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Cintas Corporation (NASDAQ:CTAS)

F4Q 2013 Earnings Call

July 15, 2013 5:00 pm ET

Executives

William C. Gale - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

J. Michael Hansen - Vice President and Treasurer

Analysts

Joe Box - KeyBanc Capital Markets Inc., Research Division

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

John M. Healy - Northcoast Research

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Dan Dolev - Jefferies & Company, Inc., Research Division

Gregory W. Halter - LJR Great Lakes Review

Sara Gubins - BofA Merrill Lynch, Research Division

Operator

Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Bill Gale, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

William C. Gale

Good evening. Thank you for joining us as we report our fourth quarter results for fiscal 2013. With me is Mike Hansen, Cintas' Vice President and Treasurer. After some commentary on the results, we will be happy to answer questions.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC.

We are pleased to report fourth quarter revenue of $1,129,000,000, which represents record quarterly revenue for Cintas and growth of 7.2% from last year's fourth quarter. Organic growth, which adjusts for the impact of acquisitions, was 6.2%. Our operating income was $153.9 million, which is 13.6% of revenue, an improvement over the 13.4% in last year's fourth quarter. This operating margin improvement comes despite adding route capacity during the past 3 quarters, material cost headwinds due to a high volume of new business sold during the fiscal year and a reduction in recycled paper prices of about $10 per ton during the fourth quarter compared to last year's fourth quarter.

Fourth quarter net income increased by 9.4% to $86 million. Earnings per diluted share were $0.69, a 15% increase over last year's fourth quarter EPS of $0.60. Our EPS growth rate was higher than our net income growth rate because of the positive impact of our share buyback program. We purchased roughly $338 million of Cintas stock in the last 15 months, which certainly had a positive impact on our EPS growth rate. During the fourth quarter of fiscal '13, we purchased about $28 million of Cintas stock, which brought our fiscal year 2013 purchases to roughly $208 million. As of May 31, we had about $162 million available under the current board authorization for future share purchases.

May 31 marked the conclusion of a very successful year at Cintas, one in which we achieved both record sales and earnings per share levels. Fiscal '13 revenue topped $4.3 billion, and earnings per share grew 11% to $2.52. This was the third consecutive fiscal year of double-digit earnings per share growth. In fact, our EPS grew 80% in that 3-year period.

Operating income for fiscal 2013 grew by 4.7% over last year to $565 million. This operating income increase came despite a negative year-over-year recycled paper price impact in excess of $13 million. This resulted in a drag on operating margin of 30 basis points.

In addition, operating income increased despite the addition of route capacity during the final 3 quarters of the fiscal year. This route capacity was necessary due to the solid new business sales during the last few years. Our employees, who we call partners, continue to do a great job of executing our game plan in order to achieve these record fiscal 2013 results.

Now I would like to turn the call over to Mike for more details on the fourth quarter, after which, I will provide additional comments on our fiscal 2014 guidance.

J. Michael Hansen

Thanks, Bill, and good evening. As Bill mentioned, total revenue increased 7.2% from the fourth quarter of last year, with total company organic growth being 6.2%. Total company gross margin for the fourth quarter was 41.4%, which is down from last year's fourth quarter gross margin of 42.1% but slightly better than this year's third quarter gross margin of 41.1%. I will discuss these items in more detail by segment.

Before doing so, let me remind you that there were 66 workdays in our fourth quarter, which is the same as last year's fourth quarter. In fiscal '14, we will have 65 workdays in each quarter for a total of 260 workdays. This creates year-over-year workday differences in each quarter except the second and results in 1 less workday for the entire fiscal year.

We have 4 reportable operating segments: Rental Uniforms and Ancillary Products; Uniform Direct Sales; First Aid, Safety and Fire Protection Services and Document Management Services. Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services are combined and presented as other services on the face of the income statement.

The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms, mats, towels and other related items. The segment also includes restroom supplies and other facility products and services. Rental Uniforms and Ancillary Products revenue accounted for 70% of company revenue in the fourth quarter and totaled $785 million, which is up 4.8% compared to last year's fourth quarter. Organic growth was also 4.8%.

Within rental, based on fourth quarter revenue levels, uniform rental accounted for approximately 52% of the segment's revenue. Dust control, which is mainly entrance mats, accounted for 19%; hygiene and other services, which is restroom supply, cleaning services and chemical services, was 16%; shop towel revenue was 5% and linen and other, which is mainly nonperson-specific garments such as aprons and butcher coats, was 8%.

