Cintas Corporation (NASDAQ:CTAS) Q1 2024 Earnings Call Transcript

Cintas Corporation (NASDAQ:CTAS) Q1 2024 Earnings Call Transcript September 26, 2023

Cintas Corporation beats earnings expectations. Reported EPS is $3.7, expectations were $3.65.

Operator: Good day, everyone, and welcome to the Cintas Corporation Announces Fiscal 2024 First Quarter Earnings Release Conference Call. Today’s call is being recorded. At this time, I would like to turn the call 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, who will discuss our fiscal 2024 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 and Exchange Commission. I’ll now turn the call over to Todd.

Todd Schneider: Thank you, Jared. We are pleased with our start to fiscal year 2024. First quarter total revenue grew 8.1% to $2.34 billion. Each of our businesses continue to execute at a high level. The benefits of our strong volume growth and revenue flow through to our bottom line. Operating income margin increased 110 basis points to an all-time high of 21.4%, and diluted EPS grew 9.1% to $3.70. I thank our employees, whom we call partners, for their continued focus on our customers, our shareholders and each other. Uniform Rental and Facility Services operating segment revenue for the first quarter of fiscal ’24 was $1.83 billion compared to $1.7 billion last year. Their organic revenue growth rate was 7.6%. While price increases moved near historical levels, revenue growth continues to be driven mostly from increased volume.

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. Our First Aid and Safety Services operating segment revenue for the first quarter was $260.7 million compared to $234.2 million last year. The organic revenue growth rate was 11%. Our value proposition continues to resonate in our First Aid and Safety Services operating segment. 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. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment.

All Other revenue was $254.8 million compared to $234.5 million last year. The Fire business revenue was $174.3 million, and their organic revenue growth rate was 14.2%. The Uniform Direct Sale business revenue was $80.5 million which was down 2.7% organically compared to last year. Now before I turn the call over to Mike to provide details of our first 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 $9.35 billion to $9.5 billion to a range of $9.4 billion to $9.52 billion, a total growth rate of 6.6% to 8%. Also, we are raising our annual diluted EPS expectations from a range of $13.85 to $14.35 to a range of $14 to $14.45, a growth rate of 7.8% to 11.2%.

Mike?

Michael Hansen: Thanks, Todd, and good morning. Our fiscal 2024 first quarter revenue was $2.34 billion compared to $2.17 billion last year. The organic revenue growth rate, adjusted for acquisitions and foreign currency exchange rate fluctuations was 8.1%. Gross margin for the first quarter of fiscal ’24 was $1.14 billion compared to $1.03 billion last year, an increase of 11%. Gross margin as a percent of revenue was an all-time high of 48.7% for the first quarter of fiscal ’24, compared to 47.5% last year, an increase of 120 basis points. Strong volume growth and continued operational efficiencies helped generate this record gross margin. Energy expenses comprised of gasoline, natural gas and electricity were a tailwind, decreasing 50 basis points from last year.

Please keep in mind that some of the energy benefit is the result of efficiencies we’ve created with our proprietary SmartTruck technology. Certainly, we’ve also seen a benefit from a drop in prices at the pump compared to a year ago. Gross margin percentage by business was 48.1% for Uniform Rental and Facility Services, 55.9% for First Aid and Safety Services, 49% for Fire Protection Services and 38.7% for Uniform Direct Sale. Operating income of $500.6 million compared to $440.1 million last year. Operating income as a percentage of revenue was 21.4% in the first quarter of fiscal ’24 compared to 20.3% in last year’s first quarter, an increase of 110 basis points. Our effective tax rate for the first quarter was 19.2% compared to 14.8% 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 first quarter was $385.1 million compared to $351.7 million last year. This year’s first quarter diluted EPS of $3.70 compared to $3.39 last year, an increase of 9.1%. Cash flow remains strong. Net cash provided by operating activities in the first quarter grew 13% over the prior year. On September 15, we paid shareholders $138.3 million in quarterly dividends, an increase of 17.8% from the amount paid the previous September. Todd provided our annual financial guidance. Related to the guidance, please note the following: fiscal ’24 interest expense is expected to be $98 million compared to $109.5 million in fiscal ’23, predominantly as a result of lower 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. Guidance includes the impact of having one more workday in fiscal ’24 compared to fiscal ’23. This extra workday comes in our fiscal third quarter. Jared?

Jared Mattingley: 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]. And our first question comes from Faiza Alwy from Deutsche Bank.

Faiza Alwy: I wanted to see if you could provide a bit more color on the new business environment. And if you’ve noticed any change in terms of the macro environment. Certainly, you guys are talking to your customers every day. So just a bit more perspective around what you’re seeing out there in the marketplace.

Todd Schneider: Great. Yes, our new business pipeline is quite good. We love the state of our sales organization, the focus that they have, the scope. And so new business is quite good, and that’s a big driver of our growth that you’re seeing and we see that continuing. As far as macro environment, it is — we haven’t seen any real change in our customers’ behavior, I would say, since we reported last. So it’s pretty consistent with what we have seen over the past few quarters. And we are watching it very, very closely and monitoring it as we move forward.

Operator: Our next question comes from Manav Patnaik from Barclays.

Manav Patnaik: I just wanted to see if you could give us a little more color, I think, in terms of the pricing strategy and then also the strong volume growth. So I think you said pricing is back to historical levels. So I’m guessing that’s down in that low single-digit camp versus almost every other company talking about still, I guess, pricing higher than above and average. So it just maybe the first question is just how do we think about your pricing strategy here?

Todd Schneider: Yes, it is certainly closer to historical levels, and we like that. That’s, we think, appropriate based upon our cost inputs. But we’re very proud of the fact that we’re growing our business attractively, and we think we can continue this based upon new business being robust and our customer retention levels, being very good as well. And we’re seeing that in our customer satisfaction scores as well. And then the status of our customers is — they’re continuing on in the operating environment as they have in the past. So we like where we’re positioned. We like the momentum in our business, and we like how we’re growing it as well, and we think it’s — it bodes well for the future.

Michael Hansen: Manav, I might just add — Manav, I might just add to that, you asked about our pricing strategy. And as we’ve talked in the past, our goal is operating margin improvement, right? And pricing can be a lever within that, but we have other levers. It’s not the only way for us to improve margins. And so as we think about the operating margin strategy of increasing, we’ve got a lot of good things going on. And this is a great quarter that shows where pricing is sort of returning back to that historical level. We still increased margins quite nicely even to record levels. And again, it’s just that pricing is a part of that strategy.

Manav Patnaik: Yes, that make sense. That’s quite impressive. And then maybe just on the strong volume growth. Could you just help provide some color on how much of that is new business, cross-selling, maybe share gains? Any color around that?

Todd Schneider: Yes. Good question, Manav. I mean, it’s everything. As I mentioned, our new is quite good. Our retention levels, we’re very happy with, and we’re cross-selling. And we’ve — we’re continuing to make good progress there. We’re never satisfied. But our value proposition is resonating with our customers, and we’re trying to make it easier to do business with us through various technologies. And I think it’s showing up in our results, and we’re again bullish.

Operator: And our next question comes from Josh Chan from UBS.

Joshua Chan: I guess could I ask about inflation and what you’re seeing across your different cost buckets, labor, energy, material? And how you expect that to kind of transpire over the coming quarters as well?