Q3 2022 Cintas Corp Earnings Call

Good day and welcome.

Good day, everyone and welcome to the Cintas third quarter full 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 <unk>, Vice President and Treasurer Investor Relations. Please go ahead Sir.

Thank you Sergei 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 third quarter results. After our commentary we will open the call to questions from analysts.

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 Securities and Exchange Commission.

I'll now turn the call over to Tom.

Thank you Paul.

Our third quarter financial results led by a strong revenue increase of 10, 3%.

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

Excluding a onetime gain recorded in this year's third quarter, selling and administrative expenses opt.

Operating income margin increased 90 basis points from 18, 4% to 19, 3%.

And EPS grew 13, 5% from $2 37.

$2 69.

Our financial results are indicative of our compelling value proposition.

Business is prioritize all we provide including image cleanliness.

Safety and compliance.

And challenge with labor scarcity, and rising cost businesses increasingly turned to <unk> to help them get ready for the work that.

I'm, especially pleased with our financial results because they were achieved in a period in which U S inflation hit a 40 year high.

Inflation is high and broad and one need not look any further than the corner gas station to see it.

We have been able to navigate this challenging time and delivered increased operating margins and EPS.

By productively selling new business.

Penetrating existing customers with more products and services.

Providing excellent service, while driving operational efficiencies.

And obtaining incremental price increases from our customer base.

As we grow via new business, we achieve operating leverage.

Better negotiating leverage with suppliers.

Answer routes.

More volume on our plants.

As we penetrate existing customers, we realize even stronger incremental operating margins.

I, thank our employees, whom we call partners for their continued focus on our customers our shareholders and each other.

Turning now to our business units.

Uniform rental and facility services operating segment revenue for the third quarter of fiscal 2002 was $1 $5 5 billion.

Compared to $142 billion last year.

Organic revenue growth was eight 9%.

Our newest vertical strategies of healthcare education, and state and local government continued to post leading revenue growth rates. However.

However, there are opportunities for us in all verticals.

Businesses in all sectors are struggling to fill open positions.

There are about 11 million job openings in the U S alone.

Businesses remain concerned with the ability to properly sanitized, even as COVID-19 infections decrease.

Additionally, businesses are shedding non core competencies to reduce cost and minimize the impacts of inflation.

For these reasons and others businesses are increasingly outsourcing to synthesis.

Our first aid and safety services operating segment revenue for the third quarter was $213.0 million compared.

Compared to $198 $5 million last year.

Organic revenue growth was six 2%, which is a nice improvement from last quarters three 2%.

This improvement reflects the growing momentum of our first aid cabinet business, which grew 22% in the third quarter.

We welcome this mix shift because it is a more consistent revenue stream and has higher profit margins.

Third quarter revenue growth improved despite a difficult comparison.

In last year's third quarter in response to the COVID-19 pandemic sales at <unk>.

Personal protective equipment or PPE were very high and the business grew organic revenue 17, 7%.

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.

In fact, we sold about $15 million and a new product, which is COVID-19 test kits and this year's third quarter.

PPE remains a larger percentage of the revenue mix than it was pre COVID-19 .

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

All other revenue was $194 3 million.

Compared to $167 million last year.

The fire business organic revenue growth rate was 15, 3%.

And the uniform direct sale business organic growth rate was 48, 7%.

Both businesses had bounced back as expected.

I'd like to comment on another one of our strengths, namely cash flow.

Third quarter operating cash flow increased 18, 5% from last year.

In this year's third quarter $105 million was used for acquisitions.

On March 15th we paid shareholders $99 million in quarterly dividends.

And during the quarter and through March 22022, Cintas purchased $584 $2 million of Cintas common stock under our buyback program.

We continue to allocate capital in many ways to improve shareholder return.

Our strong balance sheet and cash flow enable us to do so consistently.

Yeah.

Finally, I wanted to share some great news on our technology front.

Our ERP provider.

Extended membership and their strategic customer program to Cintas.

This is an exclusive program only 1% of SAP customers have membership and it <unk>.

Inclusion in the program enables us to engage directly with top management of SAP.

And gain access to developers and new technologies to realize valuable outcomes for our customers suppliers and employees.

This program will speed the pace of our transformation into a more data dynamic and process efficient business.

I'll now turn the call over to Mike.

Thanks, Todd our fiscal 2022 third quarter revenue was $1 96 billion.

Compared to $1 $78 billion last year, the organic revenue growth rate adjusted for acquisitions divestitures and foreign currency exchange rate fluctuations was 10%.

Gross margin for the third quarter of fiscal 'twenty, two was $898 2 million compared to $809 $5 million last year.

