Cintas Earnings Call Insights: Organic Revenue Growth and Capital Expenditure Outlook
Organic Revenue Growth
Joe Box – KeyBanc Capital Markets: Just a question for you on the new guidance. How are you guys thinking about the organic revenue growth for the Uniform Rental and Ancillary business? I’m just curious how sticky that mid-single digit growth rate is.
William C. Gale – SVP and CFO: That’s pretty well built into our guidance would be an expectation at that level.
J. Michael Hansen – VP and Treasurer: As I mentioned, Joe, there was no difference between the total growth and the organic growth in the rental business in our fourth quarter, and we haven’t factored in any rental acquisitions in that guidance.
Joe Box – KeyBanc Capital Markets: Quick back of the envelope math suggest that operating margin should be somewhere between I think 12.7% to 13.4% next year. Just from a sensitivity standpoint, what really needs to happen to get you guys to the higher end of that range? And I guess conversely, what needs to happen that or what could happen that would push you to lower end of the range?
William C. Gale – SVP and CFO: Well, I would say there are several things that would push us to the higher end of the range. One would be a pickup in our ads over stops, resulting in more revenue per stop in our Rental business, due to maybe new hires or I guess existing customers adding on new hires or services. Another opportunity to get to the higher end would be higher paper prices than what we may be anticipating. Third thing could be that maybe we are being a little too conservative on the impact of the Affordable Care Act. Our fourth thing could be our lower energy prices. I think there is a lot of speculation what may happen with energy prices. We presume that energy prices into ’14 will be comparable than what we saw in ’13, which in the fourth quarter we are about 3.2% of revenue…
Joe Box – KeyBanc Capital Markets: Bill, can you remind me what percentage medical expense was in 4Q?
William C. Gale – SVP and CFO: 3.5%.
J. Michael Hansen – VP and Treasurer: I think it was 3.3%.
William C. Gale – SVP and CFO: 3.3%.
Joe Box – KeyBanc Capital Markets: Was that pretty consistent throughout the year?
William C. Gale – SVP and CFO: Well, in the third quarter, we talked about that it was at – we’ve seen medical expenses be in the 3% to 4% of revenue range. Our third quarter, we were at the top of that range or the higher end of that range. So, the fourth quarter was kind of certainly a reduction from the from the third quarter levels that we saw. For the year, we were kind of in that mid-3% range.
Capital Expenditure Outlook
Andrew Steinerman – JPMorgan: Could you give a quick comment on CapEx expected for the coming year?
William C. Gale – SVP and CFO: We are expecting $240 million to $260 million, Andrew. As Mike mentioned in his comments, this is up from what we have seen the last couple of years, one due to the continuation of the rollout of our enterprise resource planning software. But secondly we are going to be – we are anticipating the need to build some rental capacity in some select markets. So that guidance assumes the opening up of some new rental capacity…
Andrew Steinerman – JPMorgan: Do you feel like this elevated level of CapEx will go down in the following year?
William C. Gale – SVP and CFO: Depends on what happens with the revenue growth. If revenue accelerates then we may be looking at some more rental capacity.
Andrew Steinerman – JPMorgan: Any assumptions in fiscal year 2014 guidance of paper prices changing or are you just taking paper prices where they are currently?
William C. Gale – SVP and CFO: Kind of where we saw them in fiscal ’13.
Andrew Steinerman – JPMorgan: Then lastly, I didn’t quite understand your ACA comment, given that the penalties have been pushed through, what are the nature of the ACA’s comments that you feel will be impacting 2014 and over what time frame within 2014 do you think these expenses will come?
William C. Gale – SVP and CFO: Well January 1st is when these expenses come. So just because of the recent change as we understand it and the business is not having to provide health insurance doesn’t impact those companies that are continuing to provide health insurance and that we are going to have to start paying these additional taxes and fees associated with the Affordable Care Act. So that as far as we’ve been able to ascertain is still in place. The other thing that we’re anticipating is that due to the job uncertainty surrounding exchanges due to the fact that many employers might drop coverage, we don’t know what’s going to happen. We think the participation rate on the part of our employee base may increase either by employees themselves coming on, because maybe they’ve been covered under their spouse coverage or not caring insurance at all or maybe now they’ll convert their family coverage over to Cintax’s plan for maybe what their spouse’s plan had been. So all of those factors go into effect, and therefore we think that the increases will start in the last five months of our fiscal year which would begin January 1.
A Closer Look: Cintas Earnings Cheat Sheet>>