Q4 2021 Cintas Corp Earnings Call
Good day, everyone and welcome to the Cintas fourth quarter fiscal year 'twenty..1 earnings release Conference call. Today's call is being recorded at this time I would like to turn the call over to Mr. Paul Adler, Vice President and Treasurer Investor Relations. Please go ahead Sir.
Thank you Nick and thank you for joining US with me today is Scott farmer and tossed executive Chairman of the board of Directors, Todd Schneider, President and Chief Executive Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer.
We will discuss our fourth quarter results for fiscal 2021 after our commentary we'll be happy to answer questions.
The private Securities Litigation Reform Act of $19.95 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 SEC.
I'll now turn the call over to Mike Houston.
Thanks, Paul our fiscal 2021 fourth quarter revenue was $1.84 billion compared to $1.62 billion and last year's fourth quarter and increase of 13, 3%.
Earnings per diluted share or EPS for $2.47, and.
And increase of 83% from last year's fourth quarter.
The organic revenue growth rate adjusted for acquisitions, and divestitures and foreign currency exchange rate fluctuations and differences and the number of work days was 11, 5% for the fourth quarter of fiscal 'twenty 1.
Organic revenue for the uniform rental and facility services operating segment was 13, 7%.
Organic revenue for the first aid and safety services operating segment declined 6.8%.
Gross margin for the fourth quarter of fiscal 'twenty, 1 was $859.1 million compared to $778 million and last year's fourth quarter.
Gross margin as a percentage of revenue increased 310 basis points to 46, 8% for the fourth quarter of fiscal 'twenty, 1 compared to 43, 7% and the fourth quarter of fiscal 'twenty.
Selling and administrative expenses improved as a percentage of revenue to 27, 4% and the fourth quarter of fiscal 'twenty, 1 compared to 39% last year.
Operating income for the fourth quarter of fiscal 'twenty, 1 of $356.4 million increased 71, 8%.
Operating margin increased 660 basis points to 19, 4% in the fourth quarter of fiscal 'twenty, 1 compared to 12, 8% and the fourth quarter of fiscal 'twenty.
Fiscal 'twenty fourth quarter operating income was affected by many items caused by COVID-19, including additional reserves on accounts receivable and inventory.
Severance and asset impairment expenses and lower incentive compensation expense.
Excluding these items for fiscal 'twenty fourth quarter operating margin was 15, 5%.
All of these items were recorded in last year's selling and administrative expenses.
Our effective tax rate for the fourth quarter of fiscal 'twenty, 1 was 19, 4% compared to 24% last year.
Tax rate can move from period to period based on discrete events, including the impact of stock compensation.
Net income for the fourth quarter of fiscal 'twenty, 1 was $267.7 million and increase of 85, 2%.
<unk> was $2.47.
And increase of 83% from last year's fourth quarter.
Our balance sheet and cash flow remained strong our leverage calculation for our credit facility definition was 1.5 times debt to EBITDA at May 31st 2021 on.
On June 1st 2021, $250 million of debt bearing an interest rate of 4.3% matured and was repaid with cash on hand.
We have and untapped credit facility of $1 billion.
During the fourth quarter of fiscal 'twenty, 1 and our first quarter of fiscal 'twenty..2 to date, we purchased $979 million of Cintas common stock under our buyback program.
On June 15th 2021, Cintas paid shareholders, $79.2 million and quarterly dividends.
For the fiscal year ended May 31st 2021 revenue was $7, $1.2 billion compared to $7.09 billion for fiscal 'twenty.
EPS for fiscal 'twenty, 1 were $10.24, compared to $8 and all and 11 for last fiscal year.
Revenue and adjusted EPS and grown 50 of the past 52 years.
Fiscal 'twenty, 1 free cash flow, which is defined as net cash provided by operating activities less capital expenditures was $1 billion to $2 billion and increase of 14, 7% compared to last year.
For our fiscal 'twenty, 2 we expect our revenue to be and the range of $7.7 $5.3 billion to 763 billion and diluted EPS to be and a range of $10.35.
For $10.75.
Please note the following regarding our guidance.
Our fiscal 'twenty 2 effective tax rate is expected to be and the range of 19, 5% to 25% compared to a rate of 13, 7% and fiscal 'twenty 1.
A higher effective tax rate negatively impacts fiscal 'twenty, 2 EPS guidance by about <unk> 85, and.
And EPS growth by about 800 basis points.
Guidance does not include any future share buybacks or potential tax reform.
We remain in a dynamic environment that can continue to change our guidance contemplates a steadily improving economy absent any economic for pandemic related setbacks.
For financial modeling purposes. Please note that there are no workday differences when comparing fiscal 'twenty 2 to 'twenty 1 both fiscal years contain 66 days and the first quarter 65, and the second 64 in the third and 66 in the fourth quarter.
I'll now turn the call for Paul for commentary on the performance of each of our businesses.
Thanks, Mike and the uniform rental and facility services operating segment includes the rental and servicing of uniforms healthcare Scruggs mass 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.
Uniform rental and facility services revenue was $1.47 billion compared to 1 point to $7 billion last year.
Our uniform rental and facility services segment gross margin increased 410 basis points to 47, 7% for the fourth quarter compared to 43, 6% and last year's fourth quarter driven in large part by lower production and service expense as a percentage of revenue.
While some inflationary pressures increased certain costs. These were more than offset by increased revenue from businesses reopening or increasing capacity as COVID-19 case counts fell and restrictions on businesses will reduce.
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.
This segment's revenue for the fourth quarter was $186.9 million compared to $196.3 million last year.
First aid and fourth quarter revenue was up against a very difficult comparison.
