Q3 2021 Cintas Corp Earnings Call

March 17, 2021

[music].

Good day, everyone and welcome to the Cintas quarterly earnings results Conference call.

Today's conference is being recorded at this time I would like to turn the call over to Mr. Paul Adler, Vice President Treasurer, and Investor Relations. Sir. Please go ahead.

Hi, Good morning, and thank you for joining US with me today is Scott farmer Centas of Chairman of the Board and Chief Executive Officer, Todd Schneider Executive Vice President and Chief Operating Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer.

We will discuss our third quarter results for fiscal 2021 after our commentary we will be happy to answer questions.

The private Securities Litigation Reform Act of 1995 provides the safe Harbor from the Civil litigation for forward looking statements. This conference call contains forward looking statements that reflect the company's current views as the future events and financial performance.

These forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss I refer you to the discussion on these points contained in our most recent filings with the SEC.

Now I'll turn the call over to Scott farmer.

Thank you Paul.

Good morning, everyone. The.

The COVID-19, coronavirus pandemic continues and remains of significant disruption to the economy.

Our fiscal third quarter, which included the months of December January and February was particularly challenging.

COVID-19 case counts surge from about 180000 on December of the first two of peak of a little over 300000 on January of the eight.

Not surprisingly economic indicators reflected an economic recovery that slowed considerably.

In December of the U S economy posted job losses again after seven straight months of job gains the.

The operating environment was also challenged by severe winter weather.

No an ice storm in February of caused extensive energy blackouts in the U S, especially in the state of Texas.

Despite a very difficult operating environment in late December and into January our sales rep productivity remains strong and our employee partners persevered, enabling us to offset the headwinds and get the flat on a sequential basis.

On top of that we were able to help our customers with large supplies of personal protective equipment before the end of the quarter.

We provided more personal protective equipment than ever enabling us to exceed our financial expectations.

Also on an organic basis, our quarterly revenue was flat year over year of strong accomplishment considering the comparison to the prior year quarter that was not impacted by COVID-19.

Looking ahead to our fourth quarter, we expect lower COVID-19 case counts to be the foundation for an improved operating environment.

We do not anticipate the personal protective equipment sales will be as strong so fourth quarter revenue in this product line will decline sequentially.

However, we believe that our recurring revenue service that the service revenue will increase solidly on a sequential basis after being flat in the third quarter.

Mike will provide more information regarding our fourth quarter guidance soon.

Regardless of the operating environment, our employee partners.

Work with urgency to get businesses ready for the work day.

Just want to open their doors every day with confidence that they are ready for their employees and their customers.

We help businesses achieved that objective by providing a wide range of products and services that enhance our customers' image and help keep their facilities and employees clean safe and looking at their best.

For over 90 years Cintas has accomplished getting business is ready for the workday in numerous ways, including providing hygienically cleans uniforms to auto manufacturers. For example, so that the workers can safely build their cars.

The restroom supplies and services to professional services firms. So bathrooms are ready for use by employees and clients.

Hygienically laundered towers, the coffee chains, so breaches conserve their coffee levers.

First aid products, the restaurants to address the cuts and burns of the kitchen growth.

And test inspection and repair services of fire extinguishers, and alarm systems, the facilities managers to protect employees and customers from danger.

The COVID-19 pandemic ushered in for businesses of new era of readiness.

Getting ready for the Workday today also includes taking actions to prevent and reduce transmission of viruses and bacteria.

Our solutions for getting businesses ready for the work day include providing hygienic Lee clean scrubs to dentist offices.

Cause hygienist feel vulnerable taking them home of the longer.

Sanitizing spray services and disinfectant wipes for food manufacturers for instance, so that they can redeem routinely sterilized surfaces.

And sanitizer dispensing units the University, so employees professors and students can keep their hands clean.

Masks and gloves, the city County, and state governments to protect employees when interacting with the public.

And hygienic Lee cleaned isolation gowns to hospitals, the safeguard caregivers from the contaminants of the set.

Our value proposition of helping businesses get ready for the workday is arguably never been more relevant.

Every business has a need the cintas can help fulfill.

And in this unpredictable environment, requiring new and increased demands businesses appreciate the certainty of sent to us.

The Cintas tagline of ready for the work day helps describe what we do.

It also helps describe who we are.

Our employees, whom we call. The partners are always ready for the work day, whether it's in the best of times or in the most uncertain of times.

Our partners are honored to be deemed essential they.

They are ready to listen ready to offer solutions ready to solve problems and ready to be counted on to deliver and they do.

Now I'll turn the call back over to Mike for commentary on our financial results. Thank you Scott our fiscal 2021 third quarter revenue was $1 78 billion compared to $181 billion in last year's third quarter.

Earnings per diluted share or EPS for $2 37, and.

An increase of nine 7% from last year's third quarter.

The organic revenue growth rate adjusted for acquisitions divestitures, and foreign currency exchange rate fluctuations and differences in the number of work days was flat for the third quarter of fiscal 'twenty one.

Organic revenue for the uniform rental and facility services operating segment was also flat.

Organic revenue for the first aid safety services operating segment increased 17, 7%.

Gross margin for the third quarter of fiscal 'twenty, one was $809 5 million compared.

Compared to $824 4 million in last year's third quarter.

Gross margin as a percentage of revenue increased 10 basis points to 45, 6% for the third quarter of fiscal 'twenty one.

Compared to 45, 5% in the third quarter of fiscal 'twenty.

This increase was despite one less workday in this year's third quarter compared to last year.

Selling and administrative expenses as a percentage of revenue were 27, 2% in the third quarter of fiscal 'twenty, one and 28, 2% last year.

The fiscal 'twenty, one third quarter results benefited from increased sales rep productivity and lower discretionary spending.

Operating income for the third quarter of fiscal 'twenty, one of $326 5 million.

The increased three 8%.

