信達思 (CTAS) 2011 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.

Thank you for joining us this evening to report our fourth quarter results for fiscal 2011.

With me is Mike Hansen, Cintas' Vice President and Treasurer.

After some commentary on the results, we will be happy to answer questions.

We are pleased to report that our revenue for the fourth quarter grew 11.3% from last year's fourth quarter to a record revenue of $1.012 billion.

Net income increased by 27.6% to $70.8 million, and earnings per share were $0.49, a 36% increase over last year.

As noted in the release, total year revenue of over $3.8 billion was 7.4% higher than last year.

And total earnings per share of $1.68 was 20% higher.

Stabilization of revenue at existing customers, excellent new business results, and cost control measures, as well as improved productivity within our organization were all factors in these very good results.

We want to express our sincere appreciation to all of our employees, who we call our partners, for their contribution to this successful year.

On May 18th, we issued $500 million of public debt spread in 2 tranches, $250 million with a 5-year maturity and the other at 10 years.

We found the rates to be very attractive and demand was strong for our bonds.

Given the price of our stock and the positive outlook for our Company 's performance, our Board of Directors authorized management to use these funds to pay off short-term debt and to purchase Cintas stock under parameters established by the Board.

The $500 million expenditure resulted in total purchases of 15.8 million shares, of which 7.7 million shares were purchased as of May 31st and the remaining 8.1 million shares were purchased between June 1st and July 6th.

Coupled with the share purchases made earlier in fiscal 2011, Cintas purchased 23.4 million shares since last July.

The impact of the share purchases in fiscal 2011 added about $0.05 to our earnings per share, but what we would have reported with no share purchases.

Our guidance for fiscal 2012 revenue is to be in the range of $4 billion to $4.1 billion and earnings per diluted share to be in the range of $1.97 to $2.05.

This guidance incorporates the impact of the recently completed $500 million share buyback program, which equates to about $0.12 a share when also factoring in the additional interest expense from the debt offering in May.

Let me address some assumptions used in developing this guidance.

While recent economic news, including the Bureau of Labor announcements for May and June, were not as bright as we would like, we expect that the North American economy and employment picture will moderately improve in the next 12 months.

We expect that we and other companies in industries in which we operate, could face input cost headwinds in the next 12 months, particularly related to cotton, energy, and oil related products such as polyester.

These rising input costs will add negative pressure to our industry's costs.

While this will create some margin pressure for Cintas and our competitors, we expect the margin pressure will also ease the extremely aggressive pricing environment that we have experienced over the last several years.

More specifically for our guidance, we have assumed that energy related costs would continue at our fourth quarter level of 3.5% of sales.

This was the highest level we have seen since our fiscal 2009.

As many of you know, the price of cotton significantly increased last Fall and has remained at relatively high levels, but has declined significantly in recent months.

Many factors contribute to the effect that cotton has on Cintas.

Certainly, the price of cotton but also Cintas' fabric inventory, as well as finished goods inventory levels, sourcing decisions and manufacturing lead times, as well as amortization periods of in-service inventory and the overall uniform industry pricing environment.

We have been managing and analyzing each of these areas to minimize the impact on our results.

We expect that the fiscal 2012 impact will be less than $15 million on our cost of rentals and other services.

And as mentioned, this impact is incorporated into our guidance.

Due to the amortizing effect of in-service inventory, the cotton impact could be heavier in our fiscal 2013 by an amount around $5 million.

However, as noted, many factors contribute to the cotton impact, and we will continue to monitor and analyze this throughout fiscal 2012.

We also believe that the improved environment will lead us to being able to obtain higher prices for our services.

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 Hansen for more details on the fourth quarter.

Thank you and good evening.

As Bill mentioned, total revenue increased 11.3% from the fourth quarter of last year, with total Company organic growth being 8%.

Total Company gross margin for the fourth quarter was 42.8%, which is up from last year's fourth quarter gross margin of 42.4%.

Before providing you with details about Cintas' fourth quarter performance, please note that there were 66 workdays in our fourth quarter, which is the same as last year.

As a planning note for fiscal 2012, our workdays will be as follows -- 66 in the first quarter, 65 in the second quarter, 65 in the third quarter, and 66 in the fourth quarter.

For a total of 262 workdays in fiscal 2012.

We have 4 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.

The rental uniforms and ancillary products operating segment consists of the rental and servicing of uniforms, mats, towels, and other related items.

This segment also includes restroom supplies and other facility products and services.

Rental uniforms and ancillary products revenue accounted for 70% of Company revenue in the fourth quarter.

Within rental, based on our fourth quarter revenue levels, uniform rental accounted for approximately 51% of the revenue.

