declined or at least grew but at a very low rate.

Any sort of liquidation there on inventory or anything else that would explain that very small increase?

No.

Just I would say overall better management -- the dollar went up because of the new facility service distribution center that we just opened a couple of months ago.

But overall it is just better use of the existing inventory.

There was no liquidation.

Okay.

Great.

Thanks for all of the color.

Thank you.

We will take your next question from Greg Halter with Great Lakes Review.

Good afternoon, guys.

Hi, Greg.

Question for you regarding the inventory again.

Have you made any changes to the amortization schedules you've had in place since the last year?

No, we have not, Greg.

All right.

On the CapEx side, any commentary on new plants either you have in progress currently or expect for '09 in the retro fit or upgrades you are going through currently?

Well we have a couple of new plants that are in the construction phase.

I think there's four maybe that we would probably be opening up over the course of fiscal '09, and that is about it from the plant side.

Where we are seeing the capital being spent is obviously supporting the truck fleets in the document management business, and then just normal maintenance type capital.

Okay.

And regarding your debt, on an average basis what was the average for fiscal '08 and I don't know that you can comment on '09, I guess depending on the fixed versus variable -- but if you could comment on where you stand fixed versus variable currently, I would appreciate that.

Sure.

We have about $163 million in commercial paper currently at May 31st, and the remainder which is about $780 million isn't fixed.

Our current blended rate is about 5.5%.

So Greg, what would happen is during the course of fiscal 2009, we would generate sufficient cash to pay off that commercial paper unless we became more aggressive on acquisitions or share buybacks.

Okay.

Or did share buybacks.

Okay.

Haven't heard much about the UNITE effort and just wanted to ask and see, I know they're still out there but what you are seeing and doing regarding that effort currently?

Well, we are doing what we continue to do is try to offset their propaganda.

They have been relatively quiet.

They show up at one of our facilities now and then distributing fliers.

I don't think their tactics have changed much.

They -- the word is I can tell you they continue to make no progress with our partner base.

We have less than 400 partners in labor unions right now.

And I think they're going to focus on the political front and depending on the elections in November we may see them trying to get their -- what they want to try to accomplish through the legislatures, and potentially the new administration..

One final one.

I know you have suits that you detail in the Q's and K's and so forth.

Any updates on any of those any particular lawsuits?

We will file our 10-K here by the end of July, and I think I can pretty much tell you that you are not going to see there's a bit much changes in the developments in those cases since the Q was filed at the beginning of April.

Okay.

Thank you.

Thank you.

Next we'll take a followup from Michel Morin with Merrill Lynch.

Thanks.

You mentioned the cost of hangers.

I was wondering if you could quantify that for us a little bit?

It's first time we have ever heard you talk about that.

It wasn't a dramatic increase, but it was enough that as you look at the increase in gross margin versus last year, the vast majority was in energy costs.

But there was an increase in hangers -- basically the increase in commodity costs and some tariff situations have caused that.

And how big of a cost is that?

I don't have it on a percent to sale basis.

It is like 0.5%.

Okay.

The reason we brought that up is just to give you all an indication that we are beginning to see inflationary pressures in some of our other cost elements.

There's no big other cost elements, but that is one that has risen fairly dramatically in the last three to six months.

Okay.

Then are there any differences in trends between Canada and the U.S.?

Canada is pretty good.

Their economy seems to be relatively strong.

We don't see nearly the ad stops and lost business we are seeing in the states.

They have had -- of course they're done pretty well.

It has been a good steady business up there.

Okay.

Great.

Just finally, the distribution center you opened -- that was opened during the quarter.

Right at the end of the quarter.

Were there any costs associated with that, or is it mostly all capitalized?

No, there's costs, start up costs but they weren't that significant in the whole scheme of things.

But we feel like they're going to help improve our distribution of our facility services products and ultimately will help lower the cost of that product in our business.

Okay.

So that is attributed to the rental segment.

Yes, it is part of the rental segment.

Okay.

Perfect.

Thanks very much.

Thank you.

At this time we have no further questions.

I would like to turn the program back over to Mr.

Gale for additional or closing comments.

Thank you.

And thank you for joining us.

We appreciate the interest in Cintas and we look forward to talking to you in September when we discuss our first quarter fiscal 2009 results.

So thanks again for joining us.

That does conclude today's call.

You may disconnect your lines at this time.