Cintas Company (NASDAQ:CTAS) This autumn 2019 Earnings Convention Name July 16, 2019 5:00 PM ET

Firm Members

Mike Hansen – EVP and CFO

Paul Adler – VP and Treasurer

Convention Name Members

Toni Kaplan – Morgan Stanley

Kevin McVeigh – Credit score Suisse

Gary Bisbee – Financial institution of America Merrill Lynch

Blake Johnson – Goldman Sachs

Andrew Steinerman – JPMorgan

Seth Weber – RBC Capital Markets

Scott Schneeberger – Oppenheimer

Justin Hauke – Robert W. Baird

Dan Dolev – Nomura

Tim Mulrooney – William Blair

Operator

Good day, everybody, and welcome to the Cintas Quarterly Earnings Outcomes Convention Name. At present’s name is being recorded.

At the moment, I’d like to show the decision over to Mr. Mike Hansen, Govt Vice President and Chief Monetary Officer. Please go forward, sir.

Mike Hansen

Good night and thanks for becoming a member of us. With me is Paul Adler, Cintas’ Vice President and Treasurer. We’ll focus on our fourth quarter outcomes for fiscal 2019. After our commentary, we will likely be joyful to reply questions. The Personal Securities Litigation Reform Act of 1995 supplies a Protected Harbor from civil litigation for forward-looking statements.

This convention name incorporates forward-looking statements that replicate the corporate’s present views as to future occasions and monetary efficiency. These forward-looking statements are topic to dangers and uncertainties, which might trigger precise outcomes to vary materially from these we might focus on. I refer you to the dialogue on these factors contained in our most up-to-date filings with the SEC.

Income for the fourth quarter of fiscal 2019 was a file $1.79 billion, a rise of seven.4% over final yr’s fourth quarter. The natural development price, which adjusts for the impacts of acquisitions and international forex change price fluctuations, was 7.6%. Within the fourth quarter of fiscal ’19, the natural development price for the uniform rental and facility providers working section was 6.8% and the natural development price for the primary help and security providers working section was 10.7%.

Gross margin for the fourth quarter of fiscal ‘19 of $823.6 million elevated 9.5%. Gross margin, as a p.c of income, was 45.9% for the fourth quarter of fiscal ‘19 in comparison with 45.1% within the fourth quarter of fiscal ‘18. Uniform rental and facility providers working section gross margin, as a p.c of income, improved 100 foundation factors from final yr’s fourth quarter to 46%. And the primary help and security providers working section gross margin share improved 70 foundation factors to 47.7%.

Reported working earnings for the fourth quarter of fiscal ‘19 of $314.Four million elevated 18.4%. Working margin was 17.5% within the fourth quarter of fiscal ‘19 in comparison with 15.9% in fiscal ‘18. Working earnings was negatively impacted by integration bills regarding the G&Ok acquisition by $900,000 within the fourth quarter of fiscal ‘19 and $15 million within the fourth quarter of fiscal ‘18. Excluding the combination bills associated to the G&Ok acquisition, working earnings elevated 12.4% and working margin improved 80 foundation factors to 17.6% within the fourth quarter of fiscal ‘19 in comparison with 16.8% within the fourth quarter of fiscal ‘18.

Reported internet earnings from persevering with operations for the fourth quarter of fiscal ‘19 was $226.2 million and reported earnings per diluted share from persevering with operations for the fourth quarter of fiscal ‘19 have been $2.06. Reported EPS was negatively impacted by integration bills associated to the G&Ok acquisition by $0.01 within the fourth quarter of fiscal ‘19. Excluding the G&Ok acquisition integration bills, internet earnings {dollars} elevated 13.5% and internet earnings margin was 12.6% in comparison with 12% final yr. EPS elevated 16.9%.

We’re happy with these fourth quarter outcomes, which conclude a really profitable yr. A yr in the past, in our ready remarks, we shared our expectations for fiscal ’19. We offered income and earnings per share steering, we dedicated to an estimated quantity of synergies from the G&Ok acquisition and the continued conversion of operations to a brand new ERP system. We shared our pleasure for — with returning to our debt to EBITDA goal forward of schedule, and we dedicated to returning to our historic priorities for deployment of money. We’re joyful to report that we not solely achieved, however exceeded these expectations.

For the ninth consecutive yr, our natural development price was within the mid to excessive single digits. This implies we have been capable of develop constantly in multiples of GDP and employment development. Because of our robust development, modern services and products, and arduous work and dedication of our worker companions, we moved up 41 locations to quantity 459 within the Fortune 500 rating. For the ninth consecutive yr, we achieved double digit earnings per share development from persevering with operations when adjusted for one time and particular gadgets.

We paid an annual dividend of $220.Eight million that elevated 26.5% over the prior yr. We have now elevated the annual dividend paid to our shareholders for the 35th consecutive yr. And the corporate deployed extra money by buying 4.Eight million shares of firm’s inventory for a complete quantity of $953.Four million. Fiscal 19’s achievements have been particularly noteworthy provided that they have been completed in a interval of maximum change administration, by which we have been integrating our largest acquisition up to now and implementing a brand new enterprise useful resource planning system, specifically SAP.

