CTAS

Cintas Corporation (CTAS)

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Cintas (CTAS)

Q2 2013 Earnings Call

December 20, 2012 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

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

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

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

John M. Healy - Northcoast Research

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

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

Gary E. Bisbee - Barclays Capital, Research Division

Gregory W. Halter - LJR Great Lakes Review

James Samford - Citigroup Inc, Research Division

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.

William C. Gale

Good evening, and thank you for joining us as we report our second quarter results for fiscal 2013. 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 Litigations 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 second quarter revenue of $1,060,000,000, which represents growth of 4% from last year's second quarter. Second quarter net income increased by 4.9% to $78 million, and earnings per diluted share were $0.63, a 10.5% increase over last year.

Our operating income for the second quarter was $139 million or 13.1% of total second quarter revenue. The effects of Hurricane Sandy did have some adverse effect on our second quarter results, but the effect was not material. Our second quarter operating income included an $8.5 million gain on the sale of stock of an investment and a $1.6 million write-off of a garment processing system used in one of our rental locations.

The operating income was also negatively impacted by recycled paper prices. The average price for the second quarter was slightly over $150 per ton, representing a 32% decrease from last year's second quarter average price of just over $220 per ton. This year-over-year drop in paper prices resulted in a negative impact in the second quarter of $5.5 million. Keep in mind that this negative impact affects both revenue and operating income. We expected the second quarter recycled paper price to be $170 per ton, so the actual average second quarter price created a $1.5 million negative variance for the quarter versus our expectations. Mike will give more details on the operating results by segment in a couple minutes.

Throughout our second quarter, our customers have continued to tell us the -- that the economic uncertainty in the U.S. caused them to be very cautious in spending, hiring and investment decision making. Unknowns concerning U.S. tax policies and the impact of changing health care regulations have created a pause in many of their business activities. In addition to this feedback from our customers, we continue to see GDP forecasts below 2% for calendar 2013.

With these in mind, we are updating our fiscal 2013 revenue expectations to be in the range of $4.275 billion to $4.325 billion. We are not changing our earnings per diluted share guidance, which is an expectation of fiscal 2013 earnings per diluted share to be in the range of $2.50 to $2.58. The guidance assumes the current U.S. economic environment continues and does not worsen going forward. We are bringing down our recycled paper price expectations for the remainder of the year to be approximately $160 per ton in the third quarter and $170 dollars per ton in the fourth quarter. And finally, this guidance incorporates the 1.9 million share buyback from our second quarter but does not contemplate any additional buybacks.

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

J. Michael Hansen

Thanks, Bill. As Bill mentioned, total revenue increased 4% from the second quarter of last year with total company organic growth being 3.4%. Total company gross margin for the second quarter was 40.7%, which is down from last year's second quarter gross margin of 42.2%. 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. Looking to the remainder of fiscal 2013, we will have 64 workdays in the third quarter and 66 in the fourth quarter. Keep in mind that the third quarter has 1 less workday than last fiscal year, where there were 65 workdays in the third quarter of fiscal 2012.

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.

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