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Cintas Earnings Call, First Quarter 2009
Author: Albena Toncheva
Last Update: 9:55 AM ET October 30 2008


Revenue rose 3.4% to $1 billion from $969.1 million. Costs rose 4% to $864.4 million. Effective tax rate was 37.5% as compared to 37.3% for the first quarter of last year reflecting reserve requirements under FIN 48. Cintas sees fiscal 2009 revenue of about $4.1 billion to $4.2 billion and earnings of $2.22 to $2.30 a share.

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This summary is based on the second quarter fiscal 2009 earnings call conducted by Cintas Corporation (CTAS) on September 18, 2008.


Chief Financial Officer, Senior Vice President: William C. Gale
Vice President, Treasurer: Michael L. Thompson

Key Investors Issues

- EPS fell to 51 cents a share compared to 51 cents a share last year.
- Profit fell to $78.6 million from $81.1 million in the year-ago period.
- Revenue rose to $1 billion from $969.1 million last year.

First Quarter Highlights

Total revenues were $1 billion, a 3.4% increase over the $969 million reported for the first quarter of last fiscal year.

- This year’s first quarter had one less workday than the first quarter of fiscal 2008. When adjusted for the one less workday, revenue growth was 5%.
- Total company internal growth was 3.9%. As a reminder, the remaining three quarters of fiscal 2009 will each have 65 workdays which is the same number of workdays of each of the last three quarters of fiscal 2008. As such fiscal 2009 will have 260 workdays which is one less than the 261 workdays in fiscal 2008. The number of workdays in a quarter does have an impact on both revenue and income.

The rental uniforms and ancillary products operating segment consists of the rental and servicing of uniforms and other garments, mats, mops, shop towels and other related items.

- Restroom and hygiene products and services are also included within this segment.
- Rental revenues were $721.4 million compared to $710.4 million in the first quarter last year. When adjusted for one less workday, this represents a 3.1% increase over the first quarter of last fiscal year.
- Rental organic growth was also 3.1% down from 3.6% in the fourth quarter of fiscal 2008.

- The difficult economic environment continues to affect customers and the company continues to experience increased loss of business and stops as they reduced headcount and closed locations.
- Other services revenue which includes uniform direct sales, first aid, safety and fire protection, and document management segments grew 10.2% on a comparable workday basis and had internal growth of 6.1%.

- Uniform direct sales operating segment incorporates global accounts and strategic markets division which direct sells uniforms, brand of promotional products and other related products to national and large regional customers and direct sale catalog which direct sells uniforms and related products primarily to local customers who also rent products from us. The uniform direct sales segment grew 0.4% on a workday adjusted basis as customers delayed or canceled new programs and reduced headcount. The company maintained revenue stream by retaining customer base but economic conditions are causing a headwind in this segment as well.

Revenues within first aid, safety and fire protection services operating segment grew 7.8% on a comparable workday basis.

On an organic basis this segment grew 5.6% which was an improvement over the fourth quarter internal growth rate of 5.3%. While general economic conditions continue to impact this business, the company was able to improve internal growth rate. After suffering through a difficult fiscal 2008 fire protection business stabilized and improved providing the increase in this segment’s internal growth rate.

Revenues for the document management operating segment grew 47.5% on a comparable workday basis.

- Internal growth for the segment was 25% down from 30% in the fourth quarter of fiscal 2008. This deceleration occurred as the increased paper prices experienced during fiscal 2008 have now been lapped. In fact the company experienced a reduction in recycled paper prices of approximately 20% versus prices from the fourth quarter of fiscal 2008.
- New business as a percent of revenues has decreased due to the overall size of this fast-growing segment and to a lesser degree than other business segments’ overall economic conditions.

Total company gross margin was 42.4% a 70 basis point decline from last year’s first quarter and a 50 basis point decline from the fourth quarter of fiscal 2008.

- Energy costs for the company increased to their highest level reaching approximately 4.4% of total company sales as compared to 3.4% a year ago and 4.0% in last year’s fourth quarter. - The increase in energy costs along with other increased commodity costs were partially offset by improved leverage over infrastructure within rental division and margin improvement in other services operating segments as the company continued to gain scale especially in document management.
- Additionally, there is margin impact across all divisions when comparing results to the first quarter of last year due to the one less workday in this year’s first quarter.

- Rental gross margins were 43.5% of revenue, a 140 basis point decline from last fiscal year’s first quarter and a 40 basis point decline from the fourth quarter of fiscal 2008.
- Energy costs increased 100 basis points over last year’s first quarter and hanger expense increased 50 basis points. The energy increase was mainly due to increased delivery gas expense but there was also some impact from increased natural gas pricing.
- Hanger costs have increased as the United States has imposed tariff on hangers produced in China which is where the company sources hangers and also due to the volatility in steel prices. The company is offsetting some of this increase by combining purchases and putting the volume through new facility services distribution center. The company is also looking into alternative sourcing arrangements.
- The company has experienced an increase in the cost of other commodities and supplies including wash chemicals. The company was able to leverage infrastructure to offset some of these increases mainly through leveraging labor costs across the organization. The 40 basis point decline from the fourth quarter was due to the same issues, just not as severe given the shorter time differential. Energy costs accounted for half of the increase as they increased 20 basis points over last year’s fourth quarter.

- Other services gross margin was 39.5% a 140 basis point improvement over the first quarter of fiscal 2008 but a 100 basis point decrease from last year’s fourth quarter. The improvement over last year’s first quarter was mainly due to sales mix. The document management segment continues to grow at rapid rate. This division which is higher margins than first aid, safety and fire protection and uniform direct sales is driving other services’ gross margin higher as it continues to become a larger percentage of other services revenue.
- Gross margins in the first aid, safety and fire protection and document management segments were relatively flat as compared to the first quarter of fiscal 2008 despite significant increases in energy costs which is mainly delivery gas for these divisions. These divisions were able to offset these energy cost increases through additional leverage of their infrastructures mainly in labor.
- The uniform direct sales segment’s gross margins improved 110 basis points over last year due to continuing improvement in sourcing operations. The 100 basis point decrease in other services’ gross margin from the fourth quarter was a combination of lower revenues in uniform direct sales causing a lower coverage of fixed costs and a low recycled paper prices in document management as discussed earlier. While paper prices impact revenue and internal growth results they have a bigger impact on margins as the change in price falls to the bottom line. In addition, energy costs were up in the other services operating segments.
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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