Cintas Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 28, 2022

There are 15 speakers on the call.

Operator

Good day, everyone, and welcome to FinTech's First Quarter Fiscal Year 2023 Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Paul Adler, Vice President and Treasurer, Investor Relations. Please go ahead, sir.

Operator

Pardon the interruption, Mr. Adler. We're unable to hear you.

Speaker 1

Thank you. Yes, we were still on mute. So 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 2023 Q1 results.

Speaker 1

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 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 Securities and Exchange Commission.

Speaker 1

I'll now turn the call over to Todd.

Speaker 2

Thank you, Paul. We are pleased with our start to our fiscal year 2023. 1st quarter total revenue grew 14.2%. Each of our businesses increased revenue at a double digit rate. The benefits of our strong revenue growth flow through to our bottom line.

Speaker 2

Excluding a one time gain recorded in last year's 1st quarter selling and administrative expenses, operating income margin increased 20 basis points and EPS grew 12.3%. Our sales force continues to add new customers and penetrate and cross sell our existing customer base. Businesses prioritize all we provide including image, safety, cleanliness and compliance. In challenge with labor scarcity and rising costs, Businesses continue to turn to Cintas to help them get ready for the workday. I thank our employees and we call partners for their continued focus on our customers, our shareholders and each other.

Speaker 2

Turning now to our business units, Uniform Rental and Facility Services operating segment revenue for the Q1 of fiscal 2023 was $1,701,000,000

Speaker 3

compared to

Speaker 2

$1,510,000,000 last year. Organic revenue growth was 12.3%. Revenue growth was driven mostly from increased volume. Additionally, price increases contributed at a higher level than historically. We believe such a mix of revenue drivers, volume versus price is healthy and supportive of continued long term growth.

Speaker 2

Our First Aid and Safety Services operating segment revenue for the Q1 was $234,200,000 compared to $199,100,000 last year. Organic revenue growth was 15.8%. This rate reflects the continued momentum of our First Aid Cabinet business, which continues to grow more than 20%. Personal protective equipment or PPE, while still elevated compared to pre COVID levels, declined again on a sequential basis. We welcome this mix shift because the cabinet service is a more consistent revenue stream and has higher profit margins and PPE.

Speaker 2

Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All other revenue was $234,500,000 compared to $189,700,000 last year. The fire business organic revenue growth rate was 17.4% and the Uniform Direct Sale business organic growth rate Was 44.1%. Before turning the call over to Mike to provide additional details on our Q1 results, I'll provide our updated financial expectations for our fiscal year. We are increasing our financial guidance.

Speaker 2

We are raising our annual revenue expectations from a range of $8,470,000,000 to $8,580,000,000 to a range of $8,580,000,000 to $8,670,000,000 Also, we are raising our annual diluted EPS expectations from a range of $11.90 to $12.30 to a range of $12.30 to $12.65

Speaker 4

Mike? Thanks, Todd, and good morning. Our fiscal 2023 Q1 revenue was $2,170,000,000 compared to $1,900,000,000 last year. The organic revenue growth rate adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations was 13.9%. Gross margin for the Q1 of fiscal 23 was $1,030,000,000 compared to $902,800,000 last year, an increase of 13.9%.

Speaker 4

Gross margin as a percent of revenue was 47.5 percent for the Q1 of fiscal 2023 compared to 47.6% last year. Energy expenses comprised of gasoline, natural gas and electricity were a headwind increasing 30 basis points from last year. Gross margin percentage by business was 47.5 percent for Uniform Rental and Facility Services, 49.6 percent for First Aid and Safety Services, 48.8 percent for Fire Protection Services and 37.3 percent for Uniform Direct Sale. Operating income of $440,100,000 compared to $394,100,000 last year. Excluding last year's Q1 gain totaling $12,100,000 and recorded in selling and administrative expenses.

Speaker 4

Fiscal 2023 1st quarter operating income increased 15.2 percent and operating income margin increased 20 basis points to 20.3% from 20.1% last year. Our effective tax rate for the Q1 was 14.8% compared to 11% last year. The tax rate can move from period to period based on discrete events including the amount of stock compensation expense. Net income for the Q1 was $351,700,000 compared to $331,200,000 last year. Last year's Q1 diluted EPS contained $0.09 from the previously mentioned gain and related income tax expense.

Speaker 4

Excluding the gain and the related income tax expense, this year's diluted EPS of $3.39 compared to $3.02 last year, an increase of 12.3%. 1st quarter operating cash flow increased 14.8%. On June 15, 2022, we paid shareholders $97,700,000 in quarterly dividends. Also during the quarter, we purchased $210,800,000 of Cintas common stock under our buyback program. We continue to allocate capital in many ways to improve shareholder return.

Speaker 4

Our strong balance sheet and cash flow enable us to do so consistently. Todd provided our annual financial guidance. Related to the guidance, please note the following: Fiscal 2022 included not only the gain on sale of operating assets in the Q1, but also a gain on an equity method investment in the 3rd quarter. Excluding these items, fiscal 'twenty two operating income was $1,550,000,000 a margin of 19.7 percent and diluted EPS was $11.28 Please see the table in our earnings press release for more information. Fiscal 2023 operating income is expected to be in the range of $1,720,000,000 to $1,760,000,000 compared to $1,550,000,000 in fiscal 2022 after excluding the gains.

