Cintas Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
December 21, 2021

There are 16 speakers on the call.

Operator

Good day, everyone, and welcome to the Cintas Second Quarter Fiscal Year 2022 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Paul Adler, Vice President and Treasurer, Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Matt, and 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 fiscal 2022 Q2 results. After our commentary, we will open the call to questions from analysts. 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 These forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss.

Speaker 1

I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Todd.

Speaker 2

Thank you, Paul. Our 2nd quarter financial results led by our strong revenue increase of 9.4%. Our financial results are indicative of our compelling value proposition, Vast total addressable markets and the outstanding execution of our employee partners. I thank our partners for continuing to navigate these challenging times by focusing on our customers. The benefits of our strong top line growth flowed through to our bottom line.

Speaker 2

Excluding last year's $18,000,000 pre tax gain on the sale of certain operating assets in the Uniform Rental and Facility Services segment And related tax benefits, 2nd quarter operating income margin increased 70 basis points from last year And EPS grew 16.5%. These results are especially significant given that They were achieved in a period in which U. S. Inflation hit a 39 year high. Uniform Rental and Facility Services operating segment Revenue was $1,540,000,000 compared to $1,410,000,000 last year.

Speaker 2

Organic revenue growth was 8.5%. The labor market is challenging. However, we are benefiting in the current environment. Businesses are struggling with the scarcity of labor, which has left many understaffed. Also, businesses have a heightened awareness of safety and cleanliness and are concerned with their ability to properly sanitize Amidst persistent COVID infections, businesses are increasingly outsourcing to Syntos, so they can focus on their core competencies And it is noteworthy that the U.

Speaker 2

S. Still hasn't recovered about 4,000,000 pre pandemic jobs And the job openings total about $11,000,000 Return of jobs represents future revenue growth opportunity for Cintas. Our First Aid and Safety Services operating segment revenue for the Q2 was $202,200,000 Compared to $194,400,000 last year. Organic revenue growth was 3.2%. 2nd quarter revenue was up against a difficult comparison.

Speaker 2

In last year's Q2, in response to the COVID-nineteen pandemic, Sales of personal protective equipment or PPE were very high and the business grew organic revenue 14.5%. At that time, PPE comprised an outsized percentage of First Aid and Safety Services revenue mix. The amount of PPE has declined year over year As expected, however, COVID infections are still prevalent and PPE remains a larger percentage of the revenue mix than it was pre COVID. Over the same period of time, the recurring First Aid Cabinet Service Business revenue has increased. In fact, it is up 20% from last year.

Speaker 2

We welcome this shift in mix because First Aid Cabinet Service business is a more consistent revenue stream and has higher profit margins than PPE. Our fire protection services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was 184 $900,000 compared to $152,100,000 last year. The fire business organic revenue growth rate was 16.9 And the Uniform Direct Sale business organic growth rate was 47.3%. Both businesses benefited in part from an improved economic environment.

Speaker 2

Regarding our balance sheet and cash flow, our financial position remains strong. 2nd quarter operating cash flow increased 27% from last year And free cash flow improved 16%. Recently, on December 15, we paid shareholders $98,500,000 in quarterly dividends. The amount per share of common stock paid of $0.95 represents a 26.7% increase from the company's previous quarterly dividend. We continue to allocate capital to improve shareholder return.

Speaker 2

And before turning the call over to Mike, I want to highlight That we recently issued our 2021 environmental, social and governance report. Cintas was founded on a sustainable business model. We are committed to protecting the environment, enhancing humanity and maintaining accountability. The report, our 2nd consecutive, Provides expanded information and data, including our reductions in energy usage, water consumption and scope 1 and scope 2 emissions. Our ESG report further illustrates that our corporate culture based on doing what is right and challenging ourselves to improve I'll now turn the call over to Mike.

Speaker 3

Thank you, Todd, and good morning. Our fiscal 2022 Q2 revenue was $1,920,000,000 compared to $1,760,000,000 last year. The organic revenue growth rate adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations was 9.3%. Gross margin for the Q2 of fiscal 'twenty two was $885,100,000 compared to $819,900,000 last year. Gross margin as a percent of revenue was 46% for the Q2 of fiscal 'twenty two compared to 46.7% last year.

