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Cintas Corporation (NASDAQ:CTAS)

Q4 2014 Earnings Conference Call

July 15, 2014 05:00 PM ET

Executives

Bill Gale - SVP, Finance and CFO

Mike Hansen - VP and Treasurer

Analysts

Sara Gubins - Bank of America Merrill Lynch

Hamzah Mazari - Credit Suisse

Joe Box - KeyBanc Capital Markets

George Tong - Piper Jaffray

Scott Schneeberger - Oppenheimer

Andrew Steinerman - JPMorgan

Nate Brochmann - William Blair

Justin Hauke - Robert W. Baird

Dan Dolev - Jefferies

Shlomo Rosenbaum - Stifel Nicolaus

Sean Kim - RBC Capital Markets

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.

Bill Gale

Thank you. Thank you for joining us this evening. With me is Mike Hansen, Cintas' Vice President and Treasurer. We will discuss our fiscal 2014 fourth quarter results, which include the effects of the April 30th closing of the partnership transaction with Shred-it International. In addition, we will provide our initial guidance for fiscal 2015. After our commentary, 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 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 $1.157 billion. Keep in mind that this total does not include any shredding revenue for the month of May due to the closing of the shredding transaction on April 30th. Excluding document shredding revenue, our fourth quarter revenue grew 4.7% over last year’s fourth quarter. Last year’s fourth quarter had one more work day than this year. When adjusting for the impact of the difference in workdays, revenue, excluding document shredding grew 6.3% and it grew organically by 6.1%. As Scott Farmer stated in our press release, after a difficult winter, we were pleased to see our growth rate improve in both our rental and First Aid, Safety and Fire segments.

Excluding document shredding related amounts, our fourth quarter operating income was $165.4 million, which was 15% of revenue. This represents an 80 basis point improvement over last year’s fourth quarter operating margin for the same businesses. Our rental operating margin improved 140 basis points over last year’s fourth quarter operating margin despite having one less work day. We continue to see improvements in both plant and route efficiency as we add more volume.

Fourth quarter net income was $127.2 million and earnings per diluted share were $1.03. However, excluding the effects of the shredding transaction, our net income was $94.3 million and earnings per diluted share were $0.76. These fourth quarter results bring to a close a very successful fiscal year for Cintas.

Our Rental segment and First Aid, Safety and Fire segment in particular had record years. Our Rental segment achieved record annual revenue of $3.2 billion and it topped $500 million in operating income for the first time, finishing at $507 million. The rental operating income of $507 million was 15.7% of revenue, which was an 80 basis point improvement over last year’s operating margin of 14.9%. Our First Aid, Safety and Fire segment revenue for the year was a record annual level of $514 million topping $500 million for the first time. Operating income was also a record $49 million, thanks to our employees who we call partners for a great year.

I will now turn the call over to Mike for more details of the fourth quarter and the effects of the shredding transaction and then I will provide a few comments on our fiscal 2015 guidance.

Mike Hansen

Thanks Bill and good evening. I will start with a reminder on workdays. There were 65 workdays in this year’s fourth quarter versus 66 workdays in last year’s fourth quarter. Looking ahead to fiscal ‘15, we will have 65 workdays in each quarter for a total of 260 workdays for the fiscal year. These workday figures for fiscal ‘15 are the exact same as in fiscal ’14. So we will have no workday differences or adjustments for the next four quarters.

We have four 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 our 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 was $825 million, which is up 5.1% compared to last year’s fourth quarter. However taking into account the one less workday this year, revenue grew 6.7% over last year. Organic growth was also 6.7%.

The Canadian dollar, relative to the U.S. dollar remained weaker than last year during our fourth quarter and it negatively impacted our rental growth rate by 0.6 percentage points. Adjusting for this impact, rental organic growth would have been 7.3%.

As it has done for the last several years, new business continues to be the main driver of revenue growth. Net [add/stops] [ph] were negative for the quarter which is typical for our fourth quarter due to seasonal changes, but were slightly better than last year’s fourth quarter.

Within the rental segment revenue and based on fourth quarter performance, Uniform Rental accounted for 52% of the total; 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 non-person specific garments such as aprons and butcher coats was 8%.