Our rental segment gross margin was 42.1% for the fourth quarter, down from 43.3% in last year's fourth quarter. Energy-related costs were 20 basis points higher than last year's fourth quarter. The remaining decrease compared to last year was due to the route capacity added during fiscal '13 and material costs being higher than last year due to the high levels of new business sold in the past year.

The fourth quarter gross margin of 42.1% improved from the 41.9% in the third quarter. Energy-related costs were 10 basis points higher than the third quarter. The gross margin improvement is mainly due to the fourth quarter having 2 more workdays than the third quarter.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms and other related products sold to national and regional customers. Uniforms and other related products are also sold to local customers, including products sold to rental customers through our direct sale catalog.

Uniform Direct Sales revenue accounted for 11% of company revenue in the fourth quarter and totaled $124.7 million, which represented sales growth of 12.1% compared to last year's fourth quarter. In the fourth quarter, we concluded several large rollouts in our Fortune 1000 business that began in the third quarter.

Uniform Direct Sales gross margin was 30.8% for the fourth quarter, consistent with last year's fourth quarter gross margin of 30.7%. Our gross margin of $38.5 million represents a 12.6% increase over last year. The fourth quarter gross margin of 30.8% is an increase over the 29.2% gross margin in the third quarter. This improvement is mainly due to an improved mix of higher margin hospitality sales in the fourth quarter.

Our First Aid, Safety and Fire Protection Services operating segment includes revenue from the sale and servicing of first aid products, safety products and training and fire protection products. First Aid, Safety and Fire Protection revenue, which accounted for 11% of company revenue in the fourth quarter, was $125.4 million. This is our highest quarterly revenue amount for this segment and represents an increase of 15.1% over last year's fourth quarter revenue. Organic growth was 8.9%.

Revenue for the year was $460.6 million, which is record annual revenue for the segment. Our First Aid, Safety and Fire Protection Services employee partners had an outstanding year. This segment's gross margin was 43.5% in the fourth quarter, which is up 110 basis points from the 42.4% in last year's fourth quarter. This improvement is due to better leveraging of the infrastructure, as well as an improved mix of higher margin sales than in last year's fourth quarter.

The gross margin of 43.5% is below the 44% gross margin in the third quarter due to a seasonal change in mix. Our third quarter generally has more cold and flu-related items, which have very good gross margins.

Our Document Management Services operating segment includes document destruction, storage and imaging services, and it accounted for 8% of fourth quarter total company revenue. Document Management revenue totaled $94 million, which is record quarterly revenue for this segment and is 11.3% higher than last year's fourth quarter. Revenue increased organically by 6.7% compared to last year. Average recycled paper prices remain relatively low at about $140 per ton, which is about $10 per ton lower than last year's fourth quarter average.

The fourth quarter gross margin was 46.4%, which is down 40 basis points compared to last year's fourth quarter gross margin of 46.8%. Energy-related expenses were 40 basis points lower in this year's fourth quarter than in last year's fourth quarter. The gross margin decrease is mainly due to opening a number of off-site shredding facilities. These facilities have significantly more capacity than our on-site shredding trucks and will create operational efficiencies and leverage opportunity as volume continues to grow.

Switching the selling and administrative expenses, SG&A was 27.8% as a percentage of revenue in the fourth quarter, which is down from last year's fourth quarter figure of 28.8%. Medical expenses were 30 basis points lower than in last year's fourth quarter. As we discussed last quarter, we are self-insured, so medical expenses can tend to fluctuate from quarter-to-quarter.

Amortization of acquisition-related expenses decreased by 30 basis points as compared to last year. And finally, we continue to manage our cost structure and had better leverage of our G&A functions during this year's fourth quarter.

Our effective tax rate was 37.4% for the quarter compared to 36.2% last year. The effective tax rate can fluctuate from quarter-to-quarter based on tax reserve builds and releases relating to specific discrete items. For the full fiscal 2013 year, our effective tax rate was 36.9%, which is relatively consistent with last year's 36.8%.

Turning now to the balance sheet. Our cash and marketable securities were $358 million at May 31, up $112 million from the $246 million at February 28. This increase was due to cash generated from operations, which was roughly $184 million in the fourth quarter. Included in the $358 million at May 31 was $51 million of cash located outside of the U.S.

