Cintas Corporation

Good day. Welcome to the Cintas quarterly earnings results conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Mike Hampton, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Good evening, and thank you for joining us tonight. With me is Paul Adler, Cintas Vice President and Treasurer. We will discuss our second quarter results for fiscal 2020. 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 second quarter of fiscal 2020 was a record $1.84 billion, an increase of 7.3% over last year's second quarter. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was also 7.3%. In the second quarter of fiscal 2020, the organic growth rate for the uniform rental and facility services operating segment was 5.8%, and the organic growth rate for the First Aid and Safety Services operating segment was 10.6%. Gross margin for the second quarter of fiscal 20 of $852.4 million increased 10%. Gross margin as a percent of revenue was 46.2% for the second quarter of fiscal 20, compared to 45.1% in the second quarter of fiscal 19, Uniform rental and facility services operating segment gross margin as a percentage of revenue improved 130 basis points from last year's second quarter to 46.6%. And the first aid and safety services operating segment gross margin improved 40 basis points to 48.4%. Operating income for the second quarter of fiscal 20 of $334.5 million increased 21.3%. Operating margin was 18.1% in the second quarter of fiscal 20, compared to 16% in fiscal 19. Operating income in the second quarter of fiscal 19 was impacted by integration expenses related to the G&K acquisition of $7.8 million, or 50 basis points. Net income from continuing operations for the second quarter of fiscal 20 was $246.4 million, and reported earnings per diluted share were $2.27. Excluding the one-time gain on the sale of a cost method investment and the G&K acquisition integration expenses, both in fiscal 19, EPS increased 29%. As our chairman and CEO, Scott Farmer, was quoted in today's earnings press release, we are pleased with our second quarter and year-to-date performance. We thank our employee partners for continuing to execute well and take great care of our customers. In addition to the strong financial performance, we continue to generate strong cash flow and commit to effectively deploying cash to increase shareholder value. On December 6th, we paid an annual dividend of $2.55 per share, an increase of 24.4% over last year's annual dividends. We've increased the dividend for 36 consecutive years. In the past 10 years, the annual dividend per share increased at a compound annual growth rate of 18.2%. Before turning the call over to Paul for more details, I'll provide an update of our fiscal 20 expectations. We have increased our expectations of financial performance. We expect revenue to be in the range of $7.29 billion to $7.33 billion. We expect EPS to be in the range of $8.65 to $8.75. Note the following regarding the guidance. The growth rate at the revenue guidance range is 5.8% to 6.4%. 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 6.2% to 6.8%. 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. Adjusting for this, the EPS growth rate range is 14.7% to 16%. Guidance assumes an effective tax rate for fiscal 20 of 19.2% compared to a rate of 19.7% for fiscal 19. 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. It 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. The guidance does not assume any future share buybacks or any additional G&K integration expenses. I will now turn the call over to Paul.

Thank you, Mike. Please note that our fiscal 20 contains 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 spent 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 contains 65 workdays. In comparison to fiscal 19, our upcoming Q3 of fiscal 20 will have one additional day and our 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 at 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 $1.47 billion, an increase of 5.7%. excluding the impact of acquisitions and foreign currency exchange rate changes, the organic growth rate was 5.8%. Our uniform rental and facility services segment gross margin was 46.6% for the second quarter compared to 45.3% in last year's second quarter, an improvement of 130 basis points. Operating income margin was a record 19.5% for the second quarter, and it was 19% year-to-date. Profit margins have strengthened for many reasons, including strong revenue growth and realization of cost synergies from the acquisition of G&K. Our first aid and safety services operating segment includes revenue from the sale and servicing of first aid products, safety products, and training. The segment's revenue for the second quarter was $169.7 million. The organic growth rate for the segment was 10.6%. The first aid segment gross margin was 48.4% in the second quarter compared to 48.0% in last year's second quarter, an increase of 40 basis points. First aid segment gross margins continue to increase with strong revenue growth. Our fire protection services and uniform direct sale businesses are reported in the all other categories. Our fire business continues to grow each year at a strong pace. 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 $204.1 million, an increase of 17.2%. The organic growth rate was 16.5%. The fire business organic growth rate was 9.6%. Uniform direct sale business had an exceptionally strong quarter, posting an organic growth rate of 25%. Growth was driven in large part due to the rollout of Carhartt-branded garments to a Fortune 100 customer. All other gross margin was 41.8% for the second quarter of this fiscal year compared to 41.2% last year. Selling and administrative expenses as a percentage of revenue were 28.1% in the second quarter of fiscal 20 and 28.6% in the second quarter of fiscal 19. Improvement was realized in many areas, including lower G&A labor expense as a percent of revenue. Last quarter, We mentioned that medical expense as a percent of revenue spiked. It came back in line in the second quarter as we expected. Our effective tax rate on continuing operations for the second quarter of fiscal 20 was 20.1%. 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. Our cash and equivalence balances of November 30th was $226.5 million. Year to date, operating cash flow increased about 66% from last year because of strong earnings growth and improvements in working capital, particularly accounts receivable, inventories, uniforms, and other rental items and service and accounts payable. Capital expenditures in the second quarter was $61.4 million. Our capex by operating segments was as follows, $48.6 million in uniform rental and facility services, $10.8 million in first aid and safety, and $2 million in all other. We expect fiscal 20 capex to be in the range of $265 million to $290 million. As of November 30th, total debt was $2,738.4 million. $2,538.6 million was fixed interest rate debt, and $199.8 million was variable rate debt in the form of a term loan. At November 30th, our leverage was 1.8 times debt to EBITDA.