Q4 2022 Cintas Corp Earnings Call

July 14, 2022

2022 earnings release conference call.

This conference is being recorded at this time I would like to turn the conference over to Mr. Paul <unk>, Vice President Treasurer Investor Relations. Please go ahead Sir.

Thanks Darren.

Thank you everyone for joining US with me is Todd Schneider, President and Chief Executive Officer, and Mike <unk> Executive Vice President and Chief Financial Officer will discuss our fiscal 2022 fourth quarter results.

After our commentary we will open the call to questions from analysts.

Private Securities Litigation Reform Act of 1995 provides a safe harbor from Civil litigation for forward looking statements. This conference call contains forward looking statements that reflect the company's current views as to future events and financial performance. These forward looking statements are subject to risks and uncertainties, which could cause.

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 Todd.

Thank you Paul.

Our fourth quarter financial results were led by a strong revenue increase of 13.0% to $2.07 billion.

Despite strong inflationary headwinds operating income margin increased 10 basis points to 19, 5% in.

<unk> grew 13, 8% to $2 81.

Okay.

Our salesforce continues to add new customers and penetrate and cross sell our existing base.

Business is prioritize all we provide including image safety cleanliness and compliance.

Challenged with finding labor to run their business heightened concerns over standardization and inflationary labor and purchasing cost businesses increasingly outsource the center to help them get ready for the workday.

We were able to deliver increased operating margin and EPS. Despite this period of significant inflation 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.

Fourth quarter free cash flow increased 15, 2% from last year.

On June 15th we paid shareholders $98 $2 million in quarterly dividends.

And during the fourth quarter and through July 13, 2022, we purchased we purchased $496 $5 million of syntax common stock under our buyback program.

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

We are pleased with our fourth quarter financial results. They conclude a fiscal year of significant accomplishments, including the following.

Fiscal year 'twenty two revenue was a record 785 billion an increase of 10, 4%.

Organic revenue growth rate was 10, 2%.

Excluding two gains recorded this fiscal year and one recorded last fiscal year operating income margin increased 50 basis points to 19, 7%.

We allocated capital to improve shareholder return.

Acquisition spend was $164 2 million.

In fiscal 'twenty, two and up until today, we repurchased four 3 million shares of Cintas stock for a total of 162 billion.

Also we increased the dividend 26, 7%.

We've increased the dividend every year since going public which is 38 consecutive years.

We made significant progress on our digital transformation journey.

Our customers continue to find added value in managing their program through our online solution.

We expect the ease of doing business with us to drive greater customer retention and faster revenue realization.

We are actively using our new rolled out proprietary routing technology, which we call smart truck.

This technology helps us make smarter routing decisions, enabling us to spend more time with our customers on service and sales.

It also allows us to reduce energy usage and expense by driving fewer miles.

We also made great strides in data analytics and enhanced business reporting.

Helping us target penetration cross selling operational efficiencies and pricing opportunities.

In addition, as part of our steadfast commitment to corporate responsibility.

We issued our second environmental social and governance or ESG report.

It's a more robust report.

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

Our corporate culture is based on doing what's right and challenging ourselves to improve.

With this in mind, we announced our ambition to achieve net zero greenhouse gas emissions by 2050.

And finally, our actions are being recognized we were again named to the prestigious Fortune 500.

It's an honor to be recognized among the most successful and respected companies.

We were also recently added to the FTSE for good Index series.

The index series includes companies demonstrating strong ESG practices.

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

Cintas has grown revenue and adjusted EPS in 51 of the past 53 years.

And our prospects for continued profitable growth are great.

The result in part from a strong value proposition and a vast total addressable market.

Every business goods, producing or services provided has a need for image safety cleanliness or compliance.

Operating our business is increasingly complex.

Rather than doing it themselves.

<unk> is increasingly outsource the cintas.

We provide the products and perform the services better faster and economically frame businesses to concentrate on their core competency.

Since every business has a need for image safety cleanliness or compliance our total addressable market is vast.

The prospects for uniform our work for our rental are significant.

The uncertain workwear rental market is tremendous.

Tens of billions of dollars of workwear are sold by retailers each year to workers in every sector of the economy.

There are millions of people in health care alone.

Hospitals urgent care Doctor's office, Dennis offices in long term care going to work every day and scrubs purchase from retailers.

We focus on targeting these retail customers converting them to a rental program.

The fact is consistently 60% of our new customers are converted from retail to our rental program speaks to the size of the opportunity as well as our continued success.

Plus we are more than just a uniform rental company.

More than half of our revenue is from facility services, including hygiene floor care items, such as dust mats and mops cleaning tools like microfiber, Mops and towels first aid cabinets services and fire protection services, including test and inspection test and inspection of extinguishers and alarms.

Every business that has a door floor wall bathroom and employees as a sales prospect.

Our organic revenue growth rates are indicative of our compelling value proposition and tremendous market stocks.

We grow revenue in multiples of GDP and jobs growth because of ample supply and demand for our products and services.

Our growth in revenue is profitable growth and our operating margins have a long runway for expansion.

Gross results in more buying power with our suppliers.

It produces operating leverage.

Route density increases, reducing energy expenses, and providing more time to spend with customers on service and SaaS <unk>.

Growth means more volume in the plants covering fixed cost of building machinery and equipment.

And when we penetrate existing customers with more products and services the incremental operating margins are even stronger because we realize more revenue per service staff.

The future of Cintas remains bright.

I'll now turn the call over to Mike to provide the details of our fourth quarter results and our financial expectations for fiscal 'twenty three.

Thanks, Todd and good morning, our fiscal 2022 fourth quarter revenue of 2.07 billion compares to $1 $84 billion last year, the organic revenue growth rate adjusted for acquisitions divestitures and foreign currency exchange rate fluctuations was 12, 7%.