Speaker 3

Gross margin percentage by business was 46.8 percent for Uniform Rental and Facility Services, 43.5 for First Aid and Safety Services, 44.6 percent for Fire Protection Services and 39.1 percent Also, we made investments in labor to support our strong current and anticipated revenue growth. Selling and administrative expenses improved Operating income of $381,200,000 compared to $352,900,000 last year. Operating income margin was 19.8% compared to 20.1% reported last year. Excluding last year's Q2 $18,000,000 gain on sale of certain assets, which were recorded in selling and administrative expenses, This year's 2nd quarter operating income grew 13.8%, and operating income margin increased 70 basis points. Our effective tax rate for the 2nd quarter was 18% compared to 13.3% last year.

Speaker 3

The In addition, last year's 2nd quarter tax rate included a 370 basis point benefit from the sale of certain assets. Net income for the Q2 was $294,700,000 compared to $284,900,000 last year. Diluted EPS was $2.76 compared to $2.62 last year. Excluding last year's Q2 gain and the related tax benefits, which impacted diluted EPS by $0.25 This year's Q2 diluted EPS of $2.76 compares to $2.37 an increase of 16.5%. We are increasing our fiscal 'twenty two financial guidance.

Speaker 3

We are raising our annual revenue expectations From a range of $7,580,000,000 to $7,600,000,000 to a range of $7,630,000,000 to $7,701,000,000 and diluted EPS from a range of $10.60 to $10.90 To a range of $10.70 to $10.95 Please note the following regarding our guidance. Fiscal 'twenty two effective tax rate is expected to be approximately 19% compared to a rate of 13.7% for fiscal 'twenty one. The higher effective tax rate negatively impacts fiscal 'twenty two diluted EPS guidance by about $0.72 And diluted EPS growth by about 700 basis points. Guidance does not include any future share buybacks, And guidance assumes an uneven economic recovery caused by COVID-nineteen. However, guidance does not contemplate Significant COVID-nineteen pandemic related setbacks, such as stay at home orders or costs necessary to comply with government COVID-nineteen mandates.

Speaker 3

Finally, when modeling our fiscal 'twenty two financial results by quarter, please note that 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 very large supplies of personal protective equipment, Gloves in particular. We provided more personal protective equipment in that quarter than in any other. Excluding the PPE that we don't Our second half of the year revenue growth guidance is over 9% at the top end of our range. That concludes our prepared remarks.

Speaker 1

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

Operator

you. We'll go ahead and take our first question from Manav Patnaik with Barclays.

Speaker 4

Thank you. I was hoping you could just address kind

Speaker 5

of your

Speaker 4

near term visibility more in terms of reactions from your customers with the Spread at the Micron and if you're seeing any change in behaviors or are people just kind of chugging along here?

Speaker 2

Hey Manav, this is Todd. Thanks for your question. Good morning. At this point, we haven't seen a change And our customer base as a result of Omicron, it's a little early to tell certainly. But nevertheless, it's I would say it's business as usual at this point with our customers and we're looking forward to the back half of the year.

Speaker 4

Got it. And then maybe just as a follow-up, just tied to the other pressures out there, which is inflation. It sounds like You guys are handling that well. You referred to investments in the labor force. Can you just address what that is and broadly how you feel about managing these inflation pressures Going forward as well?

Speaker 2

Yes, great question. Inflation is certainly real, but I think we're managing it quite well. We do have a world class supply chain organization that is a real competitive advantage in these cases. And fortunately, we've been addressing wages over the past couple of years as we've spoken about in past calls. So, we weren't caught flat footed as it relates to wages.

Speaker 2

And certainly, our wage increases are still a little above historical, But we're more investing in the infrastructure to be able to service our customers, So that based upon our current growth and our anticipated growth, which is we're very excited about.

Speaker 4

All right. Thank you.

Speaker 2

Thank you.

Speaker 6

All right. We'll go

Operator

ahead and take our next question from Andrew Steinerman with JPMorgan.