Dust control, which is mainly entrance mats, accounted for 20%.

Hygiene, which is mainly restroom supply and cleaning was 12%.

Shop towel revenue was 6%.

And linen and other, which is mainly non-person specific garments such as aprons and butcher coats, was 11%.

Rental revenue was $711.9 million for the quarter, which is up 9.9% compared to last year's fourth quarter.

Organic growth was 7.2% over last year, which is an improvement from last quarter's organic growth of 4.3%.

Sales rep productivity particularly as it relates to new accounts continue to be strong and our new business sold during the fourth quarter was up over 20% compared to last year's fourth quarter.

We are pleased with the increase in uniform wearers and the growth generated by our newer product lines.

During the fourth quarter we noted no significant changes in the pricing environment, although pricing at contract renewal, and for large national accounts remained very competitive.

As Bill noted though, we expect the current input cost pressures faced by competitors and us to result in some easing of the pricing pressures; and in fact, will likely lead us and our competitors to increase prices in the coming fiscal year.

Our rentals segment gross margin was 43.6% for the fourth quarter, an improvement of 10 basis points over last year's fourth quarter gross margin of 43.5%.

Energy related costs were 20 basis points higher than last year.

Improved capacity utilization from higher volumes more than offset the higher energy related costs and higher material costs due to the injection of in-service inventory associated with new accounts.

While we are pleased with our new account performance and increases in wearers, we have yet to see impactful hiring within existing customers.

The ad-on wearers associated with hiring at existing customers allows us to take advantage of our stockroom inventories.

Our uniform direct sales operating segment includes the direct sale of uniforms, branded promotional products, and other related products to national and regional customers.

Uniforms and other related products are also sold to local customers including products sold to rental customers through our direct sale catalog.

Uniform direct sales revenue accounted for 11% of Company revenue in the fourth quarter.

Fourth quarter revenue of $109.1 million represents an increase of 5.7% compared to last year's fourth quarter.

Organic growth was also 5.7%.

Uniform direct sales gross margin was 30.9% for the fourth quarter, which is relatively consistent with last year's fourth-quarter gross margin of 31%, and an improvement from the third quarter gross margin of 29.5%.

The improvement from the third quarter is primarily due to better capacity utilization at our distribution centers due to the higher volumes.

Our first aid, safety, and fire protection services operating segment includes revenue from the sale and servicing of first aid products, safety products, and training, and fire protection products.

First aid, safety, and fire protection revenue accounted for 10% of Company revenue in the fourth quarter.

During the quarter, revenues within this operating segment were $99.6 million, an increase of 13.4% versus last year's fourth quarter.

Organic growth was 9.7%.

We are pleased with our revenue momentum in this business as organic growth for the last 3 quarters has been 8.4%, 9.3%, and 9.7%.

Sales rep productivity particularly in the first aid and safety side, continue to be strong in our fourth quarter.

This segment's gross margin was 41.7% for the fourth quarter, a very solid improvement over last year's fourth quarter gross margin of 39.4%.

This improvement was equally strong in both first aid and safety and in fire protection services; and was largely due to better capacity utilization due to higher volumes.

The improvement also came despite a 40 basis point increase in energy-related costs compared to last year.

Our document management services operating segment includes document destruction, storage, and imaging services.

Document management accounted for 9% of fourth quarter total Company revenue.

Within document management, the European business accounted for 13% of total segment revenues during the fourth quarter.

Revenue increased 29.5% over last year's fourth quarter to $91.6 million with organic growth of 16.5%.

Recycled paper prices increased throughout the quarter and contributed to the organic growth rate.

Excluding recycled paper revenue, organic growth was 11.3% during the fourth quarter.

Because the recycled paper prices are so high, pricing for service has been very competitive.

Document management's gross margin for the fourth quarter was 51.4%, a decrease from last year's 53%.

Energy related costs increased by 60 basis points compared to last year.

In addition, our storage business had several Greenfield starts earlier this fiscal year.

These startups are running as planned, but do have a drag on overall gross margins in the early stages.

The fourth quarter gross margin of 51.4% is an improvement over the 49.4% in this year's third quarter.

Moving to selling and administrative expenses, the fourth quarter consolidated selling and administrative expenses were 30.1% of revenue, a decrease from 31.5% in last year's fourth quarter.

As expected, our selling expenses continue to be lower as a percent of total revenue due to greater rep productivity.

Administrative expenses as a percent of total revenue also decreased due to cost control initiatives and lower medical expenses.

Our effective tax rate was 39.5% for the quarter, compared to 38.2% last year.

