CTAS

Cintas Corporation (CTAS)

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Cintas (CTAS)

Q2 2012 Earnings Call

December 20, 2011 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

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

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

Vishnu Lekraj - Morningstar Inc., Research Division

Thomas Allen - Morgan Stanley, Research Division

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

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Joe Box - KeyBanc Capital Markets Inc., Research Division

James Samford - Citigroup Inc, Research Division

Steven Gregory

Gregory W. Halter - LJR Great Lakes Review

Gary E. Bisbee - Barclays Capital, Research Division

John M. Healy - Northcoast Research

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

Good evening, and thank you for joining us to report our Second Quarter Results for Fiscal 2012. 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 second quarter revenue grew 8.8% from last year's second quarter to a record revenue of $1,019,000,000. Net income increased by 33.1% to $74.4 million, and earnings per share were $0.57, a 50% increase over last year.

Our operating margin continued to expand as our second quarter operating margin of 13% was an improvement over both last year's second quarter operating margin of 10.9% and this year's first quarter operating margin of 12.6%. This improvement came despite significantly lower recycled paper prices. This margin expansion continues to be driven by better capacity utilization, our focus on selling profitable business and controlling our cost, particularly in our general and administrative area.

At our last earnings call in mid-September, we spoke of our cautiousness toward the U.S. economy. Only about 100,000 jobs have been created during our first fiscal quarter, and 2011 and 2012 economic forecast were worsening while the stock market was declining. Despite our strong first quarter results, we were uncertain about how our business would be affected by the macro environment. Obviously, given this backdrop heading into our second quarter, we have been very pleased to see that our business continued to be strong throughout this quarter.

While we continue to be cautious regarding the U.S. economy, we do have more confidence about our ability to execute in this less than robust environment. As a result, we are updating our guidance for fiscal 2012. We now expect fiscal 2012 revenues to be in the range of $4.075 billion to $4.125 billion, and we expect earnings per diluted share in the range of $2.16 to $2.20. This guidance assumes no significant changes in the U.S. economy and effective tax rate of 37% for the entire 2012 fiscal year, assumes recycled paper prices to be approximately $150 per ton, which is our price for November and December, and energy-related cost to be approximately 3.5% of revenue.

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.

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

J. Michael Hansen

Thank you, Bill. As Bill mentioned, total revenue increased 8.8% from the second quarter of last year while total company organic growth was 7%. Total company gross margin for the second quarter was 42.2%, which is up from last year's second quarter gross margin of 41.7% despite a 20 basis-point increase in energy-related costs and a steep drop in recycled paper prices. I will discuss these items in more detail by segment.

Before doing so, let me remind you that there were 65 workdays in our second quarter, which is the same as last year. As a planning note for the remainder of fiscal 2012, we will have 65 workdays in the third quarter and 66 in the fourth quarter. The total workdays in fiscal 2012 are 262.

We have 4 reportable operating segments: Rental Uniforms and Ancillary Products, Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services. Uniform Direct Sales, First Aid, Safety and Fire Protection Services and Document Management Services are combined and presented as Other Services on the face of the income statement.

The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of uniforms, masks, towels [ph] and other related items. This segment also includes restroom supplies and other facility products and services. Rental Uniforms and Ancillary Products revenue accounted for 71% of company revenue in the second quarter. Momentum continued for our rental business. Second quarter rental revenue was $722.8 million, which is up 9.9% compared to last year's second quarter, and up 7.9% organically over last year.

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