Gross margin as a percent of revenue was 45, 8% for the third quarter of fiscal 'twenty, two compared to <unk> 45, 6% last year, an increase of 20 basis points.

Energy expenses comprised of gasoline natural gas and electricity were a headwind increasing 45 basis points from last year.

Gross margin percentage by business was 46, 3% for uniform rental and facility services.

44, 2% for first aid and safety services.

46, 6% for fire protection services, and 37, 7% for uniform direct sale.

Operating income of $407 6 million compared.

Compared to $326 $5 million last year.

Operating income margin was 28% compared to 18, 4% reported last year.

Fiscal 'twenty two third quarter operating income included a $32 million gain on the acquisition of an entity of an equity method investment.

The gain was recorded in the uniform rental and facility services segments, selling and administrative expenses.

Excluding this gain fiscal 'twenty, two third quarter operating income as a percentage of revenue was 19, 3% an increase of 90 basis points from last year's third quarter.

Our effective tax rate for the third quarter was 18, 2% compared to 14, 4% last year.

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

This year's third quarter equity method investment transaction included a significant tax benefit excluding the transaction the effective tax rate for the third quarter of fiscal 2002 was 19, 6%.

Net income for the third quarter was $315 $4 million.

Compared to $258 $4 million last year.

Diluted EPS was $2 97 compared.

Compared to $2 37 last year.

Fiscal 'twenty, two third quarter diluted EPS contained 28.

From the gain on the equity method investment transaction, which included a related <unk> tax rate benefit.

Excluding this gain and the related tax impact fiscal 'twenty, two third quarter diluted EPS was $2 69 compared to $2 37.

In last year's third quarter, a 13, 5% increase.

We are increasing our financial guidance, we expect our fourth quarter revenue to be in the range of $1 $96 billion.

To $2.02 billion.

Diluted EPS to be in the range of $2 54.

To $2 74.

Our fourth quarter fiscal 'twenty two effective tax rate is expected to be approximately 23, 2% compared to a rate of 19, 4% for last year's fourth quarter.

The expected higher effective tax rate is anticipated to negatively impact fiscal 'twenty, two fourth quarter diluted EPS guidance by approximately <unk> 14.

And diluted EPS growth by approximately 560 basis points.

Our financial guidance includes share buybacks through March 22nd but does not include the impact of any future share buybacks.

Finally, I wanted to provide an update on our debt and liquidity, we have $650 million of senior notes maturing April one 2022 and $300 million of senior notes maturing June one 2022.

We expect to refinance these amounts with funds received via the issuance of new senior debt.

Also we closed today on a new credit facility, increasing it to $2 billion in.

And extending it to 2027.

We have a strong balance sheet and ample liquidity.

I'll turn it over to Paul.

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

Thank you as a reminder to ask a question at this time, please signal by pressing star one.

That's your question has already been you may remove yourself from the queue by pressing star two and please make sure the mute function on your phone is switched off till August signal two retail equipment.

Our first question comes from Andrew Andrew.

<unk> started about a month from JP Morgan. Please go ahead.

Hi, This is Alex <unk> on for Andrew Steinman today.

Wanted to touch briefly on what you guys are seeing at the vertical level, maybe with respect to a rebound in a potential rebound in hospitality or is that was that still being dragged in your last quarter from a micron and then maybe also progress maybe in driving adoption in health care or any comments on those two fronts.

Thanks, guys.

Sure Alex Thanks for the question.

Our vertical strategy is working quite well.

You mentioned the hospitality sector. It is certainly bouncing back.

If you're reading the news bookings are up.

In the airlines in the hospitality sector. So, yes, so thats bouncing back and and.

And I think the results.

And our direct sale business, which is in.

In large part tied to.

Certainly to a percentage tied to the hospitality area.

The results are outstanding so, but our and our other verticals, we're having very good success in each of those and.

And the health care, specifically, we see we're very much in the early innings.

But we have.

Products and services that are compelling to that customer base.

And we are continuing to.

Evolve and create new products and new technologies that we're integrating there.

So as a result, we're very bullish on our on our strategy in that area with our focus on that area and I think the results are reflective.

Thank you.

Okay.

Hamzah on Missouri from Jefferies. Please go ahead.

Okay.

Hey, good morning.

You had referenced.

Better trading more customers as part of.

Strong incrementals, specifically as it relates to that do you have a sense of how many customers today are buying more than one service from you has that changed at all due to having a sappy.

What was that same number pre pandemic just so we can get a sense of of that initiative.

Yes hamzah.

Certainly.

<unk>.

Virtually on one system now.

Certainly, helping our transparency into cross selling.