Operating margin increased 100 basis points to 18, 4% in the third quarter of fiscal 'twenty, one compared to 17, 4% in the third quarter of fiscal 'twenty.

Our effective tax rate on continuing operations for the third quarter of fiscal 'twenty, One was 14, 4% compared to 18, 9% last year.

The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense.

Net income from continuing operations for the third quarter of fiscal 'twenty, one was $258 4 million.

An increase of 10, 2%.

And again EPS was $2 37.

An increase of nine 7% from last year's third quarter.

Our balance sheet and cash flow remains strong our leverage calculation for our credit facility definition was one six times debt to EBITDA.

We have an untapped credit facility of $1 billion.

During the third quarter of fiscal 'twenty, one we purchased $82 million of Cintas common stock under our buyback programs.

Earlier this week on March 15th Cintas paid shareholders $79 $5 million in quarterly dividends.

For finding the financial modeling purposes. Please note that there is one more work day in our fiscal 'twenty one than in our fiscal 'twenty one.

One more workday will benefit fiscal 'twenty, one full revenue growth by 40 basis points.

One more workday also benefits operating margin and EPS fiscal 'twenty, one operating margin will be about 12 five basis points better in comparison to fiscal 'twenty due to one more day of revenue.

In fiscal 'twenty, the fourth quarter contained 65 work days.

This fiscal year's fourth quarter contains 66.

Please keep these differences in mind when modeling results on year over year and sequential basis.

For our fourth quarter, we expect our revenue to be in the range of $1 8 billion to 183 billion.

And diluted EPS to be in the range of $2 20.

The $2 40.

Our fourth quarter effective tax rate is expected to be in the range of 21% to 22, 5%.

Please note that our guidance does not include any future share buybacks for additional government government restrictions on businesses in the event of increasing COVID-19 cases.

We are encouraged by vaccinations stimulus and business reopening and we expect an improved operating environment in our fourth quarter.

We expect recurring revenue to increase solidly on a day adjusted sequential basis basis in the range of about 1% to two 5% after being flat in the third quarter.

However, we do not anticipate the personal protective equipment sales will remain at record levels. So fourth quarter revenue in this product line will decline sequentially.

Please keep in mind these points when comparing our fourth quarter guidance to third quarter results.

Our fiscal fourth quarter marks the lapping of the onset of the COVID-19 pandemic.

Our prior year fourth quarter coincided with the period of greatest GDP decline in job losses, resulting from unprecedented restrictions on businesses to help combat the surge of COVID-19 cases.

While the pandemic continues our fourth quarter financial results, including revenue growth will benefit in part from an easier comparison.

Our last year's fourth quarter operating income was also significantly affected by many items caused by the COVID-19 Corona virus.

These included additional reserves on accounts receivable and inventory.

Severance and asset impairment expenses and lower incentive compensation expense.

Excluding these items last year's fourth quarter operating margin was 15, 5%.

All of these items were recorded in selling and administrative expense.

The additional inventory reserves account for slow moving inventory, mostly in the uniform direct sales business, where customers and some of the most severely impacted industries, such as airlines and hotels exist.

Please keep these points in mind, when comparing our fiscal fourth quarter financial guidance to the prior year quarter.

I'll now turn the call over to Todd Schneider to discuss the performance of each of our businesses.

Thanks, Mike.

The uniform rental and facility services operating segment includes the rental and servicing of uniforms healthcare spreads mats and towels and the provision of restroom supplies and other facility products and services.

The segment also includes the sale of items from our catalogs to our customers on route.

The uniform rental and facility services revenue was $1 42 billion.

Compared to one for $5 billion last year.

Our uniform rental and facility services segment gross margin increased 50 basis points for 46, 3% for the third quarter compared to 45, 8% in last year's third quarter driven in large part the lower production and service expense as a percentage of revenue.

Our first aid and safety services operating segment includes revenue from the sale and servicing of first aid products safety products personal protective equipment and training.

The segment's revenue for the third quarter was $198 5 million compared.

Compared to $175 million last year.

The first aid segment gross margin was 43, 5% in the third quarter compared to $48 zero percent in last year's third quarter.

The difference in gross margin is due to revenue mix.

And the pandemic the needs of businesses for personal protective equipment, including masks and gloves has skyrocketed.

Even though of personal protective equipment has a less predictable revenue stream with lower gross margins than the relatively consistent for eight cabinet service personal protective equipment as a profitable product line and we continue to work with urgency to fulfill the needs of businesses.

Also note that on a sequential basis for <unk>.

First aid segment gross margins and operating margins have improved through the pandemic.

Our fire protection services and uniform direct sale businesses are reported in the all other category.

All other revenue was $167 million compared to $192 1 million last year.

The fire business organic revenue increased three 5% the.

Uniform direct sales business organic revenue growth rate was minus 39, 7%.

Revenue from our airline cruise line hospitality and gaming customers are largely realized within this business line.

These industries continue to be among the hardest hit by the pandemic.

That concludes our prepared remarks, we're happy to answer your questions.

Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

Using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.

Again, Please press star one to ask a question.

We will pause for just a moment to allow everyone the opportunity the signal for questions.

Our first question will come from Tim Mulrooney with William Blair.

Good morning, Scott, Todd, Mike and Paul My question I, just have one point of this morning is on the uniform rental.

The segments.

<unk> margins.

Of this business of ticked up nicely in 2021, and I think some of that was from.

The structural cost savings and maybe some from temporary cost savings moving forward would you expect the uniform operating margins kind of normalize towards debt pre pandemic run rate of a time or would you expect operating margins to kind of settle out of.

Higher level than the pre pandemic one night. Thank you.

Yeah.

Well.

Tim This is Scott.

I would start by saying that.

There have been a lot of expenses this year debt.

We have been able to control tightly discretionary spending travel things like that that impact the P&L.

How much of that returns.

