Jared Mattingley:

Thank you, Ross. 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'll discuss our fiscal '24 fourth quarter and full year results. After our commentary, we will open the call to questions from analysts. 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 will now turn the call over to Todd.

Mike Hansen:

Thanks, Todd, and good morning. Our fiscal '24 fourth quarter revenue was $2.47 billion compared to $2.28 billion last year. The organic revenue growth rate adjusted for acquisitions and foreign currency exchange rate fluctuations was 7.5%. Gross margin for the fourth quarter of fiscal '24 was $1.22 billion compared to $1.09 billion last year, an increase of 11.6%. Gross margin as a percent of revenue was 49.2% for the fourth quarter of fiscal '24 compared to 47.7% last year, an increase of 150 basis points. Strong growth from new customers and the penetration of existing customers with more products and services helped generate great operating leverage, aided by the performance of our global supply chain and focused efforts to extract inefficiencies from the business via our Six Sigma engineering teams as well as technologies like SmartTruck. The Uniform Rental and Facility Services operating segment revenue for the fourth quarter of fiscal '24 was $1.91 billion compared to $1.77 billion last year. The organic revenue growth rate was 7.1%. As we have 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 was 19%; hygiene was 16%; shop towels were 4%; linen, which includes microfiber, wipes, towels and aprons, was 10%; and catalog revenue was 3%. These percentages are consistent with last year and demonstrate we are experiencing strong demand across all our products and services. Gross margin for the Uniform Rental and Facility Services operating segment was 48.6% compared to 47.7% last year. This 90 basis point improvement was the result of good top line growth that continue to generate great operating leverage and excellent sourcing and process improvements, which continue to create additional efficiencies such as garment sharing and SmartTruck. Our First Aid and Safety Services operating segment revenue for the fourth quarter was $277.6 million compared to $249.8 million last year. The organic revenue growth rate was 11.1%, capping off another year of double-digit organic growth. Gross margin for the First Aid and Safety Services operating segment was 55.4% compared to 51% last year. This 440 basis point improvement was a result of our double-digit revenue growth that created solid operating leverage, an improved sales mix, a dedicated first aid distribution center that has lowered costs as well as efficiencies from our SmartTruck technology. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was $282.1 million compared to $261.5 million last year. The Fire Protection revenue was $197.9 million, and the organic revenue growth rate was 12.9%, resulting in another year of double-digit organic growth. The Uniform Direct Sale revenue was $84.2 million, and organic revenue decreased 4.4%. The organic growth rate in Uniform Direct Sales can vary from quarter-to-quarter. Gross margin for Fire Protection Services was an all-time high of 50% compared to 47.9% last year. This 210 basis point improvement was primarily the result of robust revenue growth that generated strong operating leverage along with route productivity improvements. Gross margin for Uniform Direct Sales was 40.9% compared to 36% last year. This 490 basis point improvement was the result of higher margin accounts from a disciplined approach to the market. Fourth quarter selling and administrative expenses as a percent of revenue was 27%, which was a 10 basis point improvement from last year. We were able to create leverage with these costs while continuing to invest in technology and selling resources. Fourth quarter operating income was $547.6 million compared to $470.8 million last year. Operating income as a percentage of revenue was 22.2% in the fourth quarter of fiscal '24 compared to 20.6% in last year's fourth quarter. The fourth quarter marks the first time that all three operating segments, Uniform Rental and Facility Services, First Aid and Safety Services, and Fire Protection Services exceeded 22% in operating income in the same quarter. Our effective tax rate for the fourth quarter was 21.4% compared to 22.4% last year. Net income for the fourth quarter was $414.3 million compared to $346.2 million last year. This year's fourth quarter diluted EPS was $3.99 compared to $3.33 last year, an increase of 19.8%. I'll now turn the call back over to Todd to provide his thoughts on next year and our financial expectations for fiscal '25.

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.

