Q1 2023 Cintas Corp Earnings Call

September 28, 2022

Hey, everyone.

Walker.

23 earnings release Conference call today's call is being recorded at this time I'd like to turn the call over to Mr. Paul.

And Treasurer Investor Relations. Please go ahead Sir.

Pardon the interruption Mr.

To hear you.

Okay.

Thank you, yes, we were at were still on mute.

But thank you for joining us.

With me are Todd Schneider, President and Chief Executive Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer.

We will discuss our fiscal 2023 first quarter results.

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

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

I'll now turn the call over to Todd.

Paul.

We are pleased with our start to our fiscal year 2023.

First quarter total revenue grew 14, 2%.

Each of our businesses increase revenue at a double digit rate.

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

Excluding a onetime gain recorded in last year's first quarter selling and administrative expenses.

Operating income margin increased 20 basis points and EPS grew 12, 3%.

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

Businesses prioritize all we provide including image safety cleanliness and compliance.

And challenged with labor scarcity, and rising cost businesses continued to turn to send to us to help them get ready for the workday.

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

Turning now to our business units.

<unk> rental and facility services operating segment revenue for the first quarter of fiscal 'twenty three was one <unk> one.

170 billion.

Compared to $1 five $1 billion last year.

Organic revenue growth was 12, 3%.

Revenue growth was driven mostly from increased volume. Additionally.

Additionally, price increases contributed at a higher level than historically.

We believe such a mix of revenue drivers volume versus price is healthy and supportive of continued long term growth.

Our first aid and safety services operating segment revenue for the first quarter was $234 2 million compared to $199 $1 million last year.

Organic revenue growth was 15, 8%.

This rate reflects the continued momentum of our first aid cabinet business.

Which continues to grow more than 20%.

Personal protective equipment or PPE, while still elevated compared to pre COVID-19 levels declined again on a sequential basis.

We welcome this mix shift because the cabinet services, a more consistent revenue stream that has higher profit margins and PPE.

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

All other revenue was $234 5 million compared to $189 $7 million last year.

The fire business organic revenue growth rate was 17, 4%.

On the uniform direct sale business organic growth rate was 44, 1%.

Before turning the call over to Mike to provide additional details on our first quarter results.

I will provide our updated financial expectations for our fiscal year.

We are increasing our financial guidance.

We are raising our annual revenue expectations from a range of $8 $4 $7 billion to $858 billion to a range of $8 five eight to $8 67 billion.

Also we are raising our annual diluted EPS expectations from a range of $11 90 to $12 30.

To a range of $12 33.

$12 65.

Mike.

Thanks, Todd and good morning, our fiscal 2023 first quarter revenue was $2 $1 $7 billion compared to $1 $9 billion last year the.

The organic revenue growth rates adjusted for acquisitions divestitures and foreign currency exchange rate fluctuations was 13, 9%.

Gross margin for the first quarter of fiscal 2003 was 1.03 billion compared.

Compared to $902 $8 million last year, an increase of 13, 9%.

Gross margin as a percent of revenue was 47, 5% for the first quarter of fiscal 'twenty three compared to 47, 6% last year.

Energy expenses comprised of gasoline natural gas and electricity, where a headwind increasing 30 basis points from last year.

Gross margin percentage by business was 47, 5% for uniform rental and facility services 49, 6% for first aid and safety services 48, 8% for fire protection services and 37, 3% for uniform direct sale.

Operating income of $441 million compared to $394 $1 million last year <unk>.

Excluding last year's first quarter gain totaling $12 $1 million in recorded in selling and administrative expenses fiscal 'twenty three first quarter operating income increased 15, 2% and operating income margin increased 20 basis points to 23% from 21 <unk>.

Were sent last year.

Our effective tax rate for the first quarter was 14, 8% compared to 11% 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 first quarter was $351 $7 million compared to $331 $2 million last year.

Last year's first quarter diluted EPS contained nine <unk> from the previous previously mentioned gain and related income tax expense.

Excluding the gain and the related income tax expense this year's diluted EPS of $3 39.

Compared to $3 <unk> last year, an increase of 12, 3%.

First quarter operating cash flow increased 13, 8%.

On June 15, 2022, we paid shareholders $97 $7 million in quarterly dividends also during the quarter, we purchased $210 $8 million of <unk> 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.

Todd provided our annual financial guidance related to the guidance. Please note the following.

Fiscal 'twenty two included not only the gain on sale of operating assets in the first quarter, but also a gain on an equity method investment in the third quarter <unk>.

Excluding these items fiscal 'twenty two operating income was $1 $5 5 billion a 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 72 billion to $1 76 billion compared.

Compared to $1 $5 5 billion 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 and their related tax impacts.

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

Our financial guidance does not include the impact of any future share buybacks and.

And we remain in a dynamic environment that can 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. Please ask just one question and a single follow up if needed. Thank you.

And if you would like to ask a question at this time, please signal by pressing star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment, but again, please limit yourself to one question and one follow up question.

We'll now take our first question from Ashish.

<unk> of RBC capital markets. Please go ahead.

Thanks for taking my question I was wondering if you could just comment on the new business trend specifically around signing up new customers have you seen any changes there and any signs of elongation of sales cycles, particularly for larger customers.

Good morning, Ashish This is Todd thanks for the question.

Yes, our new business is quite robust.

We continue to be very successful in converting over no programmers into our programs in all of our businesses with the exception of fire, which obviously.

They're all everyone to program or in that business, but we're having really good success, there and we look at the total addressable market and it's still incredibly large and growing so that's exciting for us.

But as far as the sales cycle I haven't seen anything that would lead me to believe that the sales cycles elongated.

We've we've got really good momentum in our new business.

Very encouraged by that and.

As we've spoken about in the past.

Some of our investments that we have made are really paying off big.

And in the form of some of our unique products in our in our rent align with our carhartt products, our chef works and we've got a.

Care Flex line of scrubbed through Orlando, that's it's really successful in.

In a restroom unique restroom lines and then our first aid business not just the breadth of products that we're offering is really helping us get in the door and provide.

Great products and services to our customers. They are also seeing our investments in technology that we've made.

Whether it's.

Our garment tracking that is giving us a real advantage in the marketplace. Our garmin dispensing that we've seen and I've spoken about our <unk> portal, which is a.

Which is unique and advantage in the marketplace. It makes it easier to do business with us.

And that's important for our customers.

Stand up because our sales partners com.

Confidence in walking in the door. So some really good things.

Heading in that direction.

That's very helpful color and obviously, great to see that strong momentum into top line, maybe just on the margins.

A question around energy.

It looks like oil prices might be rolling.

Ruling off here or at least the fuel prices may be rolling off but the natural gas prices are going up how should we think about those puts and takes on Dana is your friend for the rest of the year.

Yeah. So when you think about our energy spend.

Certainly it's up over.

Where we were a year over prior.

<unk> 10 basis points.

Sequentially.

Trying to anticipate exactly where thats going ahead is challenging certainly but I can tell you. This we are we're focused on efficiencies that we can drive in our business that will lower our needs for natural gas and lower our needs for gas at the pump and we're leveraging those and thats.

Is that helps us with our <unk> emissions.

Helps us with our efficiencies in our in our business and in our spend.

And we're confident we can continue to make strides there. So that's that's.

Where exactly natural gas prices will go this winter with what's going on in Europe and in other areas, it's tough to tell for sure but.

We will manage through it and we see opportunities to improve in our in our business and we're leveraging that.

Ashish I might add that.

Right around 60% of our energy spend as is the gas.

Oil and.

Gas and diesel.

And the remainder is in electricity and natural gas. So the natural gas is a smaller component of that energy spend more of it is the price at the pump, which as you suggested is coming down.

That's very helpful color. Thanks again.

Thank you and we'll now take our next question from George Tong with Goldman Sachs. Please go ahead.

Hi, Thanks, good morning in the quarter, approximately what percentage of new business growth came from the no programmer market.

Good morning, George This is Todd.

The majority of our accounts are coming from no programmers. So that is that trend has been consistent over the years and continues and in a marketplace, where it's still difficult for.

Employers to find people to work.

Yes.

Offering a.

Value of this and the way we handle it with uniforms is attractive for them. So it's another benefit for customers and.

And they see that as an opportunity to attract their employees and retaining our employees and we have a one heckmann offering when it comes to that that makes it really attractive for people. So I'd say those trends continue as they have been in the in the past.

Got it can you provide an update on uniform demand trends from the healthcare vertical.

Yes, certainly.

So the the healthcare vertical is a very attractive vertical for us.

It's growing nicely.

<unk> are such in the United States and Canada that.

That that demand will continue.

And we're seeing we have some unique offerings in that area with garmin dispensing and our unique.

Scrub line that makes it attractive there are certainly other items that are.

That we rent into the health care market, whether it be an acute or non acute.

But we're.

We really like what we're seeing there from a from that demand.

I'll give you one example of a.

Of a hospital that.

About six months ago, we sold a scrub rental program into into that account and it was a nice very nice sized customer that you would you would recognize the name in that case. The nurses that we were providing the program too they were laundering the products at home.

In the nurse's voice to concerned about safety, meaning hey, what am I taking home.

I'm monitoring it and my laundering, it correctly and in that case, they chose <unk> because of our.

A few things one is our technology that we've deployed that's unique that allows us to manage inventory for them, which provides the requisite access to the product, which is really really important and it also helps control their costs based upon how we manage that inventory, but also improves the safety aspect.

Or it separate.

Separate from being a an employee benefit because those what I'll call potentially contaminated goods or scrubbed. They don't go home we laundry.

Appropriately via our hygienic.

Process Hygienically cleaning process.

Which allows them to have the confidence that their process correctly and when that is said improve safety.

