Cintas Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
September 28, 2021

There are 13 speakers on the call.

Operator

Good day, everyone, and welcome to the Cintas First Quarter FY 'twenty one Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Adler, Vice President and Treasurer, Investor Relations. Please go ahead, sir.

Speaker 1

Thanks, Shelby. Thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our Q1 results for fiscal 2022. After our commentary, we'll open the call to questions from analysts.

Speaker 1

The Private Securities Litigation Reform Act of 1995 provides a safe harbor 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'll now turn the call over to Todd.

Speaker 2

Thank you, Paul. We are pleased with our start to fiscal 2022. 1st quarter total revenue grew 8.6% and diluted earnings per share or EPS grew 11.9%. Every business, Whether goods producing or services providing has a need for image, safety, cleanliness or compliance, Every business has a need Cintas can fulfill to help get them ready for the workday. Our financial results are indicative of our strong value proposition and vast total addressable market.

Speaker 2

Uniform Rental and Facility Services segment revenue was $1,510,000,000 compared to $1,390,000,000 last year. Organic revenue growth was 8.2%. We expected solid growth over the year prior period in which the economy was in a weakened state. We also made solid progress on a sequential basis and in total revenue grew stronger than anticipated. We continue to make measured investments to support our growth.

Speaker 2

The labor market remains challenging. U. S. Still hasn't recovered 5,300,000 pre pandemic jobs. This represents an opportunity for us.

Speaker 2

Most of our customers are open. However, most are not operating at the same capacity and employment levels as pre COVID. We are seeing inflationary signs, including higher cost of freight, energy, wages and supplies. We continue to take actions to minimize the impacts. These include reviewing and challenging our processes and procedures, produce efficiencies and reduce costs and thoughtfully implementing increases to the pricing of certain products and services in response to higher operational costs.

Speaker 2

Our First Maintenance Safety Services operating segment revenue For Q1 was $199,100,000 compared to $204,500,000 last year. 1st quarter revenue was up against a very difficult comparison. In last year's Q1, in response to the COVID-nineteen pandemic, Personal protective equipment or PPE sales were Surgeon, propelling the business to grow organic revenue over 17%. At that time, PPE comprised an outsized percentage of First Aid and Safety Services revenue mix. As discussed on previous earnings calls, The amount of PPE has declined as COVID case counts have fallen from peak levels.

Speaker 2

However, PPE remains a larger percentage of the revenue mix That was pre COVID. Over the same period of time, the recurring First Aid Cabinet Service Business revenue has increased. We welcome this shift in mix because First Aid Cabinet Service Business is historically higher profit margin business and more consistent. Our fire protection services and Uniform Direct Cell businesses are reported in the all other segment. All other revenue was $189,700,000 compared to $147,700,000 last year.

Speaker 2

The fire business organic revenue growth rate was 17.8% And the Uniform Direct Sale business growth rate was 68%. Both businesses benefited in part from increased activity in a period of reduced Regarding our balance sheet and cash flow, our financial position remains strong. Recently, on September 15, we paid shareholders $98,800,000 in quarterly dividends. The amount per share of common stock paid of $0.95 represents a 26.7% increase of the company's previous quarterly dividend. We continue to allocate capital to improve shareholder return.

Speaker 2

I'm proud of the execution of our employees whom we call partners. They continue to navigate an unsettled environment by focusing on our customers. The COVID-nineteen pandemic continues, of course, fueled recently by the surge of the Delta variant. We remain well positioned headed into the fall and winter months To provide potentially life saving items such as face masks and gloves, provide hygienically clean garments such as healthcare scrubs and isolation gowns and conduct services including hand sanitizer dispensing and sanitizing spray services. Now before turning the call over to Mike, I want to highlight a recent announcement of our ambition to achieve net 0 greenhouse gas emissions by 2,050.

Speaker 2

Synthesus was founded on a sustainable business model. Our corporate culture is based on doing what's right and challenging ourselves to improve. We view our ambition to achieve this objective as a natural extension. Also as part of our steadfast commitment to corporate responsibility, we will soon issue a more robust environmental, social and governance report. We are committed to protecting the environment, enhancing humanity and maintaining accountability.

Speaker 2

I will now turn the call over to Mike.

