信達思 (CTAS) 2019 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. Mike Hansen, Executive Vice President and Chief Financial Officer.

Please go ahead, sir.

Good evening, and thank you for joining us.

With me is Paul Adler, Cintas Vice President and Treasurer.

We will discuss our fourth quarter results for fiscal 2019.

After our commentary, we'll 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.

Revenue for the fourth quarter of fiscal 2019 was a record $1.79 billion, an increase of 7.4% over last year's fourth quarter.

The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 7.6%.

In the fourth quarter of fiscal '19, the organic growth rate for the Uniform Rental and Facility Services operating segment was 6.8%, and the organic growth rate for the First Aid and Safety Services operating segment was 10.7%.

Gross margin for the fourth quarter of fiscal '19 of $823.6 million increased 9.5%.

Gross margin as a percent of revenue was 45.9% for the fourth quarter of fiscal '19 compared to 45.1% in the fourth quarter of fiscal '18.

Uniform Rental and Facility Services operating segment gross margin as a percent of revenue improved 100 basis points from last year's fourth quarter to 46%, and the First Aid and Safety Services operating segment gross margin percentage improved 70 basis points to 47.7%.

Reported operating income for the fourth quarter of fiscal '19 of $314.4 million increased 18.4%.

Operating margin was 17.5% in the fourth quarter of fiscal '19 compared to 15.9% in fiscal '18.

Operating income was negatively impacted by integration expenses relating to the G&K acquisition by $900,000 in the fourth quarter of fiscal '19 and $15 million in the fourth quarter of fiscal '18.

Excluding the integration expenses related to the G&K acquisition, operating income increased 12.4%, and operating margin improved 80 basis points to 17.6% in the fourth quarter of fiscal '19 compared to 16.8% in the fourth quarter of fiscal '18.

Reported net income for continuing operations for the fourth quarter of fiscal '19 was $226.2 million, and reported earnings per diluted share from continuing operations for the fourth quarter of fiscal '19 were $2.06.

Reported EPS was negatively impacted by integration expenses related to the G&K acquisition by $0.01 in the fourth quarter of fiscal '19.

Excluding the G&K acquisition integration expenses, net income dollars increased 13.5%, and net income margin was 12.6% compared to 12% last year.

EPS increased 16.9%.

We are pleased with these fourth quarter results, which conclude a very successful year.

A year ago, in our prepared remarks, we shared our expectations for fiscal '19.

We provided revenue and earnings per share guidance.

We committed to an estimated amount of synergies from the G&K acquisition and the continued conversion of operations to a new ERP system.

We shared our excitement for -- with returning to our debt-to-EBITDA target ahead of schedule, and we committed to returning to our historical priorities for deployment of cash.

We are happy to report that we not only achieved but exceeded these expectations.

For the ninth consecutive year, our organic growth rate was in the mid- to high single digits.

This means, we've been able to grow consistently in multiples of GDP and employment growth.

Due to our strong growth, innovative products and services and hard work and dedication of our employee partners, we moved up 41 places to #459 in the Fortune 500 ranking.

For the ninth consecutive year, we achieved double-digit earnings per share growth from continuing operations when adjusted for onetime special items.

We paid an annual dividend of $220.8 million that increased 26.5% over the prior year.

We've now increased the annual dividend paid to our shareholders for the 35th consecutive year, and the company deployed excess cash by purchasing 4.8 million shares of company stock for a total amount of $953.4 million.

Fiscal '19's achievements were especially noteworthy given that they were accomplished in a period of extreme change management in which we were integrating our largest acquisition to date and implementing a new enterprise resource planning system, namely SAP.

The integration of a very large acquisition required the extra effort of everyone in the organization.

Our partners executed our playbook and made the right adjustments when necessary.

Better revenue retention and more cost synergies have resulted in a higher return on investment than planned.

In many respect, the implementation of an ERP system is like an integration of a very large acquisition.

It impacts hundreds of operations and requires the involvement of experts from all departments of the company.

The conversion of each operation to SAP is an 8-month process of planning, changing business processes and employee mindsets, training and STRIP certification and customer communication.

In implementing SAP, we are moving from a decades-old platform to new technology that provides powerful information and data, designed to help us improve our business.

Through fiscal '19, about 65% of the operations are now in SAP.

We will complete the rollout to the remaining locations in fiscal '20.

The Cintas story is one of growth, we have grown both revenue and profit 48 of the past 50 years.

The only exceptions were the Great Recession years.