Our Rental segment gross margin was 43.6% for the fourth quarter, an increase from 42.1% in last year’s fourth quarter, which had one additional workday than this year’s fourth quarter. Our incremental gross margin has remained strong as we have been able to increase revenue without adding additional processing capacity. Our route efficiency continues to improve as well since adding route capacity in mid fiscal ‘13.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms and other related products 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 for the fourth quarter was $118.5 million, which was 5% lower than last year’s fourth quarter. Last year’s fourth quarter included large national account roll outs which did not repeat this year. The fourth quarter revenue of $118.5 million was higher than this year’s third quarter revenue of $107.7 million. Uniform Direct Sales gross margin was 30% for the quarter, down from last year’s fourth quarter gross margin of 30.8%, mainly due to the lower volumes this year.

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 for the fourth quarter was $137.2 million. When adjusting for the workday differential, this revenue level represents an increase of 11.1% over last year’s fourth quarter revenue. Organic growth was 10.2%.

We have seen good adoption by our customers of our new First Aid and Safety Products and Services and our First Aid national account sales have been strong. This segment’s gross margin was 44.6% in the fourth quarter, compared to 43.5% in last year’s fourth quarter. Energy-related costs were consistent with last year. The gross margin improvement was due in part to improved mix, for example, higher training sales on the First Aid side and good leveraging of our infrastructure.

Let’s move to a discussion of Document Management Services. This segment has included document destruction or shredding and document storage and imaging services. We provided the document storage and imaging services revenue and operating income for the fourth quarter in today’s press release.

We were pleased with the business’ performance. Fourth quarter revenue was $23.1 million and growth over the last year exceeded 20%. Organic growth was 15.4%. Our European business has had good momentum during the fiscal year and it continued during our fourth quarter.

Our Document Shredding revenue for the fourth quarter was $53.7 million. This amount reflects only March and April revenue. Beginning with the months of May and into the future, we will no longer include Shredding revenue in our reported revenue since we are accounting for the partnership investment under the equity method of accounting.

The closing of the Shred-it transaction resulted in the recognition of a gain due to the fair value of our share of the Shred-it partnership being greater than the book value of our investment in the business. Keep in mind that the book value of our investment was recorded throughout our balance sheet, including accounts receivable, property and equipment, goodwill, service contracts, and other assets offset by certain liabilities contributed to the partnership.

The net effect of this transaction in the fourth quarter was $32.9 million in net income and $0.27 to EPS. The investment in Shred-it partnership is recorded within the balance sheet line item entitled investments. Going forward, we will record our 42% share of the partnership income within our SG&A line on the income statement.

We continue to be excited about the partnership with Shred-it. As we discussed on our call in March, we believe the combination of our Document Shredding business with Shred-it will create opportunities for synergies that will benefit our customers, our shredding employees and our shareholders. Having said that, in order to realize the synergies, the partnership will incur costs to transition IT platforms, to convert the operations and the trucks to the Shred-it name, to consolidate certain administrative functions et cetera. We expect the bulk of these transition expenses to be incurred in our fiscal ’15 year. As a result, we do not expect the partnership to contribute any income to Cintas in fiscal 2015. Instead, we expect to begin realizing synergies and income in our fiscal year 2016.

Switching to selling and administrative expenses, SG&A was 28.2% as a percentage of revenue in the fourth quarter, which was up from last year’s fourth quarter figure of 27.8%, due to a number of different items including workers comp claims experience, legal and professional expenses, and slight higher bad debt expense. The fourth quarter SG&A of 28.2% was lower than the third quarter percentage of 29.1%. Payroll taxes reset our third quarter and we generally see a reduction from the third to the fourth quarter as a percent of revenue. Medical expenses were also slightly lower than the third quarter.

Our effective tax rate was 40.5% for the quarter compared to 37.4% last year. This year’s fourth quarter rate included a number of discrete items related to the Shred-it transaction. Excluding the effects of the transaction, the fourth quarter effective rate was roughly 37.1%. We expect the fiscal ’15 effective rate to be 37.3%.

Turning now to the balance sheet, our cash and marketable securities were about $513 million at May 31, an increase of $159 million from the $354 million at February 28, mainly due to strong operating cash flow. Although we received $180 million of cash on April 30, at the closing of the Shred-it transaction, we used $206 million during the quarter for the share buyback program.

As I mentioned a few minutes ago, our investment in the shredding business was reflected in the balance sheet in a number of different items. When comparing our May 31st balance sheet to the February 28th balance sheet, you will notice decreases to accounts receivable, property and equipment, goodwill, service contracts and other assets due to the contribution of the shredding assets to the partnership.

These balances have been replaced within an investment balance of roughly $340 million that is combined with other investments in the balance sheet line items entitled investments. Long-term debt remained at $1.3 billion, representing roughly 1.6 times fiscal 2014 EBITDA. Net cash provided by operating activities for the fourth quarter was about $222 million, a $38 million improvement over last year’s fourth quarter.

