Cintas Corporation
Q4 2007 Earnings Call Transcript

Published: 19 Jul 2007

[Operator:]

Please stand by. Ladies and Gentlemen, thank you for standing by and welcome to the Cintas Quarterly Earning Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Bill Gale, Vice President of Finance and the Chief Financial Officer. Please go ahead, sir.

[William C. Gale:]

Thank you. Good evening everyone. We appreciate you joining us this evening to listen to our fiscal 2007 year-end conference call. Today we are pleased to announce that fiscal 2007 marked our 38th consecutive year of growth in revenue and earnings. Revenue for the year was $3.71 billion, an increase of 8.9% over fiscal 2006, and earning per diluted share were $2.09, also an increase of 8.9%. Our revenue results are within the guidance provided during our third quarter call, while our earnings per diluted share results were $0.01 higher than the upper end of our range. Revenue for the fourth quarter was $964 million, an increase of 6.2%. Earnings per diluted share were $0.57 versus $0.55 a year ago, a 3.6% increase. The transition to our new sales organization has taken longer and cost us more than we originally anticipated. Given the nature of our rental business, the disruption that occurred in new business sales during this transition will have an impact into fiscal 2008. However, we expect internal growth rates to improve as we progress through the year. Our financial condition continues to remain strong. Net cash provided by operations was approximately $450 million for the year. At May 31st, our debt to book capitalization was 28.9%, despite investing $180 million in capital expenditures and over $160 million in acquisitions. During Fiscal 2007, we also bought back almost $200 million worth of our outstanding shares and paid an annual dividend of $62 million. The $200 million spent under the authorized share buyback program equated to 14.2 million shares. No additional shares were purchased during the fourth quarter. But we continue to have approximately $420 million in remaining authorization under the program. With me today is Mike Thomson, Cintas' Vice President and Treasurer. After Mike's further discussion of our financial results, I will provide some final comments and then we will open the call to questions. Please note that the Private Securities Litigation Reform Act of 1995, provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflects the company's current use as to future events and financial performance. These forward-looking statements are subjects 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.

[Michael L. Thompson:]

