Bill Gale - SVP and CFO Mike Hansen - VP and Treasurer.

Greg Bisbee - Barclays Andy Whitman - Robert W. Baird Sara Gubins - Bank of America Merrill Lynch Dan Dolev - Jefferies Joe Box - KeyBanc Capital Markets Scott Schneeberger - Oppenheimer Andrew Steinerman - JPMorgan.

Good day everyone and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's call is being recorded. At this time I'd like to turn the call over to Mr. Bill Gale, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir..

Thank you for joining us this evening. With me is Mike Hansen, Cintas' Vice President and Treasurer. After our commentary, 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. As we reported in today's press release, our results for continuing operations adjusted to exclude all impacts of the document management businesses are more representative of our ongoing performance.

Therefore, our discussion of the company's performance will be based on that, the exclusion of document management. We are pleased to report second quarter revenue of $1.123 billion. Organic revenue growth, which adjusts for the impact of acquisitions, foreign currency and the Shred-It transaction was 7.2% for the second quarter.

Rental organic growth was 8.1%. And First Aid, Safety and Fire Protection Services organic growth was 12.1%. The performance of our sales force in both businesses remain strong and penetration of additional products and services into existing customers continued. Our second quarter gross margin was $481.4 million or 42.9% of second quarter revenue.

This was a nice improvement over last year's 41.3% as we continue to leverage our infrastructure, continue to operate very efficiently, and increased our revenue per stop from added penetration at existing customers. Second quarter operating income was $181.6 million or 16.2% of second quarter revenue.

This was a 20.7% increase over last year's second quarter operating income of $150.5 million or 14.3% of last year's revenue. Second quarter net income and earnings per diluted share as adjusted also improved nicely compared to last fiscal year second quarter amount, as adjusted.

Second quarter net income was $103.7 million, which was 9.2% of revenue and grew by 24% over last year's second quarter. Second quarter earnings per diluted share as adjusted was $0.86, which grew over 26% compared to last fiscal year's second quarter figure as adjusted of $0.68.

As Scott Farmer indicated in our press release today, our employees, who we call partners, have executed our game plan very effectively, and we look forward to the second half of our fiscal year. We are updating our fiscal 2015 guidance as a result of our second quarter results.

Before discussing the guidance though, let me make a few comments on our views of the economy. We have certainly been pleased with the U.S. employment growth in the last few months. While the employment growth continues to be more narrow than we would like, the overall growth totals have been good.

This has not yet translated into marketable improvements in our rental net add-stops metric. But our customers are recognizing the value of our products and services and our penetration continues to be solid. Our guidance assume that the U.S. economy will remain in this current state during the second half of our fiscal year.

We do believe, however, that this economic state is fairly fragile. Many macro factors such as interest rate environment, energy prices and global economic issues could upset the U.S. momentum, and so we are hesitant to turn too optimistic.

With these views in mind and based on our second quarter results, we now expect our fiscal 2015 revenue to be in the range of $4.45 billion to $4.5 billion. We now expect our fiscal 2015 earnings per diluted share guidance to be in the range of $3.49 to $3.54.

When excluding the special items of the impact of the document shredding business and the additional gain on the Shred-It transaction, the impact of the sale of stock and an equity investment and the impact of the discontinued operations, including the sale of document storage and imaging business, we expect fiscal 2015 earnings per diluted share guidance to be in the range of $3.20 to $3.25.

This EPS guidance is detailed in the table within today's press release. I will now turn the call over to Mike for more details on the second quarter performance..

$35 million in Rental, $3 million in Uniform Direct Sales, and $7 million First Aid, Safety and Fire Protection. We expect CapEx for fiscal 2015 to be in the range of $250 million to $275 million. That concludes our prepared remarks, and we will now be glad to answer any of your questions..

Thank you. [Operator Instructions] Our first question comes from Manof Phenix [ph] from Barclays..

Hi. This is Greg actually calling on for Manof [ph]. Just wanted to get some details on your energy costs in this lower cost environment.

Does the current guidance that you have assume that oil prices and gas stay this low or is there potential upside should we remain at these low rates?.