And finally CapEx for the fourth quarter was about $32 million. Our CapEx by operating segment was as follows: $23 million in rental, less than $1 million in Uniform Direct Sales, $4 million in First Aid, Safety and Fire protection, and $4 million in document management. We expect CapEx for fiscal 2015 to be in the range of $275 million to $325 million. This range is higher than the last few years because we expect to embark on the SAP implementation for our rental business and expect to add some rental processing capacity during the year.

I will now turn the call back to Bill for comments on our fiscal 2015 guidance.

Bill Gale

Thanks Mike. Our fiscal 2015 guidance is for revenue to be in the range of $4.425 billion to $4.525 billion and earnings per diluted share to be in the range $3.06 to $3.15. Let me provide some color to this guidance. We have explained that we will not include document shredding revenue in our fiscal 2015 reported revenue. However due to accounting requirements we still need to include the document shredding revenue in our fiscal 2014 reported revenue. This means reported growth rate will look artificially low. In our press release though we provided the table that shows fiscal 2014 base revenue without document shredding of $4.276 billion. This fiscal 2014 base revenue provides a better comparison to fiscal 2015 guidance.

As Scott Farmer indicated in our press release today, while the U.S. employment picture has improved this calendar year, it is a relatively narrow improvement. One third quarter of the new jobs this year are in areas not typically strong in uniform rental, foodservice, professional services, temporary workers in education. We set our revenue guidance with this employment narrowness and the largely inconsistent U.S. economic performance in mind.

From an EPS perspective as we reported today, our EPS for fiscal 2014 was $3.05. This figure included the net impact of the Shred-it transaction of $0.26. It also included a $0.04 benefit net of tax from the operating income of the document shredding business in fiscal 2014. As Mike just mentioned though, we do not expect any benefit in fiscal 2015 from the shredding partnership. When excluding these two amounts, our fiscal 2014 EPS would have been $2.75 and we believe this provides a better comparison to our fiscal 2015 expected results.

Our fiscal 2015 EPS guidance does include and $0.11 benefit from the sale of stock of an equity method investment that occurred a few weeks ago on June 30th. It also includes the $0.09 benefit from the share buybacks that occurred between April and June of this year. The EPS guidance does not assume any additional share buybacks for the remainder of fiscal year ’15.

As I just indicated a few minutes ago, we remain unconvinced that the U.S. economy will become consistent. In addition, as a result of the contribution of our document shredding business to the Shred-it partnership, we have less revenue that contributes to covering our SG&A structure. We will continue to control cost as we have always done but we also need to grow back into some of our SG&A infrastructure. We set our EPS guidance with those items in mind.

That concludes our prepared remarks and we will now be glad to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - Bank of America Merrill Lynch

Could you tell us some more about the rental capacity that you are adding for the year? I think you’d talked before about adding some more processing capacity?

Bill Gale

Yes, Sara, and we did speak about this in a few other calls, and it was initially our expectation that we would have added some of this capacity in fiscal ’14, but we did not. What we are adding basically is processing capacity in the form of new facilities, especially because of rapid growth that we’ve had in certain markets and some of those plants will be relatively expensive. For example, we will be adding a new plant in the New York Metro area and as anybody who lives in New York knows, land up there and construction cost et cetera are relatively expensive. So we have several plants that we will be adding. Some of them will come online maybe toward the latter part of this year. Others will not come online until next year, but they will -- a lot of that capital will be spent in fiscal ’15.

Sara Gubins - Bank of America Merrill Lynch

And then if you could give an update on add/stops and pricing trends?

Mike Hansen

As I had mentioned a little earlier, add/stops were negative for the quarter, which is not unusual given changes being made due to the change in weather, a little bit better than last year, but I would say not -- we’re not seeing much impact from the employment which seems to be a good headline but as Bill mentioned, it’s fairly narrow. So net add/stops, little bit better than last year, negative for the quarter. Pricing seems to be a little bit better. I would say it’s driven within our new business but generally we saw a little bit better pricing environment this quarter than maybe a year ago.

Sara Gubins - Bank of America Merrill Lynch

And then just last question, you mentioned the SAP implementation for the rental business. Could you tell us some more about that and whether or not there are any concerns that that might be disruptive during the year? Thank you.