What I will tell you is again, we're in the early innings of cross sell.

There is a.

Our ability to add product.

We have a really long runway in that area just to get to even a reasonable level of penetration, where we feel excited about it.

There is a long long runway to.

Penetrating our customers with our existing products separate from what we're going to bring into the marketplace in the future, which is we're always working on new products and services. So so we feel good about that.

So it's certainly improving.

Very much in the early innings of that on that subject.

Got it got it and just my follow up question I'll turn it over is just.

Around M&A.

Any updated thoughts as to as to the pipeline.

There are have valuations come in at all I know.

You've talked about historically that Emma.

M&A it doesn't necessarily mean it has to be a route based.

Just just walk us through that as well.

The rationale there thank you.

Sure Hamzah.

As we noted.

M&A was was good in the third quarter.

The investment we've made in and acquiring businesses.

We're highly acquisitive.

Pipeline looks attractive.

It takes different.

The reasons for different companies to transact I cant always predict that timing.

But we are very much a willing buyer.

Sure.

And of all shapes and sizes were very very acquisitive.

Interested in and making deals.

We are ready willing enable to two.

Continue to move forward in that area, yes.

Yes.

As you heard Todd mentioned, our third quarter.

Included in overall acquisition number of $105 million, which is certainly a step up from where we've been now included in that is the is the.

Purchase of the remaining shares of the.

Equity method investment, which was about $48 million within that number but the rest of the M&A of $57 million is still.

And up a step up from where we've been so.

There has been some good movement this entire fiscal year.

And we like we like the messaging that we're getting we like the pipeline and as you can see so far this year.

We've we've acted on many of those.

Got it very helpful. Thank you.

Thank you.

George Tong Goldman Sachs. Please go ahead.

Hi, Thanks, good morning.

Can you discuss how the business is being impacted by rising input costs, including wage inflation and higher energy costs and how effectively pricing trends are offsetting this.

Yeah.

Good morning, George Thanks for the question.

Certainly.

Yes.

Expected that inflation in input cost would be something that we would want to be talking about so.

We have so I have a few examples I would like to talk about regarding.

The items that we are steps that we're taking to mitigate input cost but inflation is.

Yes, certainly it's certainly challenging.

It's very much there as I mentioned in my prepared remarks.

Whether it's fuel or other areas.

<unk> costs are real but we are.

We're being very active and taking steps.

Steps to make sure that we are mitigating.

That type of exposure you.

You mentioned pricing so certainly pricing is a component of our strategy, but it is by no means is it.

Is it the only strategy to combat pricing or excuse me to combat inflation.

So we are we're taking other steps and they almost all involve technology.

And these were all initiatives that we have been working on however, due to the inflation subject, we decided to pull forward and go faster with them and individually they are not massive movers, but collectively they certainly add up so I'll go through a few of those.

I think Mike might help provide a little color.

First off I mentioned and I think our last call that we have invested in routing technology.

That is proprietary.

It really fits our business well and it is as long as I've been with the company. It seems like we have tried about every routing software out there and we finally said we're going to build it ourselves we're going to do it it's going to fit with SAP.

And it'll be because we have a unique.

Routing structure so.

So we did that and I am very thankful that over the past couple of years, we've invested in that technology.

Rolled out across the organization.

And we're executing on it.

So now we.

Very important we recognize that we only generate revenue when the truck stops when it stops at our customers' place of business. That's when we can generate revenue. So we've got to be more efficient and I'm really pleased with.

With that investment.

Certainly it takes time there is we are very conscious of any customer disruption, but we're trying to go faster with that subject and then again, we're blessed that we made the investment.

And we didn't have it.

Then it would put.

Much more pressure on the organization with the inflation subject. So again very pleased that we have that.

We've also from a technology standpoint, we invested in some in.

Automation.

We now have three different.

Processes for how to implement automation into our uniform processing facilities.

And this provides us flexibility we didn't have in the past.

That flexibility is meaning we can deploy one of those based upon a number of factors really gets into the footprint of the facility and the number of pieces going through.

But we pivoted on this subject as well to go faster because.

What's going on with labor costs, certainly so we're able to automate our facilities.

And Ah sped up fashion.

And then I've got a couple others that I'll talk about.

We know we've invested in technology through SAP that allows us to have a centralized dashboard.

And look at all of our rental processing facilities.

And understand how they are operating on a daily basis, a real time basis.

From a.

And efficiency.

And effectiveness standpoint, so in the past we had to go physically see these facilities to understand if they are operating in the manner that we expect but now we have this real time dashboard and allows us to know.

We are doing and as a result, there is more accountability and we're getting better.