Our successful financial formula is organic revenue growth in the mid- to high single digits, double-digit earnings per share growth, significant cash generation and prudent deployment of excess cash.

Our priorities for uses of cash are investing in the business for growth, acquisitions, dividends and share repurchases.

Our opportunity for continued growth is great.

We have a product or service to help nearly every business get ready for the workday.

This is evident in a diverse customer base, spread over numerous verticals in both services-providing and goods-producing sectors of the economy.

All businesses care about image, safety, cleanliness or compliance, and businesses continue to outsource to concentrate on their core competencies.

We are well positioned to continue to benefit from these tailwinds.

We enjoy unrivaled scale, innovate our product and service offering, invest in technology and build our brand.

Cintas possesses numerous competitive advantages, but our greatest one is our culture.

This year, Cintas celebrates our heritage 90 years in the making.

The Cintas culture is the foundation upon which the company is built, and it is the reason for the company's success.

The culture reflects our integrity, professionalism and dedication to our customers.

Other hallmarks, including positive discontent and competitive urgency, drive us to innovate and stay out in front of the competition.

The Cintas culture is why even after nearly a century of success, we believe our best years are ahead.

Before turning the call over to Paul for more details, I'll provide our fiscal '20 expectations.

We expect revenue to be in the range of $7.24 billion to $7.31 billion.

We expect EPS from continuing operations to be in the range of $8.30 to $8.45.

Note the following regarding the guidance.

The growth rate at the revenue guidance range is 5% to 6.1%.

However, our fiscal '20 contains 1 less workday than our fiscal '19.

Adjusting for this 1 day difference on a constant workday basis, the revenue growth rate range at guidance is 5.4% to 6.5%.

One less workday also has a negative impact on EPS, reducing it about $0.06, which is a 90 basis point drag on the EPS growth rate.

The guidance assumes an effective tax rate for fiscal '20 of 21% compared to a rate of 19.9% for fiscal '19.

The higher effective tax rate in fiscal '20 negatively impacts our EPS growth about 180 basis points and total EPS by about $0.14.

Keep in mind that the tax rate can move up or down from period to period based on discrete events, including the amount of stock compensation expense.

The guidance assumes a share count for computing EPS of 109 million shares.

This consists of diluted weighted average shares outstanding plus participating securities in the form of restricted stock.

It does not assume any future share buybacks, any potential deterioration in the U.S. economy or any further specifically identified G&K integration expenses.

And lastly, the guidance does not -- or does include the impact from the adoption of the Accounting Standards Update 2016-02 on leases.

With the adoption, significant changes to the balance sheet will occur.

We expect assets and liabilities to increase in the range of $160 million to $185 million.

However, we do not expect any material effect on the P&L or the cash flow.

I'll now turn the call over to Paul.

Thank you, Mike.

Please note that our fiscal fourth quarter contain the same number of workdays as the prior year fourth quarter.

Looking ahead to fiscal '20, please note that there will be 1 less workday than in fiscal '19.

One less day will negatively impact fiscal '20 total revenue growth by 40 basis points.

To illustrate the magnitude of the headwind using fiscal '19's annual revenue, 1 less workday equates to about $27 million.

One less workday also has a negative impact on operating margin and EPS.

Fiscal '20 operating income margin will be reduced by about 12.5 basis points in comparison to fiscal '19 due to 1 less day of revenue.

The negative impact on the margin occurs because certain expenses like amortization of uniforms and entrance mats are expensed on a monthly basis as opposed to on a daily basis, and we will have 1 less day of revenue to cover the expenses.

As Mike stated, 1 less workday is a headwind of about 90 basis points on EPS growth and about a $0.06 drag on total EPS in comparison to fiscal '19.

Each quarter of fiscal '20 will contain 65 workdays.

In comparison to fiscal '19, the fiscal '20 Q1 will have 1 less day, Q2 will have the same number of days, Q3 will have 1 additional day, and Q4 will have 1 less day.

Please keep the quarterly day differences in mind when modeling our fiscal '20 results.

We have 2 reportable operating segments.

Uniform Rental and Facility Services and First Aid and Safety Services.

The remainder of our business is included in All Other.

All Other consist of Fire Protection Services and our Uniform Direct Sales business.

First Aid and Safety Services and All Other are combined and presented as Other Services on the income statement.

Uniform Rental and Facility Services operating segment includes the rental and servicing of uniforms, mats and towels and the provision of restroom supplies and other facility products and services.