Accounts receivable was consistent with the balance at February 28. DSOs were just below 40, which is slightly better than the third quarter level of 40. New goods inventory at May 31 was $240 million, down $7 million from February 28, due mainly to the sale of inventory associated with several large uniform direct sale customers.

Despite higher sales this year, the new goods inventory is down about $11 million from last year's May 31 level due to improved inventory management. In-service inventory grew to $497 million at May 31, up from the $482 million at February 28 due to continued sales of new rental customers without much change in net adds from customers. Accrued liabilities increased $33 million compared to February 28, primarily due to increases in accrued bond interest and accrued profit-sharing. Long-term debt at May 31 was $1.3 billion. As of May 31, our total debt-to-EBITDA remains slightly below 2x.

As I already mentioned, cash provided by operating activities in the fourth quarter was $184 million, which is up 14% from last year's fourth quarter amount of $162 million.

CapEx for the fourth quarter was $44.7 million. Our CapEx by operating segment was as follows: $31.7 million in rental; $1.5 million in Uniform Direct Sales; $3.1 million in First Aid, Safety and Fire Protection and $8.4 million in Document Management. Our total CapEx for fiscal '13 was $196 million. We expect CapEx for fiscal 2014 to be in the range of $240 million to $260 million. This expected fiscal '14 amount is higher than fiscal '13 due to continued implementation of our enterprise-wide system and due to an anticipated need for rental processing capacity in several markets.

I'll now turn the call over to Bill for comments on our fiscal 2014 guidance.

William C. Gale

Thanks, Mike. Our fiscal 2014 guidance is for revenue to be in the range of $4.5 million to $4.6 billion and earnings per diluted share to be in the range of $2.66 to $2.75. Let me provide some color and walk through a few assumptions so you can better understand the guidance.

As Mike mentioned, our fiscal 2014 year will have 1 less workday than fiscal 2013. This will have a negative impact on fiscal '14's revenue growth as well as EPS. Fiscal '13 also had 1 less workday than the previous year, and this had a negative 40 basis point impact on fiscal '13's revenue growth rate.

The negative EPS impact of 1 less workday is due to a number of our large expenses, including rental material cost, depreciation and amortization, being determined on a monthly basis instead of a workday basis. One less work day results in 1 less day of revenue to cover these expenses.

As Scott Farmer indicated in our press release, the U.S. economy has shown some signs of improvement in the past several months. However, much uncertainty and unevenness remains. Just last week, a number of economists lowered their second quarter GDP forecast to below 1.5%, with softer second half 2013 forecasts as well.

Evidence of this uncertainty continues to show itself by our customers' reluctance to hire. Our net add-stops metric was negative in the fourth quarter and worse than the fourth quarter of the previous 2 years. It is true that overall U.S. employment figures have strengthened in the past several months. However, 2/3 of the job gains in the past 4 months have been in industries not typically strong for our rental programs: financial and information services; professional and business services, including temporary employees; education and food service. We certainly hope to see broader strengthening in employment in the coming months, but we have not seen it yet.

We have modeled our fiscal '14 guidance with the expectation that this current uncertain economic climate will remain. We have not assumed any deterioration in the U.S. economy.

There are a number of factors causing the current uncertain environment in the U.S. economy: future Federal Reserve action and its impact on the interest rate environment; the impact of worsening economies in Europe and China, to name a few. The Affordable Care Act is certainly one of those factors, and it has a direct impact on our cost structure.

The Affordable Care Act includes new costs such as the transitional reinsurance fee, which is scheduled to begin in 2014 and other associated administrative and reporting expenses. As a result, we expect fiscal 2014 medical expenses as a percent of revenue to be higher than fiscal 2013 by 10 to 30 basis points. Note that while we do have available capacity under our current share buyback program, we have not considered any additional buybacks in the fiscal '14 guidance.

One final comment on the fiscal '14 expectations. We expect the year-over-year comparisons for our first quarter to be very difficult for 3 reasons. First, the first quarter has 1 less workday in it than last year's first quarter. This will have a negative impact on both the revenue growth rate and operating margins, particularly in the rental segment.

Secondly, current recycled paper prices are roughly $45 per ton, lower than last year's first quarter average. This will create a negative $3 million to $5 million year-over-year impact on our Document Management segment's first quarter revenue and operating income.

