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Cintas (NASDAQ:CTAS)

Q4 2012 Earnings Call

July 16, 2012 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

James Samford - Citigroup Inc, Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

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

Joe Box - KeyBanc Capital Markets Inc., Research Division

Gary E. Bisbee - Barclays Capital, Research Division

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

John M. Healy - Northcoast Research

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

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

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

Gregory W. Halter - LJR Great Lakes Review

Operator

Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's call is being recorded. At this time, I'd 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 2012. With me is Mike Hansen, Cintas' Vice President and Treasurer. After some commentary on the results and our fiscal 2013 guidance, 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 record fourth quarter revenue of $1,054,000,000. In an increasingly sluggish U.S. economy, fourth quarter revenue grew 4.1% from last year's fourth quarter. Fourth quarter net income increased by 11.1% to $79 million, and earnings per diluted share were $0.60, a 22.4% increase over last year. Mike will provide more details shortly on the fourth quarter performance.

This fourth quarter concluded a very successful fiscal 2012 year for Cintas in which our revenue topped the $4 billion mark for the first time at $4,102,000,000 and our earnings per diluted share hit a record level of $2.27. Our employees, who we call partners, did a great job of executing our game plan throughout this past 12 months. Congratulations to our partners on their achievements this year.

We remain confident in our business' opportunities and our ability to execute our game plan. As such, during our fourth quarter, we purchased 3.3 million shares of Cintas stock at an aggregate cost of $129.6 million. Since these purchases were made so late in the fiscal year, they had no impact on our fourth quarter results. However, we expect it will positively increase fiscal 2013 earnings per diluted share by about $0.06. This impact is incorporated into our fiscal 2013 guidance. Our board authorized a $500 million share buyback program in October 2011, so we now have $370.4 million remaining of that authorization.

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 2013 guidance.

J. Michael Hansen

Thank you, Bill. As Bill mentioned, total revenue increased 4.1% from the fourth quarter of last year with total company organic growth being 4%. Total company gross margin for the fourth quarter was 42.1%, which is down from last year's fourth quarter gross margin of 42.8% mainly due to lower recycled paper prices. I will discuss these items in more detail by segment. Before doing so, please let me remind you that there are 66 workdays in our fourth quarter, which was the same as last year. Looking forward to fiscal 2013, our workdays will be as follows: 66 in the first quarter, 65 in the second quarter, 64 workdays in the third quarter and 66 in the fourth quarter. The total workdays in fiscal 2013 will be 261, which is one less than fiscal 2012. The difference occurs in the third quarter, where there were 65 workdays in fiscal 2012. The one less workday in fiscal 2013 will negatively impact fiscal 2013 total revenue growth by about 40 basis points.

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. This segment also includes restroom supplies and other facility products and services. Rental Uniforms and Ancillary Products revenue accounted for 71% of company revenue in the fourth quarter.

Within Rental, based on fourth quarter revenue levels, uniform rental accounted for approximately 52% of the 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%.

Fourth quarter rental revenue was $749 million, which is up 5.2% compared to last year's fourth quarter. Organic growth was also 5.2%. Growth continued to come in the form of new business, and sales rep productivity continued to be good. However, just as we have seen worsening trends in U.S. employment and in the general U.S. economy, our net add/stops trending worsened throughout the quarter. This worsening trend contributed to a slowing of the revenue growth rate from 6.5% organic growth in our third quarter.

Our Rental segment gross margin was 43.3% for the fourth quarter, a 30-basis-point decrease from last year's fourth quarter gross margin of 43.6%. Energy-related costs were down 50 basis points compared to last year's fourth quarter. This benefit, though, was offset by an increase in material costs due to the high level of new business during the year, as well as the expected higher cotton impact. The worsening trend of net add/stops resulted in a greater percentage of revenue coming from new business, which requires injection of new inventory.

Our Uniform Direct Sales operating segment includes the direct sale of uniforms, branded promotional products 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 accounted for 11% of company revenue in the fourth quarter. Fourth quarter revenue of $111.2 million represents an increase of 2% compared to last year's fourth quarter. There were no acquisitions in this segment.

Uniform Direct Sales gross margin was 30.7% for the fourth quarter, which is down slightly from last year's fourth quarter gross margin of 30.9%. The gross margin of 30.7% was a slight improvement over the third quarter gross margin of 30.5%. This segment's gross margin can move from quarter-to-quarter due to changes in mix of product and timing of program rollouts.

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 accounted for 10% of company revenue in the fourth quarter. Revenue was $108.9 million, an increase of 9.3% versus last year's fourth quarter. Organic growth was 9%. This segment had a very good fiscal year, growing 10.1% and topping $400 million for the full fiscal year.

