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 would like to turn the conference over to Mr. Mike Hansen, Executive Vice President and Chief Financial Officer. Sir, please go ahead.

Thank you, and good evening. Thanks for joining us. With me is Paul Adler, Cintas Vice President and Treasurer. We will discuss our first quarter results for fiscal 2020 and After our commentary, 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. Revenue for the first quarter of fiscal 20 was a record $1.81 billion, an increase of 6.7% over last year's first quarter. The organic growth rate, which adjusts for the impacts of acquisitions, foreign currency exchange rate fluctuations, and differences in the number of workdays, was 8.3%. In the first quarter of fiscal 20, The organic growth rate for the uniform rental and facility services operating segment was 7.5%, and the organic growth rate for the first aid and safety services operating segment was 13.8%. Gross margin for the first quarter of fiscal 20 of $849.1 million increased 9.6%. Gross margin as a percentage of revenue was 46.9% for the first quarter of fiscal 20, compared to 45.6% in the first quarter of fiscal 19. Uniform rental and facility services operating segment gross margin as a percent of revenue improved 150 basis points from last year's first quarter to 47.2%, and the first aid and safety services operating segment gross margin percentage improved 110 basis points to 49%. Reported operating income for the first quarter of fiscal 20 of $306.1 million, increased 15.4%. Operating margin was 16.9% in the first quarter of fiscal 20, compared to 15.6% in fiscal 19. Operating income in the first quarter of fiscal 19 was negatively impacted by integration expenses related to the G&K acquisition by $4.9 million for 30 basis points. Reported net income for the first quarter of fiscal 20 was $250.8 million, and reported earnings per diluted share for the first quarter of fiscal 20 were $2.32. Excluding the G&K acquisition integration expenses in fiscal 19, EPS increased 20.2%. As our Chairman and CEO, Scott Farmer, was quoted in today's press release, we are pleased with our start to our fiscal year. We thank our employee partners for continuing to execute well on our important initiatives. Before turning the call over to Paul for more details, I'll provide an update of our fiscal 20 expectations. We expect revenue to be in the range of $7.28 billion to $7.32 billion. We expect EPS to be in the range of $8.47 to $8.57. Note the following regarding the guidance. The growth rate at the revenue guidance range is 5.6% to 6.2%. 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 at guidance is 6% to 6.6%. 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 for the year. The guidance assumes an effective tax rate for fiscal 20 of 20.3% compared to a rate of 19.7% for fiscal 19. The higher effective tax rate in fiscal 20 negatively impact EPS growth about 80 basis points and total EPS by about 6 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 stock. It does not assume any future share buybacks, any potential deterioration in the U.S. economy, or any additional G&K integration expenses. I'll now turn the call over to Paul.

Thank you, Mike. Please note that our fiscal 20 contains one less workday than 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 19th. Each quarter of fiscal 20 will contain 65 workdays. In comparison to fiscal 19, our upcoming Q2 of fiscal 20 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 service. 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 en route. Uniform rental and facility services revenue was $1.45 billion, an increase of 5.8%. Excluding the impact of acquisitions, foreign currency exchange rate changes, and differences in the number of workdays, the organic growth rate was 7.5%. Our uniform rental and facility services segment gross margin was was 47.2% for the first quarter compared to 45.7% in last year's first quarter, an improvement of 150 basis points. Energy expense as a percentage of revenue was 2.20% compared to 2.45% in the prior year quarter. The gross margin expansion was driven in large part by the strong revenue increase covering certain fixed production and service department costs. 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 first quarter was $172.1 million. The organic growth rate for the segment was 13.8%. The first aid segment gross margin was 49.0% in the first quarter compared to 47.9% in last year's first quarter. an increase of 110 basis points. First aid segment gross margins continue to increase with strong top-line growth. 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 multimillion-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 $184.5 million, an increase of 8.8%. The organic growth rate was 9.7%. The fire business organic growth rate came in at 12.5%. The uniform direct sale business had a good quarter, too, posting an organic growth rate of 5.8%. All other gross margin was 42.8% for the first quarter of this fiscal year compared to 42.9% for last year's first quarter. Selling and administrative expenses as a percentage of revenue were 30.0% in the first quarter of fiscal 20 and 29.7% in the first quarter of 19. Lower labor expense as a percent of revenue was offset by increases in other expenses, particularly an 80 basis point increase in medical expense. We are self-insured and therefore subject to some volatility in medical expense from quarter to quarter. Our effective tax rate on continuing operations for the first quarter of fiscal 20 was 10.1%. Stock-based compensation positively impacted the tax rate. As Mike stated earlier, the tax rate can move from period to period based on discrete events, including the amount of stock compensation expense. Please note three new line items on our balance sheet, resulting in an increase in assets and liabilities by about $165 million. These relate to our adoption in the quarter of the Accounting Standards Update 2016-02 entitled Leases. The adoption does not have a material impact on net income or cash flow. Our cash and equivalence balances of August 31st was $102.1 million. Operating cash flow in the first quarter of fiscal 20 increased about 70% from the amount of operating cash flow in the first quarter of fiscal 19 and benefited from strong earnings growth and improvements in working capital. Capital expenditures in the first quarter were $64.7 million. Our CapEx by operating segment was as follows. $53.0 million in uniform rental and facility services, $8.1 million in first aid and safety, and $3.6 million in all other. We expect fiscal 20 CapEx to be in the range of $280 million to $310 million. As of August 31st, total debt was $2,876.9 million. $2,538.1 million was fixed interest rate debt, and $338.8 million was variable rate debt in the form of a term loan and commercial paper. At August 31st, our leverage of 1.9 times debt to EBITDA was slightly lower than our target of two times. That concludes our prepared remarks. We are happy to answer your questions.