Speaker 4

Fiscal 2023 interest expense is expected to be approximately 100 and and $10,000,000 compared to $88,800,000 in fiscal 2022 due in part to higher interest rates. Our fiscal 2023 effective tax rate is expected to be approximately 20%. This compares to a rate of 17.9% in fiscal 2022 after excluding the gains and their related tax impacts. The expected higher effective tax rate will negatively impact fiscal 2023 diluted EPS by approximately $0.32 and diluted EPS growth by approximately 2.90 basis points. Our financial guidance does not include the impact of any future share buybacks and we remain in a dynamic environment that can continue to change.

Speaker 4

Our guidance contemplates a stable economy and excludes pandemic related setbacks or economic downturns. I'll turn it back over to Paul.

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. Thank you.

Operator

Follow-up questions. We'll now take our first question from Ashish Sabadra of RBC Capital Markets. Please go ahead.

Speaker 5

Thanks for taking my question. I was wondering if you could just comment on the new business trend, specifically around signing up new customers. Have you seen any changes there? And any signs of elongations of sales cycle, particularly for larger customers? Thanks.

Speaker 2

Good morning, Ashish. This is Todd. Thanks for the question. Yes. Our new business is quite robust.

Speaker 2

We continue to be very successful in converting over no programmers And to our programs in all of our businesses with the exception of Fire, which obviously everyone's a programmer in that business. But we're having really good success there. And we look at the total addressable market and it's still incredibly large and growing. So That's exciting for us. But as far as the sales cycle, I haven't seen anything that would lead me to believe that the sales cycle is elongating.

Speaker 2

We've got really good momentum in our new business. I'm very encouraged by that. And as we've spoken about in the past, Some of our investments that we have made are really paying off big in the form of Some of our unique products in our rental line with our Carhartt products, our ChefWorks and we've got Our Cariflex line of scrubs through Landau that's really successful in our restroom unique restroom lines. And then our First Aid business, just the breadth of products that we're offering is really helping us get in the door and provide great products and services to our customers. They're also seeing our investments in technology that we've made, whether it's our garment tracking that Giving us a real advantage in the marketplace, our garment dispensing that we've seen and I've spoken about our My Cintas portal, Which is unique and an advantage in the marketplace.

Speaker 2

It makes it easier to do business with us and that's important for our customers And gives our sales partners confidence in walking in the door. So some really good things in heading in that direction.

Speaker 5

That's very helpful color and obviously great to see that strong momentum in the top line. Maybe just on the margins, The question around energy, it looks like oil prices might be rolling off here or at least the fuel prices may be rolling off, but the natural gas prices are going up. How should we think about those puts and takes on the energy front for the rest of the year? Thanks.

Speaker 2

Yes. So when you think about our energy spend, Certainly, it's up over where we were a year over prior. It's down 10 basis points sequentially. Trying to anticipate exactly where that's going to head is challenging, Certainly, but I can tell you this. We're focused on efficiencies that we can drive in our business That will lower our needs for natural gas and lower our needs for gas at the pump.

Speaker 2

And we're leveraging those and that's helping us. That helps us with our CO2 emissions and it helps us with our efficiencies in our business and our spend. And we're confident we can continue to make strides there. So that's where exactly natural gas This winter with what's going on in Europe and other areas, it's tough to tell for sure. But we'll manage through it and we see opportunities to improve in our business and we're leveraging that.

Speaker 4

Ashish, I might add that Right around 60% of our energy spend is the gas, gas and diesel And the remainder is electricity and natural gas. So the natural gas is a smaller component of that energy spend. More of it is the price at the pump, which as you suggested is coming down.

Speaker 5

That's very helpful color. Thanks again. Thank you.

Operator

And we'll now take our next question from George Tong of Goldman Sachs. Please go ahead.

Speaker 6

Hi, thanks. Good morning. In the quarter, approximately what percentage of new business growth came from the no programmer market?

Speaker 2

Good morning, George. This is Todd. The majority of our accounts are come from no programmers. So That is that trend has been consistent over the years and continues. And in a marketplace where it's Still difficult for employers to find people to work, offering a Value this and the way we handle it with Uniforms is attractive for them.

Speaker 2

So it's another benefit for customers and they see that as an opportunity to attract their employees And retain their employees and we have a one heck of an offering when it comes to that, that makes it really attractive for people. So I'd say those trends continue as they have been in

Speaker 6

Got it. Can you provide an update on uniform demand trends from the healthcare vertical?

Speaker 2

Yes, certainly. So the healthcare vertical is a very attractive vertical for us. It's growing nicely. Demographics are such in the United States and Canada that demand will continue. And we're seeing we have some unique offerings in that area with garment dispensing and our unique Scrub line that makes it attractive.

Speaker 2

There's certainly other items that are that we rent into the healthcare Market whether it be in acute or non acute. But we're we really like what we're seeing there from that demand. And I'll just I'll give you one example of a hospital that about 6 months ago, we Sold a scrub rental program into that account. And it was a nice very nice sized customer that you would recognize the name. In that case, the nurses that we were providing the program to, they were laundering the products at home.

Speaker 2

And the nurses voiced a concern about safety, Meaning, hey, what am I taking home? Am I laundering it? Am I laundering it correctly? And in that case, they chose Cintas because of A few things. One is our technology that we've deployed that's unique that allows us to manage inventory for them, which provides the requisite Access to the product, which is really, really important and also helps control their costs based upon how we manage that inventory, But also improves the safety aspect of it, separate from being an employee benefit because Those what I'll call potentially contaminated goods or scrubs, they don't go home.