Greg, as you know, our guidance has a range of about a nickel, and our basic assumption is that, generally speaking, the experience that we had in our second quarter will continue for the rest of the year. So let me just give a little color on that, because we anticipated this. If you look at the average price of fuel, and this is taken from the U.S.

Energy Information Administration, in our fiscal second quarter, the average price of gas was $3.13 a gallon and the average price of diesel was $3.71 a gallon. In the first quarter, the average price of gas was $3.54 a gallon and the average price of diesel was $3.88 a gallon.

Now, keep in mind, a little over 50% of our fleet is diesel, and we have not seen the dramatic drop in diesel prices that we've been seeing in gas prices.

But if you think about what happened in our energy prices from the first quarter to the second quarter as a basis of revenue, we had about a 14 or 10-basis-point decline in the cost of our revenues. So, you know, while it's having an impact, we would expect the kind of experience we had in the second quarter to continue through the year.

If we get what we saw late in the second quarter continue through the year, then we -- that would help us, all else being equal, to achieve toward the higher end of the guidance..

Okay, very helpful.

And I guess along the same theme, I was wondering if you had gotten any feedback from your customers on the lower costs and if it's impacting their business and maybe, you know, specific to your energy customers, how big is that to you, and what do you expect that impact to be for those contracts?.

Well, no particular industry is overly significant to us, but there's no question that if these energy prices continue with these levels, our exploration customers, which have been pretty robust here in the last several years, are going to be impacted.

And therefore, if they start laying off some of their employees, that will certainly have an impact on our revenue from those type of customers. It's not material but it will have -- it will be negative. On the other hand, lower energy prices would seem to me to drive some benefit for other types of businesses.

So I think it's hard to really say whether or not it's going to have, you know, a negative or a positive impact on the company because there's going to be some industries that will benefit and some that won't..

Fair enough.

And if I can sneak in one more, just on the buyback slowdown this quarter, does that have anything to do with the special dividend and what's your appetite for buybacks going forward?.

Yeah. We are certainly, you know, keep everyone in mind. We bought $250 million worth of stock late in our fourth quarter, into the first quarter, this past fiscal year. We did pay the special dividend in addition to our regular dividend in early December. We also have indicated that we are very, very interested in making acquisitions.

And we are continuing to pursue, you know, a fairly active pipeline. Obviously nothing significant has happened at this point, or we would have announced it.

So in view of the fact that we may not find the acquisitions that we would like to have, I think the Board has shown in past experience that we will certainly be active in purchasing our own stock if warranted..

Okay, very helpful. Thank you..

Thank you. Our next question comes from Andy Whitman from R.W. Baird..

Thanks. First, I wanted to give a very sincere congratulations to you, Bill, on a great career, and many successes, and Mike also. Big shoes to fill. Bill, I think we'll all miss your ability to put a dour outlook on the economy when your numbers are actually quite good. So that's what I'll miss the most about these calls..

Well, thank you for the kind words, Andy..

Yeah. But that being said, I have dovetail that into a question, because I think it's the question that everybody is going to be asking, when you look at the guidance range, it looks like there's a material deceleration in the growth rate that you're assuming, in EPS.

The fuel benefit only gets better from the average levels that you saw in the second quarter, you alluded to that upside, you know, puts on the top line here.

But is there something in the business here that you're seeing either somewhat offset on the cost side coming in or deceleration in some of the businesses that we should be aware of that leads us to the guidance range that you've given here?.

Well, I think as Mike mentioned in his comments, keep in mind, we've got the payroll tax reset, which is approximately an 80-basis-point impact in our third quarter. We also had a second quarter in which our experience in our workman's comp and auto claims was better than it had been in the previous couple of quarters.

We tend to see a slight increase at our medical costs in the third quarter -- in our third quarter. So with that said, we see a little bit of headwinds there, you know, which will impact the SG&A line and thus would impact the overall margins.

I think we've got to keep in perspective that the energy cost, try to put that when I responded to Greg at the first question, is not as significant as some may believe. Certainly we would benefit from continued low gas prices, but it's not as significant as I think some people think.

