Q2 2023 Cintas Corp Earnings Call

December 21, 2022

Speaker 2: C are that.

Speaker 3: foroften.

Speaker 4: Good day everyone and welcome to the Cintas second quarter fiscal year 2023 earnings release conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Paul Adler, Vice President, Treasurer and Investor Relations. Please go ahead, sir. This is aag

Speaker 5: Thanks Ross and thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2023 second quarter results. After our commentary we will open the call to questions from analysts.

Speaker 6: 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.

Speaker 7: These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Tom.

Speaker 8: Thank you Paul. Second quarter total revenue grew 13.1% to 2.17 billion dollars.

Speaker 9: Each of our businesses increase revenue at a double-digit rate.

Speaker 10: The benefits of our strong revenue growth flow through to our bottom line.

Speaker 11: Operating income margin increased 70 basis points to 20.5% and diluted EPS grew 13% to $3.12.

Speaker 12: I thank our employees, whom we call partners, for their continued focus on our customers, our shareholders, and each other.

Speaker 13: The Uniform Rental and Facility Services operating segment revenue for the second quarter of fiscal 23 was $1.71 billion compared to $1.54 billion last year.

Speaker 14: The organic revenue growth rate was 11.3%.

Speaker 15: Revenue growth was driven mostly from increased volume.

Speaker 16: Our Salesforce continues to add new customers and penetrate and cross-sell our existing customer base.

Speaker 17: Businesses prioritize all we provide, including image, safety, cleanliness, and compliance.

Speaker 18: Challenged with labor scarcity and rising costs, businesses continue to turn to Centos to help them get ready for the work day.

Speaker 19: Additionally, price increases contributed at a higher level than historically.

Speaker 20: We believe such a mix of revenue drivers, volume and price is healthy and supportive of continued long-term growth.

Speaker 21: Our first aid and safety services operating segment revenue for the second quarter was two hundred and thirty six point zero million dollars compared to two hundred and two point

Speaker 22: The organic revenue growth rate was 15.1%.

Speaker 23: This rate reflects the continued momentum of our first aid cabinet business, which continues to grow more than 20%.

Speaker 24: Whether it is COVID-19 or influenza, the health and safety of employees remains top of mind.

Speaker 25: We provide businesses with access to quick and effective products and services that promote health and well-being in the workplace.

Speaker 26: Personal protective equipment, or PPE, while still elevated compared to pre-COVID levels, declined slightly on a sequential basis.

Speaker 27: The revenue mix shift benefits our financial results because the cabinet service is a more consistent revenue stream and has higher profit margins than PPE.

Speaker 28: Our fire protection services and uniformed direct sale businesses are reported in the all other segment.

Speaker 29: All other revenue was $228.9 million compared to $184.9 million last year.

Speaker 30: The Fire Business Organic Revenue growth rate was 18.0% and the Uniform Direct Sale Business Organic growth rate was 33.9%.

Speaker 31: Before turning the call over to Mike to provide details of our second quarter results, I'll provide our updated financial expectations for our fiscal year.

Speaker 32: We are increasing our financial guidance.

We are raising our annual revenue expectations from a range of $8.58 to $8.67 billion to a range of $8.67 to $8.75 billion, a total growth rate of 10.4 to 11.4%.

Also, we are raising our annual diluted EPS expectations from a range of $12.30 to $12.65 to a range of $12.50 to $12.80.

a growth rate of 10.8 to 13.5 percent.

13.5%. All right.

Thanks, Todd, and good morning. Our fiscal 2023 second quarter revenue was $2.17 billion compared to $1.92 billion last year. The organic revenue growth rate adjusted for acquisitions, divestitures, and foreign currency exchange rate fluctuations was 12.8%.

Gross margin for the second quarter of fiscal 23 was $1 billion compared to $885.1 million last year, an increase of 15.5%.

Gross margin as a percent of revenue was 47% for the second quarter of fiscal 23, compared to 46% last year.

Energy expenses comprised of gasoline, natural gas, and electricity were ahead when increasing 10 basis points from last year.

Strong volume growth from new customers and the penetration of existing customers with more products and services helped generate great operating leverage. Gross margin percentage by business was 47% for uniform rental and facility services, 50.5%

for First Aid and Safety Services, 47.4% for Fire Protection Services, and 37.2% for Uniform Direct Sale.

Operating income of $444.9 million compared to $381.2 million last year.

fiscal 23 second quarter operating income increased 16.7%.

operating income margin increased 70 basis points to 20.5 percent from 19.8 percent last year.

Our effective tax rate for the second quarter was 22.1% compared to 18% 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 second quarter was $324.3 million compared to $294.7 million last year, an increase of 10.1%.

This year's diluted EPS of $3.12 compared to $2.76 last year, an increase of 13%.

We had to overcome higher inflation, interest expense, and tax rate. Therefore, we are especially pleased with these financial results.

Cash flow remains strong on September 15, 2022.

We declared dividends and paid them on December 15, 2022, in the amount of $117.4 million in quarterly dividends.

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

Fiscal 22 included a gain on sale of operating assets in the first quarter and a gain on an equity method investment in the third quarter.

Excluding these items, fiscal 22 operating income was 1.55 billion dollars, a margin of 19.7 percent, and diluted EPS was $11.28.

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

Fiscal 23 operating income is expected to be in the range of $1.75 billion to $1.79 billion compared to $1.55 billion in Fiscal 22 after excluding the gains.

Fiscal 23 interest expense is expected to be $113 million compared to $88.8 million in fiscal 22 due in part to higher interest rates.

Our fiscal 23 effective tax rate is expected to be 20.7%.

This compares to a rate of 17.9% in fiscal 2022 after excluding the gains and their related tax impacts.

Please keep the following in mind when modeling third quarter versus fourth quarter financial results.

The number of workdays in the third and fourth quarter of fiscal 23 are unchanged from fiscal 22.

There are 64 days in the third quarter and 66 in the fourth.

Less workdays results in less revenue to cover certain fixed and amortizing costs.

In last year's third quarter, First Aid and Safety sold about $15 million in COVID test kits. We don't expect that revenue to repeat this year.

Uniform Direct Sale organic revenue growth rates have been very strong year to date. However, we expect these rates to be pressured in the second half of the fiscal year as the business faces increasingly challenging comparisons.

Payroll taxes reset in our fiscal third quarter, increasing our SG&A costs on a sequential basis.

Our financial guidance does not include the impact of any future share buybacks, and we remain in a dynamic environment 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.

If you would like to ask a question, please press star 1 on your telephone keypad now. Please be prepared to ask your question when prompted.

You also be allowed to ask one follow-up question.

Once again, if you would like to ask a question, please press star 1 on your phone now.

And our first question comes from Fisa Awi from Deutsche Bank Securities. Please go ahead, Fisa.

Yes, hi, good morning. Thank you. You know, you've had really good results, so congratulations on that. I'm curious, you know, how would you characterize your outperformance? Has it been more because of new business? Has pricing come in sort of better than you expected?