Bill Gale

Well, I don’t think it will be disruptive. Let me answer that, because we will do it in phases and the first phase is what they call a blueprint or it’s a design phase and it really doesn’t have any impact on our operations at all but we have to dedicate a lot of resources and capital toward the implementation of this project and the design to determine what we need to do with the software and how they implement it. So we will get through that and then assuming that that is successful, which we expect it to be, then we will start into some more of the detailed programming requirements, data development et cetera that will be needed to run the system. This will be a multi-year implementation. We would not start actually impacting our locations or our customers for some time and hopefully we will be well prepared to handle that. I can assure you we are very careful on these type of projects.

But I think it’s important for all of our investors and analysts to understand that any Company that does embark upon these type of projects, it is a large expenditure, it takes a lot of time and effort to put it in and yet when it is successful and we certainly think at this point it will be, it will provide benefits into the future. And they don’t come right away but they certainly provide opportunities to more efficiently run our business, handle our customers’ needs et cetera.

Mike Hansen

And the good news is we have just recently, as you have heard us say on prior calls, we have recently finished the roll-out of our First Aid, Safety and Fire business onto the SAP platform.

Operator

And we will take our next question from Hamzah Mazari with Credit Suisse.

Hamzah Mazari - Credit Suisse

Could you give us an update on customer penetration specifically? How many of your customers subscribe to more than one service or several services and has that number changed over the last few quarters? How should we think about where you are in that process?

Bill Gale

Hamzah, I would say we have made some minimal progress in that arena, certainly not to the extent we expect to have. One of the problems that we have with doing that is the multiple types of computer systems we are on. So that’s one of the reasons why we are willing to invest in the SAP system across the entire portfolio of businesses. So, yes we certainly do continue to see some additional penetration but nothing to the extent that we ultimately expect it to be.

Hamzah Mazari - Credit Suisse

And then maybe just your commentary around growing into your SG&A infrastructure. Do you need cyclical growth for that or how do we think about your comments there and SG&A trends going forward?

Bill Gale

Well, I think what we need is revenue growth that we certainly expect to have in order to replace roughly $300 million of revenue that we no longer have from the shredding business, now that it’s part of the joint venture. So you can think about it in this way. You’ve got certain fixed costs that really don’t go away when you basically don’t have that revenue to cover that anymore. For example, we still have an audit fee that costs just as much now as it did when we had document shredding. We still have certain G&A functions that you just can’t cut out parts of because you no longer have the shredding business. So this goes through the entire organization and while we certainly have reduced staff in certain areas where there is the ability to have a variable level of expenditures associated with revenue, there’s a lot of areas where that just won’t take place.

So, our expectation is that during the course of the next year, we will essentially grow into that SG&A level and then once we reach fiscal ‘16, not only will we have covered that, the reduction in the shredding revenue, but we expect to start seeing some contribution on the bottom-line from the Shred-it joint venture.

Operator

And we will take our next question from Joe Box with KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets

I think it’s been a while since you guys have actually added some plant capacity. So can you maybe just kind of walk us through the process of how that works? Do you typically operate two separate plants or do you wait for a lease to expire and then you consolidate the two?

Bill Gale

Well, what we’re talking about, Joe is primarily the building of an additional plant in markets where we already have plants. So we are not replacing a plant. We’re actually adding a plant. The last time I think we opened a new rental plant was back in fiscal 2008 and then of course we have the great recession and therefore we actually closed a few of our facilities, especially those that had been acquired through an acquisition. So the prior, and by the way we generally own our plants Joe. It’s not a leased facility. We lease our branches or some of our First Aid and Safety operations, but our rental plant because of the extent of the infrastructure within that plant for water treatment, sortations, et cetera, we generally own those facilities. But the idea is, is that we grow so much in a market that we are forced to build another plant to handle the additional volume, and that’s the case here, that we basically have exhausted our ability to squeeze much more out of the existing plants we have and therefore we have to add another one.

Joe Box - KeyBanc Capital Markets

Understood, I get that you guys are already in the market and you’ve run out of capacity there and you have to build a new one. I guess ultimately what I’m trying to understand is how we should think about the margin headwinds from adding an additional plant?

Bill Gale

It depends on, it’s so variable depending upon the cost of what that plant will take and then how many other plants are in that market and as you move volume around you know, generally you’ll start the new plant with a said amount of volume, certainly not your capacity but you’ll also have released some of the capacity constraints in some of the other plants. So Dan, I can’t really answer your question because it’s going to be different if it’s in a New York area versus a Cincinnati, Ohio area.