Speaker 2

We laundry them appropriately via our hygienic process, hygienically cleaning process, which allows them to have the confidence that they're and that it's improved safety. And just as an anecdote, I mentioned that was about 6 months ago. Just recently, we sold a microfiber wipe rental program to that same hospital. And so they use microfiber wipes in many ways, but The most obvious one is when they're cleaning guest rooms or patient rooms, we should say. In this case, that particular hospital, They were purchasing those wipes and then they were having the, I'll call them hospital employees or EVS type folks that were cleaning those on their on premise laundry.

Speaker 2

And in that case, they chose CentOS because it was able to we were able to reduce their labor costs. They're having troubles getting access to labor. And then again, we're processing those in a manner where they can have great confidence that they're processed correctly with a Hygienically Clean process. So you asked your original question, George, was about Uniform demand in hospitals, which is quite good, but it also there's so much that we can provide to those hospitals. And I just want to give one example to just give a little color around that.

Speaker 6

Very helpful. Thank you.

Speaker 2

Thank you.

Operator

I will now take our next question from Andy Wittmann of Baird. Please go ahead.

Speaker 7

Great. Thanks Thank you for taking my questions. I guess, Mike, I just wanted to talk a little bit about what is implied in the guidance here, maybe Couple of different ways to think about that, but how much conservatism is baked into the guidance? I know you made a couple of comments in the prepared remarks. Is there any change, maybe sequentially, to the guidance the way you're factoring in the macro outlook?

Speaker 7

And maybe any leading indicators that you can give us that gives us confidence that the economy is performing at the rate that you think it is?

Speaker 4

Well, so let me start, Andy, with the guidance. The guidance implies And we're 60 days past when we gave the initial guidance. The guidance implies really good growth through the rest of the year. But as you know, we do face some tougher comps as we saw the business pick up last year throughout the year. And so we would expect a little bit of deceleration from the growth levels of where we are, But still healthy growth and ending the year in a range of 9% to over 10%.

Speaker 4

And we like the momentum of the business today and our expectation right now is that we're not seeing any change In the value that our customers are seeing and we're not changing we're not seeing any change in the way in the economy, I'll say. Now, maybe I'll flip to margins briefly. Our margin expectation remains That we will see margin improvement during the year and that range that we provided certainly contemplates that margin improvement even in a pretty challenging type of economic environment. So the guidance is

Speaker 7

a little bit

Speaker 4

better than we gave 60 days ago, part because of the Q1, part because of the momentum that we see in the business. Now as it relates to trying to dissect what the economic picture is going to look like for the rest of the year, Look, that can be pretty difficult, right? I mean, there are Some who say we may be in a recession today. There are some who say we may be in a recession early 2023. Some who say we may be in a recession late in 2023.

Speaker 4

The Fed has come out and said GDP for 2023 is going to be 1.2%. It's hard to predict what we're going to see in the economic picture as we move forward. But what we know Is that the momentum in our business today is really good. The value proposition that our Customers see and our prospects see, they're reacting very positively to it. And Because of that and many other factors, we believe that momentum can continue along with healthy margins And that's what we've given you in our guidance.

Speaker 4

Does that help answer that question a bit?

Speaker 7

It does. Thank you for that. I guess I wanted to then follow-up with a question on, I guess, overall customer retention levels, Considering that you're getting above historical averages in price increases, I thought maybe it would be helpful to comment on that. And you guys have talked about Sales momentum a couple of different ways, but if you look at sales productivity on a per head basis, is that metric up on a year over year basis as well?

Speaker 2

Andy, thanks for the question. This is Todd. First off on retention, yes, our retention is Very good. We like where that is. We like the momentum around that.

Speaker 2

We're organizing around it appropriately to make We're meeting and exceeding our customers' demands and we like our the product and service offering that we have and The customers find it attractive. I mentioned some of the products and the technology that we have that are unique and the customers like it. I think they also like our approach that we took over the past couple of years about being Really flexible and empathetic with them as they were going through what they went through the various businesses through calendar 2021 calendar 2022 2021, I should say, with the pandemic. So I think that was that is benefiting us because they saw that we were we understood what they were challenged with and we Pivoted to provide them what they needed instead of just telling them, hey, here's what you're contracted to buy. So I think all that is paying off.

Speaker 2

As far as productivity in new business, yes, we like it. It's up. And we are Certainly, we love our sales force. We think they're well trained, well positioned. When sales partners have confidence in the products and the technology and the services that they're going to provide, That confidence is powerful and it's showing itself in productivity and we like that.

Speaker 2

We're also deploying other types of technology via our investment with SAP that's paying off in a number of ways. I'll just give you one as it relates to sales, which is investing in technology that allows for what I'll call Best next prospect for a sales partner, meaning instead of just Calling blindly on businesses. We want to drive to our sales team who are who will be the next best Prospect to call, which through analytics we can tell them where to spend their time. And that's better for the partner, that's better for our company. Again, that provides more confidence.

Speaker 2

And yes, so that those types of investments Are paying dividends for us.

Speaker 7

Great. Thank you.

Speaker 2

Thank you.

Operator

We can now take our next question from Tim Mulrooney of William Blair. Please go ahead.