And just as an anecdote.

I mentioned that was about six months ago.

Just recently, we sold a microfiber wipes rental program to that same hospital.

And so they use microfiber wipes in many ways, but in the most obvious one is that when they are cleaning guest rooms are patient rooms, we should say.

And in this case that the particular hospital they were purchasing those wipes and then they are having the I'll call them Hospital employees are evs type folks that were cleaning those on their on premise laundry.

And in that case.

They chose <unk> because it was able to we were able to reduce their labor costs theyre, having troubles getting access to labor.

And then again, we're processing those in a manner, where they can have great confidence that their process correctly with a hygienic.

Hygienically clean process so.

You ask your original question George was about.

Uniform demand in hospitals, which is quite good.

But it also there is so much that we can provide to those hospitals and I just want to give one example.

Give a little color around that.

Very helpful. Thank you.

Thank you.

I will now take our next question from Andy Wittman of Baird. Please go ahead.

Oh, great. Thanks for taking my questions I guess, Mike I, just wanted to talk a little bit about what.

Is implied in the guidance here, maybe a couple of different ways to think about that but how much conservatism is baked into the guidance. I know you made a couple of comments in the press.

Paired remarks is there any change maybe sequentially to the guidance the way youre factoring in the macro outlook.

And maybe any any leading indicators that you can give us that gives us confidence that.

The economy is performing at the rate that you think it is.

Okay.

Well, so let me start Andrew with the guidance the guidance implies.

And we're 60 days past when we can.

Gave the initial guidance the guidance implies really good growth.

Through the rest of the year, but as you know we do face some tougher comps as we as we saw the business pick up.

Last year throughout the year and so we would expect a little bit of deceleration from the growth levels of where we are.

But but still healthy growth in ending the year in a range of nine to over 10%.

And we like the momentum of the business today and our expectation right now is that we're not seeing any change in.

And the value that our customers are seeing and we're not changing we're not seeing any change in the way.

In the in the economy I'll say now.

Maybe I'll flip to margins briefly our margin expectation remains.

That we will see margin improvement during the year in that range that we provided.

Certainly contemplates that margin improvement, even in a pretty challenging type of economic environment.

So the guidance is.

A little bit better than we gave 60 days ago part part because of the first quarter part because of the momentum that we see in the business now as it relates to.

Trying to dissect what the economic picture is going to look like for the rest of the year.

Look it's.

That can be pretty difficult right.

There are there are some who say we may be in a recession. Today. There are some I would say we may be in a recession early 'twenty three.

Some of US say, we may be in a recession late in 'twenty three.

The fed has come out and said GDP for 'twenty three is going to be one 2%.

It's hard to predict what we're going to see in the economic picture as we move forward, but what what we know is that the momentum in our business today is really good.

The value proposition that our that our.

Customers see in our prospects see they are reacting very positively to it.

And because of that and many other factors.

We believe that momentum can continue along with healthy margins and that's what we've given you in our guidance.

Does that help.

To answer that question a bit.

It does thank you for that.

I guess I wanted to follow up with a question on I guess overall customer retention levels, considering that youre getting above historical averages and the price increases I thought maybe it would be helpful to comment on that and you guys have talked about the sales momentum a couple of different ways, but if you look at sales productivity on a per head basis is that <unk>.

<unk> on a year over year basis as well.

Okay.

Andy Thanks for the question this is Todd.

First off on retention our retention is very good.

Like where that is.

We like the momentum around that we're organizing around it appropriately to make sure that we're meeting and exceeding our customers' demands and.

And we like our.

Our product and service offering that we have and the customers find it attractive I mentioned some of the products and the technology that we have that are unique and.

And the customers like it I think they also like our approach that we took over the past couple of years about being.

Really flexible and empathetic with them as well as they were going through what they went through the various businesses.

Through.

Calendar 'twenty, one in calendar 'twenty to 2020, one I should say.

And with the pandemic. So I think that was that is benefiting us because they saw that we were.

We understood what they were challenged with and we pivoted to provide them what they needed instead of just telling them.

Here's what youre contracted to to buy so so I think all of that is paying off as far as productivity and new business, Yes, we like it is.

It's up and.

And we are.

Certainly we love our sales force there we think they are well trained well positioned.

When sales partners have.

Confidence in the products and the technology and the services that they're going to provide that.

That confidence is powerful and.

And it's showing itself in productivity.

And we like that we're also deploying up types of technology.

Via our investment with SAP.

Paying off and a number of ways I'll just give you one as it relates to sales, which is investing in technology that allows for what I'll call backs best next prospect for a sales partner, meaning instead of.

Just calling blindly on businesses, we want to drive to our sales team.

Who are who will be the next best.

Prospect to call, which.

Through analytics, we can we can tell them.

Where to spend their time.

And that's better for the partner that's better for our company again that provides more confidence and yes. So that those types of investments are paying dividends for us.

Great. Thank you.

Thank you.

We can now take our next question from Tim Mulrooney of William Blair. Please go ahead.

Yes, good morning.

We know energy was a slight headwind to margins in the quarter relative to last year, but the gross margins were only down 10 basis points. So I was curious how some of the other cost buckets are trending how our labor cost trending where those a headwind or tailwind to margins and anything else peg to point out here like maybe materials and supplies.

Tim maybe I'll, maybe I'll start on that.

From a gross margin perspective.

Youre right were down 10 basis points from last year in a in a period where.

Total energy expenses are up 30 basis points.

We're up 190 basis points sequentially.

And so we've seen some nice.

Prove meant there and.

Look when when you think about that rental number of 47, 5%. That's a really good gross margin for us we've only we've only been higher than that a few times and Thats certainly is as a <unk>.

Much greater gross margin than we saw pre pandemic, so we like where.

Where we are in that.

In that space, we like the sequential improvement in the gross margin, which is which is pretty good and we're doing it while we have we've seen such good growth in volume over the course of the last year and we're able to two.

Yes.

<unk> be pretty flat overall and gross margins.

While we're investing in.

In the business. So in other words that volume growth over the last 12 months as these certainly created the need for additional capacity, particularly in our laundry facilities and we're investing as we should because.

We certainly want to make sure we have the capacity to serve the customer.

And so nothing I would say nothing unusual to point out in there other than we continue to make the progress that we want to make the only other the only other thing I might say about that gross margin is.

We are seeing an all time high in our first aid and safety business.

And we continue to like.

The way that business is trending in the mix back towards that first data business that we love so much Todd mentioned that the first stage.

Of that business is over 20% growth still.

And we've seen some really nice movement there so.

Again, nothing nothing real specific to point out other than making good sequential progress and certainly.

Continuing to invest for our future growth.

Yeah. Thanks, Mike I guess my follow up will just stick on that point, the first aid and safety gross margin really stuck out to me in the quarter.

You're almost at <unk>.

50% gross margin in that business well above.

What we'd normally see there.

Are there any extraordinary items to call out there that helped drive those strong results that wouldnt necessarily repeat moving forward just trying to understand how to think about gross margins when first aid moving forward.

We model out the business for the rest of the year.

Sure.

Tim This is Todd.

We're proud of the gross margin improvement that we've made in the in the first aid business. It is reflective certainly up.

The.

Shift the mix of the business.

But I wouldn't say that there's anything that is out of the ordinary where you'd say Oh my goodness.

Yes.

Is there something that a one timer so now now that being said.

We're.

Certainly there will be puts and takes of the the first aid business gross margin throughout the year don't think of it as a linear progression upward.

We're making investments we're growing that business really attractively.

We are certainly leveraging trying to leverages very much as best we can.

The revenue growth that we're getting but we've got to weave.

Mike pointed out in all of our businesses, we've got to invest to meet the demand and.

And we're doing exactly that and and trying to do it as intelligently as efficiently as possible.

We're really happy with the demand levels that we're seeing and we're going to make sure we're positioned to do to meet those demand levels.

Okay. That's really helpful. Thank you guys and congrats on a nice quarter.

Thank you. Thank you.

We can now take our next question from Manav Patnaik with Barclays. Please go ahead.

Thank you good morning.

I can appreciate obviously all the trends are very strong today as you said no no economic weakness you're seeing in your businesses, but maybe you can help us with typically if that does start impacting your customers like how how quickly do you see it how quickly do they react and I guess, what do you do.

In response to that.

Yes. So manav. Good question we are.

We're not seeing it in our customer base to that and as a reminder were as of Friday there'll be four months into our fiscal year.

And.

Will we see it how well whats this recession.

Are we in one as Mike said is there one coming in the first half of 'twenty three the back half.

We're not trying to predict all of that but we are staying acutely aware, but we're we're positioning ourselves to make sure that we can grow in all types of economic cycles.

And as a reminder, we've grown in 51 out of the last 53 years.

The only exception being the great recession, we certainly hope that.

Any recession that comes is not as severe as.

What that was.

And.

So.

Or what I'll call it whatever that traditional type of recession at that comes then we expect good performance, we expect to grow.

We have traditionally grown in multiples of GDP and jobs growth in the past.

Mike spoke of our products and services are highly valued.

You think about cleanliness safety MH and compliance those are buying motors that are stronger today than they were in the past.

Certainly stronger than what they were even pre pandemic.

Our products and services are more diversified today, our customer base is more diversified today than it was in the past today, we are 70% services in 30% goods producing so that diversification, we think we will.

It will help us.

And when you think about next codes.

We have no three digit mix goes that is greater than 10%. So again I'm really nice diversification there.

We have also invested as we've talked about in the past calls in our in our vertical sales approach.

Which we think is nice diversifications into when you think about government and you think about health care.

Higher education those types.

We've spoken about our momentum that we think is really really good and.

And also our strong cash flow, we think that will allow us to be opportunistic.