Joshua Chan:

Congrats on a strong quarter. I was wondering if you guys could comment on your retention rates. I know that you've said it's generally stable. Have you seen any slight uptick in industry churn or downtick in retention, I guess? How are you seeing your customers behave in this environment?

Joshua Chan:

That's great to hear. And then for my follow-up, could you just kind of talk about your reasoning behind choosing the 6.4% to 8.0% organic growth for next year? I guess in the context of just doing 7.5% in Q4, what are the scenarios that would lead you to the bottom and the top end of the growth range?

Operator:

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

Todd Schneider:

Well, I'll start, Heather. As we think about margin expansion, and our guide reflects margin expansion with the first item we think about as it comes to that is leverage, leverage on revenue growth. And we've demonstrated that we have the ability to do that, and we'll continue to do that. And that's easy to say, hard to do, but the team has done an incredible job in so many areas, starting with our global supply chain, which is a competitive advantage in the marketplace. How they go about their jobs, the fact that they have dual source or many sources for 90% or more of the products that we source, so how they go about that. The great work that's been done on material costs, again, starting with sourcing. But also, we leverage our SAP system to help us to improve our garment sharing. And we've been working on this for years and it's bearing fruit not only in our cost structure but also in turnaround time for our customers. So, it helps us to get product to our customers faster when it's in our stockrooms versus having to order new out of our distribution centers. Better for our customers, better for our financials, and that's paying off for us.

Andy Wittmann:

I just thought I would start with the competitive environment. Both of your largest competitors have noted increased competition out there. And I know that your product and service offering is a little bit broader. But I thought just given those competitor comments, I would take your temperature and have you comment, if you could, please, on what you're seeing out there in the competitive environment.

Andy Wittmann:

I appreciate that. And then I guess, maybe Mike, I guess I wanted to kind of ask some of the margin questions in a little bit different way. First, as I was just kind of doing the math between the EPS and the revenue, I was getting somewhere around 20 or 30 basis points of implied operating margin expansion for the year. So maybe you could just clarify that. But that's a pretty decent deceleration from the amount of margin expansion certainly you saw in the quarter or even over the course of the past fiscal year. So, I was just wondering if you could comment on if there's anything, any categories inside the P&L that we should be aware of that are inflating more materially, or if there's other areas, maybe energy costs, I don't know, that we should be aware of that could be weighing on continued margin expansion like we've seen here in recent quarters.

Operator:

And our next question comes from George Tong from Goldman Sachs. Please go ahead, George.

Todd Schneider:

Yes, we really like the verticals that we've chosen. And as a reminder, it's not just a sales strategy. It is also how we organize around those customers, those industries, those verticals to make sure that we're meeting, exceeding their needs because they're a little different. And as we do that, the products, the services that we provide, the support that we provide all comes along with that. And so yes, they're all operating at attractive levels. And I wouldn't call anyone out specifically where I'd say, oh my gosh, that one's exceeding. They're all doing quite well. I thought it might be helpful to talk a little bit about a recent health care win that we had. We recently sold a large hospital network with scrub dispensing technology for the scrubs in the various departments throughout an acute care hospital. But we're also having really good success with surgery centers and those types that are attached to the large acute care hospital networks. And you're probably seeing some of that acute care hospital networks having investments in other areas. So, in fact, I'd say three large health care systems came to us for help with their non-acute facilities. When I say non-acute facilities, I'm talking about really surgery centers, clinics, physician offices, those types. And they came to us and said, "You're doing a great job for acute care. Can you help us with the non-acute?" And what does that do for them? It allows them to have a consistent supply but also allows them to consolidate vendors. So, we're seeing good success certainly in health care. But the other verticals are all performing well. And we like the decisions, the investments that we've made in those areas, and we think they're going to continue to pay dividends for us.

Tim Mulrooney:

Just one from me, and I hopped on late so apologies if this has been addressed, but a few of your competitors have recently cited more pricing pushback and an increasing number of customers putting their contracts out to bid. I'm wondering on this pricing idea if you're seeing a similar dynamic where customers are becoming more price sensitive in this environment. Or do you think that this is less of an issue for the industry overall and could perhaps be more specific to these individual companies or markets?