The combination of a really giant acquisition require the additional effort of everybody within the group. Our companions executed our playbook and made the precise changes when mandatory. Higher income retention and extra price synergies have resulted in the next return on investments than plan [ph]. In lots of respects, the implementation of an ERP system is like an integration of a really giant acquisition. It impacts a whole bunch of operations and requires the involvement of consultants from all departments of the corporate.

The conversion of every operation to SAP is an eight month means of planning, altering enterprise processes and worker mindset, coaching and certification and buyer communication. In implementing SAP, we’re shifting from a decade’s outdated platform to new expertise that gives highly effective data and knowledge designed to assist us enhance our enterprise. By way of fiscal ‘19, about 65% of the operations are actually in SAP. We’ll full the roll out to the remaining areas in fiscal ‘20.

The Cintas’ story is one among development. We have now grown each income and revenue 48 of the previous 50 years. The one exceptions the place the Nice Recession years. Our profitable monetary formulation is natural income development within the mid to excessive single digits, double digit earnings per share development, important money technology and prudent deployment of extra money. Our priorities for makes use of of money are investing within the enterprise for development, acquisitions, dividends, and share repurchases.

Our alternative for continued development is nice. We have now a services or products to assist almost each enterprise prepare for the work day. That is evident in a various buyer base unfold over quite a few verticals in each providers offering and items producing sectors of the financial system. All companies care about picture, security, cleanliness or compliance and companies proceed to outsource to focus on their core competencies. We’re properly positioned to proceed to learn from these tailwinds. We take pleasure in unequalled scale, innovate our product and repair providing, spend money on expertise and construct our model.

Cintas possesses quite a few aggressive benefit, however our biggest one is our tradition. This yr, Cintas celebrates our heritage 90 years within the making. The Cintas tradition is a basis upon which the corporate is constructed, and it’s the purpose for the corporate’s success. The tradition displays our integrity, professionalism and dedication to our clients. Different hallmarks together with constructive discontent and aggressive urgency drive us to innovate and keep out in entrance of the competitors. The Cintas tradition is why even after almost a century of success, we imagine our greatest years are forward.

Earlier than turning the decision over to Paul for extra particulars, I will present our fiscal ‘20 expectations. We count on income to be within the vary of $7.24 billion to $7.31 billion. We count on EPS from persevering with operations to be within the vary of $8.30 to $8.45. Be aware the next concerning the steering. The expansion price on the income steering vary is 5% to six.1%. Nevertheless, our fiscal ‘20 incorporates one much less work day than our fiscal ‘19.

Adjusting for this at some point distinction, on a relentless work day foundation, the income development price vary at steering is 5.4% to six.5%. One much less work day additionally has a adverse impression on EPS, decreasing it about $0.06, which is a 90 foundation level drag on the EPS development price. The steering assumes an efficient tax price for fiscal ‘20 of 21% in comparison with a price of 19.9% for fiscal ‘19. The upper efficient tax price in fiscal ‘20 negatively impacts our EPS development about 180 foundation factors and complete EPS by about $0.14.

Remember the fact that the tax price can transfer up or down from interval to interval primarily based on discrete occasions, together with the quantity of inventory compensation expense. The steering assumes a share rely for computing EPS of 109 million shares. This consists of diluted weighted common shares excellent, plus taking part securities within the type of restricted inventory. It doesn’t assume any future share buybacks, any potential deterioration within the US financial system or any additional particularly recognized G&Ok integration bills.

And lastly, the steering doesn’t or does embrace the impression from the adoption of the accounting requirements replace 2016-02 on leases. With the adoption, important adjustments to the stability sheet will happen. We count on the property and liabilities to extend within the vary of $160 million to $185 million. Nevertheless, we don’t count on any materials impact on the P&L or the money move.

I’ll now flip the decision over to Paul.

Paul Adler

Thanks, Mike. Please be aware that our fiscal fourth quarter contained the identical variety of work days because the prior yr fourth quarter. Looking forward to fiscal ’20, please be aware that there will likely be one much less work day than in fiscal ‘19. One much less day will negatively impression fiscal ’20 complete income development by 40 foundation factors. As an example the magnitude of the headwind, utilizing fiscal ‘19’s annual income, one much less work day equates to about $27 million. One much less work day additionally has a adverse impression on working margin and EPS.

Fiscal ‘20 working earnings margin will likely be diminished by about 12.5 foundation factors compared to fiscal ‘19 as a result of one much less day of income. The adverse impression on the margin happens as a result of sure bills like amortization of uniforms and entrance mats are expensed on a month-to-month foundation versus each day and we could have one much less day of income to cowl the bills. As Mike said, one much less work day is a headwind of about 90 foundation factors on EPS development, and a couple of $0.06 drag on complete EPS compared to fiscal ‘19.

Every quarter of fiscal ‘20 will comprise 65 work days. Compared to fiscal ’19, the fiscal ‘20 Q1 could have one much less day; Q2 could have the identical variety of days; Q3 could have one further day and This autumn could have one much less day. Please maintain the quarterly day variations in thoughts when modeling our fiscal ‘20 outcomes.