And as we whenever we are in to a recession if that is today or in the future, we're going to be well positioned to make sure we're successful.

Okay got it that's helpful. And then maybe Mike if you could just remind us of your mix on the on the debt side between fixed and floating whether you hedge just just as we track these interest rate increases.

Sure.

We have.

As of the end of August Manav, we've got about $500 million in commercial paper or other short term variable debt and the rest of our debt is.

Fixed or senior notes.

We do have some of our 27 maturities.

The interest rates locked on those those are right now as you can imagine a fair amount in the money.

So thats, where we are today and look that the.

We like that we like a little bit of that.

Short term debt because it gives us optionality, we can pay that down if we we feel like we want to or we can we can certainly have more space.

Yes.

To us that if we needed to.

Alright, thank you.

And we can now take our next question from Andrew Steinman of J P. Morgan. Please go ahead.

Hi, Hi, it's Andrew.

I just wanted to get a quick.

Thought from you about organic revenue growth for the balance of the year from kind of each first aid fire uniform direct those.

Particularly strong first quarters I definitely heard your general comments about tougher comps and like do you think each of these three should be double digit organic growers. This year.

Andrew Thank you for the question.

When I think about.

Each of our businesses, we don't give guidance based upon each of them individually, but I will just provide some maybe some top line thoughts.

I'm really I haven't done the calculus on what it would be for the year, but I'm just thinking about the through the Qs two through four for each I would think about.

Uniform rental fire and the first aid business, all being high single digits, but the balance of the year keeps.

Keeping in mind that.

There was some PPE in the first aid business in our Q3, which will provide a tougher comp.

For sure.

And then in our uniform direct sale business.

Yes.

We're going to be up against much tougher comps, so I would think of that from.

High single to flat.

Maybe even negative in Q4.

Based upon the significant comps that we're up against there, which is obviously a little bit more of a lumpy business.

To say that last part again about uniform direct sale high single digit and then you said flat.

You are talking about.

Q2 for US just in the last part again about uniform direct sale, yes. So when you think about the uniform direct sale business again, a lumpier business.

High single.

Two.

From Q2 through four think about high single down to closer to flat to maybe even negative in Q4.

Due to negative sales growth due to the negative or the excuse me the significant comps that will be up against on the back half of the year.

Makes sense. Thank you so much.

Great. Thank you.

Okay.

Yes.

And we can now take our next question from Faiza <unk> of Deutsche Bank. Please go ahead.

Yes, hi, Thank you good morning.

I guess I'm curious like what has gone better than what you expected. When you gave the guide of couple of months ago, especially as it relates to <unk> I know you mentioned better pricing and I'm curious if the pricing update has been.

Better than expected or is that.

Better new business I know you mentioned the healthcare vertical in particular, so just more perspective on.

What do you think really drove the outperformance specifically in the <unk>.

Thank you.

Great. Thanks for the question as Todd I'll start if Mike you want to chime in as.

Theres, many contributing inputs to our to our positive <unk>.

That we are seeing new business is quite good as we spoke about.

But retention and penetration is very attractive as well.

We continue to improve upon our cross sell.

And then as you mentioned pricing is certainly playing a larger role than it did historically as it should because of the the levels of <unk>.

Of cost increase that that we are seeing via whether it's labor or material cost and what have you. So.

So I think just generally speaking.

We like the key inputs that we're seeing.

I mentioned earlier, our diversification into those.

Various businesses verticals et cetera, they're all we like the momentum we're seeing in all of those so.

Pretty pretty widespread.

Great. Thank you and then just a follow up on the labor environment.

I don't know if youre seeing some easing in the environment.

<unk> business at this point.

Curious how you think about about that going forward is that.

As the labor environment eases.

Is that a benefit for you or is that maybe more of a headwind from us from a competitive perspective.

Good question on labor.

I would say.

Easing a bit but that's relative it is still very challenging environment, but maybe.

Maybe not as.

Quite as challenging as it was six months ago eight months ago.

But it's still quite challenging and.

No.

We are in constant pursuit of.

Attracting and retaining the very very best people, we think that gives us competitive advantage in the marketplace.

So when we look out and say, okay, what does that mean to us.

We're constantly in pursuit of that.

So any easing of the labor market.

It would certainly be welcome.

From a standpoint of making a little bit easier to run that lower rpms.

But here's.

Here's what I know is we our team figures it out and they have they are staffed at the appropriate levels to meet our customers' demand they've done one heck of a job in fighting through all these challenges over the past.

A couple of years.

To make sure that we're positioned to be successful so whatever the environment. Our team will figure it out we've shown that ability in the past, we'll pivot appropriately.

But.

So we'll manage through it.

Great. Thank you.

Thank you.

I will now take our next question from Heather <unk> with bank.

Bank of America. Please go ahead.

Hi, Good morning, and thank you for taking my question.

New customer growth Brian .

You already touched on healthcare earlier in the Q&A, but where else are you seeing some of the momentum.

Are there additional verticals, where youre seeing asset growth or youre targeting verticals that you haven't been in the past.

Hey, great to get color on that thanks.

Hi, there thanks for the question.

Again our expense.

Experiences.

It's very broad.

The successes that we're seeing.

I'll give you one another example that might provide a little color.

One of our verticals.

We're we're calling on the government.

Sector.

There is one particular city that I won't mention but you will know the name of it.

About a year ago, we sold a uniform program into that city.

And as an example, there that was into the <unk>.

Sanitation transportation parks and recreation type departments.

And in that case, they were using a local provider before we took over that account.

And they chose us in that case, because they liked our garmin offering was better meaning they thought we had better more attractive garments that their employees wanted to wear.

R. R Garnick tracking technology help them to reduce costs, meaning less loss garments and what have you and then.

As I mentioned earlier, our investment into our <unk> web portal.

Makes it made it easier for them to do business with us so which.

Which reduces their administrative time and just helps is helpful for them.

So that was about a year ago, and then if you fast forward.

Just recently, we sold them a first aid cabinet service.

<unk>.

All of those departments and even more municipal buildings.

And in that case previously they had ordered all of their first aid products online. So they were a no programmer they were ordering it from whomever online and then they were.

Essentially doing all of that work on filling those cabinets themselves.

And coincidentally the sales lead for that opportunity came from our uniform service provider. So while there is a uniform service provider was speaking to the customer and they said hey, we're we need help here. So the uniform service provider pass it onto our the appropriate person then.

Our first aid service provider.

In that case, they chose it chose us because again, a better management of the products.

We're happy to help them manage the products better improve their compliance reduce their cost.

And remove their need to administer the program so.

You think about what businesses are challenged with in this case it was a city government, but it's still.

They are still running it as a as a business where they have to meet their customers' demands and their employees demands.

And I think another example of just how we are growing our business.

Lights.

Tractive for businesses sticky.

Good retention good cross sell.

And that shows itself in new business.

Hopefully that color helps a little bit.

Yeah. Thank you for that and then just.

A question on pricing.

Can you just walk us through where you are in the process of taking.

This outsized pricing you've been.

And taking when did it start and when do you start to anniversary. It just just trying to think through the flow through as we progress over the next few quarters.

Well Heather pricing is it's a local subject its a customer by customer subject.

Meaning some businesses are doing better than others.

And but as we look at that.

When.

Inflation.

Kicked in to much higher degrees.

<unk>.

That required us to make sure that our price adjustments were higher than historical as well. So you can think of about it that way when inflation was.

Went to.

Above historical levels, that's when we adjusted pricing at above historical levels and as far as what that means moving forward that will depend upon.

What what inflation does moving forward so.

I don't have a crystal ball as it applies to that or a recession, what have you, but we're <unk>.

Paying very very close attention to all of those inputs and we'll manage it appropriately.

Thank you.

We will now take our next question from Seth Weber of Wells Fargo Securities. Please go ahead.

Hi, guys good morning.

We had a pricing question as well kind of a similar question. So.

I guess.

I'm trying to understand how much of the price increases that you guys have been pushing through our just purely tied to inflation and how much of it is sometimes just trying to get more.

For the value prop that you are offering today, so I'm trying to understand what pricing revert back to its traditional level if inflation.

<unk> or do you think that pricing can be structurally higher for St. Thomas just based on the.

Greater value that you're offering to your customers.

Today versus history.

That makes sense.

Yes, Seth it's a fair question.

As I think about our customer base.

We have such a broad customer base so.

Some of them, we have contractual commitments some of them we will.

We have the ability to adjust prices.

Closer to inflation and what have you so.

So it is very very broad and it really depends on the particular customer and the health of that customer as well, but here's what I can tell you is that we take a long term approach.

We we don't think about our customers in.

Quarters or fiscal years, we think about them in over decades, and and that approach has really paid off paid big dividends for us now.

We are constantly trying to improve the value that we provide to our customers.

That being said.

When the inflation is at the levels that it requires us to adjust prices at above historical.

When inflation comes back down and we certainly hope and expect that that will occur. Then I think you can think of our price adjustments to be back closer to more historical.

We are now.

Am I constantly trying to improve the value to our customers absolutely that that pursuit will be.

In perpetuity.

<unk>.

And in the marketplace determines.

How that that pricing is handled appropriately.

I might add too.

Two things one one you bring up kind of the.

The structure of our pricing and we're generally the highest price.

<unk>.

Relative to our competition in the space. So in other words, we don't lead with price generally we believe that our products our service.

They are better and and that generally means we are at higher price points than our competition and I don't I don't expect that that would change as Todd said, we are continuing to look for ways of even improving that value.

More in the future, but I don't see that that type of pricing changing because of the inflation going up and down we believe that we can command the best prices because our products are better like carhartt and other products like that and our service.

Is just better.

Now the other thing I might add is.

Our pricing as Todd said is customer by.