And finally, we started adding route capacity in the second quarter of fiscal 2013. As a result, last year's first quarter had the highest gross margin of the fiscal 2013 year. While these added routes will help us continue to grow revenues, route efficiency is certainly affected, especially compared to last year's first quarter.

This concludes our prepared remarks, and we will now be glad to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Joe Box with KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Just a question for you on the new guidance. How are you guys thinking about the organic revenue growth for the uniform rental and ancillary business? I'm just kind of curious how sticky that mid-single-digit growth rate is.

William C. Gale

That's pretty well built into our guidance, would be an expectation at that level.

J. Michael Hansen

Yes, as I mentioned, Joe, there was no difference between the total growth and the organic growth in the rental business in our fourth quarter, and we haven't factored in any rental acquisitions in that guidance.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Perfect. And a quick back-of-the-envelope math suggests that operating margins should be somewhere between, I think, 12.7% to 13.4% next year. Just from a sensitivity standpoint, what really needs to happen to get you guys to the higher end of that range? And I guess conversely, what needs to happen that -- or what could happen that would push you to the lower end of the range?

William C. Gale

Well, I would say there are several things that would push us to the higher end of the range. One would be a pickup in our adds over stops, resulting in more revenue per stop in our rental business due to maybe new hires or I guess existing customers adding on new hires or services. Another opportunity to get to the higher end would be higher paper prices than what we may be anticipating. A third thing could be that maybe we are being a little too conservative on the impact of the Affordable Care Act. Third thing could be -- or fourth thing could be lower energy prices. I think there's a lot of speculation of what may happen with energy prices. We presume that energy prices in '14 will be comparable to what we saw in '13, which, in the fourth quarter, were about 3.2% of revenue.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Perfect. And Bill, can you remind me what percentage medical expense was in 4Q?

William C. Gale

3.5%.

J. Michael Hansen

I think it was 3.3%.

William C. Gale

3.3%.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Was that pretty consistent throughout the year?

J. Michael Hansen

Well, in the third quarter, we talked about that it was at the -- we've seen medical expenses be in the 3% to 4% of revenue range. And our third quarter, we were at the top of that range or the higher end of that range. So the fourth quarter was kind of a, certainly, a reduction from the third quarter levels that we saw. For the year, we were kind of in that mid-3% range.

Operator

And we will now take our next question from Andrew Steinerman with JPMorgan.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Could you give a quick comment on CapEx expected for the coming year?

William C. Gale

Yes, we're expecting $240 million to $260 million, Andrew. And as Mike mentioned in his comments, this is up from what we've seen in the last couple of years, one, due to continuation of the rollout of our enterprise resource filing software and -- but secondly, we're at -- we're going to be -- we're anticipating the need to build some rental capacity in some selected markets. So that guidance assumes the opening of some new rental capacity.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Okay. And do you feel like this elevated level of CapEx will go down in the following year?

William C. Gale

Depends on what happens with the revenue growth. If revenue accelerates, then we may be looking at some more rental capacity.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Okay. And then any assumptions in fiscal year 2014 guidance of paper prices changing? Or are you just taking paper prices where they are currently?

William C. Gale

Kind of where we saw them in fiscal '13.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Okay. And then lastly, I didn't quite understand your ACA comment. Given that the penalties have been pushed off, what are the nature of the ACA's comments that you feel will be impacting 2014? And over what timeframe within 2014 do you think these expenses will come?

William C. Gale

Well, January 1 is when these expenses come. So just because of the recent change, as we understand it, in businesses not having to provide health insurance doesn't impact those companies that are continuing to provide health insurance, and that we are going to have to start paying these additional taxes and fees associated with the Affordable Care Act. So that, as far as we've been able to ascertain, is still in place. The other thing that we are anticipating is that due to the uncertainty surrounding exchanges, due to the fact that many employers might drop coverage, we don't know what's going to happen, we think the participation rate on the part of our employee base may increase either by employees themselves coming on because maybe they've been covered under their spouse coverage or not carrying insurance at all, or may be now they'll convert their family coverage over to Cintas' plan for maybe what their spouse's plan has been. So all of those factors go into effect and therefore, we think that the increases will start in the last 5 months of our fiscal year, which will begin January 1.

Operator

And we will now go to Nate Brochmann with William Blair & Company.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

I wanted to follow up on that real quick, Bill, in terms of the CapEx spend in terms of some new capacity. Are those in new markets where you're seeing expanded business? Are those in some old markets where, during the downturn, you took away capacity and now you're adding some back? Could you talk a little bit just in terms of how to think about that?