The segment also includes the sale of items from our catalogs to our customers on route.

Uniform Rental and Facility Services revenue was $1.43 billion, an increase of 6.4%.

Excluding the impact of acquisitions and foreign currency exchange rate changes, the organic growth rate was 6.8%.

Our Uniform Rental and Facility Services segment gross margin was 46.0% for the fourth quarter compared to 45.0% in last year's fourth quarter, an improvement of 100 basis points.

Energy expense as a percentage of revenue was 2.4% compared to 2.55% in the prior year quarter.

We are pleased with the gross margin expansion and our ability to overcome wage pressures and tariff impacts.

Our First Aid and Safety Services operating segment includes revenue from the sale and servicing of first aid products, safety products and training.

This segment's revenue for the fourth quarter was $163.5 million.

The organic growth rate for this segment was 10.7%.

The first aid segment gross margin was 47.7% in the fourth quarter compared to 47.0% in last year's fourth quarter, an increase of 70 basis points.

First aid segment gross margins continue to increase with strong top line growth.

As our volume grows, we can negotiate better pricing from vendors.

Growth also enables us to improve route density, reducing gasoline and diesel costs and enabling our service teams to spend more time serving and upselling.

Our Fire Protection Services and Uniform Direct Sales business -- businesses are reported in the All Other category.

Our fire business continues to grow each year at a strong pace.

The Uniform Direct Sales business growth rates are generally low single digits and are subject to volatility, such as when we install a multimillion-dollar account.

Uniform Direct Sales, however, is a key business for us, and as customers are often significant opportunities to cross-sell and provide products and services from our other business units.

All Other revenue was $201.8 million, an increase of 12.7%.

The organic growth rate was 11.6%, and was driven by 14.3% organic growth in the fire business.

All Other gross margin was 43.7% for the fourth quarter of this fiscal year compared to 43.6% for last year's fourth quarter.

Selling and administrative expenses as a percentage of revenue were 28.3% in the fourth quarter of fiscal '19 and '18.

Lower labor expense as a percent of revenue was offset by increases in other expenses, including stock compensation, insurance, workers' compensation and medical.

We are self-insured and therefore, subject to some volatility in workers' comp and medical expense from quarter-to-quarter.

Our effective tax rate on continuing operations for the fourth quarter of fiscal '19 was 21.7%.

As Mike stated earlier, the tax rate can move from period to period based on discrete events, including the amount of stock compensation expense.

Our cash and equivalents balance as of May 31 was $96.6 million.

Operating cash flow in the fourth quarter of fiscal '19 increased 31% from the amount of operating cash flow in the fourth quarter of fiscal '18.

Capital expenditures in the fourth quarter were $68.9 million.

Our CapEx by operating segment was as follows: $54.7 million in Uniform Rental and Facility Services; $9.6 million in First Aid and Safety; and $4.6 million in All Other.

We expect fiscal '20 CapEx to be in the range of $280 million to $310 million.

As of May 31, total debt was $2,849 billion.

$2,537 billion was fixed interest rate debt, and $312 million was variable rate debt in the form of a term loan and commercial paper.

At May 31, we were at our targeted leverage of 2x debt-to-EBITDA.

That concludes our prepared remarks.

We are happy to answer your questions.

(Operator Instructions) And our first question will come from Manav Patnaik with Barclays.

This is actually Greg calling in.

I was just hoping to get an update on the G&K synergies in terms of where we were exiting 2019, what we expect in 2020 and how you guys are feeling about potential sources of upside going forward.

We finished the fiscal '19 a little bit over $100 million for the year, a little bit better than we expected at the beginning of the year.

And I would expect that in fiscal '20, we'll get to the neighborhood of $135 million, which is right in the middle of the range that we guided to 3 years ago when we announced the G&K deal.

So we feel great about achieving the synergies we initially set out to do.

That if we can get to that $135 million in fiscal '20, that's a year ahead of schedule.

We had talked about a 4-year plan.

And so we feel really good about achieving that.

The lifting -- the heavy lifting that's left continues to be the route optimization.

That will continue in fiscal '20.

That's -- as we talked about over the last few years, that's not a source of significant synergies.

We will get some energy benefits as we eliminate mileage on our routes, but we certainly are growing and need to continue to add capacity on routes.

So all in all, Greg, we feel great about the -- about where we are in that G&K integration.

Okay.

That makes sense.

And then I also wanted to ask about natural adjacencies out of your -- outside of what is the core business currently?