And maybe as part of that, if you could talk about, you know, your SAP program, like, how much of a benefit do you think that has had, you know, over the, during the course of the CR?

Good morning, thank you for your question.

Yeah, we are our beat on the revenue side are driven significantly by new business and continues to be very attractive for us but we are selling more items into our customer base.

So it's pretty broad. I mentioned in the prepared comments that pricing is above what our historical experience has been as you can imagine due to the experience with inflation that we're seeing across our organization. But it is, but the primary driver is volume growth and we're...

because of pricing. In fact, we are dedicated to finding efficiencies in our business. Some of that is through revenue leverage, just general revenue leverage that we get. But we're focused on finding efficiencies. And you mentioned SAP, certainly that technology is helping us significantly.

We've talked about the digitization or digital transformation of our business. That has been very, very important to us. And we're seeing benefits, whether it's in our routing efficiencies, productivity of our sales partners, getting better reuse of our products.

in service inventory because of SAP. Those are all of the benefits that we're seeing and the marketplace is noticing it and it's helping us with a competitive advantage in the marketplace.

Great. And then as we look ahead, some companies have started talking about, started sounding a little bit more cautious. As you know, a lot of economists are forecasting a potential recession. Talk about how do you, you talked previously about how your business might get started.

But talk about what's the sales pitch during a recession? I think that would be helpful for us to hear.

Great. You know, first off, we continue to watch our customer base very closely. We're looking at all of our data to see if there's some trends that we might see if customers are consuming less and what have you.

So we're watching that. Now, as far as in a recession, every recession that I've experienced while it's in the last 33 years, we've always sold an attractive amount of new business. And the reason being is we help businesses and in an environment that we help them.

They're looking to save money. There's in many cases we're able to save them money. It's not that they are. We're always asking for increased spend. It's just redirect the spend to us. In many cases we're able to help customers with that.

instead of spending it with some other vendor or with an outsourced item that they bring into us, and we can bring efficiencies to them. So we fully expect that our new business will be attractive in any type of way.

economic environment. Certainly we prefer when the economy is growing robustly but we'll find ways to be successful in whatever the environment.

And our next question comes from Ashish Sabhadra from RBC. Please go ahead Ashish. Thank you.

Hi, this is John , billing for Ashish. Congratulations on the storm results. Maybe just following up on Fiza's question, could you talk more about the retention as well as just what the current customer conversations are going like today? Thanks.

Yeah, thank you John . I'll speak to it if Mike if you'd like to contribute on this subject but first of all our retention levels are quite attractive. We very much like where they are. We're focused on making sure that our customer is, it's why we wake up in the morning is to take care of them.

is attractive for us. And keep in mind, we have a really broad customer base. So we serve over a million customers that we see on a very consistent basis. Some are challenged in the current economic environment.

whether they struggle to find people or they're struggling with the wage inflation or inflation in general. And then we have other customers that are thriving in this type of environment. And frankly, we have everything in between. But generally speaking, what we see are, it's still...

in M&A given some of the more challenging headwinds with inflationary pressures.

Sure, John , this is Mike and we haven't changed our philosophy in terms of capital allocation. We want to continue to invest in the business and certainly as we've seen the accelerated growth over the last three quarters, we are investing in the business.

But we love M&A and we continue to have all of the discussions to try to keep that pipeline active but it always takes two to come to a decision and we are working those conversations hard. And our expectation is that we will be able to continue to be able to get the best of

And we certainly have increased the dividend every year. We've gone public, we like that option as well. And then the buyback continues to be an opportunistic alternative for us when we have excess cash. So no philosophy changes. We're still working all of those in the same way that we have.

Our next question comes from George Tong from Golden Sacks. Please go ahead George.

Hi thanks good morning. You mentioned you're continuing to sell more items to your existing customers. Can you describe how overall customer spending behaviors have evolved with the overall economy and if sales cycles have changed at all?

Thank you, George, for the question and good morning.

know

Again, we have a very broad customer base, and we have a very broad product offering, and we're blessed to have both. And as a result, we're organized in a manner where we're trying to make sure that our customers know everything that we have to offer. They don't always. So

We've spoken in the past about how going through the pandemic was really, really challenging. One of the positive outputs of that was the fact that our customer base saw the broadness of our offering. And in many cases, didn't realize we had products and services that we have. So.

We're focused on that and trying to provide more value. When we do that, it helps us because when we stop our truck and the the invoice is larger, that's good leverage for us. So we're providing more value to the customer and we're getting...

leverage in that manner, so all that's positive. So as far as the sales process being elongated, we're not seeing that at this point. And as I mentioned earlier, we are certainly seeing a mix out there. Some customers are struggling.

was driven, I think, significantly by new business. Approximately how much of the new business growth in the quarter came from the no-programmer market or uniform rentals.

Yes, good question George. So No Programmers continues to be a really great opportunity for us. The majority of our new accounts that we sell are in the No Programmers section. And so we've been focused on that. We train our partners on that.

and we see very nice growth opportunities into the future.

Our next question comes from Andy Whitman from RW Baird. Please go ahead, Andy.

Yeah great thanks. I guess I wanted to ask on the first aid segment Mike, the the margins in particular I think really stood out. You made the comment that you're getting some favorable mix shift as the PPE is rolling out. You know last quarter's margins were also very good I think better than most people expected.

So it feels like there's something pretty sustainable in the margin rates. Would you agree with that assessment or is there something in there that we should be aware of as we come to 2Q fiscal 24 as a tough comp or something? Maybe just some detail as to what's really driving these margins that are really frankly a kind of a step function.

of areas where we're able to gain leverage. Certainly the new business is a very nice lever for us. The change in, I'll call it society, in the focus on health and wellness is a real tailwind for us.

So, as a result of that, you know, cabinet revenue growth is very attractive for us. That affects the mix. But we are also finding, you know, I mentioned we've got...

we're finding efficiencies in and throughout our business and first aid is included in that and so you know whether it's routing technology we've been on SAP and first aid for a little bit longer but we're finding efficiencies and

And we have a very strong supply chain that is finding opportunities to source better and improve our overall operating margins. And Mike, anything you'd like to contribute there? The only thing I might add is to specifically, Andy, nothing to call out that is one time or

And you're getting.

Good. Gross margin leverage, which says a lot about all the things you've already talked about. You mentioned making investments in the business. It appears that the SG&A line and the uniform rental segment in particular has been seeing investments there. And I was just wondering, maybe you could provide some detail as to what kinds of investments you're making, or if it's maybe just still...

20 basis point headwind that we're up against in energy still. So you're right, the SG&A is up. We're making investments in the business and appropriately so. So some G&A, medical costs, workers comp and what.

that margin expansion is going to come in a number of ways, but revenue growth, leverage, productivity, which is a broad word, right? There's so many areas where we get productivity improvements and pricing, but yeah, so we're focused on improving the margins there and...