Tim Mulrooney:

Okay, so not really seeing pushback on pricing. And Todd, would you say it certainly is not lost on us that you had strong incrementals this quarter as pricing moderated. Would you say now pricing has fully normalized? That there is no more headwinds as we head into 2025 from moderating pricing? Or is that -- are you still in that process?

Mike Hansen:

And I might just add, Tim, to your question, probably not a lot of fiscal '25 to fiscal '24 year-over-year pricing change.

Andrew Steinerman:

If you could believe it, I'm just going to ask you to clarify something you just said. So, you talked about moderating pricing. When I hear the words moderating pricing, I hear price decreases. I assume what you mean is you're moderating to a more normal type of modest price increase. And then when talking about fiscal '25, are you talking about modest price increases or really flat pricing year-over-year for existing customers?

Andrew Steinerman:

That's true for the fiscal '25, too, right?

Andrew Steinerman:

Good clarification.

Jasper Bibb:

Was hoping you could give a bit more color on what you're seeing as far as net headcount at customers or their hiring posture and any expectations there embedded in your fiscal '25 organic growth guidance.

Jasper Bibb:

Got it. Last one for me. Maybe asking an earlier question a little bit differently. With this whole dynamic of peers talking about increased churn, including at some of the larger national accounts, if you're not seeing a pricing or retention hit, are you potentially taking away some of this competitor business at a higher rate, given these market dynamics?

Operator:

And our next question comes from Manav Patnaik from Barclays. Please go ahead, Manav.

Todd Schneider:

As you know, M&A, it's tough to predict. We think about it long term and make sure that we have relationships so that when someone does decide that they want to transact, that we're well positioned. So, it's really tough to predict deal flow. But again, we think about long term, and we want to be -- we find M&A really attractive and in large part because of, as I mentioned earlier, it gives us a new set of customers that we can offer a wider breadth of products and services that we offer. There can be highly attractive synergies. In many cases, we get some infrastructure that is important to us. And we always get great people and we learn from those. So yes, we're highly interested in M&A of all shapes and sizes and we're active in those markets. Tough to pace it. It takes two to dance. And we just want to make sure we're at the dance and ready.

Scott Schneeberger:

The first one is just you've been speaking over the course of the year about investing in your selling capabilities, technology, management training. Just an update there. And also, you've been alluding a lot to myCintas portal. Any quantification you can put on that about penetration or anything else about how that's progressing?

Scott Schneeberger:

And the follow-up is, I just figured fiscal year-end and all-time high in the fourth quarter on the operating margin. So, kind of a conceptual longer-term question. You guys have done great since implementing the ERP and reaping benefits from it. What can you get to for peak margins? I mean, you've talked about incremental margins, 25%, 35% range. Can you get to 25% promptly? Can you get to 30% longer term? Just some consideration on what aspirational targets would be reasonable.

Operator:

And our next question comes from Shlomo Rosenbaum from Stifel Nicolaus. Please go ahead, Shlomo.

Mike Hansen:

From a Fire Protection business perspective, we're still in the implementation phase of that. And there's going to be a little bit of pressure on there. I'm not going to give a specific guidance in terms of their margin. But there'll be some pressure as we go through, keeping in mind when we go through an implementation, there is the work of the implementation, the work of training all of our people to use it, the inefficiencies that come along with that, and we will then get better and better. And fiscal '25 is going to be a little bit of a year of that training and implementation period. And so, I would say that's going to be a little bit of pressure on the margins there. Certainly, that's incorporated within our overall guide of margin improvement. From a Uniform Direct Sale perspective, our margins have been really good. We've been working on selling the right types of programs, and our Uniform Direct Sale partners are doing a great job in that area. But having said all of that, a little bit hard to tell based on that SAP implementation in Fire, but keeping in mind that's included with our overall guide.