Speaker 8

Yes. Good morning. We know energy was a slight headwind to margins in the quarter relative to last year, but gross margins were only down 10 basis points. So I was curious How some of the other cost buckets are trending? How are labor costs trending?

Speaker 8

Were those a headwind or a tailwind to margins? And Anything else big to point out here like maybe materials and supplies?

Speaker 4

Tim, maybe I'll start on that. From a gross margin perspective, you're right. We're down 10 basis points from last year In a period where total energy expenses are up 30 basis points, we're up 190 basis points sequentially. And so we've seen some nice improvement there. And Look, when you think about that rental number of 47.5%, that's a really good Gross margin for us, we've only been higher than that a few times and that certainly is a much greater Gross margin than we saw pre pandemic.

Speaker 4

So we like the where we are in that space. We like the sequential improvement in the gross margin, which is pretty good. And we're doing it while we have we've seen such good growth in volume over the course of the last year and we're able to Be pretty flat overall in gross margins, while we're investing in the business. So in other words, That volume growth over the last 12 months has certainly created the need for additional capacity, particularly in our laundry And we're investing as we should because we certainly want to make sure we have the capacity to serve the customer. And so nothing I would say nothing unusual to point out in there other than we continue to make the progress that we want to make.

Speaker 4

The only other thing I might say about that gross margin is, we're seeing an all time high in our First Aid and Safety business And we continue to like the way that business is trending and the mix back towards that First Aid business that we love so much. Todd mentioned that the First Aid part of that business is over 20% growth still. And we've seen some really nice movement there. So again, nothing real specific to point out other than making good sequential progress and certainly continuing to invest for our future growth.

Speaker 8

Yes. Thanks, Mike. I guess my follow-up will just stick on that point. The First Aid and Safety gross margin really stuck out To me in the quarter, I mean, you're almost at 50% gross margin in that business, well above What we normally see there, are there any extraordinary items to call out there that help drive those strong results That wouldn't necessarily repeat moving forward. Just trying to understand how to think about gross margins in First Aid moving forward as we Model out

Speaker 5

the business for the rest of the year.

Speaker 2

Sure. Tim, this is Todd. We're proud of the gross margin improvement that we've made in In the First Aid business, it is reflective certainly of the shift of the mix of the business. But I wouldn't say that there's anything that is out of the ordinary where you'd say, oh my goodness, what's Is there something that a one timer? So no, now that being said, we're Certainly, there will be puts and takes of the First Aid business gross margin throughout the year.

Speaker 2

Don't think of it as a linear progression upward. It's We're making investments. We're growing that business really attractively. We are certainly leveraging trying to get leverage as very much as as best we can, the revenue growth that we're getting. But we've got to we've as Mike pointed out in all of our businesses, we've got to invest to meet the demand.

Speaker 2

And we're doing exactly that and trying to do it as intelligently and as efficiently as possible. But we're really happy with the demand levels that we're seeing and we want to make sure we're positioned to meet those demand levels.

Speaker 8

Okay. That's really helpful. Thank you guys and congrats on a nice quarter.

Speaker 1

Thank you, Tim. Thank you.

Operator

We can now take our next question from Manav Patnaik of Barclays. Please go ahead.

Speaker 9

Thank you. Good morning. I can appreciate, obviously, all the trends are very strong today, as you said, no economic weakness you're seeing in your businesses. But maybe you can help us with typically if that does start impacting your customers like how quickly do you see it? How quickly Do they react?

Speaker 9

And I guess what do you do in response to that?

Speaker 2

Yes. So Manav, good question. We are we're not seeing it in our customer base today. And as a reminder, we're As of Friday, it will be 4 months into our fiscal year. And will we see it?

Speaker 2

How well what's this recession? And are we in 1? As Mike said, is there one coming in the first half of twenty twenty three, the back half? We're not trying to predict all that, but we are staying acutely aware. But we're positioning ourselves to make sure that we can grow in all types of economic cycles.

Speaker 2

And as a reminder, we've grown in 51 out of the last 53 years, The only exception being the Great Recession. We certainly hope that any recession that comes is not as severe And so we in what I'll call in a whatever the traditional type of recession, if that comes, And we expect good performance. We expect to grow. We have traditionally grown in multiples of GDP and jobs growth in the past. Mike Our products and services are highly valued.

Speaker 2

You think about cleanliness, safety, image and compliance, those are buying motives that are stronger today than they were in the past, certainly stronger than what they were even pre pandemic. Our products and services are more diversified today. Our customer base is more diversified today than it was in the past. Today, we're 70% services and 30% goods producing. So that diversification we think will help us.

Speaker 2

And when you think about NAICS codes, we have no 3 digit NAICS code that is greater than 10%. So again, a really nice diversification there. We have also invested as we've talked about in the past calls in our vertical sales approach, Which we think gives nice diversifications into when

Speaker 1

you think about government, when

Speaker 2

you think about health care, higher education, Those types, we've spoken about our momentum that we think is really, really good. And also our strong cash flow, we think that will allow us to be opportunistic as we whenever we are in To a recession, if that is today or in the future, we're going to be well positioned to make sure we're successful.

Speaker 9

Okay, got it. That's helpful. And then maybe Mike, if you could just remind us of your mix on the debt Side between fixed and floating, whether you hedge just as we track these interest rate increases?