This segment's gross margin was 42.4% in the fourth quarter compared to 41.7% in last year's fourth quarter. Energy-related expenses were 20 basis points lower this year compared to last year. In addition, improved capacity utilization from the higher volumes continue to drive the gross margin expansion.

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 decreased 8% compared to last year's fourth quarter. Revenue decreased organically by 8.2% compared to last year.

Our Document Management fourth quarter performance was adversely affected by 3 things. First, the recycled paper prices stayed at roughly $150 per ton during the quarter. This resulted in a decrease of over 30% compared to last year's fourth quarter. This lower price negatively impacted revenue for the quarter by $7.4 million, and this impact also directly affects the gross margin and operating margin of the business. Bill will discuss our fiscal 2013 recycled paper price assumptions in his guidance discussion.

The second item to negatively affect performance was continuing difficulty in Europe. We have made operational and efficiency improvements in our businesses during this fiscal year, but revenue growth in the current environment is a challenge.

And the third item to negatively affect fourth quarter results is the performance of our imaging business. The imaging business is largely a project business, and last year's fourth quarter benefited from several large onetime projects that did not reoccur this year.

Despite the challenges of lower recycled paper prices, we continue to be pleased with the North American document shredding side of the business. We continue to move forward with our game plan of managing the business for the long-term benefit of our customers, selling profitable business and creating efficiencies from off-site shredding opportunities and from process improvements. Since the impact of lower recycled paper prices falls directly to the bottom line, the Document Management gross margin dropped to 46.8% in the fourth quarter compared to 51.4% in last year's fourth quarter.

Switching to selling and administrative expenses, SG&A was 28.8% as a percentage of revenue in the fourth quarter. This is an improvement from last year's fourth quarter of 30.1%. This 130-basis-point improvement from last year is due largely to managing our cost structure while continuing to grow revenue. Fourth quarter selling and administrative expenses of 28.8% of revenue were higher than the 28.5% in this year's third quarter due to a 50-basis-point increase in the cost of providing medical benefits to our employees.

Our effective tax rate was 36.2% for the quarter compared to 39.5% 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 year, our effective tax rate was 36.8%, which is slightly lower than our expected rate of 37% due to the resolution of federal audits of our fiscal 2009 and 2010 years.

Turning now to the balance sheet, our cash balance was $340 million at May 31, down $13 million from the $353 million in cash and marketable securities at February 29 primarily due to the share buyback of $130 million during the fourth quarter. Included in the $340 million at May 31 was $52 million of cash located outside of the U.S. During the fourth quarter, we took advantage of a onetime opportunity to bring $110 million back into the U.S.

Accounts receivable increased by $11 million since February 29. DSOs on accounts receivable were 40, which is the same as at February 29. New goods inventory at May 31 was $251 million, down $25 million from February 29. This decrease was expected as the relatively high levels of the past year due to the SAP conversion normalized. Accrued liabilities increased $33 million compared to February 29 primarily due to higher accrued bond interest and higher accrued profit sharing.

Long-term debt at May 31 was $1.3 billion, of which $226 million was in current liabilities. We repaid $225 million of 6%, 10-year debt that matured on June 1, 2012. And we issued new 10-year debt on June 5 with a coupon of 3.25%. We issued the new debt due to the attractiveness of the interest rate levels. As of May 31, our total debt-to-EBITDA is slightly below 2x.

Moving on to cash flow, cash provided by operating activities in the fourth quarter was $162 million, which is up from last year's fourth quarter amount of $133 million. In addition to higher net income, the decrease in inventory during this year's fourth quarter added to the improvement over last year.

CapEx for the fourth quarter was $43.1 million. Our CapEx by operating segment was as follows: $31.2 million in Rental; $1.6 million in Uniform Direct Sales; $2.7 million in First Aid, Safety and Fire Protection; and $7.6 million in Document Management. We expect CapEx for fiscal 2013 to be in the range of $190 million to $210 million. I'll now turn the call back over to Bill for comments on our fiscal 2013 guidance.

William C. Gale

Thanks, Mike. Our fiscal 2013 guidance is for revenue to be in the range of $4.25 billion to $4.35 billion and earnings per diluted share to be in the range of $2.47 to $2.55.

Let me walk through a few assumptions so you can better understand the guidance. This guidance certainly considers the current economic climate, which is not healthy. We have had 3 consecutive months of poor job creation. In fact, only 225,000 jobs were created in that time, about half of which were professional and administrative positions. The Institute for Supply Management indicated in June that exports fell and new factory orders dropped at the fastest pace since 2001. We've seen numerous U.S. GDP forecasts that show growth of less than 2% during the next 18 months. As Mike mentioned, our net add/stops trending worsened during the -- our fourth quarter, a reflection of our customers' concern and uncertainty at this time. Clearly, there is little momentum in the economy.

