Cintas Corporation

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. Mike Hanson, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Good evening, and thank you for joining us. With me is Paul Adler, Cintas Vice President and Treasurer. We will discuss our fourth quarter results for fiscal 2019. After our commentary, we'll 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. Revenue for the fourth quarter of fiscal 2019 was a record $1.79 billion, an increase of 7.4% over last year's fourth quarter. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 7.6%. In the fourth quarter of fiscal 2019, the organic growth rate for the uniform rental and facility services operating segment was 6.8%, and the organic growth rate for the first aid and safety services operating segment was 10.7%. Gross margin for the fourth quarter of fiscal 19 of $823.6 million increased 9.5%. Gross margin as a percent of revenue was 45.9% for the fourth quarter of fiscal 19, compared to 45.1% in the fourth quarter of fiscal 18. Uniform rental and facility services operating segment gross margin as a percent of revenue improved 100 basis points from last year's fourth quarter to 46%, and the first aid and safety services operating segment gross margin percentage improved 70 basis points to 47.7%. Reported operating income for the fourth quarter of fiscal 19 of $314.4 million increased 18.4%. Operating margin was 17.5% in the fourth quarter of fiscal 19 compared to 15.9% in fiscal 18. Operating income was negatively impacted by integration expenses relating to the G&K acquisition by $900,000 in the fourth quarter of fiscal 19 and $15 million in the fourth quarter of fiscal 18. Excluding the integration expenses related to the G&K acquisition, Operating income increased 12.4%, and operating margin improved 80 basis points to 17.6% in the fourth quarter of fiscal 19, compared to 16.8% in the fourth quarter of fiscal 18. Reported net income for continuing operations for the fourth quarter of fiscal 19 was $226.2 million. and reported earnings per diluted share from continuing operations for the fourth quarter of fiscal 19 were $2.06. Reported EPS was negatively impacted by integration expenses related to the G&K acquisition by one cent in the fourth quarter of fiscal 19. Excluding the G&K acquisition integration expenses, net income dollars increased 13.5%, and net income margin was 12.6%. compared to 12% last year. EPS increased 16.9%. We are pleased with these fourth quarter results, which conclude a very successful year. A year ago, in our prepared remarks, we shared our expectations for fiscal 19. We provided revenue and earnings per share guidance. We committed to an estimated amount of synergies from the G&K acquisition and the continued conversion of operations to a new ERP system. We shared our excitement with returning to our debt to EBITDA target ahead of schedule, and we committed to returning to our historical priorities for deployment of cash. We are happy to report that we not only achieved but exceeded these expectations. For the ninth consecutive year, our organic growth rate was in the mid to high single digits. This means we've been able to grow consistently in multiples of GDP and employment growth. Due to our strong growth innovative products and services, and hard work and dedication of our employee partners, we moved up 41 places to number 459 in the Fortune 500 ranking. For the ninth consecutive year, we achieved double-digit earnings per share growth from continuing operations when adjusted for one-time special items. We paid an annual dividend of $220.8 million that increased 26.5% over the prior year. We've now increased the annual dividend paid to our shareholders for the 35th consecutive year. And the company deployed excess cash by purchasing 4.8 million shares of company stock for a total amount of $953.4 million. Fiscal 19's achievements were especially noteworthy given that they were accomplished in a period of extreme change management in which we were integrating our largest acquisition to date, and implementing a new enterprise resource planning system, namely SAP. The integration of a very large acquisition required the extra effort of everyone in the organization. Our partners executed our playbook and made the right adjustments when necessary. Better revenue retention and more cost synergies have resulted in a higher return on investment and plan. In many respects, the implementation of an ERP system is like an integration of a very large acquisition. It impacts hundreds of operations and requires the involvement of experts from all departments of the company. The conversion of each operation to SAP is an eight-month process of planning, changing business processes and employee mindsets, training and certification, and customer communication. In implementing SAP, we are moving from a decades-old platform to new technology that provides powerful information and data designed to help us improve our business. Through fiscal 19, about 65% of the operations are now in SAP. We will complete the rollout to the remaining locations in fiscal 20. The Cintas story is one of growth. We have grown both revenue and profit 48 of the past 50 years. The only exceptions were the great recession years. Our successful financial formula is organic revenue growth in the mid to high single digits, double-digit earnings per share growth, significant cash generation, and prudent deployment of excess cash. Our priorities for uses of cash are investing in the business for growth, acquisitions, dividends, and share repurchases. Our opportunity for continued growth is great. We have a product or service to help nearly every business get ready for the workday. This is evident in a diverse customer base spread over numerous verticals in both services providing and goods producing sectors of the economy. All businesses care about image, safety, cleanliness, or compliance, and businesses continue to outsource to concentrate on their core competencies. We are well positioned to continue to benefit from these tailwinds. We enjoy unrivaled scale, innovate our product and service offering, invest in technology, and build our brand. Cintas possesses numerous competitive advantages, but our greatest one is our culture. This year, Cintas celebrates our heritage 90 years in the making. The Cintas culture is the foundation upon which the company is built, and it is the reason for the company's success. The culture reflects our integrity, professionalism, and dedication to our customers. Other hallmarks, including positive discontent and competitive urgency, drive us to innovate and stay out in front of the competition. The Cintas culture is why, even after nearly a century of success, We believe our best years are ahead. Before turning the call over to Paul for more details, I'll provide our fiscal 20 expectations. We expect revenue to be in the range of $7.24 billion to $7.31 billion. We expect EPS from continuing operations to be in the range of $8.30 to $8.45. Note the following regarding the guidance. The growth rate at the revenue guidance range is 5 to 6.1%. However, our fiscal 20 contains one less workday than our fiscal 19. Adjusting for this one-day difference on a constant workday basis, the revenue growth rate range at guidance is 5.4% to 6.5%. One less workday also has a negative impact on EPS. reducing it about six cents, which is a 90 basis point drag on the EPS growth rate. The guidance assumes an effective tax rate for fiscal 20 of 21% compared to a rate of 19.9% for fiscal 19. The higher effective tax rate in fiscal 20 negatively impacts our EPS growth about 180 basis points and total EPS by about 14 cents. Keep in mind that the tax rate can move up or down from period to period based on discrete events, including the amount of stock compensation expense. The guidance assumes a share count for computing EPS of 109 million shares. This consists of diluted weighted average shares outstanding plus participating securities in the form of restricted stocks. It does not assume any future share buybacks, any potential deterioration in the U.S. economy, or any further specifically identified G&K integration expenses. And lastly, the guidance does include the impact from the adoption of the Accounting Standards Update 2016-02 on leases. With the adoption, significant changes to the balance sheet will occur. We expect assets and liabilities to increase in the range of $160 to $185 million. However, we do not expect any material effect on the P&L or the cash flow. I'll now turn the call over to Paul. Thank you, Mike.