Speaker 4

Sure. We have as of the end of August, Manav, we've got about $500,000,000 in commercial paper or other short term variable debt and the rest of our debt is Fixed or senior notes. We do have some of our 27 maturities, The interest rates locked on those, those are right now as you can imagine a fair amount in the money. So that's where we are today. And look that the we like that we like a little bit of that Short term debt because it gives us optionality.

Speaker 4

We can pay that down if we feel like we want to or we can certainly have more space to use that if we needed to.

Speaker 5

All right. Thank you.

Operator

We can now take our next question from Andrew Steinerman of JPMorgan. Please go ahead.

Speaker 3

Hi. Hi, it's Andrew. I just wanted to get a quick thought from you about organic revenue growth for the balance of the year from kind of each first aid, fire, uniform, direct. Those had particularly strong first quarters. I definitely heard your general comments about tougher comps.

Speaker 3

And like do you think each of these 3 should be double digit organic growers this

Speaker 2

Andrew, thank you for the question. When I think about each of our businesses, We don't give guidance based upon each of them individually, but I'll just provide some maybe some top line thoughts. I'm really I haven't done the calculus on what it would be for the year, but I'm just thinking about the through the Qs 2 through 4

Speaker 10

for each.

Speaker 2

I would think about Uniform Rental, Fire and the First Aid business All being high single digits for the balance of the year, keeping in mind that there was some PPE In the First Aid business in our Q3, which will provide a tougher comp for sure. And then in our Uniform Direct Sale business, We're going to be up against much tougher comps. So I would think of that from high single to flat and maybe even negative in Q4 based upon the significant comps that we're up against there, which is obviously a little bit more lumpy business.

Speaker 3

Just say that last part again about Uniform Direct Sale, high single digit, I think you said flat, just you were talking about 2 through 4, just say the last part again about Uniform Direct Sales.

Speaker 2

Yes. So when you think about Uniform Direct Sale Business, again, a lumpier business, High single from Q2 through Q4. Think about high single down to Closer to flat to maybe even negative in Q4 due to negative sales growth due to the negative or excuse me, The significant comps that will be up against on the back half of the year.

Speaker 3

Makes sense. Thank you so much. Thank you.

Operator

And we can now take our next question from Faiza Alwy of Deutsche Bank. Please go ahead.

Speaker 11

Yes. Hi. Thank you. Good morning. I guess I'm curious like what has gone better than what you expected When you first gave the guide a couple of months ago, especially as it relates to revenues, I know you mentioned better pricing.

Speaker 11

And I'm curious if the So just more perspective on like what you think really drove the outperformance specifically in the rental business?

Speaker 2

Great, Faiza. Thanks for the question. It's Todd. I'll start if Mike, you want to chime in. There's many contributing inputs to our positive growth that we're seeing.

Speaker 2

New business is quite good as we spoke about, But retention and penetration is very attractive as well. We continue to improve upon our cross sell. And as you mentioned, pricing is certainly playing a larger role than it did historically, as it should, because of the levels Of cost increase that we are seeing via whether it's labor or material cost and what have you. So I think just generally speaking, we like the key inputs that we're seeing. I mentioned earlier our diversification into various businesses, verticals, etcetera, they're all We like the momentum we're seeing in Aldo.

Speaker 2

So pretty widespread.

Speaker 11

Great. Thank you. And then just a follow-up on the labor environment. I don't know if you're seeing some easing in the environment in your business at this And curious how you think about that going forward? Sort of is that as the labor environment eases, Is that a benefit for you?

Speaker 11

Or is that maybe more of a headwind from a competitive perspective?

Speaker 2

Good question. On labor, I'd say easing a bit, but that's relative. It is still a very challenging environment, but maybe not as quite as challenging as it was 6 months ago, 8 months ago, but still quite challenging. And we are in constant pursuit Of attracting and retaining the very, very best people, we think that gives us competitive advantage in the marketplace. So when we look out and say, okay, what does that mean to us?

Speaker 2

We're constantly in pursuit of that. So any easing of the labor market would certainly be welcome from a standpoint of making a little bit easier to run that lower RPMs. But here's what I know is we our team figures it out and they are staffed at the appropriate levels to meet our customers' demand. They've done one heck of a job in fighting through all these challenges over the past couple of years to make sure that we're positioned to be successful. So whatever the environment, our team will figure it out.

Speaker 2

We've shown that ability in the past. We'll pivot appropriately, but, so we'll manage through it.

Speaker 11

Great. Thank you so much.

Speaker 2

Thank you.

Operator

And we'll now take our next question from Heather Balsky of Bank of America. Please go ahead.

Speaker 12

Hi, good morning and thank you for taking my question. On the new customer growth front, could you already touched on healthcare earlier in the Q and A, but Where else are you seeing some of the momentum? Are there additional verticals where you're seeing outside growth or you're Are there any verticals you haven't been in the past? It'd be great to get color on that. Thanks.

Speaker 2

Heather, thanks for the question. Again, our experience is very broad in our the successes that we're seeing. I'll just give you one another example that might provide a little color. In one of our verticals, where we're calling on the government sector. There's one particular city that I won't mention, but you'll know the name of it.

Speaker 2

About a year ago, we sold a uniform program into that city. And as an example there, that was into the Sanitation, transportation, parks and recreation type departments. And in that case, they were using a local provider before we took over that And they chose us in that case because they liked our garment offering was better, meaning they thought we had better, More attractive garments that their employees wanted to wear. Our garment tracking technology helped them to reduce costs, meaning Less lost garments and what have you. And then our as I mentioned earlier, our investment into our Mycintas web portal Makes it maybe it's easier for them to do business with us, so which reduces their administrative time and just it's helpful for them.