Speaker 7

Hi, it's Andrew. If I try to back into the second half operating margins in the full year guide, I get to 19 1%, which is up modestly year over year. And I just wanted to make sure that you do the Matt, the same way as maybe you could kind of go through some of those kind of puts and takes on the second half operating margins?

Speaker 3

Good morning, Andrew. We would say our implied operating margin guidance for the second half of the year is a little bit higher than what you At 19.1 percent, we think of it closer to the 19.5%. And look, We still expect some very nice operating margin growth for the year, even in the back half of the year And even in an environment which is pretty challenging, as I'm sure you're aware in terms of the inflationary pressures, But as Todd mentioned, we're managing that inflation. We like the margin improvement, and Our expectation is we're going to see better than the 19.1% that you referred to.

Speaker 7

Right. And the 19.5% is for the total company, and I assume. And I just wanted to maybe make a comment on increases on the customer side, the B2B Because you were on a hiatus. Now you've kind of in process of increasing prices to customers and kind of how has that gone? Are they understanding of the inflationary environment?

Speaker 2

I'll take that one, Mike. Thanks for the question, Andrew. Certainly on the pricing, one of the things that's important to understand is that we don't simply send out a letter Increasing prices to all 1,000,000 customers, all at the same time. We addressed the issue throughout the year. So, So you'll continue to see that.

Speaker 2

And also as we've said in the past, pricing is a local subject. Some industries are still struggling, some are doing quite well. Some geographies are still not back to pre COVID and others Are nicely ahead of the curve. Now, inflation is it seems like it's in every headline and every time you turn on the news. And as a result, I'd say the conversations with our customers are generally going well and our results are a little bit better than historical But as you know, we take a long term approach and we focus on the lifetime value of our customers, which frankly is reflected in our NPS scores being at all time highs.

Speaker 2

Now all that being said, in the face of inflation being at 39 year high, We are growing our operating income and incremental margins at very attractive rates, and we're excited about that.

Speaker 7

Right. And then just confirm, 19.5% was total company, right?

Speaker 3

Yes, that was total company against last year of just Under 19%. So, again, what we think to be pretty healthy margin improvement and let's keep in mind, Last year's margins were record margins and 3 10 basis points higher than pre pandemic levels. So we like where we're headed with this with the margins in the back half of the year.

Speaker 7

Well said. Thank you very much.

Speaker 6

All right. We'll go ahead

Operator

and take our next question from Hamzah Mazari with Jefferies.

Speaker 8

Hi, this is Mario Cortellacci filling in for Hamzah. Just my first question around labor. Maybe if you can just update us just not on the labor portion, but also on the labor availability in your business and kind of how you're managing through that? And then also maybe you could tie that through So what your pricing strategy looks like regarding that, especially since you guys really haven't taken any price in the past 2 years, I believe it was?

Speaker 2

Yes, Mario, this is Todd. As far as labor availability, we're competing quite well out there. We pay a very competitive wage and a Attractive benefits and we think we're an employer of choice and that's reflecting in our staffing levels, which we like. It's certainly more challenging this year than in the past in general, But we're competing quite well and we like that. As far as how we look at the pricing, again, It's a you'll see it throughout the year and it is something that we look at customer by customer And because as I mentioned, it's a local subject.

Speaker 2

And we do look at the long term value of the customers, But we have a we're doing better than historical. And the reason being is because there's a little bit of wind in your sales as far as Customers are highly aware of what's going on with inflation in general and wage pressures as well. So, but as a result, we think we're in a good spot. I'm very thankful that we have been addressing wage Increases over the past few years because it prevented us from being flat footed coming in and being under real pressure.

Speaker 8

Great. Thank you. And then just for my follow-up, could you just comment on the fire business and your strategy For getting into some of the top fire markets that you're not currently in and do you intend to play in any other adjacencies within the fire business Such as what API Group or other larger players have done in that space?

Speaker 2

Yes, Mario. As far as the fire business, We're continuing to build out our footprint. We have found that we very much liked our model that we are providing The service levels to customers and it's showing up very nicely in new business wins and retention and you're seeing it in the growth. As far as adjacencies, we're always evaluating those, but we think there's incredible run rate in that business With the type of strategy we have today, without even going into an adjacency, but we're certainly always evaluating this.