Thanks Bill and good evening. Total revenues were $964.1 million for the quarter, a 6.2% increase over that reported in the prior year. Internal growth was 4.3% during the fourth quarter, and 5.3% for the year. These results were in line with our revenue guidance. Please note that our fourth quarter had 66 work days, the same number of work days as the fourth quarter of fiscal 2006. As a note for fiscal 2008, the work days will be as follows; for the first quarter, 66 work days, the same as the first quarter of fiscal 2007. For the second quarter, 65 work days, the same as the second quarter of fiscal 2007. For the third quarter, 65 work days which is one more work day than the third quarter of fiscal 2007, and 65 work days in the fourth quarter, which is one less work day than the fourth quarter of 2007. The class part of businesses in the two reporting segments; Rentals and Other Services. The Rentals operating segment reflects the rental and servicing of uniforms and other garments, mats, mops, shop towels and other related items. We also provide rest room and hygiene products and services within this segment. Rental revenues were $697 million for the quarter, compared to $678 million dollars in the fourth quarter last year. This represents a 2.8% increase over the fourth quarter of last fiscal year. Factoring out acquisitions made over the last 12 months, our rental organic growth rate was 2.5% for the fourth quarter and 4.2% for the year. The implementation of our new sales structure has taken longer and cost more than we originally anticipated. While the new structure was completely rolled out from an organizational responsibility perspective by the end of December, the implementation of the new structure continued throughout our third quarter and into our fourth quarter. This transition caused our new business results to suffer, contributing to our lower growth rate. For example, during the transition to the new organization, we promoted many individuals in the sales leadership positions. Many of the individuals promoted were from sales positions and they were very successful and productive. Their vacated sales positions were then filled by new sales representatives with little to no experience, required training and further development. Traditionally, a new sales representative in our businesses can take up to 9 to 12 months in order to reach average sales representative productivity levels alone. As we have discussed in the past, the time needed for this development has lasting impact. The effects of lower rental business sold during the quarter take up to one year to work through. As new businesses will translate into weekly revenue which in turn billed to annual revenue results. Results from our new business efforts are improving and we expect to this trend to continue as the new organization becomes further engrained into our culture and our sales approach. While the amount of new business we sell has been impacted by the implementation of our new sales organization, our revenues have also been impacted by external economic pressure. Many traditional uniform wearing industries have experienced declines in domestic employment to the off shoring and improving technologies. While this pressure continued in fourth quarter, it was not as severe as earlier in the year. One of the additional benefits of our new sales organization is that our local general managers have been freed from their new business sales responsibilities. This now allows them to dedicate more of their time on customer relationships in related service and production levels. In fact, we track our customer satisfaction on a regular basis and our Customer Satisfaction Index hit an all time high in fiscal 2007. We expect the combination of our new sales efforts and the additional focus on customer service to resolve an improving revenue growth as we move through fiscal 2008. Our Other Services operating segment incorporates several businesses which have similar economic and organizational characteristics. The businesses included are National Account Sales Division which direct-sells uniforms, branded promotional products and other related products to national and large regional customers. Our direct sale catalog, which direct-sells uniforms and related products primarily to local customers who also rent products from us. Our First Aid and Safety Division which includes the sale of van-delivered first aid supplies, safety products and training, and fire protection services. And our Document Management Division, which is predominantly document shredding services. Other services revenue of $267 million increased 16.2% from last year's $230 million. On an organic basis, this segment of our business grew 9.6% for the fourth quarter and 8.6% for the year. Our uniform direct sale business, which includes our National Account Sales Division and our Rental Division catalog sales grew 4.2% on an organic basis for the quarter, and 2.9% for the year. Within our National Account Sales Division, the hospitality and gaming sectors continue to show strength, and we are seeing some preliminary results from our greater focus on the healthcare industry. The first aid safety and fire protection business continues to grow at an attractive rate. During the fourth quarter, the business grew 19% in total and 10% on an organic basis. For the year, this business grew 27% in total and 13% organically. While we have a national presence in first aid and safety, we continue to fill in our geographical footprint in fire protection services, primarily by making strategic acquisitions. After entering this business less than five years ago, we expanded rapidly and now service approximately 75 of the top 100 markets in United States. We also entered the document management business less than five years ago. This division posted very strong revenue results in the fourth quarter, with total growth of 81% and internal growth of 44%. For the year, this division grew 68% in total and 34% organically. This division now services over 150 sizeable markets in the United States and Canada, including over 80 of the top 100 markets. Our current annual revenue run rate is now in excess of $130 million. We will continue to focus on expanding into remaining urban markets via strategic acquisitions when available or through Greenfield startups. As these growth figures suggest, Cintas has undergone a significant change over the last 10 years. Over this timeframe, we have transformed from a predominantly uniform rental company to a full-fledged business services conglomerate today. To give you a better understanding of how significant this transformation has been, let me share with... some revenue data with you. For our fiscal year ended May 31, 1997, ten years ago, our total revenues were approximately $840 million. Of this, 69% was uniform rental, 10% was dust control, which is primarily entrance mats, 6% was shop towel rental, 4% was linen rental, and 11% was the direct sale of uniforms and related products. In comparison, today for our year ending May 31, 2007, 41% of our total revenue is derived from uniform rental, 15% is dust control again mainly entrance mats, 5% is shop towels, 6% is linen, and 13% is the direct sale of uniforms and related products. Together, this amounts to approximately $3 billion in revenues and equates to a compounded annual growth rate of 13.5%. However, that represents like 80% of our total revenues today. Over that 10 year timeframe, we also introduced new products and services, such that today first aid safety and fire products and services, represent 10% of our total revenues. Rest room supply and cleaning services represent 7%, and documents management services represent 3%. And several of these new businesses now represent approximately 20% of our total revenues, adding $720 million in fiscal 2007 alone. We will continue to evaluate new business products and services for future expansion when appropriate financial and strategic parameters are met. I will now discuss our margins for the fourth quarter. Total company margins of 42.9% declined 70 basis points as compared to 43.6% in the fourth quarter of 2006, but improved 30 basis points from 42.6% in the third quarter of fiscal 2007. The increase over the prior year fourth quarter is primarily due to increased delivery cost and material cost, partially offset by improved margins and other services. Energy costs for the fourth were 3.4% of sales consistent with the fourth quarter of fiscal 2006. Our 30-basis point margin improvement as compared to the third quarter of fiscal 2007, reflects the seasonal improvement in material cost in our Rental Division, and the improving margins in other services. Energy costs in the fourth quarter were 10 basis points higher than in our third quarter, reflecting increased energy pricing. Traditionally, energy costs would remain flat or decreased from the third and the fourth quarter, due to lower consumption levels, reflecting the movement out of the winter months. Our rental gross margins were 44.7% of revenue for the fourth quarter, a decline from 45.8% of revenue for the fourth of fiscal 2006. Delivery costs had increased due to introduction of Sanis UltraClean Restroom Cleaning Service. This service is more labor-intensive and currently our densities and volumes have not yet reached the scale. In addition, rental material cost increased as sales of flame-resistant garments increased at a more rapid rate than other garment sales. Material cost related to the flame-resistant garments represents a larger component to these programs than garments and traditional uniform programs. Material costs also increased as a result of the Van Dyne Crotty acquisition made late last year. Traditionally, when we make a large acquisition in our Rental Division, material costs will increase as we upgrade garments to many of these new customers. Rental gross margin of 44.7% for the fourth quarter is a 50-basis point improvement over the 44.2% reported for our third quarter. As mentioned previously, this improvement was primarily due to the seasonal improvement in material costs. Income before income taxes for the Rentals operating segment was $115.3 million for the fourth quarter and $462.4 million for the year. Other Services gross margin continues to improve. Gross margin for this segment was 38.5% in the current year fourth quarter as compared to 37% in the fourth quarter of last year, and 38.1% during the third quarter of this year. For the entire year, gross margins have improved over 200 basis points from 35.1% in fiscal 2006 to 37.2% in fiscal 2007. The significant growth within our fire protection services and document management services is allowing us to gain scale in these businesses, driving margins higher. We expect the Other Services gross margin to continue to improve, as these businesses continue to grow and build infrastructure. Income before income taxes for the Other Services operating segment was $34.3 million for the fourth quarter and $108.8 million for the year. Selling and administrative expenses were 26.8% of revenue, an increase of 20 basis points over last year's fourth quarter. Selling costs increased 80 basis points, reflecting the increased investment being made in additional sales representatives and our new sales structure, in order to benefit growth in the long-term. In addition, the adoption of FAS 123R share-based payments, and related expensing of equity compensation increased administrative expenses by 20 basis points. Offsetting these increases was a 30-basis point improvement in bad debt expense, as our locations executed well in the collection of accounts receivable at year end. In addition, in May of 2007, we exited our forward starting swap, which provided miscellaneous income of $6.2 million. This amount has been included as a credit to administrative expense. The termination of the swap will be discussed in a moment when changes to the balance sheet are discussed. Selling and administrating expenses improved by 120 basis points from the third quarter of fiscal 2007. The improvement resulted from the termination of the forward starting swap and the accounts receivable collection effort. Payroll taxes decreased 30 basis points, reflecting a normal event due to the annual resetting of payroll taxes during our third quarter. As a reminder, all employee benefit costs for our partner employees, other than wages and bonuses, are included in our administrative expenses. As compared to both the fourth quarter of the fiscal 2006 and the third quarter of fiscal 2007, our employee workers compensation costs increased. This increased... this increase which was a result of several high exposure claims incurred or sold [ph] during the current quarter was offset by an improvement in employee medical cost during the quarter. Net interest costs were 1.2% of revenue this quarter, reflecting an increased long-term debt levels taken on to fund acquisitions and share buybacks over the last 18 months. Our effective tax rate was 37.3% for the quarter down slightly from 37.4% in the fourth quarter of last year, but consistent with that of our third quarter. For the quarter, net income of $90.3 million decreased to 1.3% over the fourth quarter of fiscal 2006, reflecting increased interest expense on higher debt levels. Earnings per diluted share increased 3.6% to $0.57 per diluted share reflecting operational results and the impact of the share repurchase program. Our balance sheet continues to be strong. Despite a reduction in cash in marketable securities used for acquisitions and our stock buyback program, our current ratio was 2.9