Speaker 3

Thanks, Todd, and good morning. Our fiscal 2022 Q1 revenue was $1,900,000,000 compared to $1,750,000,000 in last year's Q1. The organic revenue growth rate adjusted for acquisitions, Divestitures and foreign currency exchange rate fluctuations was 8.6%. Gross margin for the Q1 of fiscal '22 was $902,800,000 compared to $826,200,000 in last year's Q1. Gross margin as a percentage of revenue increased 30 basis points to 47.6% for the Q1 of fiscal 'twenty two compared to 47.3% in the Q1 of fiscal 'twenty one.

Speaker 3

Gross margin percentage by business was 48.3 percent for Uniform Rental and Facility Services, 44.8% for First Aid and Safety Services, 46.1 percent for fire protection services and 41.5 percent for Uniform Direct sale. Selling and administrative expenses of $508,700,000 increased 6 point 7% compared to last year's Q1. This increase reflects investments in our sales teams as well as slight incremental travel and meeting expenses, somewhat offset by the sale of assets within our Uniform Direct Sale business. Operating income of $394,100,000

Speaker 2

increased 12.7%.

Speaker 3

Operating margin increased 80 basis points to 20.8% in the Q1 of fiscal 'twenty 2 compared to 20% in the Q1 of fiscal 'twenty one. Our effective tax rate on continuing operations for the Q1 of fiscal 'twenty two was 11% compared to 7.8% last year. The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense. Net income from continuing operations for the Q1 of fiscal 'twenty two was $331,200,000 an increase of 10.4%. Diluted EPS was $3.11 an increase of 11.9% from last year's Q1.

Speaker 3

We are increasing our fiscal 'twenty two financial guidance. We are raising our annual revenue expectations from a range of $7,530,000,000 to $7,630,000,000 to a range of $7,580,000,000 to $7,670,000,000 and diluted EPS from a range of $10.35 to $10.75 to a range of $10.60 to $10.90 Please note the following regarding our guidance. Fiscal 'twenty two our fiscal 'twenty two effective tax rate is expected to be approximately 19.5% compared to

Speaker 2

a rate of 13.7%

Speaker 3

for fiscal 'twenty one. The higher effective tax rate negatively impacts fiscal 'twenty two diluted EPS guidance by about $0.77 and diluted EPS growth by about 760 basis points. Guidance does not include any future share buybacks Guidance assumes an uneven economic recovery caused by the surging COVID-nineteen delta variant. However, guidance does not contemplate significant pandemic related setbacks such as stay at home orders and other restrictions commonly referred to as lockdowns. Finally, when modeling our fiscal 'twenty two financial results by quarter, please note the following regarding last fiscal year's financial results.

Speaker 3

In last fiscal year's Q2, certain Uniform Rental and Facility Services operating assets were sold. The pre tax gain on sale of $18,000,000 was recorded in selling and administrative expenses and impacted 2nd quarter operating margin by 100 basis points. The pretax gain and the related tax benefit impacted EPS by $0.25 And In last fiscal year's Q3, we were able to help our customers respond to a spike in COVID-nineteen cases By providing them with large supplies of personal protective equipment, we provided more personal protective equipment in that quarter than in any other.

Speaker 1

That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed.

Operator

Thank We'll take our first question from Tim Maroney with William

Speaker 3

Blair?

Speaker 4

Yes. Good morning. Thanks for taking my question. Can you talk about the primary factors That led you to raise revenue guidance this quarter. Was it primarily related to the better than expected result that you generated here in the first quarter or is it more related to your outlook for the remaining 3 quarters of this fiscal year?

Speaker 2

Hey, Tim, it's Todd. Thanks for the question. Well, certainly, our performance in Q1 exceeded our expectations, But we like the momentum that we see in our business. We like the new business That is a driver of growth for us. And we're providing more products and services to our customers.

Speaker 2

So to those who are open And hopefully, they'll be back to full strength here very shortly. But in general, yes, we like the momentum that we see in our

Speaker 4

Okay. Thanks, Todd. I was wondering if you could also maybe talk about growth by vertical a little bit more This quarter, I know hospitality was showing strong recovery last quarter. Did that vertical stall out a little bit as COVID cases ramped up here in August September. And are there any other end markets that you call out here as being somewhat stronger or weaker than you had expected?

Speaker 2

Well, great question, Tim. Certainly, the hospitality business It is well, it was so far down, hospitality was that it's coming back and it's coming back nicely. I wouldn't use the word stalled out by any stretch. Certainly, there is a bit of a tail To that, so orders aren't received and shipped In real time, meaning that they make those decisions about staffing. There's a process.