We'll manage through the SG&A investment as we move forward.

And our next question comes from Tim Mulrooney from William Blair. Please go ahead, Tim.

Good morning, Todd, Mike, Paul. Two questions, one on labor. We've heard from others. We've heard from others.

other industries and companies that they were availability today.

Still remains somewhat a governor in growth. I mean has that been the case for you guys? Are you holding back in certain markets?

Due to constraints around qualified labor and just generally how do you characterize the labor? availability situation today versus say last quarter.

Thanks for the question, Tim. Good morning. Good morning.

You know as far as labor is concerned the I'll call the labor market in totality easier, but not easy It is still certainly challenging there we We care passionately about how that looks for our customers, and how it impacts our customers I mentioned some are struggling to to staff still

are impacted. I can tell you it wouldn't go well here if someone said I can't grow as fast as you think I should because I can't staff. We figured that out and we think the environment that we provide for our partners where

They have great opportunities and a great wage and benefits and great security and great development is a real advantage for us in the marketplace. So, as far as synthol staffing, that is not slowing us up. Certainly our customers could be impacted by that to some degree.

That's good color, Todd. It's good to know there are some companies we talk to that are literally dialing back on sales and marketing costs just because they can't find the labor to support the growth. That's good to know you guys aren't in that situation. One more from me on wage rate.

I don't have an exact number to give you, but we start with the answer and work backwards. And the answer is we've got to have great people. We've got to have really well trained and prepared people who can help us be successful and take care of our customers. So, If we can just get started and give you a good introduction to how to use Teams right from the beginning, I would love for you to search for Teams and, if you don't really

Is it above historical? Yes, it is above historical. But nevertheless, you know, we're focused on putting the very, very best team out on the field so that we can take great care of our customers and and prepare us for the future of this organization.

And our next question comes from Manav Paitnik from Barclays. Please go ahead Manav.

Thank you. I guess just to follow up a little bit, there's a lot of press out there around C-suite anxiety, right? And I just wanted to know, historically, I guess, how long before that starts slowing all the way down to your direct customers.

on the street and how quickly can you react? Because your current guidance obviously is through me, and so things might be fine until then. But I'm just curious if there's a timing element that we should be considering too.

Yes, Manav, thanks for the question. We always have anxiety, right? It's part of making sure you're sharp. Nevertheless, we do worry about, as an economy, do we talk ourselves?

Some are going great, some are not, but in general, we like the direction of our customer base, and we, in many ways, we hope they don't read the press, and they stay focused on taking care of their business and investing for the future. But we'll see what that holds and how the Fed handles things and...

and how that might impact the general economy.

Manav, I might add, you know, you go back two and a half years to the pandemic, to the beginning of the pandemic, I think we showed that we can be pretty nimble when it comes to our cost structure and adapting to changes in the environment.

Yeah, that's fair. And Mike, maybe if I can just ask a follow-up just on CAPEX and pre-casual expectations for the year, any changes or help there?

What you've seen maybe in the first half of this year is when we grow and we've seen three quarters now straight of double digit organic growth, so a nice actually four quarters, so nice acceleration. zero Michel turn to record it right number one experience four participated under leadership what x

in the performance and when we grow and the volumes are healthy, we certainly invest in the business. That investment can come through in the way of working capital. So you see a little bit more working capital usage in our cash flow statement and that's not necessarily unusual for us when we see an acceleration in the growth rate.

But we like our cash flow. It will continue to be strong, and this year should not be an exception to that. That cash flow, I talked a few minutes ago about capital allocation, and the cash flow that we've got going this year will not force us to make choices. We can still do all of the capital allocation.

this which usually has new uniforms going into service, you know, how did merchandise amortization affect gross margins? I mean rental gross margins in the second quarter, you know, obviously I know rental gross margins were up despite any effect of merchandise amortization and do you expect rental gross margins to be up in the second half of the year, year over year?

Andrew, as it relates to the amortization, certainly you've seen the growth that I've talked about a few times and that translates into more garments and other products being injected into our in-service inventory and we love that.

We love when that happens. And so we're seeing growth in the amortization, but we're able to leverage that pretty nicely so far. And you know our business well, we amortize many of those rental products.

And so we have a good foresight or visibility into what's coming. And that means we can plan, we can source, we can increase prices when necessary. So the visibility gives us...

a nice advantage in terms of how we think about other ways of operating the business. As it relates to the second half of the year, look, we don't typically provide guidance on gross margins specifically, but certainly the guidance that we've provided.

contemplates improvement in our operating margins in the second half of the year. And the growth that we have on the top line and all of the other initiatives and things we've got going on, they are performing well and enabling us to do that.

to do that margin improvement even in a difficult period of time. Okay, thank you.

even in a difficult period of time. Okay, thank you.

And our next question comes from Heather Balsky from Bank of America. Please go ahead, Heather.

Hi, thank you for taking my question. So your guidance for the rest of the year, I guess, for the back half implies growth probably on the sales side in the 8 to 9% range, which is moderating from what you did in the first half. I'm curious if you could just walk us through where you're assuming there might be some deceleration.

So, a slight, but still very attractive growth. We like where that is. We're preparing for that. But we are certainly up against some tougher comps in the back half, specifically with first aid and uniform direct sale.

So we'll be lapping those, but we like the growth levels and we find them quite attractive and that's what we are preparing for.

Thank you. And do you think, you know, are there areas that you're seeing in your business? You've done well year to date. You've raised your guidance. I know First Aid and safety is very strong right now. Other sort of areas in your business, whether it's certain customers like your opportunity in healthcare or other business lines where you're really seeing a lot of people in your business.

healthcare, hospitality, education, government, are performing quite well. And they're growing at an accretive rate to our growth. And we think we chose them wisely and invested in them appropriately. And that customer base is doing well.

Within that customer base, again, you get a mix. But nevertheless, in general, we like that area and it's growing very attractively for us.

Our next question comes from Kartik Mehta from North Coast Research. Please go ahead, Kartik.

Thank you. I know you talked about the economy a few times. I'm wondering as you look at some of the

So some of the benchmarks for your business and maybe your customers businesses. Anything that stands out either that is positive that maybe you were anticipating would decline or anything that's negative that you were anticipating would be the other way.

Karthik, it's a good question. I continue to talk about our broader customer basis, so you name it, we see it. But the scarcity of workers is an issue. That is still at a very large scale.

and being judicious about that.

And then just last question just from an energy standpoint obviously fuel prices are coming down Seems that natural gas prices are coming down as well Is the headwind you're anticipating from energy prices? Maybe what you anticipated at the beginning of the year when you need guidance to now has that changed at all?

Yeah, so we still see energy as a headwind and when you go to the pump right now it is definitely a little bit lower than it was a quarter ago.

But about 40% of our spend on energy is in natural gas for our production facilities and electric. And that is not heading in the right direction. Natural gas prices are up and electric prices are up. And so, but certainly the attention more gets to

comes from Seth Weber from Wells Fargo Securities. Please go ahead, Seth.