For the full fiscal 2011 year our effective tax rate was 37.1%.

We expect our effective tax rate for fiscal 2012 to be approximately 37.3%.

Turning now to the balance sheet, our cash and marketable securities were $525.3 million at May 31st.

As mentioned in the press release, keep in mind that $259.9 million was used in June and July to purchase shares of Cintas stock.

Accounts receivable increased by $12.8 million since February 28th, primarily because of the higher revenue levels.

DSOs on accounts receivable was 42, up from 40 at February 28th, but the same as at May 31, 2010.

New goods inventory at May 31st was $249.7 million, up $17.4 million from February 28th.

This increase is mainly due to higher demand levels particularly in our Carhartt program, our flame resistant clothing line, and our women's wear.

The SAP system has been performing as expected, but we also took a more cautious approach to our inventory levels during the quarter to ensure that all of our customer needs were met.

We expect to see inventory levels decrease in fiscal 2012.

Uniforms and other rental items and service increased by $19.8 million from February 28th to May 31st due to the higher volume levels throughout the fourth quarter.

As mentioned earlier, our improved sales productivity, particularly related to new accounts, has driven the higher injection of in-service inventory.

Accrued liabilities increased $22 million compared to February 28th due to $12 million of accrued bond interest and $9 million of accrued profit-sharing, which builds throughout the fiscal year.

Long-term debt at May 31st was $1.3 billion.

Our average rate on the outstanding debt is 5.1%.

Total debt was 2 times fiscal 2011 EBITDA, and as a percentage of total book capitalization was 36%; while net debt, or long-term debt less cash and marketable securities, as a percentage of total capitalization was 25%.

As discussed, $259.5 million of cash and marketable securities was used to purchase shares of Cintas stock in June and July.

If we would have completed the share buybacks by May 31st, our debt to capitalization would have been 39%, while the net debt to capitalization would have been 33%.

Moving onto cash flow, cash provided by operating activities in the fourth quarter was $132.9 million, which is consistent with the $132.4 million from last year's fourth quarter.

The growing revenue this year has resulted in increased accounts receivable and inventory levels compared to last year.

CapEx for the fourth quarter was $40.3 million.

Our CapEx by operating segment was as follows -- $25.2 million in rental, slightly less than $1 million in uniform direct sales, $4.2 million in first aid, safety, and fire protection, and $10.1 million in document management.

We expect CapEx for fiscal 2012 to be relatively consistent with fiscal 2011 and in the range of $180 million to $200 million.

You may notice that our cash flow statement shows proceeds from issuance of debt of slightly over $1 billion and repayment of debt of $502 million.

Keep in mind that accounting guidance requires us to separately show the ins and outs of commercial paper activity.

The net of the 2 figures is the $500 million, which represents the financing that we completed in May.

That concludes our prepared remarks and we will now take any of your questions.

Thank you.

(Operator Instructions) Our first question comes from Sara Gubins with Bank of America.

Please go ahead.

Hi, thanks, good afternoon.

Good afternoon, Sara.

Good afternoon.

You mentioned seen stabilization at existing clients.

Could you talk about what their -- how the discussions with them are going around the next couple of months and into the Fall?

Well, I'm not sure, Sara, they are really telling us a bunch of what their plans are.

We saw stabilization in our existing customers within the last couple of quarters, and I can just tell you from reading what you read in the public domain that it seems like most businesses are cautious in adding new employees.

We certainly have seen that with our customers over the last couple of quarters.

The good news though, of course, is generally speaking, they are not reducing headcount like they were last year, so we are hoping that perhaps, once confidence builds, that we will begin to see some hiring at existing customers.

Okay.

And then, I'm hoping to get some more detail within the guidance for next year about how you are thinking about SG&A?

How much more room there is for rep productivity?

Well, we're certainly anticipating some improved productivity within our sales organization.

We had a very good year this year with improved productivity, so we are thinking that trend will continue.

Therefore, that will result in a lower SG&A as a percent of revenue and that is embedded in our guidance.

Great.

And then just last question, could you give a share count at the end of the year?

Yes, it's about 130 million shares, -- oh, no -- at the end of the year or as of right now?

Actually, as of right now would be even better.

Yes, it's about 129.6 million shares.

Great, thanks a lot.

Thank you.

Our next question comes from James Samford with Citi.

Please go ahead.

Thanks for taking my question.

Great quarter.

Just -- I guess now that we have the share count for potentially for next year, it seems to me that that implies almost no margin expansion in the -- for the full year; is that math correct?

Well, the one thing to keep in mind, James, is that we do have the extra interest from our $500 million in debt.

