Cintas Corporation (NASDAQ:CTAS) Q4 2023 Earnings Call Transcript

Cintas Corporation (NASDAQ:CTAS) Q4 2023 Earnings Call Transcript July 13, 2023

Cintas Corporation beats earnings expectations. Reported EPS is $3.33, expectations were $3.19.

Operator: Good day, everyone, and welcome to the Cintas Corporation announces Fiscal 2023 Fourth Quarter and Full Year Results Conference Call. Today’s call is being recorded. At this time, I’d 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 ’23 fourth quarter results. After our commentary, we will open the call to questions from analysts. Private Securities and 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. Fourth quarter total revenue grew 10.1% to $2.28 billion. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 10.3%. We are pleased with these fourth quarter results, where each of our businesses continue to grow and execute at a high level, especially coming off our highest growth quarter in fiscal ’22. Fourth quarter gross margin was $1.09 billion. Gross margin increased 210 basis points from 45.6% to 47.7%, an increase of 15.1% over the prior year. Operating income for the fourth quarter of fiscal ’23 of $470.8 million, increased 16.4% over the prior year. Operating margin increased 110 basis points to 20.6% from 19.5% in the prior year.

Fourth quarter net income was $346.2 million, an increase of 17.6%. Earnings per diluted share for the fourth quarter were $3.33, an increase of 18.5% over the prior year fourth quarter. These results conclude a fiscal year of significant accomplishments, including the following: Fiscal year ’23 revenue was a record $8.82 billion, an increase of 12.2%. Organic growth was also 12.2% for the year. We saw double-digit organic growth for every quarter during fiscal ’23. We were once again named to the prestigious Fortune 500 for the sixth consecutive year. It is an honor to be recognized among the most successful and respected companies. Operating income grew 13.6% for the year. When you exclude both fiscal ’22, $12.1 million gain on the sale of operating assets and a $30.2 million gain on an equity method investment transaction, operating income grew 16.7%.

EPS grew 11.5% for the year, excluding the previously mentioned prior year gains, EPS grew 15.2%. We increased our quarterly per share dividend by 21.1%. We’ve increased our dividend every year since going public, which is 39 consecutive years. As part of our steadfast commitment to corporate responsibility, we issued our third environmental, social and governance, or ESG report. Each year, we continue to make the report more robust. Cintas was founded on a sustainable business model. Our corporate culture is based on doing what is right and challenging ourselves to improve. We’re proud of these results and the efforts of our employees whom we call partners. I’ll now turn the call over to Mike, to provide details of our fourth quarter results.

J. Michael Hansen: Thank you, Todd, and good morning. Our fiscal ’23 fourth quarter revenue was $2.28 billion compared to $2.07 billion last year. The organic revenue growth rate, adjusted for acquisitions and foreign currency exchange rate fluctuations was 10.3%. Uniform Rental and Facility Services operating segment revenue for the fourth quarter of fiscal ’23 was $1.77 billion compared to $1.6 billion last year. The organic revenue growth rate was 9.1%. As we’ve done in the past, I will share revenue mix of the Uniform Rental and Facility Services operating segment for the fourth quarter. Keep in mind, there can be small fluctuations in mix between quarters. Uniform Rental was 48%, dust [ph] was 18%, hygiene was 16%, shop towels were 4%, linen, which includes microfiber wipes, towels and aprons was 10%, and catalog revenue was 4%.

These percentages are consistent with last year, which speaks to the robust demand across all of our products and services. Our First Aid and Safety Services operating segment revenue for the fourth quarter was $249.8 million compared to $218.2 million last year. The organic revenue growth rate was 14.1%. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was $261.5 million compared to $226.2 million last year. The fire business revenue was $173.5 million, and the organic revenue growth rate was 17.3% resulting in a strong finish to the year. The Uniform Direct Sale business revenue was $88 million, and the organic growth rate was 11.5%. This strong performance exceeded our expectations as robust demand continued for these products and services.

Gross margin for the fourth quarter of fiscal ’23 was $1.09 billion, compared to $946.2 million last year, an increase of 15.1%. Gross margin as a percent of revenue was 47.7% for the fourth quarter of fiscal ’23 compared to 45.6% last year, an increase of 210 basis points. Energy expenses comprised of gasoline, natural gas and electricity were a tailwind, decreasing 65 basis points from last year. Strong volume growth from new customers and the penetration of existing customers with more products and services help generate great operating leverage. Gross margin percentage by business was 47.7% for Uniform Rental and Facility Services, 51% for First Aid and Safety Services, 47.9% for Fire Protection Services and 36% for Uniform Direct sale.

Fourth quarter SG&A was 27.1%, which was up 100 basis points from last year. We’ve continued to invest in selling resources and branding initiatives, and our insurance costs were higher. We are self-insured, which means our insurance costs can fluctuate from quarter-to-quarter. Fourth quarter operating income was $470.8 million compared to $404.4 million last year. Operating income as a percent of revenue was 20.6% in the fourth quarter of fiscal ’23 compared to 19.5% in last year’s fourth quarter. Our effective tax rate for the fourth quarter was 22.4% compared to 22.8% last year. Net income for the fourth quarter was $346.2 million compared to $294.5 million last year. This year’s fourth quarter diluted EPS was $3.33 compared to $2.81 last year.

I’ll now turn the call back over to Todd to provide his thoughts and our financial expectations for fiscal ’24.