Hey guys, good morning and happy holidays. I wanted to ask another margin question, Mike or Todd, the guidance for this year, is that you guys YouTube channel here's another one of my social media chat but I also love as

The back half, it seems like the guidance kind of implies a higher than normal incremental margin. And I think Todd, you mentioned

The uniform business could be 20 to 30 percent incrementals this year.

Is this, are we moving into a scenario where incrementals could be higher than your normal?

call it 20 to 25 percent range and maybe are you more comfortable talking in like a 25 to 30 percent range for the business going forward. Thanks.

Well, we haven't, Seth, we haven't really changed the narrative on that in terms of the 20 to 30 percent. But, you know, as has been saying, you

There are different ebbs and flows within the business and sometimes there are periods where we are investing maybe a little bit more than in other quarters, etc. And Todd's focused on the full year results and the longer term results. So there can be ups and downs. Certainly based on our guidance.

we are contemplating a margin improvement in the back half of the year and I don't know that it's anything that we're ready to say is is a new norm It's just simply we look at the year and say we've got some really good incremental margins in that 20 to 30 percent range that will cause the full year margins to increase.

organic growth in the fire business continues to be in this sort of mid to high teens range. Is that a sustainable number, do you feel like?

for fire and just sort of maybe any color on really what's driving that unusually strong organic growth. Thanks.

Yes, Seth, I'll take that one. We love the fire business. It's a very attractive business for us. It's the only business we're in where every business legally has to comply with the local laws around it. So the TAM is absolutely massive.

And our sales team is doing really well, and we're selling into additional customers, we're selling more into our existing customers. Got a great offering, we really like our position in the marketplace. And the team's doing a heck of a job. So yeah, we would...

You know, we would like to continue to grow that business at double digit rates. Can it achieve the levels that where we are today? That would be outstanding. But certainly double digits is our focus for that business.

Got it. Okay. Thank you guys. Happy.

Okay, thank you guys. Happy. Thank you.

Our next question comes from Shlomo Rosenbaum from Stiefel Nicholas. Please go ahead, Shlomo.

Hi, thank you very much. I want to get a little follow-up on some of the questions on client hiring which obviously could impact syntax volumes. Do you feel like you really sell at a level in the organization that you get kind of an advanced look at the hiring plans or is it really kind of

you monitor it as it happens. So like in current, you need to react because clients will just kind of add or subtract people, you know, kind of in the moment, but you don't, you know, it's not that you're getting a heads up on that. I'm just trying to understand like your view, obviously, it's a very broad client base, but just in more generalities and then.

There have been any changes. You used to talk about kind of an add stops metric, and I'm wondering if there's anything materially different in what that would look like now.

Shalom Oh great question need

It really depends upon our view of what the staffing levels of our customers.

will be, it really depends upon where our relationship is. Some they'll share with us, hey, calendar 23, here's what we're thinking. Others, they don't, depending upon our relationship levels or their planning level. And so in that case, it's a little bit more reactive. So you name it, we have that type of experience.

is continuous and the patterns that we have in the past. And I mentioned earlier that, you know, I don't know, certainly Q1, I'm speaking of the economy, Q1, Q2 was GDP shrunk, Q3 was slightly positive. We'll see what Q4 holds in store for GDP.

Tough to tell if we're in a technical recession or if we're not and what calendar 23 holds in store for us. But the employment situation in the US is it's still tough to get people. And as I mentioned, there's 10 million job openings. We'll see if that continues to decline.

But we're trying to make sure that we're positioned to grow. But as Mike mentioned, if the economy affects our customer base in a very negative manner, we'll be prepared to pivot and manage our cost structure appropriately.

and we're planning on being successful in whatever the economic environment brings to us.

Thank you. Just one follow-up on just on the pricing. Is it kind of normal now for the clients to expect these pricing increases or is it are you getting any material pushback on them as this time is going on? Well, Sloane, as I mentioned in our prepared remarks, pricing...

growing our business most attractively through volume growth and getting leverage there and planning on growing margins via leverage in that revenue growth and finding efficiencies in our business. That being said, it's a very competitive environment and you know as we talk to our customers, they certainly challenge us.

And they want us to find efficiencies in our business and not just pass a long cost to them. And that's what we're focused on.

Our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead Scott.

Thanks very much. Good morning. Happy holidays everyone. First question, in uniform rental, I'm just curious about the winning business. You guys have obviously highlighted penetration of existing customers.

strong volume growth, new customers. Could you speak to what is, and no programmer versus what is competitively one? Is there a lot of that activity right now of competitively one? And then if you could just kind of differentiate what you're seeing with large customers versus maybe small and mid-sized in the context of that question.

Certainly we do take business from our competitors, but we find that there's so many businesses out there that say, wow, I didn't realize that you would serve a business of my size, or I didn't realize you had those types of products and services, and they see great value in what we do.

And so we're very focused on that. As far as the customer base, you know,

You know the larger customers some of them are struggling smaller ones are certainly some of them are struggling But I would say generally speaking the smaller ones are probably a little under a little bit more pressure Just because it's tough to attract retain staff

pay people and at the levels that you have to to be competitive in the marketplace. So that's kind of a generalization that may not be completely fair. And I could give you plenty of examples of smaller businesses that are thriving, but that's kind of a generalization I thought I might share with you.

Great, thanks. And then as a follow-up, specifically uniform direct sales, I think it was about 33-34% organic growth in the quarter, very strong. I heard you mention on an earlier question that would be a segment facing some tougher comps in the back half of the fiscal year.

Can you just speak to kind of what the business activity has been there? What's driving the strong growth right now? What type of customers? Has it been, you know, particularly lumpy or has it been just a solid broad based versus, you know, maybe just one or two big customer wins?

Just a little bit more elaboration on that business line. Thanks.

Sure, good question. Very broad-based. It's not one customer or a couple of customers. It's very broad-based. When you think about that area, certainly hospitality is a big component of it, but there's other customers that are...

national and scope type customers. But hospitality specifically, I'll speak to. Yeah, they're struggling to staff, but there's a lot of demand out there in the hospitality sector.

And as a result, they need help. And when you think of that, when they're struggling to staff and they have to provide products and services, we've become a very attractive opportunity for them to source.

to provide products that they can get quickly and that are very attractive and and allow them to provide the proper guest experience that they want to provide for their patrons.

And our next question comes from Tony Kaplan from Morgan Stanley . Please go ahead, Tony.

Thanks very much. I wanted to ask a follow-up on pricing. I know you've been sort of putting through a higher level of price than normal recently, and now it sounds like, obviously, you've mentioned a couple of times that volume is going to be a bigger driver to growth, but I guess my—

Is it going to be lower than normal or roughly around sort of a normal year for pricing in calendar 23?

