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A Uniform Route to a Wide-Moat Business

Vishnu Lekraj

Vishnu Lekraj: My name is Vishnu Lekraj. I'm an equity analyst here at Morningstar that covers the employment sector. One of the most unique and successful firms that I cover is Cintas Incorporated, and we're lucky enough to have them this week for our 2009 Stock Conference. With me today is chief financial officer Bill Gale. Thank you, sir.

William Gale: Thank you.

Lekraj: Now, the first question that I want to start off with is a macro question. Certain economists have termed this the "great recession," and Cintas has seen some declines in their revenues over the past year, but your profitability has been maintained and maintained pretty well. How have you done this, and what should investors expect going forward from a profitability standpoint?

Gale: Well, there certainly is no question this has been the worst downturn that our company has seen in its existence, and I think the U.S. economy has experienced since the Depression. But we actually saw this starting about 18 months ago, and we began to take some actions at that point in time.

One of the first things that we did is we decided to reduce our hiring, to look for opportunities to say, we didn't need to plan to have the growth that we had always planned to have. So we, in essence, right-sized our organization for whatever might happen. Now Cintas had an advantage in that we had always been a growing company. We knew what we looked like several years ago when were at these revenue levels, and so we began to adjust accordingly.

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We took our routes and instead of servicing our customer base with 40 routes in a city, we were able to reduce it to maybe 38 routes in a city. We took many of our routes to four-day work-weeks instead of five-day work-weeks to reduce the amount of windshield time that it took for the service provider to get from the facility out to our location.

We also took other steps like reducing travel expenditures, telling our people to be more efficient users of supplies. Most importantly, we convinced our management team we needed to eliminate what we called non-value-added work.

Lekraj: Right.

Gale: Value-added work is work you produce that the customer recognizes and is willing to pay for. We found, as many companies have found, that over time people start doing reports that aren't necessarily important to the value of servicing the customer. They do processes that maybe can be fine-tuned to be more efficient. So by doing this, we were able to take employees out of our headcount.

We also realized that we didn't need as much productive capacity because our revenue levels weren't going to be as large and in most cities in the U.S. and Canada, we had multiple facilities. We were able to shut down some of the facilities in various markets to make sure that we adjusted the organization for the revenue that we were going to have.

Lekraj: Outside of the current business environment, there's been a secular churn within the U.S. economy. We are moving more towards the service-oriented type firms and type businesses. A significant portion of Cintas' customer base is goods producing. How is Cintas going to handle this moving forward and what should investors except in terms of the types of moves and the types of strategy that's going to come forward from that?

Gale: Well surprisingly and many people don't know this but Cintas today only has about 15% of its customers that are really goods producing customers. We primarily are providing our services to the service economy. Back in the '90s when we were just pretty much a uniform company, we knew that it was time to broaden our service offerings into other business services.

So we began to look for services that shared some of the same traits that our existing uniform business had served. For example, recurring revenue, use of a route structure, small details for our business customers that we could take care of more efficiently and effectively than they can.

That's what enabled us to broaden our service offerings from being the uniform people to being the service provider--by getting into such things as first aid and safety, fire services, document management facility services.

I think that has helped Cintas tremendously because we've been able to provide more products and services to our existing uniform customers as well as expand our number of customers that we can service.

Today, more than half of our customers do not even rent uniforms or buy uniforms from Cintas, but use some of our other services. So we've adjusted our business, I think, coincidentally with the way the economy and the U.S. and the Canadian economies have grown to become more service oriented.

We've also looked at products that are more suitable to a service environment where the customer's employee is in front of the public as opposed to in a manufacturing environment. Today, we rent knit shirts, cargo pants, all sorts of products that are far different than what the uniform business was back in the '80s.

Lekraj: Right. When we analyzed Cintas in comparison to some of your competitors, you've been a lot more successful in the uniform rental business. What has enabled Cintas to do that and set itself apart from everyone else?

Gale: Well, we've been asked that question ever since I joined the company. And I know even before I joined the company. Why are we always growing faster? Why do we have better margins? The first answer is it's our culture.

I think every company has a culture. Cintas has been very much in tune with enhancing and promoting its culture within its company.

What does that mean? Our culture consists of three different pieces. The first is our principal objective, and our principal objective is to exceed our customers' expectations for the long-term benefit of our shareholders and our working partners. So all of our employees are focused on, what can we do for our customers and how can we do it better?

The second part of our culture is a system of policies and procedures that ensures consistency at all of our operations throughout the country. We have over 200 uniform rental operations in the U.S. and Canada.

We try to operate each one of those the same way, providing the same level of service for our customers so regardless of where our customers are, they know they can rely on Cintas to have consistency.

The final part of our corporate culture is our corporate character, such as we are professional, we are Spartan in our approach, we have a sense of competitive urgency, we have positive discontent. Things are never as good as we can do, and we tell our management people and our front-line service providers and plan providers, you can always do it better so try to figure out better ways of doing things.

The other thing that we have is scale. We have denser routes than any of our competitors in all of the businesses that we serve. We have the ability to provide a broader range of services to our customers. We have a worldwide sourcing capability where we can obtain garments and products for our customers at prices cheaper than our competitors can do.

We manage the details. Everyone focuses on all the little things that it takes to run your operation effectively be it a profit center or a staff department. We all are incentivized on growth and profitability in our company so we're all focused on that.

Then it comes back to culture. We hire people and we retain people who are compatible in our culture, enjoy what they do, and I think that is the reason for the success of the company.

Lekraj: OK, well thank you again for joining us and thank you again for coming to the Stock Conference again.

Gale: Thank you for having us.