Cintas Corporation (NASDAQ:CTAS) Q2 2026 Earnings Call Transcript

Cintas Corporation (NASDAQ:CTAS) Q2 2026 Earnings Call Transcript December 18, 2025

Cintas Corporation beats earnings expectations. Reported EPS is $1.21, expectations were $1.2.

Operator: Good day, everyone, and welcome to the Cintas Corporation Announces Fiscal 2026 Second Quarter Results 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, Ross, and thank you for joining us. With me are Todd Schneider, President and Chief Executive Officer; Jim Rozakis, Executive Vice President and Chief Operating Officer; and Scott Gurule, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2026 2nd 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 had another successful quarter, reflecting the strengths of our value proposition. Cintas delivered record revenues and strong operating margin performance, while we continue to invest in our business to position the company for the future. Second quarter total revenue grew a strong 9.3% to $2.8 billion. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 8.6%. Each of our 3 route-based businesses had strong revenue growth in the quarter. Our business continues to operate at a high level as our employee partners deliver strong execution across the board and maintain a clear focus on driving value for our customers and shareholders.

Gross margin as a percent of revenue was 50.4%, a 60 basis point increase over the prior year. Operating income grew to $655.7 million, an increase of 10.9% over the prior year, diluted EPS of $1.21 grew 11% over the prior year. Our strong revenue growth is creating leverage and our cost savings initiatives and investments we’ve made are helping to improve our employee partners productivity and help them deliver better solutions for our customers. Our operating margin for the company was an all-time high. The operating margins for our 2 largest route-based businesses were also all-time highs, reflecting the high level of execution by our employee partners. Turning to guidance. We are raising our fiscal 2026 financial guidance. We expect our revenue to be in the range of $11.15 billion to $11.22 billion, a total growth rate of 7.8% to 8.5%.

We expect diluted EPS to be in the range of $4.81 to $4.88, a growth rate of 9.3% to 10.9%. With that, I’ll turn it over to Jim to discuss the details of our second quarter results.

James Rozakis: Thanks, Todd. This quarter marked another period of solid progress for our business as we continue to advance the rollout of our technology initiatives and build on the strong foundation of organic growth we have established. Our focus on innovation, operational excellence and customer engagement is delivering measurable results. We are strengthening our relationships with existing customers through expanded offerings and superior service, which has led to all-time highs in retention rates while also successfully attracted new customers, who the clear benefits of partnering with us. These achievements reflect the commitment and talent of our employee partners, whose efforts are positioning us for sustained success.

Turning to our business segments. Organic growth by business was 7.8% for Uniform Rental Facility Services, 14.1% for First Aid and Safety Services, 11.5% for Fire Protection Services and 2% for Uniform Direct sale. Gross margin percentage by business was 49.8% for Uniform Rental Facility Services, 57.7% for First Aid and Safety Services, 48.2% for Fire Protection Services and 41.9% for the Uniform Direct sale. Gross margin for Uniform Rental Facility Services segment increased 70 basis points from last year. The 49.8% gross margin is the second highest gross margin ever for this segment. The strong revenue growth in this segment is helping to create leverage. In addition, our supply chain team and process improvement initiatives from our engineering and Six Sigma Black Belt teams continue to help expand our margins while navigating the current economic environment.

Gross margin for the First Aid and Safety Services segment was 57.7%. This equals a previous all-time high set last year. As we mentioned previously, the mix of revenue and timing of investments can impact this business from quarter to quarter. We are pleased our investments to grow this business are generating strong double-digit revenue growth, while being able to expand our gross margin. We are growing in many ways. We’re adding new business with over 2/3 being converted from no programmers. We are cross-selling to existing customers. Our retention rates are at all-time highs, and we continue to experience success in our focused verticals of health care, hospitality, education and state and local governments. Our strong culture of execution, combined with multiple growth levers has positioned us over the years to [indiscernible] multiples of job growth and GDP.

All businesses have a need for [ image ], safety, cleanliness and compliance. Our value proposition resonates in all economic cycles as evidenced by our growth in sales and profit in 54 out of the last 56 years. With that, I’ll turn it over to Scott to discuss our operating income, capital allocation performance and 2026 guidance assumptions.

