信達思 (CTAS) 2014 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 would 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.

Thank you for joining us this evening.

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

We will discuss our FY14 fourth-quarter results, which include the effects of the April 30 closing of the partnership transaction with Shred-it international.

In addition, we will provide our initial guidance for FY15.

After our commentary, we will be happy to answer questions.

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

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

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

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

We are pleased to report fourth-quarter revenue of $1.157 billion.

Keep in mind that this total does not include any shredding revenue for the month of May due to the closing of the shredding transaction on April 30.

Excluding document shredding revenue, our fourth-quarter revenue grew 4.7% over last year's fourth quarter.

Last year's fourth quarter had one more work day than this year.

When adjusting for the impact of the difference in work days, revenue excluding document shredding grew 6.3%, and it grew organically by 6.1%.

As Scott Farmer stated in our press release, after a difficult winter we were pleased to see our growth rate improve in both our Rental and First Aid, Safety and Fire segments.

Excluding document shredding-related amounts, our fourth-quarter operating income was $165.4 million, which was 15% of revenue.

This represents an 80 basis point improvement over last year's fourth-quarter operating margin for the same businesses.

Our Rental operating margin improved 140 basis points over last year's fourth-quarter operating margin, despite having one less work day.

We continue to see improvements in both plant and route efficiency, as we add more volume.

Fourth-quarter net income was $127.2 million, and earnings per diluted share were $1.03.

However, excluding the effects of the shredding transaction, our net income was $94.3 million, and earnings per diluted share were $0.76.

These fourth-quarter results bring to a close a very successful fiscal year for Cintas.

Our Rental segment and First Aid, Safety and Fire segment in particular, had record years.

Our Rental segment achieved record annual revenue of $3.2 billion, and it topped $500 million in operating income for the first time, finishing at $507 million.

The Rental operating income of $507 million was 15.7% of revenue, which was an 80 basis point improvement over last year's operating margin of 14.9%.

Our First Aid, Safety and Fire segment revenue for the year was a record annual level of $514 million, topping $500 million for the first time.

Operating income was also a record, $49 million.

Thanks to our employees, who we call partners, for a great year.

I will now turn the call over to Mike for more details on the fourth quarter and the effects of the shredding transaction.

And then I will provide a few comments on our FY15 guidance.

Thanks, Bill.

Good evening.

I will start with a reminder on work days.

There were 65 work days in this year's fourth quarter versus 66 work days in last year's fourth quarter.

Looking ahead to FY15, we will have 65 work days in each quarter, for a total of 260 work days for the fiscal year.

These work day figures for FY15 are the exact same as in FY14, so we will have no work day differences or adjustments for the next four quarters.

We have 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 our 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 was $825 million, which is up 5.1% compared to last year's fourth quarter.

However, taking into account the one less work day this year, revenue grew 6.7% over last year.

Organic growth was also 6.7%.

The Canadian dollar relative to the US dollar remained weaker than last year during our fourth quarter, and it negatively impacted our rental growth rate by 0.6 percentage points.

Adjusting for this impact, Rental organic growth would have been 7.3 %.

As it has done for the last several years, new business continued to be the main driver of revenue growth.

Net add-stops were negative for the quarter, which is typical for our fourth quarter due to seasonal changes, but were slightly better than last year's fourth quarter.

Within the rental segment revenue, and based on fourth-quarter performance, uniform rental accounted for 52% of the total.

Dust control, which is mainly entrance mats, accounted for 19%.

Hygiene and other services, which is restroom supply, cleaning services and chemical services, was 16%.

Shop towel revenue was 5%.

And linen and other, which is mainly non person-specific garments such as aprons and butcher coats, was 8%.

Our Rental segment gross margin was 43.6% for the fourth quarter, an increase from 42.1% in last year's fourth quarter, which had one additional work day than this year's fourth quarter.

Our incremental gross margin has remained strong as we have been able to increase revenue without adding additional processing capacity.

Our route efficiency continues to improve as well, since adding route capacity in mid FY13.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms 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 for the fourth quarter was $118.5 million, which was 5% lower than last year's fourth quarter.

Last year's fourth quarter included large national account rollouts which did not repeat this year.

The fourth-quarter revenue of $118.5 million was higher than this year's third quarter revenue of $107.7 million.

