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What Cintas Management Wants Shareholders to Know

Asit Sharma, The Motley Fool

Uniform rental and business services provider Cintas (NASDAQ: CTAS) released fiscal fourth-quarter 2019 earnings results on Tuesday that impressed investors with solid top-line and net income growth. Cintas shares gained nearly 9% on the Wednesday trading session and have now posted a dazzling return of 55% year to date. Can the stellar performance continue? On the company's earnings conference call, management discussed general financial targets for next year and factors that will help Cintas maintain its momentum. Let's review three key comments from executives below:

1. Organic growth and fast bottom-line expansion remain priorities in fiscal 2020

For the ninth consecutive year, our organic growth rate was in the mid to high single digits. This means, we've been able to grow consistently in multiples of GDP and employment growth...For the ninth consecutive year, we achieved double-digit earnings-per-share growth from continuing operations when adjusted for one-time special items. -- CFO Mike Hansen 

Steady revenue growth year in and year out has become one of Cintas' biggest selling points to shareholders, and the company intends to maintain its long-term annual target of organic revenue growth in the mid- to high single digits for the foreseeable future. 

With one fewer workday in the fiscal 2020 year, Cintas is projecting revenue of between $7.24 billion and $7.31 billion over the next 12 months, which will result in reported growth of 5% to 6.1%. Underpinning this expansion is a favorable macroeconomic environment for the company. Hansen pointed out that over 1 million jobs have been created in the U.S. economy in the last year -- a positive benchmark for companies in the uniform services rental industry.

As for the bottom line, Cintas is aiming for adjusted earnings per share of $8.30 to $8.45 in the upcoming fiscal year, which, at the midpoint, will represent roughly 10% year-over-year growth.

To reach this goal, in addition to sales growth and ongoing productivity initiatives, the company will seek to realize additional projected annual cost synergies arising from its $2.2 billion acquisition of uniform specialist G&K Services in 2017. So far, Cintas has reached $100 million in annual synergies, and it's targeting $135 million in fiscal 2020, with any remaining annual cost savings to be completed by fiscal 2021. The multiyear integration of G&K has provided Cintas with both a sizable growth vehicle and a chance to add value to core uniform rental margins.

Two uniformed workers shake hands in a food manufacturing facility.

Image source: Getty Images.

2. We'll complete our upgrade to SAP in 2020

In implementing SAP, we are moving from a decades-old platform to new technology that provides powerful information and data designed to help us improve our business.

Through fiscal '19, about 65% of the operations are now in SAP. We will complete the rollout to the remaining locations in fiscal '20. -- CFO Mike Hansen

The impact of Cintas' migration to a modern enterprise resource planning (ERP) system, specifically, implementation of German software giant SAP's namesake software, is perhaps underappreciated by shareholders. Decades of acquiring small independent uniform rental operators -- Cintas turned 90 this year -- has resulted in financial and resource planning systems that are adequate, but not optimized to the fullest extent. 

During the conference call, Hansen compared the implementation of SAP to a very large acquisition, noting that the process affects hundreds of operations, and that the conversion of a significant operation (accounting, for example) typically requires "an 8-month process of planning, changing business processes and employee mindsets, training and certification and customer communication."

As Hansen observed, the company is roughly two-thirds of the way through the conversion to SAP, and plans to complete the exercise in the current fiscal year. The upside to Cintas will manifest in better information to decision-makers at all levels of the company and a clearer set of analytics that should help Cintas yield more profitable business within each of its revenue streams.

3. "Other" categories have become valuable growth drivers

Cintas derives roughly 80% of its revenue from its uniform rental and facilities services business. As I noted in my fourth-quarter earnings preview, this segment's growth has curbed slightly following the G&K Services acquisition. As Cintas continues to integrate G&K's operations, the division is generating moderate organic top-line expansion in the mid-single digits: Last quarter, organic revenue grew 6.8%. 

The company's remaining services, denoted as "other" on the income statement, are adding sales at a much higher rate, primarily because they're focused on new growth areas where Cintas doesn't hold the mature and dominant market position it enjoys in its uniform rentals segment.

The "other" category includes first aid and safety services, which advanced year-over-year revenue at an organic rate of 10.7% last quarter, and fire protection and uniform direct sales, which together improved organic revenue by 12.7%.

Though relatively small, other services are providing a revenue spark and play an increasingly important role in Cintas' mid- to high-single-digit organic revenue growth framework. They're quite profitable ventures as well: Perhaps surprisingly, other services already generate nearly as high a gross margin as uniform services. In the last 12 months, uniform services booked gross margin of 45.5%, versus "other" gross margin of 45.1%. 

Below, Treasurer Paul Adler provides an example from the first aid business to demonstrate how a smaller service provides the benefit of profit growth as it seeks to grab market share:

First Aid segment gross margins continue to increase with strong top line growth. As our volume grows, we can negotiate better pricing from vendors. Growth also enables us to improve route density, reducing gasoline and diesel costs and enabling our service teams to spend more time serving and upselling.

Expect to see management devote more resources to noncore revenue streams in the new fiscal year. These businesses are particularly ripe for mergers and acquisitions activity. Shareholders probably won't see a purchase on the magnitude of the G&K Services transaction, but bolt-on acquisitions in new business lines that can raise Cintas' profitability profile are likely to occur with some frequency in the coming years. 

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.