By customer and local and it's not necessarily a we have to offset where we look to offset inflation.

Immediately.

Generally speaking we want to do the best for our customers and continue to add the right value, but we also know that given the way our cost structure works.

We don't have to necessarily immediately offset.

Inflation, we get four examples of products that we rent in our rental business, we get to amortize them right and so if we do have to take a cost increase we get.

We certainly get visibility before that hits, our P&L because that has to go through the manufacturing process.

And then it gets to our locations and then amortize over a period of time and so we can we can have multiple price increases.

Before that hits, our P&L and that ability to anticipate and manage.

Our cost structure as well as our pricing.

It's reflected in the fact that even in this pretty darn difficult environment, we've been able to increase our margins year over year, certainly excluding those onetime gains, but we've been we've been able to continue to increase our margins.

During that period of time, so I'll, just give you that color to say.

We are very thoughtful about the way we price and we are thoughtful about the way we anticipate.

The costs.

And our cost structure.

And it works because it's.

We're able to increase our margins in a pretty difficult inflationary environment in each of the last four quarters.

Yes, no. It makes total sense, Mike I appreciate it guys.

That's super helpful and Thats really all I had thanks.

Thank you.

Okay.

We will now take our next question from Shlomo Rosenbaum of Stifel. Please go ahead.

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

Pretty notable noticeable.

Cost of goods sold is up only like $10 million sequentially, but when I look at the SG&A.

It sounds like $46 million and usually when you have some kind of inflationary prices followed hits Cogs more maybe you could explain to us what does.

The changes were in SG&A and was there some kind of significant investments in production or anything like that and maybe if you can bring it down to kind of the unit level.

Well Shlomo I'll speak to the SG&A piece of this.

Yes, we did have some sequential increase but shlomo if you look at going back to <unk>.

Going back to fiscal 15.

Our first quarter SG&A is usually the highest of the year I'll throw out the pandemic.

Impacted year, but our first quarter is usually the highest SG&A.

Quarter over the year and that's been consistent for a number of years and that's simply because of some things like.

We have higher payroll taxes, when our when our equity compensation vests at that period of time, usually happens in the first quarter, we tend to have a little bit more stock options that could create.

More payroll taxes, we tend to have.

Some beginning of the year.

Meetings and other things that happen.

But year over year, if you if you pull that gain out that we've been talking about where our SG&A is down 40 basis points and so we like we do like the movement.

Of that SG&A and gosh, if you go back to <unk>.

Pre pandemic Q1 of 2020 were down almost 300 basis points.

If you go back to 2019 SG&A were down 260 basis points My point Shlomo is.

This is not unusual for us to have a first quarter higher SG&A because of just the way that our business works and the timing.

But year over year, we continue to make really good.

Performance in that and in this case down 40 basis points.

Okay. Thank you and then maybe you can also talk about.

The higher.

Revenue translated into margin.

For two of the units, but for kind of the other units. It didn't look like it's translating big.

<unk>. The same way is there something that was is there a mix item in terms of what was being sold over there and then.

Just maybe you can just touch on your expectation for cash flow through the year with such strong revenue should we expect there to be working capital drag.

So we wouldn't necessarily see revenue grow the same way that we would see earnings grow.

Shlomo I'll talk to the.

All other first.

I am not I am not.

Not sure if you're if you're talking year over year that gain that we've referred to a number of times is in the all other and so you have to you have to make sure that that youre stripping out that gain 14, 7% for the quarter for us that is that is a pretty good quarter, but as Todd mentioned.

And a little bit ago that.

That uniform direct sale piece that can tend to move up and down a bit and be more.

More inconsistent from quarter to quarter, and that's a bit of what we've seen in this quarter. So once you pull out the gain from last year, where we had that outsized.

Operating margin in all other were at a pretty good spot at 14, 7% and it more than anything is attributable to that lumpiness in the uniform direct sale business as it relates to our cash flow.

Look we like we like where the cash flow is where our operating cash flows up 13, 7% year over year free cash flow is up 7%.

And look.

From quarter to quarter, there can be puts and takes but generally speaking our cash flow is really good.

And I expect that we will see.

<unk> very good conversion from net income to operating cash flow now when we grow and we've been growing quite nicely. We have always been a bit of a drag in working capital because our our AR tends to go up as we grow our uniforms in service and other items in <unk>.

<unk> tends to grow.

Go up as we grow and that certainly has happened but were still turning that into really good cash flow and I would expect that that's going to continue for.

For the rest of the year, we're going to probably be a little bit higher in capex. During this fiscal 'twenty three year, because we've again, we've kind of come from a pandemic period, where we didn't need to grow capacity and we've really seen some nice growth over the course of the.

<unk>.

More than fiscal year and that certainly means we do some investing and so youre going to see a little bit of an increase in capex, but right in the range, where we've guided to that 3% to three 5% of revenue.

Great. Thank you.

And we can now take our next question from Scott Schneeberger of Oppenheimer. Please go ahead.

Thanks, very much good morning, guys.

I think kind of go back to the recession question that asked me. The question is going to be visibility.

Yeah, it's been asked a few times on the call.

Yes, you are.

<unk> quarter is obviously quite strong the guidance.

Certainly ambitious and I believe you guys is generally pretty conservative so things months' look really good right now and through the end of the fiscal year. So.

Manav kind of asked this but I wanted to delve in a little bit deeper when do you see when youre working with your customers something like going back to past recessions. What are the first signs you see how do they manifest and what type of visibility do you have into okay, that's going to affect our numbers.

Weeks months quarters later, if you could just tell us kind of going back to the past recession, how that takes shape.

Scott This is Todd thanks for the question.

Mike certainly if you want to chime in.

When we think about.

Again are we in a recession.

Technical.

As one coming in early 'twenty three late 'twenty three.

How severe.

We don't know those those items, but we are watching it very closely when you think about our customer base how might it show up.

We'll have customers if their demand is being impacted.

Then theyre going to look for ways to cut their costs is that in getting.

<unk>.

They'll look at their P&L and say, okay. What's the biggest things I can I can move on.

And frankly, we're not usually top of their list so and the reason being is because our spend per customer is pretty small.

But that being said we'll will they.

Reduce their needs for certain services.

Reduced quantities of products that they need certainly those types of things can happen if their demand is being impacted so those are the items that we look forward is.

Our customers reducing their their needs because their demand of their business is such that they don't need as much. So I would say that would be one of the certainly bigger categories that we look for.

Sure.

Mike any any other thoughts, but that was a that was the first one that came to mind.

Yes, I think I think that's.

I think thats true we may see some of those kinds of signs we may see a couple of our customers go out of business, depending on the type of recession, but.

But the other thing that I think is really important as we've grown through lots of recessions in the last 50 years.

And we have also sold a lot of new business through every recession.

And so even if we start to see some signs that the customers are paying a little bit more attention to.

We're spending we know this that we're not asking them generally to spend new money its spend it with us and we'll help them with our programs.

To reduce their own work content in other words, they can they find their people can do more with less because we're able to take some work away from them.

And we're not necessarily asking them to spend new dollars. So.

Look we're going to be paying attention to all different kinds of things within the economy, but we know this we're going to sell a lot of new business, we're going to sell the no programmers we're.

We're going to help our customers reduce their own work content.

And Thats why we feel we not only do we love the momentum that we have now but as we look forward.

That value proposition is still resonating very very well, we've said that a number of times and we don't see that changing.

And so we feel we feel pretty good and we generally.

Our guidance is a reflection of that.

And we like where we're headed.

Excellent.

Thanks, guys that sounds good.

I think a good follow on there you alluded to M&A, but we haven't really discussed it on this call. How is the environment right. Now are you seeing more opportunities or is that is that pretty steady Eddie.

Any commentary on multiples is that something that's looking more attractive less attractive. Thanks.

Yes, Scott this is Todd.

Deal flow is good.

We love our balance sheet.

We love our positioning.

<unk> in the marketplace.

That being said those those.

M&A type of opportunities.

<unk>.

Tough to pay some tufted.

There are various items that cause.

Things too.

To flip the switch for someone to sell their business, but I can tell you that we're really well positioned love our balance sheet.

Love, our team and the ability to manage through.

Any M&A.

<unk>.

We think that that's.

That can be an opportunity for us in the future.

And we're well positioned for it.

That being said again, it's it's tough to pay some but the deal flow looks good and <unk>.

I don't see anything that's all that different from a from a multiple standpoint in the marketplace. So.

We're interested in any and all opportunities from an M&A standpoint and.

And that will continue to push for those.

Thanks, Scott, Thanks, Mike I'll turn it over.

Thank you.

Okay.

Our final question from Toni Kaplan of Morgan Stanley . Please go ahead.

Thanks wanted to ask a longer term margin question. If I look back two years ago. Your EBITDA margin really meaningfully stepped up till mid twenties.

I think youre benefiting from travel reduced travel during the pandemic and healthcare costs, we've really been able to keep it at that level.

You talked about adjusting your cost structure at the beginning of the pandemic, but.

What what type of expenses have you been able to adjust so that.

You can stay at this mid Twenty's EBITDA level.

How sustainable is it it seems like it is.

But wanted to just get some additional color there.

Yes, Tony as Todd Youre, absolutely correct.

And when we look forward we.

We see incremental margins, we've talked about 20% to 30% and we see that in our future.

And we are.

Leveraging certainly the top line.

Very nicely.

We manage R. R.

Variable costs, I think quite well the team is very very good at that and.

But we're also getting efficiencies from some of our digital transformation that we've talked about in the past.

You see that.

Certainly energy is.

It's a big subject today, but we've talked about our smart truck.

Our proprietary routing technology that is helping us reduce idle time and drive time.

Which obviously helps with energy spend but it helps with Sidoti <unk> emissions as well and one of them.

