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 call over to Mr. Mike Hansen, Executive Vice President and Chief Financial Officer. Sir, please begin.

Thank you, and good evening, and thanks for joining us tonight. With me is Paul Adler, Cintas Vice President and Treasurer. We will discuss our third quarter results for fiscal 2020. 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. Before discussing the financials, I want to say that our thoughts go out to all of those impacted by the COVID-19 coronavirus. This is a challenging time for all of us, and we can't thank enough our employees, whom we call partners, for doing all that they can to keep our customers' places of business clean, safe, and ready for the workday. We currently find ourselves at the peak of uncertainty as it relates to the pandemic's impact on the economy. The response of our country and each state evolves daily. A week ago, we hadn't seen much impact to our business, and we were expecting today to increase revenue and EPS guidance based on our year-to-date results and fourth quarter outlook. However, much has changed in a matter of days, and more changes are likely to come. Due to this uncertainty, including the severity and duration of the pandemic, we are not providing guidance for the fourth quarter of fiscal 2020 at this time. We certainly remain focused, though, on the safety and well-being of our employee partners and the care of our customers. So let's move to providing our third quarter results, and then we will open it up for questions. Our fiscal 2020 third quarter revenue was $1.81 billion, an increase of 7.6% over last year's third quarter. Earnings for diluted share, or EPS, from continuing operations were $2.16, an increase of 17.4% over last year's third quarter, adjusted for G&K integration expenses. Free cash flow for this year's third quarter was $300 million, an increase of 17.2%. The organic growth rate, which adjusts for the impacts of acquisitions, foreign currency exchange rate fluctuations, and differences in the number of workdays, was 5.7% for the third quarter of fiscal 20. The organic growth rate for the uniform rental and facility services operating segment was 4.8%, And the organic growth rate for the first aid and safety services operating segment was 12.5%. Gross margin for the third quarter of fiscal 20 of $824.4 million increased 9.2%. Gross margin as a percentage of revenue was 45.5% for the third quarter of fiscal 20, compared to 44.9% in the third quarter of fiscal 19. Operating income for the third quarter of fiscal 20 of $314.7 million increased 13.1%. Operating margin was 17.4% in the third quarter of fiscal 20, compared to 16.5% in fiscal 19. Net income from continuing operations for the third quarter of fiscal 20 was $234.5 million, and reported earnings per diluted share were $2.16. Excluding the G&K acquisition integration expenses in fiscal 19, EPS increased 17.4%. In addition to a solid financial performance, we continue to generate strong cash flow and commit to effectively deploying cash to increase shareholder value. Third quarter free cash flow was $300 million, an increase of 17.2% compared to last year. In the third quarter of fiscal 20, we paid an annual dividend totaling $268 million. The dividend of $2.55 per share was an increase of 24.4% over last year's annual dividend. In addition to the annual dividend, we purchased $393.1 million of Syntop stock in fiscal 20 to date, including $200 million in March. The amount remaining under our buyback authorization is $1.1 billion. We end our third quarter with fiscal year-to-date revenue growth of 7.2%. and an organic growth rate of 7.1%. Operating income, excluding last year's T&K integration expenses, increased 14.7%. EPS adjusted for last year's special items increased 22.2%. And finally, free cash flow for the third quarter year to date increased 61%. Our employee partners have really done a great job this year. With that, I will turn the call over to Paul for additional details for our third quarter results.

Thanks, Mike. 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 en route. Uniform rental and facility services revenue was $1.45 billion, an increase of 6.6%. Excluding the impact of acquisitions, foreign currency exchange rate changes, and the difference in number of workdays, the organic growth rate was 4.8%. Our uniform rental and facility services segment gross margin was 45.8% for the third quarter compared to 44.9% in last year's third quarter, an improvement of 90 basis points. Gross margins have strengthened for many reasons, including strong revenue growth and realization of cost energies 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. This segment's revenue for the third quarter was $170.5 million. The organic growth rate for this segment was 12.5 percent. The first aid segment gross margin was 48.0 percent in the third quarter compared to 48.2 percent in last year's third quarter. The difference in gross margin was due to revenue mix in the quarter, which consists of service, product sales, and training. The strong organic revenue growth benefited from more safety and personal protective equipment product sales, which generally have lower margins than the other revenue categories. 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 $192.1 million, an increase of 9.9%. The organic growth rate was 7.1%. The fire business organic growth rate was 4.1%. Fire revenue was weighed down by the loss of a struggling national account in the retail sector that recently disclosed a closing of over 100 stores, by mild winter weather that resulted in less sprinkler repair service revenue, from freezing and bursting water pipes, and by a decline in sales rep productivity through the Christmas and New Year's holidays. Uniform direct sale business organic growth rate was 11.1% and benefited from additional sales from the rollout last quarter of Carhartt branded garments to a Fortune 100 customer. All other gross margin was 41.3% for the third quarter of this fiscal year compared to 42.3% last year. Selling and administrative expenses as a percentage of revenue were 28.2% in the third quarter of fiscal 20 and 28.3% in the third quarter of fiscal 19. G&A labor expense as a percent of revenue improved year over year. Our effective tax rate on continuing operations for the third quarter of fiscal 20 was 18.9% compared to 20.1% last year. 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 February 29th was $234.4 million. Of that amount, $144.7 million was in the United States and unrestricted. Capital expenditures in the third quarter were $63.2 million. Our CapEx by Operating segment was as follows, $50.2 million in uniform rental and facility services, $10.1 million in first aid and safety, and $2.9 million in all other. Year-to-date, free cash flow was $745.2 million, an increase of 61% compared to the prior year period. Free cash flow increased because of strong earnings growth and improvements in working capital, particularly accounts receivable, inventories, uniforms, and other rental items and service, and accounts payable. As of February 29th, our balance sheet remains strong. Our leverage was 1.7 times debt to EBITDA. We have an untapped credit facility of $1 billion, no debt maturities in the next 12 months, and no material debt maturities in the next two years. That concludes our prepared remarks. We are happy to answer your questions.