Uniform Direct Sales gross margin was 30% for the quarter, down from last year's fourth-quarter gross margin of 30.8%, mainly due to the lower volumes this year.

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 for the fourth quarter was $137.2 million.

When adjusting for the work day differential, this revenue level represents an increase of 11.1% over last year's fourth-quarter revenue.

Organic growth was 10.2%.

We have seen good adoption by our customers of our new first aid and safety products and services.

And, our first aid national account sales have been strong.

This segment's gross margin was 44.6% in the fourth quarter, compared to 43.5% in last year's fourth quarter.

Energy-related costs were consistent with last year.

The gross margin improvement was due in part to improved mix -- for example, higher training sales on the first aid side -- and good leveraging of our infrastructure.

Let's move to a discussion of Document Management Services.

This segment has included document destruction, or shredding, and document storage and imaging services.

We've provided the document storage and imaging services revenue and operating income for the fourth quarter in today's press release.

We were pleased with the business's performance.

Fourth-quarter revenue was $23.1 million, and growth over last year exceeded 20%.

Organic growth was 15.4%.

Our European business has had good momentum during the fiscal year, and it continued during our fourth quarter.

Our document shredding revenue for the fourth quarter was $53.7 million.

This amount reflects only March and April revenue.

Beginning with the month of May and into the future, we will no longer include shredding revenue in our reported revenue, since we are accounting for the partnership investment under the equity method of accounting.

The closing of the Shred-it transaction resulted in the recognition of a gain due to the fair value of our share of the Shred-it partnership being greater than the book value of our investment in the business.

Keep in mind that the book value of our investment was recorded throughout our balance sheet, including accounts receivable, property and equipment, goodwill, service contracts and other assets, offset by certain liabilities contributed to the partnership.

The net effect of this transaction in the fourth quarter was $32.9 million in net income, and $0.27 to EPS.

The investment in the Shred-it partnership is recorded within the balance sheet line item entitled Investments.

Going forward, we will record our 42% share of the partnership income within our SG&A line on the income statement.

We continue to be excited about the partnership with Shred-it.

As we discussed on our call in March, we believe the combination of our document shredding business with Shred-it will create opportunities for synergies that will benefit our customers, our shredding employees and our shareholders.

Having said that, in order to realize the synergies, the partnership will incur costs to transition IT platforms, to convert the operations and the trucks to the Shred-it name, to consolidate certain administrative functions, et cetera.

We expect the bulk of these transition expenses to be incurred in our FY15 year.

As result, we do not expect the partnership to contribute any income to Cintas in FY15.

Instead, we expect to begin realizing synergies and income in our FY16.

Switching to selling and administrative expenses, SG&A was 28.2% as a percentage of revenue in the fourth quarter, which was up from last year's fourth-quarter figure of 27.8%, due to a number of different items including Worker's Comp claims experience, legal and professional expenses, and slightly higher bad debt expense.

The fourth quarter SG&A of 28.2% was lower than the third-quarter percentage of 29.1%.

Payroll taxes reset in our third quarter, and we generally see a reduction from the third to the fourth quarter as a percent of revenue.

Medical expenses were also slightly lower than the third quarter.

Our effective tax rate was 40.5% for the quarter, compared to 37.4% last year.

This year's fourth-quarter rate included a number of discrete items related to the Shred-it transaction.

Excluding the effects of the transaction, the fourth-quarter effective rate was roughly 37.1%.

We expect the FY15 effective rate to be 37.3%.

Turning now to the balance sheet, our cash and marketable securities were about $513 million at May 31, an increase of $159 million from the $354 million at February 28, mainly due to strong operating cash flow.

Although we received $180 million of cash on April 30, at the closing of the Shred-it transaction, we used $206 million during the quarter for the share buyback program.

As I mentioned a few minutes ago, our investment in the shredding business was reflected in the balance sheet in a number of different items.

When comparing our May 31 balance sheet to the February 28 balance sheet you will notice decreases to accounts receivable, property and equipment, goodwill, service contracts and other assets due to the contribution of the shredding assets to the partnership.

These balances have been replaced with an investment balance of roughly $340 million that is combined with other investments in the balance sheet line item entitled Investments.