The uniform rental and facility services operating segment revenue for the fourth quarter of fiscal 'twenty, two was $1 63 billion compared.

Compared to $1 $47 billion last year.

Organic revenue growth was 10, 5%.

Our first aid and safety services operating segment revenue for the fourth quarter was $218 2 million compared to $186 $9 million last year.

Organic revenue growth was 15, 1%.

This strong growth rate reflects the growing momentum of our first aid cabinet business, which grew 25% in the fourth quarter.

While personal protective equipment remains elevated compared to pre COVID-19 levels PPE revenue was about 7% less than the fourth quarter of last year.

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

All other revenue was $226 2 million compared to $181 $9 million last year.

The fire business organic growth rate was 18, 3% in the uniform direct sale business organic growth rate was 53, 5%.

Both businesses finished the year strong.

Gross margin for the fourth quarter of fiscal 'twenty, two was $946 2 million compared to $859 $1 million last year, an increase of 10, 1%.

Gross margin as a percent of revenue was 45, 6% for the fourth quarter of fiscal 'twenty, two compared to 46, 8% last year.

Gross margin percentage by business was 45, 7% for the uniform rental and facility services segment 46, 1% for first aid and safety services 47, 5% for fire safety services and 39, 3% for uniform direct sale.

Income of $404 4 million compared to $356 $4 million last year, an increase of 13, 5%.

Operating income margin was 19, 5% compared to 19, 4% reported last year, a 10 basis point increase.

Our effective tax rate for the fourth quarter was 22, 8% compared to 19, 4% last year. The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense.

Net income for the fourth quarter was $294 $5 million.

Compared to $267 $7 million last year.

Diluted EPS was $2 81.

Compared to $2 47 last year, an increase of 13, 8%.

Note that the higher effective tax rate in this year's fourth quarter was a 500 basis point headwind to the EPS growth rate and a <unk> <unk> headwind to EPS.

For our fiscal year 'twenty three we expect our revenue to be in the range of 808, $4 7 billion.

To 858 billion in.

An increase of seven 8% to nine 2% over fiscal 'twenty two.

We expect diluted EPS to be in the range of $11 90.

To $12 30.

Please note the following.

Fiscal 'twenty two included a gain on sale of operating assets in the first quarter and a gain on an equity investment in the third quarter. Excluding these items fiscal 'twenty two operating income was 155 billion.

Margin of 19, 7%.

And diluted EPS was $11 28.

Please see the table in our earnings press release for more information.

Fiscal 'twenty three operating income is expected to be in the range of $1 68 billion.

To $173 billion.

Compared to 155 billion in.

In fiscal 'twenty two after excluding the gains.

Fiscal 'twenty three interest expense is expected to be approximately $110 million compared to $88 8 million in fiscal 'twenty two due in part to higher interest rates.

Our fiscal 'twenty three effective tax rate is expected to be approximately 20%.

This compares to a rate of 17, 9% in fiscal 'twenty two after excluding the gains in there their related tax impacts.

The expected higher effective tax rate will negatively impact fiscal 'twenty three diluted EPS by approximately 32 cents per share and diluted EPS growth by approximately 290 basis points.

Our financial guidance includes share buybacks through July 13, 2022, but does not include the impact of any future share buybacks.

And we remain in a dynamic environment that continue that can continue to change our guidance contemplates a stable economy and excludes pandemic related setbacks or economic downturns.

I'll turn it back over to Paul.

That concludes our prepared remarks.

Now we are happy to answer questions from the analysts.

Okay.

Darrin I'll turn it over to you.

Thank you.

Like to ask a question please signal by pressing star one on your telephone keypad.

Please restrict yourself to one question and one follow up question.

Again star.

Star one to ask a question, we'll pause for a moment tomorrow, everyone an opportunity to signal.

We will now take our first question from Faiza <unk> from Deutsche Bank. Please go ahead. Your line is open.

Yes, hi, good morning, everyone and thank you for taking the question.

I guess my first question is just around you mentioned that your guidance contemplates a stable economic environment.

And does not contemplate.

In any economic downturn could you maybe.

Talk to us more about that.

I know that historically.

It performed.

But to the extent they are.

A lot of concerns around the potential of this auction.

The United States and globally could you maybe talk a little bit about how.

Your outlook May change to the extent that we run into.

Into an economic downturn.

Certainly faiza. Thank you for the question and good morning.

When we think about our guidance for next year for fiscal 'twenty three.

We like our momentum, we like where we are.

Through this point in our fiscal year.

We like our sales productivity, we like our leverage that we think we're getting and we are not trying to predict the next recession.

<unk>.

And certainly not the depth or breadth.

Of that recession.

In many ways I hope that my customers don't read the newspaper or look at ever listened to the news because yes, what you hear there.

Certainly.

Scattered approaches out there, but what I can tell you is.

We like what we're seeing in our business, we like the momentum that we're seeing our business.

And.

And if.

A recession occurs.

Downturn occurs then then we will manage it appropriately which we have always done.

And we will continue to do so and we're quite confident in our ability to do so.

We remain poised and we're watching it very closely.

Excellent.

Just as a follow up could you talk about energy costs.

There's been quite a bit of volatility as it relates to oil prices, you've historically disclosed how much energy impacted your.

Jim maybe could you just talk to us about.

What the impact was this quarter and what you're anticipating for 2023.

<unk> is our fourth quarter energy for the total company was two 5% that's up 40 basis points from a year ago in our rental segment.

Energy was up 50 basis points, so just a little bit more in that business. Our expectation is on the whole.