Scott Garula: Thanks, Jim, and good morning, everyone. As Todd mentioned, we continue to perform at a high level as evidenced by record level revenue and operating margins for the second quarter. Selling and administrative expenses as a percentage of revenue was 27%, which was a 20 basis point increase from last year. Second quarter operating income was $655.7 million, compared to $591.4 million last year. Operating income as a percentage of revenue was 23.4% in the second quarter of fiscal 2026 compared to 23.1% in last year’s second quarter, an increase of 30 basis points and an all-time high. Our effective tax rate for the second quarter was 21.2% compared to 20.7% 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 $495.3 million compared to $448.5 million last year. This year’s second quarter diluted earnings per share was $1.21 compared to $1.09 last year, an increase of 11%. For the second quarter, our free cash flow was $425 million, an increase of 23.8% over the prior year. Our strong cash generation allows us to have a balanced approach to the capital allocation in order to create value for our shareholders. In second quarter, we continued to invest in our businesses through capital expenditures of $106.3 million. Also in the second quarter, we were able to make strategic acquisitions totaling $85.6 million in all 3 of our route-based businesses. During the second quarter, we paid dividends in the amount of $182.3 million.

Also during the second quarter and as of December 17, we were active in the buyback program with repurchases of $622.5 million of Cintas shares. That is the third largest share repurchase we’ve made in a quarter. During the first 6 months of fiscal 2026, we have returned $1.24 billion in capital to our shareholders in the form of dividends and share buybacks. Earlier, Todd provided our updated guidance for the remainder of the fiscal year. As you contemplate the guidance, it is important to remember that during the third quarter of fiscal 2025, we recognized a $15 million gain on the sale of an asset. That will not repeat and will be a headwind when comparing the third quarter results year-over-year. In addition, please note the following in the guidance.

Both fiscal 2025 and fiscal 2026 have the same number of workdays for the year and by quarter. Our guidance does not assume any future acquisitions. Our guidance assumes a constant foreign currency exchange rate, fiscal 2026 net interest expense of approximately $104 million, a fiscal 2026 effective tax rate of 20%, which is the same compared to our fiscal 2025, and the guidance does not include the impact of any future share buybacks or significant economic disruptions or downturns. With that, I’ll turn it back to Todd for some closing remarks.

Todd Schneider: Thank you, Scott. Looking ahead to the second half of fiscal 2026, we are right where we want to be, and our focus remains on helping customers meet, and in many cases, exceed their image, safety, cleanliness, compliance needs. We remain committed to leveraging our investments to sustain our positive momentum and deliver exceptional customer service. I want to thank our employee partners for their incredible commitment to our customers and everything they do for Cintas. I’ll now turn it back over to Jared.

Jared Mattingley: That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just 1 question and a single follow-up if needed. Thank you.

Q&A Session

Operator: [Operator Instructions] And our first question comes from Tim Mulrooney from William Blair.

Timothy Mulrooney: Only 10 minutes on the prepared remarks. That’s what I’m thankful for this holiday season. So just 1 question from me. There continues to be a lot of noise in the labor market data. But I think most would agree that we’ve seen a softening trend in terms of hiring activity over the last several months, at least on balance. And I’d be curious to hear if you’ve seen any material change in employment levels across your customer base, if what we are seeing in the broader payroll numbers are playing out in your world or if the reported job losses are more in the white collar world where you’re providing some services, but those folks don’t typically wear uniforms. I know you’ve emphasized your ability to grow in all types of environments. But I’d be interested in your take on more of the underlying dynamics here given the number of businesses that you service week to week.

Todd Schneider: Well, thank you, Tim. We are Certainly — we’re reading the same things you are. We’re watching job reports as we always do. And as we spoke about in our prepared remarks, as a reminder, we’ve shown the ability to grow in multiples of GDP and jobs growth for a long time now. And we certainly love it when our customers are adding employees and their businesses are really healthy and that’s how we love that. But we don’t need it in order to grow our business the way we like to. That being said, to your point, I think you have to dig pass the headlines on the jobs report. First off, we’ve picked our verticals really well, very strategically. . And the employment picture for them is, if you look at it, it’s positive, health care, education, hospitality, state, local government, those are good.

The services providing sector continues to show growth. And the goods-producing sector isn’t performing as well, but the specialty trades within them are doing well, and that’s — those are obvious uniform wearers and users of our services. So there are certainly many jobs that are under pressure, hence, what you see in the headlines and the market reports, but they are certainly more generally, white-collar jobs IT, financial back office that are really not end markets for us, as you pointed out, Tim.