Not sure I mean, we've learned an awful lot we don't necessarily have to have the large group meetings, where everybody's traveling into the into one.

One town to accomplish that.

Some of that will happen, but the lot of that probably won't.

But I would say that.

In.

And our sequential in our in our recurring revenue businesses.

As the economy continues to I think of improved youre going to see us need to add some some expense back onto the P&L.

That might be growth routes in the rental division as an example.

Jobs that would.

Help us with growth of additional salespeople sales training.

Additional head count and the production operations to be able to process things. So I wouldn't expect a linear improvement.

But I would tell you that we do think that we will continue to see 20% to 30% incremental margins as we add.

AD.

The sales of <unk>.

Volume back on to the P&L and over time I think that.

We can maintain margins.

Of the.

Debt will be.

At least at or above probably above where we were pre pandemic.

So the.

Yeah.

Sure.

That's how I would answer of that is that help you.

No.

That's really helpful.

On a thoughtful answer I appreciate that Scott Thanks for taking my question.

Okay. Thanks.

Thank you. Our next question comes from Andrew Steinman with J P. Morgan Hi.

Hi, Thanks question for Todd when you think of rentals being flat in the.

Just reported quarter could you just give us a sense of how much the ancillary services is contributing versus.

Are you seeing improvement in uniform rentals, as well and a quick comment on how dependent are you in some of the areas like restaurants that are still kind of opening up ahead.

Andrew Great question.

We had.

So as mentioned in the prepared remarks demand for.

Various items around the PPE et cetera, other items regarding the pandemic.

We're very strong in Q3.

That was a result of.

What was going on with case counts and you all saw that so that was significant for us.

To the tune of about $45 million more than in Q2.

We don't see that as a repeating that level of repeating in Q4, but we are very encouraged by what we're seeing in.

In in.

The business coming back so.

And you can see in our sequential improvement what we see coming in Q4 over Q3, even without debt.

At level that elevated level of of those types of products and services.

As far as restaurants.

Yes, Thats certainly a component of our business.

We are encouraged by what we're seeing there with folks.

Activities.

The increasing consumer spending increasing we.

We think people having the money in their pockets b of stimulus will help that and we sure hope that the small business folks who have been incredible about weathering the storm.

Debt there their demand starts to pick up even more so so we're encouraged by what we see okay. Thank you Andrew if I could just add.

Bob.

A clarification of the 45 of the $45 million that Todd referred to that is in the rental segment as well as the first day segment. You saw first aid segment had another very good quarter at $17 seven percentage, so where we're seeing demand in.

All of these different kinds of things in from all of our customers and we are doing.

Our best to meet those demands so.

Of that 45 of not all within the rental segment, it's in all of our businesses.

Okay. Thank you.

Okay.

Thank you. Our next question comes from George Tong with Goldman Sachs.

Hi, Thanks, good morning, if.

If you exclude the $45 million in PPE lift in the uniform rentals business could you, perhaps talk about how revenue trends progressed moving through fiscal <unk>.

Yes, George but to Mikes point that 45 million was spread out across the.

Are all of our divisions. It wasn't just the rental lift, but but relative to what happened in Q3, I think it's important that we all keep in mind that our third quarter often has.

A little less predictable than the rest of our year of this year was as well. It has two holidays in it with Christmas and new year's and our customers, sometimes take multiple days off depending on what day of those holidays fall on the there is always of the potential of weather issues with the snow and.

Ice storms and things like that.

And both of those things happened this year.

And if you combine that with the increasing COVID-19 cases, it made it a little bit more complicated than than it normally does I would say as we went into the the third quarter. We were very concerned about what we were seeing COVID-19.

Covid cases were on the on the rise.

I said the earlier in my remarks that.

As the economy shed jobs for the first time in seven months and December.

So December and into January.

Really even into February we saw a very difficult.

Economic environment, but as we got into February we.

We started to see.

Our recurring revenue start to pick back up cases were dropping dramatically.

The from Mo I want to say, maybe the second week in January.

The expected restrictions the governors that we thought were going to put on on businesses didn't.

Fully materialize.

And so the the we built some momentum in February that we continue to see as the.

As we moved into March and I think that is.

Are reflected in the guidance that we've given for the fourth quarter.

Got it that's helpful and just as a follow up to that if you look at new business trends.

And the plans for sales force hiring can you talk a little bit about how the pipeline is building.

We're very pleased with our pipeline our sales rep productivity continues to be at very very high levels.

We believe that the.

Our value proposition is resonating today in the economy.

More than ever.

So we're excited about our opportunities as we look out into the future.

Are there are $16 million or roughly 16 million businesses in the United States, and Canada, and we do business with the millions of them.

And we really like our opportunity as we.

We approach.

Hopefully the end of this pandemic.

A more normalized economy of our ability to to attract new customers. So were of the pipeline is relatively full and.

And the reps are performing at high levels, even considering the fact that many times theyre, making sales calls over of virtual.

The teams call of our zoom call and being successful in doing it. So we're excited about the.

Getting past this pandemic and getting into enrollment economy, we think we'll be well positioned to take advantage of that.

Thank you. Our next question comes from Hamzah <unk> with Jefferies.

Hey, good morning.

My Michael question is of little bit more big picture.

Pre COVID-19.

Yes, your long term growth rate was sort of 6% to 8% debt depending on the year.

Post Covid World and you touched on a little bit of this with some of the ancillary services that may be benefited from the pandemic, which may normalize but at the same time you know you have these newer verticals you've penetrated.

There is some structural outsourcing maybe in the healthcare that could be a tailwind I don't know of that sort of plateaued out or continues. So when you put all of the puts and takes together in a post COVID-19 world.

Do you expect your growth rate to be better than what it was prior to the pandemic on the normalized basis as you look out over the next.

Couple of years.

Some of Thats.

Yes.

It's tough for us to predict.

<unk>.

