Cintas Corporation Q4 2004 Earnings Conference Call Summary

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

Question: Adam Waldo - Lehman Brothers - Analyst : Good evening, Bill and Karen. Congratulations on the nice end of the year.

Question: Adam Waldo - Lehman Brothers - Analyst : Obviously your MD&A was very comprehensive on the income statement drivers but I wonder if I could ask a couple of balance sheet and cash flow questions. First with respect to inventories, obviously a very nice job, 19% year-over-year decline but I wonder if you could give us some more color as to what specific activities within Cintas would have led to that kind of decline given the moderate rebound in revenue?

Question: Adam Waldo - Lehman Brothers - Analyst : And so, Bill, are these kinds of inventory levels relative to your cost structure sustainable or would you expect to start to see inventory ramp back up a bit back in fiscal '05 as you start to build the new sales activities that much more aggressively with the sales force head count adds?

Question: Adam Waldo - Lehman Brothers - Analyst : Okay, then final quick question on pricing. Obviously all in business pricing, new and renewals, has been bouncing around that 1% range now for about four quarters and I wonder if you could just give us any commentary, either quantitatively or qualitatively, around what kind of trends you're seeing recently in new business pricing changes year-over-year relative to renewal business pricing?

Question: Adam Waldo - Lehman Brothers - Analyst : Right.

Question: Adam Waldo - Lehman Brothers - Analyst :

Question: Adam Waldo - Lehman Brothers - Analyst : Okay.

Question: Adam Waldo - Lehman Brothers - Analyst : Thanks very much. 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: Kartik Mehta - Midwest Research - Analyst : Yeah, good afternoon.

Question: Kartik Mehta - Midwest Research - Analyst : Hi. Couple questions. This quarter the revenue growth was 5.3 and, obviously, overall revenue growth more. Any reason why that might not have translated in a little bit better operating margins? Was there anything unusual in the quarter that maybe abated the operating margins?

Question: Kartik Mehta - Midwest Research - Analyst : So, in that light, where do we need to see that number go to for you to get to maybe the higher end of the estimate guidance you've given? 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: Kartik Mehta - Midwest Research - Analyst : And the last question. Any thoughts on rollout of your other services such as paper shredding and fire safety? I know it is not a big part but, maybe, what type of rollout we might see in fiscal 2005 from those services?

Question: Kartik Mehta - Midwest Research - Analyst : Thank you very much.

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

Question: Michael Schneider - Robert W. Baird - Analyst : Just want to focus on two issues. First, add/stops obviously a hot topic. We saw the government data in March, April and May nicely strong, in June it fell off. Just curious if you could comment how your figures, your data for add/stops reacted to that trend late in the quarter or actually after the quarter end?

Question: Michael Schneider - Robert W. Baird - Analyst : So did you see any discernible deceleration or downtick in add/stops in June like the government data?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And just a clarification or just more color on the add/stop rate. You mentioned only 3 of 13 were positive, so that's actually deterioration from last quarter. But, to be clear, if you back out just the jackets and the ancillary items, uniforms were actually neutral for the quarter?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay, so--

Question: Michael Schneider - Robert W. Baird - Analyst : And would you consider the third quarter a clean number because you don't have the winter jacket outflow nor do you have the inflow as you did this quarter?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay, so the five positive weeks last quarter versus, you know, some scrubbed, you know, what, 7 of 14 or 6 of 13 is actually a sequential improvement?

Question: Michael Schneider - Robert W. Baird - Analyst : So it doesn't sound like you have that trend line extrapolated into your guidance?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And actually on the guidance, this year you did basically 5% revenue growth in total earnings per share was up 11%, so nice leverage there. Although the guidance for fiscal '05, 10% revenue growth assuming the mid-point and EPS is up 11%, assuming the mid-point, which implies basically no leverage. Yet to your comments, Bill, the most profitable business is yet on the horizon. That is adds. How can you reconcile or what should we we thinking about as to why there might not be operating leverage in fiscal '05?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And again, though, if indeed you assume -- well, if there is upside surprise in that adds are better than you anticipate that would be where the real leverage comes in fiscal '05?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. Thank you.

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

Question: Chris Gutek - Morgan Stanley - Analyst : I think at the end of each fiscal year you guys typically do measure the percent of new clients that come from the no programmer market. Did you measure that this year in fiscal '04?

Question: Chris Gutek - Morgan Stanley - Analyst : Okay. So that's relatively consistent with the last couple of years.

Question: Chris Gutek - Morgan Stanley - Analyst : But if you look at the contribution to organic growth coming from the sales force production, it's been slowly trending down. I think a couple years ago it was adding 16 or 17 percentage points, and even a couple quarters ago it was adding 14 and now it's getting closer to 13. Is this slight downward trend a function of the new sales people not being fully productive? Is it a function of getting somewhat closer to market saturation or Cintas' size relative to the market? Or a combination of those factors?

