Cintas Corporation (CTAS
Q3 2009 Earnings Call Transcript
March 19, 2009, 05:00 p.m. ET
William Gale – Chief Financial Officer, Senior Vice President
Michael Thompson - Vice President, Treasurer
Andrea Wirth – Robert W. Baird & Co
Ashwin Shirvaikar - Citigroup
Scott Schneeberger - Oppenheimer & Co.
Andre Steinerman – JP Morgan Securities
Gary Bisbee – Barclays Capital
Gregory Halter – Great Lakes Review
Good day and welcome everyone to the Cintas quarterly earnings results conference. Today’s call is being recorded. At this time for opening remarks and introduction I would like to turn the program over to Mr. Bill Gale, Senior Vice President of Finance and Chief Financial Officer. Please go ahead sir.
William Gale – Chief Financial Officer
Good evening and welcome to the Cintas’ third quarter fiscal 2009 conference call. Thank you for joining us. For the quarter ending February 28, 2009, total revenue was $909 million, a 7% decrease from the third quarter revenue of fiscal 2008. Earnings per share were $0.47 versus $0.53 a year ago. The U.S. economy is experiencing a significant and widespread recession. Since the recession officially began in December of 2007, the U.S. economy has lost 4.4 million jobs. Over the last six months alone, we have seen a historical level of job losses with 3.7 million jobs lost and 2.6 million of these jobs were lost in just the last four months. A significant number of U.S. companies are reducing headcount and closing facilities with approximately 800,000 business customers many of these companies are our customers. Our business is directly impacted by this large number of job losses and facility closures. From an employment standpoint fewer jobs means fewer uniforms both rented and purchased, less usage of first aid and restroom supplies, and less opportunity for ancillary catalog sales such as shoes and jackets. Facility closures impact our volume of entrance mats, shop towels and linens, restroom cleaning and other facility needs such as fire protection services and even document destruction. Clearly, this is a difficult economic environment. We are aggressively managing our cost structure to maintain or improve margins. We are pleased that despite such a dramatic drop-off in revenue, we remain profitable, generate strong cash flow and maintain a very conservative balance sheet.
During the quarter, the company reduced outstanding debt by approximately $85 million reducing its outstanding commercial paper balance to zero at quarter end. Our ratio of debt to capitalization improved to 25% down from over 30% a year ago. We continue to focus on generating cash by managing our cost structure, minimizing capital spending, and working capital needs and being very selective in making acquisitions. Because of our strong cash flow and confidence in our business, last week we paid an annual dividend of $0.47 per share continuing our practice of raising the dividend every year since going public in 1983. While we continue to be very disciplined in making acquisitions as evidenced by the fact that we have spent approximately $29 million in acquisitions versus $102 million through the third quarter of fiscal 2008, we will make acquisitions that we believe bring long-term value to our company.
In that regard, I''m excited to report that at the end of the third quarter Cintas expanded its presence in the document management business in Europe by purchasing Aktenmühle. Headquartered in Munich, Germany, Aktenmühle provides document shredding service to most of the major cities in Germany. We are pleased to bring the Aktenmühle management and employees to the Cintas family. Combined with our prior European acquisition in the summer of 2007, we now have the ability to offer Document Management Services outside of North America in both The Netherlands and Germany. While this economic downturn is negatively impacting our customers and thus our company, we believe that it is critical to continue to provide value-added services to our customers. All of our employees who we call partners are to be complemented for their unwavering focus on taking care of the customer and making Cintas the strong company it is and will continue to be. We thank them for their outstanding efforts.
All of us at Cintas will continue to adhere to our principle objective of exceeding our customer expectations to maximize the long-term value of Cintas for our shareholders and working partners. With me today is Mike Thompson, Cintas'' Vice President and Treasurer. After some comments from Mike, we will open the call to 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.
I''d now like to turn the call over to Mike Thompson.
Michael Thompson – Vice President & Treasurer
Thank you, Bill. Total revenues were $909 million for our third quarter, a 7% decrease from the $976 million reported for the third quarter of fiscal 2008. Our year-to-date revenue declined 1% as compared to the first nine months of last year. As mentioned in our earning release and by Bill, the current economic environment continues to impact our revenue.
This year''s third quarter had the same number of workdays as the third quarter of last year. However, this year''s first quarter had one less workday than the first quarter of fiscal 2008. Therefore, our nine-month year-to-date results reflect one less workday than the same nine-month reporting period last fiscal year. On a planning note, the fourth quarter of fiscal 2009 will have the same number of workdays as last year’s fourth quarter. 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. Total company internal growth was -7.4% for the quarter. Year-to-date internal growth was -1.4%. In addition to the current economic environment, revenue was negatively impacted by 1% due to a weaker Canadian dollar.
Let’s discuss our revenue trends in more detail. First 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 Services and Document Management Services are combined and presented as other services on the face of the income statement. Detail for these operating segments is provided in the supplemental data included with the release. The Rental Uniforms and Ancillary Products operating segment consists of the rental and servicing of the uniforms and other garments, mats, mops, shop towels and other related items. Restroom and hygiene products and other related services are included within this segment. Our significant geographic coverage gives us the ability to reach approximately 95% of the workforce in the United States and Canada from our existing infrastructure.
Rental revenues were $675 million for the quarter compared to $704 million in the third quarter of last year, a 4% decrease. Internal growth for the segment was also –4%. The difficult business conditions significantly impacted our rental results. The U.S. seasonally adjusted unemployment rate increased from 4.8% a year ago to 8.1% at the end of February 2009. These job losses have a direct impact on our rental business. You may recall that from 2000 through last fiscal year, the U.S. economy lost approximately 4 million manufacturing jobs mainly due to offshoring and consolidation. This job reduction and the economic ripple effect of these job losses also impacted our rental growth rates. However because this job loss occurred more gradually overtime, we were able to react and grow through the significant reduction, proactively addressing and marketing to the growing service economy and expanding our line of services. This has not been the case in the current recession. The swift reduction in jobs with 2.6 million jobs lost in the last four months alone has been too fast and widespread to offset on a short-term basis.
We have four significant metrics that we track internally as key revenue indicators, new business, lost business, add over stops, and price increases. Our add stop ratio continues to be the most difficult metric in this environment. For the third quarter, approximately two-thirds of our rental negative internal growth rate is attributable to the decrease experienced in our add stop ratio. Given the significant job loss it is not surprising that this ratio is running negative.
The breakdown within the add stop ratio is a little surprising and that the stops are running about where they have historically. The issue is that the adds are down significantly. In effect turnover to our customers is remaining at historical levels. But once turnover occurs either through involuntary terminations or voluntary, the customer is not replacing these positions. Not only are we affected by this net reduction in headcount, but our rental revenue is also impacted by the reduced amount of churn at customers, lowering revenue from loss replacement, make up and other charges. As we mentioned last quarter, our new business results are also being pressured. Approximately one-third of our rental negative internal growth is due to a decrease in new business dollars. While the environment is difficult, we do continue to sell new business. In fact, our percentage of new business growth while below historical levels remains in double-digits and our close rate or the number of new accounts we are selling is being maintained.