Cintas Corporation (NASDAQ:CTAS) Q3 2023 Earnings Call Transcript

Cintas Corporation (NASDAQ:CTAS) Q3 2023 Earnings Call Transcript March 29, 2023

Operator: Good day, everyone and welcome to the Cintas Corporation Announces Fiscal 2023 Third Quarter 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.

Paul F. Adler: Thank you 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 third 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 M. Schneider: Thank you, Paul. Third quarter total revenue grew 11.7% to $2.19 billion. Each of our businesses continue to execute at a high level. The benefit of our strong revenue growth flowed through to our bottom line. Excluding a gain in the related tax benefit in last year’s third quarter, operating income margin increased 110 basis points to 20.4% and diluted EPS grew 16.7% to $3.14. 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 third quarter of fiscal 2023 was $1.72 billion compared to $1.55 billion last year. The organic revenue growth rate was 10.8%. While price increases contributed at a higher level than historically, revenue growth was 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 third quarter was $231.6 million compared to $213 million last year. The organic revenue growth rate was 7.8%. The segment was up against a difficult revenue comparison because last year’s third quarter revenue included about $15 million in sales of COVID-19 test kits that did not repeat this year. Excluding the prior year test kit sales, the organic revenue growth rate was 16%. We continue to have good momentum in our First Aid Cabinet business, which continues to grow greater than 20%.

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 $242.2 million compared to $194.3 million last year. The fire business revenue was 105 — $155.8 million and the organic revenue growth rate was 20.7%. Uniform Direct Sale business revenue was $86.5 million and the organic growth rate was 32%. Now before turning the call over to Mike to provide details of our third 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 $8.67 billion to $8.75 billion to a range of $8.74 billion to $8.80 billion. The total growth rate of 11.3% to 12%. Also, we are raising our annual diluted EPS expectations from a range of $12.50 to $12.80 to a range of $12.70 to $12.90, a growth rate of 12.6% to 14.4%. Mike.

J. Michael Hansen: Thanks, Todd and good morning. Our fiscal 2023 third quarter revenue was $2.19 billion compared to $1.96 billion last year. The organic revenue growth rate adjusted for acquisitions and foreign currency exchange rate fluctuations was 11.8%. Gross margin for the third quarter of fiscal 2023 was $1 billion compared to $898.2 million last year, an increase of 15.1%. Gross margin as a percent of revenue was 47.2% for the third quarter of fiscal 2023 compared to 45.8% last year, an increase of 140 basis points. Energy expenses comprised of gasoline, natural gas, and electricity were a tailwind, decreasing 15 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 47.1% for Uniform Rental and Facility Services, 51.6% for First Aid and Safety Services, 48.5% for Fire Protection Services and 35.8% for Uniform Direct Sale. Operating income of $446.8 million compared to $407.6 million last year. Operating income as a percentage of revenue was 20.4% in the third quarter of fiscal 2023 compared to 20.8% in last year’s third quarter. Fiscal 2022 third quarter operating income included a $30.2 million gain on an equity method investment transaction. The gain was recorded in selling and administrative expenses. Excluding this gain, fiscal 2023 third quarter operating income as a percentage of revenue was 20.4% compared to 19.3% in last year’s third quarter, an increase of 110 basis points.

Our effective tax rate for the third quarter was 22.1% compared to 18.2% last year. The fiscal 2022 third quarter equity method investment transaction included a significant tax benefit. Excluding the transaction, the effective tax rate for the third quarter of fiscal 2022 was 19.6%. Net income for the third quarter was $325.8 million compared to $315.4 million last year. This year’s third quarter diluted EPS of $3.14 compared to $2.97 last year. However, fiscal 2022 third quarter diluted EPS contained $0.28 from the gain on the equity method investment transaction, which included a related $0.07 tax rate benefit. Excluding this gain and the related benefit — the related tax benefit, fiscal 2023 third quarter diluted EPS of $3.14 compared to $2.69 in last year’s third quarter, an increase of 16.7%.