Question: Chris Gutek - Morgan Stanley - Analyst : Okay, great. And then just question on the balance sheet. The balance sheet has strengthened quite a bit over the last year or so. And it looks like there was a small--or actually a medium-sized acquisition in the quarter. But, putting aside acquisitions, could you comment on what the company's intended use of cash would be? In particular, is there any increasing desire to do a share repurchase or maybe to increase the dividend a bit more rapidly? 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 Gutek - Morgan Stanley - Analyst : Just on that point what was that acquisition in the quarter? It looked like about a $52 million deal. What business unit was that in?

Question: Chris Gutek - Morgan Stanley - Analyst : Great, thanks.

Question: Smita Vadlamoni - Credit Suisse First Boston - Analyst : Hi it's Smita Vadlamoni and Greg Capelli, how are you?

Question: Smita Vadlamoni - Credit Suisse First Boston - Analyst : With longer term organic growth, are you still projecting in the mid-teens?

Question: Smita Vadlamoni - Credit Suisse First Boston - Analyst : I was wondering if you could break that down by the components of growth for me? You know, same customer growth, new customer growth?

Question: Smita Vadlamoni - Credit Suisse First Boston - Analyst : Okay. That's great. Thank you very much.

Question: Bradley Safalow - J.P. Morgan - Analyst : Hi, good evening.

Question: Bradley Safalow - J.P. Morgan - Analyst : Just a question on the gross margins from the other services division. You touched on-- I'm just trying to understand where the growth actually came from year-over-year. You obviously had some very sizeable improvement. Was it all a mix shift issue-- because the organic growth, I guess, from-- on the uniform side in terms of sales was just under 3% which maybe would not suggest the kind of leverage you actuaIly saw?

Question: Bradley Safalow - J.P. Morgan - Analyst : So looking to next year, these types of gross margins you feel are relatively sustainable?

Question: Bradley Safalow - J.P. Morgan - Analyst : Sure. And then just on a longer term basis there have been some questions on the operating leverage in the model and if add/stops swing in your direction-- and Bill obviously in talking about the investment you guys are making in growth. Look beyond '05 and assuming we have a more favorable employment environment, what type of earnings growth do you think you can achieve if you do indeed hit the organic growth metrics you're talking about?

Question: Bradley Safalow - J.P. Morgan - Analyst : Okay. Then just on the acquisition environment. Has there been any meaningful change in what you see as the landscape there? Obviously the cash balance continues to grow. The debt-to-cap continues to shrink and, obviously, you want to deploy that capital in the most efficient way possible for shareholders. Is there something you see that would suggest that maybe there would be more acquisition flow this coming year than there has been in the last 12 months?

Question: Bradley Safalow - J.P. Morgan - Analyst : Thanks for that color. And in terms of--if the acquisition landscape, for whatever reason, doesn't change meaningfully would you consider share buybacks at that point?

Question: Bradley Safalow - J.P. Morgan - Analyst : Okay. I appreciate all the detail. Thanks a lot.

Question: Bruce Simpson - William Blair - Analyst : Hi Karen and Bill.

Question: Bruce Simpson - William Blair - Analyst : Two questions. The first is, I'm surprised that the big sequential stepup in revenue in the other services division, and I think Karen that you told us that the organic growth rate in that division was around 4%? 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: Bruce Simpson - William Blair - Analyst : So it seems like, figuring that out on a year-over-year basis and then adjusting for the fact that there's one more day; still seems like there is maybe, I don't know, maybe $15 million or so of revenue in the quarter above what I would have expected. Is that all -- can you comment on where that comes from? Is there sort of a major acquisition that flowed through the quarter on that?

Question: Bruce Simpson - William Blair - Analyst : Okay. Thanks for that. Then the second question has to do with where the sequential increase in organic growth rate within the uniform piece of of business was coming from? Was it coming from the core business of uniform rental? Or was it coming from like sanis and non-uniform things?

Question: Bruce Simpson - William Blair - Analyst : Okay. And then Karen, just a follow-up to that. The -- I wonder if you're willing to give us any more color on the guidance for next year when you're looking at that revenue and that EPS? What kind of organic growth rate in the rental piece of the business do you think we're going to have to get to by the May '05 quarter just in general? I'm trying to sort of tease out where you expect the current 5.3% might get to by the end of next year in order to get to the numbers you're thinking about?

Question: Bruce Simpson - William Blair - Analyst : That's organic growth rate in the uniform rental piece in the May '05 quarter?

Question: Bruce Simpson - William Blair - Analyst : Okay. That helps. Thanks both of you very much.

Question: Kurt Molar - Dresdner RCM - Analyst : Good afternoon, ladies and gentlemen.

Question: Kurt Molar - Dresdner RCM - Analyst : I was just hoping to follow up on a few things. In terms of next year, where would you expect gross margins and SG&A to be versus, you know, the fiscal year just ended?

Question: Kurt Molar - Dresdner RCM - Analyst : Okay. And then you had mentioned earlier SG&A, one of the reasons for the increase was the increase in the sales force. I believe this year, if you look at SG&A, it went from about 0% change in the first half of the fiscal year to 6% last quarter to up LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. about 12% this quarter versus a year ago. How much of that change would be attributable to the sales force and how much were other factors causing that?

