Cintas Corporation (NASDAQ:CTAS) Q2 2019 Earnings Conference Call - Final Transcript

Dec 20, 2018 • 05:00 pm ET

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Cintas Corporation (NASDAQ:CTAS) Q2 2019 Earnings Conference Call - Final Transcript

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Presentation
Operator
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. Mike Hansen, EVP and CFO. Please go ahead, sir.

Executive
J. Michael Hansen

Thank you, and good evening. With me is Paul Adler, Cintas' VP and Treasurer. We will discuss our second quarter results for fiscal 2019. After our commentary, we'll be happy to answer any questions.

(Forward-Looking Cautionary Statements)

I refer you to the discussion on these points contained in our most recent filings with the SEC.

Our revenue for the second quarter, which ended November 30, was $1,718 million, an increase of 7% over last year's second quarter. The organic revenue growth rate which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was also 7%. The organic revenue growth rate for the Uniform Rental and Facility Services segment was 6.6% and the organic growth rate of the First Aid and Safety Services segment was 10.2%.

Since the announcement of the G&K Services acquisition nearly two years ago, we communicated our expected trajectory of the acquired revenue and its impact on Uniform Rental and Facility Services growth rates. We've discussed that the organic revenue growth rate would reach bottom in the first quarter of this fiscal year, due to the lapping of the G&K acquisition. And that we expected the organic growth rate to accelerate during the remainder of fiscal '19.

Our second quarter rental organic growth rate of 6.6% rebounded as expected from the first quarter's rate of 4.9%, in fact this organic growth rate of 6.6% exceeded our internal expectations. We have seen our sales rep productivity reach pre-acquisition levels, and we've seen good performance in penetrating legacy G&K customers particularly in the hygiene space.

Gross margin for the second quarter of fiscal '19 of $775 million increased 8.2% from last year's second quarter. Gross margin as a percentage of revenue was 45.1% for the second quarter of fiscal '19 compared to 44.6% in the second quarter of last fiscal year. Uniform rental and facility services gross margin as a percentage of revenue improved to 45.3% from 44.7% in the second quarter of last fiscal year.

Gross margin improved in the quarter and year-to-date despite some cost headwinds we cited on last quarter's earnings call, including wage inflation and higher costs for certain commodities.

Reported operating income for the second quarter was $275 million compared to $235 million in last year's second quarter. Operating income was negatively impacted by integration expenses related to the G&K acquisition by $7.8 million in the second quarter of fiscal '19 and $13.1 million in the second quarter of fiscal '18.

Excluding integration expenses, our second quarter operating income grew 14.2% resulting in an operating margin of 16.5% compared to 15.5% last year.

Net interest expense was $4 million lower in the second quarter of fiscal '19 compared to last year due to debt reduction. Net income from continuing operations for the