And last year's fourth quarter and response to the onset of the COVID-19 pandemic personal protective equipment sales surged also the first aid cabinets service business was not impacted until late in last year's fourth quarter when business restrictions became widespread.
And as a result, and the division posted a 21, 9% organic revenue growth rate and last year's fourth quarter.
Our first aid segment gross margin was 43.0% and the fourth quarter of this fiscal year compared to 46, 1% last year.
The difference and gross margins is due to revenue mix.
As we guided last quarter less personal protective equipment was sold and the fourth quarter and and the third quarter. However, as a percentage of total division revenue personal protective equipment revenue was still a significant percentage while profitable personal protective equipment revenue is lower gross margins from the first day cabs.
Net servicing business we.
And we expect gross margins to improve sequentially as the cabinet servicing business continues to grow and get closer to the pre COVID-19 percentage of total division revenue.
Our fire protection services and uniform direct sale businesses are reported and the all other category.
All other revenue was $181.9 million compared to $152.3 million last year.
The fire business organic revenue increased 22, 4%.
Gross margin improved 70 basis points.
Uniform direct sale business organic revenue growth rate was 6.2% and gross margin increased 280 basis points.
I'll now turn the call over to Todd for our final prepared remarks.
Thanks, Paul we are pleased with our fourth quarter financial results and conclude a fiscal year of significant accomplishments, including the following.
We have to keep our customers' place of business clean safe and ready for the work day by providing essential products and services.
And we procured hard to find and potentially life saving items, such as face masks and gloves provided hygienically cleans and health care Scrubs, and isolation gowns and develop services, including hand, sanitizer dispensing sanitizing spray services and disinfecting wipes.
Our net promoter scores reached an all time high because we consistently deliver for our customers by providing needed products and services and being flexible with service agreement terms during the pandemic.
We were again named to the prestigious Fortune 500, climbing 31 spots to rank at number for 10 on the 2021 list. It's an honor to be recognized among the most successful and respected companies.
We allocated capital to improve shareholder return.
We paid down debt reducing interest expense.
We increased the annual dividend 10, 2% and changed from an annual dividend for a quarterly dividend to return cash to shareholders more timely.
We've increased the dividend 37 consecutive years.
Also and physical 2021 and up until today, we repurchased 2.7 million shares of Cintas stock for a total of $979 million.
As part of our steadfast commitment to corporate responsibility, we issued our inaugural environmental social and governance or ESG report.
We are committed to protecting the environment enhancing humanity and supporting the communities, where we do business.
And in addition to these many accomplishments and despite the unprecedented challenges of the COVID-19 pandemic, we grew our fiscal year revenue and adjusted EPS.
I can't thank our employee partners enough and I am so proud of their truly impressive achievements.
The Cintas story is 1 of growth.
We have grown revenue and adjusted EPS and 50 of the past 52 years.
And the only exceptions for the great recession years.
Our successful long term financial Formula is organic revenue growth and the mid to high single digits.
Double digit earnings per share growth significant cash generation and <unk>.
Prudent deployment of excess cash to further generate strong shareholder returns.
Our prospects for.
Continued growth for great and and result in part from a strong value proposition and a vast total addressable market.
We have a product or services to help nearly every business get ready for the work day. Examples include scrub rental to hospitals and dentist.
Hygiene supplies and services professional services firms.
Laura care services, including Walkup mats and marks to retailers.
First aid products to hotel and restaurant kitchens for cuts and Burns.
Fire protection services to facilities managers and universities and.
And personal protective equipment for city maintenance and sanitation departments.
For renting of health care scripts and isolation gowns is indicative of a broad uniform rental opportunity.
First we are so much more than and uniform company.
More than half of our of our revenue is from facility services, including hygiene for credit and floor care items, such as walk of maps and desktops cleaning totals like microfiber mops and towels for.
Aid cabinet services personal protective equipment, and fire protection services, including test and inspection of extinguishers and alarms.
Our total addressable market is the 15 to 20 million businesses, we don't currently service.
Every business goods, producing or services provided us and eat for image safety cleanliness for compliance every business has some task and fulfill.
Additionally, the COVID-19 pandemic ushered in a greater focus on health readiness and outsourcing of noncore activities.
Significant opportunities for new revenue continue to exist because of the need of businesses to instill confidence and their employees customers and students patients et cetera, but they will remain healthy and safe.
The new services since we launched including handset and the types of standard Dispensary service and sanitizing spray services have a long runway.
Cintas consensus consistently invest and technology to support growth.
Our recent implementation of SAP enterprise resource planning system for <unk> benefits and 3 main areas.
1.
And as operational efficiencies.
I'll Ralph drivers utilized personal around computers, which are similar to a cell phone to access data and process transactions and real time.
Also S&P enabled us to have visibility to laundry plant stock from inventories across our operations, helping improve profit profitability be at the sharing and reuse of revenue producing assets.
And the technology and helps us improve working capital be a tighter management of supply chain inventory.
And second benefit is data analytics and enhanced business reported.
These results from having the order to cash cycle, Oh, and 1 system.
SAP enables us to analyze and process and extract information from extremely large datasets pumping net target penetration cross selling and pricing opportunities.
And the third competitive advantage is improve customer service.
And our customers can pay bills and communicate with US 24 hours a day 7 days a week.
We expect for ease of doing business with will help us improve customer retention.
Also customers can order products and services via S. P, resulting in improved turnaround time and faster realization of product and service revenue.
I want to say a few more words regarding ESG and the <unk>.
Start up our comfort zone from the start of our company and the Great Depression.
<unk> business model was wholly based on sustainable practices wash and reuse.
We have a great corporate responsibility story to tell.
We'll continue to expand our ESG reporting and are excited about issuing our next report this year.
And finally I'd like to say thank you on behalf of all Cintas employee partners to Scott Farmer for his 18 years of service Chief Executive Officer.
