Cintas Corporation Q1 2005 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Greg Cappelli - Credit Suisse First Boston - Analyst : Hi, guys. It's Greg and Adam here. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Greg Cappelli - Credit Suisse First Boston - Analyst : Wondering if you could maybe -- Bill, I thought your comments were interesting on the seeing signs of improvement within various clients. Wondering if you could elaborate on that a little bit more to begin with.

Question: Greg Cappelli - Credit Suisse First Boston - Analyst : And, Bill, when you think about add/stops throughout the quarter, was it -- was it more difficult in July -- you know, just July or can you give us an idea of how it trended through the quarter?

Question: Greg Cappelli - Credit Suisse First Boston - Analyst : Okay and I'm assuming that goes for so far in the quarter as well?

Question: Greg Cappelli - Credit Suisse First Boston - Analyst : Okay. And then just in terms of your comment on the productivity of the sales force, it sounds like things are -- are improving there, from what you had seen previously. What would you expect -- I'm sorry if I missed this, in terms of headcount or percentage wise, what would you -- what would you look to expand the sales force from its current size this year? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Greg Cappelli - Credit Suisse First Boston - Analyst : Okay. And just two more quick ones on the national account side that you talked about, is this -- you mentioned pricing, which makes sense in the national account side. Is this the only area where you're still seeing, you know -- or I should say seeing the most difficulty in pricing or, you know, is it showing up in other areas as well. Obviously you are getting some pricing somewhere.

Question: Greg Cappelli - Credit Suisse First Boston - Analyst : Okay. Final question on the operating margin. I know you have talked about this before and you have been able to show some nice improvement. For this to continue to trend in the right direction, I'm just curious, if we do get a pickup in incremental growth here, you know, and the environment continues to a little bit better, how should we look at the -- I guess the increased amortization you would start to have from newer uniforms that would come in the system? So if we got two or three percentage more, you know, in incremental growth, than you had previously thought, how would that begin to impact the margin here?

Question: Greg Cappelli - Credit Suisse First Boston - Analyst : Okay. Thanks a lot. Appreciate the answers.

Question: Gary Bisbee - Lehman Brothers - Analyst : Hi, guys. A couple of quick questions. The last few quarters you have been talking about price increases in the 5 to 6% range, off of what had been the bottom throughout 2002. Now that you have lapped those numbers what kind of price increases in the rental business on new sales are you able to get today and are you thinking about for fiscal '05?

Question: Gary Bisbee - Lehman Brothers - Analyst : Okay. Great. The -- I noticed just in looking at your 10-K, you lease about half your facilities and own about half. Can you give us -- give me any sense as to, you know, is that a certain type of facility that you'd rather own versus lease and are there any major cost differences in -- either operating costs or CapEx to build out a leased facility versus owned.

Question: Gary Bisbee - Lehman Brothers - Analyst : Okay. Thanks and then just one last one, can you explain, again, exactly why we have seen seasonally the last couple of years a big sequential drop in the accrued liabilities.

Question: Gary Bisbee - Lehman Brothers - Analyst : Okay. And just one last one, the -- can you tell us the number of revenues dollar amount that is acquired in the other services?

Question: Gary Bisbee - Lehman Brothers - Analyst : Line?

Question: Gary Bisbee - Lehman Brothers - Analyst : Great. Thanks a lot.

Question: Michael Schneider - Robert W. Baird - Analyst : Hi, Karen. Hi, Bill.

Question: Michael Schneider - Robert W. Baird - Analyst : I'm wondering if you could just drill down a little bit further into the add/stop rate. I'm a little confused. It sounds like the cross selling is what's driving at least this quarter's significant improvements in add/stops. Is that right, Karen?

Question: Michael Schneider - Robert W. Baird - Analyst : And last quarter we talked about the benefit -- I'm sorry, the hit of facility service add/stops from mat returns at the end of the school year, winter jacket returns. Are we now seeing the seasonal benefit of that? And -- in other words are we -- am I counting too much into the add/stop increase?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And then switching to new business growth, up 13%. I'm curious as to where you think this pig in the python is. You've hired this new crew of salespeople that went into place, really throughout last fiscal year, but yet new business is really trended down over the last four quarters from 14 to 13% despite the sales force being up. When does the inflection point come? And, you know, I think the rule of thumb is that a salesperson really takes six to nine months to be a solid contributor? Is that really still the case or has something changed.