And that allows us to improve the efficiencies within our business.

And then I've got a few others, but.

One one other I'll give you.

As we are.

Because of the technology, we have with SAP now.

We're seeing a real nice impact in our ability to share our used inventory of garments across all of our locations.

This is due to our stock rooms, which is where we house our used inventory at each of our locations.

Having real time inventory tracking and all being on that same system of SAP.

So what it allows us to do is to gain better use of the inventory that was in the past dedicated solely to the individual locations customer base.

Now, we can spread it out across a much larger customer base.

And we get and it also allows us with non stock sizes to look at where the product is and get it faster to our customers. So I could go on but.

But I hope hopefully that gives you a few examples of items at <unk>.

Proactive steps that we're taking to mitigate the inflation because again as I mentioned, it's real it's challenging.

But I'm highly confident in the organization will be able to manage through this as we have in the past.

That's very helpful. Thank you and then just as a follow up could you provide a brief update on how your customer base is being affected by supply chain disruptions in the flow through impact on demand for certain types of services.

Yes, certainly.

George.

Our customers are being impacted by supply chain at slowing them a bit.

But and we care passionately about how our customers. Our other businesses are doing because it obviously is a dynamic impact on us.

But as I mentioned earlier.

The.

The challenges that our customers are facing with staffing and labor costs.

They are looking for ways to outsource and.

And we are beneficiaries of that.

We are certainly excited about.

Supply chain issues abating and.

And our customers being able to go even faster, but it but to date, that's a bit of a headwind, but we have the tailwind of.

The outsourcing and the benefits we're seeing there.

Very helpful. Thank you.

Great. Thanks Ashish.

Ashish the BARDA RBC. Please go ahead.

Thanks for taking my question and thanks for providing that detailed color on the technology front I was wondering if you could also talk about how technology is helping you are more on the dynamic pricing and more like local pricing can you just hold on for the just on the pricing trend what the normalized pricing has been historically at how are we thinking about pricing here.

Particularly in the inflationary environment.

The response to you by your customer to maybe potentially higher price.

Thanks, Ashish for the question I'll start if Mike wants to contribute as well.

Certainly again being on one technology platform gives us the ability to use large amounts of data to analyze.

And.

But pricing is a local subject.

<unk> customer by customer subject.

Industry by industry, and but it does give us.

The technology does give us the ability to look.

A more strategically at our customer base to make sure we're making really good long term decisions. So we feel good about that and we've had that in place and we've we've taken that approach over the past couple of years and we'll continue that approach.

And make sure that we're not just making sweeping decisions, but they're they're more targeted.

Decisions that are more strategic.

Maybe I'll simply add.

Certainly with all of the inflation in the news.

The customers are it's a little bit of an easier conversation today that that might be otherwise.

And so our customers have generally been receptive to that and that results in a little bit of a higher pricing impact then in the past and so we've talked a lot about zero to 2% in the past and we're a little bit above that today and so that certainly is one.

One way for us to.

Fight inflation.

Agreed Mike Thank you Ann.

But just to point out the.

Clearly the majority of our growth is coming from.

More volume growth not pricing.

And it is due to the value that we're adding new customers and new business that we're selling.

Ads in penetrating our customer base.

That's where the majority of our growth is coming from clearly.

I just want to conclude the thought with going back to Ashish for the technology I think.

I think sometimes it's hard for people to understand.

Magnitude of transactions in this business.

One of our general managers of our operations just one operation.

They can have 5000 customers and so the ability to have the technology as Todd spoke to seize upon that to be able to supplement the gms ability to analyze 5000 customers to ensure that the pricing is is where it needs to be or to see trends in the <unk>.

Data to understand if there are customers that are kind of paring back.

Using services over time, that's in jeopardy accounts by the general manager. He began in front of that particular customer those are the types of advantages that the technology provides because it is just such a fluminous business and that technology and data and the additional eyes.

And that intelligence is certainly a huge competitive advantage.

That's very helpful color and maybe if I can just ask I'm not sure. If you quantified how big I know she is as a percentage of overall expenses, but also my question is more longer term. How are you thinking about improving day, new <unk> efficiency of the business both on the truck side, but also on the flip the laundry.

<unk> alright, thank you.

Sure Ashish third quarter total energy for the business was two 3%.

Sales.

In our guidance side.

Certainly.

The gas prices escalated.

As we got into February and we're thinking more in terms of two 6% to 8% and our fourth quarter. So certainly we're going to see.

Little bit or our expectation is we'll see a little bit of an increase.

And just to give you a little bit of of maybe.

That impact of what we have already done to be more energy efficient. If you go back to last time, we saw prices at the pump at this kind of level.