Long-term debt remained at $1.3 billion, representing roughly 1.6 times FY14 EBITDA.

Net cash provided by operating activities for the fourth quarter was about $222 million, a $38 million improvement over last year's fourth quarter.

And, finally, CapEx for the fourth quarter was about $32 million.

Our CapEx by operating segment was as follows -- $23 million in Rental, less than $1 million in Uniform Direct Sales, $4 million in First Aid, Safety and Fire Protection, and $4 million In Document Management.

We expect CapEx for FY15 to be in the range of $275 million to $325 million.

This range is higher than the last few years because we expect to embark on the SAP implementation for our rental business, and expect to add some rental processing capacity during the year.

I'll now turn the call back to Bill for comments on our FY15 guidance.

Thanks, Mike.

Our FY15 guidance is for revenue to be in the range of $4.425 billion to $4.525 billion, and earnings per diluted share to be in the range of $3.06 to $3.15.

Let me provide some color to this guidance.

We've explained that we will not include document shredding revenue in our FY15 reported revenue.

However, due to accounting requirements, we still need to include the document shredding revenue in our FY14 reported revenue.

This means our reported growth rate will look artificially low.

In our press release, though, we provided a table that shows FY14 base revenue without document shredding of $4.276 billion.

This FY14 base revenue provides a better comparison to FY15 guidance.

As Scott Farmer indicated in our press release today, while the US employment picture has improved this calendar year, it is a relatively narrow improvement.

One-third of the new jobs this year are in areas not typically strong in uniform rental -- food service, professional services, temporary workers, and education.

We set our revenue guidance with this employment narrowness and the largely inconsistent US economic performance in mind.

From an EPS perspective, as we reported today, our EPS for FY14 was $3.05.

This figure included the net impact of the Shred-it transaction of $0.26.

It also included a $0.04 benefit, net of tax, from the operating income of the document shredding business in FY14.

As Mike just mentioned, though, we do not expect any benefit in FY15 from the shredding partnership.

When excluding these two amounts, our FY14 EPS would have been $2.75.

And we believe this provides a better comparison to our FY15 expected results.

Our FY15 EPS guidance does include an $0.11 benefit from the sale of stock of an equity method investment that occurred a few weeks ago on June 30.

It also includes the $0.09 benefit from the share buybacks that occurred between April and June of this year.

The EPS guidance does not assume any additional share buybacks for the remainder of FY15.

As I just indicated a few minutes ago, we remain unconvinced that the US economy will become consistent.

In addition, as a result of the contribution of our document shredding business to the Shred-it partnership, we have less revenue that contributes to covering our SG&A structure.

We will continue to control costs, as we have always done, but we also need to grow back into some of our existing SG&A infrastructure.

We set our EPS guidance with those items in mind.

That concludes our prepared remarks and we will now be glad to answer your questions.

(Operator Instructions)

Sara Gubins with Bank of America Merrill Lynch.

Could you tell us some more about the rental capacity that you are adding for the year?

I think you've talked before about needing some more processing capacity.

Yes, Sara.

We did speak about this in a few other calls.

It was initially our expectation that we would have added some of this capacity in FY14, but we did not.

And what we are adding, basically, is processing capacity in the form of new facilities, especially because of the rapid growth that we've had in certain markets.

And some of those plants will be relatively expensive.

For example, we will be adding a new plant in the New York metro area.

And as anybody that lives in New York knows, land up there and construction costs, et cetera, are relatively expensive.

So, we have several plants that we will be adding.

Some of them will come online maybe toward the latter part of this year.

Others will not come online until next year, but a lot of that capital will be spent in FY15.

Okay, great.

Thank you.

And then if you could give an update on add-stops and pricing trends.

Yes, as I had mentioned a little earlier, add-stops were negative for the quarter, which is not unusual, given changes being made due to the change in weather.

A little bit better than last year.

But I would say we're not seeing much impact from the employment, which seems to be a good headline, but as Bill mentioned, it's fairly narrow.

So, our net add-stops, a little bit better than last year, negative for the quarter.

Pricing seems to be a little bit better.

I would say it's driven within our new business.

But, generally, we saw a little bit better pricing environment this quarter than maybe a year ago.

Great.

And then just last question, you mentioned an SAP implementation for the Rental business.