The things we talk about around here is that we don't make money when the wheels are moving on our trucks.

So getting those efficiencies is very important.

We're extracting other efficiencies via our investment with SAP with our inventory control programs.

That are allowing us to get better reuse of our products.

And our stock rooms, which also helps improve turnaround time for our customers. We think is very very important which gives us an advantage in the marketplace.

I mentioned in our last call we have.

On operational excellence dashboard.

That provides us better transparency into the efficiency levels at each of our production facilities.

So that is significant right. So we're able to.

Understand the efficiency levels of our facilities.

Not by having to be there in person every day, but by by understanding the metrics of our operational excellence dashboard and real time.

So I guess, it's it's a blessing that we have those opportunities to improve it.

It's frustrating that we have opportunities to improve but we're focused on improving those and and extracting those efficiencies. So that will allow us to continue to provide good incremental margins separate from the items that.

I mentioned before with some of the other technologies that we've deployed with.

Making it a better win for customers.

And how they are doing business with us so yes, we look forward.

We're going to continue to extract efficiencies and.

And provide what we think are attractive incremental margins.

Great and.

On a more sort of curve basis any changes to contract structure.

Changes in contract labor.

Any.

Increasing the minimum thresholds for clients anything to call out there.

Yes, Tony I would say it's.

Nothing out of the ordinary.

Certainly.

We take a very long term approach with our with our customers I think they take a long term approach with us and we make sure that.

That we're positioned to meet the needs and exceed them and provide products and services that they really value.

So thats what were doing the marketplace and that tends to show itself in and I'll just call it long term relationships.

Others might causes contracts, but I call them long term relationships with our customers.

Got it thanks a lot.

Thank you.

This concludes the question and answer session I would now like to hand, the call back to Mr. Paul Butler for closing remarks.

Well. Thank you for joining us. This morning, we will issue our second quarter of fiscal 'twenty three financial results in late December we look forward to speaking with you again at that time I have a good day.

Okay.

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

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Good day, everyone and welcome first.

First quarter fiscal year 2020 earnings release Conference call. Today's call is being recorded at this time I would like to turn the call over to Mr. Paul <unk>, Vice President Treasurer Investor Relations. Please go ahead Sir.

So 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.

We will discuss our fiscal 2023 first 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.

I'll now turn the call over to Todd.

Thank you Paul.

We are pleased with our start to our fiscal year 2023.

First quarter total revenue grew 14, 2%.

Each of our businesses increase revenue at a double digit rate.

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

Excluding a onetime gain recorded in last year's first quarter, selling and administrative expenses operating income margin increased 20 basis points and EPS grew 12, 3%.

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

Businesses prioritize all we provide including image safety cleanliness and compliance.

And challenged with labor scarcity, and rising cost businesses continued to turn to cintas to help them get ready for the workday.

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 the uniform rental and facility services operating segment revenue for the first quarter of fiscal 'twenty three was one.

170 billion.

Compared to $1 five $1 billion last year.

Organic revenue growth was 12, 3%.

Revenue growth was driven mostly from increased volume.

Additionally, price increases contributed at a higher level than historically.

We believe such a mix of revenue drivers volume versus price is healthy and supportive of continued long term growth.

Our first aid and safety services operating segment revenue for the first quarter was $234 2 million compared.

Compared to $199 1 million last year.

Organic revenue growth was 15, 8%.

This rate reflects the continued momentum of our first aid cabinet business.

Which continues to grow more than 20%.

Personal protective equipment or PPE, while still elevated compared to pre COVID-19 levels declined again on a sequential basis.

We welcome this mix shift because the cabinet services, a more consistent revenue stream and has higher profit margins and PPE.

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

All other revenue was $234 5 million compared to $189 $7 million last year.

The fire business organic revenue growth rate was 17, 4% in the uniform direct sale business organic growth rate was 44, 1%.

Before turning the call over to Mike to provide additional details on our first quarter results.

I will provide our updated financial expectations for our fiscal year.

We are increasing our financial guidance.

We are raising our annual revenue expectations from a range of $8 $4 seven to 858 billion.

To a range of $8 five eight to $8 67 billion.

Also we are raising our annual diluted EPS expectations from a range of $11 90 to $12 30.

To a range of $12 30 to $12 65.

Mike.

Thanks, Todd and good morning, our fiscal 2023 first quarter revenue was $2 $1 $7 billion compared to $1 $9 billion last year the organic.

<unk> revenue growth rates adjusted for acquisitions divestitures, and foreign currency exchange rate fluctuations was 13, 9%.

Gross margin for the first quarter of fiscal 2003 was 1.03 billion compared.

Compared to $902 $8 million last year, an increase of 13, 9%.

Gross margin as a percent of revenue was 47, 5% for the first quarter of fiscal 'twenty three compared to 47, 6% last year.

Energy expenses comprised of gasoline natural gas and electricity, where a headwind increasing 30 basis points from last year.

Operating income of $441 million compared to $394 $1 million last year <unk>.

Excluding last year's first quarter gain totaling $12 1 million and recorded in selling and administrative expenses fiscal 'twenty three first quarter operating income increased 15, 2% and operating income margin increased 20 basis points to 23% from 21 <unk>.

<unk> last year.

Net income for the first quarter was $351 7 million compared to $331 $2 million last year.

Last year's first quarter diluted EPS contained <unk> from the previous previously mentioned gain and related income tax expense.

Excluding the gain and the related income tax expense this year's diluted EPS of $3 39.

Compared to $3 <unk> last year, an increase of 12, 3%.

First quarter operating cash flow increased 13, 8% on.

On June 15, 2022, we paid shareholders $97 $7 million in quarterly dividends also during the quarter, we purchased $210 $8 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.

Todd provided our annual financial guidance related to the guidance. Please note the following fiscal.

Fiscal 'twenty two included not only the gain on sale of operating assets in the first quarter, but also a gain on an equity method investment in the third quarter.

Excluding these items fiscal 'twenty two operating income was $1 $5 5 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 72 billion to $1 $76 billion <unk>.

Compared to $155 billion 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 and their related tax impacts.

The expected higher effective tax rate will negatively impact fiscal 'twenty three diluted EPS by approximately 32.

And diluted EPS growth by approximately 290 basis points.

Our financial guidance does not include the impact of any future share buybacks and.

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.

We'll now take our first question from Ashish.

<unk> of RBC capital markets. Please go ahead.

Good morning, Ashish as Todd Thanks for the question.

Yes, our new business is quite robust.

We continue to be very successful in converting over no programmers into our.

Our programs in all of our businesses with the exception of fire, which obviously.

They're all ever went to programmer in that business, but we're having really good success, there and we look at the total addressable market and it's still incredibly large.

And growing so that's exciting for us.

But as far as the sales cycle I haven't seen anything that would lead me to believe that the sales cycles elongated.

We've we've got really good momentum in our new business I'm very encouraged by that and.

As we've spoken about in the past.

Some of our investments that we have made are really paying off big.

And in the form of some of our unique products in our in our rent align with our carhartt products, our chef works with.

We've got a.

A careful X line of scrubbed through Orlando, that's it's really successful.

Our restroom unique restroom lines and then our first aid business just the breadth of products that we're offering is really helping us get in the door and provide.

Great products and services to our customers. They are also seeing our investments in technology that we've made.

Whether it's.

Our garment tracking that is giving us a real advantage in the marketplace. Our garmin dispensing, we've seen and I've spoken about our my Cintas portal, which is.

Which is unique and advantage in the marketplace. It makes it easier to do business with us.

And that's important for our customers.

And it gives our sales partners com.

Confidence in walking in the door. So some really good things.

Heading in that direction.

That's very helpful color and obviously, great to see that strong momentum in the top line, maybe just on the margins.

A question around energy.

It looks like oil prices might be rolling.

Ruling off here or at least the fuel prices may be rolling off but the natural gas prices are going up how should we think about those puts and takes on the energy front for the rest of the year.

Yes, so when you think about our energy spend.

Certainly it's up over.

Where we were a year over prior.

<unk> 10 basis points.

<unk>.

Does that helps us with our <unk> emissions.

Helps us with our efficiencies in our in our business and in our spend.

And we're confident we can continue to make strides there. So that's that's.

Where exactly natural gas prices will go this winter with what's going on in Europe and in other areas, it's tough to tell for sure but.

We will manage through it and we see opportunities to improve in our in our business and we're leveraging that.

Ashish I might add that.

Right around 60% of our energy spend as the gas.

Or.

Gas and diesel.

And the remainder is electricity and natural gas. So the natural gas is a smaller component of that energy spend more of it is the price at the pump, which as you suggested is coming down.

That's very helpful color. Thanks again.

Thank you and we'll now take our next question from George Tong with Goldman Sachs. Please go ahead.

Hi, Thanks, good morning in the quarter, approximately what percentage of new business growth came from the no programmer market.

Good morning, George This is Todd.

While the majority of our accounts are come from no programmers. So that is that trend has been consistent over the years and continues and in.

In a marketplace, where it's still difficult for.

Employers to find people to work.

The offering.

<unk>.

Value of those and then when we handle it with uniforms is attractive for them. So it's another benefit for customers and.

And they see that as an opportunity to attract their employees and retain their employees and we have a one heckmann offering when it comes to that that makes it really attractive for people. So I'd say those trends continue as they have been in the in the past.

Got it can you provide an update on uniform demand trends from the health care vertical.

Yes, certainly.

So the the health care vertical is a very attractive vertical for us.

It's growing nicely.

The demographics are such in the United States and Canada that that.

That demand will continue.

And we're seeing.

Some unique offerings in that area with Garmin dispensing and our unique.

Scrub line that makes it attractive there are certainly other items that are.

