Cintas Corporation (NASDAQ:CTAS) Q2 2024 Earnings Call Transcript

Cintas Corporation (NASDAQ:CTAS) Q2 2024 Earnings Call Transcript December 21, 2023

Cintas Corporation beats earnings expectations. Reported EPS is $3.61, expectations were $3.49. CTAS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to the Cintas Corporation Announces Fiscal 2024 Second Quarter Earnings Release Conference Call. Today’s call is being recorded. At this time, I would like to turn the meeting over to Mr. Jared Mattingley, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Jared Mattingley: 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 2024 second quarter results. After our commentary, we will open the call to questions from analysts. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. 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 discussions on these points contained in our most recent filings with the Securities and Exchange Commission. I will now turn the call over to Todd.

Todd Schneider: Thank you, Jared. We are pleased with our second quarter results and are excited about the future. Second quarter total revenue grew 9.3% to $2.38 billion. Each of our businesses continue to execute at a high level. Our momentum in the business is good and volume remains robust. We can grow in a number of different ways. Contribution to our growth from new business remained strong and comes from companies that either outsource their program today or they are managing it themselves. We continue to have great success cross-selling to existing customers. Retention levels are strong and remain at very attractive levels, and our value proposition of image, safety, cleanliness, and compliance continues to resonate across businesses of all sizes and in all verticals.

We continue to be pleased with the results from our focus on prospects within the verticals of healthcare, hospitality, education, and state and local government. We recently announced the opening of two cleanroom facilities, one in North Carolina and the other in Wisconsin. These facilities will provide additional capacity in these regions in order to expand our efforts in this area of attractive growth from pharmaceutical and biotechnology companies. The benefits of our strong volume growth and revenue flowed through to our bottom line. Gross margin for the second quarter grew 11.6% and operating income grew 12.3%. Diluted EPS grew 15.7% to $3.61. Cash flow remained strong. Net cash provided by operating activities in the second quarter grew 17.8% over the prior year.

Our strong cash flow gives us flexibility to choose how we deploy our capital. In the second quarter, we continued to invest in our businesses. We also acquired several smaller businesses. On December 15th, we paid shareholders $137.5 million in quarterly dividends, an increase of 17.1% from the amount paid the previous December. During the second quarter, we also purchased $320.3 million of Cintas common stock under our buyback program. I would like to thank our employees, whom we call partners, for their continued focus on our customers, our shareholders, and each other. Now, 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 $9.40 billion to $9.52 billion to a range of $9.48 billion to $9.56 billion, a total growth rate of 7.5% to 8.4%. Also, we are raising our annual diluted EPS expectations from a range of $14.00 to $14.45 to a range of $14.35 to $14.65, a growth rate of 10.5% to 12.8%. Mike?

Mike Hansen: Thanks, Todd, and good morning. Our fiscal 2024 second quarter revenue was $2.38 billion compared to $2.1 billion last year. The organic revenue growth rate, adjusted for acquisitions and foreign currency exchange rate fluctuations, was 9%. Organic growth by business was 7.9% for Uniform Rental and Facility Services, 12.7% for First Aid and Safety Services, 17.8% for Fire Protection Services, and 4.7% for Uniform Direct Sale. Gross margin for the second quarter of fiscal 2024 was $1.14 billion compared to $1.02 billion last year, an increase of 11.6%. Gross margin as a percent of revenue was 48% for the second quarter of fiscal ‘24 compared to 47% last year, an increase of 100 basis points. Strong volume growth and continued operational efficiencies helped generate this strong gross margin.

Gross margin percentage by business was 47.4% for Uniform Rental and Facility Services, 54.5% for First Aid and Safety Services, 48.6% for Fire Protection Services, and 40.9% for Uniform Direct Sale. Gross margin for the Uniform Rental and Facility Services segment increased 40 basis points from last year. We continue to leverage our strong revenue growth and extract inefficiencies out of the business in order to expand margins. Our year-over-year improvements are no accident. Our Six Sigma and Engineering teams have helped us create efficiencies in the plant that allow us to maximize the utilization of our equipment, labor, and energy. Our SmartTruck technology allows us to improve our route efficiencies and provide density to our existing routes.

While energy expenses comprised of gasoline, natural gas, and electricity were a tailwind of 40 basis points from last year, please keep in mind that some of the energy benefit is the result of efficiencies just mentioned. As an example, our rental revenue grew organically at 7.9%, but we only added 1% to our route structure since last year. Gross margin for the First Aid and Safety Services segment increased 400 basis points from last year. Our revenue growth is strong and value — our value proposition continues to resonate in this segment. Health and safety of employees remains top of mind. Our mix of revenues continues to be healthy, including growing high margin recurring revenue products like AED rentals, eyewash stations, and WaterBreak.

We continue to use technology like SmartTruck to optimize our routes and improve efficiencies. And our first aid dedicated distribution center allows us to lower product costs. All of these contributes to our improved margins. Selling and administrative expenses grew $64.4 million or 11.1% over last year. Strong revenue growth creates leverage, which allows us to invest in the business. We continue to invest in our people, adding selling resources, investing in our management trainee program to develop future leaders, and expanding our talent acquisition efforts. Operating income of $499.7 million compared to $444.9 million last year. Operating income as a percent of revenue was 21% in the second quarter of fiscal 2024 compared to 20.5% in last year’s second quarter, an increase of 50 basis points.

