Cintas Corporation (NASDAQ:CTAS) Q3 2024 Earnings Call Transcript

Cintas Corporation (NASDAQ:CTAS) Q3 2024 Earnings Call Transcript March 27, 2024

Cintas Corporation 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 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. Jared Mattingley, Vice President and Treasurer, 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 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 Schneider: Thank you, Jared. Due to the outstanding dedication and execution of our employees, whom we call partners, we delivered very strong results for our third quarter. Total revenue for the third quarter grew 9.9% to $2.41 billion. The revenue dollars represent record quarterly revenue. We are pleased with the performance of each of our businesses. Our revenue growth remains robust and we have good momentum in the business. New business remains strong. Our sales team continues to operate at a high level. We are seeing broad success across the many verticals, particularly within our focus verticals, as well as our cross-selling efforts and penetration of new products and services within our existing customers. Retention levels are strong and remain at very attractive levels.

Our strong revenue growth flowed through to our bottom line. Gross margin for the third quarter increased 220 basis points to a record 49.4%, an increase of 14.9%. Operating income was a record 21.6%, an increase of 16.6%. Diluted EPS grew a robust 22.3% to $3.84. Cash flow remains strong. Net cash provided by operating activities in the third quarter grew 32.8% over the prior year. In the third quarter, we continued to invest in our businesses through capital expenditures of $107 million. During the third quarter, we made acquisition purchases of $111 million. On March 15th, we paid shareholders $137.6 million in quarterly dividends, an increase of 17.1% from the amount paid the previous March. Our strong cash flow gives us flexibility to choose how we deploy our capital and through three quarters, we have deployed over $1.4 billion of capital across our priorities of capital expenditures, acquisitions, dividends, and buybacks.

I would like to thank our employees, whom we call partners, for their continued focus on our customers, our shareholders, and each other. 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 $9.48 billion to $9.56 billion to a range of $9.57 billion to $9.6 billion, a total growth rate of 8.6% to 8.9%. Also, we are raising our annual diluted EPS expectations from a range of $14.35 to $14.65, to a range of $14.80 to $15, a growth rate of 13.9% to 15.5%. Mike?

Mike Hansen: Thanks, Todd, and good morning. Our fiscal 2024 third-quarter revenue was $2.41 billion, compared to $2.19 billion last year. The organic revenue growth rate adjusted for acquisitions, foreign currency exchange rate fluctuations, and a difference in the number of workdays was 7.7%. Total growth was positively impacted by 170 basis points due to the extra workday. We remind you, as you update your models for next fiscal year that there will be two less workdays compared to this current fiscal year. Each quarter next year will have 65 workdays, which means, the first and the fourth quarters will each have one less workday than this fiscal year. Organic growth by business was 7.1% for Uniform Rental and Facility Services, 11.5% for First Aid and Safety Services, 13.9% for Fire Protection Services and Uniform Direct Sale was down 3.9%.

Gross margin for the third quarter of fiscal ’24 was $1.19 billion, compared to $1.03 billion last year, an increase of 14.9%. Gross margin as a percent of revenue was 49.4% for the third quarter of fiscal ’24 compared to 47.2% last year, an increase of 220 basis points. Strong volume growth, technology improvements, and continued operational efficiencies helped generate this strong gross margin. Gross margin percentage by business was 48.8% for Uniform Rental and Facility Services, 56.3% for First Aid and Safety Services, 48.8% for Fire Protection Services, and 41.1% for Uniform Direct Sale. Gross margin for the Uniform Rental and Facility Services segment increased 170 basis points from last year. Energy was a tailwind of 40 basis points.

In addition, we continue to leverage our strong revenue growth, our technology investments and extract inefficiencies out of the business through our Six Sigma and engineering teams. Our technology investments have allowed us to improve garment sharing among our plants, which improves material cost. Our SmartTruck technology allows us to improve our route efficiencies and provide route densities to our existing routes, which positively impacts truck purchasing, labor, and energy. Our Six Sigma and engineering teams have helped us create efficiencies in the plant that allow us to maximize the utilization of our plant equipment, labor, and energy. Gross margin for the First Aid and Safety Services segment increased 470 basis points from last year.

Strong revenue growth continues to help expand our margins in this segment. Strong revenue performance in some of our high-margin recurring revenue products like AED Rentals, eyewash stations, and WaterBreak continues to provide a healthy revenue mix. Our technology investment in SmartTruck continues to provide route optimization and improved efficiencies. And our First Aid dedicated distribution center allows us to lower product costs. All of these contributed to improved gross margins. Selling and administrative expenses increased 90 basis points from last year. The increase was driven by investments in selling resources, technology and our management trainee program, as well as costs associated with an agreement in principle to settle the purported class action contract dispute brought by plaintiffs City of Laurel.

We determined that settling the claim is in the best interest of Cintas. The total monetary payment agreed to in the proposed settlement, including the 60 basis points recognized in this quarter is $45 million. We expect that the settlement costs will not impact our financials in future periods. As Todd mentioned earlier, we generated strong cash flow. For the year, our free cash flow increased 31.6%. This has allowed us to invest back into the business, which has resulted in capital expenditures of 4.3% for the year. Our investments include technology to grow the top line and expand margins, automation to improve efficiencies in our plants and additional processing capacity where needed. We expect capital expenditures to finish around 4.25% of revenue for the year.