Ashish Sabadra:

Maybe just a question on the guidance philosophy because when we think about the organic growth in the quarter, still continues to be pretty robust compared to the industry growth profile at 7.5%, but it has moderated over the last eight quarters. The higher end of the guidance implies -- the 8% organic growth implies an inflection in growth. And historically, you've always set your guide where you have beaten and raised to guidance throughout the year. So, as we think about where do we really see the inflection? And in terms of guidance philosophy, when you say, is it equally conservative as we have seen in the prior years?

Ashish Sabadra:

Yes. No, that's very helpful color.

Faiza Alwy:

So, you mentioned earlier in the call about the white space opportunity and just the traction you're getting with no-programmers. I think relative to historical levels, the contribution from no-programmers to growth has been higher. So, I'm curious if you can talk about what you're doing differently. Are you maybe using technology? Has the pit changed a little bit? Is there something about the underlying environment? So just curious on what's driving sort of incremental contribution from no-programmers.

Mike Hansen:

Faiza, maybe I'll offer this a bit. If you think about the health care vertical that we've been in for maybe a decade or so now. When we got into that, we needed to create a sales team because it's just a different kind of sale, different kind of relationships. And so, we had to create a different kind of sales team. When we did that, we started with sort of maintenance uniforms, uniform rental and maintenance because we didn't have a broad product offering. As we continued in that business, we started to learn through dialogue with the customers how else we can help them, and we started things like microfiber and we started rental programs in microfiber. And that started to take off and has become a nice product for us. As we continued to have dialogue with them, that sort of evolved into then scrub rental programs. These came out of, again, dialogue with how can we help our customers. And so, this health care has grown from almost nothing to, call it, 8% of our revenue now. And it's largely because of the adaptation of our people to this new type of vertical, along with our dialogue with our customers and creating a real nice partnership, that then creates some innovation, that gets innovation flowing for us in new products and services. And then if we couple that with technology of having more information at our fingertips, of being able to find better prospecting. As we can better able to tell what customers have, which products and where might the warmest leads and so on be, over time, we have been able to grow the business and through that, grow the productivity. And so, all of these things that we do that Todd talks about, they don't happen overnight. They are the evolution and continued dialogue and collaboration with our customers to become more and more ingrained in what we do with them. And so, the -- you asked about the white space. This is just a continued evolution of that collaboration, innovation, technology wins, productivity improvement.

Mike Hansen:

We were about 4.3% in fiscal '24 as a percent of revenue. You might remember, we had a little bit of a catch-up in truck purchasing through the year. We had some of the SAP investment for Fire Protection. We largely believe that CapEx in the future is the 3.5% to 4% of revenue range. I think that's where we'll likely end up in fiscal '25.

Stephanie Moore:

I wanted to follow up actually on just the last question there and just one quick question. Are you finding potentially some increased activity from new customers that are viewing maybe a value proposition differently? So maybe taken another way, with higher inflationary environment, maybe not looking to kind of do it in-house and kind of have that initial capital outlay and your value proposition is coming in. Has that been a contributing driver to the growth?

Stephanie Moore:

Great. Got it. No, that's excellent color. Just last question for me. You talked about M&A being a bit more aggressive in this past year. I'm curious what your appetite would be to maybe more aggressively expand in the Fire and Safety or Fire and Security space. It's been a good vertical for you. I think it is an area or a market with a pretty considerable white space. So just curious your appetite within that vertical specifically.

Operator:

And at this time, there are no further questions. I'd like to turn the call back over to Jared for closing remarks.

Operator:

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

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.

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.

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?

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?

Operator:

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

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.

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.

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.

Mike Hansen:

Maybe a couple added points. As Todd said, these are great acquisitions, and we've had a handful of them this fiscal year. Each of the two that Todd talked about is less than $20 million in annual revenue. The $17.4 million that we gave you in our prepared remarks includes the impact of those. But keeping in mind, we've made acquisitions all year long, and so that fourth quarter impact would include all of the acquisitions we've made throughout the last 12 months. Just something to keep in mind as you're thinking about our fourth quarter.