So there is margin expansion if you look at the EBIT levels.

Got it.

And, I anticipate interest expense, I guess is the other question I could ask for that?

Well, it's about $20 million.

Okay.

Pretax.

Pretax.

Perfect.

Have you guys been seeing any additional impact?

I know we have another quarter behind us from Japan in terms of other manufacturing.

No.

We haven't seen any impact from that.

Not really.

Okay.

I'll hop back in the queue, thanks.

Thank you.

Our next question comes from Gary Bisbee with Barclays Capital.

Please go ahead.

Hi guys.

Congratulations on the organic growth and the buyback.

Some good surprises.

If I could ask about the first, the organic growth.

It was particularly strong I guess in rentals in terms of the change versus last quarter.

Can you help us understand at all, against what looks like a somewhat -- I guess, tougher comp; what exactly is going on there?

Is it really the new sales activity?

And if so, can you give us some examples of maybe the types of accounts you are signing up or sort of how that is going so well?

Well, keep in mind, Gary, we've seen improving organic growth all year, every quarter has been a little bit better.

I'd say that what's driving it are 3 factors.

First off, as we've seen the last couple quarters, existing customers, generally speaking, have been remaining stable so we haven't had the drag from them reducing headcount.

Secondly, we've got the prospects being more willing to take on the new program.

Third, I would say that our loss business rates have improved from what we were seeing in late fiscal '09 and '10.

And, finally, we've been selective in selling business at good prices and making sure it's good, profitable business and I think that's helped.

And certainly, within that rental business, our new -- some of our newer products and services are helping too.

The Carhartt business, the women's wear garments, the tile and carpet, our chemical business.

So we've gotten a broad increase throughout that product line.

And maybe I'm being a little cute with the numbers but, in the last few years, in the fourth quarter you've given that mix of business generically within rentals.

When I plugged those percentages in versus the percentages you gave a year ago, it looks like the uniform rental segment really didn't grow.

It's sort of indicates 1% revenue growth, but sort of 14%, 15% for hygiene and dust control actually down a little bit.

And then shop towels and linen up significantly.

Maybe that's just -- you didn't give us rounded numbers --?

That's all it is.

We had very nice growth among all our products, including the rentals.

So I think it is just a rounding issue, Gary.

Okay, all right.

And then, I was curious about the comment that you are confident that pricing will firm and I think you said will and not has.

So is that something you're expecting to help offset some of the commodity costs?

How do you have confidence in that?

Thank you.

Well we have confidence in it because, I think, the impact of these higher costs in commodities and some of the comments that have been made by some of the competitors in that they are going to have to do something with pricing to offset those cost increases because they are seeing margin deterioration, which we did not see, but they have seen; I think will result in a firming of pricing going forward.

So, it is an expectation that we are going to see that happening generally across the industry.

And then just one last one if I could.

I guess the revenue growth guidance looks like it's 5 to 7.5 generically for the year.

Any willingness to comment on organic?

Is that mostly organic at this point?

Is almost all organic, Gary.

We do not have any anticipated acquisitions in there.

We've got a little bit of carryover effect from the acquisitions that we made this year; but the bulk of that is organic growth.

And we are -- we're not real bullish on the economy.

We're just cautiously optimistic that we will see some improvement, but it's not going to be robust.

We've been saying that for the last several quarters and it's pretty well proved out what our expectations were.

So, but even with a very modestly improving economy we still expect that we think nice, organic growth.

Okay, thanks a lot.

Thank you.

Our next question comes from Andrew Steinerman with JPMorgan.

Please go ahead.

Hi, Bill and Mike.

I want to talk about the share buyback, obviously it was pretty massive.

My question is, what is your proclivity to doing additional share buybacks meaning authorizations?

And does the large share buyback indicate anything about activity around acquisitions?

The answer to your question, Andrew, is that is going to be certainly a topic of discussion at our Board.

And I know they will review the success that we have of this program, what we have accomplished this year, which is almost $700 million of buybacks this fiscal year.

And I'm sure if they are inclined to do so, they may provide us with another authorization and parameters on which to execute that.

But, that will be decided at the -- I'm sure, at the next couple of Board meetings.

Right.

And, Bill, my other question was does it speak to anything about acquisitions?

What is the Company's proclivity towards acquisitions?

And obviously, the choice of cash has been share buyback.

Well, I'd say that actions give you some indication of what we thought was the best use of our cash and our debt capacity at this time.

And that doesn't mean that we are out of the acquisition game, it just means that we felt that this was an opportune time to take advantage of what we thought were good debt markets and an attractive value of our stock.