Yeah Tony, good question. You know as we think about pricing in the future it certainly is above historical today. It's tough to predict what inflation holds in the future.

but presuming that that comes down, I'd say you'd see us closer to historical from price adjustments, but it really depends upon what happens with the Fed, what happens with the economy, what happens with wage pressures, there's so many inputs, and that one's tough to predict, but we're watching it very closely.

Great. And then when you think about the margin expansion implied and you mentioned sort of higher margin expansion in the back half of the year, is that like I guess how much of it is a result of like energy costs coming down from prior levels or...

Maybe inflation having reached its peak and coming down. I guess how much of it is that versus scale or initiatives, if you could give any sort of breakdown or examples of where the margin expansion will come from. Thanks.

Tony, I would say it comes from a lot of different places and it's hard to put a number on any particular one of them. But a couple examples, energy, we've kind of looked at that as Todd mentioned earlier, still is a little bit of a headwind.

going forward. So we're not necessarily expecting we'll get a bunch of energy benefit in the second half of the year, but our revenue growth has been really strong and and the performance, the momentum has been good and that certainly

will continue to help in the second half of the year. When we grow at real nice levels like we've guided towards and like we've had in the first half of the year, that always helps our ability to drive better margins. But we've talked over the last year or so about important initiatives that we have. Those remain.

some timing of things, maybe some investment in the first half of the year that was really helping propel our growth and continue our momentum that may not be at the same type of level in the second half of the year. So it's a lot of those different pieces that kind of fall together.

And it's hard to put numbers on every single one of those.

And at this time, there are no further questions. I would like to turn the call back to Paul for closing remarks.

All right, well thank you for joining us this morning. We will issue our third quarter of fiscal 23 financial results in late March, and we look forward to speaking with you again at that time.

Take care.

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

The host has ended this call. Goodbye.

I you.

You.

Good day everyone and welcome to the Cintas second quarter fiscal year 2023 earnings release conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Paul Adler, Vice President, Treasurer and Investor Relations. Please go ahead sir. Thanks Ross and thank you for joining us. With me is Todd Schneider.

995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we may discuss.

I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Tom.

to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Tom. Thank you Paul.

Second quarter total revenue grew 13.1% to $2.17 billion.

Each of our businesses increase revenue at a double-digit rate. The benefits of our strong revenue growth flowed through to our bottom line.

Operating income margin increased 70 basis points to 20.5% and diluted EPS grew 13% to $3.12.

I thank our employees, whom we call partners, for their continued focus on our customers, our shareholders, and each other. The uniform rental and facility services operating segment revenue for the second quarter of fiscal year 23 was $1.71 billion compared to $1.54 billion last year.

The organic revenue growth rate was 11.3%.

Revenue growth was driven mostly from increased volume.

Our Salesforce 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.

Challenged with labor scarcity and rising costs, businesses continue to turn to Centos to help them get ready for the workday.

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

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

Our first Aid and Safety Services operating segment revenue for the second quarter was $236.0 million compared to $202.2 million last year.

The organic revenue growth rate was 15.1%.

This rate reflects the continued momentum of our first aid cabinet business, which continues to grow more than 20%.

Whether it is COVID-19 or influenza, the health and safety of employees remains top of mind. We provide businesses with access to quick and effective products and services that promote health and well-being in the workplace.

Personal protective equipment, or PPE, while still elevated compared to pre-COVID levels, declined slightly on a sequential basis. The revenue mix shift benefits our financial results because the Cabinet service is a more consistent revenue stream and has higher profit margins than PPE. Our fire protection services and uniformed direct sales business.

growth rate was 33.9%. Before turning the call over to Mike to provide details of our second quarter results, I'll 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 8.58 to 8.67 billion dollars to a range of 8.67 to 8.75 billion dollars, a total growth rate of 10.4 to 11.4 percent.

Also, we are raising our annual diluted EPS expectations from a range of $12.30 to $12.65 to a range of $12.50 to $12.80.

a growth rate of 10.8 to 13.5%. Mike?

Thanks, Todd, and good morning. Our fiscal 2023 second quarter revenue was $2.17 billion compared to $1.92 billion last year. The organic revenue growth rate adjusted for acquisitions, investors, and foreign currency exchange rate fluctuations was 12.8%.

Gross margin for the second quarter of fiscal 23 was $1 billion compared to $885.1 million last year, an increase of 15.5%.

Gross margin as a percent of revenue was 47% for the second quarter of fiscal 23, compared to 46% last year. Energy expenses comprised of gasoline, natural gas, and electricity were a headwind, increasing 10 basis points from last year.

47.4% for fire protection services, and 37.2% for uniform direct sale.

Operating income of $444.9 million compared to $381.2 million last year. Fiscal 23 second quarter operating income increased 16.7%, and operating income margin increased 70 basis points to 20.5%.

from 19.8% last year. Our effective tax rate for the second quarter was 22.1% compared to 18% 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 second quarter was $324.3 million compared to $294.7 million last year, an increase of 10.1%.

This year's diluted EPS of $3.12 compared to $2.76 last year, an increase of 13%.

We had to overcome higher inflation, interest expense, and tax rate. Therefore, we are especially pleased with these financial results.

Cash flow remains strong on September 15th, 2022.

We declared dividends and paid them on December 15, 2022, in the amount of $117.4 million in quarterly dividends.

Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal 22 included a gain on sale of operating assets in the first quarter and a gain on an equity method investment in the third quarter. There are Nicolas E Charge Seeings behind the scenes.

Fiscal 22 operating income was $1.55 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 23 operating income is expected to be in the range of $1.75 billion to $1.79 billion compared to $1.55 billion in Fiscal 22 after excluding the gains.

Fiscal 23 interest expense is expected to be $113 million compared to $88.8 million in fiscal 22 due in part to higher interest rates. Our fiscal 23 effective tax rate is expected to be 20.7%.

This compares to a rate of 17.9% in fiscal 22 after excluding the gains and their related tax impacts.

Please keep the following in mind when modeling third quarter versus fourth quarter financial results.

The number of workdays in the third and fourth quarter of fiscal 23 are unchanged from fiscal 22.

There are 64 days in the third quarter and 66 in the fourth. Less workdays results in less revenue to cover certain fixed and amortizing costs. In last year's third quarter, First Aid and Safety sold about 15 million dollars in COVID test kits. We don't expect that revenue to repeat this year.

Payroll taxes reset in our fiscal third quarter, increasing our SG&A costs on a sequential basis. Our financial guidance does not include the impact of any future share buybacks, and we remain in a dynamic environment 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.

If you would like to ask a question, please press star 1 on your telephone keypad now. Please be prepared to ask your question when prompted.

You also be allowed to ask one follow-up question. Once again, if you would like to ask a question, please press star 1 on your phone now.

And our first question comes from Faiza Awi from Deutsche Bank Securities. Please go ahead, Faiza.

Good morning, Fiza. Thank you for your question. Yeah, we are beat on the revenue side, are driven significantly by new business. It continues to be very attractive for us. But we are selling more items into our customer base. So it's pretty broad.