Could you tell us some more about that, and whether or not there are any concerns that that might be disruptive during the year?

Thank you.

I don't think it will be disruptive -- let me answer that -- because we will do it in phases.

The first phase is what they call a blueprint or it's a design phase.

It really doesn't have any impact on our operations at all.

But we have to dedicate a lot of resources and capital toward the implementation of this project in the design to determine what we need to do with the software and how to implement it.

So, we'll get through that.

And then assuming that that is successful, which we expect it to be, then we'll start into some more of the detail programming requirements, data development, et cetera, that will be needed to run the system.

This will be a multi-year implementation.

We would not start actually impacting our locations or our customers for some time.

And hopefully we will be well prepared to handle that.

I can assure you, we are very careful on these type of projects.

But I think it's important for all of our investors and analysts to understand that any company that does embark upon these type of projects, it is a large expenditure, it takes a lot of time and effort to put it in, and, yet, when it is successful -- and we certainly think at this point it will be -- it will provide benefits into the future.

They don't come right away, but they certainly provide opportunities to more efficiently run our business, handle our customers' needs, et cetera.

And the good news is, we've just recently, as you've heard us say on prior calls, we've recently finished the rollout of our First Aid, Safety and Fire business onto the SAP platform.

Thank you.

Hamzah Mazari with Credit Suisse.

Could you give us an update on customer penetration?

Specifically, how many of your customers subscribe to more than one service or several services?

And has that number changed over the last few quarters?

How should we think about where you are in that process?

Hamzah, I would say we've made some minimal progress in that arena.

Certainly, not to the extent we expect to have.

One of the problems that we have with doing that is the multiple types of computer systems we're on.

So, that's one of the reasons why we are willing to invest in the SAP system across the entire portfolio of businesses.

Yes, we certainly do continue to see some additional penetration, but nothing to the extent that we ultimately expect it to be.

Got it.

Then maybe just your commentary around growing into your SG&A infrastructure.

Do you need cyclical growth for that?

Or how do we think about your comments there and SG&A trends going forward?

I think what we need is revenue growth, that we certainly expect to have, in order to replace the roughly $300 million of revenue that we no longer have from the shredding business, now that it's part of the joint venture.

So, you can think about it in this way.

You've got certain fixed costs that really don't go away when you basically don't have that revenue to cover that any more.

For example, we still have an audit fee that costs just as much now as it did when we had document shredding.

We still have certain G&A functions that you just can't cut out parts of because you no longer have the shredding business.

This goes through the entire organization.

And while we certainly have reduced staff in certain areas where there is the ability to have a variable level of expenditures associated with revenue, there's a lot of areas where that just won't take place.

So, our expectation is that during the course of the next year, we will essentially grow into that SG&A level.

And then once we reach FY16, not only will we have covered the reduction in the shredding revenue, but we expect to start seeing some contribution on the bottom line from the Shred-it joint venture.

Great.

Thank you.

Joe Box with KeyBanc Capital Markets.

I think it's been a while since you guys have actually added some plant capacity.

So, can you maybe just walk us through the process of how that works?

Do you typically operate two separate plants or do you wait for a lease to expire and then you consolidate the two?

What we are talking about, Joe, is primarily the building of an additional plant in markets where we already have plants.

So, we are not replacing a plant, we are actually adding a plant.

The last time I think we opened a new rental plant was back in FY08.

And then, of course, we had the great recession and, therefore, we actually closed a few of our facilities, especially those that had been acquired through an acquisition.

And, by the way, we generally own our plants, Joe.

It's not a leased facility.

We lease our branches or some of our First Aid and Safety operations.

But our Rental plant, because of the extent of the infrastructure within that plant for water treatment, sortations, et cetera, we generally own those facilities.

But the idea is that we grow so much in a market that we are forced to build another plant to handle the additional volume.

And that's the case here -- that we basically have exhausted our ability to squeeze much more out of the existing plants we have and therefore we have to add another one.

Understood.

I get that you guys are already in the market and you've run out of capacity there and you have to build a new one.

Ultimately, what I'm trying to understand is how we should think about the margin headwind from adding an additional plant.

It depends on -- it's so variable depending on the cost of what that plant will take, and then how many other plants are in that market.