If any acquisitions do come to the table, we will certainly look at them, but they are going to have to meet our hurdle rates and we are going to have to make sure that they would make sense for our shareholders.

Okay, thank you.

Andrew, when we look at it, we've bought the best available Company in the last quarter.

Excellent.

Okay.

Thank you very much.

Thank you.

Our next question comes from Scott Schneeberger with Oppenheimer.

Please go ahead.

Thanks.

Can I just jump back to a response on a prior question?

With regard to -- you guys are anticipating gradual improvement in the economy, did you calculate if flat from here, what that would represent with regard to the guidance?

It would be the low end of the guidance.

Okay.

Thanks.

Do you have a margin target that you -- that you are targeting, longer-term type question or at least intermediate term?

We are certainly targeting improved margins.

Each of our business units and operations within each units have plans and expectations of what we want them to achieve.

And we are not publicly talking about it, but what we have said is that we certainly are moving toward getting back to margins we used to have, and, I think we have shown some success in that regard over the last several quarters, and we will hopefully continue that as we go through the next couple of years.

Okay, thanks for that.

One more if I could.

With regard to cotton prices and thanks for the quantification that you think incrementally -- potentially an impact of $15 million.

I was a little confused about the $5 million in fiscal '13, is that incremental on top of what you're looking for in '12?

And could you just take a level deeper in how you're thinking about that with regard to the 5 or 6 levers you were thinking about?

Well, to answer your first question, Scott, the $5 million for fiscal '13 is incremental on top of the less than 15 in fiscal '12.

So, because you -- because we have that amortization effect, it kind of pushes the full impact of some of the higher prices that we have seen.

As it relates to the different factors, we're going to continue to look at all of them.

There is a lot that can happen in the next 12 months, particularly as it relates to cotton yields, the demand for cotton.

And so, we are going to be keeping our eyes on all of those different factors and working to make sure that we minimize the impact going forward.

Thanks.

Just curious on a follow up there.

Have you made any major changes with regard to cotton synthetic mix?

Or anything on your end proactively that -- that's been dramatic?

Thanks.

We have not at this point.

We certainly are always challenging the construction of our garments, but we have not made any significant changes at this point.

Okay.

Thanks for taking all my questions.

Thank you.

And our next question comes from John Healy with Northcoast Research.

Please go ahead.

Thanks and congrats on a good quarter, guys.

Thanks, John.

Thanks.

I wanted to ask about the new sales comment you made.

Up 20% seems like a very -- again, another strong number.

I was hoping I could get your thoughts on how much of that you feel is just the market opening up for you guys; and how much of that do you think is really a result of activity in some of the initiatives you've put forth to kind of stimulate some demand?

Well, I'm not sure we can quantify that.

I think it's some of both.

We've certainly been very successful in the introduction of some of the products that Mike mentioned earlier, the Carhartt product, the women's garments, some of our standard uniforms are still of a quality better than what our competitors can obtain from their third-party sources.

So, we think that's helped.

I believe, some of the additional products that Mike mentioned that are within our rental division have helped.

But, there certainly is an improvement in business attitude toward taking on these services.

I think we've been able to demonstrate that we're able to provide value that is attractive to many companies as they look to reduce their costs, and they see the value they are getting from what we can do for them.

And we've got a very good sales group that has, I think, become more tenured; and therefore, have become obviously more productive with the vast array of products that we are offering as well as the value we're providing.

So, I think it's all of those factors.

Got you.

When we -- we've talked a little bit about our programmer versus no programmer numbers, and in the recession, we saw that come down to about a 50% to 50% level and we are encouraged that in the last quarter or so, we've seen a movement back towards 60% no programmer to 40% programmer.

And I think it speaks to some of the success we've had with our new products and services and really selling the value of those to customers that haven't had a program in the past.

Oh, that's great.

I guess along those same lines too when you look at kind of the momentum in the business.

When you look at, I guess, maybe over the last 6 to 8 weeks or the last 2 months or so, have you noticed any kind of change in tone from the customers though?

Does there appear to be any sort of feedback you're hearing from the sales reps in terms of willingness to spend by the small business customer recently?

I don't want to leave that impression.

I think -- we had a good fourth quarter, it was pretty consistent throughout the quarter; but it really was just building on the momentum we saw earlier in the fiscal year.

So we'll see how things go over the next couple of quarters and whether -- we're hopeful that that trend can continue and if it is that certainly would indicate that some of this is caused by better business confidence.

Got you.

And just one last question, this might have just been me noticing it; but I noticed that you guys are marketing the chemicals business a little bit more there, and I was wondering, Bill, if you could shed some light on kind of the scale of that operation today?