I mentioned in the prepared comments that pricing is above what our historical experience has been, as you can imagine, due to the experience with inflation that we're seeing across our organization. But the primary driver is volume growth, and we're benefiting from that.

We're investing for that and things are, we like the trend there. As far as on the margin side, we are committed that we are not going to be solely focused on growing margins because of pricing. In fact, we are dedicated to finding efficiencies in our business.

Some of that is through revenue leverage, just general revenue leverage that we get. But we are focused on finding efficiencies. And you mentioned SAP, certainly that technology is helping us significantly. We've talked about the digitization or digital transformation of our business. That has been very, very important to us.

And we're seeing benefits, whether it's in our routing efficiencies, productivity of our sales partners, getting better reuse of our products, in-service inventory because of SAP. Those are all benefits that we're seeing and the marketplace is noticing it, and it's helping us with a competitive advantage in the marketplace.

Great. And then as we look ahead, you know, some companies have started talking about, started sounding a little bit more cautious, you know, as you know, a lot of economists are forecasting a potential recession. Talk about, you know, how do you, how does you talk previously about hurry.

continue to watch our customer base very closely. We're looking at all of our data to see if there's some trends that we might see if customers are consuming less and what have you. So we're watching that now as far as in a recession, you know every recession that I've been I've experienced while it's in fashion.

then somebody still has to take care of certain functions. So we're able to sell value there. If they are in an environment where they're looking to save money, in many cases we're able to save them money. It's not that they are, we're always asking for increased spend. It's just redirect the spend to us.

And in many cases, we're able to help customers with that instead of spending it with some other vendor or with an outsourced item that they bring into us, and we can bring efficiencies to them. So we fully expect that our new business will be attractive in any type of way.

economic environment. Certainly we prefer when the economy is growing robustly but we'll find ways to be successful in whatever the environment. And our next question comes from Ashish Sabhadra from RBC. Please go ahead Ashish.

Hi, this is John Filling for Ashish. Congratulations on the strong results. Maybe just following up on Fiza's question, could you talk more about retention as well as just what the current customer conversations are going like today? Thanks. Yeah, thank you, John . I'll speak to it if you'd like to contribute on this subject. First off, our retention levels are quite attractive. We very much like where the...

of them and exceed their expectations. So all that is attractive for us. And keep in mind, we have a really broad customer base. So we serve over a million customers that we see on a very consistent basis. Some are challenged in the current economic environment.

whether it's they they struggle to find people or they're struggling with the wage inflation or Inflation in general and then we have other customers that are thriving in in this type of environment and and frankly, we have everything in between and but generally speaking what we see are it's it's still we still like what we see with our customer base and

And we continue to have all of the discussions to try to keep that pipeline active, but it always takes two to come to a decision and we are working those conversations hard. And you know our expectation is that we will be able to continue to have all of the discussions to try to keep that pipeline active.

in the M&A path, but we certainly love that option. And certainly I misspoke a minute ago on dividends. We paid a dividend on September 15th, we paid another one on December 15th, and we certainly have increased the dividend every year. We've gone public, we like that option as well.

And then the buyback continues to be an opportunistic alternative for us when we have excess cash. So, no philosophy changes. We're still working all of those in the same way that we have. Our next question comes from George Tong from Goldman Sachs. Please go ahead, George. Hi, thanks. Good morning.

You mentioned you're continuing to sell more items to your existing customers. Can you describe how overall customer spending behaviors have evolved with the overall economy and if sales cycles have changed at all? Thank you, George, for the question. Good morning. Again, we have a very broad customer base.

And we have a very broad product offering, and we're blessed to have both. And as a result, we're organized in a manner where we're trying to make sure that our customers know everything that we have to offer. They don't always. We've spoken in the past about how

going through the pandemic was really, really challenging. One of the positive outputs of that was the fact that our customer base saw the broadness of our offering. And in many cases, didn't realize we had products and services that we have. So we're focused on that and trying to provide more value. When we do that, it is...

As far as the sales process being elongated, we're not seeing that at this point. And as I mentioned earlier, we're certainly seeing a mix out there. You know, some customers are struggling and some are doing quite well and everything in between. I'll tell nicely

the customer base continues to head in a positive manner. Got it. That's helpful. The upside in revenue this quarter was driven, I think, significantly by new business. Approximately how much of the new business growth in the quarter came from the no-programmer market or uniform rentals.

those that set of prospects sees value in what we provide and as a result the the TAM is is massive and so that's very exciting for us and we see very nice growth opportunities into the future.

And our next question comes from Andy Whitman from RW Baird. Please go ahead, Andy. –

Would you agree with that assessment or is there something in there that we should be aware of as we come to 2Q fiscal 24 as a tough comp or something? Maybe just some detail as to what's really driving these margins that are really, frankly, kind of a step function better than what you put up in the past.

Yeah, Andy, the, you're right, the margins are better than historical. The mix shift has been great. We have a, you know, there's a number of areas where we're able to gain leverage. The new business is a very nice lever for us.

The change in, I'll call it society, in the focus on health and wellness is a real tailwind for us. So as a result of that, cabinet revenue growth is very attractive for us. That affects the mix. But we are also finding, I mentioned we've got.

to source better and improve our overall operating margins. Mike, anything you'd like to contribute there? The only thing I might add is to specifically, Andy, nothing to call out that is one time or short term in nature. It's just that the business is performing very, very well.

which says a lot about all the things you've already talked about. You mentioned making investments in the business. It appears that the SG&A line and the uniform rental segment in particular has been seeing investments there. And I was just wondering, maybe you could provide some detail as to what kinds of investments you're making, or if it's maybe just still kind of returned from COVID and getting some travel and T&E back.

and energy still. So you're right the the SG&A is up. We're making investments in the business and appropriately so. Also some G&A, you know, medical costs, workers comp and what have you are higher this quarter.

And there's always some puts and takes as it relates to that, but we are guiding towards for the whole year in that business. Incremental is in the 20 to 30 percent range and and we're as I mentioned, that margin expansion is going to come in a number of ways. But revenue growth leverage

productivity, which is a broad word, right? There's so many areas where we get productivity improvements and pricing but yeah, so we're we're focused on improving the margins there and we'll manage through the G&A investment the SG&A investment as we move forward.

And our next question comes from Tim Mulrooney from William Blair. Please go ahead, Tim. Good morning, Todd, Mike, Paul. Two questions, one on labor. You've heard from others.

companies that labor availability today still remains somewhat a governor of growth. I mean, has that been the case for you guys? Are you holding back in certain markets due to constraints around qualified labor? And just generally, how would you characterize the labor availability situation today versus say last quarter?

Thanks for the question, Tim. Good morning. You know, as far as labor is concerned, I'll call the labor market in totality easier, but not easy. It is still certainly challenging there. We care passionately about how that looks for our customers and how it impacts our customers. I mentioned some are struggling to staff still.