Fiscal 'twenty three compared to fiscal 'twenty, two we're going to see.

An increase of call it 20% to 30 basis points.

We certainly have seen the energy high in June and the first part of the.

Of our quarter here.

But it's nice to see that the price its bumps come down just a little bit in the last.

Couple of weeks and our expectation is that it's not going to stay at this elevated level, but certainly higher than our fiscal 'twenty two year.

Understood. Thank you so much.

Thank you. Thank you. Thank you we will now take our next question from Hamzah <unk> from Jefferies. Please go ahead. Your line is open.

Hi, good morning.

My first question is just around the labor challenges labor availability.

Could you give us a sense of.

How much demand could you not because labor was an issue.

And is that is that fair was there demand out there that you couldnt meet because of labor challenges and if so what would the growth have been if labor wasn't an issue.

And do you see labor normalizing at some point do you have some visibility into that any thoughts there.

Okay.

Hamzah. It is thank you for your question is certainly a challenging environment on the labor side, but I am quite happy where we are SaaS and.

And our team has done an incredible job in managing through that process.

The demand for our customers as you can see is quite robust and we're meeting that demand.

So.

It wouldn't it wouldn't be popular here if if.

If someone said that hey, I can't I can't meet the demand. So my revenues aren't going be as good that's not how we run our business.

And we're proud of the fact that we're staffed well.

We've got a really great team that is meeting.

The customers needs and exceeding them and.

And as far as labor in the future that's a tough one but.

You would think that it might be easing a bit, but we're really not seeing it it's trying to attract and retain and develop.

Really good people is it's challenging today as I can ever remember in my career.

But when things are really hard like that we think we it gives us a chance to shine and I think we're doing just exactly that.

Got it and.

BARDA largest stock back and continue to.

Just sort of any thoughts there I don't want to your competitors is spinning off their business.

M&A environment.

What youre seeing there or have valuations come in with the market coming in and with some of the labor challenges maybe primary to operators are are more distressed than your business.

Great question, Yeah, we don't comment specifically on M&A, but what I can tell you is this that we are actively pursuing deals of all shapes and sizes.

And.

Certainly valuations matter certain.

But it really takes two to dance and we've got to find the.

<unk> situation has to occur for a.

And the owner of an organization of shareholders of an organization.

To be willing sellers and that tends to pace it more than anything as you mentioned.

Our balance sheet, we love our position and we are ready willing enable to make deals of all shapes and sizes.

Okay, great. Thank you.

Thank you.

Thank you we'll now take our next question from George Tong from Goldman Sachs. Please go ahead. Your line is open.

Hi, Thanks, good morning.

Can you provide an update on how customer purchasing behaviors have changed in the current environment, However, add stops and cross selling evolved among your customer base.

George.

The <unk>.

Current customer penetration the current customer buying patterns have been good we as you can see in our in our revenue over.

Over the course of the year, our revenue has accelerated each quarter end and thats due in part because of really good new business, but our existing customers.

The penetration we're seeing.

At those customers has gone very well and that's that certainly has been a part of the contribution of the accelerating growth.

Todd mentioned, we love our momentum as we've as you can certainly see through the quarterly growth throughout this year and are in a pretty good guide.

And we just we haven't seen a change in their behavior.

Our our value propositions that Todd talked about in our script and the outsourcing needs and the difficulties that are that are facing businesses because of the labor challenges that.

They're facing it has resonated our value has resonated really well with with those customers and so the outsourcing has been good so all in all George we like the momentum and the performance of those existing customers has been really good.

Very helpful. Thank you and then with respect to pricing trends can.

Can you talk a little bit about how that also changed in the current environment and your latest pricing increases.

Our fully offsetting input cost inflation or more than offsetting input cost inflation.

George Great question.

As I mentioned earlier, it's a very challenging environment.

We've said all along that.

We're not immune from inflation.

But we really like our plan and our investments and.

And.

And clearly pricing is a component of our strategy it has to be.

Input costs are significant.

<unk>.

Because specifically labor and material costs.

We think we're doing.

Great job with that or our price adjustments are certainly above historical as.

As they need to be too.

To address the costs that are coming through the organization.

We've done a really nice job of leveraging SG&A.

To provide us room to invest in other areas, where we've had to add people.

And certainly.

<unk>.

And labor rates et cetera.

But it's it's working nicely and.

<unk>.

Part of our.

Of our focus a big part of our focus is we are.

Looking at our customers from a long term standpoint, and saying, yes, we have to adjust price and it will be above historical.

However, we are going to find a way to grow margins and do so in ways.

Other than just pricing and we're doing that in and certainly many key initiatives two.

To help improve and find efficiencies in our business. So you didn't ask specifically about that but I think thats, what youre getting at and.

And I'll, just provide a little bit more color on that because I think it might be helpful too.

For folks to understand that as we take this long term approach with customers.

We'll adjust price, but we're going to find efficiencies. So that we can still improve our business.

And improved margins I mentioned in our script and by the way most of this of our efficiencies are tied to SAP and our digital transformation.

S&P is the backbone of how we.

Run our business and how we find we're able to enjoy the digital transformation that we're experiencing and our customers are experiencing as well. So just bear with me I'll walk through a few of these for some color I mentioned, our <unk> online portal.

It provides a really nice leverage it provides us improved revenue via sales and retention because customers value the ability to manage their program and pay their bills.

On their time not just when our office is available. So that's great. But it also provides us some improved productivity because it allows customers to self serve instead of our partners happy to take care of that as well.

I mentioned in the script as well, our smart truck technology, which is proprietary routing technology.

Allows for more efficient routing and tracking of our vehicles.

Where does this help us it helps us and provides us more time that we can spend with customers instead of driving that's more productivity.