I'm not sure that I'm going to go out and say that we're going to be doing better than we were.

From a <unk>.

Percentage growth standpoint.

Chris.

The post pandemic that we were pre pandemic blood.

But as I have said, we really like where we're positioned.

We've made a lot of investments in the business that we think are beginning to pay off.

That allow us to move quicker to be a better.

The supplier to customers.

Our customer satisfaction rates that we measure with the net promoter scores are at all time highs.

And.

We have opened up new segments.

<unk>.

The opportunity for us, we have new products and services that we can offer to more and more businesses.

So I'll just answer that by saying, we think we're very well positioned and.

We're excited about the future.

Got it.

This is Todd just ex.

Spanned upon with Scott, saying the.

The real unknown is what is going to happen with the demand for some of these additional services that we've been able to provide here's what we know is that.

Demand is going to be higher in the future than it was pre pandemic.

And what's exciting is many of our customers realize that we offered those types of products and services in the past.

<unk>.

Let me be clear, there's nothing positive that came out of the pandemic right but.

If there is any silver linings its the <unk>.

<unk>, our customers understand more of the value that we can provide them.

And.

Scott mentioned that our NPS scores of reflecting that and.

And we think that is the.

The more the products and services our customers.

Procure from us for the more value, we're bringing to that and we think that is very positive for the other item net I think it's important to understand is that.

We're going on two years now without having had a price adjustment to our customers.

We have felt very passionate that.

That it was not the appropriate time to adjust pricing when the when people are going through so much so much.

Difficulty.

No.

Fighting through the pandemic.

And as a result of that our again, our customers have really appreciated that and it's really positioned us well for.

<unk> for the future, we look at the lifetime value of a customer and we.

We think it is worth more than.

Then of short term approach so hopefully all of that covered helps.

Yes.

That's very helpful and just my follow up question and I'll turn it over.

You know just just from the fire business.

No. It's a smaller business for you, but it's a good business.

Could you maybe talk about how youre thinking about scaling that business up and the reason I ask is we look at the <unk> business and you did the medical in 2015 in that business scaled up.

The fire have the same potential in your mind and maybe if you could just talk about.

The competitive dynamic in that business.

Yes, we do think the fire business has an opportunity to scale up there are of lots and lots and lots of small.

The independent players there are regional players there are some some p/e groups that are doing some regional roll ups.

So there are opportunities for us to make some acquisitions in that business.

That would help us ramp up of scale and geographic coverage.

It is a very good business one of the things that is important to understand is the different states have different licensing requirements for the.

The level of different reps that we have service technicians that we have out there performing different levels of service be it fire extinguisher.

Repair and replacement versus sprinkler systems and alarm systems. They have different certification levels that they have to so it's different than just hiring somebody off of the street.

And and us being able to train them to be a first day.

Service revenue.

These people need to get.

The state certifications in licensing and things like that.

But that said, we like our ability to grow in the geographies that we're in there's a lot of geography that we would like to expand into.

And there are lots of opportunities for tuck in acquisitions in the markets that we're in right now so we really like that business.

I think over time, we can scale that up too.

To be upside as I always tell the.

The division of <unk>.

Residents, including fire and first day.

That their job is to figure out how to get their division to be at least $1 billion in revenue and that's what they should be thinking about.

And that helps us.

The goals in place.

And.

And decided what type of resources, we want to invest in the different businesses and so forth, but we clearly think that both first aid and fire divisions can be over $1 billion in revenue for us.

Thank you. Our next question comes from Andrew Wittmann with RW Baird.

Great and thanks for taking my questions I had one question and then a follow up.

On the.

The first question here, maybe Mike.

Over the years Cintas is growth.

Has been fairly consistent and the characteristics of the comprised of between things like price and it stops the new accounts, even retention from the some extent in normal times, we have a pretty good sense about how that contributes to your year over year growth rate now that the next few quarters are going to be driven more by of reopening type growth rate I was wondering if you'd talk about which of the.

Factors, you think will contribute more than the historical percentage to the growth and maybe less just to understand how youre thinking about how this matters and will unfold in the next few months quarters.

Yes, Andrew Boy, it's been a it certainly has been.

Different environment, the operating in the last four quarters and one that's been pretty unpredictable.

Okay.

I think what we will see what we've guided to in the fourth quarter and likely will get us off to a start in the first quarter of 'twenty two.

Is the continued reopening of businesses and getting those businesses back to somewhat normalized operations. We were we were on a nice trajectory of that.

Towards the end of our first quarter this year and into our second quarter that that certainly took a pause.

But we've got a lot of of customers that still are either not opened or at limited capacity.

And so I think as we look at the next couple of quarters, maybe even the the most.

Most of fiscal 'twenty, two it's going to be about fully reopening the economy.

And getting those getting our customers and other businesses back to healthy operating environments.

That means we'll take businesses off of.

Health Statics in the rental division, we will start to.

Service first aid cabinets again at a greater pace.

We will start to understand the needs when they open and come off of hold how can we help them in this new type of environment with.

With all of the things that we've talked about that have been important.

So I think it's going to be it's going to be more of that the reopening of the economy and getting back to some normal.

Type of of.

Process than anything else.

That's helpful.

And then just for my follow up I wanted to just talked about inflation a little bit.

It's been obviously a lot talked about it seems like Theres a lot of merit given the amount of stimulus that's going to be hitting the system here, it's already hitting the system. So I was hoping maybe you could talk a little bit about where inflation could get you where you are.

You might be seeing of today or expect to see of tomorrow obvious areas.

Come to mind like energy.

Be curious as to your thoughts of how that impacts the the outlook here for the calendar 'twenty, one, but also maybe even in some of the products that youre selling in.

In the ancillary business and in the first aid labor.

Labor, obviously, if you could just address inflation, how you affect how you expect to affect you and your ability to recovered in pricing against a recovering but still not full bore in macro.