Operator:

And our next question comes from Andy Wittmann from RW Baird. Please go ahead, Andy. Hello, Andy. Is your line muted?

Mike Hansen:

Yeah. So, Andy, I already forgot your first part of the question. What was your first part?

Mike Hansen:

Yeah, yeah.

Mike Hansen:

Yeah. I apologize. No, as Todd talked about, our market remains very large, the momentum in the business remains good, the adoption remains good, and the guide for the fourth quarter is right where we want to be in terms of sort of the stated profile of growth that we want to have. And so, all of that put together with not really any change in customer behavior would mean, no, continued performance like we've seen, and we continue to like the momentum of the business. As it relates to your second question, the 60 basis points, that was not contemplated in the initial guide from the beginning of the year and that was simply absorbed through -- well, in this third quarter, the 60 basis points simply absorbed.

Operator:

And our next question comes from George Tong from Goldman Sachs. Please go ahead, George.

Todd Schneider:

Yeah, I'm certainly happy to start. George, good morning. We haven't really seen much of a change in sales cycle as far as our -- the interest in our products and services remains good. We're always continuing -- we're continuing to invest in new products and services. Tweaks, I guess, certainly to them to make it as attractive to the prospects and the customers as possible. But we're not seeing a change. Momentum continues to be good. Outsourcing still resonates and we're seeing, as I mentioned earlier, the no program market is still really, really large. And we've become pretty darn proficient at presenting to those prospects to help them run a better business. And we help them with all the products and services we provide. And as I mentioned, it's not always new money. Usually they're spending something. It's just redirecting it to us to do it better, faster, smarter, cheaper type thing.

Todd Schneider:

Yeah. So, George, so it's in our internal growth. So it is helping us -- that focus is helping us to organize around the customer and provide the products and services that they want. And that has been a good strategy for us over the past number of years. So we like all the verticals we're in. We find them very attractive. Whether it's healthcare, hospitality, education, state, local government, business, it's all attractive and we're organized around it and our value proposition is resonating with them.

Luke McFadden:

Hi, good morning. This is Luke McFadden on for Tim Mulrooney. Thanks for taking our questions today. So I wanted to ask, too, just on first date, I'll start with the first one and then move on to the second one after. But First Aid and Safety has been growing at a double digit rate for quite a few quarters in a row now. I know there's a penetration story here with your established base of uniform customers, but I'm also curious if new product introductions are an important driver of this growth. How much of your growth in that segment is from new product introductions?

Luke McFadden:

Understood, really helpful, and maybe just sticking on first aid and safety here. As you think about that segment of your business, does it feel like you've essentially built out the full suite of products and services there, or at some point should we expect that potentially you're more about other product introductions as you continue to build out the portfolio? Because the room here for more is essentially what I'm curious to know.

Mike Hansen:

And maybe one added comment Luke, when we think about this business, you may have heard us speak to umbrellas of image, safety, cleanliness and compliance and when we think about this business, safety is a fairly large umbrella and when our first aid and safety people are speaking with customers and thinking about that innovation that Todd talked about, we're thinking quite broadly about how do we keep our customers, how do we help our customers keep their employees safe. And that can mean opportunities into the future. And that's the way we look at it from a broad perspective.

Andrew Steinerman:

Hi. In the quarter, when you look at your rentals and facility services segment, how much of the growth is actually coming from uniforms versus ancillary services directionally? Like, is there good growth in both? And also if you can make a comment about ad stops within uniforms.

Andrew Steinerman:

Thank you.

Operator:

And our next question comes from Jasper Bibb from Truist Securities. Please go ahead, Jasper.