And has it been redesigned recently or redeployed?

Or is it just that I'm maybe seeing new adds that I hadn't seen before?

No, you're right.

It has been reinvigorated with a new relationship we now have with Diversey that has given us the ability and the credibility to get into a lot of the markets that Diversey has been successful in the past; and now that we have the service organization, our partnership with them is going to help us in that regard.

So we have been increasing our marketing efforts in making it known; and I think that -- you're going to be very pleased with the results that you're going to see in that as we go forward.

Now, is that a business that has rolled out nationally now or available in most of your large markets?

We just completed rollout nationally within our own sales organization, just within the last few weeks.

So it's just beginning.

Got you.

I look forward to it.

Thank you.

Our next question will come from Shlomo Rosenbaum with Stifel Nicolaus.

Please go ahead.

Hi, guys.

Thank you for taking my questions.

And, kudos again on a good quarter.

Thanks.

Thanks, Shlomo.

Sure.

I just wanted to ask about some of the commentary in the press release about competitors competing on price while you guys are focusing very much on value.

Are you guys at all attempting to push through any pricing increases because of the energy and fuel increases?

Or, how is that working?

Are you having those discussions with customers; and are you aware, from your discussions with customers, if your competitors are having those same discussions?

Well, we are certainly reviewing all of our book prices that are new -- that our salespeople use for new business, and we will be certainly making sure that we are covering our cost increases.

We are approaching our customers on the renewal dates of the contract, which allows us to increase prices and we're certainly talking to them about the cost pressures that we have had.

And I think what you need to look at is, what competitors do show up in their margins, versus what shows up in our margins.

So I would just advise you to compare among us, and you can kind of see who is doing what.

Okay.

Now, can you comment a little bit on how the floor cleaning business is kind of nascent is doing and how that's grown over the quarter?

Well, that is the title and carpet business.

And it is growing very well as we continue to roll it across the country.

It has a bit of a margin pressure on us, but even with that, you still saw nice margins in the rental division.

But it is still relatively small.

I mean, it's miniscule in comparison to our rental business and even into our dust and hygiene business; but we expect it to grow quite nicely throughout the next couple of years.

It's just coming from such a low base, it's not really going to impact the overall growth rate for a little while.

How many markets are you in there now?

Shlomo, I don't know but I would say it's got to be close to 50 or so.

Well, actually we are in about 90.

We are going to be able to service about 90 of the top 100 markets.

Okay.

And then last question in the uniform direct sales we saw as an operating margin that was flat sequentially despite a nice uptick in the sales.

Was there a particular infrastructure or sales investment that occurred in that unit in the quarter?

No.

There wasn't.

We had a nice -- we had a nice improvement over the third quarter mainly because of the volume.

We had a nice fourth quarter last year, and there wasn't a lot of structural change.

All right.

I'll come back to you with that off-line then.

And thanks a lot.

That the end of my questions.

Thank you.

Our next question comes from Nate Brochmann with William Blair & Co.

Please go ahead.

Hi, guys it Dave for Nate.

Thanks for taking my call.

I've seen recently, cotton prices seem to have fallen off pretty dramatically.

Have you guys been following that at all?

And if so, any color to add on that as to what you guys think is causing it to fall off a little bit here recently?

Well, we certainly follow it very closely.

Our global supply chain group does that, and the things that we read and hear are that the yields from some of the cotton growing regions, excluding perhaps Texas, which is -- had a big drought; but they are very, very good.

Expectations are high that the yields are going to be good; and then secondly, there has been a diminishment of demand throughout the world.

There may have been a little bit of hoarding going on back in the Fall, but that appears to have dissipated some.

And, so, you are right.

The price -- the spot price of cotton has fallen pretty quickly, and we hope that it continues down at those levels, but we -- we're prepared to handle it however it may present itself.

Keep in mind that just because the price drops down for a couple of weeks or a couple of months, there still was a lot of high-priced stuff that was put into fabrics and then ultimately into finished goods that's got to work its way through the system.

Right.

So this would be more of a 2013 impact?

A big assumption here if prices were to stay lower?

Well, it would help us, as we got into late '12 and '13 and it even starts impacting '14 because of the lead time and the way costs are amortized.

Okay.

And then, the only other question I have was in terms of when we look at SG&A, I think in the past, you guys have said it, it takes a salesperson anywhere from 6 to 12 months to kind of get on board and get up to speed and become productive.

In terms of getting more leverage out of SG&A, what's kind of left in the toolbox there?

Well, there's several things left.

SG&A is driven by, obviously, improved productivity of our sales force, but also top line growth covers more of the fixed costs, and a lot of the SG&A, especially the G&A, is generally fixed cost that will not increase proportionately with increase in revenues.