Speaker 2

So that was about a year ago. And then if you fast forward, just recently, we sold them a first aid cabinet service to all those departments and even more municipal buildings. And in that case previously they had ordered all their first aid So they were a new programmer. They were ordering it from whomever online and then they were essentially Doing all that work and filling those cabinets themselves. Coincidentally, the sales lead for that opportunity came from our Uniform service provider.

Speaker 2

So while there, the Uniform service provider was speaking to the customer and they said, hey, we need help here. So the Uniform service provider pass it on to our the appropriate person and our first aid service provider. In that case, they chose us because, again, a better management of the products. We're able to help them Manage the products better, improve their compliance, reduce their costs, and remove their need to administer the program. So You think about what businesses are challenged with, in this case, it was a city government, but it's still They're still running it as a business where they have to meet their customers' demands and their employees' demands.

Speaker 2

And that's I think another example of just how we are growing our business and why it's attractive for businesses, sticky, Good retention, good cross sell and that shows itself in new business. Hopefully that color helps a little bit.

Speaker 12

Yes. Thank you for that. And then just a question on pricing. Can you just walk us through where you are in the process of taking, I guess, this outsized pricing you've Been taking when did it start kind of when do you start to anniversary it? Just trying to think through the flow through as we progress over the next few quarters.

Speaker 2

Well, Heather, pricing is a local subject. It's a customer by customer subject, meaning some businesses are doing better than others. And but as we look at that, when inflation Kicked in to much higher degrees than that required us to make sure that Our price adjustments were higher than historical as well. So you can think of about it that way. When inflation was went to above historical levels.

Speaker 2

That's when we adjust the pricing at above historical levels. And as far as what that means moving forward, That will depend upon the what inflation does moving forward. So I don't have a crystal ball as it applies to that or recession, What have you, but we're paying very, very close attention to all those inputs and we'll manage it appropriately.

Operator

Thank you.

Speaker 9

Thank you.

Operator

We will now take our next question from Seth Weber of Wells Fargo Securities. Please go ahead.

Speaker 6

Hi, guys. Good morning. I actually had a Pricing question as well, kind of a similar question. So, Todd, I guess, I'm trying to understand if How much of the price increases that you guys have been pushing through are just purely tied to inflation? And how much of it is Cintas just trying to get more For the value prop that you're offering today, so I'm trying to understand, will pricing revert back To its traditional level, if inflation recedes or do you think that pricing could be structurally higher for Cintas just based on The greater value that you're offering to your customers kind of today versus history, if that makes sense?

Speaker 2

Yes, Seth, it's a fair question. As I think about our customer base, we're such a broad customer base. So Some of them we have contractual commitments, some of them we have the ability to adjust prices closer to inflation and what have you. So it's very, very broad and it really depends on the particular customer and the health of that customer as well. But here's what I can tell you is that we take a long term approach.

Speaker 2

We don't think about our customers in quarters or fiscal years. We think about them in over decades. And that approach has really paid off big dividends for us. Now We are constantly trying to improve the value that we provide to our customers. That being said, when inflation is at the levels it's at, it requires us to adjust prices at above historical.

Speaker 2

When inflation comes back down and we certainly hope and expect that that will occur, then I think you can think of our price adjustments To be back closer to more historical, we're now am I constantly trying to improve the value to our customers? Absolutely. That pursuit will be in perpetuity And the marketplace determines how that pricing is handled appropriately.

Speaker 4

Seth, I might add 2 things. 1, you bring up kind of the structure of our pricing And we're generally the highest price relative to our competition in the space. So in other words, We don't lead with price generally. We believe that our products, our service, they are better. And that generally means we are at higher price points than our competition.

Speaker 4

And I don't Expect that that would change. As Todd said, we are continuing to look for ways of even improving that value more in the future. But I don't see that type of pricing changing Because of the inflation going up and down, we believe that we can command the best prices because our products are better Like Carhartt and other products like that and our service is just better. The other thing I might add is, Our pricing as Todd said is customer by customer and local And it's not necessarily a we have to offset or we look to offset inflation immediately. Generally speaking, we want to do the best for our customers and continue to add the right value.

Speaker 4

But we also know that given the way our cost structure works, we don't have to necessarily immediately offset Inflation, we get for example the products that we rent in our rental business we get to amortize them right. And so If we do have to take a cost increase, we get, we certainly get visibility before that hits our P and L because that has to go through the manufacturing process, then it gets to our locations and then it amortizes over a period of And so we can have multiple price increases, before that hits our P and L. And that ability to anticipate and manage our cost structure as well as our pricing, It's reflected in the fact that even in this pretty darn difficult environment, we've been able to increase our margins year over year, certainly excluding those one time gains, but we've been able to continue to increase our margins during that period of time. So I just give you that color to say, we are very thoughtful about the way we price and we are thoughtful about the way we anticipate the costs within our cost structure And it works because it's we're able to increase our margins in a pretty difficult inflationary environment In each of the last four quarters.

Speaker 6

Yes. No, it makes total sense, Mike. I appreciate it guys. That's

Operator

We'll now take our next question from Shlomo Rosenbaum of Stifel. Please go ahead.

