Q2 2022 Cintas Corp Earnings Call

Good day, everyone and welcome to the Cintas second quarter fiscal year 2022 earnings release Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. Paul Adler, Vice President and Treasurer and Investor Relations. Please go ahead Sir.

Thank you, Matt and thank you for joining US with me is Todd Schneider, President and Chief Executive Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer, who will discuss our fiscal 2022 second quarter results. After our commentary we will open the call to questions from analysts.

The private Securities Litigation Reform Act of 1995 provides a safe harbor from Civil litigation for forward looking statements.

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.

Refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission.

I'll now turn the call over to Tom.

Thank you Paul.

Our second quarter financial results were led by our strong revenue increase of nine 4%.

Financial results are indicative of our compelling value proposition that total addressable markets and the outstanding execution of our employee partners.

I think our partners for continuing to navigate these challenging times by focusing on our customers.

The benefits of our strong top line growth flowed through to our bottom line.

Excluding last year's $18 million pre tax gain on the sale of certain operating assets and the uniform rental and facility services segment and the related tax benefits second quarter operating income margin increased 70 basis points from last year.

And EPS grew 16, 5%.

These results are especially significant given that we they were achieved in a period in which U S inflation had a 39 year high.

Yeah.

Uniform rental and facility services operating segment revenue was $1.54 billion compared to $141 billion last year.

Organic revenue growth was eight 5%.

The labor market is challenging however, we are benefiting in the current environment.

Businesses are struggling with the scarcity of labor, which has left many understaffed.

Also businesses have a heightened awareness of safety and cleanliness.

And our concern with their ability to properly sanitized amidst.

Covid infections.

Businesses are increasingly outsourcing just send to us so they can focus on their core competencies and be ready for the workday.

It is noteworthy that the U S still hasn't recovered about $4 million pre pandemic jobs and the job openings total about $11 million.

Return of jobs represents future revenue growth opportunity for symptoms.

Our first aid and safety services operating segment revenue for the second quarter was $202 2 million compared to $194 $4 million last year organic.

Organic revenue growth was three 2%.

Second quarter revenue was up against a difficult comparison.

Last year's second quarter in response to the COVID-19 pandemic sales of personal protective equipment or PPE were very high and the business grew organic revenue 14, 5%.

At that time PPE comprised an outsized percentage of first aid and safety services revenue mix.

The amount of PPE has declined year over year as expected. However, COVID-19 infections are still prevalent and PPE remains a larger percentage of the revenue mix than it was pre COVID-19.

Over the same period of time to recurring first aid Cabinet service business revenue has increased in fact, it is up 20% from last year.

We welcome this shift in mix, because first aid cabinet service business.

More consistent revenue stream and has higher profit margins than P. B.

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

All other revenue was $184 $9 million compared to $152 $1 million last year.

The fire business organic revenue growth rate was 16, 9%.

And the uniform direct sale business organic growth rate was 47, 3%.

Both businesses benefited in part from an improved economic environment.

Regarding our balance sheet and cash flow our financial position remains strong.

Second quarter operating cash flow increased 27% from last year.

Free cash flow improved 16%.

Recently on December 15th we paid shareholders $98 $5 million in quarterly dividends.

The amount per share of common stock paid of 95.

It presents a 26, 7% increase over the company's previous quarterly dividend.

We continue to allocate capital to improve shareholder return.

Before turning the call over to Mike I want to highlight that we recently issued our 2021 environmental social and governance report.

Since <unk> was founded on a sustainable business model.

We are committed to protecting the environment enhancing humanity and maintaining accountability.

The report our second consecutive provides expanded information and data, including a reduction in energy usage water consumption.

<unk>, one and scope two emissions.

Our USG report further further illustrates that our corporate culture based on doing what is right and challenging ourselves to improve as a competitive advantage.

I'll now turn the call over to Mike.

Thank you Todd and good morning, our fiscal 2022 second quarter revenue was $1.92 billion compared to $1 $76 billion last year.

The organic revenue growth rate adjusted for acquisitions divestitures, and foreign currency exchange rate fluctuations was nine 3%.

Gross margin for the second quarter of fiscal 'twenty, two was $885 $1 million compared to $819 $9 million last year.

Gross margin as a percent of revenue was 46% for the second quarter of fiscal 'twenty, two compared to 46, 7% last year.

Gross margin percentage by business was 46, 8% for uniform rental and facility services 43, 5% for first aid and safety services 44, 6% for fire protection services and 39, 1% for uniform direct sale.

Energy related expenses were a headwind increasing 40 basis points from last year.

Also we made investments in labor to support our strong current and anticipated revenue growth.

Selling and administrative expenses improved as a percentage of revenue to 26, 2% in the second quarter compared to 26, 6% last year.

Operating income of $381 $2 million compared to $352 $9 million last year.

Operating income margin was 19, 8% compared to 21% reported last year, excluding last year's second quarter $18 million gain on sale of certain assets, which were recorded in selling and administrative expenses. This year's second quarter operating income grew 13, 8%.

And operating income margin increased 70 basis points.

Our effective tax rate for the second quarter was 18% compared to 13, 3% last year.

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

In addition, last year's second quarter tax rate included a 370 basis point benefit from the sale of certain assets.

Net income for the second quarter was $294 7 million compared to $284 $9 million last year.

Diluted EPS was $2 76, compared to $2 62 last year, excluding last year's second quarter gain and the related tax benefits, which impacted diluted EPS by <unk> 25.

This year's second quarter diluted EPS of $2 76 compares to $2 37, an increase of 16, 5%.

We are increasing our fiscal 'twenty two financial guidance, we are raising our annual revenue expectations from a range of $758 billion to $7 6 billion.

To a range of 763 billion to $7 seven zero billion.

Diluted EPS from a range of $10 60.

To $10 90.

To a range of $10 70 to $10 95.

Please note the following regarding our guidance.

Fiscal 'twenty two effective tax rate is expected to be approximately 19% compared to a rate of 13, 7% for fiscal 'twenty one.

The higher effective tax rate negatively impacts fiscal 'twenty, two diluted EPS guidance by about 72 cents.

Diluted EPS growth by about 700 basis points.

Guidance does not include any future share buybacks and guidance assumes an uneven economic recovery caused by COVID-19, However, our guidance does not contemplate significant COVID-19 pandemic related setbacks, such as stay at home orders or costs necessary to comply with government COVID-19 mandates.

Finally, when modeling our fiscal 'twenty two financial results by quarter. Please note that in last fiscal year's third quarter, we were able to help our customers respond to a spike in COVID-19 cases by providing them with a very large supplies of personal protective equipment clubs in particular.

We provided more personal protective equipment in that quarter than in any other.

Excluding the PPE that we don't expect to repeat our second half of the year revenue growth guidance is over 9% at the top end of our range.

That concludes our prepared remarks now we are happy to answer questions from analysts. Please ask just one question and a single follow up as needed. Thank you.

And if you'd like to ask a question. Please take my pressing star one on your telephone keypad. If you are using a speakerphone. Please thanks Jamie.

Your line is open.

Matt.

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

Thank you I was just hoping.

Thank you very much I was hoping you could just address kind of your.

In the near term.

Visibility in terms of reactions from your customers with either the spread for micron in it if you'd seen any change in behaviors or are people just kind of chugging along here.

Hey, Manav. This is Todd thanks for your question good morning.

At this point are we haven't seen a change in our in our customer base as a result of omicron.

Little early to tell certainly.

But but nevertheless, it's.

I'd say, it's business as usual at this point with our customers and.

We're looking forward to the back half of the year.

Got it and then maybe just as a followup just tied to the other pressures out there which is inflation. It sounds like you guys are handling that well you referred to investments in the knee before is can you just address what that is and broadly how you feel about managing people basically pressure going forward as well.

Yes, great question.

Inflation is certainly real but I think we're managing it quite well.

We do have a world class supply chain organization that is a real competitive advantage in these cases.

And Fortunately, we've been addressing wages over the past couple of years as we but we've spoken about in past calls.