Joe Box - KeyBanc Capital Markets

Okay, that’s fine and I can certainly circle up to you guys offline on some other questions but one other quick follow up. I know you guys don’t provide guidance by segment, but can you maybe give us a feel for how we should be thinking about rental margins in FY’15? Clearly a strong finish to the year. And are you assuming a lot more leverage to the plant in the first half then maybe when some of these plants start to come online we could be thinking about a little bit less leverage? Any cadence would be helpful.

Bill Gale

I would say our expectations are that margins, barring any significant cost change which we don’t anticipate should be as good as they were this year but I think you make a good point. They’ll probably be a bit stronger in the first half of the year than the second half of the year depending on how this additional capacity comes online. But when you look at it in total for the year, our expectation is we’ll be good as if not slightly better than this year.

Operator

And we’ll hear next with George Tong with Piper Jaffray.

George Tong - Piper Jaffray

Going back to add/stops, can you give some color on how add/stops are trending so far in the first fiscal quarter and whether directionally we’re seeing continued improvement?

Bill Gale

You know George, we’re so early that I would say we haven’t seen much of a change from the fourth quarter.

George Tong - Piper Jaffray

And touching on your comment earlier of the need to grow back into SG&A infrastructure, have you made all the necessary variable cost reductions you need or do you see opportunity for additional cost cuts in fiscal ’15?

Bill Gale

I’d say that there was -- some of it has lapsed into ’15 because you just continue -- the transaction took place on April 30th. So there’ll be a little bit of cost reduction as we move into early ’15 but it won’t be substantial.

George Tong - Piper Jaffray

And then lastly, could you share some commentary on how do you expect Shred-it to contribute to Cintas beyond fiscal 2015, reflecting any synergies to growth in margins you’re expecting from the JV?

Bill Gale

Well, we certainly expect synergies. We’re not prepared at this time to quantify them. I think there’s a lot of work being done on the part of the two organizations that have come together. They certainly are optimistic of being able to achieve more than what the two companies were doing separately, when you add them together. So I think as we get closer to ’16, FY’16, we’ll have clarity and we’ll certainly be able to provide that when we give guidance for FY’16 a year from now.

Operator

We’ll hear next from Scott Schneeberger with Oppenheimer.

Scott Schneeberger - Oppenheimer

I’m curious, with SAP, you mentioned its multiyear and obviously a big step up in CapEx. I know you’re probably not in a position to give guidance beyond fiscal ’15. But directionally do you think that might come back in ’16 or you think this is going to be a multiyear elevation?

Bill Gale

You talking about the CapEx expenditures?

Scott Schneeberger - Oppenheimer

Yes.

Bill Gale

I would say the first two years are going to be relatively capital intensive and then they will -- it should fall dramatically after that.

Scott Schneeberger - Oppenheimer

And any OpEx impact from the implementation?

Bill Gale

I hope not too much. If our experience is similar to what we saw with First Aid, we see a little tick up during the conversion of the operations and shortly thereafter in some of the SG&A or in the G&A expenditures and then over time the benefits start being realized. So it’s, again it’s too early to really tell. We don’t know to the extent of how it’s really going to impact the day-to-day operation itself and until we get through the design phase and start some of the pilot implementations, it’s hard for us to be able to predict that. All we know is that right now, at least going into this, we feel very positive that this is a good use of capital in that the long term return will be very beneficial to the Company.

Scott Schneeberger - Oppenheimer

And kind of on a similar vein, now with this partnership with Shred-it closed, what are the M&A thoughts with regard to the core Cintas business? And just kind of a derivative of that, do you see any further involvement? I’m assuming this is no but any further involvement with infusions to the JV -- is that something that’s been discussed?

Bill Gale

We would not expect any infusions into the JV. So we believe that they will be able to generate sufficient cash on their own in order to continue to grow and do what they need to do. With regards to Cintas core business, yes, we are very interested in making acquisitions as long as they achieve the financial and strategic objectives that we’ve set out. And that includes acquisitions within the Uniform business, the Facility Services business, First Aid, Fire and potentially some new businesses. So we’ve got an active corporate development group. We’ve got a lot of cash and a great amount of debt capacity and we are certainly going to look for opportunities to grow the Company.

Operator

And we’ll hear next from Andrew Steinerman with JPMorgan.

Andrew Steinerman - JPMorgan

I wanted to ask about rental gross margin and the effect of merchandised amortization in end of quarter, and are we at a point where we have to infuse more garments into service that might weigh on gross margins going forward?