And as a result, that affects their business, which impacts us. So, but, excuse me, from the standpoint of Cintas and how we're staffed, that is not affecting our growth rate. It would be more about how our customers are impacted. I can tell you, it wouldn't go well here if someone said I can't grow.

as fast as you think I should because I can't staff. We figured that out and we think the environment that we provide for our partners where they have great opportunities and a great wage and benefits and great security and great

development is a real advantage for us in the marketplace. So as far as synthol staffing, that is not slowing us up. Certainly our customers could be impacted by that to some degree. No that's good, that's good color. I mean it's good to know there are some companies we talk to that are literally dialing back on sales and marketing costs just because they can.

you know find the labor to support the growth. So that's good to know you guys aren't in that situation. One more from me on wage rate inflation. You know curious what that's running at approximately right now for your you know folks actually out on the routes and how does that compare to your historical averages. Thank you.

Yes, wage rates, I don't have an exact number to give you, but we start with the answer and work backwards. And the answer is we've got to have great people. We've got to have really well trained and prepared people who can help us be successful and take care of our customers. So is it above historical? Yes, it is above historical. But nevertheless…..

We're focused on putting the very, very best team out on the field so that we can take great care of our customers and prepare us for the future of this organization. And our next question comes from Manav Paitnik from Barclays. Please go ahead Manav. Thank you. I guess just to follow up a little bit, there's a lot of press out there around C-suite anxiety, and I just wanted to...

Yes, Manav, thanks for the question. Yeah, we always have anxiety, right? It's part of making sure you're sharp. But nevertheless, it is, you know, we do worry about, you know, do our, as an economy, do we talk ourselves into

pulling back and does that happen to our customer base and does that happen you know as a ripple effect and but we're not seeing it. We're again our customer base it's so broad some are some are doing great some are not but in general we like the direction of our customer base and we

In many ways we hope they don't read the press and they stay focused on taking care of their business and investing for the future. But we'll see what that holds and how the Fed handles things and how that might impact the general economy.

Yeah, that's fair. And Mike, maybe if I could just ask a follow-up just on CAPEX and pre-casual expectations for the year, any changes or help there?

Well, look, what you've seen maybe in the first half of this year is when we grow and we've seen three quarters now straight of double digit organic growth, so a nice actually four quarters.

So nice acceleration in the performance. And when we grow and the volumes are healthy, we certainly invest in the business. That investment can come through in the way of working capital. So you see a little bit more working capital usage in our cash flow statement. And that's not necessarily unusual for us when we see an acceleration in the growth rate.

But we like our cash flow. It will continue to be strong. And this year should not be an exception to that. And that cash flow, I talked a few minutes ago about capital allocation and the cash flow that we've got going this year will not force us to make choices. We can still do all of the capital.

And kind of given the strength of Syntas's new business, which usually has new uniforms going into service, how did merchandise amortization affect gross margins? I mean, rental gross margins in the second quarter. Obviously, I know rental gross margins were up despite any effect of merchandise amortization. And do you expect rental gross margins to be up in the second half of the year, year over year?

We love when that happens. We're seeing growth in the amortization, but we're able to leverage that pretty nicely so far. You know our business well, we amortize many of those rental products. We have a good ratio of buying hundred and trying to reach all of our demand and we live on a Eventually, especially when it comes to

business. And as it relates to the second half of the year, look, we don't typically provide guidance on gross margins specifically, but certainly the guidance that we've provided contemplates improvement in our operating margins in the second half of the year.

and the growth that we have on the top line and all of the other initiatives and things we've got going on, they are performing well and enabling us to do that margin improvement even in a difficult period of time. Okay, thank you.

the growth that we have on the top line and all of the other initiatives and things we've got going on They are performing well and enabling us to do that to do that margin improvement even in a difficult period of time Okay, thank you

And our next question comes from Heather Balsky from Bank of America. Please go ahead Heather. Hi, thank you for taking my question. So your guidance for the rest of the year, I guess for the back half, implies growth probably on the sales side in the 8 to 9% range, which is moderating from what you did in the first half. I'm curious if you could just walk us through kind of where...

wrong right now, other sort of areas in your business, whether it's certain customers like your opportunity in health care or other business lines where you're really seeing outperformance and kind of growth beyond your typical run rate? Yes, good question. So again, our customer base is very broad. But I'll tell you this, that our business is very broad and our business is very broad. And so we're not really seeing a lot of growth in our business right now.

verticals where we're investing our healthcare, hospitality, education, government are performing quite well. And they're growing at an accretive rate to our growth. And we think we chose them wisely and invested in them appropriately. And that customer base is doing well.

Within that customer base, again, you get a mix. But nevertheless, in general, we like that area and it's growing very attractively for us.

Our next question comes from Kartik Mehta from North Coast Research. Please go ahead, Kartik. Thank you. I know you talked about the economy a few times. I'm wondering as you look at some of the benchmarks for your business and maybe your customers' businesses, anything that stands out either that?

is positive that maybe you were anticipating would decline or anything that's negative that you were anticipating would be the other way.

Karjic, it's a good question. I continue to talk about our broader customer basis, so you name it, we see it. But the scarcity of workers.

Is an issue, you know, employment is still at a very, very low level. There's still, I think, 10 million job openings in the in the US economy. So, as a result of that, you know, people are, I think, careful.

about how they're handling their employees and being judicious about that. And then just last question, just from an energy standpoint, obviously fuel prices are coming down. It seems that natural gas prices are coming down as well. Is the headwind you're anticipating from energy prices maybe what you anticipated that could be?

it was a quarter ago. But about 40% of our spend on energy is in natural gas for our production facilities and electric and that is not heading in the right direction. Natural gas prices are up and electric prices are up and so but certainly the attention more gets to everybody fills up at the pump for the most part but not as much focus on natural gas or electric but we're seeing it

your guidance kind of implies a higher than normal incremental margin. And I think Todd you mentioned the uniform business could be 20 to 30 percent incrementals this year.

Is this, are we moving into a scenario where incrementals could be higher than, you know, your normal, you know, call it 20 to 25 percent range and maybe are you more comfortable talking in like a 25 to 30 percent range for the business going forward? Thanks. Well, we haven't, Seth, we haven't really changed.

And, you know, Todd's focused on the full year results and the longer term results. And so there can be ups and downs. Certainly based on our guidance, we are contemplating a margin improvement in the back half of the year. And I don't know that it's anything that we're ready to say is.

is a new norm. It's just simply we look at the year and say, we've got some really good incremental margins in that 20-30 percent range that will cause the full year margins to go up. But I wouldn't look at it as a new normal type of a thing. It's just simply there are ebbs and flows within the business and timing of investments, etc.