[William C. Gale:]

Thank you, Mike. Our guidance for fiscal 2008 calls for revenue between $3.9 billion and $4.1 billion, which equates to total company growth of 5.2% to 10.6%. To achieve these results, we expect internal growth to improve as we progress through the year. Based on this revenue range, our earning per diluted share for fiscal 2008 are expected to be between $2.15 and $2.25. We will now be happy to take your questions.

[Operator:]

Thank you, sir. The question-and-answer session will be conducted electronically. [Operators Instructions]. And we will take our first question from Mike Fox with J.P. Morgan.

[Mike Fox:]

Good afternoon guys and congratulations on another year of growth. You talked a lot about the growth you guys have had over the last ten years, and if you look at I think the stock over the last seven or eight years, you haven't, I guess been rewarded for further growth. I was wondering if you can talk about how you guys look at that internally, and if you guys have looked at any possibilities of a management buyout or leverage buyout given the liquidity in the marketplace right now, for those types of transactions? And if you can give us any type of perception that the Farmer Family has on the possibility of that?

[William C. Gale:]

Well Mike, to answer the latter part of your question first, I would tell you that as we have stated in the past, we cannot comment on matters of that sort. So we are not going to make any comments on that in this call or at any other time. We certainly are proud of the growth rates that this company has achieved over the last several years, as we've broadened into more of a business services company. We believe that the opportunities continue to remain in our uniform rental business, but that these additional levers will also improve growth going forward. And certainly it is frustrating to us that the stock market has not rewarded us. But we have to keep in mind that we have come from a 58 PE back in 1999 to what it's today about a 19 PE. So, we continue to view that our growth opportunities are significant. We are very pleased in the businesses that we are in, and we will continue to grow those businesses, make acquisitions, grow in totally and we are very confident of the future.

[Mike Fox:]

Okay, great. And then with regard to which the acquisition market, can you talk about just the pricing out there and the opportunities that you see. When we look out over the next year, what types of... or what segments do you see that the most opportunities for acquisitions?