And as you move volume around, generally you'll start the new plant with a set amount of volume, certainly not near capacity, but you'll also have relieved some of the capacity constraints in some of the other plants.

So, I can't really answer your question because it's going to be different if it's in a New York area versus a Cincinnati, Ohio area.

Okay, that's fine.

And I can certainly circle up with you guys off-line on some other questions.

But one other quick follow-up.

I know you guys don't provide guidance by segment, but can you maybe give us a feel for how we should be thinking about Rental margins in FY15?

Clearly, a strong finish to the year.

And are you assuming a lot more leverage at the plant in the first half, and then maybe when some of these plants start to come online we could be thinking about a little bit less leverage?

Any cadence would be helpful.

I would say our expectations are that margins, barring any significant cost change, which we don't anticipate, should be as good as they were this year.

But I think you make a good point.

They will probably be a bit stronger in the first half of the year than the second half of the year, depending on how the additional capacity comes online.

But when you look at it in total for the year, our expectation is it will be as good as, if not slightly better, than this year.

Great.

Thank you.

George Tong with Piper Jaffray.

Going back to add-stops, can you give us some color on how add-stops are trending so far in the first fiscal quarter, and whether directionally we are seeing continued improvement?

George, we're so early that I would say we haven't seen much of a change from the fourth quarter.

Okay.

Got it.

And touching on your comment earlier, the need to grow back into SG&A infrastructure, have you made all the necessary variable cost reductions you need, or do you see opportunity for additional cost cuts in FY15?

I'd say that some of it has lapsed into 2015 because the transaction took place on April 30.

So, there will be a little bit of cost reduction as we move into early 2015, but it won't be substantial.

Okay, that's helpful.

And then, lastly, could you share some commentary on how you expect Shred-it to contribute to Cintas beyond FY15, reflecting any synergies to grow the margins you are expecting from the JV?

We certainly expect synergies.

We are not prepared at this time to quantify them.

I think there's a lot of work being done on the part of the two organizations that have come together.

They certainly are optimistic of being able to achieve more than what the two companies were doing separately, when you add them together.

So, I think, as we get closer to FY16, we'll have clarity and will certainly be able to provide that when we give guidance for FY16 a year from now.

Very helpful.

Thanks very much.

Scott Schneeberger with Oppenheimer.

I'm curious -- with SAP, you mentioned it's multi-year and obviously a big step up in CapEx.

I know you're probably not in a position to give guidance beyond FY15.

But directionally do think that might come back in in 2016, or do you think this is going to be a multi-year elevation?

You're talking about the CapEx expenditures?

Yes.

I would say the first two years are going to be relatively capital intensive and then it should fall dramatically after that.

Thanks.

And any OpEx impact from the implementation?

I hope not too much.

If our experience is similar to what we saw with first aid, we see a little tick up during the conversion of the operations and shortly thereafter in some of the SG&A, or in the G&A expenditures.

And then over time the benefits start being realized.

So, again, it's too early to really tell.

We don't know to the extent of how it's really going to impact the day to day operation itself.

And until we get through the design phase and start some of the pilot implementations, it's hard for us to be able to predict that.

All we know is that right now, at least going into this, we feel very positive that this is a good use of capital in that the long-term return will be very beneficial to the Company.

Great.

Thanks.

And on a similar vein, now with this partnership with Shred-it closed, what are the M&A thoughts with regard to the core Cintas business, just a derivative of that?

Do you see any further involvement?

I assume the answer's no, but any further involvement with infusion to the JV?

Is that something that's been discussed?

We would not expect any infusion to the JV.

We believe that they will be able to generate the sufficient cash on their own in order to continue to grow and do what they need to do.

With regards to Cintas core business, yes, we are very interested in making acquisitions, as long as they achieve the financial and strategic objectives that we've set out.

And that includes acquisitions within the uniform business, the facilities services business, first aid, fire, and potentially some new businesses.

We've got an active corporate development group.

We've got a lot of cash and a great amount of debt capacity.

And we are certainly going to look for opportunities to grow the Company.

Excellent.

I will stop there.

Thanks very much.

Andrew Steinerman with JPMorgan.

I wanted to ask about Rental gross margin and the effect of merchandise [harmonization] in the quarter.