We have now two reportable working segments, uniform rental and facility providers and first help and security providers. The rest of our enterprise is included in all different. All different consists of fireplace safety providers and our uniform direct sale enterprise. First help and security providers and all different are mixed and offered as different providers on the earnings assertion. Uniform rental and facility providers working section consists of the rental and servicing of uniforms, mats and towels, and the supply of restroom provides and different facility services and products. The section additionally consists of the sale of things from our catalogs to our clients on route.

Uniform rental and facility providers income was $1.43 billion, a rise of 6.4%. Excluding the impression of acquisitions and international forex change price adjustments, the natural development price was 6.8%. Our uniform rental and facility providers section gross margin was 46.0% for the fourth quarter in comparison with 45.0% in final yr’s fourth quarter, an enchancment of 100 foundation factors. Vitality expense, as a share of income, was 2.4% in comparison with 2.55% within the prior yr quarter. We’re happy with the gross margin growth and our skill to beat wage pressures and tariff impacts.

Our first help and security providers working section consists of income from the sale and servicing of first help merchandise, security merchandise and coaching. This section’s income for the fourth quarter was $163.5 million. The natural development price for the section was 10.7%. The primary help section gross margin was 47.7% within the fourth quarter, in comparison with 47.0% in final yr’s fourth quarter, a rise of 70 foundation factors. First help section gross margins proceed to extend with robust high line development. As our quantity grows, we will negotiate higher pricing from distributors. Progress additionally allows us to enhance route density, decreasing gasoline and diesel prices, and enabling our service groups to spend extra time serving and upsell.

Our fireplace safety providers and uniform direct sale companies are reported within the all different class. Our fireplace enterprise continues to develop annually at a powerful tempo. The uniform direct sale enterprise development charges are typically low single digits and are topic to volatility, equivalent to after we set up a multimillion greenback account. Uniform direct sale nonetheless, is a key enterprise for us and its clients are all usually important alternatives to cross promote and supply services and products from our different enterprise models. All different income was $201.Eight million, a rise of 12.7%. The natural development price was 11.6% and was pushed by 14.3% natural development within the fireplace enterprise. All different gross margin was 43.7% for the fourth quarter of this fiscal yr in comparison with 43.6% for final yr’s fourth quarter.

Promoting and administrative bills, as a share of income, have been 28.3% within the fourth quarter of fiscal ‘19 and ‘18. Decrease labor expense, as a p.c of income, was offset by will increase in different bills together with inventory compensation, insurance coverage, staff’ compensation and medical. We’re self- insured and due to this fact topic to some volatility in staff’ comp and medical expense from quarter to quarter.

Our efficient tax price on persevering with operations for the fourth quarter of fiscal ‘19 was 21.7%. As Mike said earlier, the tax price can transfer from interval to interval primarily based on discrete occasions, together with the quantity of inventory compensation expense. Our money and equivalents stability as of Might 31 was $96.6 million. Working money move within the fourth quarter of fiscal ‘19 elevated 31% from the quantity of working money move within the fourth quarter of fiscal ‘18.

Capital expenditures within the fourth quarter have been $68.9 million. Our CapEx by working section was as follows: $54.7 million in uniform rental and facility providers; $9.6 million in first help and security; and $4.6 million in all different. We count on fiscal ‘20 CapEx to be within the vary of $280 million to $310 million.

As of Might 31, complete debt was $2,849,000,000; $2,537,000,000 was mounted rate of interest debt and $312 million was variable price debt within the type of a time period mortgage and business paper. At Might 31, we have been at our focused leverage of two occasions debt to EBITDA.

That concludes our ready remarks. We’re joyful to reply your questions.

Query-and-Reply Session

Operator

[Operator Instructions] And our first query will come from Manav Patnaik with Barclays.

Unidentified Analyst

Hello, that is really Greg calling in. I used to be simply hoping to get an replace on the G&Ok synergies when it comes to the place we have been exiting 2019, what we count on in 2020, and the way you guys are feeling about potential sources of upside going ahead.

Mike Hansen

We completed fiscal ‘19 a bit of bit over $100 million for the yr, a bit of bit higher than we anticipated at the start of the yr. And I’d count on that in fiscal ’20, we’ll get to the neighborhood of $135 million, which is true in the course of the vary that we guided to a few years in the past after we introduced the G&Ok deal. So we really feel nice about attaining the synergies we initially got down to do. If we will get to that 135 in fiscal ’20, that is a yr forward of schedule, we had talked a couple of 4 yr plan and so we really feel actually good about attaining that. The lifting, the heavy lifting that is left continues to be the route optimization that can proceed in fiscal ‘20. That is, as we have talked about over the previous couple of years, that is not a supply of great synergies. We’ll get some vitality advantages as we get rid of mileage on our routes, however we definitely are rising and have to proceed so as to add capability on route. So all in all, Greg, we really feel nice about the place we’re in that G&Ok integration.