That we rent into the health care market, whether it be an acute or non acute.

But.

We really like what we're seeing there from a from that demand.

I'll give you one example of a.

Of a hospital that.

In the nurse's voice to concerned about safety, meaning hey, what am I taking home.

I'm monitoring it and my laundering, it correctly and in that case, they chose <unk> because of our.

A it separate.

Separate from being an employee benefit because those what I'll call potentially contaminated goods or scrubbed. They don't go home we laundry.

Appropriately via our hygienic.

Process Hygienically cleaning process.

Which allows them to have the confidence that their process correctly and when that improves safety.

And just as an anecdote.

I mentioned that was about six months ago.

Just recently, we sold a microfiber wipes rental program to that same hospital.

And so they use microfiber wipes in many ways, but in the most obvious one is when they are cleaning guest rooms are patient rooms, we should say.

And in this case that that particular hospital. They were purchasing these wipes and then they are having the I'll call them hospital employees or Evs type folks that were cleaning those on their on premise laundry.

And in that case.

They chose <unk> because it was able to we were able to reduce their labor costs, we're having troubles getting access to labor.

And then again, we're processing those in a manner, where they can have great confidence that there is a process correctly with a hygienic.

Hygienically clean process so.

You ask your original question George was about.

Uniform demand in hospitals, which is quite good.

But it also there is so much that we can provide to those hospitals and I just want to give one example.

Give a little color around that.

Very helpful. Thank you.

Thank you.

I will now take our next question from Andy Wittman of Baird. Please go ahead.

Oh, great. Thanks for taking my questions I guess, Mike I, just wanted to talk a little bit about what.

Is implied in the guidance here, maybe a couple of different ways to think about that but how much conservatism is baked into the guidance. I know you made a couple of comments in the press.

Paired remarks is there any change maybe sequentially to the guidance the way youre factoring in the macro outlook.

And maybe any any leading indicators that you can give us that gives us confidence that.

The economy is performing at the rate that you think it is.

Well, so let me start Andrew with the guidance.

Guidance implies.

And we're 60 days past when we gave the initial guidance the guidance implies really good growth.

Through the rest of the year, but as you know we do face some tougher comps as we as we saw the business pick up.

Last year throughout the year and so we would expect a little bit of deceleration from the growth levels of where we are.

But but still healthy growth in ending the year in a range of nine to over 10%.

We like the momentum of the business today and our expectation.

Right now is that we're not seeing any change in the value that our customers are seeing and we're not changing we're not seeing any change in the way.

In the in the economy I'll say now.

Maybe I'll flip to margins briefly our margin expectation remains.

That we will see margin improvement during the year in that range that we provided.

Certainly contemplates that margin improvement, even in a pretty challenging type of economic environment.

So the guidance is a.

A little bit better than we gave 60 days ago because.

Because of the first quarter part because of the momentum that we see in the business now as it relates to.

Trying to dissect what the economic picture is going to look like for the rest of the year.

<unk>.

That can be pretty difficult right.

There are there are some who say we may be in a recession. Today. There are some I would say we may be in a recession early 'twenty three.

<unk> say, we may be in a recession late in 'twenty three.

The fed has come out and said GDP for 'twenty three is going to be one 2%.

It's hard to predict what we're going to see in the economic picture as we move forward, but what we know is that the momentum in our business today is really good.

The value proposition that our that our.

Customers see in our prospects.

They are reacting very positively to it.

And because of that and many other factors.

We believe that momentum can continue along with healthy margins and that's what we've given you in our guidance that does that help.

To answer that question a bit.

It does thank you for that.

I wanted to then follow up with a question on I guess overall customer retention levels, considering that youre getting above historical averages in price increases I thought maybe it would be helpful to comment on that and you guys have talked about the sales momentum a couple of different ways, but if you look at sales productivity on a per head basis as that metric up.

On a year over year basis as well.

Andy Thanks for the question this is Todd.

First off on our retention our retention is very good.

Like where that is.

We like the momentum around that.

Organizing around it appropriately to make sure that we're meeting and exceeding our customers' demands and.

And we like our <unk>.

Product and service offering that we have and the customers find it attractive I mentioned some of the products and the technology that we have that are unique and.

And the customers like it I think they also like our approach that we took over the past couple of years about being <unk>.

We're really flexible and empathetic with them as well as they were going through what they went through the various businesses.

Through.

Calendar 'twenty, one in calendar 'twenty to 2020, one I should say.

And with the pandemic. So I think that was that is benefiting us because they saw that we were.

We understood what they were challenged with and we pivoted to provide them what they needed instead of just telling them hey, here's what youre contracted to to buy so so I think all of that is paying off as far as productivity and new business, yes, we like it.

It's up and.

And we are.

Certainly we love our sales force there we think they are well trained well positioned.

When sales partners have.

Confidence in.

The products and the technology and the services that they're going to provide that.

That confidence is powerful and.

And it's showing itself in productivity.

And we like that we're also deploying up types of technology.

Via our investment with SAP.

Just calling blindly on businesses, we want to drive to our sales team.

Who are who will be the next best.

Prospect to call, which.

<unk> analytics, we can we can tell them.

Where to spend their time.

And that's better for the partner that's better for our company again that provides more confidence and yes. So that those types of investments are paying dividends for us.

Great. Thank you.

Thank you.

We can now take our next question from Tim Mulrooney of William Blair. Please go ahead.

Yes, good morning.

Energy was a slight headwind to margins in the quarter relative to last year, but gross margins were only down 10 basis points. So I was curious how some of the other cost buckets are trending how our labor cost trending where those a headwind or tailwind to margins.

Els peg to point out here like maybe materials and supplies.

Tim maybe I'll, maybe I'll start on that.

From a gross margin perspective.

Youre right were down 10 basis points from last year in a in a period where.

Total energy expenses are up 30 basis points.

We're up 190 basis points sequentially.

And so we've seen some nice.

<unk> there and.

Look when when you think about that rental number of 47, 5%. That's a really good gross margin for us we've only we've only been higher than that a few times and Thats certainly is as a <unk>.

Much greater gross margin than we saw pre pandemic, so we like where.

Where we are in that.

Yes.

<unk> be pretty flat overall and gross margins.

While we're investing in.

We certainly want to make sure we have the capacity to serve the customer.

We are seeing an all time high in our first aid safety business.

And we continue to like.

The way that business is trending in the mix back towards that first stage business that we love so much Todd mentioned that the first stage.

Of that business is over 20% growth still.

And we've seen some really nice movement there so.

Again, nothing nothing real specific to point out other than making good sequential progress and certainly.

Continuing to invest for our future growth.

Yeah. Thanks, Mike I guess my follow up will just stick on that point, the first aid and safety gross margin really stuck out to me in the quarter.

You're almost at <unk>.

<unk>, 50% gross margin in that business well above.

What wed normally see there.

We model out the business for the rest of the year.

Sure.

Tim This is Todd.

We're proud of the gross margin improvements that we've made in the in the first aid business. It is reflective certainly of.

No.

The shift of the mix of the business.

But I wouldn't say that there's anything that is out of the ordinary what you'd say Oh my goodness.

Yes.

Is there something that a one timer so no now that being said.

We're.

Certainly there will be puts and takes of the first aid business gross margin throughout the year don't think of it as a linear progression upward.

We're making investments we're growing that business really attractively.

We are certainly leveraging trying to leverages very much as best we can.

The revenue growth that we're getting but we've got to weave as Mike pointed out in all of our businesses, we've got to invest to meet the demand and.

And we're doing exactly that and and trying to do it intelligently and as efficiently as possible, but we're really happy with the demand levels that we're seeing and we're going to make sure we're positioned to do to meet those demand levels.

Okay. That's really helpful. Thank you guys and congrats on a nice quarter.

Thank you Tim Thank you.

We can now take our next question from Manav Patnaik with Barclays. Please go ahead.

Thank you good morning.

In response to that.

Yes, so manav a good question.

We are.

We're not seeing it in our customer base today and as a reminder, we're at.

As of Friday, there'll be four months into our fiscal year.

And.

Will we see it how well whats. This recession are we in one as Mike said is there one coming in the first half of 'twenty three the back half.

We're not trying to predict all of that but we are staying acutely aware, but we're we're positioning ourselves to make sure that we can grow in all types of economic cycles.

And as a reminder, we've grown in 51 out of the last 53 years.

The exception being the great recession.

We certainly hope that.

Any recession that comes is not as severe as.

What that was.

And.

So.

Or what I'll call, an eight whatever than a traditional type of recession at that comes then we expect good performance, we expect to grow.

We have traditionally grown in multiples of GDP and jobs growth in the past.

Mike spoke of our products and services are highly valued.

You think about cleanliness safety MH and compliance those are buying motors that are stronger today than they were in the past.

Certainly stronger than what they were even pre pandemic.

It will help us.

And when you think about next codes.

We have no three digit nicks goes that is greater than 10%. So again I'm really nice diversification there.

We have also invested as we've talked about in the past calls in our in our vertical sales approach.

Which we think is nice diversifications into when you think about government and you think about health care.

Higher education those types.

We've spoken about our momentum that we think is really really good and.

And also our strong cash flow, we think that will allow us to be opportunistic.

And as we whenever we are into a recession, if that is today or in the future, we're going to be well positioned to make sure we're successful.

Sure.

We have.

As of the end of August Manav, we've got about $500 million in commercial paper or other short term variable debt and the rest of our debt is.

Fixed or senior notes.

We do have some of our 27 maturities.

The interest rates locked on those those are right now as you can imagine a fair amount in the money.

So thats, where we are today and look that the.

We like that we like a little bit of that.

Short term debt because it gives us optionality, we can pay that down if we we feel like we want to or we can we can certainly have more space.