Operator: And our next question comes from Manav Patnik from Barclays.

Manav Patnaik: I also just had 1 broader question, maybe just following up from that one. I know you’ve obviously shown that you guys can outperform and execute in any kind of environment. But just maybe help us appreciate like what is your downturn playbook look like? Like if unemployment does crack, how do you still keep up these kind of high single-digit growth levels, which levers typically make up more? Is it all of them? Just any color there would be helpful.

Todd Schneider: Yes. Good question, Manav. We certainly have a wide array of products and services that we provide, and we service a wide breadth of customers as well. So our target of mid- to high single-digit organic growth is important to us. And we have so many ways to grow that it gives us flexibility. Certainly, new business is important to us. And when you think about a business that — when they have less people, that can certainly impact us. But they also have still other needs that they need to address. And in many cases, they don’t have enough people to address those and they look to us to outsource for those items. So new business is important. We have — are still very early in the innings of cross-selling all of our various products and services into us.

So trying to gain growth from our current customers is an important lever for us. So that’s all valuable. M&A tends to get better during those periods of times as well. But we’re — we have many levers in addition to obviously the ones that I’ve mentioned that I think give us real optionality. And certainly, when we look at new programmers, that’s a big opportunity for us.

James Rozakis: Manav, this is Jim. Perhaps I can give just a little more color on how much opportunity really lies within our current customers. And as Todd mentioned in his prepared remarks, our objective is to first supply our customers with a great experience with us. And that starts at the foundational level. And then we are in the right now to be able to ask them for more opportunities and to steer more of their spend that they already have over to us. . And just due to the nature of our service model, we’re in their facilities so frequently that we get a really deep understanding of what their needs are and what the opportunities may come from. So I have an example here of a property management company that we service out on the West Coast, and we’ve been servicing that facility for a number of years for uniform rental for all the folks who work on the property.

And during our routine visits, our team uncovered that they were doing bulk orders from an e-commerce solution for all their restroom supplies. And when inquiring with the company, they realized that they were tying up cash flow. They were tying up really precious real estate space and storage space that they did not want to tie up and they were taking a lot of their labor and manpower to go ahead and inventory all of those goods. Our folks went in and introduced the concept of outsourcing that to us and utilizing the Cintas hygiene program. They found out that now their spend is much steadier than it was in the past. It makes it much easier to budget. They’re not tying up that space. And maybe most importantly, their team is not involved in taking their precious time away from what they focus on going ahead and managing hygiene inventories.

They let us handle that for them. So just a small example of activities that happen across 1 million plus customers every day.

Operator: And our next question comes from Andrew Steinerman from JPMorgan. .

Andrew Steinerman: I definitely heard the pluses and minuses about the customers’ employee base, but I just didn’t quite get a compilation if [ ad stops ] are changed year-over-year. I surely heard the separate point that you continue to grow with same customers. So just a comment on ad stops year-over-year? And then my second question is with the acquisitions that were completed in this second quarter, how much will that add to the second half of the year revenues?

Todd Schneider: Well, I’ll take the first half, Andrew. So thank you for the question. As we mentioned and through Jim’s example, we talked about the — all the various products and services we can provide for our customers and it’s broad and growing. So from that standpoint, growth from current customers, I would describe it as very stable, if anything, slightly positive. So we’re in a good position. Our current customers see the value proposition that we can offer to them, and that actually helps with retention as well. Scott, if you want to address the second half?

Scott Garula: Yes. Thanks, Todd. And Andrew, we’ve talked in the prepared remarks the acquisition impact during the second quarter was about 70 bps. And if you think about the rest of the year and our guide, we obviously assume no new acquisitions. You can assume that there’s a normal tail when it comes to the acquisition volume and generally for the second half of the year, you would assume about half of the second quarter impact, so call it, 30 to 35 bps.

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

Joshua Chan: Congrats on a really strong quarter. I guess my 2 questions. One, I think both Todd and Jim mentioned that retention rates are at record levels. Usually, you see those in stronger economic time. So maybe could you talk about how you’re able to achieve strong retention rates even in these types of climate? And then I guess my second question is on the incremental margins, I think both Q1 and Q2 were within your longer-term range, but maybe towards the lower end. So any way to think about how that kind of transpires in the second half would be great.