William C. Gale

They're actually in existing markets where we're currently at. And I would tell you, it's not due to the fact that we eliminated capacity necessarily, but rather that we have been growing in those markets at a rate that we are just bursting at the seams and needing to build capacity.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay. Good, and that's encouraging from that angle. And then kind of second, one of the things where you have done a great job is kind of penetrating some of your customers with some of the newer services, as well as just kind of converting some of the nonprogrammers in the face of the add-stop metric. Is that pretty much obviously somewhat embedded in your forecast going into next year in terms of kind of those penetrations in that way that you have grown over the last couple of years is kind of continuing? And in the face of all this uncertainty, and you're absolutely right with all the government issues, are some of those customers that have been very eager to add some of those new services, is that getting incrementally harder at this point? Or is it still in the face of a sluggish environment, still pretty readily accepted in terms of being able to -- in terms of the sales cycle being about the same length?

William C. Gale

Well, I -- you asked a lot there. I think generally, our guidance is assuming we'll continue to see the very good results in new business from new customers, primarily no-programmers or the majority, which are no-programmers, but as well as some competitive wins. So again, higher cost initially with that kind of growth; obviously, some additional pressure on capacity, et cetera. So that's what's assumed in our guidance. We are continuing to do some penetration of other products and services with customers -- with existing customers, and we'll continue to focus on that, things like chemical dispensing and some of the facility services product -- products. But when you really look through the impact of where the growth is coming from in rental, it's primarily driven by new customer wins, and that's what our assumption is continuing to go forward. It's what we've seen through the last couple of years, really.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay. And then just one last quick one in terms of those new wins. I know typically on a brand-new customer, you don't see a lot of competitive pressures. But how's the overall pricing environment? And then I'll turn it over.

William C. Gale

Very, very competitive. It is no different than what it's been for the last couple of years. And I would tell you, we are seeing some competition on no-programmers because some of our big competitors have actually started doing the same approach and often, a customer can be fairly sophisticated, and they may bring in another supplier. So it is, certainly, still a competitive situation.

Operator

And we will now go to Andrew Wittmann with Robert W. Baird.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

So just, I guess, building on Nate's question a little bit, can you just talk about retention rates of customers and how your service levels maybe compared this year versus last year?

William C. Gale

We have seen improvement. Our rental management made a concerted effort to really improve our lost [ph] business rates, and I think they've done a nice job and that. The trend is going in the right direction, focusing on service as well as some of the additional products that we have. So it has improved from the prior year or 2.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Great. And then just to dig into the direct sale, you guys kind of alluded to -- it sounded like finishing up some of the larger rollouts. Are there still other large rollouts that are ongoing? It appears that there's some -- obviously, the segment's done well and I just want to kind of understand what we should be expecting here over the next couple of quarters.

William C. Gale

Well, I would say that the big rollouts began, Andrew, in primarily the third quarter and continued through the fourth. I don't see a repeat of those big rollouts, but we won't really see -- we're working on new ones obviously, but our guidance doesn't assume any big rollouts in '14, but rather kind of a status quo of the revenues that we saw in '13.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Okay. So just on a run rate basis here then, is -- does 1Q feel a little bit like 4Q?

William C. Gale

I don't -- we really don't get into specific quarters. I'd just tell you, for the year, it's just a modest growth in the direct sale business.

J. Michael Hansen

Yes, with the real large rollouts in the second half of the year, our fiscal '14 Uniform Direct Sale is going to have a hard time growing much over those large amounts. Generally, we like to see that Uniform Direct Sales number, over time, grow in the mid-single digits, and it's continued to do that even though it is pretty lumpy. But I would say, again, I'd say that we've got a little bit better comps in the first half of the year. In the second half of the year, it's going to be tough to see much growth.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Yes. Okay. That makes sense. And just digging into the balance sheet a little bit here, can you talk about kind of priorities of capital, recognizing that you still do have some capacity on the buyback program? Typically, there's a -- we see a dividend hike somewhere here later in the year. And then just the M&A environment as well, I'd just like to get some of your thoughts on that.