Because our overall energy costs are 2.5% of revenue, of which the delivery side of it is approximately 1.5%. Now, so with that said, we still would like to see a broader employment growth. We have not seen any adds to speak of at existing customers.

We have seen additional penetration of products and services at our customers, but we've yet to see really the uniform wears being added. Were that to happen, then we would certainly be at the upper end of the guidance, but based on our current view, we thought the guidance that we provided was appropriate..

Got it. So just -- you mentioned efficiency, obviously the business model has got some leverage in it, but efficiency was a word that was mentioned a few times. Last we checked, the implementation of SAP to the uniform business, the Rental segment, you know, still kind of more in the future than present [ph].

Is there anything that structurally that's new and different or are we seeing other things like leverage, and frankly, price contribution adding more to the margin expansion we're seeing here? I think those are other key questions, then I'll leave it there..

Andy, you're right, the last two things you hit on, leverage of the infrastructure and the price increases have certainly benefited margins. The SAP system is still in its early stages.

We will not be piloting anything, at the earliest, until our fiscal 2016, and therefore there really won't be anything benefiting us probably until latter part of 2017 or 2018. So right now it's really one of just getting additional volume within our routes and through our plants.

We mentioned previously that we will be constructing some new facilities in various markets. We're not moving as rapidly as we once thought, as we continue to look for the appropriate pieces of land.

And therefore, that's one of the reason why you saw a reduction in the CapEx guidance, because we don't think we'll be moving as fast with those -- that new construction as we originally thought.

So I would say that as long as we can continue to leverage what we've got, we'll continue to see margins at these levels, adjusted for the SG&A I talked about earlier..

Would you -- on the pricing, would you say that pricing continues to get better sequentially here? Is it --.

You know, we're a little concerned, it's okay to the second quarter, but as we see these lower gasoline prices in the headlines, we're wondering, is that going to create some difficulty for the industry to continue to get the kind of pricing that we've been seeing lately.

So I think there is a concern out there that, you know, we'll have to make sure we explain this properly when we continue to try to get price increases..

All right. Thanks..

Our next question comes from Sara Gubins of Bank of America Merrill Lynch..

Hi, thanks. Good afternoon. Maybe just a follow-up on the discussion around pricing.

Could you give us any sense of the magnitude of price increases that you're seeing?.

No, Sara, we don't talk about those in any magnitude publicly. We just, as we said in the first quarter and a little bit today, we did see an improvement in the pricing environment in the last six months compared to a year ago..

Right. Okay. Last quarter when you talked about margin expectations, it sounded like you were thinking that they'd be flat in the absolute versus the first quarter. And then of course in the second quarter they were up quite nicely. I'm wondering what drove the surprise, if it was a surprise, but what drove the surprise in the quarter.

And it may have been pricing and it may have been a little bit of energy, but I'm wondering if there was anything else..

Well, in the second quarter relative to the first, our overall gross margins were about the same, we got -- which was a very good level year over year, helped by nice -- the nice pricing environment, helped by leverage of our infrastructure, and the penetration of new products and services.

The real sequential margin improvement was in that SG&A where Bill mentioned we had better workers' comp and auto experience in the second quarter. And the other thing we talked about in the first quarter was the extra G&A, if you will, because of the document shredding contribution, so we lost quite a bit of revenue to cover that extra G&A.

And we've done a very good job of managing our cost structure and kind of rationalizing that G&A to the organization that we have today. And so we're pleased with the execution there..

Great. And then just last question, would it be possible to give any more color on what's driving the strong uniform rental growth? And I'm thinking new programs versus some market share shifts..

I think a lot of it's driven by the strong execution of new business by our sales organization, so, new customer adds, primarily from the programmer side [ph]. Again approximately two-thirds of our new business is coming from customers who have not used the services before. But I think it also is driven by the additional products and services.

As we've spoken about for the last several years, we continue to expand our offerings both within the Rental segment as well as within the First Aid and Safety segment, to provide additional things to our customers. And I think that has helped the growth rates in both those segments..