Unidentified Analyst

After which I additionally need to ask about pure adjacencies out of your, exterior of what’s the core enterprise presently. It looks like we’re getting in direction of the tip of among the heavy lifting on the combination and the SAP implementation. And leverage is fairly affordable at this level. Simply questioning if that adjustments the way you guys take into consideration doubtlessly going after a few of these markets and what sort of markets that might doubtlessly be?

Mike Hansen

Effectively, we, I’d say this, we — I discussed a bit of bit in my ready remarks that we search for alternatives in picture, security, cleanliness and compliance and people are some fairly good umbrellas to be masking for our clients and there are a number of alternatives there. As we have seen over time, now we have had product adjacencies in all of our companies and we’re persevering with to search for these underneath these 4 umbrellas that I discussed. And definitely we’re searching for different issues which will even be included underneath these umbrellas, that could possibly be presumably a special route construction or what have you ever. However, we’re being disciplined and we need to guarantee that there’s long run worth that there is a large market alternative for any new sort of product adjacency or enterprise. We definitely, as you talked about, we’re at our two occasions leverage sort of aim, and we have got a powerful stability sheet and so we’ll be searching for alternatives to deploy that money and positively acquisitions and different investments in our product traces are proper on the high of our record. So we’ll be searching for alternatives.

Operator

Our subsequent query will come from Toni Kaplan with Morgan Stanley.

Toni Kaplan

Needed to get a way of the way you’re occupied with the financial and employment outlook and mainly what you are listening to out of your clients proper now when it comes to their propensity to spend going ahead, just a few background on the business can be nice.

Mike Hansen

Effectively, we really feel fairly good in regards to the macro nonetheless, the atmosphere nonetheless feels fairly conducive to promote new enterprise to proceed to penetrate and also you see with our fourth quarter income outcomes, in addition to the steering that we have provided that we really feel fairly good in regards to the momentum that now we have within the enterprise and that we’ll proceed into our fiscal ‘20. We have a look at GDP for calendar ‘19, it’s nonetheless above expectations or nonetheless above 2%. Excited about the final 9 years, that is the neighborhood by which we have carried out and we have had a fairly good 9 yr interval the place now we have grown in extra of that GDP and employment. So we nonetheless just like the macro atmosphere within the final quarter, we have seen slightly below 500,000 jobs being created within the final six months, one million within the final yr, 2 million. And so the job development has continued to be fairly good as properly. So Toni, we just like the atmosphere and as you may see by our fourth quarter and our steering, we just like the momentum within the enterprise.

Toni Kaplan

That is nice. After which when it comes to margins, how ought to we be occupied with growth throughout the segments within the upcoming yr s after which moreover, how ought to we be occupied with incremental SAP prices over subsequent yr.

Mike Hansen

So from a margin perspective, our steering would indicate one thing in the best way of low to mid 17s as an organization, and we’re definitely striving inside every of our companies to develop margins and that is our expectation. That margin expectation for fiscal ‘20 would come with some fairly good incrementals as a complete enterprise. And so we proceed to search for alternatives and count on enhancements in that.

From an SAP price perspective, we’ll proceed to roll that system out this fiscal yr. And we have talked about a few of these rollout prices rolling off after fiscal ‘20. That is been someplace within the, let’s name it, $10 million to $12 million as a result of we have talked about SAP prices from a couple of years in the past, growing about 25, about half of which has been prices which can be associated to the rollout whether or not it is coaching, consultants, et cetera. So we do count on that a few of that can roll off in fiscal ‘21.

Operator

And subsequent, we’ll go to Kevin McVeigh with Credit score Suisse.

Kevin McVeigh

Hey, very nice job, the natural development within the fireplace enterprise, the 14.3%, was there something in there specifically that sort of drove that after which simply actually, actually, very nice margin growth. Are you able to give us a way of how a lot of a headwind sort of the tariffs and we simply work as a result of clearly we’re capable of actually offset that properly.

Paul Adler

Yeah. Kevin, it’s Paul. I will discuss fireplace and switch it to Mike on the tariffs. However when it comes to fireplace, yeah, the natural development was robust at 14%. However we proceed to count on out of that enterprise, natural development of 10% or a bit of bit higher. So, excellent execution in This autumn. However that is sort of par for the course with the hearth enterprise of late. So nothing particular to essentially name out. However we simply proceed to do an incredible job of successful enterprise. We have now a really skilled, aggressive gross sales drive, and sort of leveraging our service capabilities that now we have in uniform rental, and our experiences there by the hearth enterprise and really skilled service oriented companies on the service facet, and so we count on that robust natural development to proceed.