It provides real time tracking to assist with customer needs.

US reduce idle times, which is obviously.

<unk> to us lower fuel consumption, and obviously lower GHT emissions as a result, and in fact over the last three quarters within our rental division our distance between customers has reduced 5%.

Which is just it's just finding and efficiency in our business by leveraging technology and.

Because driving.

We've always said when the wheels are moving we don't generate any revenue, which one will stop so that's important to US and then we also have something.

We've rolled out through our technology transformation or digital transformation, where we call our operational excellence dashboards.

Which allows for us the ability to evaluate our production facilities are plants to see how they are performing without having to be at each plant physically to evaluate performance. So in the past you had to be out of plant two to see how they were performing with a on time.

We are.

Turn times in our wash alleys, we track everything and now we have <unk>.

Technology that allows us to do that and.

So, it's all driven because of our SAP platform.

Platform.

Many of this it ends up showing up in faster turnaround a product that is utilization of in service inventory, which helps offset purchases.

It's been significant for us and I thought I'd, just provide a little color because.

Because I thought it might help you as you think about pricing and <unk>.

We are fighting inflation.

That's very helpful color. Thank you very much.

Thank you.

Thank you we will now take our next question from Ashish <unk> from RBC. Please go ahead. Your line is open.

Thanks for taking my question I, just wanted to focus on the healthcare government and education vertical those three key verticals that a key area of focus how is the progress on that front and then maybe a more broader question around the economic sensitivity of your end market.

Just wanted to follow up on the earlier question like how much of the revenue.

From more sensitive and market voices more recession resilient end market any color on that front will be helpful. Thanks.

Ashish Thanks for the question.

Our verticals are.

Quite robust we've invested significantly there.

And we look at those businesses.

How we operate the products the services that we're providing the tools to our partners.

And that provides us.

Advantages in the marketplace and helps us.

<unk> positions us to provide better services to our customers.

Which is important to us and <unk>.

Certainly the education sectors had the last two years have been a bit bumpy for them. It seems like there, meaning with close enclosures and what have you.

That appears to be behind them hopefully.

The government sector.

It's been very consistent for us hospitality as you read of has been quite robust.

And continue the demand in that.

In the hospitality sector seems to be quite good.

<unk>.

And when we think about our fortune 1000 and corporate accounts.

The sectors.

Our customers seem to be doing quite well.

And trying to.

See into the future and CEO what will occur.

With the recession imminent or we end one is it going to be next year.

Sure what I can tell you is.

Our value proposition, what Mike spoke about.

The items that we provide are important to people.

<unk> compliance and standardization image.

Wellness those things are very important and then when you combine that with the fact that it's.

There is still over 11 million job openings in the country and as a result, it's tough for our customers to to hire and train and keep their people and they're looking to us to outsource items and and we're we're in a great position to take that on and we're happy to take that on and.

And help them with those those functions.

That's very helpful color and maybe just a quick one on the follow up on the healthcare I know the last disclosure was it was I think almost 7% of the revenue with <unk> community to be pushed into a bit heading into Mcdonald I was wondering is it possible to provide any update on that front, particularly on the healthcare side.

Yes, the health care is.

There's been a absolute great vertical for us it's a very important one.

It's our.

Largest vertical as we look at.

The opportunity is still it's still under 10% we see an.

An amazing runway there and.

Big.

Big items in the future when you think over the coming years.

Again, we're organized appropriately too.

To meet the needs of those customers, we know really well and.

And we listen to what they are.

Their needs are and we're addressing and continuing to invest in technology that will help them be more successful to help them run a better business and.

We're quite quite.

Quite bullish on that on that vertical.

That's great and congrats on the strong momentum in the business.

Thank you.

Thank you we will now take our next question from Andy Wittmann from Baird. Please go ahead. Your line is open.

Okay, great. Thanks, I was just wondering if.

Okay.

As you look back at the fact that you grew margins during COVID-19.

Recently, just a couple of years ago does that limit any flexibility that you have on your margins.

Excuse me on your P&L.

We're headed into the next recession.

Andy Thanks for the question.

It depends upon.

The.

When how long how deep that recession is in.

That's that's for others to to try to forecast.

But we see.

Fortunately, we have plenty of runway on finding efficiencies in our business.

The.

And when we think about the value that we're providing our customers.

When our customers are healthy our business is that much better, but we will.

Fight through whenever recession comes our way, we've done that and we've shown the ability to grow sales and profits in.

I would say just about every operating environment out there.

One of the past 53 years, the exception being the OE dollars nine.

I certainly hope that it's not that deep nasty recession whatever comes next.

But we'll be prepared to manage through that as you've seen us do over the years.

Andy I might I might just add.

We certainly adjusted at the beginning of the pandemic, our cost structure, and we're able to pull costs out but as you can as you can imagine for the last I'll call. It five quarters. Our growth has been our revenue growth has been really solid and accelerating and so along the way there has been.

Investments that have been nessus.

<unk> necessary and investments that we've wanted to make and.

That means we've added growth routes back that we took out in the early days of the pandemic, we have added capacity.

In our production facilities to handle this great volume growth that.

And that we've had and so we've got we've got this investment going on right now.

And as Todd said look if the if the environment changes and we need to pivot.

You've seen us pivot pretty effectively certainly in the last few years and we will do that again, if the if the economic situation requires us to do so.

That's helpful color.

And it usually asks about the all other segment, but there was a big number on the direct sale I think you said plus 53% year over year, obviously, the comps were relatively easy but it was that just a program that was contained in the quarter or do you is there something changed in the outlook that could.

Flow into <unk> or more sustainably.

Change in how that business is going to market or how customers are reacting.

