CTAS

Cintas Corporation (CTAS)

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Cintas (CTAS)

Q4 2011 Earnings Call

July 19, 2011 5:00 pm ET

Executives

J. Hansen - Vice President and Treasurer

William Gale - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Andrew Steinerman - JP Morgan Chase & Co

Sara Gubins - BofA Merrill Lynch

Dave Brinkman

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Justin Hauke - Robert W. Baird & Co. Incorporated

James Samford - Citigroup Inc

Scott Schneeberger - Oppenheimer & Co. Inc.

John Healy - Northcoast Research

Gary Bisbee - Barclays Capital

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 Gale

Thank you for joining us this evening to report our fourth quarter results for fiscal 2011. With me is Mike Hansen, Cintas' Vice President and Treasurer. After some commentary on the results, we will be happy to answer questions.

We are pleased to report that our revenue for the fourth quarter grew 11.3% from last year's fourth quarter to a record revenue of $1,012,000,000. Net income increased by 27.6% to $70.8 million, and the earnings per share were $0.49, a 36% increase over last year. As noted in the release, total year revenue of over $3.8 billion was 7.4% higher than last year, and total earnings per share of $1.68 was 20% higher. Stabilization of revenue at existing customers, excellent new business results and cost control measures, as well as improved productivity within our organization, were all factors in these very good results. We want to express our sincere appreciation to all of our employees, who we call our partners, for their contribution to this successful year.

On May 18, we issued $500 million of public debt spread in 2 tranches, $250 million with a 5-year maturity and the other at 10 years. We found the rates to be very attractive, and demand was strong for our bonds. Given the price of our stock and the positive outlook for our company's performance, our Board of Directors authorized management to use these funds to pay off short-term debt and to purchase Cintas stock under parameters established by the board. The $500 million expenditure resulted in total purchases of 15.8 million shares, of which 7.7 million shares were purchased as of May 31, and the remaining 8.1 million shares were purchased between June 1 and July 6. Coupled with the share purchases made earlier in fiscal 2011, Cintas purchased 23.4 million shares since last July. The impact of the share purchases in fiscal 2011 added about $0.05 to our earnings per share from what we would have reported with no share purchases.

Our guidance for fiscal 2012 revenue is to be in the range of $4 billion to $4.1 billion and earnings per diluted share to be in the range of $1.97 to $2.05. This guidance incorporates the impact of the recently completed $500 million share buyback program, which equates to about $0.12 a share, when also factoring in the additional interest expense from the debt offering in May.

Let me address some assumptions used in developing this guidance. While recent economic news, including the Bureau of Labor announcements for May and June were not as bright as we would like, we expect that the North American economy and employment picture will moderately improve in the next 12 months. We expect that we and the other companies in industries in which we operate could face input cost headwinds in the next 12 months, particularly related to cotton, energy and oil-related products, such as polyester. These rising input costs will add negative pressure to our industry's cost. While this will create some margin pressure for Cintas and our competitors, we expect the margin pressure will also ease the extremely aggressive pricing environment that we have experienced over the last several years.

More specifically, for our guidance, we have assumed that energy-related cost would continue at our fourth quarter level of 3.5% of sales. This was the highest level we have seen since our fiscal 2009. As many of you know, the price of cotton significantly increased last fall and has remained at relatively high levels but has declined significantly in recent months. Many factors contribute to the effect that cotton has on Cintas, certainly the price of cotton, but also Cintas' fabric inventory, as well as finished goods inventory levels, sourcing decisions and manufacturing lead times, as well as amortization periods of in-service inventory and the overall uniform industry pricing environment. We have been managing and analyzing each of these areas to minimize the impact on our results. We expect that the fiscal 2012 impact will be less than $15 million on our cost of rentals and other services, and as mentioned, this impact is incorporated into our guidance. Due to the amortizing effect of in-service inventory, the cotton impact could be heavier in our fiscal 2013 by an amount around $5 million. However, as noted, many factors contribute to the cotton impact, and we will continue to monitor and analyze this throughout fiscal 2012.

We also believe that the improved environment will lead us to being able to obtain higher prices for our services. 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.

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