Todd Schneider: Thank you, Josh. I appreciate that. I’ll take the first half and regarding retention, and Jim will address the incrementals. Our retention rates are, they’re at all-time levels, and we have been for several quarters now, and it speaks to a number of things. First off, the execution by our team is impressive. They’re doing a great job, making sure they’re taking great care of our customers that is easy to say, really hard to do, starts with our supply chain team, our operations organization. They’re doing a great job. And that all ties back into our culture. And we have spoken over and over again about the fact that our culture is our ultimate competitive advantage, and it shines even brighter in economic environments that are a little bit more uncertain than others.

So — and it’s showing up big time for our folks. We’re also providing great value for our customers, and they’re seeing it with not only the products but the services, the technology that we’re utilizing and the technology investments that we’ve made help accomplish 2 things at a 30,000-foot level. One is it makes it easier for our partners, our employee partners to service and take care of our customers to provide value for them. And the second one is it makes it easier for our customers to do business with us. So when you add those up, all that you mix it in, it adds up to retention rates that we find very attractive. Jim?

James Rozakis: Yes, Josh, I’ll get to the second question regarding margins. So first of all, we ran [ 27% ] incremental margin by the second quarter, which we really like. And that’s right in our stated range of that 25% to 35%. That range is really important for us. That allows us to continue to invest in the future growth of the business, while being able to expand margin along the way. So we really like that, that allows us to make the investments in technology, the necessary investments in capacity, bench strengths, selling resources. All of those are really critically important to us. So that would be really right in the sweet spot of the range. Now a couple of things to keep in mind with regards to incremental this year, and how it plays out for the remainder of the year.

First off, we’re coming off of a comparison to last fiscal year which is a really tough comp. Last fiscal year, we ran in the second quarter, incrementals of [ 49.7% ] that’s an outperformance not what we normally expect. So we’re really pleased with the 27% this quarter given that comparison. In fact, if you look at the whole first half of last year, we ran an incremental of 44.3%. So really, really high in the beginning of last fiscal year, settling back into our range this fiscal year. A couple of other things maybe to keep in mind is really what the guide implies with regards to incrementals for this fiscal year. If you look at the whole year across the board, incrementals would imply somewhere between the [ 29 and 30 ] when you adjust for the $15 million asset sale from last fiscal year, so that’s right in the heart of where we want to be, a perfect level of investment continuing to fuel the future growth.

And if you look at the back half of the year, that would imply incrementals of 30% to 33%. So moving back up towards the high side of that range, so we’re really pleased with where we are. We like the outlook of the year, and we think that’s a great spot for running the business.

Operator: and our next question comes from Jasper Bibb from Truist Securities. .

Jasper Bibb: I wanted to get an update on your experience with sourcing costs and tariffs so far this year. I guess, how have things trended relative to your expectations when you initially set guidance for the year?

Todd Schneider: thanks for the question. Yes, the tariffs is certainly a dynamic environment as it relates to that. We continue to execute at a high level. As I mentioned earlier, our culture, when the times are challenging, you might have to run at higher RPMs, but we’re executing at a high level. We’re not immune from impacts of higher costs from tariffs. But our supply chain has always been a competitive advantage. And when you’re in this type of environment, it’s that much more of an advantage. Now keeping in mind, the ability to — they’re flexible and adaptable and part of how they have that optionality is because we source from all over the world. And we do have really good geographic diversity, and we’ve spoken in the past that 90-plus percent of our products, we have 2 or more options.

So that optionality is incredibly important when it comes to an economic — excuse me, a sourcing environment than what we’re dealing with. The guide does contemplate the current environment for tariffs. So it’s coming in very similar to what we expected. You recognize that we do have the ability to — we amortize most of our goods. So as a result of that, it does give us time to pivot and adapt, but it’s coming in about where we expected. But we’re certainly staying on our toes because the sourcing environment is dynamic and the tariff environment is there certainly could be changes coming as well.

Jasper Bibb: And then really healthy margin in the First Aid business this quarter. Can you provide a bit more detail on what the underlying mix has looked like in that business this year? I know you were a bit heavier on the training side for the end of last year. So curious if that flipped back more recurring revenue.

Todd Schneider: Yes. We’re — we love the First Aid business. It is a great business for us. We’re very pleased with that. And you’ve seen that they’ve had outsized performance for a period of time now. One of the things that — the mantra that we have and the leadership of our organization there talks about there’s nothing more important than the health and wellness of our businesses, employees and customers. We completely agree with that, and you’re seeing really good growth in that business. . We see them as a low double-digit grower for the foreseeable future. So that’s great. That being said, certainly, the mix of business can have an impact on the margins in that. So we like the range we’re in. But if we have a little bit of change in mix, and there’s a little change in margin within a range for us.