[William C. Gale:]

Well right now, our primary focus has been in document management and fire... the fire service because we really are intend on building out a national footprint in both those businesses. But, our corporate development group continues to remain active looking at acquisitions in any of our business areas including uniform rental. Unfortunately there hasn't been many opportunities to make acquisitions in the uniform rental business over the last couple of years other than the Van Dyne Crotty one which we made last year. So, these things come in waves and we will continue to look at it. As far as pricing; pricing has been relatively stable in all the businesses over the past year. We continue to have very strict targets with regard to achievement of internal rates of return and we haven't deviated from that. So, we will continue to be active in the market, but at reasonable rates.

[Mike Fox:]

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

[William C. Gale:]

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

[Mike Fox:]

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

[William C. Gale:]

No, Mike I wouldn't say we do. We are number two in fire service and certainly I don't think we can go out and price things above what the number one competitor is going to do, or the 3600 local people are doing. So we've got to remain competitive there, and I'd say the other businesses are very similar.

[Mike Fox:]

Okay, great. Thanks a lot.

[Operator:]

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

[Michael Schneider:]

Good afternoon guys.

[William C. Gale:]

Hi Michael.

[Michael Schneider:]

May be first you can just kind of walk through some of the implications in the guidance. It looks like the guidance anticipates 5% to 6% organic growth and based on this attitude [ph] close the year at 4.3. It does anticipate an acceleration. I guess could you just give us a sense, one, where you expect to start the year given that the quarter is half over or more so? And then secondly, if indeed you even show flat organic growth at 4, it implies the end of year at 7 or 8. Is that reasonable knowing what we know today about the economy and about Project One Team?

[William C. Gale:]

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

[Michael Schneider:]

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

[William C. Gale:]

I don't expect it to decelerate. I think it will stabilize or it might show a slight up tick.

[Michael Schneider:]

Okay. And why would that be in light of... the understanding of the uniform model is this ruling 12 month impact both plus and minus. Given that Project One Team you mentioned at the outset was still being implemented in Q3 and Q4... fiscal Q3 and fiscal Q4, wouldn't that imply then that the impact of that at least rolls through the first half or longer of fiscal '08?

[William C. Gale:]

Well. There are several components to growth, certainly Project One Team is the impact on new business, and I would say to you that, well I don't expected it to be an appreciable increase. I do think new business as these new sales reps begin to become more productive is... it should be slightly better in the first quarter than it was in the fourth quarter. The other phenomenon we are seeing is that our loss business rates in add/stop seem to be improving. I think part of that is driven by the impact to Project One Team, as our general managers have been able now to focus on taking care of their customers, and we are seeing as Mike I think indicated, the highest customer satisfaction rate that we've ever had in the Rental Division and that bodes well for the future. Businesses seem to be stabilizing somewhat in terms of their hiring or firing. So I am hopeful that that will continue. But with all that said, I don't want to leave an expectation that there should be a dramatic improvement, because you are absolutely right. We have got a 12-month role here... rolling impact that has to be felt through the business. And I expect moderate improvement and then, steady improvement as we go trough the year, assuming the economy cooperates.

[Michael Schneider:]

Okay. And I guess just on the add/stops, that's consistent with what we had written about last week based on our survey work; is there any particular region or call it employment verticals that indeed is driving the improvement in add/stops or is it broad based?

[Michael L. Thompson:]

It's broad based, Mike. It has been across the Board.

[Michael Schneider:]

And then just moving to margins, if you look at the guidance again, it implies that you actually show another decline in margins, which would mark basically the fourth year of flat to drown to margins. With Project One Team, at least the rollout and trainee expenses behind you, energy really no appreciable change. Why would margins be down in fiscal '08?

[William C. Gale:]

Well, because as you new business picks up, you are going to have the impact of material costs coming through. So that will be one part of it. Selling costs will continue to remain high, as we move throughout the year, because we are going to continue add sales people, and that will have an impact. And I think the growth rates if you talk about overall margins, the growth rates in the other services businesses are going to be faster than the rental business and they slightly lower margins than the rental business.

[Michael Schneider:]

Okay. And final question then just on the organic growth rate guidance; is there any expectation in there that the other services business actually accelerates from this 8.5% organic growth rate?

[William C. Gale:]

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

[Michael Schneider:]

Okay. Thank you again, guys.

[Operator:]

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

[Dan Suzuki:]

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

[William C. Gale:]

Hi, Dan.

[Dan Suzuki:]

Hey, first off; can you just talk a little bit about sales, both retention and attrition and how that's going these days, and in terms of the headcount you said you would like increase headcount over fiscal year '08. Any targets you have there?