Speaker 2

We They place the orders, we ship them, etcetera. So there's a little bit of a tail there. But we still like what we see in the hospitality business. Certainly, they are anxious about business travel coming back, convention travel specifically, But the in general, the hospitality business is doing so much better And but they're a little bit anxious, right, about how things will be impacted because of the variant, but also When will Business Travel come back? As far as our other areas, healthcare continues to do well for us.

Speaker 2

We've talked about those offerings that we have and they really resonate with those folks. So whether it's helping them clean their facilities, helping with isolation gowns, Scrubs, etcetera, all that is very attractive for folks. And I'd just like to take a moment to talk about What we compete with in those markets in many cases is disposables. And with the focus on ESG, that value proposition of Providing an item that is essentially re laundered and recycled is very attractive, separate from the economics of it. It's very attractive for the health institutions and many institutions to say, wow, you can provide me a product that doesn't just go to landfill After a use.

Speaker 2

So again, that value proposition is very much resonating.

Operator

We'll take our next question from Andy Wittmann with R. W. Baird.

Speaker 5

Great. Thanks. I don't usually ask about the direct sales segment, but I'm going to this quarter. The segment margins in all other came out very strong. We haven't seen them as strong in a while, obviously, plus 68%.

Speaker 5

It's Big number, but we all know that the compare was fairly easy. Todd, could you just talk a little bit about What drove the margin leverage? Was there an unusually large order that came back with somebody kind of redressing folks? Or maybe just a little bit of color as to what drove the great profit margins in the all other reportable segment?

Speaker 2

Well, Andy, first off, our thanks for the question. Our partners In that area of the business, really appreciate you calling it out and citing that their performance is really, really good. You're right. The comps are more than reasonable because of what happened to the hospitality The business in particular last summer. But our revenue is coming back very nicely there, hence the revenue growth.

Speaker 2

But And we're getting leverage over the organization staffing levels that we have in place. And Mike cited that we had a sale of an asset that occurred in that area. So but in total, you put it all together, we see you shouldn't anticipate that level of Increase in the future, but nevertheless, we like the leverage we have there and we think we're well positioned. Our organization is was, as As you can imagine, right sized as a result of what occurred last summer. And we think we're in a really good spot to capture Opportunities in the marketplace and gain leverage on our investment.

Speaker 3

Well, the other half or part of that other Segment is the fire business, which also had a great Q1. And so We're very pleased with that business and the momentum in that business as well. We saw some nice sequential improvement in the gross margin of the Fire business And at organic growth of 17.8%, we're thrilled with the performance that we've seen.

Speaker 5

Yes. Okay. And then I guess just for my follow-up question, I wanted to just get a little bit more specific on the labor markets, both as it relates to your own business, your ability Hire and compensate people as well as the impact on your customers. I don't know if there's a way for you guys to talk to us about The level of staffing at your you're always selling new business, but at the historical customers that you've had through this whole time, What is the headcount look like for those customers? Are they still can you How far down they are?

Speaker 5

I mean, we talked about the 5,000,000 jobs that are still missing. How many of those were former Cintas wearers?

Speaker 2

Yes, Andy, first of all, you can't open up a newspaper without hearing about wages and pressure in the market on labor. So we are certainly not immune from that, nor are our customers. And so we are battling it every single day and At levels that we feel very good about in our business, and as far as our customers, I mean, it's really difficult to say to put a number on it. It varies so much based upon geographies and industries. It's The restaurant business is certainly, they're nowhere near back to where I think they hopefully will be someday and certainly not back to where they were pre COVID, as an example.

Speaker 2

Warehousing and distribution is back very, very nicely and probably At or above pre COVID levels. In total, we're certainly down from pre pandemic levels. And I think we're representative of the 5 point something 1000000 jobs That we have less in the U. S. Versus pre COVID.

Speaker 2

So we're anxious for our customers to get back to previous levels. And when we think about labor and we think about those functions, we always focus more about how it impacts our customers. We'll figure things out and how to manage it.

Speaker 1

Well, not only 5,300,000 jobs lost, right, versus pre pandemic, but still 10,000,000, 11,000,000 job openings that haven't been filled, which is Great opportunity for us.

Speaker 2

The latest number I saw from the Bureau of Labor Statistics that you reported out Earlier this month was 10,900,000 job openings. So I don't know how many of those would be people that would Wear a Cintas uniform and utilize items out of our first aid cabinets, etcetera. But We'd like to see those all be filled.

Operator

We'll take our next question from Manav Patnaik with Barclays Capital.