Yes, so so from a I'll say of short term, we could certainly see changes in gas prices at the pump.

We saw sequentially an increase in our energy percentage of.

Of about 10 basis points and Thats certainly the.

Could contribute over the course of of.

The next year.

I think labor is certainly in the news and the conversations about about wage rates.

Is likely to have some impact on us as well as our customers.

We could see as you mentioned certainly in some of the PPE we have seen.

Quite dramatic changes in prices and cost to us in terms of gloves and masks and sanitizer of the course of the last year and there is probably a little bit of that continued unpredictability in that kind of product.

But but Andrew the really good news in all of that is.

We've got great efficiency in our business.

And so many times, we're able to offset that with current initiatives that we have within the business.

But if we can't we certainly can look to pricing changes into the future. Todd mentioned, we have not liked that idea in the last year. We did not think it's the right thing to do but.

In two years really since we've done it but if we see inflation.

The peak.

That's an opportunity that we will certainly have to consider and usually in the past that's allowed us.

Two two per.

Pass on a good portion of those kind of costs, if we can't offset them within our operations and of this time.

The build upon that.

Everything Mike said is right on target for the reporting of.

The good position to withstand the.

Those adjustments.

Based upon our model of our efficiencies that we can bring to market.

But with all of these whether it's.

Inflation in general wage inflation, specifically, our biggest concern is always the impact to our customers.

We will manage our business, we'll do it so appropriately.

But if it if it affects our customer base than than that.

That's a much greater concern and we're hoping that.

The health of those smaller businesses.

It's been tested and were.

In hopes that they can continue to withstand and thrive in the and the.

New environment.

Thank you. Our next question comes from Toni Kaplan with Morgan Stanley.

Thank you.

Just wanted to ask about the S&P benefits that you are seeing just now that the.

Integration within rentals being completed I know, we're sort of in a unique period, but I just wanted to see if any of those are coming through now or if we should be expecting it.

Going forward, just anecdotally any benefits from the S&P program.

Tony is the Todd.

We're seeing very nice efficiencies from having beyond.

For the most part of one platform for the entire organization.

Benefiting our customers in one view of Cintas its benefiting our.

<unk> locations.

And the ability to share inventory, our distribution centers in order to be able to anticipate needs.

It's Ben.

The quite impactful and a lot of.

Positive things that have come out of having that one platform.

And the efficiencies that come along with the first for the customer but also internally.

It's been very encouraging.

Great.

I wanted to also ask about capital allocation.

We hit a period now where demand accelerates.

The investing more back into the business.

For organic growth opportunities for M&A and I saw your of buying back from stock in the quarter. So does that get back to historical levels. Just what are you thinking about allocating capital.

Paul If you if we start with Capex, we're still sort of managing through.

The unpredictability of.

The economy, so we're probably a little more conservative right now and will be in the fourth quarter.

<unk>.

But over time, I think our capex spend as the economy turns around we'll get back to a more normalized historical type.

Yes.

Typically roughly 60% based on growth of 40% of on maintenance.

So I think we will continue to see that debt type of spend.

We do generate a lot of cash we've got a very strong balance sheet.

And so we would be interested in acquisitions in all of our businesses.

And then obviously.

The dividend is important to our shareholders we have continued to.

The in a position where we could increase the dividend to our shareholders every year since we went public.

Obviously that is a strength that we'd like to see continue and then.

Finally, we do have.

Roughly of $1 billion left on our authorization.

And that is more sort of opportunistic from time to time.

As we see opportunities to acquire our own.

Stock and.

So.

Should we be in a position where were building cash and we think the opportunity is right I think that the.

The board would agree that we would.

<unk> in a position to buy back some of our stock.

Paul a little bit of add in the third quarter.

When the stock price went down.

<unk>.

So it.

I think that I wouldn't be surprised to see debt.

Sort of thing in the future.

Thank you. Our next question comes from Gary Bisbee.

With bank of America.

Hey, guys good morning.

It's impressive to get back to flat year over year same day sales I guess the quarter really before lapping the step down from the pandemic I wanted to ask about mix within within that that sales. So can you give us a sense of how meaningful PP&E sanitizers.

In other.

In other pandemic driven sales are to the current revenue levels and so how much the.

More normal historical mix.

Would still be down right in Q3 with without that.

That's the first question.

Well, let me, let me start by saying that.

Things like.

The hand sanitizer.

And some of the.

The sanitation products and wipes that we have fit into a recurring revenue stream.

Once we've put this like the restroom supplies once we put the the standout there we come in service in on a regular basis make sure they have enough.

Product in there to make it through till the next delivery and so forth so that that is.

That becomes part of the recurring revenue stream the other products.

Things like disposable gloves disposable face masks and things like that are the onetime PPE sale.

One of it as one time, but it's more of a direct sale debt.

The.

It can fluctuate up and down depending on.

On customer needs.

But we.

We have.

A lot of it depends on geography, it depends on the the industry that the customer is in some.

The distribution type businesses, the increased head count increase number of wearers we.

The other businesses have reduced the number of wearers. So it's a little bit all over the board of trying to put some.

Some.

Parameter on that.

Relative to.

The historical average.

Say recurring revenue.

With the understanding that some of that is is now.

The result of.

And sanitizer and.

And that's where the.

Is flat.

Through the quarter.

And we.

We think that that revenue is going to pick up as the economy turns around as our customers get back to.

Being able to open their businesses more fully bring.

Bring back some of their head count.

And I believe that an awful lot of the.

Recurring business like hand, sanitizer is here to stay.

I've said in the past and I continue to believe.

That.

It's going to be a long time before.

The typical American walks into a business walks into a restaurant of lobby of movie theater.

Any place and isn't looking for of hand sanitizer station after the of grab the doorknob going in and out of the public building and we're seeing that in stadiums, we're seeing net.

And hotels that are open at the.

At elevator.

The.