Speaker 8

Great. Thank you very much and I hope you all have a great holiday.

Speaker 2

Thank you. You too.

Operator

And we'll go ahead and take our next question from George Tom with Goldman Sachs.

Speaker 9

Hi, thanks. Good morning. Your gross margins contracted 80 bps year over year in the Uniform Rental Can you elaborate a bit on margin performance there and what your guidance implies for Uniform segment gross margins?

Speaker 2

Certainly, George. This is Todd. I'll start and then Mike can chime in. Gross margin In general, it's up 40 basis points due to just energy alone. So that's obviously a headwind.

Speaker 2

I think gas Standalone is up 60% year over year. So, but as far as the balance of that, the 70 basis points, We're making investments in the additional employee partners that we need to service the very nice growth that we're seeing Along with the growth that we see coming. The revenue now, George, is different a little different from last year. It's much closer to our revenue, our traditional revenue mix. And let me just give you an example, because I think it'll maybe help you understand that a little bit better.

Speaker 2

With PPE last year, there was obviously significant demand for that and we're happy to help our customers with it. But in those cases, and in many of the cases with that, they were simply a drop ship to those customers. And when you drop ship those large quantities, it doesn't take a whole lot of work, right? It's just a drop ship and then you're able to book the revenue, etcetera. You think of that versus the level of employee partners that is required to service uniforms, Facility Services, First Aid and Safety Cabinets, it simply takes more work, right?

Speaker 2

However, We welcome this shift as it provides more value to the customers than simply a drop ship. It's stickier business and long term it has better margin. So, we like it. We like that switch and we knew That was coming and we've been staffing for it and guiding for it. All that said, As we know, inflation is at a 39 year high.

Speaker 2

As I mentioned, energy is up 40 basis points, our investment in growth for the Today and the future. And if you exclude the one time gain of our operating our one time gain from last year, our operating margins were up 70 basis points And our incremental margins are quite strong. So we're doing exactly what we had hoped and planned for, I guess, would be the way I would

Speaker 9

Got it. That's helpful. Your healthcare and hygiene businesses Have seen a boost in demand with COVID. Can you talk about trends and the broader opportunity you're seeing in healthcare and hygiene?

Speaker 2

Certainly. Healthcare, they're connected, right? But healthcare is a vertical. Hygiene is Subject that crosses all businesses. So, as far as the healthcare vertical, we're continuing to see strong demand.

Speaker 2

We like what we're providing with scrubs, items to help customers clean Patient rooms and other rooms, in addition to isolation gowns. So all of that is, we continue to be very bullish About the healthcare vertical. As far as hygiene, and I'll lump hygiene with Sanitization, cleanliness, all of that health and safety, all of that We believe has been a sea change and something that is going to be wind at our sails Maybe forever, right, because of you see the focus that people have on sanitizing, hygiene, Health, safety, we think we can see that in certainly our Uniform Rental Facility Services segment, But also our first aid business, people are very focused on the health, safety and wellness of their people and their customers,

Speaker 10

Got it. Very helpful. Thank you.

Speaker 2

Thank you.

Operator

And we'll go ahead and take our next question from Ashish Subhadra with RBC.

Speaker 5

Thanks for taking my question. I just wanted to follow-up on the comments that you made on the healthcare, but just focus on The larger opportunities across the 3 verticals, healthcare, government and education vertical, I was wondering if you could comment on the pipelines for those larger opportunities. Thanks.

Speaker 2

Yes, Ashish. The pipeline looks quite strong for all those verticals. We feel good. Our sales organization is operating at a very high level And we really like our new business wins in that area. Our retention is very attractive.

Speaker 2

So, you look at all that, you say our new business wins are very strong. Our retention is very strong. And we are excited for our customers to get back to full strength As well, and we think that bodes well for the future for us.

Speaker 5

That's very helpful color. And maybe just talking about technology, on the last call, you had talked about the benefits of SAP implementation and more to come. I was wondering if you could talk about what you're doing on the technology Brent, on the automation front, provide some preview on what we could see over the next few next year and how should that help offset some of the Inflationary pressure. Thanks.