It seems like we're getting towards the end of some of the heavy lifting on the integration and the SAP implementation and leverage is pretty reasonable at this point.

Just wondering if that changes how you guys think about potentially going after some of these markets, and what kind of markets that could potentially be?

Well, we -- I would say this, we -- I mentioned a little bit in my prepared remarks that we look for opportunities and image, safety, cleanliness and compliance, and those are some pretty good umbrellas to be covering for our customers and there are a lot of opportunities there as we've seen over the years.

We have had product adjacencies in all of our businesses, and we're continuing to look for those under those 4 umbrellas that I mentioned.

And certainly, we're looking for other things that may also be included under those umbrellas that could be possibly a different -- a route structure or what have you.

But we're being disciplined, and we want to make sure that there is long-term value, that there's a big market opportunity for any new type of product adjacency or business.

We certainly, as you mentioned, we are at our 2x leverage kind of goal and we've got a strong balance sheet, and so we're going to be looking for opportunities to deploy that cash and certainly, acquisitions and other investments in our product lines are right at the top of our list.

So we'll be looking for opportunities.

Our next question will come from Toni Kaplan with Morgan Stanley.

I wanted to get a sense of how you're thinking about the economic and employment outlook and basically, what you're hearing from your customers right now in terms of their propensity to spend going forward.

Just some background on the industry would be great.

Well, we feel pretty good about the macro still.

The environment still feels pretty conducive to sell new business to continue to penetrate, and you see with our fourth quarter, our revenue results as well as the guidance that we've given that we feel pretty good about the momentum that we have in the business and that we'll continue into our fiscal '20.

We look at GDP for calendar '19.

It's still above expectations or still above 2%.

I think about the last 9 years, that's the neighborhood in which we've performed, and we've had a pretty good 9-year period where we have grown in excess of that GDP and employment.

So we still like the macro environment.

In the last quarter, we have seen just under 500,000 jobs being created; in the last 6 months, 1 million; in the last year, 2 million.

And so the job growth has continued to be pretty good as well.

So Toni, we like the environment and as you can see by our fourth quarter and our guidance, we like the momentum in the business.

That's great.

And then in terms of margins, how should we be thinking about expansion across the segments in the upcoming year as -- and then additionally, how should we be thinking about incremental SAP costs over next year?

So from a margin perspective, our guidance would imply something in the way of low to mid-17s as a company, and we're certainly striving within each of our businesses to grow margins and that's our expectation.

That margin expectation for fiscal '20 would include some pretty good incrementals as a total business.

And so we continue to look for opportunities and expect improvements in that.

From an SAP cost perspective, we'll continue to roll that system out this fiscal year.

And we've talked about some of those rollout costs rolling off after fiscal '20, that's been somewhere in the, let's call it, $10 million to $12 million because we've talked about SAP costs from a few years ago increasing about $25 million, about half of which has been costs that are related to the rollout, whether it's training, consultants, et cetera.

So we do expect that some of that will roll off in fiscal '21.

And next we'll go to Kevin McVeigh with Crédit Suisse.

Hey, really nice job.

The organic growth in the fire business, the 14.3%, was there anything in there in particular that kind of drove that?

And then just really, really, really nice margin expansion.

Can you give us a sense how much of a headwind kind of the tariffs and wages were?

Because obviously, you're able to really offset that nicely.

Yes.

Kevin, it's Paul.

I'll talk about fire and turn it over to Mike on the tariffs.

But in terms of fire, yes the organic growth was strong at 14%.

But we continue to expect out of that business organic growth of 10% or a little bit better.

So very good execution in Q4, but that's kind of par for the course for the fire business of late.

So nothing specific to really call out.

But we just continue to do a great job of winning business.

We have a very professional aggressive sales force and kind of leveraging our service capabilities that we have in Uniform Rental and on our experiences there to the fire business and very professional service-oriented businesses on the service side.

And so we expect that strong organic growth to continue.

Kevin, from a tariff standpoint, there certainly has been a lot of noise in the tariff environment.

And -- but I would say, certainly, a little bit of impact, not a lot.

The noise around Mexico kind of came and went.

China, while we have seen a lot of noise and seen some tariffs, we have not been too affected by the first couple of buckets of those tariffs.

But we're not immune to additional tariffs that might happen.

We have to stay ahead of those things.

And so we're seeing a little bit of it, but there's probably more noise than impact.

From a labor perspective, we have certainly seen some impact market-by-market especially.