And are we at a point where we have to infuse more garments into service that might weigh on gross margins going forward?

During the quarter, Andrew, we did not see any change in the trend.

So, I would say we've not hit a point where we need to infuse garments.

We still have stockrooms that have a lot of capacity, that have a lot of uniforms in them, and we're using them very efficiently.

So, I would say, I wouldn't expect to see a significant change in the injection rate.

Good.

Would you expect Rental gross margins to be up for FY15?

As I mentioned earlier to a question, Andrew, we would expect there to be a slight improvement in that.

It will most likely happen early in the year, and, then, dependent on the time of when the additional capacity comes online, it may come down a bit.

But overall for the year they should be up versus FY14.

Right.

I was actually a little confused by the comment before.

So, when you said margins should be up for FY15, you meant total operating margins, or did you mean just Rental?

I'm talking specifically about Rental because that was what the question was posed.

Sure.

So, could you just comment, in the guidance what's implied in total operating margin for FY15?

We don't break it down like that, Andrew.

But if you look at the growth rates in the top line, they are a little less than the growth rates in EPS.

And, therefore, I would tell you that there's got to be a little bit of margin expansion.

Okay.

Perfect.

Thanks for the help.

Nate Brochmann with William Blair.

Just wanted to talk a little bit -- you guys have done a really outstanding job of going after and getting some new business from non-programmers, as well as penetration with some additional services throughout the organization.

Could you talk about the ability to keep that churning?

Obviously, I know the market is pretty big out there in terms of the potential.

But in terms of whether that has been over the last couple of years some low-hanging fruit and opportunities, or whether it's something that you've done differently?

I know that we've injected a few more salespeople here, give or take a year ago, to get after that.

Can you just talk about in terms of the pipeline and the opportunity in terms of to keep that going?

I think it's very similar.

Our expectation it will continue that way for the next several years.

We still have a very large sales force.

Our mix of new business continues to be more heavily weighted towards the no programmer side versus the programmer side; therefore, we continue to see the market itself expanding.

We are looking always for new products to help attract other types of no programmers.

And we've had several of those things roll out in the last year or two.

So right now I would say I feel very good about our ability to continue to sell a lot of new business, with the bulk of it coming from no programmers.

And, Bill, do you think -- and I know this might be hard to answer, so I get it -- but do you think that anything has changed fundamentally in terms of the percentage of non-programmers that are converting over to a uniform program?

Or is it that there's just more overall businesses out there to go after?

So, maybe not necessarily the percentage of programmers versus non has changed?

Or do think that, indeed, the share of the pie is increasing in terms of the conversion?

I think the share of the pie is increasing because there are more products that we have that enable us to go after certain types of businesses that maybe in the past we never would have gone after.

Okay.

I think that's an interesting point in terms of why it might be a little bit better than it was in the past in terms of the conversion rate.

The conversion rate, though -- I just want to make sure -- the conversion rate has not changed that dramatically since I've been with the Company, other than during the recession.

I just think that we've gotten a lot bigger.

We are $3.2 billion now in the Rental division.

And yet I still think we feel like there is just tremendous opportunities out there because in the past maybe there was a limited number of businesses that we would have gone after, but now, given our wide spectrum of different types of garments, different types of facility services products and services, there's more types of businesses we can go for.

Okay.

That make sense.

Thanks for that.

And then specifically within the Fire and Safety opportunity, are you guys pretty much everywhere you want to be at this point?

And is further growth at this point just continuing to build off of the locations you have and scaling that in terms of continue to increase profitability there?

Or are there more locations and more salespeople to go in terms of relative investment?

Certainly within the fire business, we are not nearly to the point of being everywhere we want to be.

So, there are many cities that we believe we still need a presence in and we would like to make acquisitions in to get into those cities.

Short of that, we certainly feel that if it's important enough we will start greenfielding those cities.

Therefore, I would say the geographic expansion is primarily within the Fire business.

As far as the Uniform Rental and the First Aid businesses, we are, by and large, in most of the largest metropolitan areas.

But that doesn't mean there's not acquisition opportunities because tuck-ins are great opportunities and relatively profitable.

Therefore, we will continue to go after those, too.

Sure.

Yes.

All about route density so it makes perfect sense.