So we weren't caught flat footed as it relates to wages.

And.

Certainly our wage increases are still a little above historical but were more investing in the infrastructure.

To be able to service our customers.

So that base.

Based upon our current growth and our anticipated growth, which is we're very excited about.

Alright, thank you.

Thank you.

Okay. We'll go ahead and take our next question from Andrew Steinman with J P. Morgan.

Hi, it's Andrew if I'm, if I try to back into the second half operating margins in the full year guide I get to 19, 1%, which is up modestly year over year.

And I just wanted to make sure that you do the math the same way as may or maybe you could you kind of go through some of those kind of puts and takes on the second half operating margins.

Good morning, Andrew.

Or are we would say our implied operating margin guidance for the second half of the year is a little bit higher than what you stated at 19, 1%.

1%, we think of it closer to the 19 and a half.

And look.

We still expect some very nice operating margin growth.

For the year, even in the back half of the year and even in an environment, which is pretty challenging us as I'm sure you're aware in terms of of.

The inflationary pressures, but.

As Todd mentioned, we're managing that inflation, we we like the margin improvement and our expectation is we're going to see better than the 19, one that you referred to.

Alright, and then the 19 five is for the total company and I I assume and I just wanted to maybe make a comment on on.

Increases on the customer side, the BTB increases because you.

We're out of hiatus now you've.

Kind of in process of increasing prices to customers.

How is that gone.

Are they understanding of the inflationary environment.

I'll take that one Mike.

Thanks for the question, Andrew certainly on the pricing.

One of the things that's important to understand is that we don't simply send out a letter increasing prices to all 1 million customers at all at the same time.

We address the issue throughout the year. So so youll consider continue to see that.

And also as we signed in the past pricing is it's a local subject.

<unk> industries are still struggling some are doing quite well.

Geography are still not back to pre Covid and others are nicely ahead of the curve.

No.

<unk>.

Inflation is it seems like it's on every headline and every time you turn on the news.

And as a result, I would say the conversations with our customers are generally going well and our results are a little bit better than historical in that area as well.

But as you know we take a long term approach and we focus on the lifetime value of our customers.

Which frankly is reflected in our NPS scores being at all time highs.

Now all that being said in the face of inflation being a 39 year high.

We're growing our operating income, Inc, and incremental margins at very attractive rates and we're excited about that.

Alright, and then just to COVID-19, five with total company right.

Yeah.

Yes that was total company against last year of just under 19% so.

Ken.

What we think to be pretty healthy margin improvement and let's keep in mind.

Last year's margins were record margins and 310 basis points higher than pre pandemic levels. So so.

So we like we like where we're headed with this with the margins.

In the back half of the year.

Well said, thank you very much.

And we'll go ahead and take our next question from Hamzah <unk> Macquarie with Jefferies.

Hi, This is Mario <unk> filling in for Hamzah.

My first question around around Labor, maybe you can just update us just not on the labor inflation portion, but also on the labor availability.

In your business and kind of how you're managing through that and then also maybe you could tie that through.

What your pricing strategy looks like regarding that especially since you guys really haven't taken any price in the past two years I believe it was.

Yes, Mario this is Todd.

As far as labor availability.

We're competing quite well out there, we pay very competitive wage and a very attractive benefits.

And we think we are.

An employer of choice and Thats, reflecting in our staffing levels, which we like.

It's certainly more challenging this.

This year than in the past in general, but but we're competing quite well and we like that.

As far as.

How we look at the pricing again, I'd say youll see it throughout the year and it is something that.

We look at customer by customer.

And because as I mentioned, it's a local local subject and we do look at the long term value of the customers.

But we have.

We're doing better than historical and the reason being is because.

There's a little bit of wind in your sales as far as customers are highly aware of what's going on with.

Inflation in general and and wage pressures as well, so but as a result.

We think we're in a good spot I'm very thankful that we have been addressing wages wage.

Increases over the past few years, because it prevented us from being flat footed coming in and being under real pressure.

Okay.

Great. Thank you and then just for my follow up.

Could you just comment on the fire business and your strategy for.

For getting into some of the top fire markets that you're not currently in and do you intend to play in any other adjacencies within the fire business.

Such as Wawa, API group or other larger players have done in that space.

Yes, Mario as far as the fire business.

We're continuing to build out our footprint.

We have found that we very much like our model that we're providing.

The service levels to customers.

And it's showing up very nicely and new business wins and retention and youre seeing it in the growth as.

As far as <unk>.

Jason sees we're always evaluating those but we think there's incredible run rate in that business.

With the.

Type of strategy, we have today without even going into an adjacency, but we're certainly always evaluating us.

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

Thank you you too.

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

Hi, Thanks, Good morning, your gross margins contracted 80 bps year over year in the uniform rentals segment can you elaborate a bit on margin performance, there and what your guidance implies for uniforms segment gross margins.

Certainly George this is Todd I'll start and then Mike can chime in.

Gross margin in <unk>.

In.

In general was up 40 basis points due to just energy alone.

So that's obviously a headwind I think cap gas stand alone is up 60% year over year. So.

But as far as.

The balance of that the 70 basis points.

We're making investments within the additional employee partners that we need to service the very nice growth that we're seeing along with the growth that we see coming.

The revenue now George is different a little different from last year.

It's much closer to our revenue our traditional revenue mix and.

And let me just give you. An example, because I think it will maybe help you understand that a little bit better.

With PPE last year.

There was.

Significant demand for that and we're happy to help our customers with it.

But in those cases.

And many of the other.

Cases with that they were simply a drop ship to those customers.

And when you drop ship those large quantities it doesn't take a whole lot of work right. That's just a drop ship and then you are able to book the revenue et cetera.

Do you think of that versus the level of employee partners that is required to service uniforms facility services first aid and safety cabinets.

It simply takes more work right. However.

However, we welcome this.

This shift as it provides more value to the customers than simply a drop ship.

Stickier business and long term and they have better margin. So we like it we like that switch and we knew.

That that was coming and we've been staffing for it.

And guiding for it all of that said.

As we know inflation is at a 39 30.

<unk> 39 year high.

As I mentioned energy is up 40 basis points, our investment and growth for the today in the future.

If you exclude the one time gain of our operating our one time gain from last year, our operating margins were up 70 basis points.

Incremental margins are quite.

Strong so.

So we're doing exactly what we had hoped and planned for I guess it would be the way I would describe it.

Got it that's helpful.

Healthcare and hygiene businesses have seen a boost in demand with Covid can you talk about trends in the broader opportunity youre seeing in health care and hygiene.

Certainly.

Healthcare.

They're connected right, but about.

But healthcare is a vertical hygiene is.

Subject to crosses all businesses so as.

As far as the health care vertical which continue to see strong demand.

Like what we're providing with.

With scrubbed.

Items to help customers clean patient rooms, and other rooms.

In addition to isolation gowns, so all of that as we continue to be very bullish about.

About the health care vertical as far as hygiene and I'll lump hygiene with.

Standardization cleanliness.

All of that health health and safety all of that is.

We believe has been a sea change and something that is going to be.

Wind at our sails.

Maybe forever right because of you see the focus that people have on sanitizing hygiene health safety and we think we can see that in and certainly our uniform rental and facility services segment, but also our first aid business.

People are very focused on the health.

Safety and wellness of their of their people and their customers of their patients and other guests and as a result, that's that's good for us.

Got it very helpful. Thank you.

Thank you.

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

Yeah.

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

Yes Ashish.

The pipeline is.

It looks quite strong for all of those verticals.

We feel good.

Our sales organization is operating at a very high level, and we really like our new business wins in that area.

Tension is.

Very attractive.

You look at all that you say are new business wins are are very strong our retention is very strong and.

We are excited for our customers too.

To get back to full strength as well and we think that that bodes well for the future for us.

That's very helpful color and maybe just talking about technology on the last call you had talked about the benefits of the SAP implementation and more to come I was wondering if you could talk about what youre doing on the technology front on the automation front like some preview on what we could see over the next few next year and how should.