It was back in calendar 14, and if you think about the third quarter of our calendar 14.

We're certainly a smaller company but.

Our total energy at that time was 3% of revenue so.

At the same price and the pump we've been able to reduce our energy by almost a third and from 3% to two 3%. So we've made some really good progress and we've talked about some of those things some of it is certainly scale and growth, but but as Todd.

<unk> talked about some of it is also the routing efficiency the penetration that allows us to park the truck a little bit longer. So we've made some really nice progress over over the last.

Several number of years and how do we think about it going forward.

We certainly are going to continue to work at routing efficiency penetration, but also certainly we've talked a little bit about getting electric vehicles onto the road and that has started and our expectation is we'll put many many more of those as we as we move towards our goal.

Full of net zero in 2050, so there is a lot more to come in this in this type of space and we're in the early early.

Part of exploring that alternative fuel vehicles, but we certainly think that's a big part of our future.

Ashish in addition.

I mentioned earlier about the centralized dashboard that.

It allows us to understand how our locations are are functioning at what level of efficiency.

<unk>.

Speaks directly to energy usage in our in our production facilities. So the more efficient we are.

Sure.

The lower the at the consumption of the energy certainly per pound specifically.

And then I didn't mention but we have also over the past couple of years, we've invested in converting out all of our locations to led lighting.

<unk>.

Helped in our ESG journey, but it helps with the consumption of energy.

It helps reduce some cost so it's also a cost mitigation.

Subjects, so and we're looking at other items and in that area to work to reduce.

Energy consumption in our production facility.

That's very helpful color and congrats on the solid results.

Thank you.

Andy Wittmann R. W. Baird. Please go ahead.

Hey, thanks.

Just keep going on this path I guess, Mike just.

When when kind of using your EPS in your revenue guidance I'm backing into fourth quarter margin guidance, which is at the midpoint about flat year over year, I think thats, probably right and you can comment on that I suppose but.

You just mentioned that energy prices on a sequential basis, maybe like 40 basis points.

I was wondering if the third quarter was plus 90 basis points adjusted on the margin improvements you've got 40% of energy what's the other 50 and can you talk about some of the other puts and takes that drive you to that margin implied margin guidance.

Yes.

Let's start with the implied margin guidance.

The range that.

What we see as something like 18, 5% to the bottom to 20%.

At the top.

So last year's fourth quarter was 19, 4%. So you are right at the midpoint.

It's somewhat flattish against.

Let's call it a 60 to 80 point.

Energy headwind from a year ago and at the top of that range. Its its margin expansion, even even in this period of time so.

Our goal will be to continue to drive towards margin expansion, even in a pretty difficult environment, so getting back to.

I think your question of why why maybe not more margin expansion.

First of all I would say.

Look Andy.

Don't know how many companies are expanding margins in this kind of environment, but but we intend to.

But we also are growing quite nicely and you've seen our growth move from organically eight six in total in the first quarter to nine three to 10 and growth.

Means for us when we're growing that volumes, we are investing in in things like.

Capacity in our in our wash alleys and other places we're investing in.

Even when we talk about the route efficiency that doesn't mean, we're necessarily not adding routes and so we're going to continue to invest in our routes, we're going to continue to invest in other.

Customer facing positions and so we're going to continue to invest.

Even in this kind of environment because the growth is very very good and strong so.

That comes with a little bit of a cost too, but gosh handy in this kind of environment with with looking at.

Our 60 to 80 point.

Basis points.

Energy headwind.

To guide towards margin expansion, we feel pretty good about.

Wasn't trying to imply otherwise.

Could you comment specifically on.

The labor market are your positions filled today or do you are you having enough people to do what you need them to do and can you talk about the overall pricing trends on that category specifically.

Andy we're.

We always have job postings.

Openings, we're growing.

And as I mentioned earlier, we're growing our volume very attractively, so theres more work and we're really pleased about that.

And the labor market is challenging trying to to get the <unk>.

Levels that we're at we're running at higher Rpms gets get they're not speaking of when I say higher rpms, our management teams working harder to get there but.

But we like our staffing levels.

And we will continue to plan to invest in that area.

We like our productivity that we're seeing from our from our partners.

In all areas of our business.

And I think that speaks in large part to our culture.

We are.

Our folks are.

They get up earlier, they work harder they work later.

And as a result.

We have a strategic competitive advantage in the marketplace as a result of that but yes, we're conscious of what we're trying to add roles and we're doing it quite successfully.

Good enough.

From a leadership standpoint, but we're focused on it.

Thanks.

Tim Mulrooney William Blair. Please go ahead.