Speaker 2

Yes. Great question. So, obviously, investing in technology is one of our top priorities Because we see the opportunity to improve efficiencies in our business, operational efficiencies, But also provide items that the customers notice and recognize and make it easier to do business with us. Those are things that we're trying to leverage. I think a good example of technology that we're leveraging By leveraging SAP and partnering with a communications company, we have launched what we call smart tech Smart Truck Technology, which collects and analyzes data to create a much more efficient routing structure.

Speaker 2

So what this allows us to do is to spend more time with the customers instead of and reduce fuel expense Instead of driving in between stops and as we say, we only make money in this business when the wheels stop. When the wheels are moving, it's just expense. So we see that as an opportunity to leverage technology to improve operational efficiencies. We have as another example, we have launched a portal for our customers that allows them To do business with us online, which is a competitive advantage in the marketplace, What we're seeing is, contrary to years ago, people don't always want to do business During normal business hours, what they're interested in is doing business on their time. And what we're seeing is the request That we see from our customers is well over half of the requests are outside of normal business hours.

Speaker 2

So, it's making it easier to do business with us. We allow them to make requests On changes to their program, we allow them to pay their bills online. All these are items that the customers see as an advantage in the marketplace being easy to do business with And we get really excited when customers see a technology advantage and find us easier to do business with.

Speaker 5

That's very helpful color. Thank you and happy holidays.

Speaker 2

Thank you.

Speaker 6

All right. And we'll go ahead

Operator

and take our next question from Andy Wittmann with Baird.

Speaker 11

Great. Thanks for taking my question. I guess I just wanted to get a little subjective comments on The new guidance this quarter versus the guidance you gave last quarter, Mike. It kind of looks like the biggest Change in the EPS side is just a little bit lower tax rate. On the revenue side, the quarter beat consensus, you don't guide quarterly, but it kind of feels like the fundamental outlook for the revenue and core operating margin performance of the business isn't materially changed.

Speaker 11

Is that the right way of looking at it? Or did you see a change in the business fundamentals that you're factoring into the guidance, the new updated guidance today?

Speaker 3

Andy, I think that's a fair assessment from the perspective of not a lot of change from what we had been talking about in the last And that is growth continuing to be pretty strong in the second half of the year, Ex that big PPE number that we've talked about in the Q3 and a little bit in the Q4, our growth Would be in excess of 9%. And roughly the same margins we've been talking about For much of the year, and that is we certainly expect margin growth and continue to Half of the year that's coming on top of, I'll call it, gain adjusted 50 basis point improvement in the first half of the year. And you might remember, we talked at the early part of the year at a kind of a 0 to 70 basis point improvement. And the performance through midway through the year is showing that we're right at the top of That initial guide, and so the movement is a little bit of taxes, maybe a little bit of margin improvement, but generally speaking, your assessment It's fair, Andy. Pretty nice growth and a healthy margin improvement On record margins from a year ago.

Speaker 11

Yes. Okay. Thanks for going to that, Mike. I guess my follow-up question then, You just talked now and previously in the call you talked about these margins and I think they speak for themselves. But and you talked about price being a little bit above average.

Speaker 11

Are there any other things that are driving the margin performance Besides just price and then the operating leverage from the business, are there actions or other investments that you're making that are helping this margin performance? Or is this The natural progression of price cost as well as fixed cost leverage. Yes.

Speaker 2

Andy, this is Todd. Good question. I think it's the normal operation of the business. We're always investing in various items that help our operational efficiencies. And I mentioned the smart truck technology That we think is going to be exciting for us.

Speaker 2

But I think it's just the general leverage that we're getting In the face of what is still a very challenging operating environment. And we're, as Mike said, Coming off of a record 310 basis point improvement margin, we're very excited about that and we're going to continue to take another step forward Yes.