Great. Thank you Andy.

And the partners in that area. Thank you for asking about it as well.

As you know that.

There can be a little bit more spiky.

The direct sale business, but.

The comps were easier but.

But nevertheless, we like the momentum we have in that business.

Yes.

Diversified our customer base.

We're selling to a broader area we've got.

Nice position in that market.

And yes, we like where we are now certainly comps will get tougher next year. So.

Even more so in the back half of the year.

Not just for that business, but all of our businesses, but we really like the momentum in the position in the marketplace in that business.

Great. Thanks, guys.

Thank you.

Thank you we will now take our next question from.

Nick from Barclays. Please go ahead your line is open.

Thank you good morning, Todd.

Todd. Thank you earlier call those unit going to productively examples we talked about and despite the high inflation environment. You guys are one of the few companies that is showing margin expansion and so I was hoping maybe you or Mike.

Remind us of the big cost buckets, and how you are being able to manage two different based on the environment to show this margin expansion and how perhaps sustainable it could be.

Sure Manav.

Certainly when you think about the cost structure and I'll speak mostly to our rental business certainly labor is an important.

Bucket for us.

And.

And as you've heard Todd explained over the last four quarters or so we've worked really hard over the last several years to improve or increase the rates at higher than I'll say historical averages and that left us.

Not flat footed in this challenging environment and it's allowed us to.

Two to continue to raise but not at an alarming rate that maybe some of our other competitors have had to do and we will continue to manage that very very appropriately.

<unk>.

The other bucket that I'll mention is our material cost certainly material cost is a big component.

And as you know we are able to amortize.

<unk>.

Although rental items. So the items that we are re using in the business in a recurring nature garments.

Just mats mops et cetera shop towels.

And so we're able to amortize those and.

So we don't get inflation.

Impact immediately these these.

This amortization allows us.

Two to understand what's coming and allows us to anticipate and that allows our global supply chain to flex when we need to to change volumes around.

And that's very important for us to be able to see ahead and the other thing it allows us to do.

It allows us to potentially get a couple of price increases in before that that I'll.

I will say higher cost even hits our P&L. So for example, when we have if we have cost increases in our materials and we amortize those over 18 months.

Thats first that first months of higher cost.

118th of it the second the second month, we get to 18% of it.

So it doesn't fully hit our P&L for 18 months, we can we can adapt make decisions, including pricing decisions before that fully hits. So so we have this we've got this nice I'll call it hedge in that part of the cost structure in that.

Certainly as an important part of our cost structure.

And the other thing I'll say is certainly we've got some infrastructure and.

And we can leverage that infrastructure pretty well with revenue growth like we've got it today and the momentum and so we've been able to manage.

All of those buckets.

In different ways, but quite appropriately and then when you couple all of those the way we manage those different buckets with the initiatives that Todd spoke of to get efficiencies labor efficiencies productivity improvements.

Technology improvements those things can really help us as we as we face inflation.

And as Todd laid out.

We've got a pretty good game plan against it as you've seen we've in this and this.

Year just ended.

In a pretty difficult inflationary environment, we were able to raise our operating margins 50 basis points.

Thank you Mike Yeah, I think that's very helpful to give a lot of discussions just as a follow up the $164 million will be spent in the deal can you just give us a flavor of.

Kind of where how many of the sizeable deals and perhaps what that small tuck in pipeline looks like.

Sure, we're always working that pipeline and we've made some some very nice deals in our rental segment. This year. We also certainly made some very nice deals in our first aid and fire businesses as well and then we had the equity.

Investment.

That we effectively bought out and that is more of a global supply chain impacting.

Acquisition, but we like all of them.

And they have certainly provided some nice synergies.

Tuck in nature for the year and we will continue to work on those as we move forward. We think the pipeline is good.

Alright, Thank you very much.

Thank you.

Yes.

Thank you we will now take our next question from Andrew Steinman from Jpmorgan. Please go ahead. Your line is open.

Hi, two questions. The first one is in the 'twenty three revenue guide that you gave percentages in dollars could you. Just also give that in terms of the percent change in our organic constant currency numbers.

Well, Chris I assume FX makes a difference in M&A might have some needle moving and the second question I just wanted to hear more about your first aid business like particularly the cabinets business like what percentage of first aid is in cabinets now versus pre COVID-19, how fast is it <unk>.

<unk> business growing and then we also introduced a new product Covid testing and Covid test kits and how is that going.

Sure.

Andrew I'll tackle the first part and turn the first aid question over to Todd So as it relates to our revenue guidance seven 8% on the low end nine 2% on the on the.

On the high end in the third and the fourth quarter, we had 30 basis points of organic benefit in FX.

The impact.

I would expect that we will see that continue for let's call. It the first half of the year and depending on then.

The acquisitions that we make in the in fiscal 'twenty three we may see that continue but those any future acquisitions are not baked into those numbers. So call. It the first half of the year, we will continue with something in the way of 20% to 30 basis points of Av.

M&A and FX.

And.

That's probably going to decrease then without any new M&A activity in the back half of the year.

Does that answer your question Andrew.

Okay.

And then Todd I'll turn it over to you for the first day it great. Thanks for the question Andrew.

Yes.

Certainly as a percent.

Our first aid cabinets dropped during COVID-19.

But it's coming back and coming back quite nicely in fact that grew 25% our first aid cabinet business did in Q4.

And that's very very encouraging and it's showing up in our margins as well. So we will continue to.

To be opportunistic and helping customers with the.

The breadth of our offering.

Certainly don't know exactly what Covid will bring this fall.

But.

We're focused on growing our first aid business, then helping all of our customers in that area and if that means they need.

No.

Covid test kits.