I wouldn't say that it's been significant.

We do -- in our production or our plant environment, we do see a little bit more difficulty in hiring people.

But generally speaking, the pressures that we've seen have been not significant, and we've been able to deal with them quite well so far.

We're certainly going to need to continue to keep our eyes on all of the tariff information that's going on though as we move forward.

Our next question will come from Gary Bisbee with Bank of America Merrill Lynch.

I guess if I could go back to margins and the margins implied in the guidance.

I think if we back out the margin benefit from the tail of that G&K synergies and also the drag from 1 less workday, it doesn't sound like there's -- the guidance implies a whole lot of margin expansion aside of the -- from those 2 factors.

So I know you tend have some conservativism in how you guide.

But is there anything else you'd call out that would lead to less operating leverage in fiscal '20?

No, and quite honestly, Gary, I'm not sure that I would agree.

I think if you think about that margin improvement, that's -- let's call it, low to mid-17s compared to 16.7% for fiscal '19 would imply, at the midpoint, roughly incrementals right around 30%.

That's at the high end of where we've talked about being.

If you strip out those incremental synergies, you're still above 20% at the midpoint.

So we feel we're right where we want to be with those operating margins, and we do expect continued improvement even without the synergies.

But inclusive of the synergies, we like the margin expansion quite a bit.

Keep in mind -- Gary, keep in mind that when we compare -- if you're backing from EPS, we've got a $0.14 headwind in the higher tax rate than in fiscal '18, and then as you mentioned, we've got the $0.06 headwind from the 1 less workday.

So if you're backing in from EPS, you've got to keep in mind, there's a $0.20 headwind.

Yes.

I guess I was just doing -- you said $35 million incremental savings, that's 50 basis points.

And then that's offset by $10 million or $15 million from the 1 less workday.

It sort of like half that margin.

But I guess your point is fair that the other half is still pretty good expansion.

So that's fine.

Yes.

I guess I just want to ask one other thing...

Yes, and I would say from a synergy standpoint, Gary, I would -- we think about it as $105 million to $135 million.

So about a $30 million improvement.

Okay.

All right.

Fair enough.

And then on SAP, a two-parter.

You've -- I guess you said you're 65% of the way through the network rollout at this point.

That you've talked about 2 benefits, the one you're most excited about is just the information allowing you to cross-sell and run the business better.

How is that playing out?

Once you've got one of your facilities that is up and running, is that pretty quick or is there a meaningful learning curve?

And I guess what I'm really trying to get at is are you beginning to benefit yet from the rollout to date or should we think of it more as a future benefit in -- later this year, maybe even more so into next year?

Sure.

I -- the -- there is a learning curve.

No question about it.

This is a system that is heavily data-dependent, and we have to change our business processes locally to be able to use that system most efficiently.

So there is a drag in terms of we've talked about an 8-month planning process prior to implementation.

There's also a period of time afterwards where we're getting efficient at using the system.

So it is a -- it certainly is a process and a lot of change going on.

From a local perspective, I think we are seeing some incremental benefits like new portable route computers for our SSRs, and so there are some incremental benefits that are probably more on the minor side.

I think from the ability to manage the information, we would typically do that at greater than a one location at a time type of a look.

And so the more we get on, the more we can begin to look at different regional groupings and take advantage of the power of that information.

So I think most of that is going to come as we move into '21 and '22.

Great.

And then if I could just sneak in one quick cleanup number.

You said last quarter you expected, like, in the cadence of '19 that the Q1 tax rate would be a lot lower.

Is last year's number a good ballpark or should we think it's higher than that but still much lower than the rest of the year?

Yes, you're right, Gary.

It will be quite a bit lower.

I would probably think of it in terms of kind of a 12% to 13% type of a range.

And a lot of that will depend on the level of stock compensation benefits based on the price of our stock, the performance of the stock.

But you're right, it will be much lower than the rest of the year.

Our next question will come from Blake Johnson with Goldman Sachs.

Regarding your revenue guidance, how much of the growth do you expect to be driven by further penetration of the nonprogrammer market versus head count growth in that existing customers?

And can you discuss traction in penetrating underrepresented verticals such as healthcare and industrials this quarter?

Sure.

So for fiscal '20, our new business efforts are generally the driver of our revenue growth in all of our businesses, and we like the opportunities there, particularly in that no programmer space.

We can get to the no programmer space with our unique garments, with our unique garment solutions like our scrub systems, and we think there is a big opportunity there.