Todd Schneider:

Yeah, Jasper, good morning. As I mentioned, we really like the business and it's performing really well and we're investing appropriately. The amount of prospects out there are massive. And to Mike's point earlier, the value proposition is resonating. We talk about the mantra in that business is what's more important to a business than the health and safety of their employees and their customers. So that is resonating. We're in a great position to invest to provide those products and services. So we're doing just that. And so we're investing in selling resources, we're investing in marketing resources, because we really like where we are and it makes sense to invest. And I think you're seeing it show up in the operating margin and the gross margin.

Jasper Bibb:

Thanks, that makes sense. And then just was hoping to get an update on what you're seeing for expense growth on labor and fleet related costs in the quarter?

Operator:

And our next question comes from Ashish Sabadra from RBC. Please go ahead, Ashish.

Todd Schneider:

Good question, Ashish. I would characterize -- well, first off, we have a great relationship with Google. You're correct, we did migrate to the Google Cloud platform and I would characterize it as we're in the early innings there. And so we certainly hope to maximize our relationship and put our employee partners in a position to provide more value and to be as successful as possible. Because we believe there's tools that will be available to us to provide more value to the customers and to put our people in a better position to provide that value which makes them more successful. So early innings, but we're optimistic about where that can go.

Mike Hansen:

Yes. Todd talked a little bit about how we are working on all pieces of the business, but certainly one of those is inventory, and he touched on a little bit of garment sharing. So you can think about when we improve garment sharing, for example, we don't need to inject as many new garments into that in-service inventory. So the more sharing means better utilization of our existing in-service inventory, and it means we don't have to add as much into the in-service inventory from new purchases. That's one of the areas. Certainly, though, there are others like improved sourcing as well. Volume growth, as Todd said, remains really strong, and so what we're seeing is some nice offsetting of the volume growth with some of these initiatives.

Stephanie Moore:

Hi, good morning. Thank you. I wanted to continue the discussion on the pretty impressive margin front for the quarter. I appreciate the color in terms of kind of discussing the route optimization, the merchandise management, Six Sigma, the likes. But maybe if you could provide a little bit of color of your major initiatives, which ones you think are kind of still in the early innings, or we could kind of continue to see some more improvement or accelerated improvement? And then maybe taking it a step further, what is next for you guys, in terms of other areas of opportunity that haven't been as major focused yet? Thank you.

Mike Hansen:

Yeah, the only thing I might add is we're certainly in the very early innings of technology and we believe there's a nice runway there. Todd talked about just the recent migration to the Google Cloud and that creates a foundation for us to do some interesting things moving forward.

Operator:

And our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead, Scott.

Todd Schneider:

I'll start on the outlook and, Mike, if you want to speak to the margins. The uniform direct sale business is strategic business for us. We have some really large strategic accounts, whether it's national accounts or in the hospitality, gaming area of our business. And so strategic meaning that those customers spend a lot more money with us not just with garment direct sale but also outside of that. So that's important. That being said, that business certainly can be a little lumpy due to the nature of it with rollouts and purchases. But we like where we're positioned there. We like the value proposition that we're -- where we are there. So we think the outlook's very positive there. As far as the fire business, it's been a great business for us. The results over the last several years, we've seen great revenue growth, we've seen great margin improvement, and it's the only business we're in where you legally have to have those products and services. So we think it’s -- the outlook is really positive because of the prospects that are out there and the runway we see for opportunity. So, Mike, if you want to comment on margin.

Unidentified Analyst:

Thank you.

Shlomo Rosenbaum:

Hi, thank you for taking my questions. Hey, Todd, can you talk a little bit about the macro environment with regard to employment? And specifically if you could touch up on some of the areas where they're looking for more automation to reduce the employment due to raises in minimum wage in areas like California, are you -- how exposed are you to those kind of verticals? And then after that, I have a follow up.

Shlomo Rosenbaum:

Okay, thank you. Just for a follow-up, you have a competitor there that was spun out, say, six months ago. And I was just wondering, has there been any change in the environment with them competitively in terms, either positively or negatively? I mean, have you seen any changes in the way that they bid? Are you taking more business from them? Maybe you could just comment in general.