Speaker 6

Thank you. Good morning, gents. I just had one question for you guys. And I was just hoping you talked about wage and labor a bit, but can you just talk about the moving pieces On the cost side, we've heard a lot about driver shortages and fuel costs and supply chain. I was just hoping you guys could just give us the quick In the state of what's happening with you guys?

Speaker 2

So Manav, I'll start and then Mike can Assist with this. Certainly energy costs are increasing. We're seeing that whether it's at the pump, natural gas to run our facilities. But we've worked really hard on efficiencies in routing and our production facilities to maximize efficiencies there to mitigate all of that. And I think we're doing a very good job there.

Speaker 2

Lasius, we talked a little bit about. But we have discussed in previous earnings calls that we've been addressing this wage issue with particular focus on our frontline partners Over the past couple of years, so we weren't flat footed when it came into this wage subject. We're continuing to address it. We've got to be very competitive in the marketplace to attract the right partners on our team, And we're doing that and we're going to be able to continue to navigate that successfully. And then as you can imagine, we've been Very diligent about managing discretionary spend.

Speaker 2

There is some travel that is back, but certainly not near the levels that they were pre COVID. Mike, anything else?

Speaker 3

No, I think that hits the cost side, but Manav also keep in mind, we Talked a little bit about this in July, but we have begun to increase prices Here in the Q1, it is a strategic local customer by customer view, But early indications suggest a positive reception from our customer base. And certainly, That's important as we look at things like energy being up 40 basis points year over year. We're not immune to some inflationary pressures, but we are, as Todd said, we're managing them very, very diligently. We're looking for Automation opportunities, efficiency opportunities and if we need to, we can strategically increase prices And we've started to do that here in this Q1 after taking a few years off.

Speaker 6

Got it. And actually, maybe if I can squeeze in one more. Just Hoping you could give us an update on the M and A pipeline perhaps in the non uniform Are there opportunities that you guys are actively seeking?

Speaker 2

Great question, We are active and acquisitive in every business we're in. We'll say that activity has ramped up here in the back half of the year, Probably anticipation of tax changes, etcetera, but nevertheless, so we like the activity. We have we are in a great financial position. We love our balance sheet. And right after investing in our facilities to help grow those organizations.

Speaker 2

Our number 2 use of capital is for M and A. And So we're very inquisitive and looking very active and looking forward to closing on more deals in the near future.

Operator

We'll take our next question from Hamzah Mazaris with Jefferies.

Speaker 7

Good morning. Thank you. I just wanted to follow-up on pricing. You had mentioned you hadn't taken pricing for a while, I Price is baked into your guidance and how are the customer conversations? I assume customers see inflation headlines all over the place.

Speaker 7

So And given you have an increased pricing for a while, could you maybe talk about order of magnitude? Are you doing that pricing catch up? Or how should we think about Pricing strategy?

Speaker 2

Hamzah, I wouldn't think of it as a catch up. And we I have not raised price in 2 years. But these are, Mike mentioned, these are Strategic decisions, their pricing is a local subject. It really gets down What type of what industry is that business in? What even geography are they in?

Speaker 2

In what condition is their business and to be able to handle it, so that we're able to be Fair with our customers as we look out, meaning that there are certain organizations that are their business is doing a whole lot better than others, And we're conscious of that. But as far as the conversations, again, that would depend upon the particular business. But It does make the conversation easier when inflation is so much in the headlines. So that certainly gives us a little benefit, but these conversations are they're never easy, right, Because from our customer standpoint, it's a tough subject. But we're focused on the long Term value of those customer relationships and we handle them appropriately.

Speaker 7

Got it. And just my follow-up question Would just be around just the I know it's been a while since the SAP implementation was Completed, but then COVID hit and we were sort of caught up in that and it's still kind of going on. But maybe you could just give some examples How the SAP system is maybe benefiting you now as organic growth comes back, maybe if you want to talk about it Qualitatively or quantitatively, however, either on the cost side or revenue side, any examples would kind of be helpful.

Speaker 2

Yes, Hamzah. So a few items on SAP that where we're benefiting from. Certainly, one view of the customer is significant for us, and that helps us with cross sell. And we know when we do that, When we are able to provide more products and services, the customer sees more value. And when they see more value, It's a better retention tool for us.

Speaker 2

So that's been significant for us and has been and will continue to be moving forward. We get some other certainly advantage from a data analytics standpoint, The cash cycle, those types of subjects. But some other items that I think you might You'll be able to see out in the marketplace is routing efficiencies are a real opportunity for us. We are focused on that from a dollar efficiency, from our ambition on the 2,050 Net 0 emissions. And we see we can advance that subject, Advance that ball much further than we have in the past by bringing technology to that.