William C. Gale

Well, it hasn't -- our desire really hasn't changed much. We want to use the cash, number one, to grow the business through additional capacity and other needs that we have. Secondly, we'd love to make good acquisitions. But as you can see from the results, we didn't make a whole lot of acquisitions during the year, but I'd say that's due to a -- not a lack of desire on our part, but rather a lack of good opportunities, so we continue to stay disciplined. You -- certainly, the past 30 years have shown that we continue to increase the dividend every year, and that decision will be made later this calendar year by the board. And then the share buybacks, we still have money left under the current authorization, and we've got a lot of cash sitting there. And obviously, we will follow the direction of the board to execute on that buyback as conditions warrant.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

In terms of the dividend, is it fair to think about the dividend growth rate in line with the earnings growth rate? I mean historically, that's been a fairly good proxy. Is there anything different that might change that today, Bill?

William C. Gale

I really can't comment on that, Andrew, because the board will discuss that at their future meetings. But certainly, history tends to be an indication of the future, so I would say it should increase.

Operator

And we will now go to John Healy with Northcoast Research.

John M. Healy - Northcoast Research

Bill, I wanted to ask a little bit more about your guidance. When I look at kind of what you put out last year in terms of the top line band, and pretty comparable in terms of the band that you put out this year, so when you think about the impact of the Affordable Care Act, are you guys more concerned with the uncertainty regarding what it could do to the demand side of your business? Or is it just that from a cost perspective, it's really just not known to you yet? So I'm trying to understand the guidance and what part has maybe more risk to it.

William C. Gale

Well, I'm concerned on both parts. But to me, the economy and what the impact of this thing could have on the attitude of businesses to hire employees is probably more of a long-term concern to me than anything else. And I think that there is a tremendous amount of concern on the part of many businesses of what this could do to them, even though there may have been some rule changes that businesses don't have to necessarily provide health insurance next year if they have over 50 employees. Those companies that do have over 50 employees realize that the cost of providing that insurance to every employee is going to go up, just like we're anticipating it's going to go up. And then, of course, the issue is what happens in '15 when these rules get reinstated as far as businesses. So John, there's so much uncertainty out there that I think businesses are -- don't like uncertainty. And as a result of that, I think they're being cautious. But it's not just the Affordable Care Act. As I mentioned in the comments, what's the Fed going to do? What interest -- what's going to happen with interest rates? What's going to happen in China? How's the European economy going to impact us? All of that stuff is weighing on people's decision of how much they should invest and that has impact, ultimately, on us and how fast and how much more we can grow. So I think we've done a pretty darn good job as a company over the last few years adapting to this environment. Sure, we'd like faster growth from our existing customers, but it hasn't been there. So we've been able to go out and get new business, and hopefully, we've got a lot of pent-up demand that ultimately will generate additional business for us as confidence builds.

John M. Healy - Northcoast Research

Got you. And I might have missed it, but were you guys able to quantify what the estimate is on the ACA act on the cost structure for '14?

William C. Gale

Yes, we said 10 to 30 basis points is our current estimate.

John M. Healy - Northcoast Research

Okay. I have a question on the document management side of the business. We came across you guys partnering up with a national retailer to offer the shredding side of the offering. I was wondering if that's something you're looking to do more of? And do you see an opportunity to maybe even do some other -- cross-sell other parts of the business with some of the office stores out there?

William C. Gale

I don't see a lot of that going on. We did partner with that one retailer. It hasn't really been any significant part of our business. And at this point, I don't really see too much expansion of that.

John M. Healy - Northcoast Research

Okay. Great. And just one housekeeping. Mike, I was wondering if you could give us, by quarter, maybe the comps for the paper market so we could better model that?

J. Michael Hansen

The actual prices in fiscal '13 first quarter were $170; second quarter, $150; third quarter, $140; fourth quarter, $140.

Operator

And we will now go to Shlomo Rosenbaum with Stifel, Nicolaus.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Bill, when did that add-stop metric turn [ph] down? It looked pretty optimistic at the end of the last quarter, and I'm not sure if you said it's head taking [ph] number 4, number 5 or number 6 over the last few years.

William C. Gale

Yes, we were a little surprised at that too, Shlomo. It happened shortly after we announced our earnings back in March, so we had seen a tick-up late in the third quarter, and then we got into kind of the spring and it kind of turned the other way on us. And it was interesting how one of other -- our other national competitors saw the same thing happened with their business that they announced a couple of weeks ago.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

And it just looks like -- I mean, not adjust [ph] , but it looks like it's attributable to kind of macro uncertainty in terms of the hiring side. Is that what you guys are thinking?