Mike Hansen

Kevin from a tariff standpoint, there definitely has been a number of noise within the tariff atmosphere, and — however I’d say, definitely a bit of little bit of impression, not rather a lot, the noise round Mexico sort of got here and went. China, whereas now we have seen a number of noise and seen some tariffs, now we have not been too affected by the primary couple of buckets of these tariffs. However we’re not resistant to further tariffs which may occur. We have now to remain forward of these issues and so we’re seeing a bit of little bit of it. However there’s in all probability extra noise than impression. From a labor perspective, now we have definitely seen some impression market by market particularly. I would not say that it has been important. We do, in our manufacturing or our plant’s atmosphere, we do see a bit of bit extra problem in hiring individuals. However typically talking, the pressures that we have seen have been not important and we have been capable of cope with them fairly properly to date. We’re definitely going to wish to proceed to maintain our eyes on all the tariff data that is happening, although as we transfer ahead.

Operator

Our subsequent query will come from Gary Bisbee with Financial institution of America Merrill Lynch.

Gary Bisbee

I assume if I might return to margins and the margins implied within the steering. I believe if we again out the margin profit from the story of the G&Ok synergies and likewise the drag from one much less work day, it does not sound just like the steering implies an entire lot of margin growth exterior of these — from these two components, so I do know you are inclined to have some conservatism in the way you information, however is there the rest you’d name out that may result in much less working leverage in fiscal ‘20?

Mike Hansen

No, and fairly actually, Gary, I am undecided that I’d agree. I believe if you consider that margin enchancment, that is, let’s name it low to mid 17s in comparison with 16.7 for fiscal ‘19 would indicate, on the midpoint, roughly incrementals proper round 30%. That is on the excessive finish of the place we have talked about being. Should you strip out these incremental synergies, you are still above 20% on the midpoint. So we really feel we’re proper the place we need to be with these working margins and we do count on continued enchancment even with out the synergies, however inclusive of the synergies, we just like the margin growth fairly a bit.

Be mindful, Gary, remember that after we evaluate, in case you’re backing from EPS, we have got a $0.14 headwind within the increased tax price than in fiscal ‘18 after which as you talked about, we have got the $0.06 headwind from the one much less work day. So in case you’re backing in from EPS, you bought to bear in mind, there is a $0.20 headwind.

Gary Bisbee

Yeah, I assume I used to be simply doing, you stated 35 million incremental financial savings, that is 50 foundation factors after which that is offset by 10 or 15 from the one much less work day. It’s form of like half that margin, however I assume your level is honest that the opposite half remains to be fairly good growth, in order that’s positive. I assume I simply need to ask one different factor…

Mike Hansen

Yeah. And I’d say from a synergy standpoint, Gary, I’d — we give it some thought as 105 to 135. So a couple of $30 million enchancment.

Gary Bisbee

Okay. All proper, honest sufficient. After which on SAP, a two parter, you have, I assume, you stated, you are 65% of the best way by the community rollout at this level, you have talked about two advantages, the one you are most enthusiastic about is simply the data permitting you to cross promote and run the enterprise higher. How is that taking part in out, as soon as you have bought one among your amenities that’s up and operating, is that fairly fast or is there a significant studying curve? And I assume what I am actually making an attempt to get at is, are you starting to learn but from the rollout up to now, or ought to we consider it extra as a future profit, later this yr, perhaps much more so into subsequent yr.

Mike Hansen

Positive. There’s a studying curve. No query about it. This can be a system that’s closely knowledge dependent and now we have to alter our enterprise processes regionally to have the ability to use that system most effectively. So, there’s a drag when it comes to, we talked about an eight month planning course of previous to implementation, there’s additionally a time frame afterwards the place we’re getting environment friendly at utilizing the system. So it definitely is a course of and a number of change happening.

From a neighborhood perspective, I believe we’re seeing some incremental advantages like new moveable route computer systems for our SSRs and so there are some incremental advantages which can be in all probability extra on the minor facet. I believe from the flexibility to handle the data, we’d sometimes try this at better than a one location at a time sort of a glance. And so the extra we get on, the extra we will start to take a look at totally different regional groupings and make the most of the facility of that data. So I believe most of that’s going to return as we transfer into ‘21 and ‘22.

Gary Bisbee

After which if I might simply sneak in a single fast cleanup quantity, you stated final quarter you anticipated like within the cadence of ‘19, that the Q1 tax price can be rather a lot decrease. Is final yr’s quantity ballpark or ought to we expect it is increased than that, however nonetheless a lot decrease than the remainder of the yr?

Mike Hansen

Sure, you are proper, Gary. It is going to be fairly a bit decrease. I’d in all probability consider it when it comes to a sort of a 12% to 13% sort of a spread and a number of that can rely upon the extent of inventory compensation advantages primarily based on the worth of our inventory, the efficiency of the inventory, however you are proper, it will be a lot decrease than the remainder of the yr.

Operator

Our subsequent query will come from Blake Johnson with Goldman Sachs.

Blake Johnson

Hello, good afternoon. Thanks for taking my questions. Concerning your income steering, how a lot of the expansion do you count on to be pushed by additional penetration of the non-programmer market versus headcount development at present clients? And may you focus on traction and penetrating underrepresented verticals equivalent to healthcare and industrials this quarter?