We’re okay with that. We’re investing for that for the future, providing more value to our customers. And running a business isn’t linear. So we’re not focused on just a pure, hey, we’ve got to get another a certain amount of basis points lift in gross margin in that business. We think it’s important that we are running a range that’s really attractive so we can grow our operating margins, but mix of business really is impacted by that. So Jim, anything else that you’d like to comment on that?

James Rozakis: No, Todd, I think you hit all the main points of what really drives this business. The only other thing I might just say is the team did a fantastic job in the quarter of execution, and we’re really pleased with the results and where they stand.

Operator: and our next question comes from Andrew Wittman from RW Baird.

Andrew J. Wittmann: I just thought I would give you guys an opportunity or hear — I’d like to hear a little bit about the competitive environment. Obviously, over the last couple of years, you’ve had some competitors that have really gone on volume chasing spree. You guys have obviously executed very well amongst all this, but I was just wondering what you’re seeing out there and how that’s affecting your price realization.

Todd Schneider: Andrew, thanks for the question. Yes, I mean we — as you know, we operate in a very competitive environment, always have, always will. My entire career, it’s always been like that. And we certainly do win some business from competitors, but that’s — as you know, that’s not where our focus is, our focus is on signing new customers that weren’t programmers when we walked in and when we walk out, they are. And as a result of that, still over 2/3 of our new customers are coming from that sector. And the white space is incredibly large there, with us servicing a little over 1 million customers, but there’s still 16-plus million businesses in the U.S. and Canada. So that’s really attractive for us. So I mentioned our retention rates are at all-time high.

That’s helping us as well. But that’s really about the value proposition that we’re providing for our customers, which starts with our culture and is executed through our employee partners. But it is a — we’re pleased with how our folks are performing competing in the marketplace and really attacking that large TAM out there of that [ no program ] market, which we say we’re really excited about.

Andrew J. Wittmann: Just for my follow-up, I thought I would just ask a little bit on the M&A side. Obviously, last fiscal year was one of your bigger years that you had since for a while, a pretty big quarter here in terms of capital deployment towards M&A. Maybe, Todd, you could just talk about kind of the funnel here. Do you feel like thinking about the amount of capital deployment last year is again doable this year with the progress that you made this year so far?

Todd Schneider: Andrew, great question. First off, just capital allocation in general, we’re very pleased with how we’re going there. We just we invested over $100 million in CapEx for the quarter, $85 million in M&A. All 3 route-based businesses, we were acquisitive in. And then on top of that, $182 million in dividends paid out and over $600 million in buybacks. So we really like that capital allocation strategy, we’ve shown to be good fiduciaries with that. But — and M&A is certainly a part of that. As I mentioned, we had a really good quarter. We had a great year last year. But as you know, it’s hard to predict. M&A tends to be a little unpredictable and lumpy, whether it’s because they’re family-owned businesses that are waiting on their — the next generation, whether they want to move on or not.

And we do love M&A of all shapes and sizes. We love tuck-ins. We like new geographies. And when we make M&A, we always — we value so much of it, but there’s — the #1 things that we get out of it are the people that are running the business and the customers. And we try to make sure that we can get synergies if it’s a tuck-in. And if it’s not a tuck-in, then we get extra capacity. And we also then have more customers that we can cross sell. So all that’s attractive. The pipe, we are always working on that pipe. Jim and I and our corporate development team are all in that game together. We have relationships that are going back decades, and we’re ready and willing to — for M&A to be an important component of our strategy moving forward.

Operator: And our next question comes from George Tong from Goldman Sachs.

Keen Fai Tong: You touched on some of this, but can you provide a high-level overview on what you’re seeing with sales cycles and broader customer purchasing behaviors. And if you’ve noticed any meaningful changes from prior quarters?

Todd Schneider: George, nothing specific to call out. We’ve certainly operated in easier environments. As this economic environment, it’s a little less certain than we like. But despite that uncertainty, the value proposition continues to resonate. As I mentioned earlier, especially in periods of uncertainty, it can do that. Outsourcing can save money, improving steady cash flow and same time that can be spent on running the business. That was referenced in Jim’s example that we talked about earlier. I’ve already referred to retention rates being at very attractive levels. And our — and I also mentioned our growth from our current customers was steady and if anything, improved slightly. So we think we’re in a good spot, and we like where we’re pointing.