Under Scott's leadership, the company's revenue grew from $2.$6.9 billion and 2003 to 7.1 and $2 billion and fiscal 2021.
Scott successfully led cintas for years filled with challenges changes and opportunities, including the great recession and.
Largest acquisition, the COVID-19, pandemic and the integration of <unk> technology across the organization.
Thanks, Scott for his service to the company CEO and we are grateful that he remains as executive chairman.
Thank you Todd and I'd like to take this moment to thank all of my simple off partners across the company and I'm proud of our many collective accomplishments, including the innovative products and services that we provide our customers as well as the tremendous dedication of our employee partners without whom.
We wouldnt be successful.
Our company and sort of in a position of financial strength with the strongest and most experienced management team that we've ever had and executing a proven strategy that has allowed our continued success even through the recent pandemic.
Yeah.
It's been a true honor and privilege for me to lead this company as CEO for the last 18 years and I'm as excited about our future as I've ever been and I look forward to watching this leadership team steer us to continued success and the future.
That concludes our prepared remarks, we are happy to answer your questions.
Thank you and if he would like to ask a question. Please signal by pressing star 1 on your telephone keypad.
If you're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
What's your name has been announced you'll have the opportunity to ask your question along with 1 additional follow up question.
Again, Please press star 1 to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.
Okay.
And our first question comes from Andrew Wittmann with R. W. Baird. Please go ahead.
Great and thanks for taking my question Scott Congratulations on a great run it's been a pleasure and we look forward to sell have you associated maybe when we come to Cincinnati next time.
Yeah.
Yeah.
You bet. Thank you.
Yeah, So I guess getting onto the business here, a little bit and maybe this is for Mike.
And there's been a lot of focus on inflationary factors and and.
And what I heard here on your prepared remarks and in your release was that it sounds like Youre getting good operating leverage but I was just hoping you could drill in and talked about some of the key factors you've talked about in the past.
And certainly labor is isn't 1.
And it's come up a lot broadly across the street, you've talked about some other things like health care travel and others have mentioned merchandise cost I was just wondering if you could talk about some of those key buckets and and talk about the offsets that.
You have baked into guidance because it looks like your margin guidance is flat to up slightly and so I was just kind of hoping you could talk about some of the moving pieces inside of that as to why you feel like you can offset some of these headwinds that might be creeping in.
Sure I'll begin and and.
Certainly Todd can jump in but as it relates to guidance.
Ah you're right Andrew the implied margins would be.
At the low end of the guidance are flattish to at the high end.
Up Oh.
And 70 basis points, so a pretty good range and you know you've heard us talk a lot about.
We've made some for some really great progress, we made some difficult decisions.
And through this pandemic and and they'd be ashamed to go backwards.
And this and this guidance is is suggesting that we don't intend to.
And so how do we how do we think about this inflation certainly labor as you mentioned Andrew is a big component of our cost structure.
And.
They're really good news for us as we are.
We've been working on.
On the labor rates for some time. So this isn't something that is catching us by surprise and over the last several years, we've been we've been increasing the labor rates.
And so certainly the labor environment is a difficult 1 from the standpoint of the supply of of people hiring has been a little bit more difficult.
But we don't expect that the the increasing wages around us is really going to be a significant issue. We've been working on that for years and and don't expect that to really be that difficult for us as we move into the future.
Yeah, and I would add to that includes last fiscal year, we raise to the wage rates of all of our hourly people and our distribution centers offices production all of our service our frontline service personnel.
And so we don't have a big catch up as a result of that I know there are other businesses out there that froze wages and the pandemic.
And because it was a year or they might have a catch up and make and we don't have that so you know.
And I'm happy to say that but I don't think that so far we've seen issues, where the labor rates are gonna clauses.
The significant problems, but we're more concerned about what happens to our customers as a result of this and and.
And so it will be we'll be watching that very closely and.
Scott, It's a great question.
Hmm.
And we're in a good staffing position, we like where we are there we are we like the.
And the fact that we've been addressing this subject over the course and a number of years.
And as Scott pointed out appropriately even in the the peak of the pandemic last year, we were committed to staying the course and and doing the right things and taking care of our hourly partners too because we knew that.
See things coming right and and we're committed to it so that's important to US certainly other input costs are hum.
Cost of goods and our.
Our supply chain team is working harder than ever and they're doing a great job and managing through that process and get us the goods that we need to make sure we're servicing our customers, which are doing a great job at.
And to manage our cost structure from that standpoint and.
But we like the spot we're in and and we.
Anticipate getting when some leverage on the additional revenue that we bring in.
We've done such a great job and took such a big jump forward.
Our fiscal 'twenty to fiscal 'twenty, 1 that as Mike stated.
It'll be ashamed to go backwards and we're we're focused on going forward.
And Andrew maybe I'll add a couple other items you saw that energy was a 30 basis points higher and our fourth quarter than our third quarter.
And about 40 basis points year over year, we've built that kind of increase into our guidance and certainly there is room within our guidance for for a larger increases the net but but something that we'll keep our eye on we are.
And we constantly are working on improving efficiencies and productivity.
Productivity levels.
Routing and those things will all have a positive impact.
Hum.
From a material cost standpoint.
The good news is many of our rental items are amortized. So when we when we see increases and costs are they generally tend to take a long time to make it to our P&L and they must they they have to last for a while.
And so that they they they bleed in overtime and and so you know obviously, we've got a great global supply chain, Todd talked about and they adapt and so when we see inflationary pressures, we look for for opportunities to adapt to that new environment, and and I think over the core.
For the last year, we've talked a lot about our supply chain and they've done a great job and we anticipate that they'll continue.
2.