Todd Schneider: Thank you, Mike. As we move into fiscal ’24, we will celebrate our 40th anniversary of being a publicly traded company. Back then, we were excited about what laid ahead. Today, we are equally excited about the significant opportunities that the future holds. Our value proposition remains strong, and our prospects for continued profitable growth are great. Every business goods producing or services providing has a need for image, safety, cleanliness and compliance. We work with businesses to help them build a better workday. We provide the products and perform the services better, faster and more economically freeing businesses to concentrate on their core competency. A year ago, I introduced three priorities: branding, ESG and technology to help drive our focus, continue to differentiate us in the marketplace and provide increased competitive advantages.

I’m pleased with our progress in each of these key areas. Our branding efforts continue as more and more businesses have learned how we can help them get ready for the workday. We continue to make progress on our ESG goals and our sustainable solutions focus on reducing, reusing, recycling and repurposing our textiles. These solutions continue to resonate with our customers and prospects as we help them achieve their sustainability initiatives. I want to spend a minute speaking about technology, in particular, our digital transformation journey. We’ve been very successful thus far in using technology to drive efficiencies in our production facilities, efficiencies out on the routes with our trucks via our proprietary Smart Truck technology, and we are in the early innings of our My Cintas customer portal, which makes it easier for our customers to do business with us.

As we look to the future, we’re very excited to have great technology partners in SAP and Verizon, which are helping us to provide a better customer experience and improve efficiencies within our business. We are excited to announce today that we have an additional strategic technology partner with Google, leveraging their Google Cloud platform. As a result of these relationships, it positions us at the forefront of technology innovation. We are still in the very early stages of our digital transformation journey, and we are excited about the impact it will have on our customers and our company in total. We are confident technology will be a competitive advantage for us now and well into the future. I will now provide our guidance for fiscal ’24.

Our fiscal year ’24 — for our fiscal year ’24, we expect our revenue to be in the range of $9.35 billion to $9.5 billion, a total growth rate of 6.1% to 7.8%. We expect diluted EPS to be in the range of $13.85 to $14.35, a growth rate of 6.6% to 10.5%. Please note the following: fiscal year ’24 interest expense is expected to be approximately $98 million compared to $109.5 million in fiscal year ’23, predominantly as a result of lower variable rate debt. This may change as a result of future share buybacks or acquisition activity. Our fiscal ’24 effective tax rate is expected to be 21.3% compared to a rate of 20.4% for 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.

Guidance does not include any future share buybacks or significant economic disruptions or downturns. And 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. We’re excited about next year and beyond. The future of Cintas remains bright. I’ll turn the call back over to 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 as needed. Thank you.

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Q&A Session

Operator: [Operator Instructions] And our first question today comes from Andrew Steinerman with JPMorgan Securities.

Andrew Steinerman: Hi. I’d like to talk about net realized price as part of the organic revenue growth in the fourth quarter and into the guide. And I think you might need to remind me, I think there’s no explicit gas surcharge that Cintas puts on, but obviously, gas prices are down year-over-year. And how does that factor into pricing? And just overall, how has Cintas done in terms of raising price to their B2B customers versus the input costs?

Todd Schneider: Good morning, Andrew, thanks for the question. Yes, good question. We’re — from a pricing standpoint, as we have spoken about in past quarters, is our pricing has been certainly above historical during fiscal ’23, as it needed to be because of the cost inputs. When we think about what that will look like moving forward in our ’24 guide, we expect that pricing will return closer to historical and our cost inputs are in a similar spot, as you saw in the CPI report that came out yesterday and the PPI report that came out this morning. We are seeing inflation coming down. I think our team has done a pretty amazing job of managing input costs, both our operational team but our supply chain team which has really benefited us.

So it’s — we do not rely upon pricing as the only lever to gain leverage to expand margin. We are committed to extracting out inefficiencies in our business, and you’re seeing that. And you’ve seen that in fiscal ’23. And our guide for fiscal ’24 reflects incremental — attractive incremental margins, and we’re going to do it successfully, and we’re going to expect that inefficiencies in our business to help us expand margins.

J. Michael Hansen: Thank you, Andrew, I might just add two things. One, specifically, we do not have a fuel surcharge. And secondly, you made a comment about our price increases offsetting input costs and I think the best — the way to think about that is margins in the fourth quarter were up 110 basis points. Margin for the fiscal ’23 year were up 70 basis points and our guidance implies margin improvement throughout the range of guidance for next year. So, keep that in mind as we think about pricing versus input costs, et cetera, we’re still raising margins, improving margins.

Andrew Steinerman: Great. Thank you.

Operator: Our next question will come from Faiza Alwy with Deutsche Bank Securities.

Faiza Alwy: Yes. Hi, good morning. I wanted to talk about the type of economic or macro environment that you’re embedding in your guide. I know you said that significant economic disruptions or downturn is not assumed, but give us a sense of what type of economic environment you’re assuming?

Todd Schneider: Faiza, thank you for the question. We’re not guiding towards a significant economic disruption. Trying to predict economic indicators is certainly very challenging. But I can tell you what’s going on, what we’re seeing in our business, which is we haven’t seen much change in our customer behavior. Our sales productivity is very good. Our customer retention levels remain quite strong. And there is — there’s still really good interest in our products and our services. Know programmers are still going very well. And there’s still the majority of the new accounts that we sell. So we like that very much. We like expanding the pie and those customers are seeing value in what we’re providing. We also like our vertical strategy that — the vertical sales strategy that has been working quite nicely for us.

So I would say, reasonably so business as usual is what we would expect. We recognize there will be ups and downs in macro environments, but we’re not guiding towards anything — any economic downturn.