CTAS

Cintas Corporation (CTAS)

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Cintas (CTAS)

Q1 2014 Earnings Call

September 19, 2013 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

Sara Gubins - BofA Merrill Lynch, Research Division

Joe Box - KeyBanc Capital Markets Inc., Research Division

Manav Patnaik - Barclays Capital, Research Division

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

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

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

Sean Sun-Il Kim - RBC Capital Markets, LLC, Research Division

Molly R. McGarrett - JP Morgan Chase & Co, Research Division

Gregory W. Halter - LJR Great Lakes Review

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, sir.

William C. Gale

Thank you for joining us this evening as we report our first quarter results for fiscal 2014. With me is Mike Hansen, Cintas's Vice President and Treasurer. After some commentary on the results, 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.

We are pleased to report first quarter revenue of $1,120,000,000 which represents growth of 6.6% from last year's first quarter. Our first quarter had one less workday than last year. Adjusting for this workday difference, revenue increased by 8.2% over last year's first quarter. Organic growth, which adjusts for both the impact of acquisitions and the difference in workdays, was 7.1%. As mentioned in today's press release, the organic growth for each of our 4 operating segments exceeded 6%. Mike will give more detail by operating segment in a few minutes.

Our operating income for the first quarter was $140.1 million, which is 12.5% of revenue. This operating margin is 70 basis points lower than last year's first quarter operating margin of 13.2%. On our July earnings call, I indicated that comparisons to last year's first quarter would be difficult due to 3 items. First, as I mentioned a few minutes ago, our first quarter had less workday than last year. This had a negative impact of approximately 50 basis points on this year's operating margin due to a number of our large expenses, including rental material costs, depreciation and amortization, being determined on a monthly basis instead of a workday basis. Secondly, this year's first quarter recycled paper prices were over 20% lower than last year's first quarter recycled paper prices. This resulted in a negative impact to operating margin of 30 basis points compared to last year's first quarter. Finally, we began adding route capacity in the second quarter of last fiscal year, so last year's first quarter had none of the expenses associated with that capacity expansion. All in all, we are pleased with our first quarter operating margin results and a solid start to our fiscal 2014 year.

First quarter net income was $77.8 million, and earnings per diluted share were $0.63. We were active with our share buyback program and purchased a total of 3 million shares of Cintas stock in the first quarter and into September. Since we purchased the shares in the latter part of the first quarter and in September, the buybacks had no impact on our first quarter earnings per share. However, we expect that these buybacks will benefit fiscal year 2014 EPS by about $0.04. We announced in July that our Board of Directors authorized an additional share repurchase program of $500 million. As of today, we have available for future share repurchases $15.4 million under the October 2011 board authorization and $500 million under the July 2013 board authorization.

As Scott Farmer indicated in our press release, much uncertainty remains in the U.S. economy. The employment picture from month to month remains uneven and inconsistent, a reflection of businesses' uncertainty about future investment plans. As a result, we are maintaining our fiscal 2014 revenue expectations to be in the range of $4.5 billion to $4.6 billion. We are updating our EPS expectations to include the impact of the buybacks through today so that we now expect fiscal 2014 EPS to be in the range of $2.70 to $2.79.

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

J. Michael Hansen

Thanks, Bill. As Bill mentioned, total revenue increased 6.6% from the first quarter of last year, with total company organic growth being 7.1%. Total company gross margin for the first quarter was 41.6%, which is down from last year's first quarter gross margin of 42.4%. I'll discuss these items in more detail by segment.

Before doing so, let me remind you that there were 65 workdays in our first quarter, which is one less than last year. In fiscal '14, we will have 65 workdays in each quarter, for a total of 260 workdays. This creates year-over-year workday differences in each quarter except the second and results in one less workday for the entire fiscal year.

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