Cintas Corporation (CTAS
Q2 2009 Earnings Call Transcript
December 19, 2008 8:30 a.m. ET
William Gale - Senior Vice President of Finance and Chief Financial Officer
Mike Thompson - Vice President and Treasurer
Andrea Wirth – Robert W. Baird & Co
Ashwin Shirvaikar – Smith Barney Citigroup
Vance Edelson – Morgan Stanley
Gary Bisbee – Barclays Capital
Scott Schneeberger – Oppenheimer & Co
Greg Halter – Great Lakes Review
Good day everyone and welcome to the Cintas Quarterly Earnings Results Conference Call. Today’s call is being recorded. (Operator instructions) 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 – Chief Financial Officer
Good morning. Thank you for joining us today to discuss our second quarter fiscal 2009 results. Joining me is Mike Thompson our Vice President and Treasurer. After some brief comments we will open the call to questions. For the quarter ending November 30, 2008, total revenue was $985.2 million, a slight increase over the second quarter last year. The current economic slowdown impacted all of our business segments. We saw especially weak results in the sale of uniforms to the hospitality industry and also saw weakness in uniform rental as our customers reduced headcount or shut down facilities. Additionally, our rental revenues were negatively impacted by the rapid decrease in the value of the Canadian Dollar and the impact of the September gulf coast hurricanes.
Net income was $71.8 million down from last year’s $82.9 million. Higher cost of energy, hangers, and employee medical expenses coupled with the rapid deterioration in revenues all contributed to the disappointing net income. Additionally, this year’s results were negatively impacted by a higher effective tax rate of 39.4% versus last years 38.3%. With the adoption of the new rules on tax accounting companies must be more precise on a quarterly basis in the recording of the tax provision versus the old rules which calculated taxes on an effective rate for the entire year. This quarter’s higher tax rate should be the highest of the year. By the end of the year we expect our rate for the entire year to be 37.1%.
Shortly, Mike will provide you further details regarding growth by segment as well as a discussion of margins. During the quarter, the company paid down approximately $80 million in commercial paper through aggressive management of capital spending and acquisitions. We will continue to focus on cash generation in order to take advantage of growth opportunities over the next few years as financial conditions improve. Due to the uncertainties that exist in the economy we must remove the previous guidance we provided for the fiscal year ending May 31, 2009. We are unable to determine the severity or the length of the recession and believe that any guidance we would provide would be subject to too much risk and therefore not meaningful. We recognize our obligation to our shareholders to manage our costs aggressively and are taking steps necessary to adjust to the new revenue levels. In addition, we will continue to focus on providing our customers with exceptional service.
The Private Securities Litigation Reform Act of 1995 provides us 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.
I would now like to turn the call over to Mike Thompson for additional commentary.
Mike Thompson – Treasurer
Thanks Bill and good morning. Total revenues were $985.2 million for our second quarter, a $1.3 million increase over the $983.9 million reported for the second quarter of fiscal 2008. As mentioned in our earnings release and by Bill, the current economic environment continues to impact our revenue. In addition, the weakening of the Canadian Dollar and the impact of September hurricanes reduced our revenue growth rate by approximately 1% for the quarter. This year’s second quarter had the same number of workdays as the second quarter of last year. However, this year’s first quarter had one less workday than the first quarter of fiscal 2008. Therefore, six month year-to-date results reflect one less work day in the same six month reporting period last fiscal year. Year-to-date revenue growth for the six months ended November 30, 2008, was 2.5% on a comparable workday basis.
Total company internal growth was -0.7% for the quarter. Year-to-date internal growth was 1.6%. The remaining two quarters of fiscal 2009 will each have the same number of workdays, 65, as each of the last two quarters of fiscal 2008. Accordingly, fiscal 2009 will have 260 total workdays, one less than the 261 workdays last fiscal year. The number of workdays does have an impact on both revenue and income. As a reminder, we classify our businesses into four 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 service and document management services are combined and presented as other services on the face of the income statement. Detail for the operating segments is provided in the supplemental segment data included in the release.
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. Our restroom and hygiene products and other related services are included within the segment. We are the largest uniform rental company in North America and have significant geographic coverage giving us the ability to reach approximately 95% of the workforce in the US and Canada with our existing infrastructure. Rental revenues were $711.5 million for the quarter compared to $708.8 million in the second quarter last year, a 0.4% increase. Internal growth for the segment was 0.4% as well. As with the company in total, the significant weakening of the Canadian Dollar and the gulf coast hurricanes during the quarter also had a negative impact on our rentals revenue growth rate by approximately 1%. If the current US to Canada exchange rate remains at its current level for the rest of fiscal 2009 we expect our revenue growth rates in the third and fourth quarters to be negatively impacted by approximately 1%.
As mentioned, business conditions deteriorated further during our second quarter. US economy has lost approximately two million jobs so far this year and the national unemployment rate rose to 6.7% in November, the highest level since 1993. While these conditions have affected revenue from all of our rental products and services, our uniform business has been impacted the most, experiencing slightly negative internal growth during the quarter. As with last quarter the most significant impact on the rental revenue has been through our add stop metric as many existing customers are being forced to reduce headcount and close or consolidate existing facilities. During our first quarter earnings call we indicated our new business results began to be impacted by the economic environment. Our second quarter new business results weakened further as prospects became more reluctant to add new services given current economic uncertainties.
While our lost business increased slightly during the quarter this was mainly due to customers going out of business or not paying their bills timely. We have continued to do a solid job overall in maintaining our existing customer base. Price increases, while also affected during the quarter have held up relatively well. While our growth metrics suffered, we are encouraged with our customer retention results. Many of our existing customers are reducing staff and locations but overall they continue to retain our services understanding and appreciating the value our products and services provide them. This high customer retention provides us a solid foundation for when conditions improve. Our other services revenue which includes our uniform direct sales, first aid safety and fire protection and document management segments, declined 0.5% for the quarter. Internal growth was -3.5%. Other services incorporate our uniform direct sales, first aid and fire protection services and document management services operating segments. Other services revenues were significantly impacted by lower revenue from uniform direct sales.