Yes. Good morning, I wanted to go back to pricing for a second if your uniform contracts are typically several years in length.

Can you talk about the actual mechanics around how you adjust for pricing are there.

Are there annual pricing conversation stipulated within the contract could you just kind of reach out to customers as needed and when you hurts when you hit certain inflationary thresholds.

And are there inflation pass through provisions in these contracts.

Okay.

Tim Thanks for the question, we have 1 million customers or more so the.

<unk> as you name it we've got it.

But generally what I'll speak to us.

Our agreements allow us to raise price and raise prices.

As appropriate.

And when we when we do so our approach as we do that once a year.

Doesn't mean that they all happen on the same day, they may be spread out throughout the year, but the conversation is once a year with the customer and we have found that that is.

Our commitment to our customers is to handle it in that manner, they like that our partners like that.

<unk>.

<unk>.

In these inflationary times.

As Mike mentioned earlier, those conversations are going better than they normally have and then they are just because.

Inflation is front and center of everything every newspaper.

When I look at so.

But our approach is once a year with the customer and.

And we've been sticking by that and we can and plan to continue to stick by that commitment to them.

Okay. That's great. Thank you.

Thank you.

Enough with Barclays. Please go ahead.

Thank you I just wanted to follow up on the.

Libre environment broadly.

It sounds like you're managing your own pretty well, but just curious what you can share in terms of the.

The challenges.

<unk> since some of your customers are facing.

Yes.

Looking today.

Manav certainly we are seeing a higher level, we call it a churn through our customer base, meaning we.

We see people.

One one customer and they end up at the other customer and that is at a higher level than it has been in the past.

So.

But nevertheless.

We like the trend that we're seeing with our customer base in there.

The add stops trends that we're seeing that's positive.

And just as I mentioned it seems like it's harder for businesses right now everybody is having to work a little bit more at it and productivity has to be a little bit better, but we are.

Certainly seeing more churn of our within our customer base than we did historically.

Got it and.

Mike maybe just for the fourth quarter.

Some tough comps on the rental side by side as well at least if you could just help us with maybe the sequential organic growth trends, we should be thinking about what the M&A contribution is maybe.

Sure.

When we think about organic growth.

For the rental division, we were at eight 9%.

Our expectation and it was so first of all Manav, let me maybe step back.

The guidance for us implied six 8% to 10% growth slightly over 10% growth.

So we love the momentum of the rental business and we think thats going to continue to perform very very well in those upper single digit type ranges first aid and safety is going to is going to rebound quite a bit.

In the fourth quarter due to great momentum, but also a little bit of an easier comp and we expect that to be in the mid teens.

Our fire business, which grew organically 15, 3% this quarter.

We continue to expect.

Very good growth in that area and then R. R.

Uniform direct sale business is going to it's going to face a tougher comp and likely that's going to come back to something more normalized low to mid single digits.

Did I get I wasn't I'm not sure if I heard the second part of your question if there was.

One model, yes. It was just around it was just around given all the M&A and I guess you picked up on what that quarterly contribution look like got it.

Yes, yes.

Yes, so I think I covered that maybe.

Maybe ill touch on we talked about I talked about the M&A and a big component of that M&A was was this.

Equity investment transaction.

That is.

We got into a joint venture years ago for primarily the purposes of product innovation.

And particularly within our facility services business, but that's a component that entity.

Which we decided made sense to wholly owned now is going to tuck into our global supply chain. So it's.

It's.

Relatively non revenue producing.

And so we won't see much of an impact on that it tucks into global supply chain.

Got it thank you.

Heather <unk> Bank of America. Please go ahead.

Hi, Good morning, Thank you for taking my question.

I wanted to just touch.

And clarify.

The PP&E side.

Just curious where you guys are relative to 2019 levels at this point.

Are you still above are you have you gotten back to Pat.

I had a more normalized trend.

And then you mentioned sales during the quarter.

How youre thinking about that business going forward and is there an inventory investment around that as well. Thank you.

Yes R. R personal protective equipment sales have still been above pre pandemic levels, we like.

We've talked a little bit throughout here about the value that our customers are seeing in it.

And we are certainly recognizing that they still value safety cleanliness and sanitizing and so those revenue streams are still above pre pandemic levels.

It's hard to predict what those what those are going to look like into the future, but theyre certainly above pre pandemic and the value proposition is being is resonating certainly more today than it did pre pandemic. So we like the we like the movement in that business and the and so far.

The staying power of that from a from a test kit perspective.

As we've done throughout this pandemic our goal has been to do our best to take care of our customers and in this particular quarter with <unk> really rising.