Yes.

To us that if we needed to.

Alright, thank you.

And we can now take our next question from Andrew Steinman of Jpmorgan. Please go ahead.

Hi, Hi, it's Andrew.

I just wanted to get a quick.

But from you about organic revenue growth for the balance of the year from kind of each first aid fire uniform direct those.

Particularly strong first quarters I definitely heard your general comments about tougher comps and like do you think each of these three should be double digit organic growers. This year.

Andrew Thank you for the question.

When I think about.

Each of our businesses, we don't give guidance based upon each of them individually, but I will just provide some maybe some top line thoughts.

I'm really I haven't done the calculus on what it would be for the year, but I'm just thinking about the through the Qs two through four for each I would think about.

Uniform rental fire and the first aid business, all being high single digits, but the balance of the year.

Keeping in mind that.

There was some PPE in the first aid business in our Q3, which will provide a tough comp.

For sure.

And then in our uniform direct sale business.

We're going to be up against much tougher comps, so I would think of that from.

High single to flat.

Maybe even negative in Q4.

Based upon that significant comps that we're up against there, which is obviously a little bit more of a lumpy business.

To say that last part again about uniform direct sale high single digit I think you said flat.

Are you talking about Q.

Q2 for US just say that last part again about uniform direct sale, yes. So when you think about the uniform direct sale business again, a lumpier business.

High single.

Two.

From Q2 through four think about high single is down to closer to flat to maybe even negative in Q4 due.

Due to negative sales growth due to the negative or the excuse me the significant comps that will be up against on the back half of the year.

Makes sense. Thank you so much.

Great. Thank you.

Okay.

Yeah.

And we can now take our next question from Faiza <unk> of Deutsche Bank. Please go ahead.

Yes, hi, Thank you good morning.

I guess I'm curious like what has gone better than what you had expected. When you gave the guide of couple of months ago, especially as it relates to <unk> I know you mentioned better pricing and I'm curious if the pricing update has been.

Better than expected or is that.

Better new business I know you mentioned the health care vertical in particular, so just more perspective on what you think really drove the outperformance specifically in the <unk>.

So that's it.

Great.

Thanks for the question as Todd I'll start if Mike you want to chime in.

Theres, many contributing inputs to our to our positive <unk>.

Both that we're seeing new business is quite good as we spoke about.

But retention and penetration is very attractive as well.

We continue to improve upon our cross sell.

And then as you mentioned pricing is certainly playing a larger role than it did historically as it should because of the levels of <unk>.

Of cost increase that that we are seeing via whether it's labor or material cost and what have you. So.

So I think just generally speaking.

We like the key inputs that we're seeing.

I mentioned earlier, our diversification into.

Various businesses verticals et cetera, they're all we like the momentum we're seeing in all of those.

Pretty pretty widespread.

Great. Thank you and then just a follow up on the labor environment.

I don't know if you are seeing some easing in the environment in your business at this point.

I'm curious, how you think about about that going forward.

As the labor environment eases.

That is a benefit for you or is that maybe more of a headwind from us from a competitive perspective.

Good question on labor.

I would say.

Easing a bit but that's relative it is still very challenging environment, but maybe not as.

Quite as challenging as it was six months ago eight months ago.

But still quite challenging and.

We are in constant pursuit of.

Attracting and retaining the very very best people, we think that gives us competitive advantage in the marketplace.

So when we look out and say, okay, what does that mean to us.

We're constantly in pursuit of that.

So any easing of the labor market.

It would certainly be welcome.

From a standpoint of making a little bit easier to run that lower rpms.

But.

Couple of years to make sure that we're positioned to be successful so whatever the environment. Our team will figure it out we've shown that there will be in the past we will pivot appropriately.

But.

So we'll manage through it.

Great. Thank you so much.

I will now take our next question is from Patrick <unk> with Bank of America. Please go ahead.

Hi, Good morning, and thank you for taking my question.

New customer growth Brian .

You already touched on healthcare earlier in the Q&A, but where else are you seeing some of the momentum.

There are additional verticals, where youre seeing asset growth or you're targeting verticals you haven't been in the past.

Okay, great to get color on that thanks.

Heather Thanks for the question.

Again our expense.

Experiences.

A very broad in our the successes that we're seeing.

I'll give you one another example that might provide a little color.

And one of our verticals.

We're calling on the government.

Sector.

There is one particular city that I won't mention but you will know the name of it.

About a year ago, we sold a uniform program into that city.

And as an example, there that was into the <unk>.

Sanitation transportation parks and recreation type departments.

And in that case, they were using a local provider before we took over that account.

And they chose us in that case, because they liked our garmin offering was better meaning they thought we had better more attractive garments that their employees wanted to wear.

R. R Garnick tracking technology help them to reduce costs, meaning less loss garments and what have you and then.

As I mentioned earlier, our investment into our <unk> web portal.

Makes it made it easier for them to do business with us so which.

Which reduces their administrative time and just helps is helpful for them.

So that was about a year ago, and then if you fast forward.

Just recently, we sold them a first aid cabinet service.

<unk>.

All of those departments and even more municipal buildings.

And in that case previously they had ordered all of their first aid products online. So they were no programmer they were ordering it from whomever online and then they were.

Essentially doing all that work and filling those candidates themselves.

And coincidentally the sales lead for that opportunity came from our uniform service provider. So while there is a uniform service provider was speaking to the customer and they said hey, we need help here. So the uniform service provider pass it onto our the appropriate person then.

Our first aid service provider.

In that case, they chose it chose us because again, a better management of products.

We're happy to help them manage the products better improve their compliance reduce their cost.

And remove their need to administer the program so.

You think about what businesses are challenged with in this case it was a city.

Government, but it's still.

They are still running it as a as a business where they have to meet their customers' demands and their employees demands.

And that's I think another example of just how we are growing our business.

And why it's attractive for businesses sticky.

Good retention good cross sell.

And that shows itself in new business.

Hopefully that color helps a little bit.

Yes, thank you for that.

And then just.

A question on pricing.

Can you just walk us through where you are in the process of taking.

This outsized pricing.

And taking when did it start.

When do you start to anniversary. It just just trying to think through the flow through as we progress over the next few quarters.

Well Heather pricing is it's a local subject its a customer by customer subject.

Meaning some businesses are doing better than others.

But as we look at that.

You win.

Inflation.

Kicked in to much higher degrees.

<unk>.

That required us to make sure that our price adjustments were higher than historical as well. So you can think of about it that way when inflation was went to.

Above historical levels, that's when we adjusted pricing at above historical levels and as far as what that means moving forward that will depend upon the wood inflation does moving forward. So.

I don't have a crystal ball as it applies to that or a recession, what have you, but we're paying.

Paying very very close attention to all of those inputs and we will manage it appropriately.

Thank you.

I will now take our next question from Seth Weber of Wells Fargo Securities. Please go ahead.

Hi, guys good morning.

Actually I had a pricing question as well kind of a similar question. So.

I guess.

I'm trying to understand how much of the price increases that you guys have been pushing through our just purely tied to inflation and how much of it is so Todd just trying to get more.

For the value prop that you are offering today, so I'm trying to understand what pricing revert back to its traditional level if inflation.

Receives or do you think that pricing can be structurally higher for some time just based on the greater value that you're offering to your customers kind of today versus history.

That makes sense.

Yes, Seth it's a fair question.

As I think about our customer base.

We have such a broad customer base so.

Some of them, we have contractual commitments some of them, we have the ability to adjust prices.

Closer to inflation and what have you so.

So it is very very broad and it really depends on the particular customer and the health of that customer as well, but here's what I can tell you is that we take a long term approach.

We we don't think about our customers in.

Quarters or fiscal years, we think about them in decades, and and that approach has really paid off paid big dividends for us now.

We are constantly trying to improve the value that we provide to our customers.

That being said.

When inflation is at the levels that it requires us to adjust prices at above historical.

When inflation comes back down and we certainly hope and expect that that will occur. Then I think you can think of our price adjustments to be back closer to more historical.

We're now in.

Am I constantly trying to improve the value to our customers absolutely that that pursuit will be.

In perpetuity.

<unk>.

And the marketplace determines.

How that that pricing is handled appropriately.

I might add too.

Two things one one you bring up kind of the.

The structure of our pricing and we're generally the highest price.

<unk>.

Relative to our competition in this space. So in other words, we don't lead with price generally we believe that our products our service.

They are better and and that generally means we are at higher price points than our competition and I don't I don't expect that that would change it as Todd said, we are continuing to look for ways of even improving that value.

More in the future, but I don't see that that type of pricing changing because of the inflation going up and down we believe that we can.

Demand the best prices, because our products are better like carhartt and other products like that and our service is just better.

Now the other thing I might add is.

Our pricing as Todd said is customer by.

By customer and local and it's not necessarily a we have to offset or we look to offset inflation.

Immediately.

Generally speaking we want to do the best for our customers and continue to add the right value, but we also know that given the way our cost structure works.

We don't have to necessarily immediately offset.

Inflation, we get for example, the products that we rent in our rental business, we get to amortize them right and so if we do have to take a cost increase we get.

We certainly get visibility before that hits, our P&L because that has to go through the manufacturing process.

And then it gets to our locations and then it amortize over a period of time and so we can we can have multiple price increases.

Before that hits, our P&L and that ability to anticipate and manage.

Our cost structure as well as our pricing.

During that period of time, so I'll, just give you that color to say no.

We are very thoughtful about the way we price and we are thoughtful about the way we anticipate.

The costs.

Within our cost structure and it works because we're able to increase our margins in a pretty difficult inflationary environment in each of the last four quarters.

Yes, no. It makes total sense, Mike I appreciate it guys.

That's super helpful and that's really all I had thank you.