Bill Gale

During the quarter Andrew we did not see any change in the trend. So I would say we’ve not hit a point where we need to infuse garments. We still have stock rooms that have a lot of capacity, that have a lot of uniforms in them. And we’re using them very efficiently. So I would say I wouldn’t expect to see a significant change in the injection rate.

Andrew Steinerman - JPMorgan

Good. And would you expect rental gross margins to be up for fiscal 2015?

Bill Gale

Well, as I mentioned earlier to a question Andrew, we would expect there to be a slight improvement in that. It will most likely happen early in the year and then is dependent on the time of when the additional capacity comes online. It may come down a bit. But overall for the year they should be up versus fiscal ’14.

Andrew Steinerman - JPMorgan

Right. Bill, I was actually little confused by the comment before. So when you said margins should be up for fiscal 2015, you meant total operating margins or did you mean just rental?

Bill Gale

I’m talking specifically about rental because that was what the question was posed.

Andrew Steinerman - JPMorgan

Sure. So, could you just comment, in the guidance what’s implied in total operating margin for fiscal ’15?

Bill Gale

We don’t break it down like that Andrew but if you look at the growth rates in the top line, they’re a little less that the growth rates in EPS and therefore I would tell you that there has got to be a little bit of margin expansion.

Operator

We’ll take our next question from Nate Brochmann with William Blair & Company.

Nate Brochmann - William Blair

Just wanted to talk a little bit, you guys have done a really outstanding job of going after and getting some new business from non-programmers as well as kind of penetration with some additional services throughout the organization. Could you talk about like the ability to kind of keep that churning? Obviously I know the market is pretty big out there in terms of the potential, but in terms of whether than has been over the last couple of years, some like low hanging fruit and opportunities or whether it’s something that you’ve done differently, I know that we’ve injected a few more sales people here give or take a year ago to get after that. Could you just talk about in terms of the pipeline and the opportunity in terms of how to keep that going?

Bill Gale

I think it’s very similar. Our expectation, it will continue that way for the next several years. We still have a very large sales force. Our mix of new business continues to be more heavily weighted toward the no-programmer side versus the programmer side. Therefore, we continue to see the market self-expanding. We are looking always for new products to help attract other types of no-programmers and we’ve had several of those things roll out in the last year or two. So right now I would say I feel very good about our ability to continue to sell a lot of new business with the bulk of it coming from no-programmers.

Nate Brochmann - William Blair

And Bill do you think, and I know this might be hard to answer, so I kind of get it. But do you think that anything has changed fundamentally in terms of the percentage of non-programmers that are converting over to a uniform program or is it that’s there is just more overall businesses out there to go after? So maybe not necessarily the percentage of programmers versus not has changed or do think that the -- that the share of the pie is increasing in terms of the conversion?

Bill Gale

I think the share of the pie is increasing because there are more products that we have that enable us to go after certain types of businesses that maybe in the past we never would have gone after.

Nate Brochmann - William Blair

Okay. So, I think that’s an interesting point in terms of why it might be a little bit better that it was in the past in terms of the conversion rate?

Bill Gale

The conversion rate, though I just want to make sure, the conversion rate has not changed that dramatically since I’ve been with the Company other than during the recession. So I just think that we’ve gotten a lot bigger. We’re $3.2 billion now in the rental division and yet I still think we feel like there is just tremendous opportunities out there, because in the past maybe there was a limited number of businesses that we would have gone after, but now given our wide spectrum of different types of garments, different type of facility services products and services, there is more types of businesses we can go for.

Nate Brochmann - William Blair

Okay, that makes sense. And then specifically within the Fire and Safety opportunity, are you guys pretty much everywhere you want to be at this point. And is further growth at this point just continue to build off of the locations you have and scaling that in terms of continue to increase profitability there or are there more locations and more sales people to go in terms of relative investment?

Bill Gale

There are -- certainly within the Fire business, we are not nearly to the point of being everywhere we want to be. So there are many, many, cities that we believe we still need a presence in and we would like to make acquisitions and to get into city. Short of that we certainly feel that if it’s important enough we will start Greenfield in those cities. Therefore, I would say the geographic expansion is primarily within the fire business. As far as the uniform rental and the first aid businesses, we’re by and large in most of the largest metropolitan areas, but that doesn’t mean there’s not acquisition opportunity. So tuck-ins are opportunities and relatively profitable and therefore we will continue to go after those too.

Operator

We’ll take our next question from Justin Hauke with Robert W. Baird.