The stations and Thats, where the thing I think that's going to be here to stay so if <unk>.

Right about that as they bring back in the open up their operations more fully.

That will be revenue.

As they add people back on and Thats, where the revenue on top of where they are right now.

Gary This is Todd.

I think it's important to understand also the vast majority of the products and services, we're speaking up.

Whether it's for.

Face shields clubs.

And sanitizer.

Cleaning chemicals all of those.

<unk> been offering those for decades.

It's not new or any of its Jeff.

It's elevated and.

And we think it will be it will maybe not be at the current levels, but it will it will remain elevated.

Into the near and maybe distant future earlier in the.

Or in the near future, certainly and maybe even much further out than that so that's exciting for us.

We see that again, our customers now see that that's much more of a value in it in large part because people are much more focused on hygiene and cleanliness than they were in the past.

And many of our customers they cleaned for image and now the our cleaning for health and that's a very much of positive we think for society, but also.

It makes our value proposition that much stronger for our customers. So some very positive coming out of it.

If I could just clarify one thing in that in that response, Scott you said recurring revenues were flat did you mean sequentially versus Q2 or did you mean year over year and if the latter flat year over year does that imply then that the.

One time ish PP&E sales increase year over year was similar to the <unk>.

The form direct sales decrease which will allow that to be flat I just want to make sure I understand exactly what youre, saying.

I meant sequentially from the second quarter.

Got it okay alright.

I'm trying to solve for is how much the traditional businesses are down I. Appreciate everything you are saying about this demand persists and the big uptake in sustainable recurring sanitizer sales, but in the traditional pre pandemic business mix. I mean is that is that still down 5% and it's offset by.

PP&E up 5% of Directionally can you help us understand it.

What I'm really trying to solve for is what's at risk of going away over 12 months 18 months.

As the as the the traditional business mix, obviously comes Roaring back.

Gary I think the probably the best our distributors as we mentioned in total for the company.

It was up $45 million sequentially.

We don't think that will repeat but we do believe that these elevated levels relatively elevated levels are here to stay.

Yes.

Gary of the to answer what's at risk.

It's really premature Scott talked a little bit about.

The enhanced value proposition of all of these things and while while we may see we have seen some some.

Ups and downs in terms of that that product mix in the last three quarters.

We don't expect that to go away overnight. This is not going to be a flip of the switch and the pandemic is over and so we it's hard to say how much of this will continue in the future will the will the frequency of sanitizer spray services stay.

Stay the same frequency as today.

The frequency of our ultra clean services stay the same as today, it's hard to tell but what we what we fully expect is that this cleanliness.

Idea and the value is going to stick around for a while and so so trying to.

Dissect the the results by product category and other things, we're not going to get into that because it's too early to tell exactly what that.

Future run rate is going to look like.

Okay.

Thank you. Our next question comes from Kevin Mcveigh with Credit Suisse.

Great. Thanks, and then tuck T kind of severe weather holiday impact showing the way to think about how much the weather kind of the holiday and then the.

<unk> total they impacted the quarter and I know it kind of areas across the business line, but just any thoughts.

How that impacted the quarter.

Well I guess.

The easiest way to look at it would be the there was a dip.

From early December into January.

And then.

The revenue started to rebound as we got into February February was better than January.

And obviously, if you look at all of that the quarter winds up being flat sequentially to the second quarter. So.

You can run the dip down and then the dip back up.

I would tell you that.

We do have some momentum as we go into the fourth quarter.

And.

So we're.

We have a better expectation of of <unk>.

Economic conditions in our business as we get into <unk> into and through the fourth quarter.

Yes.

Got it and then just is there any way to think of that kind of across the client base what percentage, maybe R&D day right now for the.

Net interest product for service versus where it was last quarter, where that sort of historically.

But I guess, just trying to get a sense of how many clients may be arent fully active right now if we expect to start coming back as the economy starts to reopen.

Kevin I think your question was.

What percentage of our customers are on hold.

So we have.

We had a.

As Mike mentioned I believe a strong run up in the.

The summer into the fall.

Some never came back. Some then went on hold so it's a little difficult to give you an exact number on that.

I can tell you. This we're anxious for those folks to get back we think that there is.

An incredible amount of pent up demand there is in the marketplace you add that with the <unk>.

Stimulus checks and we think consumer spending could.

Despite quite strongly in the.

Q3, Q for calendar years of the calendar year, and we think that'll be really positive if you put that together with the.

The strong.

The value proposition that we have increasingly strong.

The value proposition that we have with our customers meaning.

That when they come back they still have to provide confidence to their employees and their customers or clients.

Theyre coming back to a safe environment and so we think all of that the combined is going to make for a.

Quite a quite of bit situation.

Thank you for our next question comes from Scott Schneeberger with Oppenheimer.

Thanks, very much good morning, somewhat following up on that last question from Kevin.

Specifically in your airline cruise line hospitality of the travel segment can you put any quantification on how much those are down and more importantly, maybe just a feel for if you've seen any any improvement on those metrics since the since.

The trough of we're still there and then I will take away from the answer to that last question that debt is one of the categories that you think in the back half of this calendar year could significantly open up.

To begin with the.

Most of those of the revenue from those customers is in our.

The direct sale.

The business.

And that business is down about 40% over prior year.

And as you analyze that it's it's a law.

Little different depending on which segment.

Youre talking about.

For example.

A lot of cruise ships are still at port. So the cruise line of business has really been affected.

There is some travel happening now and particularly.

The sort of vacation travel.

So the hotels are doing a little bit better the airlines are starting to pick up.

And when I say that I mean, their revenue streams to their financing within their own business.

We had seen a little bit of improvement for.

Our revenue to those customers.

And but still down 40% is a pretty significant number.

And I think that the.

Those businesses will.

For some form of recovery as the vaccines continue to rollout and people begin to feel safer.

The traveling.

I haven't been to the.