Despite this lack of momentum, though, we remain encouraged by our business' performance and continue to expect our revenue to grow organically in the mid-single digits in this type of environment. As we have discussed on the last few calls, recycled paper prices have been quite a headwind during the last 2 quarters. We expect it to remain this way for the next 2 quarters. We have assumed that recycled paper prices increase about $10 per ton each quarter in fiscal 2013 from the $150 a ton level at May 31. Last year's first quarter average price was roughly $275 per ton, and the second quarter average price was roughly $225 per ton. Keep in mind that this pricing difference impacts both revenues -- both revenue and falls directly to operating income. Our energy-related expenses for fiscal 2012 were roughly 3.3% of sales. Our guidance assumes that fiscal 2013 energy-related expenses remain at this level.

We recently issued $250 million of 10-year debt with a 3.25% coupon that essentially replaced the $225 million of debt that matured on June 1. Including all fees and the impacts of interest rate locks, this new debt will reduce overall interest expense by about $3.5 million. However, much of this benefit will be offset by a higher effective tax rate. We expect our fiscal 2013 effective rate to be 37.3%, which is higher than the 36.8% in fiscal 2012. As Mike discussed, the fiscal 2012 effective rate benefited from the resolution of audits.

And finally, keep in mind that the guidance incorporates the share buybacks from our fourth quarter but does not contemplate any additional buybacks. As I mentioned earlier, this will benefit fiscal 2013 earnings per share by approximately $0.06. Hopefully, this additional color adds perspective to our guidance. With that, we will now be glad to take any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from James Samford with Citi.

James Samford - Citigroup Inc, Research Division

Just a couple of questions on the guidance. It looks like you're still guiding to margin expansion for next year, if I back into it, of roughly 40 to 50 basis points. Just trying to understand, how much of that is a function of increasing paper prices that you sort of built in there? And what gives you confidence that paper prices can be up $10 per quarter going forward?

J. Michael Hansen

Well the -- James, if you take a look at that, the guidance for our paper prices were actually -- including guidance, that would be a 13% -- almost a 13% reduction in year-over-year paper prices. So that -- our guidance assumes about an average of $175 per ton, and fiscal '12 was about $200. So we will see a negative impact for the full year. That will certainly be front-end loaded. The first 2 quarters, as Bill mentioned, will be negatively affected by paper. And in the back half of the year, we should see a small benefit. And we're basing this assumption on talking with our partners in the industry and other people who are familiar with the paper.

William C. Gale

But with that said, James, our margins are anticipated to expand overall in the company primarily as a result of the improved margins in the Rental, First Aid and Safety and Uniform Direct Sale divisions but just being offset by the Document Management segment.

James Samford - Citigroup Inc, Research Division

Yes. And I guess on that Rental piece, are you assuming some sort of return to normalcy or at least some hiring occurring? Or is that still taking into account an increasing mix of new versus the additional new wearers from existing accounts?

William C. Gale

We're actually continuing to expect most of that growth primarily coming from new business. We do not expect to see much growth in our existing customers' headcount.

Operator

Our next question comes from Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch, Research Division

Could you talk about what you're seeing in Uniform Direct Sales? The year-over-year growth rate slowed in the fourth quarter and I'm wondering what the tone of your client base is there.

William C. Gale

Sara, the growth rate was lower, as you point out. But that segment, we've always said, will grow over time in the mid-single digits. So if I could remind you, last year, the growth rate was over 8%. This year, it's a little around 3%. Therefore, it's not unusual for that to fluctuate. We have not seen a lot of, I guess, communication from customers indicating any big concern in the environment. But on the other hand, as a result of lack of orders in the quarter, I would say they're being cautious just pending the outcome of what's going to happen in the economy.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then within the guidance for next year, how are you thinking about SG&A? You've gotten great leverage recently.

William C. Gale

We're seeing SG&A being approximately at the same levels that we saw this year.

Sara Gubins - BofA Merrill Lynch, Research Division

On a dollar basis?

William C. Gale

On a percent of sales basis. It did increase in dollars, but percent of sales should be roughly the same levels.

Sara Gubins - BofA Merrill Lynch, Research Division

Got it. And then if you could just provide us with the ending share count at the end of the year, that would be great.

William C. Gale

Yes, it's on the face of the balance sheet. And if you'd just give me a second, I can...

J. Michael Hansen

126,000,519 is the outstanding -- that's the outstanding shares at May 31.

Operator

We'll take our next question from Andrew Wittmann with Robert W. Baird.

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

I just wanted to dig in a little bit more on the Rental segment, just kind of talking about the amount of new business that's out there and the pricing for these new customers, how maybe that's changed here over the last couple of months or quarters, if at all.

J. Michael Hansen

I would say that pricing, while it hasn't changed much in -- from the third quarter to the fourth quarter, remains competitive. And we're seeing our competitors be very aggressive, particularly at national account levels.