So, that will be a plus.

We continue to invest in systems and other productivity initiatives within the Company, that will be a plus going forward.

And, it's an area of focus throughout our organization to minimize any increase in our SG&A and yet continue to increase the top line.

Okay, great.

Thanks for taking my call.

Thank you.

Our next question comes from Greg Halter with Great Lakes Review.

Please go ahead.

Yes, guys.

Good afternoon.

Hi, Greg.

On the debt, 2 pieces there due in 2016 and 2021, were there any swaps used to hedge any that or convert or anything like that?

We did put in place, a -- I guess a --

An interest rate lock.

An interest rate lock.

Yes, thanks, Mike.

That we put into place in advance and the cost of that will be amortized as part of the interest expense over the life of the bond.

Okay.

You discussed the CapEx $180 million to $200 million expectations.

Just wondered if you had any sort of breakout in terms of new facilities for maybe your different segments and so forth?

Well, no.

We don't break that out, Greg, in detail.

We will have new facilities, a lot of the capital expectation is really for growth within existing facilities.

More than brand-new facilities, going forward.

Okay.

I think this was maybe mentioned earlier on about the acquisitions and so forth.

It looked like for the quarter it was only about $14 million, if my math is correct and obviously there's always timing there, and willing buyer and willing seller and all that; but just wondering if that was something that you may have not done as much as in the quarter given the buyback and possibly what you are seeing in the market these days?

Well, I think as we said earlier, we thought that we were buying the best thing available by buying ourselves.

And so that was the focus that we had in the quarter.

Okay.

And, on the share buyback and the count, I think you mentioned it was just under 130 million shares as of now.

And I know that your options -- between options and restricted stock awards total about $8 million, but most of them are at higher prices, probably $35, $36 and higher so not many of those will be going into the share count unless the share price continues to do well, which we hope, obviously, and I'm sure you do.

But just want to make sure that my take on that is accurate in terms of those exercise prices, and given your guidance, what kind of additional shares you are looking at in terms of going into that diluted share count?

Greg, your assumption is correct.

Let me ask you to hold off on that until -- we will be issuing our 10-K the end of next week.

And included in that are the footnote disclosures with all the restricted shares and the option in their prices.

But, generally speaking, your absolutely correct, the additional impact is not that significant.

Okay.

We will typically plan for, Greg, about 0.5 million shares with just everything that -- restricted stock that gets issued and some stock options, but you're right in your assumptions.

Okay, and I know through your third quarter, I don't think there was any difference between basic and diluted share count.

Correct.

Okay.

And, Mike, early on when you were discussing the uniform rental business and you gave those percentages of 51%, 20%, 12%, 6%, and 11% for the 5 different areas within uniform rental, I believe you mentioned that was of the segment total, not of the Company total?

I just wanted to make sure to clarify that?

Yes, that's correct.

Okay, so those percentages would be less as a percentage of the total?

Yes.

So there would not be a shift or a big shift as maybe one of the callers may have asked about earlier?

Correct.

Yes, when I mentioned, I believe it was uniform rental of 51%, that's 51% of the 70% of the rental segment.

Which works out to about 36% of the total?

You're right.

Okay.

And you've discussed the pricing, just wonder if you had any commentary on what percentage type increase may be contemplated?

No, we do not -- we're not willing to disclose that right now.

Okay.

I thought I'd give you a chance.

Your European business looks like it's about $50 million on an annual basis now, if my math is correct, just wonder what your goals and aspirations are for that particular area?

Well, right now our focus is to work with what we have.

We've got presence in 4 countries over there.

We've got very good businesses that we acquired, great management teams, and while we would not, not look at another acquisition, I don't think it would be anything significant at this time.

It might be some fill ins for some services that we may not be providing in one particular area that we would like to have, to complement what we've got.

But, right now, I think the main emphasis in fiscal '12 is to improve the margins and to grow those businesses.

Okay.

And one last one if I could, I think, though, a while back, maybe a year ago, you bought a door business, and I know you get into these businesses just to see how they are going to perform as maybe an incubator.

Just wonder if you could provide any thoughts in regard to that particular area?

Yes, it was more than just a door business, it's facility services and it primarily services the retail and commercial industries.

That acquisition was made last Fall, late Fall.

It has performed very well.

We are continuing to tweak it; and right now, we are very pleased with the results as we incorporate it into our other facility services offerings.

Okay, great.

Thank you.

Thank you.

Our next question comes from Justin Hauke with Robert W.

Baird.

Please go ahead.

Good afternoon, guys.