[William C. Gale:]

Well, one of the opportunities that we saw with Project One Team and why we moved forward on it is that, we saw in our test markets an improvement in turnover rates among our sales people, and that continues to be the case. So, we are pretty confident that the turnovers will... turnover rates will continue to improve among our sales force, and thus that improves the productivity going forward. With the new sales structure, we are going to able add more feet on the street if you will, with more sales people. And our plan calls for adding more sales people as we move throughout the year in all of our businesses.

[Dan Suzuki:]

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

[William C. Gale:]

No, we are not publicly disclosing that, Dan.

[Dan Suzuki:]

Okay. And then as you look, you finished the fiscal year '07, how was capacity utilization for your uniform business, and are there any areas for a plant consolidation or closures?

[William C. Gale:]

No. We really have no areas. In fact historically, Cintas has very rarely closed a plant; we've grown in all of our markets over time. Our capacity saw it's a difficult number to define, because it gets the details of wash always capacity versus clean storage etcetera. We think we have sufficient capacity to continue to grow and continue to make investments like we have in the past and our CapEx. So, we expect our CapEx to grow at about the same rate as historical levels. But other than that, we don't see any spikes needed for increased growth opportunities.

[Dan Suzuki:]

Okay. And last question, just on medical cost; can you update us on how that's turning this quarter?

[Michael L. Thompson:]

Yes. The medical cost in the fourth quarter actually came down after two high quarters in the second and third quarter. It's about 3% of our revenues. So, we like the positives there. We did change administrators in... January 1st. So, we think that had some of the reasons for that. But really our claims experience improved as well. So, we did... we did see a decrease there, and that decrease is offset by a slight increase in workers comp as well.

[Dan Suzuki:]

Great. Thanks very much.

[Operator:]

We'll move next to Gary Bisbee with Lehman Brothers.

[Gary Bisbee:]

Hi guys. Couple of questions; one thing you've referenced really... fairly repeatedly over the last year or so has been this concept of external economic pressures, and I think a lot of it has been manufacturing, but also industries that service manufacturing. It doesn't seem to me if you just take a future view of what the economy that is going that those pressures are likely to subside a whole lot. So, I guess if you sit back and think about the five-year plan, is there any thing you are thinking about in terms of targeting new verticals or move... trying to switch or adjust the mix of business more aggressively? Or do you think it to steady as you go trying to invest over time in the non-uniform businesses, will be enough to generate the kind of growth that you'd like to do?

[William C. Gale:]

Gary, I think that Cintas has embarked upon a number of things to take advantage of the changing economy by developing other products and services that will be more appealing to let's say some of these new areas. I think the economy continues to be strengthened by a lot of small businesses, and we are certainly getting our share of business with the small businesses. It takes a lot of small business wins in order to make up for the big manufacturing plants to shut down. So, it takes time to catch up with that. We've developed new products that I think are going to help us in that regard. We've targeted other industries that I think will be beneficial to us in the long run. And I think the Project One team is going to improve our ability to cross-sell our business services among our customers. And I think that will be beneficial down the road. So, I think all of those things together have... will enable us to continue to grow into the future.

[Gary Bisbee:]

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

[William C. Gale:]

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

[Gary Bisbee:]

Have you... on that point, is there anything you're doing differently? And now that you're gaining skill on those in terms of marketing in those businesses; for example, in New York, and I understand it's a bit of an odd market, but I have heard like radio commercials for companies doing the document shredding, and I don't think you're in New York yet. But we are sort of... it seems like with these businesses there's lots of companies in the Yellow Pages and what not, that you've got scaled. How do you really take advantage of that? Is it just going to the large customer and trying to get multi-side contract or can you... on the marketing front choosing things differently?

[William C. Gale:]

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

[Michael L. Thompson:]

On top of that, I would like to add two things. First, our top sales reps are selling all of our products and services today, when you talk of marketing... that is how we have handled some of that. In addition to that, our new sales organization, by having all of our representatives on the street knowing about our different products and services and presenting those to customers, is much more efficient in our mind than an advertisement on the radio. When you have a personnel relationship with the customer that you are seeing every week from a service standpoint, and being able to recommend another service from a known quantity like Cintas, we think that is very effective.

[William C. Gale:]

We are finding our sales people on the new organization are working together. We are developing technology to assist them in doping that. There is a lot more interaction going on than there ever was before, when they were all in their different silos. So that's why we continue to bullish in the future.

[Gary Bisbee:]

Great. And then just one last clean up one; you mentioned last quarter that you had some marketable securities that you are awaiting for them to mature before you might pay down some debt. If we look at the next quarter or two, is that something that's still likely to happen that that securities down for coming, but you haven't dealt with that?

[Michael L. Thompson:]

Yes. There is not a significant amount that lasts. We used most of that during this fiscal year.

[Gary Bisbee:]

Yes, okay. Alright, thanks a lot.