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

Okay. Just digging more in the Rental segment, by some of the end markets that you break out here annually, it looks like there was a pretty material step up in the hygiene segment. It also looks like the core uniform rental portion of the core segment was also up just modestly. Is that the right way to think about it? Is that, first of all, accurate? And then second of all, can you just talk about the traction you're getting in the hygiene segment there and kind of what your outlook is for what appears to be outsized growth there for the year ahead?

J. Michael Hansen

Andrew, the hygiene number includes some of our newer products and services, like our chemical services and tile and carpet. And so we're getting a boost by some of our newer products and services in that hygiene bucket. And we continue to be very pleased with the rollouts of those items and continue to expect very good growth in those. The uniform rental had a very good year. We saw some great performance in our fire-resistant clothing line. We also saw very good performance in other lines like our women's wear, and our Carhartt continues to perform well. So we did see a very good year out of uniform rental.

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

Okay. I guess maybe one final question on the Document side. There's been some talk in the industry that there's maybe a modest expectation of enhanced M&A activity. Just wanted to get your thoughts on are you seeing that? And do you expect that segment is probably more active than maybe other segments for you in terms of potential M&A?

William C. Gale

I would say it is more active than other segments at this point, but I am not really sure that the expectations of sellers and buyers have yet reached the level to generate a lot of dealmaking.

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

Okay. And any change in terms of the way you're thinking about that business? Are you still very, very focused on the shredding side? Or are you becoming increasingly open to the storage business maybe?

William C. Gale

I would say we're primarily continuing to focus on the shredding side. The storage side is less attractive to us.

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

No change, it sounds like.

Operator

Our next question comes from Joe Box with KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Can I just follow up on the guidance? Of the mid-single digit growth that you guys are expecting, can you maybe just give us a sense of where you expect this to come from relative to your different businesses?

William C. Gale

Well, our expectation is all the businesses will grow. Even the Document Management business will grow on the service side, albeit at relatively modest rates due to the economy. The Document Management, though, will still have the headwind, as Mike mentioned, on the paper prices. So if you pull out the change in paper price, you'll see growth in the service side of the business. But none of the businesses are expected at this time to grow robustly because of the economic environment that we anticipate will be in place now for the next 9 to 12 months.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay. And can you just maybe give us a little bit more color on the end markets that drove the add/quit metric into the negative territory for the quarter? And then maybe highlight some areas where you're actually seeing some positive momentum?

William C. Gale

Well, the positive momentum is primarily coming in the energy sector from a lot of the oil and gas exploration that's going on in this country, and we're servicing many big customers there. So there -- that's the positive side. I would say the deterioration in the add/stop ratio was really outside the energy industry, everywhere else. There was really no one area that's causing it. I just think you have seen a real pullback on the part of

[Audio Gap]

continue to be a focus of ours going forward.

Operator

We'll take our next question from Gary Bisbee with Barclays Capital.

Gary E. Bisbee - Barclays Capital, Research Division

What was the Document Management organic growth excluding the recycled paper? Did that dip negative this quarter because of those other 2 things you mentioned? Or was that positive?

J. Michael Hansen

It was about 1%, Gary. So it did not dip negative. But it certainly continues to be affected by the European economic environment and, in this case, in the fourth quarter, the imaging projects.

Gary E. Bisbee - Barclays Capital, Research Division

How do the imaging comps look over the next couple of quarters? Is that one-off a year ago? Or is that likely to be an area that just economic weakness will hurt demand for a while?

J. Michael Hansen

Well, it's difficult to predict. We're actively pursuing opportunities. We would like to focus on more recurring-type revenue. We've had some success with that with some companies. But we certainly will also take advantage of projects as they come about. Most of our project work had -- a lot of it had come from the banking side. We continue to think that we've established a strong reputation in this area and that we'll continue to look for those projects. We just are having difficulty predicting exactly when they will come, but I know our salespeople are actively pursuing several things right now.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And then how much of the cautious tone that you're giving around the guidance is impact that you're already actually seeing in the business versus feeling it's prudent to take a cautious tone? I hear you on the add/stops, but that was never a big driver of the revenue growth acceleration, as I understand it, over the last year or so. It was much more new business was getting better as opposed to existing customers adding products and employees. So are there other signs than that? Is it getting tougher to sell new business? Or is a lot of this just cautiousness because you're reading the tea leaves of all the data having weakened?

William C. Gale

Well, I'd say it's a combination of both. But certainly, we're reading the tea leaves and looking at things. But we saw a trend in our fourth quarter that caused us to have some concern on the overall economic environment. And as a result of the -- yes, the add/stop ratio going negative is not as significant, but we also see the caution just in the economy on doing anything. So as a result of that, that's why we felt it prudent to basically give guidance that we think is achievable, and we'll certainly adjust it upward if we prove to be a little too conservative as we move through the year.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And then just can you -- you had commented a year ago or so that cotton prices would remain a headwind in fiscal '13. Given the pullback there, is that still the right way to think about the gross margin? Or is it likely to be more of a push and maybe even a positive later in the year?