That help offset some of the <unk>.

Inflationary pressure.

Yeah, Great Great question. So obviously, you're investing in technology is one of our top priorities because we see the opportunity.

To improve efficiencies in our business operational efficiencies, but also provide items that the customers notice.

And recognize and and make it easier to do business with us those are things that that we're trying to leverage.

I think a good example of technology that we're leveraging is.

By leveraging SAP and partnering with them.

Our communications company, we have launched what we call smart tech or <unk> Smart truck technology.

Which collects and analyzes data to create a much more efficient routing structure.

So what this allows us to do is to spend more time with the customers instead of and reduced fuel expense instead of.

Driving in between stops and as we say, we only make money in this business when the wheel stop when the wheels are moving.

Just expense so we see that as an opportunity to leverage technology to.

Improve operational efficiencies.

As another example, we have launched a portal for our customers.

It allows them to do business with us.

Online.

Which is a competitive advantage in the marketplace, what we're seeing is.

Contrary to two years ago people don't always wanted to do business.

During normal business hours, what theyre interested in us doing business on their time and what we're seeing is the request that we see from our customers is well over half of the requests are outside of normal business hours.

It is making it easier to do business with us.

To allow them to.

To make request.

Changes to their program.

We allow them to pay their bills online all of these are items that the customers see as.

An advantage in the marketplace being easier to do business with.

And we get really excited when our customers see a technology advantage and and find us easier to do business with.

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

<unk>.

We'll go ahead and take our next question from Andy Wittmann with Baird.

Okay, great. Thanks for taking my question.

I just wanted to get a little subjective comments.

New guidance this quarter versus the guidance you gave last quarter Mike.

It kind of looks like.

The biggest change in the EPS side is just a little bit lower tax rate.

The on the revenue side the quarter beat consensus.

Guide quarterly but.

It kind of feels like the fundamental outlook for the revenue and core operating margin performance of the business isn't materially changed is that the right way of looking at it or did you see a change in the business fundamentals that you're factoring into the guidance the updated guidance today.

Andy I think Thats, a fair assessment from their perspective.

Not a lot of change from what we what we had been talking about in the last quarter and that is.

Growth continuing.

Continuing to be pretty strong in the second half of the year.

Ex that PPE.

Number that we've talked about in the third quarter and a little bit in the fourth quarter, our growth will well.

Would be in excess of 9%.

And roughly the same margins, we've been talking about for much of the year in that as well.

We certainly expect margin growth.

And continue to expect margin growth, if we did hit $19 five that I talked about.

Earlier, Thats, roughly a 60 basis point improvement in the back half of the year, that's coming on top of.

I'll call it gain adjusted 50 basis point improvement in the first half of the year and you might remember we talked that the early part of the year at a kind of a zero to 70 basis point improvement.

And the performance through midway midway through the year is showing that we're right at the top of that.

Initial guide and sort of the movement is a little bit of taxes may be a little bit of margin improvement, but generally speaking your assessment is fair, Andy pretty nice growth and healthy.

A healthy margin improvement on on.

On record margins from a year ago.

Okay. Thanks for going through that Mike I guess I guess my my follow up question and then just.

You just talked now previously in the call you talked about.

These margins and I think they speak for themselves but.

And you talked about price being a little bit above average, but are there any other things that are driving the margin performance. Besides just price and then the operating leverage from the business are there actions or other investments that youre, making there helping this margin performance or is this kind of just the natural progression of price cost as well as fix.

Cost leverage.

Yes, Andy This is Todd good question I think it is.

It's the normal operation of the business, we're always investing in various items that help our operational efficiencies.

And I mentioned in the smart technology that we think is going to be exciting for us.

But I think it's just a general leverage that we're getting.

In the face of what is a <unk>.

Still a very challenging operating environment, and we're as Mike said coming off of a record three.

310 basis point.

Improvement in margin.

We're excited about that we're going to continue to take another step forward this year.

Okay Andrea.

I might throw it into a couple different buckets.

As well as in little bit of reiterating what Todd and I have already talked about that.

Local our growth is.

At pretty good levels and when we grow at that at those pretty good levels, we get some really nice leverage in the business and we're seeing that leverage is a benefit.

Productivity improvements.

From from our laundry facilities to our service and the routes that.

The route improvements that Tom just talked about to sales rep productivity productivity is strong and continues to improve as we look at process improvement and innovation in automation and so.

Productivity is.

Is very strong.

Efficiencies, we look we made some pretty difficult cost cuts last year, some changes to our cost structure and.

We'd rather not give up many of those and so while we while we will start to see.

We have started to see a little bit of travel for example come in.

Look we're still managing the cost structure very tightly.

And maybe then the last bucket I'll throw out there is.

We've talked.

Quite a bit about resuming pricing and pricing is helping a little bit.

This year and so.

Margin improvement I think we can we can throw it in those four buckets.

And.

And it's.

<unk>.

I would say is it certainly is leading to some pretty good performance even in the face of 40 basis point increases in energy and other certain.

Canary factors.

Yeah, great. Thanks for the comprehensive answer guys happy holidays.

You too Andy.

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

Yeah.

Hey, this is Sam customer I'm filling in for Tim Thanks for taking our questions here.

I wanted to hit on margins real quick again in the uniform rental segment operating margin was down year over year, but still very strong relative to historical standards.

That kind of how we should think about this segment's margin structure from a long term perspective may be down year over year because of higher cost inflation, but capable of maintaining 2021 margins in a more normalized environment.

Well a couple a couple of points that I might make first of all.

We've talked a little bit about the gain on the sale of assets from a year ago and so if you take that that was all recorded in SG&A within rental if you take out the impact of that gain.

Last year's second quarter was 21, 1% compared to our 22%. This year, so a 90 basis point improvement.

So some pretty healthy healthy yeah.

Year over year improvement.

Look we've been in the rental business.

Above 20%.

For the last six quarters and.

And our expectation is.

We're going to see a little bit because this is such a challenging environment, we're going to see some some ups and downs periodically but generally speaking.

Look we like where the business is running in the rental segment and our expectation is we will stay above that 20%.

Number.

Excellent. Thanks for clarification, there maybe switching gears back to the P. P. Arun Thank you.

<unk> pte headwind of about 1% in fiscal 2022.

Sounds like maybe that expectation could be changing a bit can you just update us on what you think the P. P headwind will be for fiscal 2022 here.

Well.

I think if you take a look at our guidance for example for the back half of the year.

I believe the at the high end of revenue growth.

Seven 4% over last year. So if you think about the comment we made of growth being 9%, we're talking about 160 basis points in the back half of the year. So you can think about 80 basis points for the full year. So I would say we are.

Not far from where we talked about early on in the year, but certainly it's back end loaded a little bit more.

Gotcha. Thanks.

Thanks.

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

Thank you.

Wanted to ask an ESG related question.

The size of your fleet and shift to electric vehicles seems like it'll be pretty meaningful.

I know in your ESG report you indicated that by January do you expect to deploy 12 electric vehicles and so just curious if this program.

Graham has been initiated and if you could talk about how we should think about the potential of rolling out this the.

The entire fleet.

Yes, Toni this is Todd Thank you for the question.

So yes, we're excited about about electrifying the fleet.

We are right on schedule as far as what we plan for a for testing.

We have a diverse fleet because of the various types of trucks, we have the rental trucks.

The first eight trucks in the in the fire trucks as well.

We're working with.

Some very large manufacturers at very high levels and.

We're.

Excited about the future as it relates to that.

We think that that is something thats important to our core.

Customers and it's important to our partners and our employee partners and and we think it will be very important to shareholders as well. So we believe that getting out ahead of this curve is important to us and we're committed to doing so.

And dealing with all the challenges that are associated with that with.

The weight of the vehicles that we operate.

The size of our fleet.

And also getting access to.

The supply, which is why we're working with.

Diverse group and at high levels. So that way we are in a good position as a organization.