The.

Of the vacation spots in.

In Florida, but I understand as the spring break crowd as of.

Maybe not as big as normal, but theyre down there right now so I think there is a.

As Todd said of pent up demand for people to be able to go and do things again vacation again.

Go get on an airplane and go visit family in a different states across the country that sort of thing and I think that.

The big the big trigger for all of that and when that all happens is.

How of how soon the good portion of the U S.

Population has a vaccine.

How long will it take to get back to pre Covid at that I don't know might take a couple of years, but.

But I definitely could see that there would be some improvement in the second half of the year. If the pace of vaccines continues at the rate that it is right now.

Alright, Thanks for that Scott My follow up is you had mentioned earlier, it's been two years since any any any change in pricing as the.

This is at the customer.

The appreciation type.

Strategy I'm curious as we as you move into the next fiscal year what is.

Might we see that starting to happen would it be only in specific areas that are seemingly overdue and necessary to cover inflation or is that a part of.

The strategy of Youll continue to maintain what would it take I guess the the question for.

For you to start.

To get a little bit of sort of what pricing. Thanks.

Scott.

Thanks for that question first of all of its important that you understand it.

It's not so much that we do it as a.

As the sort of a favor to the customer but from our perspective.

We want our customers too.

Two.

Survive this pandemic and we were doing all kinds of things to help them out in that regard.

They needed to add things, depending on the customer by customer basis, but a small business might need to add hand, sanitizers and masks and gloves and things from us, but they can't afford all of that so we help them with adjustments on their invoices from maybe maybe their entrance mats went from a weekly service too.

Biweekly or monthly service at a.

At a lower rate to help them or for what was what was happening.

And it's for US it's the relationship that we have with a customer.

We believe we enhance their image of us.

And their opinion of what type of of provider we are.

During these type of.

Yeah.

The.

Unfortunate situations. It was similar in the the great recession, we had the experience of doing things.

The.

Then as well and the lifetime value of of customers. We come out of this significant they like us they are willing to and they trust us they are more willing to hear what we have the offer them when we develop new products and services. They are more willing to try those new products and services because of the relationship that we have with them.

And so forth and are less likely we think the listen do a competitors offer.

And that all goes into.

We would.

We used to make our general calculations about the lifetime value of that customer. So so so from a price standpoint, yes, we're coming up on.

On on two years since we last increased gen.

Generally speaking last increased our prices on a recurring revenue and that's particularly in the rental division.

That's.

Probably a stronger statement.

And more relative to the the rental division.

The than others, but.

But we have seen competitors typical.

<unk> pricing environment, and our business is that the.

When they are trying to take our business they offer ridiculously low prices to try to get our customers' attention.

But the way they treat their customers is that they are willing to raise prices to.

To help protect their.

Our competitors' bottom line as opposed to help protect the customer we've seen that in various places.

In the competitive environment in the last couple of years, we will look at it in the future.

On a customer by customer basis.

What type of products and services they need.

We.

If we are seeing price increases across the board. We will have the took in our own supply chain will have to figure out the right way too.

The <unk>.

Past some of those costs onto our customers.

But the fact that we haven't done it in the last couple of years puts us in a pretty darn good position when we sit down to talk to them about the fact that it's.

It's time for us to have some price adjustments and generally speaking I think that those conversations are going to go well.

Will that happen.

In the near future of that I can't tell you I want to I can't tell you yet a lot of it depends on how economic conditions continue to recover at the pace that we're on right now I would assume that.

Net.

The potential for energy prices do increase the potential for inflation to increase.

We're eventually going to have to adjust our prices and.

Now that'll happen when I'm not ready to predict.

Thank you. This concludes today's Q&A I would now like to turn the call back over to Paul Adler for closing remarks.

Thank you Katie and thank you everyone for joining us. This morning, we will review our fourth quarter of fiscal 'twenty. One financial results in July we look forward to speaking with you again at that time of day.

Thank you. This concludes today's teleconference. You may now disconnect.

[music].

Sure.

[music].

Good day, everyone and welcome to the Cintas quarterly earnings results Conference call.

Today's conference is being recorded at this time I would like to turn the call over to Mr. Paul Adler, Vice President Treasurer, and Investor Relations. Sir. Please go ahead.

Hi, Good morning, and thank you for joining US with me today is Scott farmer Centas of Chairman of the Board and Chief Executive Officer, Todd Schneider Executive Vice President and Chief operating Officer, and Mike <unk> Executive Vice President and Chief Financial Officer.

We will discuss our third quarter results for fiscal 2021 after our commentary we will be happy to answer questions.

The private Securities Litigation Reform Act of $19 95 provides the safe Harbor from Civil litigation for forward looking statements. This conference call contains forward looking statements that reflect the company's current views as the future events and financial performance.

Now I'll turn the call over to Scott farmer.

Thank you Paul.

Good morning, everyone. The.

The COVID-19, coronavirus pandemic continues and remains of significant disruption to the economy.

Our fiscal third quarter, which included the months of December January and February was particularly challenging.

COVID-19 case counts surged from about 180000 on December the first two of peak of a little over 300000 on January of the eight.

Not surprisingly economic indicators reflected an economic recovery that slowed considerably.

In December of the U S economy posted job losses again after seven straight months of job gains the.

The operating environment was also challenged by severe winter weather.

<unk> an ice storm in February of caused the extensive energy blackouts in the U S, especially in the state of Texas.

Despite a very difficult operating environment in late December and into January our sales rep productivity remains strong and our employee partners persevere of enabling us to offset the headwinds and get the flat on a sequential basis.

On top of that we were able to help our customers with large supplies of personal protective equipment before the end of the quarter.

We provided more personal protective equipment than ever enabling us to exceed our financial expectations.

Also on an organic basis, our quarterly revenue was flat year over year of strong accomplishment considering the comparison to the prior year quarter that was not impacted by COVID-19.