Our customers were asking us for four.

The test kit opportunities and we were able to fulfill those it did not come with an inventory requirement.

Our expectation is that's not going to be a big mover into the future we called out about $15 million worth Thats something that we wouldn't typically expect to repeat at anything close to that level.

Thank you and just a follow up on the PP&E side just because.

Recall it is a lower margin.

Is that even though it's still elevated is it declining do you see it as a tailwind to your margin going as it levels off going into next quarter end.

Our next year as well.

Yeah.

The short answer is yes Heather.

Maybe talk about it this way the first aid and safety business, where a lot of that <unk> has been.

We've seen some really nice momentum in the first aid.

Side of the business and that generally comes with those better margins and we saw a nice uptick from Mark from our second quarter to our third quarter in our first aid and safety gross margins and our expectation is that momentum is going to continue.

Even though we still certainly hope that there is more PPE going forward than pre pandemic.

But youre right Heather.

But as the mix tilts back to a greater amount of first aid business. We expect those gross margins to start to get closer and closer towards those pre pandemic levels.

One thing I will say in the in the first aid and safety businesses are we made a nice jump in our operating margin too.

And if you think about the SG&A part of that business.

Our sales people are producing at very very high levels, and our SG&A in that business as well below pre pandemic levels and so as we continue this mix.

Moving in the right direction, our expectation is that those overall operating margins will certainly get back to pre pandemic levels and can and can improve from there we were at <unk>.

Call it in the mid 14% range pre pandemic.

We're we're on our way back towards those and our goal is certainly would be more expansion after that.

Okay. Thank you for that color.

Scott Schneeberger of Oppenheimer. Please go ahead.

Thanks, very much good morning, and I have one more following up on on.

Inflation and price.

You had stated that the majority of the growth is coming from from volume.

And I'm just curious I guess the essence of the question is what percent of the Youre doing on a customer by customer base, but what percent of your base would you say you have affected with price increases at this juncture.

And will we see a greater percentage of the growth going forward coming from the pricing side as opposed to the volume side.

Yeah.

That kicks in on who you've already priced in whom you maybe have yet to price just a little bit better feel on the time.

As as how much more contribution we may see from price offsetting.

Cost pressure going forward. Thanks.

Thanks for the question Scott.

<unk>.

How we approach as I mentioned is once a year, but it's.

Relatively smoothed out throughout the year.

<unk>.

And as we've talked about in the past some of it depends upon the condition of that customer how their business is that industry that geography.

And as time goes on and hopefully that will become a lot more consistent but I think what youre seeing as far as our volume growth and.

And the pricing of wins that we're getting I think youll see that be pretty consistent in the future.

I don't think Youll see an outsized percentage coming from pricing.

Next year in that coming.

<unk> months something like that.

Because of how we approach it and.

And again, we're very very happy with the level of demand that we're seeing from our customer base.

<unk>.

It's.

Very attractive for us, we're investing appropriately for it and.

And we're very pleased.

Great. Thanks, I appreciate that response.

For my follow up I'm, just curious going back to this.

1% of SAP.

Extended membership in which youre participating could you elaborate on how that came to be and.

You've covered some of the benefits.

About what it offers but do you think you could take us a little bit deeper on was that something you pursue was that something that that they granted how it came to be and just where do you expect to go with that.

Great Great. Yeah, we're very proud of the relationship we have with SAP and it goes back a number of years now.

And.

It is something that they bestowed upon us.

Our relationship has been flourishing over the past few years because of the.

The degree to which we deploy their technology and and the usefulness that we get out of it. So I think they really like seeing how we leverage their technology.

And as a result.

It gets us as I mentioned.

We're in a.

And a different stratosphere.

When you think about SAP customer base, and then you think about where being in the top 1%.

It's unique air and.

So as I mentioned, it does get us relationships at very high levels. There is a an SAP board member that is assigned to us.

As a customer we have relationships again, it obviously had really really high levels, but it gives us access to their developers.

And to their technologies.

On the front end instead of it being rolled out and then we got to figure out we can have input and instead of just having something rollout and then we got to figure out how to how to manage through the change. So so when you're in that 1%.

Hugh.

You have the year of those folks and allows you to impact.

Those items go so as a result, we think that's an advantage for us and.

We're very pleased with it and very pleased with our investment in SAP.

And we're seeing.

Real dividends from that as we I think we've laid out over the past few quarters.

That sounds great. Thanks, I'll turn it over.

Thank you Shlomo Rosenbaum Stifel. Please go ahead.

Hi, Good morning, Thank you for taking my questions.