[Operator:]

Next question comes from Chris Gutek with Morgan Stanley.

[Chris Gutek:]

Thanks, guys; a couple of follow-up questions to the previous ones. First, let me dig a little bit more deeply into the sales force productivity. I guess this is the second call in a raw, where you've talked about generally improving results, although clearly it will take some time. Could you elaborate a little bit more on how difficult it's been to find new sales people, the quality of the people, how well you have to pay them and how this class of new hires is ramping up versus previous groups?

[William C. Gale:]

Based on the information that I've received from our sales organization, Chris, I would say that we are finding pretty good quality people. However, it is still difficult to find the right type of individuals, who we believe will be successful at Cintas. I think it takes a lot of review of resumes and lot interviews to get the right person in. But fortunately with the improved turnover rates, we believe that that will enable us to not have to hire as many people going forward as we have. Productivity is certainly improving. It's back to... I would say it's improving at rates that we've seen before in the uniform business, but it's accelerating in some of the other businesses, because of a lot of the cross-selling opportunities that are being made available to these other businesses. Keep in mind the uniform rental is our biggest business and has the most customers. So, you have I think the most opportunities to do the cross-selling. As far as compensation levels, we've tweaked the compensation plan. We've talked about that before that we are giving people a little bit more comfort in knowing what their compensation is going be on a month-to-month basis than the way it used to be. But it still requires an individual be successful at Cintas. That individual still has to be productive and there's still an awful lot of their comp... ultimate compensation is based on their results. So, we are... they quickly find out if they don't sell enough that maybe this isn't the right job for them. Fortunately, I believe that with the training we've got and with the management team that now is going to mentor these people, that we should be more successful in the future holding on to them.

[Chris Gutek:]

Okay. And then I don't know if you guys measured for the full year fiscal of '07, what percentage of new client adds were no programmers, and related to that if you measured or if you didn't, if you have a sense of how the industry saturation or maturity level is playing out over time?

[William C. Gale:]

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

[Chris Gutek:]

Okay. So, from your perspective, no sign of anything close to saturation yet.

[William C. Gale:]

No. No I think there is... the potential market is still three times the size of the served market.

[Chris Gutek:]

Okay. And I apologize, if you mentioned this in your prepared comments, with request there [ph] thanks for that, but relative to the lower guidance on the prior call, both the revenue and EPS for the full year were slightly above the lowered numbers. Was there anything that was a positive surprise during the fourth quarter that drove that?

[William C. Gale:]

Well. Mike mentioned the swap, so that was certainly a positive that we didn't anticipate. So there was a little income from that. But sales came in a little bit above of the mid-point of our guidance. And I think it was just kind of spread around the number of different areas. The organic growth rate in document management was certainly very positive. Our National Account Sales Division finished up the year very well and the loss business improved a bit in rental. So just kind of a myriad of different things. As far as margins, they were pretty well inline with what we thought they would be. Medical costs did comedown a bit from what our... what we had experienced during the year, so that helps somewhat.

[Chris Gutek:]

You are seeing anything different on the competitive landscape, again I would not to believe over the point, but it was air mark [ph] having gone private and maybe a little bit less focus on growth and more in cash flow. So less competition there, but potentially more competition from G&K, especially for National Accounts.

[William C. Gale:]

Well. We certainly respect all of our competitors, and I think they all continue to be very, very good businesses. But I can't tell you that I put any appreciable change in anybody's behavior over the last six to nine months from where they had been.

[Chris Gutek:]

Okay. And then finally any updated thoughts on the new optimal capital structure?

[William C. Gale:]

We continue to evaluate it continuously. That was part of the analysis we did in structuring our debt payment this last quarter. But it's an ongoing situation; as you well know, the market is fluid with regard to the alternatives. And we will continue to assess it, and get guidance from our Board and our advisors.

[Chris Gutek:]

Okay. Thanks, Bill.

[Operator:]

And next we have a Peter Carrillo with Citigroup.

[Peter Carrillo:]

Hi, guys. Actually, sorry, I apologize for a couple of repeat that I just didn't get in the call. The swap income was how much again, sorry?

[Michael L. Thompson:]

It was a gain of $6.2 million.

[William C. Gale:]

pre-tax, pre-tax.

[Peter Carrillo:]

Okay. You gave that 10 year thing '97 and 2007; can you just go real quickly through those numbers again for the full year '07... not '97, but '07, the percentages?

[William C. Gale:]

Of '07, sure. 41%, uniform rental;15%, dust; 5%, shop towels; 6%, linen; 14%, direct sales of uniforms; 10%, first aid safety and fire; 7%, rest room supply and cleaning services; and 3%, document management.

[Peter Carrillo:]

Okay. Couple of a quick one and I've got a couple of questions for you. William did you give operating income breakout? I thought I heard you say but it seems did not --

[William C. Gale:]

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

[Peter Carrillo:]

Yes.