Speaker 2

So that will be exciting. The other item is with SAP, it allows for us to have an online experience for our customers that they haven't had in the past. And what we realize is that our customers want they all want to communicate with us The way that they did when I started with the company 32 years ago, meaning they don't want to just have to call during working hours. They want to do business when they want to do business, whether that's to pay a bill, whether that's to communicate a request, To order something, those types of items are all we want to make it easier to do business with us. And on our online presence, And we call it MyCentOS, allows for our customers to do just that.

Speaker 2

So providing more value to them, more conduits for them to communicate with us instead of having to do it in the old traditional 9 to 5 type model. So those are significant for us. Another operational item would be our ability to speed up the process from When we see an order from a customer, receive an order from a customer to when we can get it out to them. Having that transparency throughout our supply chain is an absolute advantage Where we can anticipate better and even once we receive the order, get it out the door faster than what we were historically. And so that efficiency shows up to the customer in speed to market And then able to get them products and faster than we had in the past.

Speaker 2

So we want to leverage that system and I think we've done that quite nicely to date, But there will be more to come.

Operator

We'll take our next question from George Tong with Goldman Sachs.

Speaker 8

Hi, thanks. Good morning. Revenue growth in the quarter was stronger than you expected on Sequential basis, can you elaborate on the sources of upside specifically and where you see the most promising trends over the next year?

Speaker 2

George, I'll start. But I would say 2 significant drivers of growth for us have been new business. It's still quite robust. Our value proposition is resonating very much. And many companies are still struggling with staffing.

Speaker 2

As we cited earlier, 10,900,000 job openings. And when you're struggling with staffing and you find a company like Cintas who can outsource certain functions to, It makes it very attractive. So they look at it and say, wow, you can take care of these items. And maybe they were a do it yourself in the past. So that resonates with them.

Speaker 2

So that's been quite nice. Moving on to another Most of our customers were, I'd say, are open and probably were open going into the Q1, But we are providing more products and services to them. We are again anxious for them to get back to their pre employment levels, and we think that will be even better. But new business and then I'd say again, ads within our current customers are 2 significant drivers for us that we think will continue to help us throughout the year.

Speaker 8

Got it. That's helpful color. And then wanted to dive into pricing increases, which you touched on earlier. To what extent do you think that pricing combined with efficiencies can fully The input cost increases that you're seeing and could there be a timing lag as to when those pricing increases will take effect and the real time nature of the input cost increases that you're seeing now?

Speaker 3

Yes, George. Certainly timing, it is difficult to match up The timing exactly to when costs increase and when we see changes in the Supply chain, for example. But we're doing our best to manage And the as I mentioned a little bit ago, when we have those conversations today, The message resonates that, look, there are increases in cost and these Price increases when we do make them, they are reasonable and they make sense to our customers. That's been our Experience so far. The really nice thing about our if you think about our cost structure as well, Todd hit on this a little bit that our labor, we've been working on that for a while.

Speaker 3

And so we may not be while not immune, we may not be as affected as some of our peers and others. And so that's important for us. The other part is that many of our material costs are amortized. So when we see spikes in supply chains in various Areas whether it is labor throughout the world or cotton or other things, We're amortizing costs and it tends to be a bit of a natural hedge for us. And so it does slow down the impact And it requires the impact to be greater for a much longer period of time before it really starts to hit us.

Speaker 3

And in those cases, we can get ahead of The inflationary pressures a little bit with our pricing strategy. So generally Speaking, we feel like we're while it's not perfect matching of expense and benefit, We do a pretty good job and we get a little bit of benefit from just the way our business works.

Operator

We'll take our next question from Ashish Sabadra with RBC.

Speaker 9

Thanks for taking my question and good results. Mike, I just wanted to drill down further on the cross sell opportunities that you mentioned. I was wondering if you could provide any color on where you are in penetrating, let's say, hygiene product, Safety as well as first aid and fire services within your existing customer base and how can you accelerate that cross So either through organic or through M and A, any color on those fronts? Thanks.

Speaker 2

Ashish, Well, thanks for the comments and the questions. We have our sales and service organization well positioned To offer these various products and services, again, they have tools that allow them to understand Where those opportunities exist, they're certainly not perfect, but they are allowing them to get pointed in the right direction To help provide that value to customers. And as I mentioned, the more value excuse me, the more products and services we provide to customer, We know the stickier that relationship will be, just like most relationships, right? If it's Just one product is probably more at risk than having 2 and so on and so forth. So it's very much a point of focus.

