Cintas Management Discusses Q3 2012 Results - Earnings Call Transcript

Cintas (CTAS)

Q3 2012 Earnings Call

March 20, 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

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

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

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

Gary E. Bisbee - Barclays Capital, Research Division

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

Joe Box - KeyBanc Capital Markets Inc., Research Division

Gregory W. Halter - LJR Great Lakes Review

David Ridley-Lane - BofA Merrill Lynch, Research Division

John M. Healy - Northcoast Research

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

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

William C. Gale

Thank you for joining us this evening, where we will report our third quarter results for fiscal 2012. With me is Mike Hansen, Cintas' Vice President and Treasurer. After some commentary on the results, we will be happy to answer your questions.

We are pleased to report that our third quarter revenue grew 7.9% from last year's third quarter to revenue of $1,012,000,000. Net income increased by 28.7% to $76 million, and earnings per share were $0.58, a 41.5% increase over last year.

I would like to make a few comments on this quarter's revenue growth. This year's third quarter had one more work day than last year's third quarter, which benefits our overall revenue growth. On a same-workday basis, our revenue growth was 6.3% over last year's third quarter.

Our organic growth, which accounts for both workday adjustments and the impact of acquisitions, was 5.9%. Keep in mind that the recycled paper prices remained at approximately $150 per ton throughout the quarter, and this lower price negatively impacted our consolidated revenue growth over last year's third quarter by 0.6%.

Our operating margin continues to reflect our focus on high quality growth. The operating margin of 13.6% was an improvement over both the third quarter of last year and this year's second quarter. We also benefited this quarter from lower-than-expected energy-related costs and medical costs. Energy-related costs for the third quarter were 3.3% of revenue, which is slightly better than the expected level of 3.5% assumed in our guidance. In addition, medical-related expenses were 30 basis points lower than last year due to better than expected experience.

As a result of the better-than-expected results in the third quarter, we are updating our guidance for fiscal 2012. We now expect fiscal 2012 revenue to be in the range of $4.09 billion to $4.12 billion, and we expect earnings per diluted share in the range of $2.24 to $2.27. This guidance assumes no deterioration in the current U.S. economy and effective tax rate of 37% for the entire 2012 fiscal year, and recycled paper prices to continue to be approximately $150 per ton. It also assumes that energy-related costs will increase to approximately 3.5% of revenue and medical expenses to increase to normalized levels.

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.

Now I would like to turn the call over to Mike Hansen for more details on the third quarter.

J. Michael Hansen

Thank you, Bill. As Bill mentioned, total revenue increased 7.9% from the third quarter of last year, with total company organic growth being 5.9%.

Total company gross margin for the third quarter was 42.1%, which is up from last year's third quarter gross margin of 41.8% despite a steep drop in recycled paper prices. I will discuss these items in more detail by segment.

Before doing so, please let me remind you that there were 65 workdays in our third quarter, which is one more than last year; and there are 66 work days in our fourth quarter, which is the same as last year. As a planning note for 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.

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, masks, 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 third quarter. Third quarter rental revenue was $721 million, which is up 8.4% compared to last year's third quarter and up 6.5% organically over last year. All areas of our rental business grew in the third quarter, and we continue to focus on selling profitable business.

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