Great. Thank you..

Our next question comes from Dan Dolev from Jefferies..

Hey. Thanks for taking my question. Question on the gross profit in uniform rental. So if I look at the incremental margins in Q1, they were very strong, in the mid 70s. They decelerated a little bit in Q2. My question is, so it stopped the accelerating trend which started early last year.

My question is, it seems like it should be accelerating given the cheaper energy prices. So what was -- what made it decelerate? And the second part of the question is, what kind of level do you think you can maintain throughout 2H? Thanks..

Well, Dan, in both quarters, our gross margin was very strong, and it's been that way for a number of quarters now, and we continue to get very healthy incremental gross margin in that business.

And as long as we continue to penetrate and make our customers more valuable, as long as we can continue to grow without adding capacity, it should be healthy. And so, you know, overall that incremental margin was still very healthy..

Absolutely. But you see that not decelerating significantly below, so, call it the mid-60s to high-60s..

Well, I think, Dan, some of that depends on the mix of the revenue that comes. And we've talked a little bit about adding some capacity, rental processing capacity in a few markets in the future. And so it depends on the timing of that capacity addition and it depends a little bit on the mix of revenue that we get.

If we see a marketable improvement in our customers' hiring, we may see even better incremental margin..

Great. Thank you, and congrats again for both of you for the promotion and for the retirement..

Thank you, Dan..

Thanks, Dan..

Our next question comes from Joe Box from KeyBanc Capital Markets..

Hey. Good evening guys..

Hi, Joe..

Hi, Joe..

So I just want to take the rate question from earlier, just take it from a different angle.

When you guys are looking at rates and you're saying that rates are actually up, are you looking at core rental rates or are you maybe looking to say a yield number that might include ancillary fees like loss waiver, stuff like that? Just trying to understand what it is..

What do you mean by rates, Joe?.

Well, just maybe the core rate that you might charge a customer per day. When you're saying pricing is going up..

When we're talking about pricing, being a little bit of a better environment today than a year ago, what does that mean? Is that your question?.

Correct. Correct..

Yeah. Well, that -- generally that means when we are renewing some accounts, we're able to do it at a little bit of a better level. When we have -- our contracts generally have an annual price increase opportunity and that annual price increase opportunity can be a little bit easier.

And it just comes back to our ability to speak to the value that we're providing to our customers. And we've been able to do a pretty good job of that in the last six months..

That's good to hear, Mike. I just wasn't sure if that was, you know, you're maybe able to tack on some additional surcharges and that was able to raise the bill, and you're maybe considering that core pricing. But it doesn't sound like that's the case. And then -- maybe just switching gears then.

I'm curious, from a high level, are you guys starting to see new business formation? Are you still seeing subtractions? Has that been a positive driver? Or is the organic growth really more of a function of ancillary products to existing customers at this point?.

Well, there's still no question, we're adding new customers, Joe. Is that indicative of the economy, adding new businesses? I don't think we really could say that for sure, because there are so many businesses that were out there that weren't using our services.

So I don't think we could, you know, tell you that there's all these new business adds or whatever. I can just say, from our perspective, we're able to get more companies to take our services and we're getting more of our existing customers to take some of our other services. So I think those are the two primary reasons why you're seeing the growth..

Understood. Just one last follow-up for you.

Are the payroll taxes higher than they'd normally be in 3Q, so there'd actually be a year-over-year impact? Are you just pointing out the sequential change?.

Sequential change. We're just trying to make sure that everyone understands that. No, it's not a year-over-year thing, it's a sequential change..

Okay. So I guess I'm really just trying to understand then why there wouldn't be better SG&A leverage in the back half of the year. And I certainly understand there are some minor things in there like auto claims and workers' comp..

No, there's a lot of things in there. And I think what we're telling you is that we would not expect there to be a significant improvement in the overall SG&A number at this point.

We think we've done a pretty good job given the fact we lost a lot of revenue from the document shredding and document storage transactions, and we're trying to get that revenue right-sized for the -- those costs, right-sized for the remaining revenue.