Speaker 10

Yes. Andrea,

Speaker 3

I might throw it into a couple of different buckets as well as And a little bit of reiterating what Todd and I have already talked about, but look, our growth Is at pretty good levels and when we grow at those pretty good levels, we get some really nice leverage in the business and we're seeing that leverage as a benefit. Productivity improvements, I mean, we've from our laundry facilities to our service and the routes that The route improvements that Todd has talked about to sales rep productivity, productivity is strong and continues to improve As we look at process improvement and innovation and automation, and so productivity is very strong. Efficiencies, look, we made some pretty difficult cost cuts last year, some changes to our cost structure, and We'd rather not give up many of those. And so while we'll start to see we have started to see a little bit of I will, for example, come in. Look, we're still managing the cost structure very tightly.

Speaker 3

And maybe then the last bucket I'll throw out there is, we've talked quite a bit about resuming pricing, And pricing is helping a little bit this year. And so margin improvement, I think we can throw it in those 4 buckets. And it's I would say it certainly is leading to some pretty good performance even in The face of 40 basis point increases in energy and other certain inflationary factors.

Speaker 11

Yes, great. Thanks for the comprehensive answer, guys. Happy holidays.

Speaker 3

You too, Andy.

Operator

And we'll go ahead and take our next question from Tim Mulrooney with William Blair.

Speaker 12

Hey, this is Sam Pusz from filling in for Tim. Thanks for taking our questions here. I wanted to hit on margins real quick again. In the Uniform Rental segment, operating margin was down year over But still very strong relative to historical standards. Is that kind of how we should think about this segment's margin structure from a long term perspective, Maybe down year over year because of higher cost inflation, but capable of maintaining 2021 margins in a more normalized environment.

Speaker 3

Well, a couple of points that I might make. First of all, we talked a little bit about the gain on the sale of assets And so if you take that, that was all recorded in SG and A within rental. If you take out the impact of that gain, Last year's Q2 was 21.1% compared to our 22% this year, so a 90 basis point improvement. So some pretty healthy year over year improvement. Look, we've been in the rental business above 20% for the last 6 quarters and our expectation is we're going to see a little bit because this is such a Challenging environment.

Speaker 3

We're going to see some ups and downs periodically. But generally speaking, look, we like where the business is running in that rental And our expectation is we'll stay above that 20%

Speaker 12

number. Excellent. Thanks for the clarification there. Maybe switching gears back to PPE. Earlier in the year, I think you expected a PPE headwind of about 1 In fiscal 2022, it sounds like maybe that expectation could be changing a bit.

Speaker 12

Can you just update us on what you think the PPE headwind will be for

Speaker 3

Well, I think if you take a look at our guidance, for example, for the Back half of the year, I believe at the high end, the revenue growth To 7.4% over last year. So if you think about the comment we made of growth being 9%. We're talking about 160 basis points in the back half of the year. So You can think about 80 basis points for the full year. So I would say we're not far from where we talked about early on in the year, but Certainly, it's back end loaded a little bit more.

Speaker 12

Got you. Thanks for the color, Gary. Thanks.

Operator

And we'll go ahead and take our next question from Toni Kaplan with Morgan Stanley.

Speaker 13

Thank you. I wanted to ask an ESG related question. Given the size of your fleet, a shift to electric Vehicle seems like it would be pretty meaningful. And so I know in your ESG report, you indicated that by January, you expect to deploy 12 Electric Vehicles. And so just curious if this program has been initiated and if you could talk about how we should think about the potential of Rolling out this to the entire fleet.

Speaker 13

Thanks.

Speaker 2

Yes, Tony, this is Todd. Thank you for the question. So, yes, we're excited about electrifying the fleet. We are right on schedule as far as What we plan for testing. We have a diverse fleet because of the various types of trucks we have, the rental trucks, The first aid trucks and the fire trucks as well.

Speaker 2

But we're working with some very large manufacturers at Very high levels and we're excited about the future as it relates to that. We think that that is something that's important to our customers and it's important to our partners, our employee partners, And we think it will be very important to shareholders as well. So we believe that getting out ahead of this curve is important to us And we're committed to doing so, and dealing with all the challenges that are associated with that, With the weight of the vehicles that we operate, the size of our fleet and also getting access to the supply, which is why we're working with a diverse group and at high levels.