Keen Fai Tong: Got it. That’s helpful. And then just a follow-up. You took up your full year guide for revenue. Can you talk about how much of the increase reflects upside in the quarter versus what you were internally expecting compared to maybe a stronger outlook for the remainder of the year?

Todd Schneider: Yes. We’re — first off, our guide for the year is really good. It looks right where we want it to be. If you look at the guide for — or excuse me, the guide for the year is showing growth of 7.8% to 8.5%, midpoint of 8.2%. It’s right where we want. I think it’s also important to recognize that the comps do get tougher in the second half for growth. Last year’s second half growth was about 90 basis points higher than the first half of last year. So we’ve booked a good performance, but we’re going to be up against tougher comps in the second half on growth than we were in the first half. But we’re pleased with where we are, and we’re pleased with our guide. And we think that we’ll be able to get some leverage as we move forward on that guide, which will help fall to the bottom line, hence the EPS guide as well.

Operator: And our next question comes from Jason Haas from Wells Fargo.

Jason Haas: I just wanted to follow up to get some more detail on the timing of the tariff costs. It sounds like those have maybe started to flow through the P&L, but there’s more impact to come. Is that like a fair understanding. And then how is the industry reacting — how are you reacting? Have you started to raise prices of your competitors beyond raising prices? How should we think through that?

Todd Schneider: Well, a few things. First off, as tariffs come through, I mentioned that we have optionality. So don’t think of it as simple as well. Tariffs are a significant impact. We just haven’t seen it yet. That’s not the case because our culture is such that we don’t just accept that we’ve got to go find ways to improve. We’ve got to find — work at higher RPMs to find other additional suppliers to take cost out of our business as well. And we’re doing all that. I mentioned we’re not immune from it. But we’re working really hard to mute that subject as very best we can. As far as pricing is concerned, we’re — we take a long-term approach on pricing. We are at what I’ll call historical type levels. But our philosophy is we care about the long-term value of a customer.

So we’re focused on growing our business via volume growth, not just pricing. We’re going to go out and extract out the inefficiencies of our business that will help us allow us to grow our margins at attractive levels, along with the revenue growth to help us get leverage. But we don’t simply just pass along those costs to our customers and because we operate in a really competitive environment. And those customers have choices. So we’ve got to work really diligently to mute the cost impacts of tariffs and other costs that are going through so that — and we’re extracting out those inefficiencies and doing the very best we can to make sure that we’re positioned for success to grow our margins.

Jason Haas: Great. That’s very helpful. And then as a follow-up, can you just refresh us on the timing of the [ SAP Fire ] implementation costs? Are you — are you still expecting a greater headwind to margins in fire in the second half of the year as that system gets turned on and you start recognizing the amortization?

Todd Schneider: Jason, thanks for the question. These ERP implementations take time. And we are experiencing some additional costs now for sure. But there is more cost to come in the future. We’re working really hard on on this implementation. We think it will be really valuable for our employee partners and our customers. But so we’re investing for the future in that business. You see that we’re growing it really attractively. We’re not only growing it attractively, but we are also highly acquisitive in that business. . So when you think about the fire business, think about it this way. We are also dealing with M&A that comes to us. And as I mentioned earlier, M&A, you can’t predict it exactly. But — and in that business, we are — some of our M&A is — allows us to be tuck-ins, but others are actually geographic expansion.

And when we make M&A in that business and you get M&A expansion, it is — for a period of time that doesn’t run at the margin profile that we do. We’ve got to make sure that we get our operating protocols in place. And as you can see, M&A account for 340 basis points of total growth for fire in Q2. So that’s a component of any margin pressure that we have in that business, little bit of SAP, but we’re investing for that in that business because we think the future is really, really bright. And we’re quite optimistic about the coming years.

Scott Garula: Jason, this is Scott. I just might add, as Todd mentioned, the ERP implementations take some time. We’ve got some experience with that in our rental business as well as First Aid and Safety, and we are expecting the Fire rollout to carry on into next fiscal year. And I would just look at the impact for fiscal year ’27 to be around that 100 basis points for the fire protection business. .

Operator: And our next question comes from Faiza Alwy from Deutsche Bank. .