That's helpful and one question I've been getting recently is around the ability for you to do large scale M&A.

And some skepticism around that do you think that's valid or because of the fragmented market. There's still potential for you to be able to do a large deal and I'd also say it maybe seems a little harder for deals to get done right now or at least longer to get approved so just wanted to hear you.

Your thoughts around large scale M&A.

Yes, Tony So just as a reminder, M&A as our.

Our second priority.

Capital use right behind investing in our business and we're excited about M&A volte.

All shapes and sizes.

Sure.

We're blessed to have a market.

That is massive in size, meaning.

If you think about.

How many people are wearing garments wearing uniforms out in the marketplace. It is a significant market.

And that's representative of.

Our new business wins that we have so.

Two thirds of our new accounts that we bring in are all people that are customers that are what we call no programmers some people in different industry come uninvented.

Nevertheless, when we walk in they don't have a uniform program and when they walk out we do so a little bit more complicated than that but but thats. The net net that being said.

That's simply the uniform market or other markets are just vast.

Vast addressable market.

Whether it's facility services and all the headwind or excuse me all the tail winds that are behind that business from a health safety sanitation hygiene same way with the first aid business.

And then the fire business, we see it as obviously a massive market just simply because everybody is required by law to have those products and services. So yeah I think we're in a.

Incredibly good position in all of those because of the market size that leads us to.

Think.

We're interested in M&A and all of our businesses.

And are.

We are excited about the potential of <unk>.

M&A.

Small medium and large because we think the market is such that it is absolutely appropriate.

Very helpful Happy holidays. Thank you.

Thank you.

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

Thanks, very much good morning.

I'm curious.

This is a question of your average customer in first aid.

Pre pandemic, what would what would their cabinet look like how much has it changed of the items or the contents inside to what it looks like now.

The level of detail you can speak to that and then how has the.

Pricing and margin profile changed of that cabinet I assume better but anything you can share on that.

And then I'll just have a quick follow up after that thanks.

Okay, Scott this Todd.

Far as our cabinet.

Were constantly bringing out new products for our first aid cabinets.

And that is an important component of that business.

Offer other services in that business, whether it be.

Aedes training and compliance as well as.

I wash stations, which are required.

By Osha to be serviced appropriately. So all of that is we're seeing a return back to our focus on that with our customers which is.

Which is exciting to us.

As far as the cabinet itself. Besides the new products that we've launched it's pretty well a traditional.

Type of situations now.

What is changing is.

The focus on health and safety of employees cut.

Customers.

Guests patients those types of things and.

And as a result, we think thats good for the first aid business.

Does it end.

As we've spoken about the first aid.

Cabinet business is more predictable is more.

Provides more value to the customer than a drop ship type of PPE and is more profitable. So I think as you see.

That trend of the health and.

And safety are continuing and as more people are back to work and that's going to be very positive for that business.

I might add a couple a couple of things just reminding reminding as Scott that.

I think Todd mentioned that first aid cabinet business is up 20% year over year in our second quarter. So we really do like the momentum of it.

But we are not quite back to the mix.

Pre pandemic, but we certainly like the.

The.

The movement towards that mix and we.

When we think about the gross margin in this business.

The material cost really has.

Proved.

What youre seeing in this particular quarter is that we are.

We're spending a little bit of that improvement on some of the labor investments that Todd talked about in terms of.

<unk>.

Building the service capacity both for the current growth that we've had but also for anticipated.

Second half of the year growth so.

Really nice performance by our by our first aid and safety partners.

The performance is as.

Is improving just like we expected it to.

Just like we wanted to.

Great. Thanks, I appreciate all that color and the follow up is on the same subject.

You guys are running below.

What were pre pandemic peak.

First aid and safety margins is that do you think within a matter of a year or two you can get back to that prior level.

And why or why not thank you.

Yes, Scott this is Tom.

So we're very focused on that we think that revenue mix will be very.

Very positive for us and.

And we also look at the as I mentioned, the the wind behind our sails on the focus on health and wellness.

Folks out in the marketplace is going to be positive so.

As we continue to focus on that area net revenue mix.

<unk> balances.

Youre going to see a nice trend towards.

More traditional type margins in that business.

Great appreciate it guys happy holidays.

Thank you Scott Youtube.

And we will take our next question from Shlomo Rosenbaum of Stifel.

Hi, Good morning. Thank you for taking my questions, Hey, Todd I wanted to ask you a little bit on the competitive environment.

Aramark has been trying.

To execute a turnaround for the last couple of years and once you build.

Does that make a difference to you guys in the market at all have you seen a change in terms of competitiveness or terms that you guys have to be more competitive, whereas the market so fragmented that <unk>.

Like that wouldn't necessarily filter back to you guys.

Thanks for the question.

It's a good question.

The operating environment, we're in it's always competitive.

Nothing noteworthy, though I would say in the change.

Our revenue retention rates are very strong.

And as I mentioned, our new business wins.

Our very strong as well and theyre coming from no programmers.

Much more so than than the competition and I just think it speaks to the the vast market out there.

That that we're focused on providing that value to the customers when we walk in and I'll just skip uniforms. As an example, when we walk in one of the top areas on top of things, we hear back from customers as well I didn't know you could do all that for what you do it for.

So there.

So one of the other items that we hear is we didn't know that you would be able to service.

Customer of our size he might have 10 wearers.

And that is something that.

I can average sized customer for us, but the perception is all you have to have a 100 people 1000 people.

We're attacking that market.

We see that the customer sees value in what we provide.

And there are also there's a little certainly wind behind our sails on.

It's tough to attract talent right now so being able to provide.

A service like this.

And that's attractive to people and you think about how many people are working out in the marketplace and.

And the fact that we can provide that service to.

Tens of millions of more wearers.

Very exciting for the future.

So as a result of how we focus on it it really.

Those competitive pressures were more focused on retaining our customers and we're more focused on <unk>.

We're growing the market and because it's just so massive.

Okay, Great and then.

This is one for Mike just put it in the other segments I know there is definitely volatility quarter over quarter in terms of the margins I was just comparing the operating margin.

This quarter versus the last couple of quarters is there something besides sequentially, obviously, its a lower revenue, which make a difference in the margin going back a couple of quarters could you just give us some of the puts and takes of what whats impacting the operating margin.

Shlomo when you when you look at Q2 compared to Q1 keep in mind that we we referred in the first quarter call to a gain on sale of some assets so in that in.

In the first quarter, there was a $12 $1 million gain.

So we had we had a little bit of an anomaly in that in that particular quarter.

I would say this the fire business has been performing very very nicely and.

We've seen.

Organic growth this quarter of 16, 9% and remains healthy and some of the things that Todd and I have talked about.

With the first aid business is going on in the fire business in that.

We are certainly seeing some great growth.

And we're investing for for both current for that current growth, but also for anticipated growth. So we're seeing a little bit of the investment there and then as you.

Shlomo the uniform direct sale business, Ken can be quite bumpy and so there is going to be more volatility from quarter to quarter.

In this business.

But I would say this as well a 11, 7% for the all other segment is still pretty a pretty good quarter on a 65 day workday quarter relative to pre pandemic. So.

Again, just like the other businesses, we like the momentum in these businesses and we like the performance.

Did you say that that extra day versus say for Q2 'twenty one is a bigger impact just.

Trying to get a little bit more detailed completely appreciate the volatility in the uniform direct business.

Okay.

The direct.

I would say that the day is more of an impact of the fire business.

And it is the uniform direct sale the uniform direct sale tends to be bumpy based on on.

It could be a rollout of a new program. It's just timing of the sales within those current customer programs.

That's the biggest volatility item.

Within the uniform direct sale.

Alright, thank you.

Alright.

Questions at this time, Mr. Arthur I'd like to turn the conference back to you for any additional or closing remarks.

Okay, well. Thank you for joining us. This morning, everyone. We will issue our third quarter of fiscal 'twenty two financial results in March we look forward to speaking with you again at that time have a good day.