[William C. Gale:]

That was income before income taxes for Rentals operating segment was $115.3 million for the fourth quarter. So, that totaled to $462.4 million for the year, and income before income tax for Other Services operating segment was $34.3 million for the fourth quarter, which totaled to $108.8 million for the year.

[Peter Carrillo:]

Great. Then in terms of, sorry... on your CapEx, finally got, sort of the 5% goal you guys have been talking about for few years and it looks... I guess is that related to Sanis mostly for '07 and should that continue into '08 towards... for the 5% level or should we draw back to the mid-point 0.5% range?

[William C. Gale:]

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

[Peter Carrillo:]

Okay. And that's sort of next couple of years, I think. Is that right?

[William C. Gale:]

Right.

[Peter Carrillo:]

And if your guidance... what is your sort of assumptions for fuel as you look at the fiscal '08? How do you guys model that. You did assume flat from today or the last 30 days, or could you do that. Because it seems pretty volatile right now there the fuel obviously?

[William C. Gale:]

Well. We are trying to considering it to remain flat. It was interesting throughout the year. Our... the energy cost as a percent of sales remained for around 3.2% to 3.5%. So that kind of the expectation going forward that it will be in that range throughout fiscal '08.

[Peter Carrillo:]

Still no idea that plans to do kind of... any kind of I guess hedging in the area?

[William C. Gale:]

No I think hedging is a situation where you could be right 50% of the time or wrong 50% of the time and I believe that the situation that Cintas finds itself in is that we are probably as well off to continue to do, what we done before and just look at better ways to conserve energy, as opposed to try to do financial maneuvering to hedge it.

[Peter Carrillo:]

Okay on the sales force issues, my real kind of bigger picture question is sort of I mean... how do... what's your sense of how happy the sales force is during the restructuring period. Is that part on a what's kind of going on in the last year or I mean, every one is not getting to move to supervise you are obviously right. You are not using all your sales people. What's overall, what's the level of the mood or the turnout?

[William C. Gale:]

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

[Peter Carrillo:]

Great. Thanks a lot.

[Operator:]

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

[Scott Schneeberger:]

Hey, good afternoon. Just a couple of quick clarification questions. In the revenue guidance, could you give a breakout on internal versus acquisitive growth or should we just assume predominantly organic there?

[William C. Gale:]

It's predominantly organic. Although you have a carry over impact of acquisitions that were made in the... in fiscal '07. The acquisitions were made in '07 were primarily in first aid and safety, and document management. First aid and safety being primarily higher. So you'll have a little bit of carry over but the bulk of that growth is organic.

[Scott Schneeberger:]

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

[William C. Gale:]

Yes.

[Scott Schneeberger:]

Okay, Thanks. And then haven't heard much union front lately. Is there anything you can add updates on what you are seeing there?

[William C. Gale:]

Actually, no. There is really, it... they continue to try to cause a little problem now and then. But as we have stated before they are having no success with our partners. They... our partners continue to resist any efforts that the union has with regard to that and they are going to continue to be a nuisance, they are continue to cause us issues now and then. But we are continuing to move on and run the business as we think it should be run.

[Scott Schneeberger:]

Okay, thanks a lot. That's all for me.

[Operator:]

Next question comes from Greg Halter with Great Lakes Review.

[Greg Halter:]

Good afternoon and thanks for taking my questions.

[William C. Gale:]

Sure Greg.

[Greg Halter:]

Looking at the Other Services gross profit margin, you had talked about a target of 30 to 35 and up that 32 to 37 and now you are about 38.5. Any thoughts on where they can fall out going forward?

[William C. Gale:]

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

[Greg Halter:]

It definitely is, no question. Stock option expense I presume was only around $0.03 a share for fiscal '07?

[William C. Gale:]

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

[Greg Halter:]

Okay. And will it be a approximately the same for fiscal '08?

[William C. Gale:]

Probably around that area, yes.

[Greg Halter:]

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

[William C. Gale:]

A dollar figure for what?

[Greg Halter:]

Capital expenditures.

[William C. Gale:]

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

[Greg Halter:]

In '08?

[William C. Gale:]

Yes.

[Greg Halter:]

Okay. And I know there has been some rumblings and maybe more than rumblings about Wal-Mart in replacing their uniforms and dress code and so forth. Are you participating in that and are you aware of where they stand or what they are doing and how Cintas fits in?

[William C. Gale:]

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

[Greg Halter:]

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

[William C. Gale:]

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

[Greg Halter:]

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

[Michael L. Thompson:]

I gave you both.

[William C. Gale:]

He gave you both.

[Greg Halter:]

Okay. Could you repeat those, as I missed them?

[Michael L. Thompson:]

No problem. CapEx for the year was $181 million, $133 million of it was rental.