So that -- we expect that to continue to drive the growth like it has for years past.

But the penetration remains good.

It's when we can provide a good product and articulate the value to our customers, they certainly have shown that they are willing to spend.

So that certainly will be important for us but it's led by the new business efforts.

From a fourth quarter perspective, those underpenetrated verticals continue to perform very well, healthcare, education, the government sectors, they continue to perform very well.

We are focused on those areas, particularly with our sales efforts, and we're encouraged by what we have seen in '19 and expect good things out of those verticals also in fiscal '20 and beyond.

Great.

That's helpful.

And then regarding G&K, one of the strategic benefits was to drive higher penetration of ancillary products to legacy G&K customers.

Can you discuss any progress made here?

Maybe the current percentage of cross-selling between various lines of business or any other metrics, that would be great.

We certainly have made progress in fiscal '19 in terms of some penetration.

It's hard -- I'm not going to provide any specific penetration because so much of that volume is intermixed with legacy Cintas volume.

However, we certainly have seen that our penetration has been strong.

Our hygiene growth has been strong for the year, and so we are encouraged and believe that we've made some good headway there and expect to continue that in fiscal '20.

But I would say, overall, we're pleased.

Next we'll go to Andrew Steinerman with JPMorgan.

How about a -- just a quick comment about client retention levels and any changes year-over-year?

And my second question is the pricing for new accounts, has that seen any upward movement in recent years?

Andrew, it's Paul.

In terms of retention, I would say that, really, no significant change in our business.

It's been roughly about 95%, and that's still where it was last fiscal year and that's what we still expect it to be.

Of course, we're always working on improving that, and there are opportunities.

But I would say, nothing significant to note.

In terms of pricing, I bet you know our business is very -- book for new accounts.

Andrew, it's a pretty competitive environment still out there and I'll give you an example.

When we're out there selling workwear, for example, our customers have lots of options.

And so there is a retail option where we're seeing billions of dollars being spent at retail at large retailers.

We're seeing direct sale options where those competitors can design and manage programs, and we're seeing the rental option as well.

So our customers have alternatives and options.

And so we have to continue to innovate and create good garments and other products.

We've got to be able to articulate the value of what we do versus a retail environment, versus a direct sales program and we've got to follow through on a great service.

So the point, Andrew, is our customers still have lots of options.

The competition is certainly out there and is available to them, and we've got to make sure that we are providing the right value.

And so all of that competition keeps -- it's a bit of a governor on what we can do with pricing and so while we are looking for the best price and we sell profitable new business, there certainly is competition that keeps that pricing in a bit of a tighter range.

Next, our question will come from Seth Weber with RBC Capital Markets.

I wanted to ask about the big share buyback in the fourth quarter.

In your prepared remarks, you kind of listed share buyback as, I think third or fourth in your pecking order.

So I mean is this just a function of you couldn't find acquisitions that you want -- that you like or valuations just stretched above what you're willing to pay?

Or can you just sort of characterize why the buyback was so strong in the fourth quarter relative to kind of your pecking order?

Sure.

We -- our pecking order is just as we said, and we are certainly looking for opportunities.

But I'll tell you, Seth, our cash flow was really good.

In the fourth quarter, our cash flow from operations was just under $400 million; in the third quarter, it was $325 million.

So 750 -- $725 million in the second half of the year.

So cash flow has been really good.

And look, we like to put that to work.

We would love to be -- we have continued to invest in the business.

We would love to find acquisitions.

We are aggressively working on those, but we can do the buyback that we just did in the fourth quarter and still do execute on a large acquisition if it became available.

So it's a little bit opportunistic.

We like the momentum in the business.

The average of those -- the average buyback was something in the way of just under $220 million for the fourth quarter.

And based on where our stock sits today, it feels like a pretty good move for us.

So I think it's opportunistic.

We'll continue to look at it this way, but we certainly love investing in the business, and we love to make acquisitions as well.

Okay.

That's fair.

And then just -- maybe just a comment on the -- the SG&A in the fourth quarter was kind of flattish year-to-year.

You did mention some extraordinary costs, I think, that offset the lower labor.

So how are you thinking about SG&A as a percentage of revenue for next year?

Do you -- should you see some leverage there?

Should it go down as a percentage of revenue?

We do.

We certainly do.

If you think about the fourth quarter, one of the call-outs that Paul made was our stock compensation expense.

Our stock continues to perform very, very well, and we love that.

But it does result in greater stock comp expense.

It was higher by about 30 basis points than last year.

