CTAS

Cintas Corporation (CTAS)

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Cintas (CTAS)

Q1 2013 Earnings Call

September 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

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

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

Thomas Allen - Morgan Stanley, Research Division

John M. Healy - Northcoast Research

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

James Samford - Citigroup Inc, Research Division

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

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

Joe Box - KeyBanc Capital Markets Inc., Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Presentation

Operator

Good afternoon, everyone and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's presentation 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.

William C. Gale

Thank you for joining us this evening as we report our first quarter results for fiscal 2013. With me is Mike Hansen, Cintas' 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 $1,051,000,000, which represents growth of 3.4% from last year's first quarter. First quarter net income increased by 11.8% to $77 million and earnings per diluted share were $0.60, a 15.4% increase over last year. Our operating margin for the first quarter improved to 13.2% from last year's first quarter operating margin of 12.6%. Energy-related costs were 40 basis points lower in last year's first quarter. However, this positive impact from energy was more than offset by the $8.3 million negative impact of lower recycled paper prices this year. Keep in mind that in addition to negatively impacting revenue, lower recycled paper prices directly impact operating income as well. Aside from these 2 items, the improvement in operating margin was mainly due to continued efforts to manage our cost structure.

When we announced our fiscal 2013 guidance in July, we commented that the absence of momentum in the U.S. economy, as well as numerous sub-2% GDP forecasts for the remainder of 2012 and 2013 caused us to view fiscal 2013 with caution. Our assessment of the economic climate has not changed since then. The disappointing employment picture has continued and various reported economic data during the past 2 months have not been encouraging. However, despite this negative climate, we continue to be pleased with the performance of our businesses, and as a result, we reiterate our fiscal 2013 revenue expectations to be in the range of $4.25 billion to $4.35 billion. We are updating our fiscal 2013 earnings per diluted share guidance for the impact of our first quarter share buyback. While the 1.8 million share buyback had no impact on the first quarter results, it will benefit the remainder of the year by $0.03. As a result, we now expect earnings per diluted share to be in the range of $2.50 to $2.58.

Let me make a few comments about this guidance. The guidance assumes no further deterioration in the U.S. economy. Mike generally comments on the workdays by quarter. The number of workdays does affect revenue and operating income levels. Keep in mind that our second quarter workdays are 65, 1 less than the first quarter, but the same as last year's second quarter. The third quarter however, has only 64 workdays, 2 less than this first quarter and 1 less than last year's third quarter. This third quarter workday impact, coupled with the uncertainty surrounding a fiscal cliff impact, may result in a difficult year-over-year comparison for the third quarter.

While the first quarter recycled paper prices were significantly lower than last year, those prices were generally in line with our expectations. Our expectations for the remainder of the year have not changed since July, roughly $170 per ton in the second quarter, followed by a $10 increase in the third and fourth quarters. And finally as I mentioned, the guidance incorporates the share buyback from our first 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 first quarter.

J. Michael Hansen

Thank you, Bill. As Bill mentioned, total revenue increased 3.4% from the first quarter of last year, with total company organic growth being 3.2%. Total company gross margin for the first quarter was 42.4%, which is down from last year's first quarter gross margin of 43.2% due to lower recycled paper prices and higher material cost. I will discuss these items in more detail by segment. Before doing so, let me remind you again that there were 66 workdays in our first quarter, which is the same as last year. Looking to the remainder of fiscal 2013, our workdays will be as follows: 65 in the second quarter, 64 in the third quarter and 66 in the fourth quarter. The workdays in the second and fourth quarters are the same as last year. The third quarter has 1 less workday, as Bill mentioned, than last fiscal year, where there were 65 workdays in the third quarter of fiscal 2012.

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