Our effective tax rate for the second quarter was 20.9% compared to 22.1% last year. The tax rates in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. Net income for the second quarter was $374.6 million compared to $324.3 million last year. This year’s second quarter diluted EPS of $3.61 compared to $3.12 last year, an increase of 15.7%. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal ‘24 interest expense is expected to be $100 million compared to $109.5 million in fiscal ‘23, predominantly as a result of less variable rate debt. Our fiscal ‘24 effective tax rate is expected to be 21.3%. This compares to a rate of 20.4% in fiscal ‘23.

The higher effective tax rate negatively impacts fiscal ‘24 EPS guidance by about $0.16 and diluted EPS growth by about 120 basis points. Our financial guidance does not include the impact of any future share buybacks and guidance includes the impact of having one more workday in fiscal ‘23 compared to fiscal — I’m sorry, fiscal ‘24 compared to fiscal ‘23. This extra workday comes in our fiscal third quarter. I’ll turn it back to Jared.

Jared Mattingley: Thanks, Mike. 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Ashish Sabadra from RBC. Please go ahead, Ashish.

Ashish Sabadra: Thanks for taking my question. Just on the four verticals that you highlighted as areas of strength in particular. I was wondering if you can quantify how big the combined revenues are from those verticals and how does the growth profile there compare to the company average? Any color? Thanks.

Todd Schneider: Good morning, Ashish. This is Todd. Thanks for the question. We don’t — I don’t have any specific number for you as far as that exact number, but I can tell you that our verticals are performing quite well. We’re having really good success. Our focus around not just selling but organizing around those is really paying off for us. And I’ve just got a couple of wins I can share with you regarding the verticals. In healthcare, in the acute space, we’re having good success and non-acute as well. We’ve got a scrub rental program to a big hospital network in South Carolina that is benefiting from a new consistent image but also identification. The customer told us that they were interested in being able to — pardon me, identify their people, understanding who was supposed to be in what area and this new scrub program did that.

We had a really similar experience with a nursing home in Virginia. Same thing. They were buying their own and they — but the leadership wanted to be able to identify and have a consistent image with their people. We had a — on the acute side, again a hospital in Florida that we rolled out a new microfiber program because they were struggling with inventory control and product quality, which led to cleanliness concerns. And our program offered some great products, technology to control the inventory, which allow them to focus more on their patients, instead of having a full run with trying to manage the microfiber. Excuse me. And then I’ve got a couple of other examples I thought might be helpful for the group. In our government sector, we have — we just recently rolled out a first aid and AED rental program to a public library system in California, which is — you wouldn’t think of a public library system as being a great prospect for us, but it is.

They realized that the value would bring to their employees and being prepared with the AEDs in case it was needed because the publics in their locations. And then lastly, I’ll just share with you a little bit on education. A variety of wins there. We had a chemistry department at a nice-sized university in Virginia. They put all their educators and students in a lab tour program. The maintenance department at a University in California put all of their people in Carhartt uniforms, a rental program from us, they love the Carhartt. And then the last item would be there was a dining facility at a university in Arizona where they put all their culinary people in Chef Works, which is a big win for those folks. The branded programs with Carhartt and Chef Works were big wins.

So, I don’t want to belabor it, but I thought I would just share a few wins because I know verticals are of interest to yourself, Ashish, but also plenty of other folks on the call.

Mike Hansen: Yeah. The only other thing I might add is, as Todd just talked about, we have so many ways to win, and clearly, those verticals are growing faster than the average. So we still are seeing really good momentum in each of those.

Ashish Sabadra: That’s great color and thanks for sharing those events. It does provide a lot more clarity on those verticals. And if I can ask a quick follow-up. I was just wondering if there is — if you could share any update on your technology, the SmartTruck program, and particularly the partnership with Google, Verizon, and SAP, any updates on that front? Thanks.

Todd Schneider: Certainly. I think how — one of the things we have around here is we don’t make money when the wheels are moving. We make money when the wheels stop. And — so we’re — or the way Mike described it, in total for our company, we grew revenues over 9%, but we only added 1% to our route structure in total. So that means we’re spending more time with the customer, less time driving, which is better for our customers, better for our partners, and better for Cintas. So we’re pleased with that. Our technology and we still have plenty of room to go there. We’re focused on bringing those efficiencies, extracting out the inefficiencies in our business. We sent out a note — a press release regarding our migration this quarter to the Google Cloud, that has been very successful for us.

There’s a number of benefits that we get from moving from a server farm to the Google Cloud. The first one is it’s more secure, so very important to us. Second item is, over time, we believe we will — that’ll be more cost-effective for us. And the third is it gives us access to Google’s AI platform. So certainly in the very early innings, we just migrated, but we think that that will be able to help us longer term in making it more attractive, making it easier to do business with Cintas, making sure that we are positioning our people to be successful, to point them in the right direction and leverage that type of — those types of tools.

Operator: And our next question comes from Manav Patnaik from Barclays Capital. Please go ahead, Manav.

Manav Patnaik: Thank you. Todd, just to follow up on all the wins and contracts you talked about, maybe, I guess the question is more around the competitive environment versus is this just first time outsourcers? Any trends, any changes you’re seeing from that front, the new business percentage you’ve called out before, but whether that’s more market share or just first time outsourcing?