Speaker 13

Hi, good morning. Thank you for taking my questions. It's pretty noticeable that the cost of goods sold is up only like $10,000,000 sequentially. But when I look at the SG and A, It's up like $46,000,000 And usually when you have some kind of inflationary prices, I would have thought it'd hit COGS more. Maybe you could explain to us what The changes were in SG and A and was there some kind of significant investments in Production or anything like that?

Speaker 13

And maybe if you can bring it down to kind of the unit level?

Speaker 4

Well, Shlomo, I'll speak to the SG and A piece of this. Yes, we did have some Sequential increase, but Shlomo, if you look at going back to I've got going back to fiscal 2015, Our Q1 SG and A is usually the highest of the year. I'll throw out the pandemic Impacted year, but our Q1 is usually the highest SG and A quarter of the year and that's been and is being recorded for a number of years and that's simply because of some things like we have higher payroll taxes When our equity compensation vests at that period of time, it usually happens in the Q1. We tend to have a little bit more stock options that Create more payroll taxes. We tend to have some beginning of the year meetings and other things that happen.

Speaker 4

But year over year, if you pull that gain out that we've been talking about, our SG and A is down 40 basis And so we like we do like the movement of that SG and A. And gosh, if you go back to Pre pandemic Q1 of 2020, we're down almost 300 basis points. If you go back to 20 nineteen's SG and A, we're down 260 basis points. My point Shlomo is, This is not unusual for us to have a Q1 higher SG and A because of just the way that our business works and the timing. But year over year, we continue to make really good performance in that and in this case Down 40 basis points.

Speaker 13

Okay. Thank you. And then maybe you can also talk about the higher Revenue kind of translated into margin for 2 of the units, but for kind of the other units, it didn't look like it's Translating exactly the same way. Is there something that was is there a mix item in terms of what was being sold over there? And then Just maybe you can just touch on your expectation for cash flow for the year.

Speaker 13

With such strong revenue, should we expect there to be a working capital drag, So we wouldn't necessarily see revenue grow the same way that we would see earnings grow?

Speaker 4

Shlomo, I'll talk to the all other first. I'm not sure if you're talking year Over year that gain that we've referred to a number of times is in the all other. And so you have to make sure That you're stripping out that gain 14.7% for the quarter for us. That is a pretty good quarter. But as Todd mentioned a little bit ago that uniform direct sale piece That can tend to move up and down a bit and be more inconsistent from quarter to quarter And that's a bit of what we've seen in this quarter.

Speaker 4

So once you pull out the gain from last year where we had that outsized Operating margin and all other, we're at a pretty good spot at 14.7% and it more than anything is attributable to that lumpiness in the Uniform Direct As it relates to our cash flow, look, we like where the cash flow is. Our operating cash Flow is up 13.7% year over year. Free cash flow is up 7%, and look, from quarter to There can be puts and takes, but generally speaking, our cash flow is really good. And I expect that we'll see a continued very good conversion from net income to operating cash flow. Now, when we grow and we've been growing quite nicely, we have always been a bit of a drag in working capital because Our AR tends to go up as we grow.

Speaker 4

Our uniforms in service and other items in service tends to grow Go up as we grow and that certainly has happened. But we're still turning that into really good cash flow And I would expect that that's going to continue for the rest of the year. We're going to probably be a little bit higher in CapEx during this fiscal 2023 year because we've again, we've kind of come from a pandemic period where we didn't need to grow capacity and we've really seen some nice growth over the course of the last more than fiscal year And that certainly means we do some investing. And so you're going to see a little bit of an increase in CapEx, but right in the range where we've guided to that 3% to 3.5% of revenue.

Speaker 13

Great. Thank you.

Operator

We can now take our next question from Scott Schneeberger of Oppenheimer. Please go ahead.

Speaker 14

Thanks very much. Good morning, guys. I mean, kind of go back to the recession question, the essence of the question is going to be visibility. It's been asked a few times on the call, but Yes. Your guidance, your quarter is obviously quite strong.

Speaker 14

The guidance is certainly ambitious. And I view you guys as Generally pretty conservative. So things must look really good to you right now and through the end of the fiscal year. So Manav, kind of asked this, but I want to delve in a little bit deeper. When do you see when you're working with your customers something like going back to past recessions, What are the first signs you see?

Speaker 14

How do they manifest? And what type of visibility do you have into, oh, okay, that's going to affect our numbers weeks, months, quarters later. If you could just tell us kind of going back to past recession, how that takes shape? Thanks.

Speaker 2

Scott, this is Todd. Thanks for the question. Mike, certainly, if you want to chime in. When we think about again, are we in a recession? Technical, is one coming in early 2023, late 2023?

Speaker 2

How severe? We don't know those items, but we are watching it very closely. When you think about our customer base, How might it show up? Well, customers, if their demand is being impacted, Then they're going to look for ways to cut their costs. Is that in getting they'll look at their P and L And say, okay, what's the biggest things I can move on?

Speaker 2

And frankly, we're not usually top of their list. So, and the reason being is because our spend per customer is pretty small. But that being said, Will they reduce their needs for certain services, reduce quantities of products that they need? Certainly, those types of things can happen if their demand is being impacted. So those are the items that we look for is Our customers reducing their needs because their demand of their business is such that they don't need as much.

Speaker 2

So I'd say that would be one of the certainly bigger categories that we look for. Mike, any other thoughts? But that was the first one that came to mind.

