CTAS

Cintas Corporation (CTAS)

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Industry: Consumer Non-Durables
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Cintas Corporation (CTAS)

F3Q 2014 Earnings Conference Call

March 19, 2014 17:00 ET

Executives

Bill Gale - Senior Vice President, Finance and Chief Financial Officer

Mike Hansen - Vice President and Treasurer

Analysts

Hamzah Mazari - Credit Suisse

Sara Gubins - Bank of America

Shlomo Rosenbaum - Stifel

Justin Hauke - Robert Baird

Nate Brochmann - William Blair

George Tong - Piper Jaffray

Scott Schneeberger - Oppenheimer

Dan Dolev - Jefferies

Sean Egan - KeyBanc Capital Markets

Manav Patnaik - Barclays

Presentation

Operator

Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today’s conference 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.

Bill Gale - Senior Vice President, Finance and Chief Financial Officer

Good evening and thank you for joining us. With me is Mike Hansen, Cintas’ Vice President and Treasurer. We will discuss our fiscal 2014 third quarter results. In addition, we will discuss this morning’s press release in which we announced an agreement o combine our Document Shredding business with Shred-it International. 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.

We are pleased to report third quarter revenue of $1.130 billion, which represents growth of 5.1% from last year’s third quarter. Our third quarter had one more workday than last year. Adjusting for this workday difference, revenue increased by 3.5% over last year’s third quarter. Organic growth, which adjusts for the impact of acquisitions and workday differences, was 3.1%.

Let me provide some color on our organic growth figure. First, we experienced a weaker Canadian dollar relative to the U.S. dollar negatively impacting organic growth by 0.5 percentage points the. Second, we had a difficult year-over-year comparison due to our Uniform Direct Sales operating segment having the largest uniform program rollout in the company’s history during last year’s third and fourth quarters. This adversely impacted this year’s organic growth by 1.7 percentage points.

Finally, revenue in this year’s third quarter was impacted by the severe winter weather experienced by the majority of the United States. There were numerous days, in which our operations or our customers or both were closed as a result of the severe condition. Due to the nature of our businesses, the effects were greatest on our first aid, safety and fire protection services and document management services operating segment.

Our operating income for the third quarter was $150 million or 13.3% of revenue. This operating margin was 90 basis points higher than last year’s third quarter operating margin, up 12.4%. Much of this improvement was the result of a very strong performance by our rental uniforms and ancillary products operating segment. Also the additional workday in this year’s third quarter had a positive impact on operating margin due to the number of our large expenses, including rental material cost, depreciation and amortization being determined on a monthly basis instead of a workday basis.

Third quarter net income was $84.6 million and earnings per diluted share were $0.69, a 15% increase over the EPS of $0.60 in last year’s third quarter. As Scott Farmer stated in our press release, despite the many headwinds this quarter, we grew earnings at a double-digit rate. We are pleased with our results for the quarter and fiscal year-to-date and we complement our employees who we call partners. We especially recognize the hard work and dedication of our route-based operations and partners who were challenged by this winter severe conditions.

Earlier today, the company announced an agreement with the shareholders of Shred-it International Incorporated to combine Cintas’ Document Shredding business with Shred-it’s Document Shredding business. Under the agreement, Cintas and Shred-it will each contribute its Document Shredding business to a newly formed partnership that will be owned 42% by Cintas and 58% by the shareholders of Shred-it. The combined entity will operate under the Shred-it brand and is expected to have annual revenue in excess of $600 million. In addition to its 42% ownership of the partnership, Cintas will receive approximately $180 million in cash at the closing of the transaction, which is expected to occur before May 31, 2014. Following closing the new company will be led by Vince DePalma, current Chief Executive Officer of Shred-it, who will become CEO of the new venture and Karen Carnahan, current President and Chief Operating Officer of the Cintas’ Document Management Division, who will become COO of the new venture.

The partnership will allow the Document Shredding businesses of both companies to leverage the combined scale and create synergies in a way to generate more profitable growth for shareholders, additional opportunities for employees and better service to customers. Such synergies include one IT platform taking advantage of the enhanced revenue and lower cost of plant-based shredding facilities versus on-site shredding and improve route efficiency and density.

We also see this transaction as in the best interest of our shareholders due to the opportunity to enhance value as noted above but also due to the nature of the shredding business. The volatility of the paper price we receive for the shredded paper creates an unpredictable variable in performance that is not present in our other segments. Additionally while we’ve found many opportunities to extend service offerings in our other segments the same does not exist in the Document Destruction business.

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