Justin Hauke - Robert W. Baird

Yes. So what’s the rationale for running the joint venture income through SG&A as opposed to just adding a separate equity income contribution? I’m just, I’m trying to understand, are we going to be able to have any visibility into performance of the joint venture from here?

Bill Gale

Justin for the first year as we’ve said, we don’t expect any contribution from it anyway. So it’s going to be so small that it’s really not worth reporting out into a separate line. Starting in fiscal ’16, if we feel like the contribution is something that is significant, we’ll pull it out and put it into a separate line.

Justin Hauke - Robert W. Baird

Okay. But for right now we should just basically think it as like a negative offset to your SG&A?

Bill Gale

Well, you should think of it for fiscal ‘15 as kind of a zero.

Justin Hauke - Robert W. Baird

Right. But going forward in ‘16 in terms of thinking about it?

Bill Gale

Yes.

Justin Hauke - Robert W. Baird

Okay. Just one clarification. On the guidance, I know you said that ‘15 includes the $0.09 contribution from share repurchases in the fourth quarter and so far in the first. And then there was $0.11 benefit as well, that you mentioned. What was that?

Bill Gale

That was a gain on the sale of an equity investment that we had, that was closed on June 30th.

Justin Hauke - Robert W. Baird

So if you net those two out – I’m just trying to reconcile that with your comments that you’re expecting margins to be up next year. Because if you kind of take both of those out, it looks like the EPS and the revenue growth are about the same?

Bill Gale

It depends what base you start at Justin, but, again Mike tried to -- we tried to share with you that you got to back out of fiscal ‘14 some things like the shredding contribution et cetera and all the transaction costs. But then you take that and you take out the -- go to the top end of the guidance knock out the two items, the share buyback impact and the investment gain, I think you’ll find that there will be a larger increase in EPS than there would be in the top end of the revenue guidance.

Justin Hauke - Robert W. Baird

I guess my last one is just on healthcare, I know that was a concern for ’14 and it sounded like your healthcare expense on a dollar basis is actually lower year-over-year in the fourth quarter. Is there any additional healthcare impact that we should be assuming in ‘15 or is that the -- the impact’s mostly gone through at this point and it’s more or less a flat assumption going forward?

Bill Gale

First off, our medical expenses were about the same year-over-year. So I don’t know where you might have gotten less then. Regarding our expectations, who knows? I really – I’m having difficulty predicting it, because the rules keep changing. There is just too many uncertainties. So right now, I think we’re surprised that it did not go up more dramatically in ‘14 versus the prior year. Next year I would say if I were a betting man, I would think it would go a up a little bit, but I hope it won’t be more than a little bit, because again until we get clarification from the healthcare providers and from the government, it’s hard to predict.

Operator

And we will take our next question from Dan Dolev with Jefferies.

Dan Dolev - Jefferies

When I look at your guidance, your top-line guidance this year, excluding shredding, so 3.5% to 5.8%, I would say it’s like 1 point lighter than similar guidance that was given in July of last year through this year. Where is the slower growth coming from? Is it shredding or is there someone else, something else?

Bill Gale

Well, shredding was certainly a big contributor. Even though it wasn’t -- it was like less than 10% of the revenue, it still was a rapid grower. But to answer the guidance, Mike and I anticipated that there would be some questions on this. And I think it’s important for everyone to understand that first off, there is a lot of inconsistency in this job growth and the economy and therefore we are trying to take that into consideration. We don’t foresee there being any big catalyst to really getting things going. And I would tell you that we tend to be conservative, especially at the beginning of a fiscal year. I would rather make sure that the expectations -- that we can meet expectations. So we tend to be on the conservative side. Therefore I hope that as we go through the year, if we see growth better than what we are currently giving you in the guidance, we will certainly adjust the guidance upward as we go through the year.

Dan Dolev -Jefferies

Thanks. And is that conservatism also reflected in your commentary about not expecting any EPS benefit from shredding this year.

Bill Gale

That one is a real tough one to say. They’ve got a lot of things they have to go through and changing an IP platform and rebranding the trucks and everything else. I think it’s too early for me to say that that’s conservative or not. I would say right now, I think our expectation of no contribution is maybe realistic.

Operator

And we’ll take our next question with Shlomo Rosenbaum with Stifel Nicolaus.

Shlomo Rosenbaum - Stifel Nicolaus

I just have a few housekeeping type questions in general. The SG&A from the shredding that you said to expect as zero. That’s from a total year perspective though, right? I mean if there is going to be a lot of investments to go after the synergies, I would expect that at least for part of the year that you would have some -- to the extent that there is some losses, that might be reflected and you guys have called that out for us, is that the right way to think of it?