Looking ahead to our fourth quarter, we expect lower COVID-19 case counts to be the foundation for an improved operating environment.

We do not anticipate the personal protective equipment sales will be as strong so fourth quarter revenue in this product line will decline sequentially.

However, we believe that our recurring revenue service the service revenue will increase solidly on a sequential basis after being flat in the third quarter.

Mike will provide more information regarding our fourth quarter guidance soon.

Regardless of the operating environment, our employee partners.

Work with urgency to get businesses ready for the work day.

I just want to open their doors every day with confidence that they are ready for their employees and their customers.

For over 90 years since the US has accomplished getting business is ready for the work day in numerous ways, including providing hygienically cleans uniforms to auto manufacturers. For example, so that the workers can safely build their cars.

Restroom supplies and services to professional services firms. So bathrooms are ready for use by employees and clients.

Hygienically water towers, the coffee chains, so for reasons can serve their coffee levers.

First aid products, the restaurants to address the cuts and burns of the kitchen crew.

And test inspection and repair services of fire extinguishers, and alarm systems, the facilities managers to protect employees and customers from danger.

The COVID-19 pandemic ushered in for businesses of new era of readiness.

Getting ready for the Workday today also includes taking actions to prevent and reduce transmission of viruses and bacteria.

Our solutions for getting businesses ready for the workday include providing hygienically cleans grubbs, the dentist offices, because hygienist feel vulnerable taking them home the longer.

Sanitizing spray services and disinfectant wipes for food manufacturers for instance, so that they can redeem routinely sterilized surfaces.

And sanitizer dispensing units the University, so employees professors and students can keep their hands clean.

Masks and gloves, the city County, and state governments to protect employees winter interacting with the public.

And hygienic Lee cleaned isolation gowns for the hospitals to safeguard caregivers from the contaminants of the set.

Our value proposition of helping businesses get ready for the work day is arguably never been more relevant.

Every business has a need that cintas can help fulfill.

And in this unpredictable environment, requiring new and increased demands businesses appreciate the certainty of sell to us.

The Cintas tagline of ready for the work day helps describe what we do.

It also helps describe who we are.

Our employees, whom we call. The partners are always ready for the work day, whether it's in the best of times or in the most uncertain of times.

Our partners are honored to be deemed essential.

They are ready to listen ready to offer solutions ready to solve problems and ready to be counted on to deliver and they do.

Now I'll turn the call back over to Mike for commentary on our financial results.

Thank you Scott our fiscal 2021 third quarter revenue was $1 78 billion compared.

Compared to $1 eight $1 billion in last year's third quarter.

Earnings per diluted share or EPS were $2 37.

An increase of nine 7% from last year's third quarter.

Organic revenue for the uniform rental and facility services operating segment was also flat.

Organic revenue for the first aid safety services operating segment increased 17, 7%.

Gross margin for the third quarter of fiscal 'twenty, one was $809 5 million compared to $824 4 million in last year's third quarter.

Gross margin as a percentage of revenue increased 10 basis points to 45, 6% for the third quarter of fiscal 'twenty one.

Compared to 45, 5% in the third quarter of fiscal 'twenty.

This increase was despite one less workday in this year's third quarter compared to last year.

Selling and administrative expenses as a percentage of revenue were 27, 2% in the third quarter of fiscal 'twenty, one and 28, 2% last year.

The fiscal 'twenty, one third quarter results benefited from increased sales rep productivity and lower discretionary spending.

Operating income for the third quarter of fiscal 'twenty, one of $326 $5 million in.

The increased three 8%.

Operating margin increased 100 basis points to 18, 4% in the third quarter of fiscal 'twenty, one compared to 17, 4% in the third quarter of fiscal 'twenty.

Our effective tax rate on continuing operations for the third quarter of fiscal 'twenty, One was 14, 4% compared to 18, 9% last year.

The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense.

Net income from continuing operations for the third quarter of fiscal 'twenty, one was $258 4 million an increase of 10, 2%.

And again EPS was $2 37.

An increase of nine 7% from last year's third quarter.

Our balance sheet and cash flow remains strong our leverage calculation for our credit facility definition was one six times debt to EBITDA.

We have an untapped credit facility of $1 billion.

During the third quarter of fiscal 'twenty, one we purchased $82 million of Cintas common stock under our buyback programs.

Earlier this week on March 15th Cintas paid shareholders $79 $5 million in quarterly dividends.

For the financial modeling purposes. Please note that there is one more work day in our fiscal 'twenty one than in our fiscal 'twenty.

One more workday will benefit fiscal 'twenty, one total revenue growth by 40 basis points.

One more workday also benefits operating margin and EPS fiscal 'twenty, one operating margin will be about 12 five basis points better in comparison to fiscal 'twenty due to one more day of revenue.

In fiscal 'twenty, the fourth quarter contained 65 work days.

This fiscal year's fourth quarter contains 66.

Please keep these differences in mind when modeling results on year over year and sequential basis.

For our fourth quarter, we expect our revenue to be in the range of $1 8 billion to $1 $83 billion.

And diluted EPS to be in the range of $2 20.

The $2 40.

Our fourth quarter effective tax rate is expected to be in the range of 21% to 22, 5%.

Please note that our guidance does not include any future share buybacks or additional government government restrictions on businesses in the event of increasing COVID-19 cases.

We are encouraged by vaccinations stimulus and business reopening and we expect an improved operating environment in our fourth quarter.

We expect recurring revenue to increase solidly on a day adjusted sequential basis basis in the range of about 1% to two 5% after being flat in the third quarter.

However, we do not anticipate the personal protective equipment sales will remain at record levels. So fourth quarter revenue in this product line will decline sequentially.

Please keep in mind these points when comparing our fourth quarter guidance to third quarter results.

Our fiscal fourth quarter marks of the lapping of beyond set of the COVID-19 pandemic.