Operator:

And our next question comes from Kartik Mehta from Northcoast Research. Please go ahead, Kartik.

Todd Schneider:

Yeah, Kartik, it starts with our culture and our expectations of our employee partners and the pace and the intensity of which they run. But that being said, we’ve -- our value proposition is really resonating in each of the businesses we're in. The first aid business we spoke about, it's very good. Outsourcing is resonating nicely. Maybe it has to do with, it's not as easy to hire people as it has been in the past, so if you want someone to outsource it, it's that much more attractive. Yeah, we like the spot we're in, and it’s -- and we have exceeded our internal expectations, and we're pleased with that. But there's so many inputs to it, because we're trying to focus on providing better products, better services, better technologies to make our people more successful and to make our customers that much happier. So a lot of inputs but we like where we're positioned and we're continuing to invest for the future.

Todd Schneider:

Yeah, Kartik, good question. I wouldn't speak to any change there. It's more about -- certain events might cause them, whether it's an owner's age or succession or -- there's many different life events that would cause them to make a move. And it's more about that to your point. It's in certain cases, these are decades in the making. And you can't really pace them, but when they are ready, we're ready. And we're highly acquisitive, very interested in M&A from all shapes and sizes, big, little, medium, everything in between, we think it’s -- we're very interested.

Toni Kaplan:

Thanks so much. I wanted to ask a question on the focus verticals. Are you able to share sort of the growth between focus verticals versus non-focus ones? And how do you assess whether to add a new vertical into that sort of focus designation? Is there a different go-to-market strategy for focus verticals as well? Thanks.

Toni Kaplan:

Terrific. I wanted to also ask about your marketing budget and whether you've increased that year-over-year. I recently heard some Cintas commercials on Bloomberg Radio for example, just wondering if that's coincidence or if there's been a greater push towards more marketing? Thanks.

Toni Kaplan:

Terrific. Thanks a lot.

Operator:

And at this time, there are no further questions. I'd like to turn the call back over to Jared for closing remarks.

Operator:

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

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 second 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 discussions on these points contained in our most recent filings with the Securities and Exchange Commission. I will now turn the call over to Todd.

Mike Hansen:

Thanks, Todd, and good morning. Our fiscal 2024 second quarter revenue was $2.38 billion compared to $2.1 billion last year. The organic revenue growth rate, adjusted for acquisitions and foreign currency exchange rate fluctuations, was 9%. Organic growth by business was 7.9% for Uniform Rental and Facility Services, 12.7% for First Aid and Safety Services, 17.8% for Fire Protection Services, and 4.7% for Uniform Direct Sale. Gross margin for the second quarter of fiscal 2024 was $1.14 billion compared to $1.02 billion last year, an increase of 11.6%. Gross margin as a percent of revenue was 48% for the second quarter of fiscal ‘24 compared to 47% last year, an increase of 100 basis points. Strong volume growth and continued operational efficiencies helped generate this strong gross margin. Gross margin percentage by business was 47.4% for Uniform Rental and Facility Services, 54.5% for First Aid and Safety Services, 48.6% for Fire Protection Services, and 40.9% for Uniform Direct Sale. Gross margin for the Uniform Rental and Facility Services segment increased 40 basis points from last year. We continue to leverage our strong revenue growth and extract inefficiencies out of the business in order to expand margins. Our year-over-year improvements are no accident. Our Six Sigma and Engineering teams have helped us create efficiencies in the plant that allow us to maximize the utilization of our equipment, labor, and energy. Our SmartTruck technology allows us to improve our route efficiencies and provide density to our existing routes. While energy expenses comprised of gasoline, natural gas, and electricity were a tailwind of 40 basis points from last year, please keep in mind that some of the energy benefit is the result of efficiencies just mentioned. As an example, our rental revenue grew organically at 7.9%, but we only added 1% to our route structure since last year. Gross margin for the First Aid and Safety Services segment increased 400 basis points from last year. Our revenue growth is strong and value -- our value proposition continues to resonate in this segment. Health and safety of employees remains top of mind. Our mix of revenues continues to be healthy, including growing high margin recurring revenue products like AED rentals, eyewash stations, and WaterBreak. We continue to use technology like SmartTruck to optimize our routes and improve efficiencies. And our first aid dedicated distribution center allows us to lower product costs. All of these contributes to our improved margins. Selling and administrative expenses grew $64.4 million or 11.1% over last year. Strong revenue growth creates leverage, which allows us to invest in the business. We continue to invest in our people, adding selling resources, investing in our management trainee program to develop future leaders, and expanding our talent acquisition efforts. Operating income of $499.7 million compared to $444.9 million last year. Operating income as a percent of revenue was 21% in the second quarter of fiscal 2024 compared to 20.5% in last year's second quarter, an increase of 50 basis points. Our effective tax rate for the second quarter was 20.9% 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 second quarter was $374.6 million compared to $324.3 million last year. This year's second quarter diluted EPS of $3.61 compared to $3.12 last year, an increase of 15.7%. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal ‘24 interest expense is expected to be $100 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 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 and guidance includes the impact of having one more workday in fiscal ‘23 compared to fiscal -- I'm sorry, fiscal ‘24 compared to fiscal ‘23. This extra workday comes in our fiscal third quarter. I'll turn it back to Jared.