When we have good stock performance, we generally will also get a lot of stock option exercises, which we had in the fourth quarter, which was why our tax rate was a little lower than guided.

And when we have those exercises, because they are nonqualified stock options, there is an employer portion of payroll tax.

And so when you combine those things, it's a little bit of a headwind.

We don't mind it because of the stock performance but it was there.

For the year, our SG&A was down 30 basis points, and we certainly do expect to get leverage in fiscal '20 and beyond.

That doesn't mean it's going to happen every quarter, but certainly over the course of the year, we expect it.

And next we'll go to Scott Schneeberger with Oppenheimer.

I have 3 but a couple of maybe quick and easy.

First one, the way you guys have sized the synergies, it's been more in a time period of achievement than it has been.

Any change to the absolute level?

And you said obviously, the route optimization is the last big piece that isn't going to be super impactful.

So I guess the question I'm getting at is, is there potential upside to the $130 million, $140 million once we get out a year from now?

Or is this probably going to be it for the way you guys discuss it?

Well, 2 things.

First of all, the upside, I've mentioned a few times in the past, we think, is coming -- will come from our sourcing environment as we kind of combine the G&K spend -- legacy G&K spend and our spend.

We have seen some of that heavy lifting that is rolling into our P&L and will continue to do so in fiscal '21, and we look for continued opportunities and benefits there.

So if it gets above the $135 million that I mentioned earlier, and we generally expect that it will, it will likely be in that service -- I'm sorry, in that supply chain area.

I'll say this though, Scott.

It gets harder as -- the farther we get from the acquisition date, it gets harder and harder to specifically say whether it's a synergy or just more efficiency in the business.

And so our expectation is after fiscal '20, we won't be talking about that quite as much, and we'll be moving forward with looking for all different kinds of efficiencies in the business.

All right.

Yes.

Understood and appreciate that.

The next question is just on CapEx.

It looks like an increase of about 1% to about 12% at the high end of the range year-over-year.

I was just curious, what would be the swing factors of the 1% versus the 12% over the coming year on a year-over-year basis?

I'm a little confused by what you mean by 1% to 12%.

Just comparing this -- for the guide of fiscal '20 versus fiscal '19, assuming my numbers are right.

So the guide of $280 million to $310 million, you're saying it's a 12 -- you're saying a 12% increase over our CapEx for fiscal '19?

Yes, that's correct.

At the high end.

It's 1% at the low end if I...

Yes, at the high end.

Yes.

I'm sorry, I -- sorry, it took me a bit to understand that.

Look, we are growing.

We're growing nicely.

And we've -- as you know, we've -- we consolidated quite a few G&K locations into Cintas locations, but there still are capacity needs, particularly in those markets that didn't have a G&K operation in them.

And so we do have capacity needs as we continue to grow, and I would expect that, that would -- that, that fact would continue if we continue to grow the way we're growing.

And so we're going to probably have a little bit of an uptick this fiscal '20 just simply because we are continuing to grow and add more plants than probably we have in the last few years because of the consolidation efforts.

All right.

Great.

And that third question I wanted to get in was, on the fourth quarter call in years past, you've shared a little bit of information with regard to uniform segment revenue mix.

I'm not anticipating much of a change, but is that something you're open to sharing this year?

Yes, Scott, I have that.

And you're right, not much of a change.

Uniform rental -- and as you mentioned, this is measured as a percentage of the Uniform Rental and Facility Services segment and it's Q4 data.

So uniform rental, 50% of the mix; dust control came in at 18%; hygiene is 14%; shop towels at 5%; linen, 9%; and then catalog was about 4%.

(Operator Instructions) And next we'll go to Justin Hauke with Robert W. Baird.

I guess the one question that I had here just on the balance sheet, and kudos for getting the leverage down to where you're looking to hold it at 2x, but I'm curious on the upside, in the cycle where we are today, how much leverage would you be willing to tolerate to the extent that there were opportunities whether in the ancillary business or in your current business, maybe there were more material acquisitions that would be out there, how much leverage would you be willing to put on the balance sheet here?

Well, I'll start with, we currently have a covenant that limits us to 3.5x.

Now we've got a great banking group and if we had an acquisition that forced us to go above 3.5x, then we would look at it in a couple of different ways.

First, does it create the long-term value that would warrant that kind of leveraging and secondly, given then the combined cash flow, would we be able to reduce that fairly quickly like we did with the G&K -- after the G&K deal closed.