I just -- I think that so many of you do you models and then you want to assume the same level of SG&A from the second quarter and the third quarter. So we're telling you that's not the case.

What we're also telling you is that we would expect the rates that we saw in the second quarter adjusted for payroll taxes, adjusted for potential increases in workman's comp type cost, to basically be comparable for the rest of the year..

Understood. Thanks guys, and great quarter..

Thanks, Joe..

Thank you..

Our next question comes from Scott Schneeberger from Oppenheimer..

Thanks. Yeah, let me add guys, Bill and Mike, congratulations to both of you. So you covered it well earlier, but just curious if you could add, if you want to do so at this juncture, your oil and gas exposure as an end-market, just that part of the total mix.

I know you mentioned that you didn't think it would be too material on a direct level, maybe on a broader level over time. But just curious on that. Thanks..

Scott, it's in the low single digits. It's nothing of any significance. I don't have the exact number, but as you followed us for years, there's just no one industry that really impacts us all that much..

Great. Thanks. Appreciate that. And then curious on M&A pipeline, you addressed that a little bit earlier as well. Would appreciate if you could delve a little more into the types of things you're seeing. Obviously you have a lot of cash sitting over [ph] on the balance sheet right now, a lot of flexibility with things that you do.

And I know that you're going to come across this as a dumb question, but is document management, which seems to have some M&A activity, completely out of the picture? Thanks..

Yeah. Document management is completely out of the picture. We've disposed of the storage and imaging business and we still have our 42% share of the joint venture, but we will not be pursuing any document management transactions within Cintas any longer. We certainly are going to pursue acquisitions in our other businesses. And we will continue to do.

There are some big ones, there are some small ones, and there are some good regional players.

We also will continue to pursue other businesses that either will complement one of the segments we're already in or may perhaps even be another new segment, although historically we've never gone into a brand-new segment in any big way without testing it first.

So I just wanted to be sure everyone understands that we are actively pursuing things within First Aid, Safety, Fire, as well as in the uniform side of the business, and we will continue to do so. But we will not make an acquisition that doesn't make sense economically just because prices may have become a little frothy..

Great. And good job and congratulations again..

Thanks..

Thank you..

Our next question comes from Andrew Steinerman from JPMorgan..

Good evening. I was wondering if, Bill, you meant to say, to get to the high end of the revenue guide, that we need add-stops to pick up. I know you said something similar to that.

But is that what you meant?.

To get -- I really didn't address the revenue, Andrew. I was talking more about the profit side, because I think it was more of a margin question. To get at the high, you know, yes, if we -- I would know. I would tell you that the high end of the revenue guidance does not assume a significant improvement in add-stops.

If it would assume a continued good pricing environment, a continued impact of good new business results, and the penetration that we've seen.

If we were to see a lot of our customers really adding people and therefore increasing the revenue per stop in a significant way, we certainly would be able to get to that top end of the guidance plus some as we go forward..

Yes. I'm still sort of curious about this add-stop and wondering if you think add-stops will increase this cycle, because when I look at the Labor Board's [ph] diffusion index, it's broadening out.

And it's including categories that seemed extremely relevant for uniforms, like manufacturing and warehousing and transportation, but perhaps they're adding people in areas that are uniformed, or something along those lines that I was just wondering if you feel like, if this continues, that add-stops will go up?.

I certainly hope so, but I will tell you from our experience with our existing customers, we are not really seeing that type of activity. Now we're not seeing declines either..

Right.

Which category do you think needs to kick in more for add-stops to go higher?.

Which category, you mean like which….

Manufacturing, transportation?.

Services, I think just generally services. That's the bulk of our customer base, are in the service sectors..

Okay. Thank you very much..

Ladies and gentlemen, that does conclude our Q&A session. I'd like to turn the call back over to Mr. Bill Gale for closing remarks..

Again I want to thank everyone for joining us this evening. And on behalf of all my fellow partners here at Cintas and our management team, we want to wish you a very happy holiday season. Mike will be back in March to give you our third quarter results..

Ladies and gentlemen, that does conclude our conference for today. We do appreciate your participation. Have a great day. Thank you..