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

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Good day, everyone and welcome to the Suntrust second quarter fiscal year 2000, <unk> earnings release Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Paul Adler, Vice President and Treasurer Investor Relations. Please go ahead Sir.

Thank you.

Thank you for joining US with me is Todd Schneider, President and Chief Executive Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer, who will discuss our fiscal 2022 second quarter results. After our commentary we will open the call to questions from analysts.

The private Securities Litigation Reform Act of 1095 provides a safe harbor from Civil litigation for forward looking statements. This conference call contains forward looking statements that reflect the company's current views as to future events and financial performance. These forward looking statements are subject to risks and uncertainties, which.

Could cause actual results to differ materially from those we may discuss I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission.

I'll now turn the call over to Tom.

Thank you Paul.

Our second quarter financial results were led by our strong revenue increase of nine 4% or.

Our financial results are indicative of our compelling value proposition vast total addressable markets and the outstanding execution of our employee partners.

Thank our partners for continuing to navigate these challenging times by focusing on our customers.

The benefits of our strong topline growth flowed through to our bottom line.

Excluding last year's $18 million pre tax gain on the sale of certain operating assets in uniform rental and facility services segment and the related tax benefits second quarter operating income margin increased 70 basis points from last year.

And EPS grew 16, 5%.

These results are especially significant given that they were achieved in a period in which U S inflation had a 39 year high.

Uniform rental and facility services operating segment revenue was 154 billion.

Compared to $141 billion last year.

Organic revenue growth was eight 5%.

The labor market is challenging.

However, we are benefiting in the current environment.

Businesses are struggling with the scarcity of labor, which has left many understaffed.

Also businesses have a heightened awareness of safety and cleanliness.

And our concern with their ability to properly sanitized amidst persistent COVID-19 infections.

Businesses are increasingly outsourcing to cintas. So they can focus on their core competencies and be ready for the workday.

And it is noteworthy that the U S still hasnt recovered about $4 million pre pandemic jobs and the job openings total about $11 million.

Return of jobs represents future revenue growth opportunity for Cintas.

Our first aid and safety services operating segment revenue for the second quarter was $202 $2 million.

Compared to $194 4 million last year.

Organic revenue growth was three 2%.

Second quarter revenue was up against a difficult comparison.

Last year's second quarter in response to the COVID-19 pandemic sales of personal protective equipment or PPE were very high and the business grew organic revenue 14, 5%.

At that time PPE comprises an outsized percentage of first aid and safety services revenue mix.

The amount of PPE has declined year over year as expected. However, COVID-19 infections are still prevalent and PPE remains a larger percentage of the revenue mix than it was pre COVID-19.

Over the same period of time to recurring first aid cabinets service business revenue has increased in fact, it is up 20% from last year.

We welcome this shift in mix because first aid cabinets service business is a more consistent revenue stream and has higher profit margins than PPE.

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

All other revenue was $184 9 million compared.

Compared to $152 1 million last year.

The fire business organic revenue growth rate was 16, 9%.

In the uniform direct sale business organic growth rate was 47, 3%.

Both businesses benefited in part from an improved economic environment.

Regarding our balance sheet and cash flow our financial position remains strong.

Second quarter operating cash flow increased 27% from last year.

Free cash flow improved 16%.

Recently on December 15th we paid shareholders $98 $5 million in quarterly dividends.

The amount per share of common stock paid of 95.

<unk> represents a 26, 7% increase over the company's previous quarterly dividend.

We continue to allocate capital to improve shareholder return.

Now before turning the call over to Mike I want to highlight that we recently issued our 2021 environmental social and governance report.

Since <unk> was founded on a sustainable business model.

We are committed to protecting the environment enhancing humanity and maintaining accountability.

The report our second consecutive provides expanded information and data, including a reduction in energy usage water consumption and scope, one and scope two emissions.

First report further further illustrates that our corporate culture based on doing what is right and challenging ourselves to improve as a competitive advantage.

I'll now turn the call over to Mike.

Thank you Todd and good morning, our fiscal 2022 second quarter revenue was $1 nine $2 billion compared to $1 $76 billion last year.

The organic revenue growth rate adjusted for acquisitions divestitures, and foreign currency exchange rate fluctuations was nine 3%.

Gross margin for the second quarter of fiscal 'twenty, two was $885 1 million.

Compared to $819 $9 million last year.

Gross margin as a percent of revenue was 46% for the second quarter of fiscal 'twenty, two compared to 46, 7% last year.

Gross margin percentage by business was 46, 8% for uniform rental and facility services 43, 5% for first aid and safety services 44, 6% for fire protection services and 39, 1% for uniform direct sale.

Energy related expenses were a headwind increasing 40 basis points from last year.

Also we made investments in labor to support our strong current and anticipated revenue growth.

Selling and administrative expenses improved as a percentage of revenue to 26, 2% in the second quarter compared to 26, 6% last year.

Operating income of $381 2 million compared to $352 $9 million last year.

Operating income margin was 19, 8% compared to 21% reported last year, excluding last year's second quarter $18 million gain on sale of certain assets, which were recorded in selling and administrative expenses. This year's.

Second quarter operating income grew 13, 8% and operating income margin increased 70 basis points.

Our effective tax rate for the second quarter was 18% compared to 13, 3% last year.

<unk> rate can move from period to period based on discrete events, including the amount of stock compensation expense in.

In addition, last year's second quarter tax rate included a 370 basis point benefit from the sale of certain assets.

Net income for the second quarter was $294 7 million.

Compared to $284 $9 million last year.

Diluted EPS was $2 76.

Compared to $2 62 last year, excluding last year's second quarter gain and the related tax benefits, which impacted diluted EPS by <unk> 25.

This year's second quarter diluted EPS of $2 76 compares to $2 37, an increase of 16, 5%.

We are increasing our fiscal 'twenty two financial guidance, we are raising our annual revenue expectations from a range of $758 billion to $7 $6 billion to a range of 763 billion.

770 1 billion.

And diluted EPS from a range of $10 60.

To $10 90.

To a range of $10 70 to $10 95.

Please note the following regarding our guidance.

Fiscal 'twenty two effective tax rate is expected to be approximately 19% compared to a rate of 13, 7% for fiscal 'twenty one.

Effective tax rate negatively impacts fiscal 'twenty, two diluted EPS guidance by about 72, and diluted EPS growth by about 700 basis points.

Guidance does not include any future share buybacks and guidance assumes an uneven economic recovery caused by COVID-19, However, our guidance does not contemplate significant COVID-19 pandemic related setbacks, such as stay at home orders were cost necessary to comply with government COVID-19 mandates.

Finally, when modeling our fiscal 'twenty two financial results by quarter. Please note that in last fiscal year's third quarter, we were able to help our customers respond to a spike in COVID-19 cases by providing them with very large supplies of personal protective equipment clubs in particular.

We provided more personal protective equipment in that quarter than in any other.

Excluding the PPE that we don't expect to repeat our second half of the year revenue growth guidance is over 9% at the top end of our range.

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

And if you'd like to ask a question. Please taking my pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure to be turned off two layers increase our equipment.

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

Thank you. Please go ahead I was just hoping.

Thank you very much I was hoping you could just address kind of your.

In a minute.

His ability more in terms of reactions from your customers in the the spread for micron and if you've seen any change in behavior or people just kind of chugging along here.

Hey, Manav. This is Todd Thanks for your question and good morning.

At this point are we haven't seen a change in our in our.

<unk> base as a result of omicron.

Little early to tell certainly.

But but nevertheless, it's.

I'd say, it's business as usual at this point with our customers and.

We're looking forward to the back half of the year.

Got it and then maybe just as a followup just tied to the other questions out there, which is inflation. It sounds like you guys are handling that well, you're referring to investments and the need before can you just address what that is and broadly how you feel about managing because basically pressure going forward as well.

Yes, great question.

Inflation is certainly real but I think we're managing it quite well.

We do have a world class supply chain organization that is a real competitive advantage in these cases.