J. Michael Hansen

Yes, Gary, we expect that it will continue to be a slight headwind for the first half of fiscal '13, after which we may start to see a bit of a benefit. But keep in mind, that moves very slowly as we amortize.

Gary E. Bisbee - Barclays Capital, Research Division

Right, okay. And then just last question. Does a weaker economy in your mind mean that M&A would be -- there'd be more opportunities? Or have you historically seen more that people don't want to sell when they feel like things are getting a little more difficult? I ask mostly just because with the -- a quarter ago, I think you said you were optimistic that maybe the environment was filling out a bit, and certainly you're very well capitalized to pursue something.

J. Michael Hansen

Gary, I think there's 2 factors here that I think will be interesting to see how they play out. One is, yes, in a deteriorating environment, some of the people who were interested in selling their businesses are seeing top line reductions and, therefore, they feel like they can't get as much value for their business. So they might tend to hold out until things get better again. At least that's what we saw in the last couple of recessions. So that would say there'd be less M&A. On the other hand, I don't know what people's expectations are with regard to the change in the tax laws and how that will play out. But there certainly would be some benefit of people wanting to sell now before the end of the calendar year based on what seems to be the prevailing opinion of what's going to happen with tax rates.

Operator

Our next question comes from Andrew Steinerman with JPMorgan.

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

To go over Rental gross margins again in the quarter, it sounded like merchandise amortization, which includes a cotton contribution there, was a larger drag than the energy benefit in that to minus 30. Was there anything else that influenced the Rental gross margin? And then my question is for fiscal year 2013, since you expect the mid-single digit growth to be primarily driven by new business, so what does that mean that Rental gross margin will be down for 2013 with that assumption?

J. Michael Hansen

Well, in the fourth quarter, the energy impact and the material cost movement generally offset each other. It was pretty close. And there were a couple of other things, very minor. But generally speaking, it was material cost that was moving towards the negative. Going into fiscal '13, if we continue to see new business as the driver, then we would expect that material costs may continue to be a bit of a headwind. Our challenge will be, can we offset that with operational improvements and routing improvements like we have over much of the last couple of years?

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

Right. And so in your guidance assumption, are you expecting Rental gross margin to be down? Or do you expect that you could offset it and it could be closer to flat?

William C. Gale

Well, with the range of guidance, I would tell you that it's probably a little bit of both. I mean, we're -- we got a range there, and if -- depending on what happens with our assumptions that we've made on new business versus growth in existing accounts, the material costs that Mike mentioned, energy, I think you're going to see either a slight reduction in gross margins or a slight improvement in gross margins depending on what happens.

Operator

We'll take our next question from John Healy with Northcoast Research.

John M. Healy - Northcoast Research

Bill, I want to ask you a little bit more about the paper prices. To the degree that those move in the spot market, is there a lag in terms of how they impact your P&L? And is there any sort of hedging or in terms of contract price that you guys get from buyers out there? And have you used contracts in the past? And has the -- if you have, has that changed materially in terms of the price points and then whether it impacts your business?

William C. Gale

Our contracts with the companies that we sell our paper to basically are all pegged. The price we receive is all pegged off the spot price. So generally, we receive what the spot price is plus whatever contract premium that we have negotiated. We've been with contracts with the paper consumers for some time. So that's nothing new for us. We continue to do that. As far as hedging, we've looked -- we're looking at it. We have looked at it. To date, we have not determined that it was beneficial for us to do so, but we'll continue to evaluate it. It is not a very robust hedging market. But as a result of that, you're really taking more of a gamble than really hedging anything based on what we're seeing so far. But we continue to evaluate it, and we've got some potential opportunities to do so with parties outside the U.S. and we're looking at those.

John M. Healy - Northcoast Research

And then I wanted to ask from an M&A perspective. When you guys look at returns on capital or returns on the business, what business unit, whether it's the uniform business or the Document Management business, do you think you get the best returns on in terms of the deals you look at? And where are the most -- what business has a better synergistic value to you in terms of deploying -- maybe looking at some M&A deals?

William C. Gale

I would say, well, our criteria for evaluating an M&A opportunity, we have the same basic expectations regardless of the business unit. So we're not going to take necessarily a lower return on one unit versus another. As far as synergies, it so much depends, John, on the nature of where the customers are coming from, the size of the customers. If we have a deal whereby we have capacity in existing facilities in a region and we buy a local competitor that perhaps serves multiple cities, we can get a lot of synergies because we can deploy that new volume pretty easily in multiple facilities. The more concentrated the volume is that we get, the more likely it'll take a little longer to get those synergies because we'll have to maybe build some capacity or take over their capacity and then bring it up to our standards. So I would tell you, though, we really believe that when we use M&A capital, our shareholders are expecting a certain return. And by and large, we stick to those requirements regardless of the business unit.