We would look at it from those 2 standpoints.

So I think it just depends on the value and the long-term value creation, but we've certainly -- if we felt like it was a great opportunity, we certainly would evaluate that.

Our next question will come from Dan Dolev with Nomura.

Nice job.

So on uniform rental organic growth, I can't believe I'm complaining here because 6.8% is truly an amazing number, but compares were about 120 basis points easier, I mean what can get us upside to that number in fiscal '20?

Is it productivity?

Is it upselling?

Like, when can you get to that -- the heydays of the 8% organic growth?

I mean what needs to happen for that?

Well, we would certainly need a very good macro, and we like the macro today, but we would need a good macro.

We need to be firing on all cylinders in terms of our sales productivity and with some good and innovative products and services.

And we've got to be really on our game to sell into our current existing customers.

Dan, look, the last 4 years, our organic growth has been right in this range where we came in this fourth quarter.

And we've talked about a few times in the past, we like this pace.

It allows us to manage the growth in sales reps, the growth in route capacity, the growth in production capacity and so we do like the pace and we think that we can get some pretty good margin improvement when we're at this kind of pace.

We can manage the business very well and we like it.

The last 4 years we've been, our organic growth in total has been 6.8%, 6.7%, 7.1%, 6.5%, and obviously, the 6.5% included the first quarter where we were bottoming out in terms of the post G&K.

That's right where we want to be, that 6.8%, and our guidance for next year is pretty darn close to that.

So that's the pace we like, Dan.

Got it.

No.

Great job.

And then just a quick follow-up on the productivity, just to be clear.

I think last quarter you said that the sales productivity was good but if I can quote, "Not as good as it was in the second quarter." Is there an update to that one in terms of how it trended in the fourth quarter?

Yes.

Dan, you are correct.

We were making great progress on sales rep productivity kind of coming out of the G&K acquisition in terms of filling the sales roles and getting everybody trained and up to speed and then also getting the systems converted, which was necessary for those G&K reps to sell the Cintas product line.

You'll recall, we -- we're making nice improvements through Q2, and then last quarter in Q3, with some weather impacts, we noted that the productivity dipped, but in Q4 did bounce back very nicely, even stronger than it was in Q2.

Our next question will come from Timothy Mulrooney with William Blair.

A couple of quick ones here.

First of all, if I go back to the fourth quarter and I look at the uniform rental segment gross margin expansion of 100 basis points year-over-year, I mean that's a very solid result.

Can you just walk us through the primary factors driving that expansion outside of the lower energy cost?

Yes.

We certainly got some good leverage from the revenue growth.

We had some nice synergy capture.

Energy, as you said, helped a little bit, and we're selling profitable business.

And so a lot of things went well in the quarter.

From a pricing perspective, probably a little bit better in the fourth quarter incrementally than in previous quarters, the pricing while still competitive as I talked about with Andrew's question, probably just a little bit incrementally more positive.

And that certainly helps the margin as well.

So all in all, great synergy, great leveraging, selling good profitable business and a little bit of energy help all put together for a pretty good quarter.

By the way, if I could add, you know that this -- that the rental gross margin for the year was up 170 basis points from our fiscal '16, which was the year before the G&K deal, so if you think about adding a legacy G&K business with a gross margin of about 37.5% to now today, that's full rental gross -- full year rental gross margin of 45.5%, we've made some great progress in the last few years and our partners have worked so hard in integrating this acquisition.

We bought a very good business and our new partners have done a great job, our existing partners have as well, and it really shows in this fiscal '19 year with some really good margins, especially in that gross margin area.

Yes.

I think everybody in the investment community would agree with that statement.

It's been very impressive.

If I could move on, how much do you have remaining on your buyback, Mike?

And does your guidance assume -- what does your guidance assume with respect to share repurchase?

We have $263 million on the $1 billion that was authorized last fall, and the guidance assumes no additional share buyback.

No additional share buybacks, okay.

And lastly from me, any quantifiable impact from weather in the quarter?

I mean we had more rainfall across the U.S. this quarter, but I'm not sure if that has the same level of impact that the cold weather had last quarter.

Not nearly the same widespread impact.

So nothing worth calling out.

And that does conclude our question-and-answer session for today, and I'd to turn the call back to over to Mike Hansen for any additional or closing remarks.

Well, thank you again for joining us tonight.

We will issue our first quarter financial results in September, and we look forward to speaking with you again at that time.

That does conclude our conference for today.

Thank you for your participation.