To do a very good job now having said that.
There are a lot of challenge, it's in and the supply chain and and hiring that we've talked about and we're not immune to inflationary pressures.
They are all built into our guidance, but but but the other thing is we have and increase our pricing for 2 years right and but we certainly believe that that is an opportunity for us as we move into this new fiscal year.
We have selectively started to do that and in some areas pricing is local.
For us it's customer by customer decision and where we believe it makes sense, we will do that and and so that is.
That is certainly something that is available to us when we believe that that debt.
The cost pressure is warranted.
Again, all of that is built into our guidance, which assumes not not just keeping the great leap forward that we made in fiscal 'twenty, 1, but even continuing to improve upon.
That's really helpful. Thank you.
And my my 1 follow up is just I'm trying to get a sense of the reopening benefits that you're getting or expecting on a sequential basis.
How much is left after the may quarter and into June is there still businesses that are closed for you or substantially closed for the revenues are so de minimis that they might as well be considered close to where and a sequential basis are you starting to feel like things are fairly normal here June July time period. Thank.
Thank you.
So Andrew Mike talked about pricing being a local subject reopening as a local subject as well.
But for the most part most businesses are back.
Certainly, Canada and spend a little slower to come back because of vaccination rates and government Oh God government.
Effects impacts there, but nevertheless, and.
In general most businesses are back now are they back at the levels that we think they will be in the future no.
And we're committed to helping them with our valuable products and services to us to help them for being prepared.
Their employees come back and their customers come back.
So and so they can be they can compete in the marketplace. So hopefully that helps.
And this is Scott I would add that you know.
We think that candidate and will be and the position that the U S is sometime the end of the summer with re openings, but they're on a steady pace heading in that direction and the.
The biggest issue that we have is that businesses are open, but there were about 7 million and fewer people and employee right now and then there were pre pandemic.
And.
So theres a lot of room, there and I think as federal unemployment benefits subside.
And what September.
Uh huh.
We hope to see that our customers that are open and will be able to get themselves back to full staffing and that'll that'll obviously, oh benefit our business.
Thank you moving on to our next question will go to Manav Patnaik with Barclays Capital. Please go ahead.
Thank you and good morning, guys.
So I was just hoping you could help us with the and the kind of cadence of organic growth by segment.
Still obviously.
A lot of uncertainty potentially outpace and thank you for giving full year guidance, but I was just hoping if there's anything to call out in terms of modeling the growth rates are for segments.
Okay.
Yeah Manav this is Todd.
So.
I think you've seen for our guidance we expect.
And a range of 5.8% to 7.2 for me and <unk>.
Growth rate.
And when you think about having to say around division is our by far and largest division so that will be in that range, but we expect that.
All of our businesses, meaning the other businesses fire first aid.
And our direct sales business will all be high.
High single digit growth businesses and and this fiscal year. So we feel very very positive about all of them and I look forward to growth and each of those businesses.
Yeah, I think we might see a little bit of a.
A little bit a little bit of.
Bumping this and the first aid business.
And you saw that their revenue was a little bit lower growth wise, they they should do.
And I had a decline and the fourth quarter. They had such a strong year last year, particularly in the fourth quarter and the first quarter, we may see a little bit of of bumping this through the year, but but it's.
It's a great business, it's and are improving.
We're seeing the recurring business and the mix start to turn back to where we liked it and.
And and so that's just true.
Throughout the year, maybe a little bit of a different performance than we're used to seeing and from a steadiness perspective.
Okay that makes sense and then if I can just ask you know around capital allocation I mean, the the buyback was it pretty.
And I think number and the 900 plus million that you've talked about can you just help.
Help us understand you know back and the contact stuff you know the M&A pipeline and what you should.
And that going forward.
Yeah, so amount of our commitment is still number 1 and.
Our priority is to invest back into our business to grow the number of customers, we have and grow those customers and invest in our and our infrastructure.
Our second 1 is to invest and M&A and we are very focused on M&A.
Active and that area and.
It's a it's a big push for US and then third if there is.
Consistent with what our approaches and the past if there is.
Capital that is and access of that then we will return it back to the shareholders and the form of increasing dividends and and repurchase stock as appropriate.
And Manav. This is Paul and I was just wanted to add that you know, we're so fortunate to have such a strong balance sheet. The cash flow is so strong.
We did that buyback and our leverage is 1.5 times as we mentioned in the script. So.
Fortunate to be in a position, where you know what we do with the dividend and the buybacks doesn't preclude us from M&A or any other activities because of the strike and the balance sheet.
Alright, thank you.
Thank you and our next question comes from Andrew Steinman with J P. Morgan Securities. Please go ahead.
And when you frame fiscal 'twenty 2 revenue growth could you just talk about some verticals.
Yeah, you know, which verticals do you think will be above the average growth of the guide and you know which verticals might take longer to to rebound from maybe maybe they are just kind of slower growth verticals.
So Andrew this is Todd.
As we look at the business. The certainly the hospitality business is you read about it and the papers rankings and you hear about bookings, so whether it's airlines or hotels et cetera that and some.
A vertical that we think will be quite.
Quite positive this year and <unk>.
Health care vertical is going to continue to be strong for us.
Hospitals are for.
Catching up on voluntary types of.
And procedures, which is helping that and we have a very attractive value proposition and both of those areas as well education and government are.
But we expect to be quite strong for us.
Oh, well there was a mix of business I think you will see will be different and those areas are less P. P E and more focused on more of a traditional type of approach that we've had in the past.
But those those key verticals are are all positioned well and.
And if you think of them, all and they're all positioned quite well and hospitality probably the best.
Mhm and.
Are there any slower growth verticals, there really is a rising tide here.
Yeah, I would say.