Just two very quick ones here.

First, I guess I was just curious, we talked a lot about the buyback, but how are you guys thinking about the dividend here with the authorization being spent?

Is there a chance that maybe the dividend is going to become a more meaningful part of your shareholder returns going forward?

And also, I noticed that you shifted the timing of when the dividends normally paid, and just curious if it's going to continue to be an end of calendar year dividend?

Justin, my expectation is that the timing of the payment of the dividend will continue to occur just like it did last year where we accelerated the payment from March into December.

As far as the amount of the dividend, I think, again, I have to defer that will be a decision made by the Board.

Typically, now under the new timeframe that would be contemplated and made at the October time frame by the Board.

All I can also tell you is that we've increased the dividend every year since we went public in 1983.

And so, I'm sure the Board will factor the share buyback, the expectations for future results, as well as the results in the previous year when they make the decision on what to declare.

Fair enough and my last question is a little bit of a clarification, but, with the numbers you gave, it would seem like your hygiene business is actually the same size as your document management business.

Something like $320 million in annual revenue, and just curious if there's any chance that we might start to see that segment broken out separately?

Justin, one of the issues we have with breaking that business out separately is that much of it is on the same route as either a facility services mat route, or, in some cases, on a uniform route.

So we have some difficulty in coming up with the specific product line results.

And so that is the difficulty right now.

We will certainly continue to look at it, and if it becomes feasible, we will think about breaking that out.

Sure.

Is that correct, though that it is about the same size as the document management business?

It's probably a little bit less than that, than the document management business.

Sure.

Okay.

Thank you very much.

Thank you.

Our next question comes from Gary Bisbee with Barclays Capital.

Please go ahead.

Just one quick follow-up, which is within the facility services businesses in general, can you give us a sense of what your margin goals or targets are and what those businesses are doing?

I know you will say this is a bad comparison, but I look at something like ABM, which is in janitorial services and the margin is less than half what yours is, and so how do -- how do you think about the profitability of that business?

Thank you.

Gary, the profitability of the facility service business is comparable to the overall profitability that we report in rental.

It really depends a lot on different markets, but I think you can make the assumption that facilities services business will have margins pretty similar to what we obtained in our garment business -- garment rental business.

Okay, thank you.

Thank you.

(Operator Instructions).

And we will go back to Shlomo Rosenbaum.

Please go ahead.

Hi, one more question.

I just wanted to ask about your inventory.

I know you guys have been stocking a little bit because of the SAP implementation.

I wanted to know if there are any milestones or times in the next year that we should be looking to, which afterwards, you guys will feel comfortable if it goes well to bring the inventory levels back down a bit?

We have a plan, Shlomo, internally that we hope to start reducing those inventory levels all else being equal as we proceed through fiscal '12.

So, hopefully, we will be able to demonstrate that we can reduce those inventories back to more appropriate levels in line with our revenues as we proceed throughout '12.

And is there an inventory DSO that you guys feel comfortable with, or how should I think about that?

Well, that -- we certainly have targets, but it is very complicated because we have inventory that ranges from raw fabric to in-process inventory to finished goods and all of our different businesses.

And we certainly have individual goals and expectations as a result of that.

But for me to just give you a general number, there is so much different stuff in there, it wouldn't be meaningful, and I really would not want to start providing that on an ongoing basis.

Okay, so just in terms of the SAP milestones are there any key milestone going on over the next -- over the year that we should be looking towards?

As far as the conversion to the global supply chain or SAP in general?

Well, I understand that there is the SAP implementation there are different aspects to it.

Right.

So if there are different points in time that you guys are going to be measuring success then I just want to know, because I know that those things tend to be complicated and can have some repercussions throughout the rest of the business.

Yes, we are working right now, Shlomo, on implementing SAP at a couple of our different business units.

And we will begin converting those later this Fall and through the Winter on a -- kind of a very measured basis that we will do so many operations each month.

So, as we get later into fiscal 2012, we will be able to report to you on how well l we are doing with the and is it going according to plan.

We are still in the final testing and design phase -- final testing phases right now, and hopefully we will start some pilot implementations here in the next few months.

And then if those are successful, then we will start rolling out on a more aggressive basis as we complete the year.

Okay, thanks a lot.

Thank you.

(Operator Instructions) And at this time we have no other questions from the phones.

Well, I want to thank everyone for joining us.

We are very pleased with these results and we are very happy with the momentum that our Company has achieved here over the last several quarters.

We look forward to even better results as we move into fiscal '12.

So we look forward to talking to you again in September -- late September when we release our first quarter results.

And this concludes today's conference.

Thank you for your participation.