Bill Gale

Yes, I think if we saw -- so for example, we may see because of the timing of some of these transitional expenses, we may see some ups and downs from quarter-to-quarter and we would likely point those out to you, yes.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. And then the SAP system, I know you guys went through -- in the fiscal year ‘10 timeframe there was a roll out of SAP and you guys had built up some inventory in advance of that. What was that for and how many other parts of the business are there left to roll this system out to?

Bill Gale

We started the SAP -- the first thing we did were our financial systems and that was done several years ago. That was back in probably the ’09 timeframe. Very successful and that was phase one. Phase two was we took our global supply chain, essentially the manufacturing, the ordering of garments and other products, we put that on SAP. That’s where the buildup of inventory was, in anticipation of converting the vet system and we didn’t want any disruption. Then we embarked upon the SAP implementation at our First Aid and Safety and Document Shredding operations, and that just concluded just at the end of this past fiscal year. So now we are moving forward into the rental business and then yet to be done would be the Direct Sale business and the Fire business.

Shlomo Rosenbaum - Stifel Nicolaus

Okay, great. And then in terms of the document storage, that’s such a tiny part of that business. Does it make sense to think about that as an ongoing business for you guys?

Bill Gale

At this time, yes. As we mentioned in March, we are evaluating strategic options for that business. We had a very nice fourth quarter. We are very encouraged by the growth rate. But we will continue to evaluate alternatives and if and when we should decide to something differently other than to continue to operate them, we will certainly let everyone know.

Shlomo Rosenbaum - Stifel Nicolaus

Are they concentrated in particular geographies for?

Bill Gale

Primarily, they are located in the Midwest and in the UK and in the Benelux countries.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. And then internally, how are you evaluating -- how are you valuing the Shred-it transaction? In other words what you contributed in there? And the reason I’m asking that question is it seems like the transaction cost of $26.3 million is like -- at least versus the investment, it seems like you paid a fee of 7.2%. That sounds like an IPO fee unless you valued the transaction much higher than net investment?

Bill Gale

Mike you want to take him through a little details there?

Mike Hansen

Sure. Shlomo, we did not use any investment banking firm to do this. Instead the transaction costs that you refer to, a large portion of it relates to the stock compensation expense because we early vested stock options and restricted shares for those employees who move from Cintas to the joint venture. We also had some costs, certainly some legal and professional costs related to public accounting, firms looking at the tax side of things and looking at the valuation for our accounting purposes. We had some IT contracts that had to be canceled that were specifically related to the Document Shredding business. So those are the kind of costs that were incurred as part of the shredding transaction itself.

Operator

We’ll take our next question from Sean Kim with RBC Capital Markets.

Sean Kim - RBC Capital Markets

I guess sort of looking back at fiscal ’14, I think your results for the full year came in probably at the high-end or ahead of what your initial guidance would have suggested a year ago. So I guess, what do you think drove the better performance? Because it seems like if we think about what your comments about add/stop trends during the year, it doesn’t seem like much has changed. So I was just wondering what do you think drove the better performances here?

Bill Gale

I think Sean, it was really an excellent execution on the part of our Rental business and our First Aid and Safety business. They were able to squeeze more capacity out of existing operations. They did very well on new business. As Mike mentioned, we saw a little bit of an uptick in the pricing environment, which helped. And I think that was really the reason that we surpassed our initial feel of guidance on both the revenue side and EPS side.

Sean Kim - RBC Capital Markets

Okay. And in terms of share repurchases, assuming no major M&A activity, do you think it’s safe for us to assume a similar level of stock repurchases that you done over the past couple of years?

Bill Gale

Sean, that's hard to say because I would tell you that we want to make acquisitions, but obviously if we don’t then we would anticipate that we would use that cash to purchase our own stock. I would not model it that way. I would hope that we would be able to make some acquisitions, but again you know and I know that you just can’t predict when that will happen.

Operator

It appears there are no further questions at this time. Mr. Gale and Mr. Hansen; I’d like to turn the conference back to you for any additional or closing remarks.

Bill Gale

I would just like to thank everyone for joining us this evening. It was a very complicated quarter, but you all are pretty smart people because you all pretty much figured it out. And therefore we appreciate your support. We will anticipate providing our first quarter update sometime in the latter part of September. So thank you again. Have a good rest of the summer.

Operator

And this does conclude today’s Cintas quarterly earnings results conference call. We thank you again for your participation.

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