Operator

Our next question comes from Shlomo Rosenbaum with Stifel Nicolaus.

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

I want to focus a little bit more on the paper and shredding business. Usually, the market dynamics are when you have a collapse in the paper prices, that the actual price that you are able to charge your customers for the shredding, at some point in time, you should be able to go up in the smaller competitors that are giving away the services in order to get the commodity paper start to pull out of the market. Are you starting to see that happen and that was contributing to your expectation in the increase in paper prices during next year?

J. Michael Hansen

We're starting to see a little bit of that. We've had some price increases that we've been able to institute, and they have stuck. I think there's a couple of other dynamics that are going on in the industry, though, that may be unique. We've got a couple of large players that perhaps are not as committed long term to the business based on some recent items that they've been involved with. So I'd say that there's a little disruption due to that. I think also that the time frame -- it takes a little longer for that dynamic to work through, Shlomo, where you'll see prices really balance themselves out. I think we're still a little early in the process. When we gave guidance back in March for our fourth quarter, I think several people thought that we were being overly conservative with what we thought the paper price was going to be. So the expectation in the market was that it was going to increase a little quicker. Well, it didn't turn out to do so, at least through our fourth quarter. We've seen some improvement here in June and July. So perhaps, the paper price will start rising a little bit, and that will perhaps temper people's willingness to raise their service price until they see what really shakes out.

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

So the sequential $10 a ton that you're expecting through the year, you say you talked to people in the industry, what exactly is it based on? Is it based on the fact that you're already getting some pricing lift? I mean, can you just give us some color on that?

William C. Gale

Well, I think it's an estimate or prediction of demand primarily from overseas. When the demand's going to come, when it's going to pick up, that's what's going to increase the price. And that's what we're hearing from the various brokers, that there is a lot of talk that the demand will be picking up as the year progresses, thus increasing the price.

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

Okay. Then last quarter, you guys talked a little bit about rep turnover was normalizing. And has that continued? Or has the trend towards more normalized rep turnover kind of slowed down with the economy slowing down?

William C. Gale

No, it's basically been about the same level. It certainly is worse than what we were seeing in '11, but it didn't get any worse nor much better than where we saw in the third quarter. The difference in the fourth quarter is that we were able to replace some of those turned reps that we had in the third quarter and the normal rep turnover that happened in the fourth. So our actual headcount on sales reps was higher at the end of the fiscal year than it was at the end of our third quarter, which positions us better going into this current year for new business growth.

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

How much time do the new reps that replaced the ones that were leaving -- how long does it take till they -- you believe that they're fully productive? Is it 9 months? Is it 12 months? What is it?

William C. Gale

Yes, 9 to 12 months is generally the time frame it takes for a new rep to get up to average productivity.

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

Okay. Then on the more competitive pricing on rentals in national accounts, this seems to me to be kind of a change in tone from the last few quarters when in general, you guys were talking about a little more stability in the marketplace from the competitors. Is this a factor of the competitors looking at cotton pricing coming down and saying, oh, we're going to start to get more profitability, we can become more aggressive? I mean, what do you attribute this to?

J. Michael Hansen

Shlomo, neither Mike nor I really recall a difference in our commentary. I apologize if we left that impression. I thought we had been saying that pricing had stabilized except on large national accounts where we continue to see aggressiveness on the part of several big players. I'd say we certainly saw an improvement in the pricing environment from fiscal '10 and '11, but I'd say it's always been very competitive and the national account business is very much sought after by several of the large players.

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

So just to make sure I understand then, there is no change and it has been competitive and it remains competitive in the large national accounts?

William C. Gale

Yes, it does, yes. It remains ...

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

And what about the accounts outside of those large national accounts where you guys were noting through last year that there was more stability? Has that remained the same?

William C. Gale

It has remained the same. There has been no improvement but no real deterioration either recently.

Operator

Our next question comes from Scott Schneeberger with Oppenheimer.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Just following up on the last question with regard to rep turnover. So I guess interesting time in a fiscal year end. Could you update us, just going back to projects won and I don't recall how many years ago that was but just what you've seen over the past, I guess, 2 or 3 years now that you've gone through that transition, what's different, what worked, what didn't out of that?