Okay.

We will now take our next question from Shlomo Rosenbaum of Stifel. Please go ahead.

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

It's pretty notable noticeable.

Cost of goods sold is up only like $10 million sequentially, but when I look at the SG&A.

It sounds like $46 million and usually when you have some kind of inflationary prices I would've thought it hits Cogs more maybe you could explain to us what.

The changes were in SG&A and was there some kind of significant investments in production or anything like that and maybe if you can bring it down to kind of the unit level.

Well Shlomo I'll speak to the SG&A piece of this.

Yes, we did have some sequential increase but shlomo if you look at going back to <unk>.

Going back to fiscal 15.

Our first quarter SG&A is usually the highest of the year.

I'll throw out the pandemic.

Impacted year, but our first quarter is usually the highest SG&A.

Quarter over the year and that's been consistent for a number of years and thats simply because of some things like.

More payroll taxes, we tend to have.

Some beginning of the year.

Meetings and other things that happen.

But year over year, if you if you pull that gain out that we've been talking about where our SG&A is down 40 basis points and so we like we do like the movement.

Of that SG&A and gosh, if you go back to <unk>.

Pre pandemic Q1 of 2020 were down almost 300 basis points.

If you go back to 2019 as SG&A were down 260 basis points My point Shlomo is.

This is not unusual for us to have a first quarter higher SG&A because of just the way that our business works and the timing.

But year over year, we continue to make really good.

Performance in that and in this case down 40 basis points.

Okay. Thank you and then maybe you can also talk about.

The higher.

Revenue translated into margin.

For two of the units, but for kind of the other units. It didn't look like it's translating the exactly the same way is there something that was is there a mix item in terms of what was being sold over there and then.

Just maybe you can just touch on your expectation for cash flow through the year with such strong revenue should we expect there to be working capital drag.

So we wouldn't necessarily see revenue grow the same way that we would see earnings grow.

Shlomo I'll talk to the all other first.

I'm not I'm not sure if you're if you're talking year over year that gain that we've referred to a number of times is in the all other and so you have to you have to make sure that that youre stripping out that gain 14, 7% for the quarter for us that is that is it.

Pretty good quarter, but as Todd mentioned, a little bit ago.

That uniform direct sale piece that can tend to move up and down a bit and be more.

More inconsistent from quarter to quarter, and that's a bit of what we've seen in this quarter. So once you pull out the gain from last year, where we had that outsized.

Operating margin in all other were at a pretty good spot at 14, 7% and it more than anything is attributable to that lumpiness in the uniform direct sale business as it relates to our cash flow.

Look we like we like.

Where the cash flow is where our operating cash flows up 13, 7% year over year free cash flow was up 7%.

And look.

From quarter to quarter, there can be puts and takes but generally speaking.

Cash flow was really good and I expect that we will see continued very good conversion from net income to operating cash flow now when we grow and we've been growing quite nicely. We have always been a bit of a drag in working capital because our are our tenants.

To go up as we grow our uniforms in service and other items in service tends to grow.

Go up as we grow and that certainly has happened but were still turning that into really good cash flow and I would expect that that's going to continue.

<unk>.

But more than fiscal year and that certainly means we do some investment and so youre going to see a little bit of an of an increase in capex, but right in the range, where we've guided to that 3% to three 5% of revenue.

Great. Thank you.

And we can now take our next question from Scott Schneeberger of Oppenheimer. Please go ahead.

Thanks, very much good morning, guys.

I think kind of go back to the recession question that essence of the question is going to be visibility.

Yeah, it's been asked a few times on the call.

Your guidance a quarter is obviously quite strong the guidance.

Certainly ambitious and I view, you guys as generally pretty conservative so things must look really good right now and through the end of the fiscal year. So.

The amount of kind of asked this but I wanted to delve in a little bit deeper when do you see when youre working with your customer something like going back to the past recession. What are the first times you see how do they manifest and what type of visibility do you have into okay, that's going to affect our numbers.

Weeks months quarters later, if you could just tell us kind of going back to the past recession, how that takes shape.

Scott This is Todd thanks for the question.

Mike if you want to chime in.

When we think about.

Are we in a recession.

Technical.

As one coming in early 'twenty three late 'twenty three.

How severe.

We don't know those those items, but we are watching it very closely when you think about our customer base how might it show up.

Well customers if their demand is being impacted.

Then theyre going to look for ways to cut their costs is that in getting.

No look at their P&L and that and say, okay. What's the biggest things I can I can move on.

And frankly, we're not usually top of their list so and the reason being is because our spend per customer is pretty small.

But that being said we'll will they.

Ah reduce their needs for certain services.

Reduce quantities of products that they need certainly those types of things can happen if their demand is being impacted so those are the items that we look forward is.

<unk>.

Mike any any other thoughts, but that was a that was the first one that came to mind.

Yes, I think I think that's.

I think that's true we may see some of those kinds of signs we may see a couple of our customers go out of business, depending on the type of recession, but.

But the other thing that I think is really important as we've grown through lots of recessions in the last 50 years.

We have also sold a lot of new business through every recession.

And so even if we start to see some signs that the customers are paying a little bit more attention to.

We're spending we know this that we're not asking them generally to spend new money its spend it with us and we'll help them with our programs.

To reduce their own work content in other words, they can they find their people can do more with less because we're able to take some work away from them.

And we're not necessarily asking them to spend new dollars. So.

Look we're going to be paying attention to all different kinds of things within the economy, but we know this we're going to sell a lot of new business, we're going to sell to no programmers.

We're going to help our customers reduce their own work content.

And Thats why we feel we not only do we love the momentum that we have now but as we look forward.

That value proposition is still resonating very very well, we've said that a number of times and we don't see that changing.

And so we feel we feel pretty good and we generally.

Our guidance is a reflection of that.

And we like where we're headed.

Excellent thanks, guys that sounds good.

I think a good follow on there.

Alluded to M&A, but we haven't really discussed it on this call. How is the environment right. Now are you seeing more opportunities or is that is that pretty steady Eddie.

Any commentary on multiples is that something that's looking more attractive less attractive things.

Yeah, Scott this is Todd.

Deal flow is good.

We love our balance sheet.

We love our positioning.

In the marketplace.

That being said those those.

M&A type of opportunities.

<unk>.

Tough to pay some tufted.

There are various items that cause.

Things too.

Flip the switch for someone to sell their business, but I can tell you. This we're really well positioned love our balance sheet.

Love, our team and the ability to manage through.

Any M&A.

<unk>.

We think that that's.

This can be an opportunity for us in the future and we're well positioned for it.

That being said again it's.

It's tough to pay some but the deal flow looks good and <unk>.

I don't see anything that's all that different from a from a multiple standpoint in the marketplace. So we're interested in any and all opportunities from an M&A standpoint and.

We'll continue to push for this.

Yes.

Thanks, Scott, Thanks, Mike I'll turn it over.

Thank you.

Okay.

I'll now take our final question is from Toni Kaplan of Morgan Stanley . Please go ahead.

Thanks wanted to ask.

Longer term margin question.

If I look back two years ago. Your EBITDA margin really meaningfully stepped up to mid twenties and at the beginning I think youre benefiting from travel reduced travel during the pandemic and healthcare cost, but you've really been able to keep it at that level and I know you talked about adjusting your call.

Structure at the beginning of the pandemic, but basically what what type of expenses have you been able to adjust so that.

You can stay at this mid Twenty's EBITDA level.

Sustainable is it it seems like it is.

But wanted to just get some additional color there.

Yes, Tony as Todd you're absolutely correct.

And when we look forward we.

We see incremental margins, we've talked about 20% to 30% and we see that in our future.

And we are.

Leveraging certainly the top line.

Nicely.

We manage our.

Variable cost I think quite well the team is very very good at that and.

But we're also getting efficiencies from some of our digital transformation that we've talked about in the past.

You see that.

Certainly energy is.

It's a big subject today, but we've talked about our smart truck.

Proprietary routing technology that is helping us reduce idle time and drive time.

Which obviously helps with energy spend but it helps us <unk> emissions as well and one of them.

The things we talk about around here is that we don't make money when the wheels are moving on our trucks.

So getting those efficiencies is very important.

We're extracting other efficiencies via our investment with SAP with our inventory control programs.

That are allowing us to get better reuse of our products.

And our stock rooms, which also helps improve turnaround time for our customers. We think is very very important which gives us an advantage in the marketplace.

I mentioned in our last call we have.

On operational excellence dashboard.

Provides us better transparency into the efficiency levels at each of our production facilities.

So that is significant right. So we're able to.

Understand the efficiency levels of our facilities.

Not by having to be there in person every day, but by by understanding the metrics of our operational excellence dashboard and real time.

So I guess, it's it's a blessing that we have those opportunities to improve it.

As I mentioned before with some of the other technologies that we've deployed with.

Making it a better win for customers.

And how they are doing business with us so yes, we look forward.

We're going to continue to extract efficiencies and provide what we think are attractive incremental margins.

Great and.

No more sort of current basis any changes to contract structure.

Changes in contract labor.

Any.

Increasing the minimum thresholds for clients anything to call out there.

Yes, Tony I would say it's.

Nothing out of the ordinary.

Certainly.

We take a very long term approach with our with our customers I think they take a long term approach with us and we make sure that.

And that we're positioned to meet the needs and exceed them and provide products and services that they really value.

So that's what we're doing the marketplace and.

That tends to show itself in and I'll just call it long term relationships.

Others might causes contracts that I call them long term relationships with our customers.

Okay. Thanks, a lot.

Thank you.

This concludes the question and answer session I would now like to hand, the call back to Mr. Paul Butler for closing remarks.

Okay.

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

Q1 2023 Cintas Corp Earnings Call

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