If they need masks the hub.

Name it.

But our focus is on trying to make sure that we're growing that that.

That profitable consistent.

First aid cabinet business and we're encouraged by the trends.

Okay. Thank you very much.

Thank you.

Thank you we will take our next question from Seth Weber from Wells Fargo. Please go ahead. Your line is open.

Hi, guys. Good morning, Thanks for taking my question.

Maybe for Mike can you just talk about I mean, the free cash flow is really strong here can you just talk about how youre thinking about capex going forward.

And just talk maybe give us a sense for kind of where youre at from a capacity utilization perspective, and whether you have enough capacity or.

Capex needs to go higher from here. Thanks.

Sure.

EES Seth we're.

Our first our free cash flow has been good our expectation is that.

That's not going to change in this upcoming fiscal 'twenty three year.

Our capex.

Look we expect it to be in the three to three 5% of revenue type of a range.

If you look over the last 10 years, that's maybe a little bit down from where we've been.

But we're going to keep keep investing in the business as it relates to our capacity we have had some really good growth.

This year and there are spots, where we've had to add capacity, but generally speaking.

<unk>.

I don't expect that it will have <unk>.

Significant.

And.

I'll say lumped together type of capacity investments that will happen over time as we continue to grow so our.

Our expectation is our good and healthy free cash flow will continue in fiscal 'twenty three.

Seth.

As I spoke about earlier one of the items that we're focused on is making sure that we leverage our infrastructure to its fullest whether that be our fleet, but also our production facilities and as I mentioned, our operating excellence technology platform is helping us to.

Two.

Make sure we're finding all the efficiencies in our business.

<unk>.

And in certain cases, thats, allowing us to forgo capex as a result, because we were able to find efficiencies in running our business and our production facilities as well and we will continue to do that as the very best we can.

Okay. Thanks, and then maybe just on on the fiber business can you just give us a little bit of color whats driving the strength there with double digit revenue strength.

Yes.

It's been it's been double digits for a while now and is that just you are taking share from smaller operators.

Is that where some of the inorganic growth is coming from just any color on how that business is being sustained at this kind of double digit level.

Sure Seth.

We really like the fire business.

We have a very good team thats operating and selling into our customer base. The uniqueness about the fire customers is there really is no no program market everybody is.

Is served.

<unk> served in some manner, but we've invested in.

In that business to make sure that we are positioned with the best people.

First technology that.

And that we are continuing to invest in there.

And the best training and and we're not really we like our spot there from a.

The levels of service that we're providing our customers and is getting noticed.

And that's a business that you want to feel good about who's walking in your facility and who is taking care of you and we think that we're well positioned so.

Good good momentum in that business and we're focused on.

Continuing that momentum.

Okay, guys. Thanks, very much I appreciate it.

Yes.

Thank you we'll take our next question from Heather <unk> from Bank of America. Please go ahead. Your line is open.

Hi, Thank you for taking my question I wanted to piggyback on some of the questions regarding.

Business risks.

Kathryn macro environment, if we do see one.

Can you just talk at a high level, how your business has changed.

Last decades, since the last economic recession or non COVID-19.

In terms of cyclicality.

Do you think is from an end customer perspective.

Prior to close you operate or from a product perspective, where you think you're better positioned today than you may have been a decade ago.

Sure Heather we I'll say a couple of things we've got first of all great momentum in the business and we love the value that we're providing our customers and the outsourcing.

<unk>.

That is needed in this challenging time is really resonating and working well for us so.

That's really important for us in any in any turn in the economy.

We like our momentum.

That's important.

I would say if you think about the last 10 years, our growth has been in multiples above GDP and why is that.

And multiples above.

Employment growth and why is that it's because we're able to sell number one too many what we call in the industry no programmers. So those that don't have a current recurring program and.

And thats important because.

And any kind of environment.

We go to prospects and existing customers and when we sell the value usually it's four things.

Things that they're already spending money on and so we're not we're not necessarily asking them to spend new money, we're asking them to spend money with us while we take work content away from them. So.

For example, we don't want you to do things, we don't want our customers to do it all themselves that takes time capacity labor et cetera, we want to help them do it and so as we take that work content away from them.

Again in any type of environment, that's helpful, but certainly in one where where businesses are feeling the pressure.

Of an economy that can really resonate and help so.

We like the way that our value is working and in the past, we've really been able to grow when there hasnt been much.

Economic growth or or employment growth and our expectation is we will continue to be able to do that 60% of our new business.

From those no programmers.

The other thing is look we've got a different kind of sales force today than we did at the <unk>.

10, 12 years ago and that sales forces.

Is really dialed in on on finding those no programmers finding the business and also penetrating more in our penetration has worked.

Very well, but so but that sales team is also focused on different verticals that we were walking by in the last recession in those verticals like healthcare.

It can be a little bit.

Less.

Impacted by recessions and Thats good for us so we like the the diversity in our customer base that we've created over the course of the last 10 years, we think moving forward that diversity is going to help us as we move forward.

In addition to that look we're going to continue to look for M&A opportunities and we're going to look for continue to look for.

Efficiency opportunities and those will help protect us in the next downturn, we can't predict when it may happen, if it's happening we can't predict how long how deep how broad it's going to be but we like where we are today with momentum and a value proposition that is resonating better than ever.

And and as you have seen Heather over the course of the last few years, if we need to pivot.

We've shown that we can pivot.

<unk>.

Pivot appropriately to match the environment.

Thank you I appreciate that.

Thank you we'll now take our next question from Toni Kaplan from Morgan Stanley . Please go ahead. Your line is open.

Thanks, so much.

Mike Sorry, if I missed this but in the fourth quarter.