Question: Michael Schneider - Robert W. Baird - Analyst : Sure.

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And in SG&A, your point is well taken that SG&A as a percent peaks in the first quarter, but a number strikes me that SG&A was up just over $9 million sequentially, where revenue was up only $8 million sequentially. Is that the type of relationship you would ordinarily see or is there something about this quarter's -- this first quarter's SG&A number that might be unusual. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And to be clear again, Bill, the SG&A percentage falls through the year now?

Question: Michael Schneider - Robert W. Baird - Analyst : And, Bill, if you presented the case -- final question. Have you presented the case of a share repurchase to the board during the year-end meetings and what was their response.

Question: Michael Schneider - Robert W. Baird - Analyst : All right. Thanks, guys.

Question: Chris Gutek - Morgan Stanley - Analyst : Yeah. Hi, Chris Gutek, Morgan Stanley. Hi, Bill and Karen.

Question: Chris Gutek - Morgan Stanley - Analyst : I hate to beat this dead horse with the sales force productivity, but I have a question I'll ask in a slightly different way. If the 13% contribution is equal to what Aramark reported in their June quarter. And as you guys know they have been growing their sales force presumably somewhat faster than revenues have been growing and even the number three competitor G&K services, while their sales force productivity LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. is much lower at about 9.5% they have also increasingly been trying to put more focus on growth going forward. I'm curious, are you guys seeing any impact of increasing competition in the marketplace.

Question: Chris Gutek - Morgan Stanley - Analyst : Okay. Switching gears on an unrelated question, can you guys comment on the Company's new tag line? Cintas, the service professionals? And I guess what I'm getting at, is this starting to -- to send a message to clients that Cintas is going to move far beyond the uniform business and starting to encompass the paper shredding business and maybe some other businesses? Or is that reading too much into the new tag line?

Question: Chris Gutek - Morgan Stanley - Analyst : Okay. That's helpful. And one quick follow-up. I noticed in the 10-K. The Company's exposure to variable interest rates increased due to some swap activity over the course of fiscal 2004. Given the potential for rising interest rates going forward, would you guys intend to reverse course, remove some of those swaps and maybe incur slightly higher interest rates?

Question: Chris Gutek - Morgan Stanley - Analyst : Okay. Great. Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Chris Delmonte - Deutsche Bank - Analyst : Hi. It's actually Chris Delmonte for Brandt. What are your latest thoughts on international opportunities at the uniform business?

Question: Chris Delmonte - Deutsche Bank - Analyst : Okay. And could you remind us of your -- what your full year assumptions are for cash flow from operations and then what your priorities are for using your excess cash?

Question: Chris Delmonte - Deutsche Bank - Analyst : Okay. And one last question. Thanks for a lot of detail by the way. One last question, what is the latest pricing environment, like an acquisitions target?

Question: Chris Delmonte - Deutsche Bank - Analyst : Thank you very much.

Question: Tony Menachio - Midwest Research - Analyst : Good afternoon. A couple of questions I was hoping you'd give me a little bit of color on. First of all, any kind of color you provided on the geographic basis in terms of, you know, pricing structure, or strength of sales and things of that nature from, you know, any geographic disparity from what the Company reported for the overall quarter? And on the other businesses, this document shredding is this an area that provides strong margins in comparison to what corporate margins are currently? And how would that trend as that business, we would assume, is going to grow? T hank you.

Question: Bruce Simpson - William Blair - Analyst : Good afternoon.

Question: Bruce Simpson - William Blair - Analyst : Following up on your last comments about document management. How many acquisitions have you performed there? Where are they located around the country? And how much capital in total has been dedicated to that business?

Question: Bruce Simpson - William Blair - Analyst : Okay. Can you comment at all on the total amount of capital or money that's been allocated to that effort?