Question: Kurt Molar - Dresdner RCM - Analyst : If I were to think about the process of hiring a new sales person and the compensation for that sales person. How long would it take that sales person to be at, you know, the productivity that would I guess be typical?

Question: Kurt Molar - Dresdner RCM - Analyst : Bill, you mentioned that growth was expensive. Sales force being one of those things that's expensive. Is there something else that causes growth to be expensive?

Question: Kurt Molar - Dresdner RCM - Analyst : Right. Thank you. And just switching gears for a minute. If we were to look at the most recent quarter in the rental segment, the uniform rental versus the non-uniform rental and compare it with the May of '03 quarter, which one would have grown faster? 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: Kurt Molar - Dresdner RCM - Analyst : No, within the uniform rental segment, comparing versus the May of '04 quarter versus the May of '03 quarter would uniform rental have grown faster or would the ancillary services in that segment have grown faster?

Question: Kurt Molar - Dresdner RCM - Analyst : How significant would that difference be?

Question: Kurt Molar - Dresdner RCM - Analyst : Thank you so much for the answers and thanks for letting me take so much time asking questions here.

Question: Brandt Sakakeeny - Deutsche Banc - Analyst : Thanks, good afternoon. Hi Karen and Bill.

Question: Brandt Sakakeeny - Deutsche Banc - Analyst : Let's see, I think most of my questions have been answered, but I did want to go after the CapEx numbers for this coming fiscal year. What are your expectations on that and, I guess, if I could get a little more detail in terms of free cash flow expectations for the year. Thanks.

Question: Brandt Sakakeeny - Deutsche Banc - Analyst : And why the big difference between the free cash flow growth versus the net income growth next year versus this year?

Question: Brandt Sakakeeny - Deutsche Banc - Analyst : Okay, great.

Question: Brandt Sakakeeny - Deutsche Banc - Analyst : Okay, perfect. That's all I needed. Thank you.

Question: Greg Halter - LJR Great Lakes Review - Analyst : Hi, Bill and Karen, how are you?

Question: Greg Halter - LJR Great Lakes Review - Analyst : A question for you regarding the medical costs. You've talked about it obviously more than once here. Are you doing anything different? I know you had a VIBA trust awhile ago and some other things. But is there anything else that you can do and are doing now?

Question: Greg Halter - LJR Great Lakes Review - Analyst : Okay. And also on the energy costs. Given the increase in fuel in the last quarter, I was surprised that your costs weren't higher than they were. Can you comment on that and what you are seeing currently?

Question: Greg Halter - LJR Great Lakes Review - Analyst : Okay, and last question. I think in the first quarter of fiscal '04 there was a garment manufacturer receivable. Any update on the status regarding that? 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. Thank you.

Question: Bruce Simpson - William Blair - Analyst : I just wanted to touch base. Strikes my memory that in the May of '03 quarter you had a significant benefit in your SG&A from the recovery of bad debts or delinquent debts, that that was kind of a significant swing factor in limiting SG&A as a percentage of revenue and that that is kind of an intermittent function of your fourth quarter. Can you talk about how that impacted this quarter, was that a piece in keeping SG&A lower, or didn't we get that this year?

Question: Bruce Simpson - William Blair - Analyst : Thanks, Bill.

Question: Adam Waldo - Lehman Brothers - Analyst : Bill and/or Karen, I wonder if you could just give us a little more color on the assumptions you've made in your fiscal '05 EPS guidance with respect to healthcare cost inflation, expected workers comp claims inflation and energy cost inflation?

Question: Adam Waldo - Lehman Brothers - Analyst : And that is cost per claim inflation in the latter case, Bill?

Question: Adam Waldo - Lehman Brothers - Analyst : Okay. And then finally just any ability that you might have to provide ahead of your 10-K filing either business segment EBIT margins or inventory obsolescence account reserve balance at the end of the year.

Question: Adam Waldo - Lehman Brothers - Analyst : I knew you would.

Question: Adam Waldo - Lehman Brothers - 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: Adam Waldo - Lehman Brothers - Analyst : Great.

Question: Adam Waldo - Lehman Brothers - Analyst : Okay.

Question: Adam Waldo - Lehman Brothers - Analyst : Just for the fourth quarter, Karen, because we have them from your Qs for the first three quarters.

Question: Adam Waldo - Lehman Brothers - Analyst : Okay.

Question: Adam Waldo - Lehman Brothers - Analyst : Thank you so much.

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

Question: Michael Schneider - Robert W. Baird - Analyst : A question on the sales force. You mentioned that you're up 9% year-over-year as of year end. Do you just have a rough idea, though, of what you averaged during the year? Because it seems to me, you're probably at best flat in head count for the year.

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

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. Okay. And then just two other quick questions. CapEx for fiscal '05. Have you you assumed any acceleration in your RFID rollout or is that a fiscal '06 event?

Question: Michael Schneider - Robert W. Baird - Analyst : Okay. And have you guys put any brackets around what the savings per plant or productivity increase per plant would be given your early experiment in Ohio? 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, fair enough. Thanks again.