Speaker 13

That's helpful. And one question I've been getting recently is around The ability for you to do large scale M and A and some skepticism around that. Do you think that's valid Or because of the fragmented market, there's still potential for you to be able to do a large deal. And I'd also say it maybe seems a little harder for deals to get done right now, or at least longer to get approved. So just wanted to hear your thoughts around large scale M and A.

Speaker 13

Thanks.

Speaker 2

Yes, Tony. So just as a reminder, M and A is our Our second priority of capital use right behind investing in our business and we're excited about M and A of all shapes and sizes. We're blessed to have a market that is massive in size, meaning If you think about how many people are wearing garments, wearing uniforms out in the marketplace, It is a significant market. And that's representative of Our new business wins that we have. So, about 2 thirds of our of the new accounts that we bring in Are all people that are customers that are what we call no programmers, some people in different industry call them unvended.

Speaker 2

Nevertheless, when we walk in, they don't have a uniform program and when they walk out, we do. It's a little bit more complicated than that, but that's the net net. That being said, that's simply the uniform market. Our other markets are just a vast Addressable market, whether it's facility services and all the headwinds or excuse me, all the tailwinds That are behind that business from health, safety, sanitation, hygiene, same way with the first aid business. And in the fire business, we see it is obviously a massive market just simply because everybody is required by law to have Those products and services.

Speaker 2

So, yes, I think we're in an incredibly good position in all those because of the market size. That leads us to, we think we're interested in M and A In all of our businesses and are excited about the potential of M and A Of small, medium and large, because we think the market is such that it is absolutely appropriate.

Speaker 13

Very helpful. Happy holidays. Thank you.

Operator

Thank you. And we'll go ahead and take our next question from Scott Schneeberger with Oppenheimer.

Speaker 14

Thanks very much. Good morning. I'm curious, This is a question of your average customer in first aid. Pre pandemic, what would their cabinet look like? How much has it changed of the items or the contents inside to what it looks like now to the level of detail you can speak to that?

Speaker 14

And then how has the pricing and margin profile changed of that cabinet? I assume better, But anything you can share on that, and then I'll have a quick follow-up after. Thanks.

Speaker 2

Okay, Scott. This is Todd. As far as our cabinet, we're constantly bringing out new products for our first aid cabinet, And that is an important component of that business. We offer other services in that business, whether it be AEDs, training and compliance, as well as eyewash stations, which are required By OSHA to be serviced appropriately. So all of that is, we're seeing a return back to a focus on that with our customers, Which is exciting to us.

Speaker 2

As far as the CAMIT itself, besides the new products that we have launched, it's pretty well A traditional type of situation. Now, what is changing is The focus on health and safety of employees, customers, Guests, patients, those types of things and as a result, we think that's good for the first aid business. And as we've spoken about, the First Aid Cabinet Business It is more predictable, it provides more value to the customer than a drop ship type of PPE and is more profitable. So, I think as you see that trend of the health and safety Continuing and as more people are back to work, then that's going to be very positive for that business.

Speaker 3

I might add a couple of things. Just reminding you, Scott, that I think Todd mentioned that first aid Cabinet business is up 20% year over year in our Q2. So we really do like the momentum of it. But we're not quite back to the mix of pre pandemic, but we certainly like The movement towards that mix and when we think about the gross margin in this business, the material cost really has Improved. What you're seeing in this particular quarter is that we're spending a little bit of that improvement On some of the labor investments that Todd talked about in terms of building the service capacity, Both for the current growth that we've had, but also for anticipated second half of the year growth.

Speaker 3

So really nice performance by our First Aid and Safety Partners and the performance is improving just like we expected it to And just like we want it to.

Speaker 14

Great. Thanks. I appreciate all that color. And the follow-up is on the same subject. You guys are running below what were pre pandemic peak First Aid and Safety margins.

Speaker 14

Is that do you think within a matter of a year or 2, you can get back to that prior level? And why or why not? Thank you.

Speaker 2

Yes, Scott. This is Todd. So we're very focused on that. We think that revenue mix will be Very positive for us. And we also look at the, as I mentioned, the wind behind our sales and the focus on health and wellness of folks out in the marketplace is going to be positive.