Please note that our fiscal fourth quarter contained the same number of workdays as the prior year fourth quarter. Looking ahead to fiscal 20, please note that there will be one less workday than in fiscal 19. One less day will negatively impact fiscal 20 total revenue growth by 40 basis points. To illustrate the magnitude of the headwind, using fiscal 19's annual revenue, one less workday equates to about $27 million. One less workday also has a negative impact on operating margin and EPS. Fiscal 20 operating income margin will be reduced by about 12.5 basis points in comparison to fiscal 19 due to one less day of revenue. The negative impact on the margin occurs because certain expenses like amortization of uniforms and entrance mats are expensed on a monthly basis as opposed to on a daily basis. And we will have one less day of revenue to cover the expenses. As Mike stated, one less workday is a headwind of about 90 basis points on EPS growth and about a six cent drag on total EPS in comparison to fiscal 19. Each quarter of fiscal 20 will contain 65 workdays. In comparison to Fiscal 19, the Fiscal 20 Q1 will have one less day, Q2 will have the same number of days, Q3 will have one additional day, and Q4 will have one less day. Please keep the quarterly day differences in mind when modeling our Fiscal 20 results. We have two reportable operating segments, Uniform Rental and Facility Services and First Aid and Safety Services. The remainder of our business is included in all other. All other consists of fire protection services and our uniform direct sale business. First aid and safety services and all other are combined and presented as other services on the income statement. The uniform rental and facility services operating segment includes the rental and servicing of uniforms, mats, and towels, and the provision of restroom supplies and other facility products and services. The segment also includes the sale of items from our catalogs to our customers on route. Uniform rental and facility services revenue was $1.43 billion, an increase of 6.4%. Excluding the impact of acquisitions and foreign currency exchange rate changes, the organic growth rate was 6.8%. Our uniform rental and facility services segment gross margin was 46.0% for the fourth quarter. compared to 45.0% in last year's fourth quarter, an improvement of 100 basis points. Energy expense as a percentage of revenue was 2.4% compared to 2.55% in the prior year quarter. We are pleased with the gross margin expansion and our ability to overcome wage pressures and tariff impacts. Our first aid and safety services operating segment includes revenue from the sale and servicing of first aid products safety products and training. This segment's revenue for the fourth quarter was $163.5 million. The organic growth rate for this segment was 10.7%. The first aid segment gross margin was 47.7% in the fourth quarter compared to 47.0% in last year's fourth quarter, an increase of 70 basis points. First aid segment gross margins continue to increase with strong top line growth. As our volume grows, we can negotiate better pricing from vendors. Growth also enables us to improve route density, reducing gasoline and diesel costs, and enabling our service teams to spend more time serving and upselling. Our fire protection services and uniform direct sale businesses are reported in the all other category. Our fire business continues to grow each year at a strong pace. The Uniform Direct Sale business growth rates are generally low single digits and are subject to volatility, such as when we install a multi-million dollar account. Uniform Direct Sale, however, is a key business for us, and its customers are often significant opportunities to cross-sell and provide products and services from our other business units. All other revenue was $201.8 million, an increase of 12.7%. The organic growth rate was 11.6% and was driven by 14.3% organic growth in the fire business. All other gross margin was 43.7% for the fourth quarter of this fiscal year compared to 43.6% for last year's fourth quarter. Selling and administrative expenses as a percentage of revenue were 28.3% in the fourth quarter of fiscal 19 and 18. Lower labor expense as a percent of revenue was offset by increases in other expenses including stock compensation, insurance, workers' compensation, and medical. We are self-insured and therefore subject to some volatility in workers' comp and medical expense from quarter to quarter. Our effective tax rate on continuing operations for the fourth quarter of fiscal 19 was 21.7%. As Mike stated earlier, the tax rate can move from period to period based on discrete events, including the amount of stock compensation expense. Our cash and equivalence balance as of May 31st was $96.6 million. Operating cash flow in the fourth quarter of fiscal 19 increased 31%, from the amount of operating cash flow in the fourth quarter of fiscal 18. Capital expenditures in the fourth quarter were $68.9 million. Our CapEx by operating segment was as follows. $54.7 million in uniform rental and facility services, $9.6 million in first aid and safety, and $4.6 million in all other. We expect fiscal 20 CapEx to be in the range of $280 million to $310 million. As of May 31st, total debt was $2,849,000, $2,537,000 was fixed interest rate debt, and $312 million was variable rate debt in the form of a term loan and commercial paper. At May 31st, we were at our targeted leverage of two times debt to EBITDA. That concludes our prepared remarks. We are happy to answer your questions.