And Fortunately, we've been addressing wages over the past couple of years as we've spoken about in past calls so we weren't caught flat footed as it relates to wages.

And.

Certainly our wage increases are still a little above historical but were more investing in the infrastructure to be able to service our customers.

So that.

Based upon our current growth and our anticipated growth, which is we're very excited about.

Alright, thank you.

Thank you.

Okay. We'll go ahead and take our next question from Andrew Steinman with J P. Morgan.

Hi, it's Andrew.

If I try to back into the second half operating margins in the full year guide I get to 19, 1%, which is up modestly.

Lee you year over year.

And I just wanted to make sure that you did.

The math the same way as may or maybe you could you kind of go through some of those kind of puts and takes on the second half operating margins.

Good morning, Andrew.

Are we would say our implied operating margin guidance for the second half of the year is a little bit higher than what you stated at 19, 1%.

1%, we think of it closer to the 19 and a half.

And look.

We still expect some very nice operating margin growth.

For the year, even in the back half of the year and even in an environment, which is pretty challenging as I'm sure you're aware in terms of of.

The inflationary pressures, but.

As Todd mentioned, we're managing that inflation, we we like the margin improvement and our expectation is we're going to see better than the 19, one that you referred to.

Alright, and then the 19 five is for the total company and I assume and I just wanted to maybe make a comment on an.

Increases on the customer side, the BTB increases because.

Rado hiatus now you've.

Kind of in process of increasing prices to customers.

How has that gone.

Are they understanding of the inflationary environment.

I'll take that one Mike.

Thanks for the question, Andrew certainly on the pricing.

One of the things that's important to understand is that we don't simply send out a letter increasing prices to all 1 million customers at all at the same time.

We address the issue throughout the year. So so youll consider continue to see that.

And also as we said in the past pricing is it's a local subject.

<unk> industries are still struggling some are doing quite well some geographies are still not back to pre COVID-19 and others are nicely ahead of the curve.

<unk>.

<unk>.

Inflation is it seems like it's in every headline and every time you turn on the news.

And as a result, I would say the conversations with our customers are generally going well and our results are a little bit better than historical in that area as well.

But as you know we take a long term approach and we focus on the lifetime value of our customers.

Which frankly is reflective in our NPS scores being at all time highs.

Now all that being said in the face of inflation being a 39 year high.

Growing our operating income and incremental margins at very attractive rates and we're excited about that.

Alright, and then just to COVID-19, five with total company right.

Yes that was total company against last year of just under 19% so.

Again.

What we think to be pretty healthy margin improvement and let's keep in mind.

Last year's margins were record margins and 310 basis points higher than pre pandemic levels. So so we like we like where we're headed with this with the margins.

In the back half of the year.

Well said, thank you very much.

And we'll go ahead and take our next question from Hamzah <unk> with Jefferies.

Hi, This is Mario <unk> filling in for Hamzah.

Just my first question around around Labor, maybe you can just update us just not on the labor inflation portion, but also on the labor availability.

In your businesses and kind of how youre managing through that and then also maybe you could tie that through.

What your pricing strategy looks like.

Guarding that especially since you guys really haven't taken any price in the past two years I believe it was.

Yes, Mario this is Todd.

As far as labor availability.

We're competing quite well out there, we pay very competitive wage and a very attractive benefits and.

And we think we are.

An employer of choice and Thats, reflecting in our staffing levels, which we like.

It's certainly more challenging this.

This year than in the and in the past in general.

But we're competing quite well and we like that.

As far as.

How we look at the pricing again.

You'll see it throughout the year and it is something that.

We look at customer by customer.

And because as I mentioned, it's a local local subject and we do look at the long term value of the customers.

But we have a.

We're doing better than historical and the reason being is because.

There are still a little bit of wind in your sales as far as customers are highly aware of what's going on with <unk>.

Inflation in general and and wage pressures as well, so but as a result.

We think we're in a good spot.

Thankful that we have been addressing wages wage increases.

Increases over the past few years, because it prevented us from being flat footed coming in and being under real pressure.

Yeah.

Great. Thank you and then just for my follow up.

Could you just comment on the fire business and your strategy.

Getting into some of the top five markets that you're not currently in and do you intend to play in any other adjacencies within the fire business.

Such as Wawa, API group or other larger players have done in that space.

Yes, Mario as far as the fire business.

We're continuing to build out our footprint.

We have found that we very much like our model that we're providing.

Our service levels to customers.

And it's showing up very nicely and new business wins and retention and youre seeing it in the growth.

As far as.

Adjacencies that we're always evaluating those but we think there's incredible run rate in that business.

With the <unk>.

The strategy, we have today without even going into an adjacency, but were certainly always evaluating those.

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

Thank you Youtube.

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

Hi, Thanks, Good morning, your gross margins contracted 80 bps year over year in the uniform rental segment can you elaborate a bit on margin performance, there and what your guidance implies for uniforms segment gross margins.

Certainly George this is Todd I'll start and then Mike can chime in.

Gross margin in.

<unk> is in general is up 40 basis points due to just energy alone.

So thats.

Say headwind I think kept gas stand alone is up 60% year over year. So.

But as far as the.

The balance of that.

70 basis points.

We're making investments in the additional employee partners that we need to service the very nice growth that we're seeing along with the growth that we see coming.

The revenue now George is different a little different from last year.

It's much closer to our revenue our traditional revenue mix.

And let me just give you. An example, because I think it will maybe help you understand that a little bit better.

With PPE last year.

And there was.

Obviously significant demand for that and we're happy to help our customers with it.

But in those cases.

And in many of the other.

The cases with that they were simply a drop ship to those customers.

And when you drop ship those large quantities.

It doesn't take a whole lot of work right. That's just a drop ship and then you.

You are able to book the revenue et cetera.

You think of that versus the.

The level of employee partners that is required to service uniforms and facility services first aid and safety cabinets.

Simply takes more work right.

However, we welcome this.

This shift as it provides more value to the customers than simply a drop ship.

Stickier business and long term and they are better margin. So we like it we like that switch and we knew well.

That that was coming and we've been staffing for it.

And guiding for it all of that said.

As we know inflation is at a 39 30.

<unk> 39 year high.

As I mentioned energy is up 40 basis points, our investment and growth for the today in the future.

You exclude the one time gain of our operating our onetime gain from last year, our operating margins were up 70 basis points.

Incremental margins are quite.

Strong so.

So we're doing exactly what we had hoped and planned for I guess it would be the way I would describe it.

Got it that's helpful.

Healthcare and hygiene businesses have seen a boost in demand with Covid can you talk about trends in the broader opportunity youre seeing in healthcare and hygiene.

Certainly.

Health care.

They're connected right, but about.

But healthcare is a vertical hygiene is.

Subject to across all businesses so.

As far as the health care vertical which continue to see strong demand.

Like what we're providing with.

With scrubbed.

Items to help customers clean patient rooms, and other rooms.

In addition to isolation gowns, so all of that as well.

We continue to be very bullish about.

About the health care vertical as far as hygiene and I'll lump hygiene with.

Standardization cleanliness.

All of that health health and safety all of that is.

We believe has been a sea change and something that is going to be.

Wind at our sails.

Maybe forever right because you see the focus that people have on sanitizing hygiene health safety and we think we can see that in and certainly our uniform rental facility services segment, but also our first aid business.

People are very focused on the health.

Safety and wellness of their of.

Of their people and their customers of their patients and other guests and as a result, that's that's good for us.

Got it very helpful. Thank you.

Thank you.

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

Yeah.

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

Yes Ashish.

The pipeline.

It looks quite strong for all of those verticals.

We feel good.

Our sales organization is operating at a very high level.

We really like our new business wins.

In that area.

Retention is.

Very attractive.

So you look at all that you say are new business wins are are very strong our retention is very strong.

We are excited for our customers too.

To get back to full strength as well and we think that that bodes well for the future for us.

That's very helpful color and maybe just talking about technology on the last call you had talked about the benefits of the SAP implementation and more to come I was wondering if you could talk about what youre doing on the technology front on the automation front for like some preview on what we could see over the next few next year and how.