Give the mix between.

Rental sub segments.

Shop, towels hygiene et cetera can you give us an updated breakdown there.

Hey, Tony It's Paul I do have that information and this is just the uniform rental and facility services segments measured on Q4's activity uniform rental which is the workwear that we rent carhartt. The healthcare scrubbers are in there that was 48% of the mix.

Dust, which is the mats the ops similar cleaning tools, 18% hygiene is 17%.

<unk> towels, four linens, which are typically eight brands towels.

Adult run throughout flat iron.

A machine that's 9% of the mix and then catalog revenue was about 4%.

And those percentages are very similar to last year, which.

Yes, I think speaks to the continued strong demand that we have for all the products and services within that segment.

Terrific.

And just sort of on a.

Similar lines, if you think about upselling within uniform rental.

What are the.

Real sort of new product that people are demanding what areas.

Obviously in terms of cross sell and we've seen a lot of success from.

Sanitizers and.

Test kits and things like that but when you look really specifically within rental.

What are sort of the new upselling opportunities that you're seeing the most succession.

Tony within rental.

We're seeing quite strong demand.

For all of our products and services and we really don't care, where it starts as far as the what we sell into a customer first because.

Because we have such a broad offering that will whatever they're interested in we will where we will help provide and then we will continue to provide additional offerings to them and but when you think about it right. If it's a tough environment to hire and retain people providing.

Providing.

A benefit of.

Workwear and laundering of workwear.

As a nice benefit for people.

<unk> helps to attract and retain people.

When you think about it.

If you're interested in are our restroom items when it's hard to.

When you are when you are busy and you're you're trying to run a business trying to deal with those items is something you'd rather you love to outsource and as I mentioned earlier, we were able to do it better faster cheaper.

All of that than what they can do for themselves.

And in many of those cases were not even asking for additional spend is just a reallocated spend to us so whether that's.

We have such a broad customer base it depends but I'm speaking more generically.

Got restrooms, you've got people.

You need products and services.

To help prepare your facility for either your customers your guest your employees.

Patients may be.

And.

So all of that is being is in very nice demand.

And certainly the focus on health wellness cleanliness safety is more so today than it was a few years ago, which we think is that as a positive for our business.

Terrific. Thanks.

Thank you.

Thank you we'll take our next question from Shlomo Rosenbaum from Stifel. Please go ahead. Your line is open.

Great. Thank you very much for taking my questions, Hey, Todd I will start with a question for you given the breadth of your business with like a million clients you have kind of a unique insight into mainstream America Main Street America.

What what is what is the sentiment amongst your clients and in terms of they are running their businesses and what youre thinking what are you hearing from the salespeople are they okay.

Leading back to the same kind of fear that we're seeing in the headlines in the newspapers and what the stock market seems to be indicating.

Or is it really not that way is there kind of a.

Disparity between the headlines and what Youre actually seeing on the street from your view.

Shlomo Great question, and you're right, we have such a broad and diverse customer base, we are up and down main street USA every single day and.

And we're watching it really closely.

It seems as though demand is quite strong there.

Demand within their business demand for our products and services.

As I mentioned earlier I hope.

I think we'd all be better off if nobody read in the news or listen to the news.

Because it seems like we are and we're trying to talk ourselves into it.

But but that being said, we're watching it really really closely because as Mike mentioned, we will pivot will pivot appropriately.

To date.

It appears as though main street USA is.

Is doing just fine.

We're encouraged by that.

Great. Thank you and then Hey, Mike maybe you could just talk a little bit about the dispersion of costs across the business units.

The margin expansion.

It was really pronounced in the first aid and safety and other and then.

Rental uniforms. So the margin come down is there do they have just much more significant energy and labor aspect to it or maybe you can kind of explain that to us.

Okay.

Sure.

Certainly the rental business is more affected by energy than the other businesses.

No question about it.

We had really nice quarters in our first aid business as you as you point out and what Youre seeing there is.

Of that cabinet growth that we talked about earlier in the call being 25% plus and that getting back to mix that we love and so we.

Our first aid team has really done a nice job of getting that.

Working on that mixing getting it back to.

On the I'll say pre pre pandemic type of mix closer to that kind of mixed so really good.

Mixed shift and momentum in that business are fire.

Uniform direct sale businesses.

Margins are certainly bear.

Benefiting from the Great top line.

Improvement, we're getting great leverage theyre not.

That all other is not affected by the energy in the same way that rental is.

And we're able to see some superb productivity out of that group too. So we really like that momentum on the rental side.

We like where the business is and we've been.

Investing in that business for the growth that we've seen in terms of an acceleration.

Throughout the year and.

Look.

Operating our business, Susan it's always a linear perfect linear function and that means there are times, when there's a little bit more investment in some quarters not as much in others.

And look overall, we love.

Love the trajectory of the rental business.

We have certainly.

Added some of those growth routes that I mentioned earlier some capacity in the in the.

Our production facilities.

But but we like where the move the momentum is going in all of those businesses, but it's not a linear it's not a perfectly linear type of a thing to operate our business.

Sure just to clarify in the.

Our focus in that.

Rental side I guess.

The obvious answer would be Oh, youre, seeing inflationary cost and thats whats kind of hitting that number but I want to just kind of figured out what youre seeing over here that is there a heavier weighting of investments in the last quarter or some of the things.

Exactly what youre, saying it may not be linear and it's not really the inflation that might be hitting you guys, but the fact that you are deciding to to continue to invest at this period.

Well I mean look.

The way that we typically invest as over time and as we needed and it's and it's generally incremental and and in this particular case in the rental business, we've been investing all year and sometimes.

We're running up against.

Pretty.

A pretty high comp.