Mike Hansen

Positive. So, for fiscal 20, our new enterprise efforts are typically the motive force of our income development in all of our companies and we just like the alternatives there significantly in that no programmer house, we will get to that no programmer house with our distinctive clothes, with our distinctive garment options like our scrub methods and we expect there is a large alternative there. So, we count on that to proceed to drive the expansion prefer it has for years previous, however the penetration stays good. It is after we can present product and articulate the worth to our clients. They definitely have proven that they are prepared to spend, in order that definitely will likely be essential for us, but it surely’s led by the brand new enterprise efforts.

From a fourth quarter perspective, these underneath penetrated verticals proceed to carry out very properly: healthcare, schooling, the federal government sectors, they proceed to carry out very properly. We’re targeted on these areas, significantly with our gross sales efforts. And we’re inspired by what now we have seen in ‘19 and count on good issues out of these verticals additionally in fiscal ‘20 and past.

Blake Johnson

After which concerning G&Ok, one of many strategic advantages was to drive increased penetration of ancillary merchandise to legacy G&Ok clients. Are you able to focus on any progress made right here? Possibly the present share of cross promoting between varied traces of enterprise or some other metrics that may be nice.

Mike Hansen

We definitely have made progress in fiscal ‘19 when it comes to some penetration, it is arduous. I am not going to supply any particular penetration as a result of a lot of that quantity is intermixed with legacy Cintas quantity. Nevertheless, we definitely have seen that our penetration has been robust. Our hygiene development has been robust for the yr. And so we’re inspired and imagine that we have made some good headway there and count on to proceed that in fiscal ‘20. However I’d say, total, we’re happy.

Operator

Subsequent, we’ll go to Andrew Steinerman with JPMorgan.

Andrew Steinerman

Only a fast remark about shopper retention ranges and any adjustments year-over-year and my second query is the pricing for brand spanking new accounts, has that seen any upward motion lately?

Paul Adler

Andrew, it’s Paul. By way of retention, I’d say that basically no important change in our enterprise. It has been roughly about 95% and that is nonetheless the place it was final fiscal yr, and that is the place we nonetheless count on it to be. After all, we’re all the time engaged on bettering that and there are alternatives, however I’d say nothing important to notice. By way of pricing, I have been doing a number of companies for brand spanking new accounts.

Mike Hansen

Andrew, it is a fairly aggressive atmosphere nonetheless on the market. And I will provide you with an instance. Once we’re on the market promoting work put on, for instance, our clients have plenty of choices and, and so there’s a retail possibility, the place we’re seeing billions of {dollars} being spent at retail, giant retailers, we’re seeing direct sale choices the place these rivals can design and handle applications and we’re seeing the rental possibility as properly. So our clients have options and choices. And so now we have to proceed to innovate and create good clothes and different merchandise, we have got to have the ability to articulate the worth of what we do versus a retail atmosphere versus a direct sale program. And we have got to observe by on that nice service. So the purpose Andrew is, our clients nonetheless have plenty of choices. The competitors is definitely on the market, and is accessible to them and we have got to guarantee that we’re offering the precise worth. And so all of that competitors retains, it’s kind of of a governor on what we will do with pricing. And so whereas we’re searching for one of the best value and we promote worthwhile new enterprise, there definitely is competitors that retains that pricing in a little bit of a tighter vary.

Operator

Subsequent, our query will come from Seth Weber with RBC Capital Markets.

Seth Weber

I wished to ask in regards to the large share buyback within the fourth quarter. In your ready remarks, you sort of listed share buyback as I believe, third or fourth in your pecking order. So, I imply, is that this only a perform of you could not discover acquisitions that you just appreciated or valuations simply stretched above what you are prepared to pay or are you able to simply form of characterize why the buyback was so robust within the fourth quarter relative to sort of your pecking order? Thanks.

Mike Hansen

Positive, our pecking order is simply as we stated, and we’re definitely searching for alternatives, however I will let you know, Seth, our money move was actually good. Within the fourth quarter, our money move from operations was slightly below $400 million. Within the third quarter, it was $325 million. So $725 million within the second half of the yr. So money move has been actually good. And, look, we wish to put that to work. We’d like to be, now we have continued to spend money on the enterprise. We’d love to seek out acquisitions. We’re aggressively engaged on these, however we will do the buyback that we simply did within the fourth quarter and nonetheless do execute on a big acquisition if it grew to become obtainable. So it is a bit of bit opportunistic. We just like the momentum within the enterprise, the typical of these, the typical buyback was one thing in the best way of slightly below $220 million for the fourth quarter. And primarily based on the place our inventory sits immediately, it seems like a fairly good transfer for us. So I believe it is opportunistic, we’ll proceed to take a look at it this manner. However we definitely love investing within the enterprise and we like to make acquisitions as properly.

Seth Weber

After which simply perhaps simply to touch upon the SG&A within the fourth quarter was sort of flattish yr to yr, you probably did point out some extraordinary prices, so I believe, that offset the decrease labor. So, how are you occupied with SG&A as a share of income for subsequent yr? Do you have to see some leverage there? Ought to it go down as a share of income?