Speaker 4

I think that's true. We may see Some of those kinds of signs, we may see a couple of our customers go out of business depending on the type of recession. But the other thing that I think is really important is we've grown through lots of recessions in the last 50 years And we have also sold a lot of new business through every recession. And so even if we start to see some signs that the customers are paying a little bit more attention to Their spending, we know this that we're not asking them generally to spend new money. It's spend it with us and we'll help them with our programs to reduce their own work content.

Speaker 4

In other words, they can They find their people can do more with less because we're able to take some work away from them And we're not necessarily asking them to spend new dollars. So, we look, we're going to be paying attention to all different kinds of Things within the economy, but we know this, we're going to sell a lot of new business. We're going to sell to no programmers. We're going to help our customers reduce their own work content and that's why we feel we not only do we love the momentum that we But as we look forward, that value proposition is still resonating very, very well. We've said that a number of times And we don't see that changing.

Speaker 4

And so we feel pretty good. And we generally Our guidance is a reflection of that and we like where we're headed.

Speaker 14

Excellent. Thanks guys. That sounds good. I think a good follow on there. You've alluded to M and A, but we haven't really discussed it on this call.

Speaker 14

How is the environment right now? Are you seeing more opportunities? Or is that pretty steady? Any commentary on multiples? Is that something that's looking more attractive?

Speaker 14

What's attractive? Thanks.

Speaker 2

Yes, Scott, this is Todd. Deal flow is good. We love our balance sheet. We love our position in the marketplace. That being said, Those M and A type of opportunities, they tough to pace them, tough to there's various items that Cause things to flip the switch for someone to sell their business.

Speaker 2

But I can tell you this, We're really well positioned, love our balance sheet, love our team and the ability to manage through Any M and A and we think that's going to be an opportunity for us in the future and we're well positioned for it. That being said, again, it's tough to pay some, but deal flow looks good And I don't see anything that's all that different from a multiple standpoint in the marketplace. So We're interested in any and all opportunities from an M and A standpoint and we'll continue to push for those.

Speaker 14

Thanks Todd. Thanks, Mike. I'll turn it over.

Speaker 5

Thank you.

Operator

We can now take our final question from Toni Kaplan of Morgan Stanley. Please go ahead.

Speaker 10

Thanks. I wanted to ask a longer term margin question. If I look back about 2 years ago, your EBITDA margin like really meaningfully stepped up to mid-20s. And at the beginning, I think you're benefiting from travel reduced travel during the pandemic and healthcare costs. You've really been able to keep it at that level.

Speaker 10

And I know you talked about adjusting your cost structure at the beginning of the pandemic. But basically, What type of expenses have you been able to adjust so that you can stay at this mid-20s EBITDA level? Just how sustainable is it? It seems like it is, but wanted to just get some additional color there.

Speaker 2

Yes, Tony, this is Todd. You're absolutely correct. And when we look forward, we see incremental margins. We've talked about 20% to 30% and And we see that in our future. And we are leveraging certainly the top line very nicely.

Speaker 2

We manage our variable costs, I think quite well. The team is very, very good at that. And but we're also getting efficiencies from some of our digital transformation that we've talked about in the past. You see that certainly energy is a big subject today, but we've talked about our smart truck A proprietary routing technology that's helping us reduce idle time and drive time, which obviously helps with energy spend, but it helps CO2 emissions as well. And one of the things we talk about around here is that we don't make money when the wheels are moving in our trucks.

Speaker 2

So getting those efficiencies is very important. We're extracting other efficiencies via our investment with SAP with Our inventory control programs that are allowing us to get better reuse of our products in our stockrooms, which also helps improve turnaround time for our customers. We think it's very, very important, which gives us an advantage in the marketplace. I mentioned in our last call, we have an operational excellence dashboard that provides us better transparency in To the efficiency levels at each of our production facilities. So that is significant, right.

Speaker 2

So we're able to Understand the efficiency levels of our facilities, not by having to be there in person every day, but by understanding the metrics of our operational excellence dashboard in real time. So I guess it's a blessing that we have those opportunities to improve. It's frustrating that we have opportunities to improve, but we're focused on improving those and extracting those efficiencies. So that will allow us to continue to Provide good incremental margins, separate from the items that I mentioned before with some of the other technologies that we've deployed with Making it a better win for customers and how they're doing business with us. So yes, as we look forward, we're going to continue to extract

Speaker 10

And on a more sort of current basis, any changes to contract structure, changes in contract lengths, Any increasing the minimum thresholds for clients, anything to call out there?

Speaker 2

Yes, Tony, I would say it's nothing out of the ordinary. Certainly, We take a very long term approach with our customers. They take a long term approach with us and we make sure That we're positioned to meet their needs and exceed them and provide products and services that they really value. And so that's what we're doing in the marketplace and that tends to show itself in I'll just call it long term relationships. Others might call these contracts, but I call them long term relationships with our customers.

Speaker 10

Sure. Thanks a lot.

Speaker 2

Thank you.

Operator

This concludes the question and answer session. I would now like to hand the call back to Mr. Paul Adler for closing remarks.

Speaker 1

Well, thank you for joining us this morning. We will issue our Q2 of fiscal 2023 financial results in late December.

Powered by Quartr
Earnings Conference Call
Cintas Q1 2023
00:00 / 00:00