Speaker 2

When you think about our relationships, every single customer virtually needs Our fire service, right, because of the legal requirements around that subject. But we see very nice overlap with Those who would, who are uniform customers, who would need some direct sale, they're in uniform rental. And we also see overlap with those who are uniform rental customers who would need first aid and safety products, Training, CPR, all the various items that we provide. So it's our big issue has been In the past that our customers weren't aware of everything we provided. And that's a nice problem to have, but nevertheless, It's still very much a problem for us, and we're trying to change that position in the marketplace that our customers Realize that not just through our sales and service organizations, but also through our mass media spend, which you may have seen this past weekend where we had a Significant position in Golf's Ryder Cup.

Speaker 2

We're We're trying to get the message out about all the products and services we provide. And not a complete one stop shop for our business, but we Sure. Do get them a long ways on that path. Mike, anything else on this?

Speaker 3

Well, the only thing I would add is the really good news We're in the early innings of penetration. And so when you think about the rental customers and the opportunity To continue to penetrate with even rental items such as our restroom products and our Things that we've talked about recently in the last year like isolation gowns and hand sanitizers, we're in the very early innings. And when you couple that with the 1st aid and safety and fire opportunities, again, less than 20 Penetration. And so we've got a lot of work to do and the really exciting thing is much opportunity remains.

Speaker 9

That's very helpful color. That's great. And maybe just a quick clarifying question. I was just wondering at a very high level, Can you provide what are the key categories of spend and the percentage of expenses from labor versus fuel versus amortization of equipment? Any color will be helpful.

Speaker 9

Thanks.

Speaker 3

Sure. Let me start with energy. So energy and that would include fuel for our trucks and the running of our laundry operations In the quarter was 2.1%. That is up 40 basis points from a year ago, Flat with our 4th quarter. So it's a while it is up some, it's still a relatively insignificant part of our overall Cost structure.

Speaker 3

When you think, Ashish, about our cost structure, though, You can I'm going to use cost of rentals. You can think about them in 3 buckets. The cost of the materials, The cost of running the laundries and then the cost of the service component. And while they're not exactly The same. You can think about them as a third each.

Speaker 3

And each of those buckets are a little bit different. I mentioned the materials, Many of which we amortize over certain periods of time. So we get a little bit of smoothing of those costs. And then we also have some that are direct sale type like the restroom products that we expense immediately. The major component of that would be those rental items that we're amortizing.

Speaker 3

When you think about the laundries, then you're then we're into the depreciation of the buildings And certainly the equipment that's in our wash alleys, but also the labor component Within that as well. And then the service component, you've got our drivers, our trucks and the amortization of the trucks and the gas to run those. When you put it all together, certainly labor is a large part of our cost structure. The materials, the products that we sell, Certainly a large part of our structure, and we manage each one of those quite tightly and look for improvement opportunities.

Operator

We'll take our next question from Toni Kaplan with Morgan Stanley.

Speaker 10

Hey, good morning. This is actually Jeff on for Tony. I know this question was asked earlier related to revenue guidance, but I wanted to ask it slightly different as it relates to EPS. The EPS guide is up by about 2% for the full year, but it seems like a lot of that is maybe flowing through the buybacks and better than expected tax rate. So is that fair?

Speaker 10

And is that to say from an operating standpoint, maybe you're a little bit more optimistic on the revenue side, but maybe some cost headwinds keep you a little conservative here? Just some more color on that would be helpful.

Speaker 3

Sure, Jeff. I don't think that's a fair reflection of our guidance. You think about our guidance of $10.60 to $10.90 That's a 3.5% to 6.4% increase in annual EPS. But You referred to a lower tax rate. Our tax rate is going to based on our guide today, it's going to go up 5.8% Compared to 'twenty one, that's quite a significant impact.

Speaker 3

And if you think about the 760 basis points that I referred to In my opening remarks, that takes EPS growth from about 11% to 14%. Now certainly, The buyback that we had done in the Q4 and the Q1 did create some benefit, but that still gets to a pretax Earnings growth in the range of double digits, and so it's a pretty good year. And then if you kind of move Farther up, we talked in July about our guidance of implying operating improvement At the low end, 0 basis points to 70 at the high end, we're still right around in that neighborhood in terms of The guidance that we provided today and keep in mind that's on the heels of a 310 basis point improvement in operating margin in the previous fiscal year. So to kind of say that our guidance is Based on share buyback and taxes, I think is not a great reflection of really what's going on. The guidance on the EPS side is nice healthy margin improvement, Pre tax increases of right around double digits and then a higher tax rate that Pulls that EPS down.