Mike Hansen

We definitely do. If you consider the fourth quarter, one of many name outs that Paul made was our inventory compensation expense. Our inventory continues to carry out very, very properly and we love that. Nevertheless it does end in better inventory comp expense, it was increased by about 30 foundation factors than final yr. When now we have inventory efficiency, we typically may even get a number of inventory possibility workouts, which we had within the fourth quarter, which was why our tax price was a bit of decrease than guided. And when now we have these workouts, as a result of they’re non-qualified inventory choices, there’s an employer portion of payroll tax. And so if you mix these issues, it is a bit of little bit of a headwind. We do not thoughts it due to the inventory efficiency, but it surely was there. For the yr, our SG&A was down 30 foundation factors, and we definitely do count on to get leverage in fiscal ‘20 and past. That does not imply it should occur each quarter, however definitely over the course of the yr, we count on it.

Operator

And subsequent, we’ll go to Scott Schneeberger with Oppenheimer.

Scott Schneeberger

I’ve three, however a pair is likely to be fast and simple. First one, the best way you guys have sized the synergies, it has been extra in a time interval of feat than it has been, any change to absolutely the stage. And also you stated clearly, the route optimization is the final large piece that is not going to be tremendous impactful. So I assume the query I am getting at is, is there potential upside to the 130, 140, as soon as we get out a yr from now, or is that this in all probability going to be it for the best way you guys focus on it?

Mike Hansen

Effectively, two issues. To start with, the upside, I’ve talked about a couple of occasions previously, we expect is coming, will come from our sourcing atmosphere, as we sort of mix the G&Ok spend, legacy G&Ok spend and our spend. We have now seen a few of that heavy lifting that’s rolling into our P&L and can proceed to take action in fiscal ‘21. And we search for continued alternatives and advantages there. So if it will get above the 135, that I discussed earlier, and we typically count on that it’s going to, it will probably be in that service, I am sorry, in that provide chain space.

I will say this although, Scott. It will get more durable as — the farther we get from the acquisition date, it will get more durable and more durable to particularly say whether or not it is a synergy or simply extra effectivity within the enterprise. And so our expectation is after fiscal ‘20, we can’t be speaking about that fairly as a lot and we’ll be shifting ahead with searching for all totally different sorts of efficiencies within the enterprise.

Scott Schneeberger

The following query is simply on CapEx, appears like a rise of about 1% to about 12% on the excessive finish of the vary yr over yr. I used to be simply curious what can be the swing components of the 1% versus a 12% over the approaching yr on a yr over yr foundation?

Mike Hansen

I am a bit of confused by what you imply by 1% to 12%.

Scott Schneeberger

Simply evaluating the spend – for the information of fiscal ‘20 versus fiscal ‘19, assuming my numbers are proper.

Mike Hansen

So the information of 280 to 310, you are saying it is a, you are saying a 12% enhance over our CapEx for fiscal ‘19?

Scott Schneeberger

Yeah, that is appropriate. On the excessive finish, it is 1% on the low finish…

Mike Hansen

Yeah, I am sorry. Sorry, it took me a bit to know that. Look, we’re rising, we’re rising properly. And we have, as you realize, we consolidated fairly a couple of G&Ok areas into Cintas areas, however there nonetheless are capability wants, significantly in these markets that did not have a G&Ok operation in them. And so we do have capability wants as we proceed to develop, and I’d count on that that may, that that reality would proceed, if we proceed to develop the best way we’re rising. And so we’ll in all probability have a bit of little bit of an uptick this fiscal ’20, simply just because we’re persevering with to develop and add extra vegetation than in all probability now we have in the previous couple of years due to the consolidation efforts.

Scott Schneeberger

And that third query that I wished to get in with was on the fourth quarter name and in years previous, you have shared a bit of bit of data with regard to uniform section income combine. I am not anticipating a lot of a change, however is that one thing you are open to sharing this yr?

Paul Adler

Yeah, Scott. I’ve that and also you’re proper, not a lot of a change. Uniform rental, and as you talked about, that is measured as a share of the uniform rental and facility providers section and it’s This autumn knowledge. So uniform rental, 50% of the combo. Mud management got here in at 18%; hygiene is 14%, store towels at 5%, linen 9% after which catalog was about 4%.

Operator

[Operator Instructions] And subsequent we’ll go to Justin Hauke with Robert W. Baird.

Justin Hauke

I assume the one query that I had right here simply on the stability sheet, and, kudos for getting the leverage right down to the place you are trying to maintain it at two occasions. However I am curious on the upside, within the cycle the place we’re immediately, how a lot leverage would you be prepared to tolerate to the extent that there have been alternatives, whether or not an ancillary enterprise or your present enterprise, perhaps there have been extra materials acquisitions that may be on the market. How a lot leverage would you be prepared to placed on the stability sheet right here?

Mike Hansen

Effectively, I will begin with, we presently have a covenant that limits us to three.5 now. We have an incredible banking group and if we had an acquisition that pressured us to go above 3.5, then we’d have a look at it in a few alternative ways. First, does it create the long run worth that may warrant that sort of leveraging? And secondly, given then the mixed money move, would we be capable of cut back that pretty rapidly like we did with the G&NK, after the G&Ok deal closed? We’d have a look at it from these two standpoints. So I believe it simply depends upon the worth and the long run worth creation. However we would definitely, if we felt prefer it was an incredible alternative, we definitely would consider that.