Faiza Alwy: Yes. So I wanted to ask about your technology initiatives. I think it’s well understood that you guys are at the forefront of implementing the latest and the greatest in terms of technology. So I just wanted to get an update on what are — is there any recent initiatives you’d like to talk about? And maybe the return on those types of investments, whether it’s AI related or anything else you would want to highlight?

Todd Schneider: Yes, we are investing in technology, have been for many years, and will be probably in perpetuity, just it’s the nature of how business works now. And we are — we spoke about in the past, we’re seeing benefits, whether it’s a material cost or cost of goods, production, delivery cost, all those, you’re seeing that. We talked about Smart Truck helping us from a technology standpoint, garment utilization being on one system allows us to share garments and reduce our cost there. All that is important. Certainly, AI, we see obvious opportunity there. We’re in the early stages as many companies are on the AI front. And I include that into our total technology investment. But we’re optimistic about where that will impact us in the future, and we are organizing and investing appropriately to make sure we leverage those opportunities.

Operator: And our next question comes from Stephanie Moore from Jefferies.

Stephanie Benjamin Moore: I think 2 areas of your strategy were very clear this morning and obviously have been clear for some time now. And first is, obviously, the record retention levels that you could continue to see as well as as you called out your investments in key verticals and just the strength that you’re seeing there despite the uncertain macro. So kind of given these 2 factors, maybe talk about how your view on pricing can change because it would seem like look retention is very strong. You’re also in the verticals where you’re seeing a lot of impact, but also continuing to build out your value with these customers. So i.e., I would assume being much stickier. So maybe just talk about how this can inform your pricing strategy going forward.

Todd Schneider: Stephanie, our pricing strategy hasn’t changed. And as I mentioned, we’re running at historical levels. And I also mentioned, we think long term about these subjects. So our strategy around pricing thinking long term has helped the retention rates. So we’re focused on growing our margins, but we’re not going to do that just through pricing. We have to go extract out inefficiencies because we operate in a very competitive market. And we have many competitors, whether it is what you might think of as a traditional competitor. But online, e-commerce, the big box retail, we compete with all these people. And as a result, we’ve got to be focused on providing great value and that applies to our key verticals as well.

Each of our verticals that we operate in a very competitive environment, and we’re focused on providing the value, extracting out those inefficiencies, but — because we do not operate — never have, never will operate in an environment where we can just adjust price up because it’s an ultra-competitive environment.

Operator: And our next question comes from Scott Schneeberger from Oppenheimer.

Scott Schneeberger: It was asked earlier a question on sales cycles and you guys covered the spectrum with the answer pretty well. I’m curious just to ask that a little different way. What you’re seeing behaviorally from large customers as opposed to small customers. Are you seeing any softness or strength in one or the other? Just any indications on those — on size category.

Todd Schneider: Yes. Good question, Scott. As you can imagine, we watch our customer base really closely. But we have such a wide breadth of customers and products and services. But it’s a wide breadth of customers, whether it’s geographic or by [ NIC ] code. You name it, we service it. And so nothing to call out specifically there. We’ve got certain customers that are thriving, certain ones have more challenges. But we’re — I wouldn’t say anything specific to call out regarding the customer base. If we want to go to the fourth decimal type we could get into those levels. But I don’t think it’s appropriate at this point because in general, our customer base is — has been pretty stable. And as I mentioned earlier, if anything, we had a slight improvement there.

Scott Schneeberger: And I did some — as you guys mentioned, a very large buyback in the quarter. And clearly, we infer from this call, you’re interested in being acquisitive. But with — it seems like we’re going to see some large buybacks from you going forward based on what we’ve just seen. And your leverage is below 1x, ticked up a little bit using a little bit of short-term borrowing to do it. What’s the propensity to take the leverage higher and do that? How aggressive might we see you be with the buybacks? And where would you take the leverage?

Todd Schneider: Good question. We view buybacks as an excellent use of cash to provide shareholder return. That being said, we have been very transparent on this. We view it as an opportunistic approach. So I wouldn’t just simply model in that we are going to lever up and be highly aggressive on buybacks. We’ll be opportunistic and handle that as we have in the past. And if you look at our history, even our 5-, 10-, 20-year history, we’ve been pretty consistent on that. Our capital allocation approach and I wouldn’t expect to change to our approach there. We’ll continue to look at that opportunistically and return that back to our shareholders as appropriate.

Operator: And our next question comes from Shlomo Rosenbaum from Stifel.