Cash flow remains strong. On December 15, 2022 we paid shareholders $117.4 million in quarterly dividends, an increase of 18.6% from the amount paid the previous December. Todd provided our annual financial guidance, related to the guidance please note the following; fiscal 2022 included a gain on sale of operating assets in the first quarter and again on an equity method investment in the third quarter. Excluding these items, fiscal 2022 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 2023 operating income is expected to be in the range of $1.77 billion to $1.80 billion compared to $1.55 billion in fiscal 2022 after excluding the gains.

Fiscal 2023 interest expense is expected to be $112 million compared to $88.8 million in fiscal 2022 due in part to higher interest rates. Our fiscal 2023 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. 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 significant economic disruptions or downturns. I’ll turn it back over to Paul.

Paul F. Adler: And that concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you.

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Q&A Session

Operator: . And our first question comes from Manav Patnaik from Barclays. Please go ahead Manav.

Manav Patnaik: Thank you. Good morning. I was just hoping you could talk about — clearly, you had strong results in the quarter, so I assume all the trends that you’re hearing from your customers were solid but have you seen any changes more recently with all the events that have occurred out there in the banking world and if that’s impacting kind of the small business confidence where you guys have more kind of exposure to?

Todd M. Schneider: Good morning Manav, thanks for the question. It is — we’re watching it very closely. Certainly, there’s rumblings when you read the newspapers every day and what’s going on in the marketplace, but our customers seem still quite solid. And it’s always a very competitive marketplace, and we’re competing quite well there. They like our products and services, and we help them run their business better. So — and help free them up to take care of items to where they can focus on their business. So we like our value proposition and — but we certainly prefer an environment where our customers are in a great strong economy. But we’re not seeing it just yet. And — but we’re certainly watching it very closely and monitoring it and making sure that we’re focused on providing great value for our customers.

Manav Patnaik: Got it. And then just as a follow-up, the growth has obviously been pretty strong, better than I think what we were expecting to, but you said most of that growth was mostly volume. And so I was just wondering on the volume piece, is it that you’re taking maybe more share than normal or is it just that these businesses are starting to get back to more normal capacity, and so there’s more of that volume recovery that’s aiding that?

Todd M. Schneider: Yes, it’s a good question. There’s a whole lot of inputs to our success in growing our revenue at the levels that we’re growing at, and it is exceeding our expectations. Certainly, new business is quite good. We really like that. Our retention levels are very attractive. Cross-sell, we’ve spoken about in the past is continuing to improve. And as we mentioned, pricing is above historical, but the volumes are really coming from the three areas that I mentioned. Keep in mind, the majority of the new accounts that we sell are new to our segment, meaning we call them new programmers, so we’re growing the pie, not taking — just taking share. We certainly love to do both, but growing the pie has been something that we are quite good at and have done consistently over the years, and we still — we think the future is quite bright there.

Operator: And our next question comes from Andrew Steinerman from J.P. Morgan Securities. Please go ahead Andrew.

Andrew Steinerman: Hi, with just one quarter left in the fiscal year, I just wanted to ask what the organic revenue growth year-over-year for the fourth quarter 2023 is implied in the upgraded fiscal 2023 guide?

J. Michael Hansen: Andrew, the fourth quarter guide would contemplate 6.5% to 9.5% revenue growth. But keep in mind, we’ve talked a lot about the direct sale business, which grew 32% in the third quarter, and it is coming up against tougher comps. And so we just don’t see that kind of growth continuing and settling back into what we would say is a typical growth rate for direct sale in that low single digits. So that’s the primary change that we see in the fourth quarter.

Andrew Steinerman: Right. And so for the rental business, you’re expecting a similar growth rate in the fourth quarter than you had in the third?

J. Michael Hansen: Well, I’ll say this, Todd, just talked about the — we haven’t seen much change in customer behavior and the demand has still been really good and the momentum in the rental business is good. And while I’m not ready to say we’re guiding to a specific number, we don’t see much change to it coming into the fourth quarter. Momentum still is strong.

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

Faiza Alwy: Yes, hi, good morning. I was hoping to talk a little bit about — you’ve historically seen your results have accelerated beyond what the would suggest, and you’ve talked about new verticals and the benefits at the implementation. So curious, how much more run rate do you see in both of those areas as we look ahead to next fiscal year and potentially ?