Speaker 2

So, as we continue to focus in that area And that revenue mix rebalances, then I think you're going to see a nice trend towards more traditional tech margins in that business.

Speaker 14

Great. Appreciate it, guys. Happy holidays.

Speaker 2

Thank you, Scott. You too.

Operator

And we'll take our next question from Shlomo Rosenbaum with Stifel.

Speaker 3

Hi, good morning.

Speaker 15

Thank you for taking my questions. Hey, Todd, I want to ask you a little bit on the competitive environment. Aramark has been trying To execute a turnaround for the last couple of years, I want you to know, does that make a difference to you guys in the market at all? Have you seen a Change in terms of competitiveness or in terms that you guys have to be more competitive? Or is the market so fragmented that a change like that wouldn't necessarily filter back to you guys?

Speaker 2

Shlomo, thanks for the question. It's a good question. The operating environment we're in, it's always competitive. Nothing noteworthy though, I would say, in the change. Our revenue retention rates are very strong.

Speaker 2

And as I mentioned, our new business wins are very strong as well. They're coming from there's no programmers, Much more so than the competition. And I just think it speaks to the vast market out there That we're focused on providing that value to the customers. When we walk in and I'll just give uniforms as an example, when we walk in, One of the top areas, top of things we hear back from customers is, wow, I didn't know you could do all that for what you do it for. So they're surprised.

Speaker 2

One of the other items that we hear is we didn't know that you would be able to service a customer of our size. They might have 10 wearers, and that is something that, like an average sized customer for us, but the perception is, oh, you have to have 100 people, a 1000 people. So we're attacking that market because we see that the customer sees value in what we provide. And there are also there's a little certainly wind behind our sails on it's tough to attract talent right now. So Being able to provide a service like this is something that's attractive to people.

Speaker 2

And you think about how many people are working out In the marketplace and the fact that we can provide that service to Tens of millions of more wearers. It's very exciting for the future. And so as a result of how we focus on It really those competitive pressures, we're more focused on retaining our customers and we're more focused on Growing the market and because it's just so massive.

Speaker 15

Okay, great. And then maybe this is one for Mike. Just In the other segments, I know there's definitely volatility quarter over quarter in terms of the margins. Just comparing the operating margin This quarter versus the last couple of quarters, and is there something besides sequentially, obviously, it's a lower revenue, which make a difference in the margin. Going back Could you just give us some of the puts and takes of what's impacting the operating margin?

Speaker 3

Shlomo, when you look at Q2 compared to Q1, keep in mind that we referred in the first Quarter call to a gain on sale of some assets. So in that in the Q1, there was a $12,100,000 gain. So we had a little bit of an anomaly in that particular quarter. I would say this, the fire business Has been performing very, very nicely, and we've seen organic growth this quarter of 16.9% and Remains healthy. And some of the things that Todd and I have talked about with the first aid businesses going on in the fire business in that We are certainly seeing some great growth, and we're investing for both current for that Current growth but also for anticipated growth.

Speaker 3

So we're seeing a little bit of the investment there. And then As you know, Shlomo, the Uniform Direct Sale business can be quite bumpy. And so there's going to need be more volatility from Quarter to quarter in this business. But I'd say this as well, 11.7% For the all other segment, it's still a pretty good quarter on a 65 day workday quarter Relative to pre pandemic. So again, just like the other businesses, we like the momentum in these businesses and we like the

Speaker 15

Did you say that extra day versus say 4Q 2021 is a bigger impact? Just trying to get a little bit more detail, completely appreciate the volatility in the Uniform Direct business.

Speaker 3

The direct I would say that the day is more of an impact to the fire business Then it is the Uniform Direct sale. The Uniform Direct sale tends to be bumpy based on it could be a rollout of a new program. It's just Timing of the sales within those current customer programs, that's the biggest volatility item within the Uniform Direct Sale.

Speaker 4

Okay. Thank you.

Operator

All right. As there are no further

Speaker 1

morning, everyone. We will issue our Q3 fiscal 'twenty two financial results in March. We look forward to speaking with you again at that time. Have a good day.

Operator

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

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Earnings Conference Call
Cintas Q2 2022
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