Where are you now in terms of the only opening up and getting back to normal like kind of an apples to apples basis in terms of volumes with your customers. So pre COVID-19 versus where you are today, how much more juice is left in that kind of recovery play for.

Things, just kind of opening up more and getting back to your historical basis, Let's say 2019 volume levels.

Shlomo Greg Great question.

Customers are for the most part they are all open certainly there are some that are.

Unfortunately that did not survive through the pandemic.

The challenges at that.

Folks.

But our customers are all I'll say there are open.

They're not all at the same levels of consumption that they once were some are higher summer it lower.

We think theres still some opportunity there.

As the economy.

Opens up and.

To a larger degree as people are back more to work to a larger degree. So we think that's positive and we think there's also some hidden.

Benefits that we can get from the fact that during the throughout the pandemic.

As we've talked about the customers see us in a different light.

How we handled their accounts how we handled.

Their invoices there the lack of increase of the flexibility that we provided.

But also the access to product that they didn't even know that we provided in the past. So shlomo that is an advantage for us. The fact that they look at it and they say Wow we didn't.

We didn't realise cintas provided these items they can get them, they're great to work with their consistent.

And a reasonable so as a result that I think.

Thats a different level of.

Different pool level.

And.

But we still think theres, even more opportunities within that customer base, where.

Folks.

They will get back to a spend level where around where they once were so we think.

The future looks quite attractive from that standpoint.

Okay. Thank you and then just to clarify maybe this is for you Mike.

The equity method investments was the supply chain technology business early stage that you bought in and then you decided that you wanted to own all of it but it's not a product sale. It's a capability to manage our business internally is that we're talking about.

Okay.

Got it.

And it has been an entity, where we've we've done product innovation that has created products for the rental division, particularly in facility services.

While it isn't a direct producer of revenue it has created.

Products over the years that have created revenue streams for the rental division.

Okay Alright.

Alright, Thank you very much.

Toni Kaplan Morgan Stanley . Please go ahead.

Thank you.

I had to ask one more follow up on inflation and whether you have.

Inflationary escalators built into the contracts and if you do you know what percent of contracts to have that okay.

Tony.

I appreciate the question.

As I mentioned earlier, we have such a broad customer base that you name. It we haven't from a contractual standpoint generally speaking.

We have the ability to raise price.

And no limits and do so as we deem appropriate.

<unk>.

Fundamentally and practically how we've handled it as we go into we talked to the customer once a year and explain what the.

The adjusted that price adjustment is.

And we manage through that so but no. We're not limited certainly do we have some certain customers that we have limits on absolutely, but generally speaking no. We're not we're not limited from that standpoint, it's more about making good long term practical decisions.

That help us retain those customers for life.

And while we're at I will just I will say our customer retention rates are are.

A really attractive right now.

They have been.

Since for.

For the past couple of years and in there. They are they have certainly not degraded. So we're excited about that I think in large part it's our approach.

Tony that we take on this subject about the flexibility the pricing the reasonableness.

And we have good conversations that I think people understand and and we can we can manage through it.

Great and there were a couple of.

Question about different verticals earlier, and you mentioned a couple of women specific but wanted to understand if there were certain verticals outside of.

And that goes healthcare.

Hospitality that we mentioned earlier.

That has seen higher or lower growth than normal.

Just if there's any others that.

What.

It makes sense to call out and then related I just wanted to hear any color on the new business pipeline.

Sure. So hospitality is obviously as you are reading in the midterm.

And the journal and other periodicals.

Bookings are way up for those folks there so thats bounce back nicely healthcare has been.

Some stops and starts.

But but the demand for our products have been very consistent.

And.

Through the pandemic.

The us being having product available was a big deal.

And the movement towards getting away from.

In many cases as folks look at saying, Hey, we don't want a onetime disposable they're hard to access not waiting for the environment and going to reusable has been been great in healthcare.

But we've kind of detailed out in the past.

Education sector.

Has.

Ben.

I would say a little bit of stops and starts as well in the fact that they literally stopped and started.

There are schools in many cases.

But.

But generally speaking the education sector is.

It's doing quite well.

Then.

Lastly, with the the government sector Thats, obviously been really consistent.

And we like our vertical we like our approach in those areas.

And they're all growing attractively and and we expect them to continue to grow attractively based upon our strategy there.

Thank you.

Thank you.

Thank you all and there are no further questions in the queue I would like to hand, the call back over to Mr. Paul Adler for any additional or closing remarks over to you Sir.

Alright, thanks, Thanks, Sarah and thank you all for joining US. This morning, we will issue our fourth quarter of fiscal 2022 financial results in July we look forward to speaking with you again at that time. Thank you.

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

Okay.

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