William C. Gale

Well, I think it's worked very well in that we've got a cohesive sales group now that works together well, is not siloed by business unit, is under one management structure. And so I think that has been a big success. The turnover rate that we talked about was really more due to the economy. We have very attractive, trained sales reps that are of interest to other industries. And therefore, that's what caused that turnover. But I thought -- but I think what we have been able to at least accomplish is stem the turnover in that there is no further increase in it and we've been successful in replacing some of those turned reps, especially in the fourth quarter.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Shifting up a bit. In an earlier question, you mentioned energy industry and exploration as a boost. I think the scope of that question was on add/stop. I assume you're seeing a lot of activity in new there as well. And I'm just curious. And I think you touched on this, but I wanted to be clear. It sounded like that's one of the only end markets that's really producing. I'm just curious, within the guidance, is it a maintained level? Is it an increased level? You had mentioned you weren't sure what the forward persistence would be, but I'm just curious how you think about it within the guidance.

William C. Gale

I think we'll see energy continuing to be one of the positive spots in the U.S. economy and the Canadian economy. I mean, it's up -- going on up there, too, and we're participating in that. I would say that the level is not a significant increase in the headcount. It's just that as you have more exploration and frac-ing going on, more companies are doing it. And therefore, it's not necessarily adding to an existing operation but rather just increase in number of locations where this energy exploration is occurring. So we being the largest provider of FRC garments in the country and in -- I think we will participate as that segment of the economy continues to do well.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And just for clarification, I think it's probably obvious. But curious, maybe it's hitting something of which we're not aware, is that predominantly just uniform rental, Carhartt? Or are you -- is oil and gas exploration helping in other areas of the business as well?

William C. Gale

Well, it's probably helping in our First Aid and Safety business also. Is that what you mean?

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Yes, yes. Just -- yes, I mean...

William C. Gale

Yes, I think there's some benefit we'll get from that side, from that industry and that business also.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And one more from me real quick. On cash availability, for any type of transaction, could you update us where -- what is abroad, what is domestic as far as cash balances?

William C. Gale

I think Mike mentioned in the comments that we have about $50 million now outside the U.S. So the remainder of the cash is here in the U.S. We still have access to the debt markets. We have significant capacity available to us should a transaction make sense. We've got a untapped commercial paper line of credit. And so I would say that we would have no problem making a big deal if it makes sense for us.

Operator

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

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

Wanted to kind of just ask a little bit. Obviously, we can clearly see with the add/stop metric kind of declining here sequentially over the last couple of months in line with the general macro numbers. But just wondering, in terms of your conversations with your customers, whether they're still kind of upbeat potentially on their business opportunities but just are really reluctant to do anything right now and backing on certain environment, or whether it's gotten really a lot more pessimistic than that in just kind of the general conversations you're having.

William C. Gale

Nate, I have to be honest, I don't have many conversations with our customers. You talk to our operating …

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

Well, with the salespeople.

William C. Gale

Yes, well, I haven't specifically asked that question. I would tell you the tone that I hear is more one of caution, and I think there's just a lot of uncertainty right now. And until that gets resolved, I'm not sure we're going to see much activity.

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

Okay, that's fair. And then if things did get a little bit worse, and this just as a kind of a pause and caution but there's an underlying current of some broader issues at work, are there more levers that you have left in your firepower on the cost side after doing such a great job during the downturn of really kind of making your overall business a lot more efficient?

William C. Gale

I think every company always has some things that can be done depending on what the circumstances are. I think you -- we have continued to operate at headcount levels that are significantly below where we were at the peak even though our revenues now exceed where we were previous. So we've gained a lot of efficiencies in our operations. But if there were another significant recession and the loss of a lot of revenue, we would have to take another look at how we do things and see if we could even make more efficiencies. So I think it's incumbent upon all management to always be ready to adjust depending on what the environment is.

Operator

[Operator Instructions] We'll take our next question from Greg Halter with Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

I don't know if I heard an estimate for your capital spending or your plans there for fiscal '13.

J. Michael Hansen

Our CapEx, we expect to be in the range of $190 million to $210 million.

Gregory W. Halter - LJR Great Lakes Review

That sounds like a decent uptick from the $161 million for this -- or fiscal '12. Anything specific in there?

William C. Gale

We had a few -- we actually thought we'd spend a little bit more in fiscal '12, and we've now moved a few things into fiscal '13. So that's our expectation is, is that really, it's just a little delay of some things that we were going to do that now we're going to do in '13.

Gregory W. Halter - LJR Great Lakes Review

All right. And you had commented with the new debt where your interest expense should be about $3.5 million lower, and I presume that's over the full year fiscal '12. And is that net interest expense? Or is that broken out just by the interest expense, not factoring in the -- any interest income?

William C. Gale

Yes, well, there's basically hardly any income. I don't think we -- you've got any good investment safe, we'll look at it. That's the reduction in the interest expense or interest cash outlay in fiscal '13 versus what we had in '12.

Gregory W. Halter - LJR Great Lakes Review

All right. And for the quarter, you had $18.3 million in interest expense. For the prior 3 quarters, it was in the $17 million range, and I'm just wondering why the step-up in the quarter. Were there some kind of fees associated with the...