None come to mind, where I would say, yes slower type of growth.
And what kind of a rising tide is the best way to put it.
Great. Thank you.
Thank you and our next question comes from Hamzah, Missouri with Jefferies. Please go ahead.
Hey, good morning, actually Ryan Gunning filling in for Hamzah.
My first question just around that fire protection business and.
If you could just talk about the competitive dynamics, there and any opportunity for larger scale M&A and that business is kind of similar to what you did with Zee medical and the first aid side.
Yeah, Ryan and this is Todd, we like our position and our fire business and really like the fire business.
There are we understand.
The how to go to market and how to make attractive margins and that business and we're investing we're investing in M&A and we're investing in infrastructure to to me.
Sure that were or we're able to service all of our customers and.
Oh, we have a national offering.
And that business some be a sub contracting, but nevertheless, a very attractive national approach and we're positioned well.
How we and our culture, our infrastructure, how we execute puts us in a good spot and and there is a good momentum and that business and there was.
Are you thinking about it right. It's all legally you have to have that.
Those products and there's.
Services.
But nevertheless, there was some.
Pent up demand and it from a repairs right so and if you think about.
Someone comes through and looks at your.
Your fire equipment and.
There are some items that need to be repaired.
During the pandemic people and work so anxious to spend money on those types of subjects and but it has as we're coming out of it.
We're busy we're busy and that area for many reasons, but 1 of which is some pent up demand on repair which is great business for us.
Got it thanks, that's helpful and.
Switching over.
Could you provide any kind of visibility on like how much of your sales you consider today's pandemic like nonrecurring vs reoccurring and how do you kind of define that.
Yeah.
Great question so.
And when you think about.
And what's called PPE items that.
And we're really pandemic related and.
They are still at levels elevated from pre pandemic.
But we do not expect for them to repeat at the levels that they were in fiscal 'twenty..1. So if you think about our guidance.
So we think we would be a win with the PPE that doesn't repeat if it had free and if it does for beat them, we would be and the.
On the high and above 8% from a internal growth rate, so and think about it that way about how much is will not be repeating that we don't expect to repeat.
Just kind of demonstrates the mix of businesses.
Gotta be back closer much closer to traditional and there's some real good momentum there to get to the growth rate that we've guided towards.
Got it thank you very much.
Thank you and our next question comes from George Tong with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning, and the.
And uniform rental segment, but can you talk a bit about sales rep productivity trends and how the pipeline is performing especially moving through the quarter and entering fiscal 2020.2.
George I'm glad you asked about that I've been so impressed by our sales organization.
And creativity and the flexibility the urgency and intensity about which way they go about their jobs and and how they have adapted to a crazy environment.
And and we try to work very hard to position them with great products and services so that piece.
People are very much wanted to pick their calls and so we like where that's heading the mix of business and obviously changing.
But it's getting back to much more traditional George and but there is a.
There is a strong audience for that the our sales partners and then.
And they're calling on.
Partly because.
You know there was a there were some items that you are right when people were going for the pandemic. They said, hey, I can't make a decision on uniforms right now, but I need some critical products to help my business right.
We provided us quite a critical products and services and it's positioned us now that its a close from 2 businesses getting back to normal what do we say, okay. Now I'm ready to talk about those types of items. So all of that is positive for us.
Hum.
As we went through right.
Folks didn't realize that and we had all the products and services that we do so that opened some doors and and we're continuing to operate and those doors to help improve our business.
Okay. That's very helpful. And then switching gears to health care and hygiene and those are very strong categories over the past year can you describe what kind of performance you're expecting structurally from those health care and hygiene categories.
First in fiscal 'twenty, and 'twenty, 2 but really looking forward and then diving into PPE and you talked a little bit about normalization, there and first aid mix going back to.
Pre COVID-19 levels over time, which has higher margins and talk a little bit about that evolving mix as well and the implications for growth and profitability.
Yes, George I'll start and if Mike Scott, Paul whenever I jump in.
And we've spoken in the past about hygiene.
Cleanliness and all of those subjects.
That.
The pandemic has done for those subjects are what 911 did to security.
Oh, 27, and 20 years ago and.
And so what we're seeing is there's a greater focus on and.
On the health of employees health of patients and health of our guests students and hygiene and a big part of that so we see that as a.
Something that will be elevated into.
Into the future and we think that's good for society, that's good for our business.
And and certainly for all of those individuals. So we think that's a that's going to be something that's elevated I'm hopefully in perpetuity.
As far as PPE normalization.
No there is.
There was a break neck pace to get PPE last year, because folks couldn't keep the doors open and in certain cases couldn't couldn't work.
So there was some real peaks last year and that is certainly less we expect this year the variance the delta variant and I think it brings a bit of a wildcard into that which we're not going to try to predict.
But nevertheless, as you see them as we go throughout the here and you will see a much more normalization and you'll see more people using our traditional cabinets.
First aid products hands, and cabinets, as we say and <unk> and <unk> and PPE will will.
We will be more moderate now just keep in mind and we've always been and the P. P E business.
And we've always provided these products and services.
They were elevated we will continue to offer them.
And as more people get back to work.
And in offices and and machine shops and.
Government and education are there will be more people that will be consuming.
From a percentage standpoint.
And our traditional types of damages and and tablets et cetera, So hopefully that can simple color.
And George This is Paul I, just wanted to and you mentioned first state specifically too. So I just want to make sure we provided enough clarity there and that business as Mike said alluded to it's true and.
And a transition period, where you know to Todd's point so much P. P. He was provided we seize the opportunity to come through for our customers and provide thermometers and masks and pfizer's et cetera. So it's an outsized percentage of and the revenue that will transition as we've been talking about the last couple of quarters.
And what I want to make sure everybody understands is that first aid business and he was.