In last year's fourth quarter and look it's I wouldn't say, it's an overinvestment or that we underinvested in the past. It's just simply that we are we are investing in the way that we appropriately need to and some of that is.

A little bit more labor.

Over the course of this year, where we're we're lapping a year fiscal 'twenty one that was.

Significantly impacted by the pandemic.

<unk>.

As we've gotten into fiscal 'twenty, two as we've accelerated our growth.

We need capacity to in order to grow.

I think Hamzah may have asked the question earlier about.

Are we able to find the labor that we need.

In order to continue to grow and Todd answered, yes, and that that investment is necessary.

But it's important for us, especially in the long term view that we have in that Todd talked about earlier.

Thank you.

A question from Scott Schneeberger from Oppenheimer. Please go ahead your line is open.

Thanks, very much <unk>.

Near the end here. So I'll just have one but if there is a few parts to it.

Most of the modeling so Mike probably for you.

Kind of a summary question on operating margin the guidance implies after a very good year of expansion in 'twenty two more expansion at the midpoint in 'twenty three what are the one or two things that you really worry about that could push you to the low end of the range.

And then what are the couple of items that could push you above and then the latter part of this question is cadence of operating margin into the into the into fiscal 'twenty. Three how comfortable are you and where you were thinking about for the first half of the year.

And then kind of you talked about higher interest expense. What do you think the cadence is of that and maybe some color on the tax rate. Thanks for fielding all that at once.

Sure I'll do my best.

Yes, the guide that we provided.

Provides for operating income growth of eight 6% at the low 12% at the high.

When we're comparing to that.

Adjusted 22 operating.

Income.

What can take us to the low.

I don't.

I don't we don't mean to be overconfident, but I would say that the things that concern us most are certainly the macro and what happens.

Outside of our control.

Right now, we really like the way the.

The prospects and the customers view our value.

Are they are our sales productivity numbers are really high.

And I think it's more about the macro for us and certainly we're not trying to time or predict a recession.

And our numbers don't necessarily incorporate a recession, but theres a little bit of economic movement that certainly can happen that may move us towards the low end of that range. If we don't see any.

Economic slowdown, we certainly given the revenue momentum, we certainly could exceed the high end so.

I would say, but more than anything it's about the macro and how does that impact us.

From an interest perspective.

Look the defense not finished and we do have some albeit a fairly small amount, but we do have some variable.

Interest.

Variable debt and the fed's not finished so we may see a little bit of an impact as we go through the year, but on the other hand.

We generate a lot of cash I talked about our free cash flow a little bit earlier, and if we feel like if we have available cash will certainly pay down some variable debt.

So I would say the the 110 that we gave in the guide is a reasonable number and I wouldn't expect that to move too much unless we unless we did something with the use of our cash potentially in M&A otherwise I think that 110 is a fairly solid type of a number.

From a tax rate perspective.

Look it's hard to predict what's going to happen in the stock market. It is hard to predict based on the stock market movement, how much we may see in the way of exercises of our of our stock options et cetera. Those are those things can have.

On impact.

Our tax rate.

And.

So it's hard to predict where we're going to be but that 20% that were in the guide I think thats a reasonable place for us.

What would take to move that down.

Would take a more significant amount of stock options being exercised than we're expecting or it or it certainly could be other discrete events that happen that we're that we're not expecting but I think the 20 percents are fairly good.

<unk> again.

Based on what we're seeing today.

Great great job answering that thanks a lot.

Thank you we have no further time, so I'll hand, the call back to the speakers for any additional or closing remarks.

Well. Thank you for joining us. This morning, we will issue our first quarter of fiscal 'twenty three financial results in September we look forward to speaking with you again at that time.

Thank you.

Thank you that concludes today's conference call you may now disconnect.

Okay.

[music].

Sure.

[music].

Good day, everyone and welcome to the Cintas fourth quarter full year 2022 earnings release Conference call.

This 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.

Thanks, Darren and thank you everyone for joining US with me is Todd Schneider, President and Chief Executive Officer, and Mike <unk> Executive Vice President and Chief Financial Officer.

I'll discuss our fiscal 2022 fourth 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.

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 Todd.

Thank you Paul.

Our fourth quarter financial results were led by a strong revenue increase of 13.0% to $2.07 billion.

Despite strong inflationary headwinds operating income margin increased 10 basis points to 19, 5% and EPS grew 13, 8% to $2 81.

Our sales force continues to add new customers and penetrate and cross sell our existing base.

Business is prioritize all we provide including image.

Cleanliness and compliance.

<unk> finding labor to run their business heightened concerns over standardization and inflationary labor and purchasing cost businesses increasingly outsource the center to help them get ready for the workday.

We were able to deliver increased operating margin and EPS. Despite this period of significant inflation 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.

Fourth quarter free cash flow increased 15, 2% from last year.

On June 15th we paid shareholders $98 $2 million in quarterly dividends.

And during the fourth quarter and through July 13, 2022, we purchased we purchased $496 $5 million of Cintas common stock under our buyback program.

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

We are pleased with our fourth quarter financial results. They conclude a fiscal year of significant accomplishments, including the following.

Fiscal year 'twenty two revenue was a record 785 billion an increase of 10, 4%.

The organic revenue growth rate was 10, 2%.

Excluding a two gains recorded this fiscal year and one recorded last fiscal year operating income margin increased 50 basis points to 19, 7%.

We allocated capital to improve shareholder return.

Acquisition spend was $164 2 million.

In fiscal 'twenty, two and up until today, we have repurchased four 3 million shares of Cintas stock for a total of 162 billion.

Also we increased the dividend 26, 7%.

We have increased the dividend every year since going public which is 38 consecutive years.