Shlomo Rosenbaum: The first question I have, I was just hoping to get more detail on the growth verticals versus the rest of the business. Maybe you could talk a little bit about the growth of those verticals in aggregate versus the rest of the business and maybe — versus each other? And what percentage of the business they are right now? And then just a separate — just a deep dive a little bit more on one of the verticals. In terms of some of those like scrubs business that you guys have been very successful in, how much of a differentiator is it for you in terms of being able to use your balance sheet to have those dispensers out there and really invest in effective dispensers.

Todd Schneider: Jim, why don’t you take the first half, and then I’ll talk about the dispensaries.

James Rozakis: Sure. Yes. Shlomo, as we mentioned in our prepared remarks, we continue to see really good success across all 4 of our verticals, health care, hospitality, state and local government and education. We continue — right now, health care is the largest and probably the most developed, we’ve been in that business the longest. That one represents about 8% of our total revenue, is growing and all 4 of them, by the way, are growing slightly faster than the aggregate of the company, but all the company — we’re getting demand in all of our business lines. So we’re seeing good growth across the board. But right now, health care is about 8% of total. And if you put all 4 together, they’re about 11%. But we really like the trajectory and the total available market in each one of those. So we continue to organize around those and put good resources toward them.

Todd Schneider: Yes. And I’ll take the second half, Shlomo. The — as a reminder, we don’t just sell into these verticals. We organize around them, whether it be customer service, the routing of that, which would take a little bit away from density, but we think it’s so important to be experts in that business so that we can provide that much more value. So that helps us get better at finding the next products and services that those customers want and help us provide a better customer experience. That being said, you mentioned dispensers. We have deployed dispensers at many customers. And the value that we bring is significant there because it changes the game for them and allows them to look at the product differently. Instead of looking at the product as a commodity, that’s — and let’s go with the cheapest one we can, they can provide a better value product because they have control over that inventory.

So that’s all important. And we’re blessed to have a great balance sheet. We have a balance sheet that allows us to invest for those customers and ultimately get a return for our company, provide a better value and value proposition for the customer, better products, better service, better technology, and that gives us a strategic advantage.

Operator: And our next question comes from Toni Kaplan from Morgan Stanley.

Toni Kaplan: I was hoping you could talk about — if you think about your business long term, you’re already growing high single digits, great. Where do you see the next like step-up of growth coming from? Is it from the key verticals? Is it from new geographies, new products. I guess when you think about your penetration in the key verticals, like how do you think about long-term sustainability of growth at this level? And where are the biggest growth drivers come from?

Todd Schneider: Toni, we really like the growth levels that we’re at. You see that organically, we’re growing at that mid- to high single-digit revenue number. And then we’ve had some nice M&A advantage as well. So we really like where we are. And it all goes into the algorithm. Our verticals, as Jim mentioned, are growing at a higher rate than our business overall. And we expect that. We’re always looking at new products and services that we can launch and do launch. And that goes into our algorithm as well. New geographies, we are — we have the coverage that we really like in our Rental and First Aid businesses. The fire business, we are still rolling out some flags in that area. So we do get some geographic expansion there, but we’ve already spoken to that.

But the great news is for all of us that we don’t need to take our models and go to other geographies. But we certainly need to continue to invest in our business, continue to invest in capacity, invest in new products and services, invest in new technologies so that we can continue to grow at these levels. And we like these levels of growth because we can organize around them. We can plan for them, we can staff for those. We can invest capital for those levels. And when we grow at these levels, it gives us the opportunity to get leverage and margin expansion as a result.

Scott Garula: Tony, this is Scott. I might just add that we obviously had an outstanding quarter in the second quarter, strong growth performance from all 3 of our route-based businesses. We had a favorable comp in Q2 to last Q2. And as we have talked about earlier, when we think about the second half of the year, I think Todd mentioned this. We do have some more challenging comps. And you can see that in our guide for the second half of the year. But whether it’s the first half of the year or our guide for the second half, we’re right in the stated range of that mid- to high single-digit growth. And as Todd mentioned, the growth algorithm we have, we have a lot of confidence in that we can sustain that level of growth moving forward.

Operator: At this time, there are no further questions. I’ll turn the call back over to Jared for closing remarks.

Jared Mattingley: Thank you, Ross, and thank you for joining us this morning. We will issue our third quarter of fiscal 2026 financial results in March. We look forward to speaking with you again at that time. Thank you. .

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