And just getting back to that and more reoccurring revenue stream with that cabinet services business.
Which we are very excited about and you have to think about 9% or high single digit type of growth rate for.
For first aid.
And fiscal 'twenty, 2 that's coming off a huge growth rate and with a lot of P. P. E. So still a strong performance and what what I want to make sure people Miss is that.
In order to drive a high single digit growth rate and 22 with P. P. E declining net cabinet services business is growing very strongly and what that will do that and.
And improve the margins going forward for the first aid business in fiscal 'twenty, 2 and we probably won't get back all the way to pre COVID-19 levels in terms of margins and first aid because just like many of our businesses. It's a lot of small transactions or some momentum that has to build.
But definitely the margins will continue to improve through the year as we get back to a.
Servicing those cabinets.
Okay very helpful. Thank you.
Thank you. Our next question will come from Toni Kaplan with Morgan Stanley. Please go ahead.
Thank you and I know you talked about the margin guidance earlier in the call and address the inflation and packs, but wanted to see if you could provide maybe some additional detail around which business lines, you're expecting to see the most strength and from a margin perspective.
Well, Tony I would say.
You know all of our we expect all of our businesses to perform very very well and in order for us to to be able to guide and the way that we did from about a flattish to up 70 basis points.
We're gonna need good performance out of all of our businesses net.
That translates into very good incremental margins.
And especially in our rental business.
Certainly as Paul just described it means that we're going to see some nice improvement and our first aid margins as we see a bit of a mix shift.
We expect continued good performance in our fire business as is.
I think we mentioned, 22% organic growth and the fourth quarter, we've got some great momentum and we will get.
And some nice leverage as we move into the year.
And then certainly our direct sale business those margins I would expect from a percentage standpoint to really increase nicely as we see those.
See the revenue start to come back that will allow us to get a little bit more efficient and and certainly be able to leverage our infrastructure in that business. So we're looking for margin a good margin performance and all of our businesses all contributing to that guy.
<unk> range margin improvement and all contributing to a real healthy 20% to 30% incremental margins Tony are the.
Obviously, we were guiding towards all of our business is growing.
And.
Incremental margins 20, and 30% but.
When you think about obviously the mix is going to change and and all of those businesses.
And each of them sold with the exception of fire.
There was some PPE and.
So there is.
And we'll get back to more traditional type of mix and that and the leverage on the additional revenue and it's gonna help us.
That's great and in your prepared remarks, you mentioned the 15 to 20 million businesses that you don't currently service could you just talk about the recent industry outsourcing trends and.
Has that have you seen that accelerate or flat and how.
How do you go about reaching out to those businesses is that and initiative is a big opportunity for you any more so than historically.
And we think about the opportunity.
Yes, Tony and the.
And the outsourcing trends continue.
And that has been positive and addition.
The.
The focus on bringing manufacturing back to the United States and in Canada. We think there will be a positive just that's obviously in your early innings.
But both of those we think will be.
Hum.
Positives for our business as far as reaching out.
Yeah, we have a a significant.
Significant investment and our and our infrastructure.
And.
Part of that infrastructure and our route based and part of that is and our sales organization.
So that is a that's a significant investment you've probably also seen I hope you've seen some of our investment and mass media that are that were that were leveraging because we think of.
And it can pay dividends for that infrastructure and <unk>.
And then and 1 thing we hear from customers and prospects frankly is hey, I didn't know you did that.
And that that and.
And that is a product or a service that they didn't realize that we provided so we're trying to leverage that and get the message out.
And to give a little air cover to our for infrastructure.
Thank you.
Thank you. Our next question comes from Tim Mulrooney, with William Blair and go ahead.
Good morning, guys and I wanted to check in on the health care opportunity, which I know has gotten a lot of attention on recent calls and we haven't talked about it a lot. Yet today you previously stated that I think I think for them.
And Paul could expand from kind of 7% of sales today towards potentially 10% of sales over the next several years, but I know things are changing rapidly. These days. So it's another 3 months under your belt and.
Curious if those expectations have changed at all in either direction.
Tim This is Todd.
I'll start.
And we don't see and.
And momentum slowing down and in that area.
And again hospitals are getting a little bit back to more normal operation.
And how they run their business and our.
Our value proposition resonates with them.
We've talked.
Often about the various products and services that we provide scraps being a big 1 and isolation gowns, but also cleaning products to help them.
<unk> provides a healthy environment you know so.
There's a whole lot more focus on on health and welfare and now obviously, you're in the health care business.
Because of what they do for living and Theres always been a major focus on providing an environment that.
And that allowed for a high patient.
And satisfaction that was not only and health, but also and image. So when you think about what they need it's a great vertical for us and the products and services we provide.
And there's a long runway there.
And we're providing price.
And the services to.
Health care institutions that I'd like to thank you you'd be impressed by the name of the list of people and we do business with.
And the who's who.
And that business, but nevertheless.
We're not nearly as penetrated where we can be should be and moving so so we're pretty much and the early innings on a net vertical step.
Okay, great. Thanks, Thanks, Todd and.
Just switching gears I apologize if you already addressed this but how did that energy costs impacted the results this quarter.
Quarter am I haven't.
And I don't know maybe year over year or sequentially or however, you want and presented but can you also talk about your expectations.
And for energy costs, and that's built into your guidance.
Maybe for your fleet, but that's but then also for your production plans and thank you.
Kim our total energy costs for the quarter were 2.1% of revenue that's up 30 basis points from the third quarter, and that's up 40 basis points from a year ago.
So we did certainly see some increase within the quarter. Our expectation is that those will remain elevated during fiscal 'twenty 2.
But those levels, maybe even a little bit higher so that's what we've we've got incorporated most of that increase being.