Operating income of $520.8 million compared to $446.8 million last year. Operating income as a percentage of revenue was 21.6% in the third quarter of fiscal ’24 compared to 20.4% in last year’s third quarter, an increase of 120 basis points. Our effective tax rate for the third quarter was 19.9% 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 third quarter was $397.6 million compared to $325.8 million last year. This year’s third-quarter diluted EPS of $3.84 compared to $3.14 last year, an increase of 22.3%. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal ’24 interest expense is expected to be $99 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 20.6%. This compares to a rate of 20.4% in fiscal ’23. Our guidance does not include the impact of any future share buybacks. As I mentioned earlier, we expect that the proposed settlement will not impact our financials in future periods and accordingly, there is no impact on our guidance. Guidance includes $17.4 million of acquired revenue for the fourth quarter. This revenue includes the impact of the recently announced acquisitions during the third quarter. 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] We will now take our first question from Manav Patnaik from Barclays Capital. Please go ahead, Manav.

Ronan Kennedy: Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my questions. Can I just ask, with regards to the strong margin performance, can you kind of assess or characterize the contributions from, whether it’s the SmartTruck, the Six Sigma, the engineering extracting of inefficiencies? But also how we should think about those as drivers in the context of the sustainability of the margins, if you could elaborate on that, please?

Todd Schneider: Thank you for your question, Ronan. It’s — when you think about the gross margin, it really starts with our culture, how we run our business, the expectations we have, the intensity of which we run it, and the focus. That being said, there’s many, many inputs to those numbers. Certainly, our investments that we are making are paying off. The investments in SmartTruck, the investments in our Six Sigma team, the investment in our engineering team, the investment in our supply chain organization are all helping us to improve those results. So I can’t give you an exact number with, hey, SmartTruck gave us X basis points, what have you. It’s — there’s many inputs, and we’re pleased with the investments that we’ve made, and we’re pleased with the leadership and the culture of the organization, where they’re focused on driving those results, providing a better experience for our customers and providing a better experience for our employee-partners.

Ronan Kennedy: That’s helpful. Thank you. And then with regards to obviously, strong performance on the top line as well, can you just talk about the contributions from new business and penetration versus expectations, how pricing is trending, and also retention, please?

Todd Schneider: Yeah, good question. So when we think about our growth, again, there’s many contributing factors. We really like where we are from a growth standpoint, the internal growth, certainly we like the acquisitions that we’ve made. They’re really good businesses. But when we think about the components of it, certainly pricing is a component, but it is not the majority. The majority of our growth is from volume growth. And that’s really pleasing to us because we want to be able to grow our business in that manner. Pricing is — has moderated and it’s much closer to historical, and that’s exactly what we had planned throughout the year. Where we’re really benefiting is from our new business. Our team is performing at a high level.

Our service organization is — the retention levels are very attractive. And then we are cross-selling appropriately. We have a great breadth of products and services that we want to make sure that our customers and our prospects are aware of. And so we’re benefiting kind of across all, not kind of, we are benefiting across all of those areas, and they’re all big contributing factors, but we like where we are and we like how we’re growing the business.

Operator: And our next question comes from Joshua Chan from UBS. Please go ahead, Joshua.

Joshua Chan: Hi. Good morning, Todd and Mike. Thanks for taking my questions. Could you talk about the — I guess, piggybacking on the prior question, could you talk about the sustainability of growth that you’re seeing now that the pricing has moderated to a historical level? Do you see the current run rate staining based on what you’re seeing out there, talking to customers and retention rate dynamics, and all that?

Todd Schneider: Yeah, Josh, good morning. Again, we like where we are from a growth standpoint. The exciting thing is there’s — we service a little over a million customers. There’s 16 million businesses in North America, so we’re — we think there’s an incredible runway for us. So we’re selling to — about 60% of our new accounts come from no programmers, and that is continuing. So we’re seeing great results from talking to prospects and showing them a better way to do it than they are today. Now, that doesn’t necessarily mean that, that is new spend. They might be spending that money somehow. It’s just we’re redirecting it to do it better, smarter, faster, in some cases, even less expensive than the way they’re doing it. So we think the runway is very attractive because of the number of prospects that are out there and our business — or, excuse me, our buying proposition resonating with prospects and customers.

So, we expect that we like where we are from a growth standpoint. As I mentioned, we like how we’re growing and we want to continue in that manner.

Joshua Chan: That’s great color. Thank you. And for my follow-up, you talked about incremental margins being in the 20% to 30% range historically, and now you’re sort of at the higher end of that in recent years. Is this the right level of incremental margins going forward on revenue growth that comes ahead?

Todd Schneider: Yeah. So we’re — we recognize the math of 20% to 30% incremental margins. We need to be the higher end of that in order to continue to improve our margins and we’re focused on doing that. We’re doing so by extracting out those inefficiencies, getting really good leverage on our revenue growth, so many ways. But running a business is not linear. And so, we know there’s going to be some puts and takes and some quarters will be higher and some won’t be as high. But generally speaking, we like that range. And I prefer the higher end than the lower end, that’s for sure.

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

Heather Balsky: Hi. Thank you. I was hoping you could just talk about the M&A you did this quarter and what attracted you to the assets. And then an update on how to think about M&A going forward.