Speaker 3

Hopefully, that gives you a little bit more color on that EPS guidance.

Speaker 10

No, understood. That was helpful. And then I want to ask about First Aid margins, which were pretty strong in the quarter. Are you able to quantify at all how much PPE is still constraining margins Just given it's greater than normal mix. And then I guess based on that, how should we think about near term upside As that rolls off, like is that really going to kick up in the next few quarters as that roll off?

Speaker 10

Just kind of overall, if you could talk about the path back to pre COVID level margins in that line

Speaker 3

Sure. We certainly PPE has been a major factor In that business, and Jeff, you're correct in pointing that out. And it was really important Our customers over the course of the last year and we invested quite a bit in inventory to be able to serve the customers Even if it was at a bit of a lower gross margin for us, but we've seen some nice sequential improvement there. Our 44.8 percent is still lower than our pre pandemic of, call it, 48 ish percent. And so we still believe we can get back to those kinds of levels.

Speaker 3

Now The PPE that we've had over the course of the last year tends to drop off a little bit more quickly than the first aid Comes back because as Todd and Paul have referenced, we still have a lot of Job openings, quite a bit fewer people in the workplace today than pre pandemic. And so As those people come back and as those job openings get filled, that creates more hands in our first aid cabinets And that creates some nice momentum. One of the nice things that we really have seen coming out of the last few quarters is Our customers and our new customers, so prospects turning into customers, are really seeing the value Of keeping their employees safe and healthy, and our first aid business really allows us to provide that value to them. And so our new business has been really strong in this first aid cabinet space, But it's coming back and while we like the momentum, we're not there yet. And we do expect to see sequential improvement And I'll maybe step that back a bit.

Speaker 3

We expect to see improvement in the year. Every quarter can be a little bit bumpy here and there. But generally speaking, we continue to look for improved gross margin in that business.

Operator

We'll take our next question from Gary Bisbee with Bank of America Securities.

Speaker 11

Hey, good morning. If I could go back to labor for a minute, I think a lot of your comments have been about cost and working on wages, but are you fully staffed both from a service And if you had seen any elevated turnover relative to history or had any increased difficulty Hiring to support the rebound in growth you're seeing?

Speaker 2

Gary, very good question. I guess the way I describe it is we're having to run at higher RPMs to get the output that we want. So it's harder. There's no doubt about it. Attracting, retaining and developing the talent It's core to what we do as a company, and we're working that much harder now to get to the levels that we want to be at.

Speaker 2

So Are we staffed at the levels we want to be at? Yes. Yes, we like our staffing position. Turnover is still very manageable. And I think it speaks to many, many things.

Speaker 2

Certainly, the total compensation that we provide, The attractive benefits, but it really speaks to the culture and the investment that we put into people Because there's so many partners that have grown up in the company And have advanced in the company and that's part of our culture. So we've always had to be really good And painting a picture for people about this is where you start, but we will invest and develop you. And We're having to work harder at it, but it's still resonating with folks. And so that's where we are now.

Speaker 11

Okay, great. And then on you've talked about the PP and E and some of the pandemic driven sales in First Aid and Safety, but I think you also had some of that in Uniforms paneling that stuff through the facilities business. I'm not going to ask you when it's going to go away because who knows, but is there a meaningful chunk of revenue there that probably churns off in the future? And what I'm really Trying to think through is how that could impact the rate of growth over the next several quarters or whatever in the core Uniforms business, is it elevated or is that just not a big deal in the grand scheme of that business?

Speaker 2

Yes, Gary, what Mike spoke of is it was a A significant portion of our First Aid and Safety business. There was certainly some revenue that went through our rental business, Sold on route, that was for PPE, but nowhere near the amount as a percentage that would go through Our first eight business. So is there some there today? There's a little bit, but it's not significant whatsoever. So and As far as when we look out about demand, we're still in a good spot.