J. Michael Hansen

Well, in the fourth quarter, the only difference was we had an extra day of accruing. So otherwise, nothing.

Gregory W. Halter - LJR Great Lakes Review

Okay. And the figures you gave on the dust control and hygiene and shop towels and linens and so forth, was that for the quarter or for the full year?

J. Michael Hansen

That was for the quarter.

Gregory W. Halter - LJR Great Lakes Review

Do you have those for the full year?

J. Michael Hansen

No. We have -- in the last couple of years, we've been updating based on fourth quarter levels. And so we've not provided the full year.

Gregory W. Halter - LJR Great Lakes Review

Okay. Similar question but relative to your vertical markets served for fiscal '12. Would you have those available or at least maybe the top couple?

J. Michael Hansen

We have not provided that other than to say we don't have any verticals that account for more than 10% of our business. So we've got a pretty spread -- a pretty diverse customer base.

Gregory W. Halter - LJR Great Lakes Review

And that would be like the car parts or car repair would probably be one of the largest?

William C. Gale

Automotive certainly is one of our larger verticals. Hospitality is a big vertical for us. Health care is becoming a larger vertical for us, and it certainly is an area of focus. Specialty trade contractor-type is a good vertical for us, maintenance-type positions.

Gregory W. Halter - LJR Great Lakes Review

Okay, that's helpful. And when I do a calculation on your net income divided by the diluted share count, I get $0.61 or $0.609 for the quarter and $2.29 for the year. Can you explain the difference there?

J. Michael Hansen

You have to take into account the participating securities. So a couple of years ago, some new accounting guidance came out that requires an adjusted EPS calculation to incorporate the impact of participating securities like restricted shares. If you went to our Q for the third quarter and looked at our EPS footnote, you'd see the calculation that I'm talking about. So we have to essentially allocate some of our net income to those participating securities.

Gregory W. Halter - LJR Great Lakes Review

Okay. And one last one. We've noticed that Uniforms To You has opened up a second retail store in the Chicago area, and just wondering what the prospects are for that particular area, if you want to call it that, to expand in other parts of the country.

William C. Gale

No. No plans to do that, Greg. But that store was basically part of the original company that we purchased. It was under a different name there. They've reopened it now to service the North Side of Chicago, but it's very small. It's just locally driven and it's really just more of a legacy from the old company that was bought. We have no intention at this point of rolling out any retail operations anywhere else in the country or expand in Chicago beyond the 2 we already have.

Operator

We'll take our next question from Shlomo Rosenbaum with Stifel Nicolaus.

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

Just a few stragglers here. Just you talked about oil being a kind of a bright spot out there. Do you have a -- can you give us any sense as to how big the oil industry is for you guys?

William C. Gale

Shlomo, I don't have that at this point. We'll look into it and see if we can provide it as part of our overall review of what we have by industry.

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

Yes, I'm just trying to get a sense. Does it stand out because it's large? Or does it stand out because it's the only one that's doing well?

William C. Gale

I'd say the latter. Not so much that it's large. It's one of the only bright spots in the economy.

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

Okay. And then can you remind us, as of the last quarter, how big is Europe as a percentage of revenue? And is it primarily all in the Document Management area?

William C. Gale

It is all Document Management, primarily storage and imaging. And it's about 1% of our overall revenue.

Operator

Our next question comes from James Samford with Citi.

James Samford - Citigroup Inc, Research Division

I'll make this a quick one. If I just take some of your mix in the uniform rental segment, it looks like the Rental Uniforms are sort of high-single digits, 7%. But you've got a pretty dramatic difference here between hygiene and actually shop, the aprons and such being actually down negative for the quarter. I was wondering, what are you doing to turn that around. Or is it -- is there something in that industry in particular that's a drag on the overall growth of the segment?

J. Michael Hansen

Well, I'll say that all of those areas that I mentioned have grown. It's just that some have grown faster than others. And when you take a look at that hygiene bucket, that includes our newer products and services, which have grown very well in the last year. That growth is certainly exceeding the shop towel growth as well as the linen growth. But those areas are still growing, and we expect them to continue to grow.

James Samford - Citigroup Inc, Research Division

Okay. I guess just looking at them -- I think shop or linens was 11% of revenues last year. Maybe there's something else that's mixed in there that just makes it look not apples-to-apples. It's the only thing that caught my eye, but I'll go off-line with you on that.

Operator

It appears there are no further questions at this time. I'd like to turn the conference back to our speakers for any additional or closing remarks.

William C. Gale

Just would like to thank you all again for joining us this evening, and we'll look forward to speaking with you in late September when we report first quarter results.

Operator

That concludes today's conference. Thank you for your participation.

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