Okay, that's a couple of thanks. And then just, you know, the fire business, your organic growth in the fire business continues to be in this sort of mid to high teens range. Is that a sustainable number, do you feel like, for fire? And just sort of maybe any color on really what's driving that unusually strong.

organic growth. Thanks. Yes Seth, I'll take that one. We love the the fire business. It's a very attractive business for us. It's the only business we're in where every business legally has to comply with the local laws around it. So the TAM is absolutely...

So yeah, we would like to continue to grow that business at double digit rates. Can it achieve the levels that where we are today? That would be outstanding. But certainly double digits is our focus for that business.

Thank you guys. Our next question comes from Shlomo Rosenbaum from Stiefel Nicholas. Please go ahead, Shlomo. Hi, thank you very much. I want to get a little follow-up on some of the questions on client hiring. describe roots and invocations in this webinar.

which obviously could impact syntax volumes. Do you feel like you really sell at a level in the organization that you get kind of an advanced look at the hiring plans, or is it really kind of you monitor it as it happens, so like concurrent you need to react because clients will just kind of add or subtract people, you know, kind of in the moment, but you don't, you know, it's not that you're getting a heads up on the hiring plan.

It really depends upon our view of what the staffing levels of our customers will be. It really depends upon where our relationship is. Some they'll share with us, hey, calendar 23, here's what we're thinking. Others they don't, depending upon our relationship levels or their planning level. Those come very percentages among my customers who have been very died down. So I'll miss those numbers even more that I had to figure out what those things were, so I think that will certainlyance an Rachel O'clock story here. Therefore, if an pants dress teizophrenic don't make us so

So in that case, it's a little bit more reactive. So you name it, we have that type of experience where it's very transparent and we have a good, we can see around the corner with our expectations there and then some are just very reactive and wait to see what's going on with their customers. So,

But generally speaking, with Ad Stops, I would say we see our experiences continues and the patterns that we have in the past. And I mentioned earlier that, you know, I don't know, certainly Q1, I'm speaking of the economy, Q1, Q2 was GDP shrunk. Q3 was slightly positive. We'll see what Q4 holds in store for GDP. One good question we'll probably get back to is it seems to like if we had an broader up, we would increase the numbers via global regulations or more Cheng nitrogen, which was based on Randi's chat about economic performance and whether that's furthering from global fore Pat's.

and we're planning on being successful in whatever the economic environment brings to us. Thank you. Just one follow-up on just on the pricing. Is it kind of normal now for the clients to expect these pricing increases, or are you getting any material pushback on them as this time is going on?

Well, Shlomo, as I mentioned in our prepared remarks, pricing has always been a component of our growth, sans what we went through with some serious economic turbulence with COVID-19 and what have you.

So that being said, we're planning on growing our business most attractively through volume growth and getting leverage there and planning on growing margins via leverage in that revenue growth and finding efficiencies in our business. That being said, it's a very competitive environment. You'll love it when you learn from Vsauce or Harvard Prize winners under these Conclusion Class of 2021.

you know, as we talk to our customers, they certainly challenge us, and they want us to find efficiencies in our business and not just pass a loan cost to them, and that's what we're focused on.

Our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead, Scott. Thanks very much. Good morning. Happy holidays, everyone. First question in Uniform Rental. I'm just curious about the

The winning business, you guys have obviously highlighted penetration of existing customers, strong volume growth, new customers. Could you speak to what is, programmer versus what is competitively won? Is there a lot of that activity right now of competitively won? And then if you could just kind of.

differentiate what you're seeing with large customers versus maybe small and mid-sized in the context of that question. Thanks. Yes, Scott, I'll start. Mike, if you want to contribute on this subject there. As far as the market, the competitive market.

We sell a lot of new programmers. Certainly we do take business from our competitors. But that's where we find that there's so many businesses out there that say, wow, I didn't realize that you would serve a business of my size. We do a lot of chemical engineering with different techniques to

I didn't realize you had those types of products and services and they see great value in what we do and So we're very focused on that As far as the customer base you know You know the larger customers some of them are struggling smaller ones are certainly some of them are struggling But I would say generally speaking the smaller ones are probably a little under a little bit more pressure to

But that's kind of a generalization I thought I might share with you. Great, thanks. And then as a follow-up, specifically uniform direct sales, I think it was about 33-34% organic growth in the quarter, very strong. I heard you mention on an earlier question, that would be a segment facing some tougher comps in the back half of the fiscal year.

Can you just speak to kind of what the business activity has been there? What's driving the strong growth right now? What type of customers? Has it been particularly lumpy or has it been just a solid broad based versus maybe just one or two big customer wins? Just a little bit more elaboration on that business line. Thanks?

Sure, good question. Very broad-based. It's not one customer or a couple of customers. It's very broad-based. And when you think about that area, certainly hospitality is a big component of it, but there's other customers that are national and scope-type customers. But hospitality is a big component of it.

and services, we've become a very attractive opportunity for them to sole source and to provide products that they can get quickly and that are very attractive and allow them to provide the proper guest experience that they want to provide for their...

for their patrons. And our next question comes from Tony Kaplan from Morgan Stanley . Please go ahead Tony. Thanks very much. Wanted to ask a follow-up on pricing. I know you've been sort of putting through a higher level of price than normal recently and now it sounds like

Obviously, you've mentioned a couple of times that volume is going to be a bigger driver to growth, but I guess my question is, is pricing going to be more of a normal increase versus prior years, or based on the challenging macro, although you said you're not seeing it yet, is it going to be lower than normal or roughly around a normal year for pricing in calendar 23? Yeah, Tony, good question.

You know, as we think about pricing in the future, it certainly is above historical today. It's tough to predict what inflation holds in the future, but presuming that that comes down, I'd say you'd see us closer to historical from price adjustments, but it really depends upon.

What happens with the Fed, what happens with the economy, what happens with wage pressures? There's so many inputs. And that one's tough to predict, but we're watching it very closely. Great, and then when you think about the margin expansion implied, and you mentioned sort of higher margin expansion in the back half of the year, is that, like, I guess how much of it is a result of like energy costs coming down from prior levels or

it's hard to put a number on any particular one of them. But it, you know, a couple examples. Energy, we've kind of looked at that, as Todd mentioned earlier, still is a little bit of a headwind going forward. So we're not necessarily expecting we'll get a bunch of energy benefit.

in the second half of the year, but our revenue growth has been really strong and and the performance the momentum has been good and that certainly will continue to help in the second half of the year when we grow at real nice levels like we've guided towards and like we've had in the first half of the year that always helps

our ability to drive better margins. But we've talked over the last year or so about important initiatives that we have. Those remain and continue to do well. And those are things like our routing improvements through our Smart Truck Initiative. And we have more of those, whether it is sourcing initiatives that Todd touched on in first aid or others. But those initiatives become...

very important to us too. And then there are just some timing of things, maybe some investment in the first half of the year that was really helping propel our growth and continue our momentum that may not be at the same type of level in the second half of the year. So it's a lot of those different pieces that kind of fall together. And it's hard to put numbers.

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

Q2 2023 Cintas Corp Earnings Call

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