William C. Gale

That's what we're -- yes, it's certainly not an individual thing for our customers. It's more of a macro thing.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then where did you guys come out in the fourth quarter versus your internal plan, both like revenue and margin? Were you guys in line, above, below? How did it do versus what you thought you would do?

William C. Gale

Well, we have a plan at the beginning of the year, but then we have to adjust it for reality as we go through the year. And I would say based on what we saw happening through the year, we pretty much finished in line.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

And the fourth quarter as well, I mean, you say going into the fourth quarter?

William C. Gale

Again, if I take the plan as it may, I thought it might be a year ago, I would say we finished under that plan. But as we went through the year, we adjusted to reality and we finished in line with our expectations.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. I understand. And then you guys had a particularly strong cash from ops. So you had good free cash flow in the fourth quarter. I was wondering, do you anticipate -- one of the items were working capital items, it seems. Do you anticipate a reversal of that? Or is there something sustainable in the way that you guys can grow that? I'm just wondering if the cash from ops might -- is there a potential for that to go down at the same time CapEx goes up, so you find a particularly narrow free cash flow year as opposed to what we saw this year?

William C. Gale

We got a little bit of benefit in the fourth quarter from inventory reduction due to the fact we had built up some inventory for some of these direct sale rollouts, and we then dissipated that inventory as we roll those out. So I don't think you'll see a repeat of that. Everything else should be in line, though. So there'll be -- probably a minor increase, a relatively minor increase in inventory levels as we go through '14, which, obviously, would have the offset effect that we saw in the fourth quarter.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then First Aid has been growing very nicely for a while. I was wondering if you can just give us a little bit more detail as to -- we've seen the pickup in that growth. It seems the year-over-year growth was particularly strong. What's the, I guess, a near term 1 or 2 years outlook for this business? And secondly, how have you guys done such a good job over there?

William C. Gale

Well, first, I want to credit our management team in the first aid group. I think they've really done a nice job and the sales team also. But what it has been, Shlomo, is the fact that we've now got more of a national footprint, and we're able to provide these First Aid, Safety and Fire Protection Services to national customers. So we're focusing on some of that, and that's increased the growth. The other thing that they -- that the business unit has done is expanded their product offerings, especially in things like training. And that has been very, very well received in the marketplace. So I think it's a combination of the national footprint's there. Therefore, we can provide coverage to a lot of national customers, and we've got a pretty broad offering of products and services within that group that are very appealing to helping companies maintain compliance with laws and regulations.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

So how should I think about the growth of that? Is this like a double-digit grower going forward now?

William C. Gale

Yes, I think so. I think it's a double-digit, low teens type growth rate in an economy like we've seen.

Operator

And we will now go to Dan Dolev with Jefferies.

Dan Dolev - Jefferies & Company, Inc., Research Division

Just 2 quick questions. The first one, again, on the organic growth in the rental business. You did just mention now that you got a little bit caught by surprise on a sort of unexpected weakness. How has that looked in the last few weeks or month or so? Because you were much more positive. I think in February you said there was quite a little bit of life in that business. And how does that look -- how is it looking in the last few weeks?

William C. Gale

It's comparable to what we saw late in the fourth quarter, Dan, and all that was factored into the guidance that we provided. We still are very bullish on the new business and therefore, we still anticipate that the rental segment will grow organically in fiscal '14.

Dan Dolev - Jefferies & Company, Inc., Research Division

Okay. And then just a quick question on the organic growth in the Document Management business. The comps seem to be much easier this quarter, and yet the acceleration is lower than it was in the last quarter. How much of that is paper prices versus demand?

J. Michael Hansen

I'll give you -- sometimes, we'll talk about the growth without recycling, and our organic growth in the fourth quarter without recycling was 8.9%. That is a nice increase over the 7.1% in the third quarter, and we've seen steady improvement in that organic growth rate without the recycling for the last 5 quarters. So after the shocks of the up and downs of paper, now that paper has kind of steadied out over the last 3 quarters, we've seen some real nice organic growth improvement in the business.

Operator

And we will now go to Greg Halter with Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

Wondered if you have your -- the rate on your debt that you're paying now? I think last time, it was around 4.5%. Is that still the case?

J. Michael Hansen

It is. Yes, there has been no change, and it's all fixed rate debt.