Price at the pump, so our gas and our service.
Our routes.
So that's what we've got and the AR and the guidance.
Great. Thank you.
Thank you and our next question comes from Gary Bisbee with Bank of America Securities. Please go ahead.
Hi, guys good morning.
I guess on revenue first day, 1 clarification..1 question I just wanted to clarify so high single digit for first aid I heard that and then I heard you.
You know some discussion of the tough comps and I think the term bumping. It says is high single digit the right number for the year, but but you know maybe declines and the near term as you get through the toughest period of comps is not out of the question is is that a fair statement on that business and and the question then on revenue.
And the rentals business right. The long term growth rates been sort of in line with this guidance you've got easy comps you've had sequential improvement throughout last year, the fourth quarter had quite strong growth.
And I guess I Wonder why you wouldnt be positioned to grow faster than the historical long term trend given those factors and this year is did the hygiene business within rentals have an outsized benefit from P. P and either rolls off and is that a drag or are there other factors.
You know beyond just your normal conservatism that might be.
Be weighing on that business. Thank you.
So Gary as far as the first day again think about it as high single digits for the year as Mike stated Q.
Q4 last year Q1 excuse.
Excuse me Q4 of 'twenty.
Was was sick and tired of.
Huge growth rate for.
The first aid business as was.
Q1, so so with the comp from from right now.
And we're really big.
So as the year goes on.
The P P will comparable lesson.
And as a result, our.
Our growth rates will be will be better and that business. So there's lumpiness that Mike spoke about was simply that the PPE comps and the early portions.
For this fiscal year versus flat as far as the rental.
Yeah. It was as we mentioned in the past, there's there's PPE and that and and our results from last year and rental as well and.
And again, just going back to our total.
Our guidance.
Yeah.
And if the PPE would repeat that we do not believe it will this year then you begin to be Uh huh.
The number would serve and any.
As far as internal growth, so how far into the eights I really don't know, but nevertheless.
And we'd be picking up and having a heck of a lot of basis points and growth if that PPE repeat and so it's a headwind.
And we're proud that we provided the product to our customers our customers really value did it open doors.
Excuse the pun, but it kept their doors opened in many cases.
And our and our and our net promoter scores reflect it so and they were they were very appreciative that we were able to provide those products and services if they need them again, we'll provide them and.
We just don't think that there'll be at the levels that they were in the past.
Thank you and then a quick follow up in the past, Mike I think you've provided the breakdown and the rentals business revenue and the fourth quarter by the various sub segments I wonder if you'd be willing to do that again this year.
Yeah, Gary it's Paul and we do.
Yes, Gary we have that information for you.
Excuse me and and I would preface it by saying.
Saying first of all.
And what we provided typically as you know Q for sample.
Q4 first.
'twenty 1 versus fiscal 'twenty, obviously, theres a lot of.
Noise and these figures.
Excuse me and that.
Yeah. It's it's an unprecedented time fiscal 'twenty fourth quarter was the onset of the pandemic. So a lot of job losses, and a lot of pandemic driven demand as Todd just said for certain items of PPE. So want to throw that out there first but last year's fourth quarter, So fiscal 'twenty Q4.
Before and rental was 50% of the of the segment mix.
Dust, which as you know the walk off match mops.
That was 18% of the mix hygiene products are there.
Those are the soaps air Fresheners Sanitizing dispenser.
Dispensers et cetera, that's 14% last year shop towels were for Lynn and 10, and the catalog business, which is more like the direct a small direct sales components of the rental business products off for the route from the drivers that was 4% so that and this year's mix.
Uniform rental, 48% dust, 17% hygiene, and 17% shop towels for linear and is 9 and catalog and 5.
So again obviously.
Covid impacted results not necessarily reflective of future performance.
But with the this this breakout you can obviously see how strongly hygiene performed.
Typically like and in the queue for fiscal 'twenty that was mostly restroom type items stopes and air Fresheners, the paper, but and this Q4 'twenty 1 that.
And that hygiene percentage grew greater driven by the sanitizer dispensers stands for sanitizing spray and et cetera, and then that catalog nudged up a little bit from 4% for 5% and that's where a lot of the P. P E and the uniform rental and for Sony services business and we've talked about it.
It is as recorded the masks gloves.
Gloves and those types of items.
Thank you.
Thank you and our next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.
Oh, Thanks very much for my first 1 I just wanted to follow up on the M&A comments earlier. It sounded like you have a very active pipeline that you're pursuing I'm. Just curious if you could elaborate a little bit on.
And what what areas, you may be pursuing and size and targets and and and how Reits things are and and then maybe what you're seeing with regard to multiples good or bad and the environment. Thanks.
Scott.
Oh for each of our businesses were acquisitive.
But tuck ins.
Certainly some geographic expansion as well.
So we're highly active and.
There's folks that are at least answering phones.
And and taking calls.
And we'll see where that goes.
And certainly and you wonder about the changes to our tax potential changes to the taxes will that free things up and it'll be interesting to see what happens with that.
As far as Hum.
The size and mulch.
Multiple those sorts of things.
Theirs.
Everything from the very small.
<unk> 2 medium sized types I won't comment on ALS, but it's they're all active and up and.
Part of it is because.
Yeah.
Multiples if you look at it historically and in the marketplace, there, they're pretty hot and.
But where we're quite active in that area because.
We look at it from a very long term approach and.
And we know when and when we make those types of acquisitions.
And that it positions us to grow those as well.
And so because of our broad offering of products and services that we bring to the table and in many cases.
The folks that were speaking to don't have the net broadness and allows for us to take a long term approach and grow those businesses, whether it's just in that area of the business or cross selling and across each of our enterprise.