Okay, thanks for the extra time.

I appreciate it.

Justin Hauke with Robert W. Baird.

What's the rationale for running the joint venture income through SG&A as opposed to just adding a separate equity income contribution?

I'm trying to understand, are we going to be able to have any visibility into the performance of the joint venture from here?

Justin, for the first year, as we've said, we don't expect any contribution from it anyway.

So, it's going to be so small that it's really not worth reporting out into a separate line.

Starting in FY16, if we feel like the contribution is something that is significant, we will pull it out and put it into a separate line.

Okay.

But for right now we should just basically think it as a negative offset to your SG&A?

You should think of it for FY15 as a zero.

Right.

But, going forward in 2016 in terms of thinking about it.

Yes.

Okay.

And then just one clarification.

On the guidance, I know you said that 2015 includes the $0.09 contribution from the share repurchases in the fourth quarter and so far in the first.

There was an $0.11 benefit, as well that was mentioned.

What was that?

That was a gain on the sale of an equity investment that we had, that was closed on June 30.

So, if you net those two out -- I'm just trying to reconcile that with your comments that you are expecting margins to be up next year.

Because if you take both of those out, it looks like the EPS and the revenue growth are about the same.

I wanted to better understand that.

It depends what base you start at, Justin.

Again, we tried to share with you that you've got to back out of FY14 some things like the shredding contribution, et cetera, and all the transaction costs.

But then you take that and you go to the top end of the guidance, back out the two items -- the share buyback impact and the investment gain -- I think you'll find that there will be a larger increase in EPS than there would be in the top end of the revenue guidance.

Got it.

Okay.

All right, that's helpful.

My last one is just on health care.

I know that was a concern for 2014.

It sounded like your healthcare expense on a dollar basis was actually lower year over year in the fourth quarter.

Is there any additional healthcare impact that we should be assuming in 2015?

Or the impact's mostly gone through at this point and it's more or less a flat assumption going forward?

First off, our medical expenses were about the same year over year.

So, I don't know where you might have gotten the less than.

Regarding our expectations, who knows.

I really -- I'm having difficulty predicting it because the rules keep changing.

There is just too many uncertainties.

So, right now, I think we are surprised that it did not go up more dramatically in 2014 versus the prior year.

Next year, I would say, if I were a betting man, I would think it would go up a little bit.

But I hope it won't be more than a little bit.

Because, again, until we get clarification from the healthcare providers and from the government, it's hard to predict.

Got it.

Okay.

Thanks a lot.

Thanks, guys.

Dan Dolev with Jefferies.

When I look at your guidance, your top-line guidance this year, excluding shredding, so 3.5 to 5.8, I would say it's like 1 point lighter than the similar guidance that was given in July of last year for this year.

Where is the slower growth coming from?

Is it shredding or is there something else?

Thanks.

Shredding was certainly a big contributor.

Even though it was less than 10% of the revenue, it still was a rapid grower.

But to answer the guidance, Mike and I anticipated that there would be some questions on this.

And I think it's important for everyone to understand that, first off, there is a lot of inconsistency in this job growth and the economy, and, therefore, we're trying to take that into consideration.

We don't foresee there being any big catalyst to really getting things going.

I would tell you that we tend to be conservative, especially at the beginning of a fiscal year.

I would rather make sure that the expectations -- that we can meet expectations.

So, we tend to be on the conservative side.

Therefore, I hope that as we go through the year, if we see growth better than what we are currently giving you in the guidance, we will certainly adjust the guidance upward as we go through the year.

Thanks.

And is that conservatism also reflected in your commentary about not expecting any EPS benefit from shredding this year?

That one's a real tough one to say.

They've got a lot of things they have to go through, and changing an IT platform, and rebranding the trucks and everything else.

I think it's too early for me to say that that's conservative or not.

I would say, right now, I think our expectation of no contribution is maybe realistic.

Great.

Thank you very much.

Shlomo Rosenbaum with Stifel Nicolaus.

I just have a few housekeeping type questions, in general.

The SG&A from the shredding that you said to expect as [de-rode], that's from a total year perspective, though, right?

If there's going to be a lot of investments to go after the synergies, I would expect that, at least for part of the year, that you would have some, to the extent that there's some losses that might be reflected and you guys would call that out for us.