Question: Bruce Simpson - William Blair - Analyst : Okay. And then the next question, Bill, is sort of more conceptual. It has to do with operating leverage in general. You are getting good traction on new business written. You are beginning to see an improvement in the add/stop and yet now to feed that or maybe retroactively, you are putting a lot of money into sales promotions and so forth. What do you think about the opportunities for operating leverage as we move through fiscal 2005? Does it just depend upon whether it's growth at existing accounts versus new business or at the existing level of sales, like no improvement in the add/stop, do you think that as your sales grow, your operating margins have room to improve or do you think we'll kind of stay here below 10% on net income margins?

Question: Bruce Simpson - William Blair - Analyst : Okay. And I guess the last thing, just quickly, any comments whatsoever on competitive landscape? Are you seeing anything different in terms of sales activity, acquisition pricing, new account business out of Aramark, G&K, Unifirst or any of your private accounts.

Question: Bruce Simpson - William Blair - Analyst : Thanks a lot, Bill and Karen.

Question: Brad Safalow - J.P. Morgan - Analyst : Hi. Good evening. Just to return to the question on working capital. I guess we had expected you to build inventories maybe a little bit more during the quarter, as we look out through the rest of the year do you expect to build inventories as you have traditionally as, you know, uniform rental demand increases and how should we think about that?

Question: Brad Safalow - J.P. Morgan - Analyst : Okay and then just -- do you have the non-programmer conversion number for the quarter. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Brad Safalow - J.P. Morgan - Analyst : And just based anecdotally, you don't think that's changed materially for the quarter?

Question: Brad Safalow - J.P. Morgan - Analyst : Okay. And then just back to the acquisition questioning, what -- where were the acquisitions made, the 14 million plus you made during the quarter. Was it in the rental side? Was it on the other services line? Or was it a mix?

Question: Brad Safalow - J.P. Morgan - Analyst : Okay. So of the 14 million you spent in the quarter, is it safe to say the mix was relatively similar to the revenue contribution we have seen in the last quarter?

Question: Brad Safalow - J.P. Morgan - Analyst : Okay and then just in general, you guys have talked a lot about the acquisition pipeline, and the use of cash, you know, obviously you're going to have another solid free cash flow year. Would you guys ever consider a large acquisition in the other services, line items, something outside the uniform rental business?

Question: Brad Safalow - J.P. Morgan - Analyst : Okay. Great. I'll turn it over.

Question: Greg Halter - LJR Great Lakes Review - Analyst : Good afternoon, Bill and Karen.

Question: Greg Halter - LJR Great Lakes Review - Analyst : I wanted to look at the types of price increases you're getting on the new business. Is it still around that 2 to 4% area?

Question: Greg Halter - LJR Great Lakes Review - Analyst : Okay. That receivable that you wrote off, I think it was about a year ago now, any progress made there, or any change?

Question: Greg Halter - LJR Great Lakes Review - Analyst : Okay. And Karen, I know you made a comment about energy costs up 20 basis points as a percentage of revenues. Would that mean they are about 2.7% of your revenue in total? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Greg Halter - LJR Great Lakes Review - Analyst : Okay. That is all I have. Thank You.

Question: Michael Schneider - Robert W. Baird - Analyst : Just going back to the new business number, plus 13%. I'm wondering if some of the reason the productivity hasn't come back as fast as I might have expected is the size of new accounts. Is it true that new account sizes are still falling, Karen, or have you seen the bottom in that?

Question: Michael Schneider - Robert W. Baird - Analyst : Have you lowered the threshold for new account sales or is it just that the economy by virtue of taking jobs out of accounts, has lowered the average size?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And then the SG&A level, Bill, the -- again focusing on the SG&A number and the sales force growth, if you look at the sales force size today, versus, say, 24 months ago, are you flat or up in that number? Because I know you're up 10% year-over-year but that's really off of the depressed base of last year after the -- culling the sales force, right?

Question: Michael Schneider - Robert W. Baird - Analyst :

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. Okay. And then just on an RFID, you've been testing the Milford plant now, I think for over a year. Can you give us an update there.

Question: Michael Schneider - Robert W. Baird - Analyst : And have you allocated money within the CapEx budget to test any other plants this year?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And that is all I have. I appreciate it. Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.