Speaker 2

If demand is there for those types of products and services, we're managing that inventory and there is still demand. We sure hope as a country and as North America, as a world that, that is that will be diminishing over The course of the balance of our fiscal year. So our guide takes all that into account and we're focused on Building the core of our business, and but if our customers need those types of products and services, we're there for them,

Speaker 3

and we will help them with those. Gary, I might just add, as you're thinking about, I believe you referred to the next several quarters, As I said in my opening remarks, we talked last Q3 about $45,000,000 that we did not expect to repeat in our 4th quarter, and so that's going to be as you think about the growth of quarter to quarter, Definitely keep that in mind as a 3rd quarter growth impact. Now, again, as it relates to this PPE,

Speaker 8

look,

Speaker 3

the safety and cleanliness themes that we've sold under For years, it's really resonating. And we certainly believe that those areas will be larger moving forward than pre COVID, And that certainly is exciting for us.

Operator

We'll take our next question from Scott Schneeberger with Oppenheimer.

Speaker 12

Thanks very much. Good morning all. I want to hone in a little bit on the offsetting efficiencies of the environment in the automation. Just anecdotally, if you could speak to a few things you're doing. I know on Hamz's question, you talked about SAP and automation of payments and customer facing.

Speaker 12

Just curious if you could elaborate maybe a little bit on what you're doing in this environment, Yes, maybe at facilities or otherwise and some of the longer term goals of other automation? Thanks.

Speaker 2

Good morning, Scott. A couple of obvious ones for us. I mentioned routing. That is obviously a significant one That we think is going to pay dividends for us. The Scott Farmer always spoke about, we We don't generate any revenue when the wheels are turning on our trucks, right.

Speaker 2

We generate revenue when the wheels stop and we see an opportunity to improve that efficiency and that we're investing in technology there to do so. And we're excited about the impact That will have only on our cost structure, but also on our emissions as we move forward. In the production facilities, We are managing very tightly our wash alley and making sure that We have much better efficiencies there, meaning we're tracking very closely The number of loads that go through our facilities versus the AcquaTees that went through pre COVID on the same playing field, meaning same amount of Volume that's going through. And we've put some technology in place to help us with that instead of just doing it through Elbow grease. And as a result, we're seeing some real benefits there.

Speaker 2

And again, that will help us in Our cost structure, but also in our missions. And so we're focused on making sure That we're managing that very tightly and we're seeing some benefits there.

Speaker 3

Yes. I'm not one other one I might talk about. I don't know that Todd mentioned the stock rooms in In our laundry facilities and the ability to get those automated and that creates visibility And it creates the opportunity to share. And when we are more efficient in our stockrooms, so let me be clear, our stockrooms are Within all of our rental facilities, they are garments that have been in service already. And so when we are efficient, that means we are reusing garments that are already amortizing in our cost structure.

Speaker 3

And so that creates revenue generation out of garments that are either already in our cost structure or maybe have been Amortized fully. And so we get some real nice incremental margins when we can more efficiently use those We'll put back those garments into service. SAP has allowed us to get visibility and to be able to improve the use Of those garments within our stockroom. So that's another example, Scott, of something that's really benefiting us.

Speaker 12

Excellent. Sounds good, guys. Thanks. I appreciate that. And then just as a follow-up, wanted to touch on It sounds like you're very active in M and A that came up, I think, particularly before calendar year end, maybe with some consideration for tax But you've done over $1,000,000,000 worth of stock buybacks in the 4th and the first quarter here back to back.

Speaker 12

And that's just kind of looking back, that's as big as any year going back for a while. So I'm just kind of curious how the thought process there is, it sounds like you're getting close on some M and A, but it's not Really a lot of allocation of capital is going to repurchase, and is that something we should expect to continue?

Speaker 2

Scott, we are, as I mentioned, we're active and it takes 2 to dance And we're seeing more folks at the dance. As anecdotally, my guess is because of tax reform. And as a result, we think more deals will come through. Now that being said, we are in a great position on our balance sheet. And we are ready, willing and able to activate that balance sheet As appropriate, that is best for long term value for our organization.

Speaker 2

And just as a reminder, the number one Priority for our capital is has been and will continue to be the investment into our current business to help grow The sales and profits of our organization, whether that's through additional products and services, additional facilities, Training, staffing levels, all those is our number one priority. And then after that, number 2 is M and A. And we're steadfast in that commitment, and we'll allocate appropriately. And then thereafter, then we'll return to the shareholders as available in the form of stock buyback and dividends. And I think we've got a really good track record Of managing those priorities appropriately and intelligently for the long term value.

Operator

That concludes today's question and answer session. Speakers, at this time, I will turn the conference back over to you for any additional or closing remarks.

Speaker 1

Thank you for joining us this morning. We will issue our Q2 of fiscal 'twenty two financial results in the latter half of December. We look forward to speaking with you again at that time. Thank you.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Cintas Q1 2022
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