Is that the right way to think of it?

Yes.

So, for example, we may see, because of the timing of some of these transitional expenses, we may see some ups and downs from quarter to quarter.

And we would likely point those out to you, yes.

Okay.

And then the SAP system, I know you guys went through in the FY10 timeframe, there was a rollout of SAP, and you guys had built up some inventory in advance of that.

What was that for?

And how many other parts of the business are there left to roll the system out to?

We started the SAP -- the first thing we did were our financial systems.

That was done several years ago.

That was back in probably the 2009 timeframe.

Very successful.

That was phase one.

Phase two was we took our global supply chain, essentially the manufacturing, the ordering of garments and other products, we put that on SAP.

That's where the buildup of inventory was in anticipation of converting to that system and we didn't want any disruption.

Then, we embarked upon the SAP implementation at our first aid and safety and document shredding operations.

That just got concluded just at the end of this past fiscal year.

So, now, we're moving forward into the Rental business.

And then yet to be done would be the direct sale business and the fire business.

Okay, great.

Then in terms of the document storage, that's such a tiny part of that business.

Does it make sense to think about that as an ongoing business for you guys?

At this time, yes.

As we mentioned in March, we are evaluating strategic options for that business.

We had a very nice fourth quarter.

We were very encouraged by the growth rate.

But we will continue to evaluate alternatives.

And if and when we should decide to do something differently other than to continue to operate them, we will certainly let everyone know.

Are they concentrated in particular geographies?

Primarily, they are located in the Midwest and in the UK and in the Benelux countries.

Okay.

And then, internally, how are you valuing the Shred-it transaction?

In other words, what you contributed in there?

The reason I'm asking that question is it seems like the transaction costs, the $26.3 million, at least versus the investment, seems like you paid a fee of 7.2%.

That sounds like an IPO fee unless you valued the transaction much higher than that investment.

Mike, do you want to take him through a little detail there?

Sure.

Shlomo, we did not use any investment banking firm to do this.

Instead, the transaction costs that you refer to, a large portion of it relates to the stock compensation expense, because we early vested stock options and restricted shares for those employees who moved from Cintas to the joint venture.

We also had some costs -- certainly, some legal and professional costs related to public accounting firms, looking at the tax side of things, and looking at the valuation for our accounting purposes.

We had some IT contracts that had to be canceled, that were specifically related to the document shredding business.

So, those are the kind of costs that were incurred as part of the shredding transaction itself.

Okay.

That clarifies a lot.

Thank you so much, guys.

Sean Kim with RBC Capital Markets.

Looking back at FY14, I think your results for the full year came in probably at the high end or ahead of what your initial guidance would have suggested a year ago.

What do you think drove the better performance?

Because it seems like, if we think about your comments about add-stop trends during the year, it doesn't seem like much has changed.

So, I'm just wondering what you think drove the better performance this year.

I think, Sean, it was really an excellent execution on the part of our Rental business and our First Aid and Safety business.

They were able to squeeze more capacity out of existing operations.

They did very well on new business.

As Mike mentioned, we saw a little bit of an uptick in the pricing environment, which helped.

I think that was really the reason that we surpassed our initial feel of guidance on both the revenue side and the EPS side.

Okay.

And in terms of share repurchases, assuming no major M&A activity, do you think it's safe for us to assume a similar level of [solid] purchases, as you have done over the past couple of years?

Sean, that's hard to say because I would tell you that we want to make acquisitions.

But, obviously, if we don't, then we would anticipate that we would use that cash to purchase our own stock.

I would not model it that way.

I would hope that we would be able to make some acquisitions.

But, again, you know and I know that you just can't predict when that will happen.

Okay.

Thank you.

It appears there are no further questions at this time.

Mr. Gale and Mr. Hansen, I'd like to turn the conference back you for any additional or closing remarks.

I would just like to thank everyone for joining us this evening.

It was a very complicated quarter, but you all are pretty smart people because you all pretty much figured it out.

And, therefore, we appreciate your support.

We will anticipate providing our first-quarter update sometime in the latter part of September.

So, thank you again.

Have a good rest of the summer.

This does conclude today's Cintas quarterly results earnings conference call.

We thank you again for your participation.