Operator

Our subsequent query will come from Dan Dolev with Nomura.

Dan Dolev

So on uniform rental natural development, I can not imagine I am complaining right here, as a result of 6.Eight is actually a tremendous quantity. However, comparability was about 120 foundation factors simpler. I imply, what can get us upside to that quantity in fiscal ‘20? Is it productiveness, is it up promoting like, when can get to that heydays of the 8% natural development? What must occur for that factor?

Mike Hansen

Effectively, we will surely want an excellent macro and we just like the macro immediately. However we would wish macro. We must be firing on all cylinders when it comes to our gross sales productiveness and with some good and modern services and products. And, we have got to be actually on our recreation to promote into our present present clients.

Dan, the final 4 years, our natural development has been proper on this vary the place we got here on this fourth quarter, and we talked about a couple of occasions previously, we like this tempo. It permits us to handle the expansion in gross sales reps, the expansion in route capability, the expansion in manufacturing capability, and so we do just like the tempo and we expect that we will get some fairly good margin enchancment after we’re at this type of tempo, we will handle the enterprise very properly. And we prefer it, the final 4 years, we have been — our natural development in complete has been 6.8, 6.7, 7.1, 6.5 and clearly, the 6.5 included the primary quarter, the place we have been bottoming out when it comes to the put up G&Ok. That is proper the place we need to be, that 6.Eight and our steering for subsequent yr is fairly darn near that. So that is the tempo we like, Dan.

Dan Dolev

After which only a fast observe up on the productiveness simply to be clear. I believe final quarter, you stated that gross sales productiveness was good, but when I can quote, not so good as it was within the second quarter, is there an replace to that one when it comes to the way it trended within the fourth quarter?

Mike Hansen

Sure, Dan, you’re appropriate. We have been making nice progress on gross sales rep productiveness, sort of popping out of the G&Ok acquisition when it comes to filling the gross sales roles and getting all people skilled and on top of things after which additionally getting the methods transformed, which was mandatory for these G&Ok reps to promote the Cintas product line. You will recall, we’re making good enchancment by Q2 after which final quarter in Q3 with some climate impacts, we famous that the productiveness dipped, however in This autumn, it did bounce again very properly, even stronger than it was in Q2.

Operator

Our subsequent query will come from Tim Mulrooney with William Blair.

Tim Mulrooney

A few fast ones right here. To start with, if I’m going again to the fourth quarter, and I have a look at uniform rental section gross margin growth of 100 foundation factors year-over-year and that is a really strong end result. Are you able to simply stroll us by the first components driving that growth exterior of the decrease vitality prices?

Mike Hansen

Yeah, we definitely bought some good leverage from the income development. We had some good synergy seize. Vitality, as you stated, helped a bit of bit and we’re promoting worthwhile enterprise. And so a number of issues went properly within the quarter from a pricing perspective, in all probability a bit of bit higher within the fourth quarter incrementally than in earlier quarters, the pricing whereas nonetheless aggressive, as I talked about, with Andrew’s query, in all probability just a bit bit, incrementally extra constructive. And that definitely helps the margin as properly. So all in all, nice synergy, nice leveraging, promoting good worthwhile enterprise and a bit of little bit of vitality assist, all put collectively for a fairly good quarter.

If I might add that this — the rental gross margin for the yr was up 170 foundation factors from our fiscal ’16, which was the yr earlier than the G&Ok deal. So if you consider including a legacy G&Ok enterprise with a gross margin of about 37.5% to now immediately that full rental gross – full your rental gross margin of 45.5, we have made some nice progress in the previous couple of years and our companions have labored so arduous in integrating this acquisition. We purchased an excellent enterprise and our new companions have achieved an incredible job, our present companions have as properly. And it actually exhibits on this fiscal ‘19 yr with some actually good margins, particularly in that gross margin space.

Tim Mulrooney

Yeah. I believe all people within the funding neighborhood would agree with that assertion. It’s been very spectacular. If I might transfer on, how a lot do you will have remaining in your buyback, Mike, and does your steering assume — what does your steering assume with respect to share repurchase?

Mike Hansen

We have now 263 million on the billion that was approved final fall. And the steering assumes no further share buybacks.

Tim Mulrooney

No further share buybacks, okay. And lastly from me, any quantifiable impression from climate within the quarter. I imply, we had extra rainfall throughout the US this quarter, however I am undecided if that has the identical stage of impression that the chilly climate had final quarter.

Mike Hansen

Not almost the identical widespread impression. So nothing value calling out.

Operator

And that does conclude our question-and-answer session for immediately and I would like to show the decision again over to Mike Hansen for any further or closing remarks.

Mike Hansen

Effectively, thanks once more for becoming a member of us tonight. We’ll concern our first quarter monetary ends in September and we look ahead to talking with you once more at the moment.

Operator

That does conclude our convention for immediately. Thanks on your participation.