Should that help offset some of the inflationary pressure.

Yeah, Great Great question. So obviously, you're investing in technology is one of our top priorities because we see the opportunity.

To improve efficiencies in our business operational efficiencies, but also provide items that the customers notice.

And recognize and and make it easier to do business with us.

Are things that that we're trying to leverage.

I think a good example of technology that we're leveraging is.

By leveraging SAP and partnering with them.

Our communications company, we have launched what we call smart tech or <unk> Smart truck technology.

Which collects and analyzes data to create a much more efficient routing structure.

So what this allows us to do is to spend more time with the customers instead of and reduced fuel expense instead of.

Driving in between stops and as we say, we only make money in this business when the wheel stopped when the wheels are moving.

Just expense so we see that as an opportunity to leverage technology to improve operational efficiencies. We have as another example, we have launched a portal for our customers that allows them to do business with us online.

Which is a competitive advantage in the marketplace, what we're seeing is.

Sure.

Contrary to years ago people don't always want to do business.

During normal business hours, what theyre interested in us doing business on their time and what we're seeing is the request that we see from our customers is well over half of the requests are outside of normal business hours. So, it's making it easier to do business with us.

We allow them to to make request.

Changes to their program.

We allow them to pay their bills online all of these are items that the customers see ads.

An advantage in the marketplace being easier to do business with.

And we get really excited when our customers see a technology advantage and find us easier to do business with.

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

<unk>.

We will go ahead and take our next question from Andy Wittmann with Baird.

Okay, great. Thanks for taking my question I guess I just wanted to get a little subjective comments on the new guidance this quarter versus the guidance you gave last quarter Mike.

It kind of looks like.

The biggest change on the EPS side is just a little bit lower tax rate.

The on the revenue side.

Beat consensus.

Guide quarterly but.

It kind of feels like the fundamental outlook for the revenue and core operating margin performance of the business isn't materially changed is that the right way of looking at it or did you see a change in the business fundamentals that you're factoring into the guidance.

The guidance today.

Andy I think Thats, a fair assessment from their perspective.

Not a lot of change from what we what we had been talking about in the last quarter and that is.

Growth.

Continuing to be pretty strong in the second half of the year.

Ex that PPE.

Number that we've talked about in the third quarter and a little bit in the fourth quarter, our growth will well.

It would be in excess of 9%.

And roughly the same margins, we've been talking about for much of the year in that as well.

We certainly expect margin growth.

And continue to expect margin growth. If we did hit 19, five that I talked about.

Earlier, Thats, roughly a 60 basis point improvement in the back half of the year, that's coming on top of.

I'll call it gain adjusted 50 basis point improvement in the first half of the year and you might remember we talked at the early part of the year.

Zero to 70 basis point improvement.

And the performance through midway midway through the year is showing that we're right at the top of that.

Initial guide and so the the movement is a little bit of taxes may be a little bit of margin improvement, but generally speaking your assessment is fair, Andy pretty nice growth and healthy.

The healthy margin improvement on on.

On record margins from a year ago.

Okay. Thanks for going through that Mike I guess I guess my my follow up question and then just.

You just talked now previously in the call you talked about.

These margins and I think they speak for themselves but.

And you talked about price being a little bit above average, but are there any other things that are driving the margin performance. Besides just price and then the operating leverage from the business are there actions or other investments that youre, making there helping this margin performance or is this kind of just the natural progression of price cost as well as fix.

Cost leverage.

Yes, Andy This is Todd good question I think it's.

It's the normal operation of the business, we're always investing in various items that help our operational efficiencies.

And I mentioned, the smart technology that we think is going to be exciting for us.

But I think it's just a general leverage that we're getting.

In the face of what is a <unk>.

Still a very challenging operating environment and.

As Mike said coming off of a record three.

310 basis point.

Improvement in margin.

We're excited about that we're going to continue to take another step forward this year.

Okay Andrea.

I might throw it into a couple different buckets.

As well as in little bit of reiterating what Todd and I have already talked about.

Local our growth is.

At pretty good levels and when we grow at that at those pretty good levels, we get some really nice leverage in the business and we're seeing that leverages a benefit.

Productivity improvements so I mean, we've.

From from our laundry facilities to our service and the routes that.

The route improvements that Tom has talked about to sales rep productivity productivity is strong and continues to improve as we look at process improvement and innovation in automation and so.

Productivity is.

Is very strong.

Efficiencies, we look we made some pretty difficult cost cuts last year, some changes to our cost structure and.

We'd rather not give up many of those and so while we while we will start to see.

Have started to see a little bit of travel for example come in.

Look we're still managing the cost structure very tightly.

And maybe then the last bucket I'll throw out there is.

We've talked.

Quite a bit about resuming pricing and pricing is helping a little bit.

This year and so.

Margin improvement I think we can we can throw it in those four buckets.

And.

And it's.

<unk>.

I would say it certainly is leading to some pretty good performance even in the face of 40 basis point increases in energy and other certain inflationary.

Factors.

Yeah, great. Thanks for the comprehensive answer guys happy holidays.

You too Andy.

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

Hey, this is Sam platform filling in for Tim Thanks for taking our questions here wanted.

I wanted to hit on margins real quick again in the uniform rental segment operating margin was down year over year, but still very strong relative to historical standards.

That kind of how we should think about this segment's margin structure from a long term perspective, maybe down year over year because of higher cost inflation, but capable of maintaining 2021 margins in a more normalized environment.

Well a couple a couple of points that I might make first of all.

We've talked a little bit about the gain on the sale of assets from a year ago and so if you take that that was all recorded in SG&A within rental if you take out the impact of that gain.

Last year's second quarter was 21, 1% compared to our 22%. This year, so a 90 basis point improvement.

So some pretty healthy healthy year.

Year over year improvement.

Look we've been in the rental business.

Above 20%.

For the last six quarters and.

And our expectation is.

We're going to see a little bit because this is such a challenging environment, we're going to see some some ups and downs periodically but generally speaking.

Look we like where the business is running in the rental segment and our expectation is we will stay above that 20%.

Number.

Excellent. Thanks for clarification, there maybe switching gears back to the P. P. You know Arun I think you expected the PPE headwind of about 1% in fiscal 2022, it sounds like maybe that expectation could be changing a bit can you just update us on what you think the P. P headwind will be for fiscal 2022 here.

Well.

I think if you take a look at our guidance for example for the back half of the year.

I believe the.

The high end of revenue growth.

274% over last year. So if you think about the comment we made of growth being 9%.

We're talking about 160 basis points in the back half of the year.

So you can think about 80 basis points for the full year. So I would say, we're not far from where we talked about early on in the year, but certainly its backend loaded a little bit more.

Gotcha. Thanks.

Thanks.

And we'll go ahead and take our next income Toni Kaplan Morgan Stanley.

Thank you.

I wanted to ask an ESG related question given the size of your fleet a shift to electric vehicles seems like it'll be pretty meaningful.

And so I know in your ESG report you indicated that by January you expect to deploy 12 electric vehicles.

Just curious if this program has been initiated and if you could talk about how we should think about the potential of rolling out this fee.

The entire fleet.

Yes, Toni this is Todd Thank you for the question.

So yes, we're excited about that.

Electrifying the fleet.

We are right on schedule as far as what we planned for.

We're testing.

We have a diverse fleet because of the various types of trucks, we have the rental trucks.

First eight trucks in the in the fire trucks as well.

But we're working with.

Some very large manufacturers at very high levels.

And.

We're.

Excited about the future as it relates to that.

We think that that is something thats important to our.

Customers and it's important to our partners and our employee partners and and we think it will be very important to shareholders as well so.

We believe that getting out ahead of this curve is important to us and we're committed to doing so.

And dealing with all the challenges that are associated with that with.

The weight of the vehicles that we operate.

The size of our fleet.

And also getting access to.

The supply, which is why we're working with.

Diverse group and at high levels. So that way we are in a good position as a organization.