[Greg Halter:]

Okay

[Michael L. Thompson:]

$48 million was other services. And in relation to that on depreciation and amortization, it was $176 million for the year in total. It was $135 million in rental and $41 million in other services.

[Greg Halter:]

Great. Thank you very much.

[Operator:]

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

[Bruce Simpson:]

Good afternoon guys.

[William C. Gale:]

Hi Bruce.

[Bruce Simpson:]

What was the CapEx number in the fourth quarter?

[Michael L. Thompson:]

CapEx in the fourth quarter, let me get back to you on that because I don't have it right in front of me.

[Bruce Simpson:]

Okay. You talked a lot about the disruptive influence from sales people being promoted. How many people have been promoted or what percentage of the total sales force?

[William C. Gale:]

Bruce, we are not disclosing those numbers, but it was a substantial number of people who have moved into new positions.

[Bruce Simpson:]

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

[William C. Gale:]

No. We had in place a forward swap that we entered into last year that locked us into a certain interest rate if we should decide to issue 30-year debt in June. We... instead after a lot of analysis and discussions, we decided instead of doing that we expanded our CP capacity and we borrowed sufficient monies under the commercial paper program to pay off the $225 million debt that came due on June 1st and did not enter the... did not issue 30-year bonds. Therefore we terminated the forward swap and because we were in a positive stat at that time, we generated $6 million of pre-tax income and received cash as the payoff of that swap.

[Bruce Simpson:]

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

[William C. Gale:]

Yes, that's right.

[Bruce Simpson:]

Okay.

[Michael L. Thompson:]

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

[Bruce Simpson:]

52?

[Michael L. Thompson:]

Yes.

[Bruce Simpson:]

And then with respect to the growth rate in the earnings projections for next year, there seems to be kind of an awkward sort of tacit understanding here that the rate of growth has come down to a level that seems to be fairly permanently below what you had last updated us on your long-term thoughts about growth. Maybe it's possible to say what you think organic growth would have been in the absence of having switched over to the Project One team this year. In other words, how much of that hurt for the full year or quarterly program?

[William C. Gale:]

Bruce, that's a theoretical question that would be impossible for me to answer and I would just be speculating. I think issue with your term permanently reduction in internal growth, I think we have hit a low point hopefully and that we will begin to see it accelerate back up. We made this decision to go to Project One team with a lot of discussion and analysis, but we felt in the long-term it was the right thing to do for Cintas and we still believe that. Unfortunately it was more costly and more disruptive than we had expected it to be. But we are still very bullish that it is the right thing to do long-term and we believe that it will give us the opportunity to get growth rates back up into the levels that we used to talk about being able to achieve.

[Bruce Simpson:]

So, what are we looking at, and just seizing on the last 10 words of your response then, what do you think over the next 3-5 years, what is a realistic sustainable top or bottom line growth rate for this company in this stage of its growth?

[William C. Gale:]

Low to mid-teens.

[Bruce Simpson:]

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

[William C. Gale:]

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

[Bruce Simpson:]

Okay, thanks.

[Operator:]

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

[Michael Schneider:]

Specifics on what the earliest territories look like because presumably they're over the experience curve and I think you mentioned last quarter that the first territory was actually showing improving growth. Can you give us what the first batch of five, or the first batch of 10 territories did a year ago and what they are doing today in organic growth?

[William C. Gale:]

Michael, I am sorry, we are not going to get into that level of detail. Suffice it to say that we are encouraged that the results indicate that this was the right decision to do.

[Michael Schneider:]

Okay. And on the cost side, you mentioned it was more costly than expected. What were the specific costs that were unexpected?

[William C. Gale:]

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

[Michael Schneider:]

Okay. And hiring more people than expected, that seems to contradict the statement that turnover is lower, or was it --

[Michael L. Thompson:]

Maybe that was a misstatement. The fact that we are... we had to... we just had more destruction, is probably the right... more correct way to say it.

[William C. Gale:]

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

[Michael Schneider:]

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

[William C. Gale:]

Well, I won't.

[Michael Schneider:]

Okay. And then revisiting the swap, can you give us the just underlying rationale? I understand you did a lot of analysis, but why make a bet on the interest rate curve at this point commercial paper versus long-term debt I'm just curious?

[William C. Gale:]

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

[Michael Schneider:]

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

[William C. Gale:]

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

[Michael L. Thompson:]

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

[Michael Schneider:]

Okay, thank you again.

[Operator:]

Gentlemen, there are no more questions at this time.

[William C. Gale:]

Well, thank you all very much. Appreciate everyone joining us this evening and we will look forward to speaking with you again in just a couple of months. We will have our first quarter results out in probably the latter part of September and we look forward to talking to you then.

[Operator:]

Once again everyone, this will conclude today's program. On behalf of Cintas, we thank you for joining us. Please enjoy the rest of your day.