Gregory W. Halter - LJR Great Lakes Review

All right. And your tax rate expectations for fiscal '14, probably around 37%?

J. Michael Hansen

Yes, we've modeled 37.3%, which is kind of where we've opened the last few years as well.

Gregory W. Halter - LJR Great Lakes Review

All right. And I know the SAP is an ongoing program, but have you seen any benefits that you can quantify at this point?

William C. Gale

We've seen some benefits in a couple of the early conversions, obviously, in the finance group and the Global Supply Chain group. We've seen some of the benefits we were anticipating. It's still too soon to see them as we're rolling it out into our first venture in any of our business groups. We've had a few hiccups, but nothing serious. But I would say right now, we are continuing to expect to roll it out company-wide, but we want to make sure that we're successful in the initial business rollout first.

Gregory W. Halter - LJR Great Lakes Review

All right. And what's the performance of Europe and the outlook there for your business overseas?

William C. Gale

Pretty much run for profit, improve margins, generate cash. Right now, it's doing reasonably well. It's not growing a lot, but that's by design. And we are continuing to take some of the marketing and operating ideas that we have done here in the States, have been successful and applying them over in Europe with some degree of success. So I would say that it's kind of let's prove out that what we've invested in made sense and it can generate the kind of profits and cash flow that we originally anticipated.

Gregory W. Halter - LJR Great Lakes Review

All right. And on your CapEx, the $240 million to $260 million, I mean, obviously, most would go into the rental. But if you were to look at the other businesses on a percentage of what you expect to spend there, how would that play out?

William C. Gale

Well Rental will be the biggest part. It's 70% of the revenue, and it's a major capital user with the equipment facilities and trucks. The next biggest area, of course, is Document Management, and they would be the next highest percentage of capital. We will really break down our CapEx expectations by business unit. We'll report what it actually was after the fact, but that will give you some idea where it's going to.

Gregory W. Halter - LJR Great Lakes Review

All right. And one last one, do you have the number of shares either bought in the quarter or for the year? When I look at your cash flow statement, it shows $216 million and I think, Bill, you cited $208 million for fiscal '13. There may be some timing there.

J. Michael Hansen

We have purchased $200 -- almost $208 million during the fiscal year, which was a 5-point -- just under 5.1 million shares. There's a little bit of a difference on the balance sheet between the two -- from the $208 million because we do buy back some shares related to our equity compensation program and stock option exercises. So there's a little bit of a difference there.

Operator

And we will now go to Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch, Research Division

Sorry if I missed any of this, but could you talk about the rate at which you're continuing [ph] route capacity?

J. Michael Hansen

Sara, did you say the rate at which we're adding route capacity?

Sara Gubins - BofA Merrill Lynch, Research Division

Yes.

J. Michael Hansen

Well, as you -- as we mentioned, we started to add route capacity in our second quarter and continued to do that into the third and fourth quarters. As we move into '14, we will -- because of the new business performance, we'll likely continue to add routes, probably a little bit less and a little bit more strategic than in fiscal '13. So probably not quite as many coming in the next year as we did in fiscal '13.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. Great. And then separately, as you think about M&A opportunities over time, how do you think about what the split between what might be additive to existing businesses versus acquisitions that could be more of a branch-out into ancillary or really new areas?

William C. Gale

We're primarily, at this point, focused more on acquisitions that would be additive towards our existing segments. I don't see us, at this point, really aggressively going after a new leg of the stool in the next year or 2.

Sara Gubins - BofA Merrill Lynch, Research Division

So more geographic than anything else or...

William C. Gale

No, a lot -- geographic is part of it, but it's probably more tuck-in, where we can buy a facility or a business in an area that we're already in and combine that with our existing operations.

J. Michael Hansen

Really has to do with where -- if we can find a tuck-in opportunity at a good value, we certainly love those kind of acquisition opportunities, and that can happen wherever we have current operations.

Operator

And it appears there are no further questions at this time. Mr. Gale, I'd like to turn the conference back to you for any additional or closing remarks.

William C. Gale

I just want to thank everyone for joining us. I know it's a very busy time with earnings season, and we're off-cycle, but this is the one that always fits in with everybody, all the calendar year companies. So thank you for the attendance. I hope everyone has a good rest of the summer, and we'll speak with you in the latter part of September as we report first quarter results.

Operator

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.

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