That's helpful and one question I've been getting recently is around the ability for you to do large scale M&A.

And some skepticism around that do you think that's valid or because of the fragmented market. There's still potential for you to be able to do a large deal and I'd also say it maybe seems a little harder for deals to get done right now or at least longer to get approved so just wanted to hear.

Your thoughts around large scale M&A.

Yes, Tony So just as a reminder, M&A is our.

Second priority.

Capital use right behind investing in our business and we're excited about M&A volte.

All shapes and sizes.

Sure.

We're blessed to have a market.

That is massive in size, meaning.

If you think about.

How many people are wearing garments wearing uniforms out in the marketplace. It is a significant market.

And that's representative of.

Our new business wins that we have so.

Two thirds of our new accounts that we bring in are all people that are customers that are what we call no programmers some people in different industry come uninvented.

Les when we walk in they don't have a uniform program and when they walk out we do so a little bit more complicated than that but that's the net net that being said.

That's simply the uniform market or other markets are just vast.

A vast.

<unk> market.

Whether it's facility services and all the headwind or excuse me all the tailwind that are behind that business from a health safety sanitation hygiene same way with the first aid business.

And in the fire business, we see it as obviously a massive market just simply because everybody is required by law to have those products and services. So yeah I think we're in.

In incredibly good position in all of those.

Because of the market size that leads us to we think we're interested in M&A and all of our businesses.

And our.

We are excited about the potential of.

M&A.

Small medium and large because we think the market is such that it is absolutely appropriate.

Very helpful Happy holidays. Thank you.

Thank you.

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

Thanks, very much good morning.

I'm curious.

This is a question of your average customer in first aid.

Pre pandemic, what would what would their cabinet look like how much has it changed of the items or the contents inside to what it looks like now.

The level of detail you can speak to that and then how has the.

Pricing.

And margin profile changed of that cabinet I assume better, but anything you can share on that.

And then I'll just have a quick follow up after that thanks.

Okay. Scott this is Todd.

As far as our cabinet.

Were constantly bringing out new products for our first aid cabinets.

And that is an important component of that business.

Offer other services in that business, whether it would be.

Aedes training and compliance.

Well as.

I wash stations, which are required.

By Osha to be serviced appropriately. So all of that is we're seeing a return back to our focus on that with our customers which is.

Which is exciting to us.

As far as the cabinet itself. Besides the new products that we've launched it's pretty well a traditional.

Type of situations now.

What is changing is.

The focus on health and safety of employees cut.

Customers.

Guests patients those types of things and.

As a result.

That's good for the first aid business.

And.

As we've spoken about the first aid.

Cabinet business is more predictable is more.

<unk> provides more value to the customer than a drop ship type of PPE and and is more profitable. So I think as you see.

That trend of the health and.

And safety are continuing and as more people are back to work then that's going to be very positive for that business.

I might add a couple a couple of things just reminding reminding us Scott.

I think Todd mentioned that first aid cabinet business is up 20% year over year in our second quarter. So we really do like the momentum of it.

But we're not quite back to the mix of pre pandemic, but we certainly like the.

The.

The movement towards that mix and.

When we think about the gross margin in this business.

The material cost really has.

Improved.

What youre seeing in this particular quarter is that we are.

We're spending a little bit of that improvement.

On some of the labor investments that Todd talked about in terms of.

Building the service capacity both for the current growth that we've had but also for anticipated.

Second half of the year growth so.

Really nice performance by our by our first aid and safety partners and the performance is.

Is improving just like we expected it to.

Just like we wanted to.

Great. Thanks, I appreciate all that color and the follow up is on the same subject.

You guys are running below.

What were pre pandemic peak.

First aid and safety margins is that do you think within a matter of a year or two you can get back to that prior level.

And why or why not thank you.

Yes, Scott this is tod. So we're very focused on that we think that revenue mix will be very.

Very positive for us and.

And we also look at the as I mentioned, the the wind behind our sails on the focus on health and wellness.

Folks out in the marketplace is going to be positive so.

As we continue to focus in that area, our net revenue mix.

Balances.

Youre going to see a nice trend towards.

More traditional type margins in that business.

Great appreciate it guys happy holidays.

Thank you Scott Youtube.

And we will take our next question comes Shlomo Rosenbaum of Stifel.

Hi, Good morning. Thank you for taking my questions, Hey, Todd I wanted to ask you a little bit on the competitive environment.

Aramark has been.

To execute a turnaround for the last couple of years they want to know.

Does that make a difference to you guys in the market at all have you seen a change in terms of competitiveness or in terms that you guys have to be more competitive or is the market is so fragmented that <unk>.

Like that wouldn't necessarily filter back to you guys.

Shlomo Thanks for the question.

That's a good question.

The operating environment, we're in it's always competitive.

Nothing noteworthy, though I would say in the change.

Our revenue retention rates are very strong.

And as I mentioned, our new business wins.

Our very strong as well and theyre coming from those no programmers.

More so than than the competition and I just think it speaks to the the vast market out there.

That that we're focused on providing that value to the customers when we walk in and I'll just skip uniforms. As an example, when we walk in one of the top areas on top of things, we hear back from customers as well I didn't know you could do all that for what you do it for.

So they're they're surprised one of the other items that we hear is we didn't know.

You would be able to service.

A customer of our sites they might have 10 wearers and that is something that.

I can average sized customer for us, but the perception is all you have to have 100 people 1000 people.

So we're attacking that market.

Because we see that the customer sees value in what we provide.

And there are also there's a little certainly wind behind our sails on.

It's tough to attract talent right now so being able to provide.

A service like this.

Its something thats attractive to people and you think about how many people are working out in the marketplace.

And the fact that we can.

Provide that service to.

Tens of millions of more wearers.

Very exciting for the future.

So as a result of how we focus on it it really.

Those competitive pressures were more focused on retaining our customers and we're more focused on.

Our growing the market and because it's just so massive.

Okay, Great and then maybe this is one for Mike just put it in the other segments I know there is definitely volatility quarter over quarter in terms of the margins I'll just comparing the operating margin.

This quarter versus the last couple of quarters.

Is there something besides sequentially, obviously, its a lower revenue, which make a difference in the margin going back a couple of quarters could you just give us some of the puts and takes of what whats impacting the operating margin.

Shlomo when you when you look at Q2 compared to Q1 keep in mind that we we referred in the first quarter call to a gain on sale of some assets so in that.

In the first quarter, there was a $12 $1 million gain.

So we haven't we had a little bit of an anomaly in that in that particular quarter.

I would say this the fire business has been performing very very nicely and.

We've seen.

Organic growth this quarter of 16, 9% and remains healthy and some of the things that Todd and I have talked about.

With the first aid business is going on in the fire business in that.

We are certainly seeing some great growth.

And we're investing for for both current and for that current growth, but also for anticipated growth. So we're seeing a little bit.

Of the investment there and then as you.

Shlomo the uniform direct sale business, Ken can be quite bumpy and so there's going to be more volatility from quarter to quarter.

In this business.

But I would say this as well a 11, 7% for the all other segment is still pretty a pretty good quarter on a 65 day workday quarter relative to pre pandemic. So.

Again, just like the other businesses, we like the momentum in these businesses and we like the performance.

Did you say that that extra day versus say for Q2, 'twenty one is a bigger impact.

Trying to get a little bit more detailed completely appreciate the volatility in the uniform direct business.

Okay.

The direct.

I would say that the day is more of an impact of the fire business.

And it is the uniform direct sale the uniform direct sale tends to be bumpy based on on.

It could be a rollout of a new program, it's just timing of Av.

The sales within those current customer programs.

Thats the biggest volatility item.

Within the uniform direct sale.

Great. Thank you.

Alright.

Questions at this time, Mr. Adler I'd like to turn the conference back to you for any additional or closing remarks.

Okay, well. Thank you for joining us. This morning, everyone. We will issue our third quarter fiscal 'twenty two financial results in March we look forward to speaking with you again at that time and have a good day.

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