Great. Thanks, I appreciate that and then my follow up for a bit of a 2 parter, but it ties together pretty well and Todd section and the and the press release, there was mention of investment and our continued investment in technology and competitive advantage just hoping you could elaborate on that and then the back part of the question is low Capex is down.
A lot in the past fiscal year, almost half of what it was and the fiscal year 19, and and down a good day from fiscal 'twenty, just curious where that goes this year and and and and and maybe any tie together with the tech question. Thanks.
First I'll start with the question and then Mike and handle the Capex if you prefer.
And Scott.
Investing heavily there because.
We see a need to from a whether it's productivity or from a competitive advantage.
All areas of our business, we've talked about leveraging SAP P.
Leveraging the platforms that come along with that that.
And have customer benefits and.
Our operational benefits for us and.
And then obviously the data that goes along with that.
But that being said.
We see some opportunities and automation that we've been investing and over the years, and we see them and opportunities to get efficiencies out of our fleet.
And that we're investing in and we think can pay big dividends and that area and so we're focused on and.
And doing such and making it easier to do business with <unk>.
So and we think as you do that.
That that for Michael average for us so leveraging the marketplace. So Michael I'll, let you handle the Capex question sure from a from a capex perspective clearly.
The amounts were down and in the this past year.
Because capacity needs just weren't the same as they had been in the previous years.
We certainly kept up the capex for maintenance activities, but as we know there is there is a bit of a lag between when we need new capacity and when this revenue starts to has started to come back and we've we've seen some momentum, but there will be a little bit of a lag and the capex, having said that.
And I expect we will get back to.
Historical levels.
By the end of the fiscal year that puts us probably and the $200.250 million range for.
For fiscal 'twenty, 2 but certainly when we invest we will certainly when we need to invest whether it's capacity technology or otherwise, we will certainly do that and the <unk>.
Great News is regarding our investments and the ERP system SAP and we've talked about a lot I mean, a lot of that and that spending and that debt.
And if somebody the major expenses behind us and.
And it took us a while to roll it out and get the entire network and that we hit the GK acquisition net add more locations and it.
And a slow down the time to complete it and then we had the pandemic.
And so the exciting thing is the.
The additional investment will continue to be made throughout the business of course still and technology, but a lot of it is already paid for and now its perfecting and you know.
And the system, taking you know.
Toy so to speak out of the box and not just using it for the Xs and OS and running the business but.
Using it to be that competitive advantage to give us the data analytics and the other advantages that we haven't had previously.
Okay. Thanks, so much.
Thank you and our final question today comes from Kevin Mcveigh with Credit Suisse. Please go ahead.
Hey, guys. This is actually Brian on for Kevin and thanks for squeezing and same here.
Thanks for the commentary kind of around the.
Color sort of on the reopening and you know you don't expect.
Not all customers aren't quite back yet so just drilling into that a little bit.
How should we think about you know sort of what percentage of clients are.
You know still inactive versus maybe you know kind of how that compares to.
And out of businesses or attrition that we would see just to just to kind of frame that in and.
And any any any sort of commentary around how that shakes out geographically either.
Geographically or by vertical here in the U S.
So Brian and I don't have a specific number for you, but just generally speaking I'd say most businesses are back to some degree not.
Not certainly back to.
Full bore.
We mentioned, Canada, specifically as an outlier, which we expect a let's just say by August September to be back a much closer to normal.
But 1 of the big issues is there are 7 million people less working today than there were a year ago or so.
And.
Of those 7 million people and I don't know what how many of them are cintas wears and will be but.
Theres a percentage up and.
We want those Dayton and I, certainly see those folks get back to work.
And <unk> and whether they're wearing uniforms or.
And utilizing our first aid.
Products and services all of that impacts.
Impacts us so oh.
For the most part businesses are back there certainly not anywhere near where we think they will be.
Overtime.
Got it Okay, and then last 1 here for us.
You guys talked about continuing to expand on ESG.
ESG reporting and.
And certainly what we've noticed is.
Yeah. She scores tend to focus on the internal operations, but we'd be curious if you could just touch on.
And maybe how you guys help customers achieve their ESG goals. Thanks.
Yeah, Brian Great question.
You know again at our heritage and what we do and when.
And frankly and so I'm.
And the rental business, what our industry does.
The impact and it has on saving customers water and.
Energy.
What we do to treat water instead of going down into the sewer because those products, whether they're garments or our towels or what have you all that they're gonna be either.
And purchased and front and the garbage or purchased and cleaned at home.
And in both cases, we are helping substantially those folks helping the environment.
And and helping to save.
And landfill space, helping to fill or excuse me save water energy and the cleanliness of water as well.
And I don't think we've told the story well enough in the past because and our heritage we are.
A wash and reuse business.
And and again without our industry.
And there would be millions of more gallons and.
Units of energy and et cetera that are able to utilize because they're going to be either thrown in a landfill or laundered somehow and we know that we are infinitely more.
Efficient at it.
Laundry and those products and they would be at home more and another type of setting.
You know I might I might add also that when you think about our first aid and safety and fire businesses.
And the purpose of those businesses are to keep our customers' employees safe and healthy and.
And so it's a little bit of a different ESG angle and then what Todd was talking about but but from an employee perspective, our goals are to help our customers really are.
Achieve the safety and the health of their employees.
So we're looking out for them from that from that perspective of the ESG as well.
Alright, and thank you and this concludes today's question and answer session. Mr. Adler at this time I'll turn the conference back to you for any additional or closing remarks.
Alright, Thanks, Nick and thank you all for joining US. This morning, we will issue our first quarter of fiscal 'twenty 2 financial results from September and we look forward to speaking with you again at that time and.
Good day.
And this concludes today's call. Thank you all for your participation you may now disconnect.
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