Operator:

[Operator Instructions] Our first question comes from Ashish Sabadra from RBC. Please go ahead, Ashish.

Todd Schneider:

Good morning, Ashish. This is Todd. Thanks for the question. We don't -- I don't have any specific number for you as far as that exact number, but I can tell you that our verticals are performing quite well. We're having really good success. Our focus around not just selling but organizing around those is really paying off for us. And I've just got a couple of wins I can share with you regarding the verticals. In healthcare, in the acute space, we're having good success and non-acute as well. We’ve got a scrub rental program to a big hospital network in South Carolina that is benefiting from a new consistent image but also identification. The customer told us that they were interested in being able to -- pardon me, identify their people, understanding who was supposed to be in what area and this new scrub program did that. We had a really similar experience with a nursing home in Virginia. Same thing. They were buying their own and they -- but the leadership wanted to be able to identify and have a consistent image with their people. We had a -- on the acute side, again a hospital in Florida that we rolled out a new microfiber program because they were struggling with inventory control and product quality, which led to cleanliness concerns. And our program offered some great products, technology to control the inventory, which allow them to focus more on their patients, instead of having a full run with trying to manage the microfiber. Excuse me. And then I've got a couple of other examples I thought might be helpful for the group. In our government sector, we have -- we just recently rolled out a first aid and AED rental program to a public library system in California, which is -- you wouldn't think of a public library system as being a great prospect for us, but it is. They realized that the value would bring to their employees and being prepared with the AEDs in case it was needed because the publics in their locations. And then lastly, I'll just share with you a little bit on education. A variety of wins there. We had a chemistry department at a nice-sized university in Virginia. They put all their educators and students in a lab tour program. The maintenance department at a University in California put all of their people in Carhartt uniforms, a rental program from us, they love the Carhartt. And then the last item would be there was a dining facility at a university in Arizona where they put all their culinary people in Chef Works, which is a big win for those folks. The branded programs with Carhartt and Chef Works were big wins. So, I don't want to belabor it, but I thought I would just share a few wins because I know verticals are of interest to yourself, Ashish, but also plenty of other folks on the call.

Ashish Sabadra:

That's great color and thanks for sharing those events. It does provide a lot more clarity on those verticals. And if I can ask a quick follow-up. I was just wondering if there is -- if you could share any update on your technology, the SmartTruck program, and particularly the partnership with Google, Verizon, and SAP, any updates on that front? Thanks.

Operator:

And our next question comes from Manav Patnaik from Barclays Capital. Please go ahead, Manav.

Todd Schneider:

Good morning, Manav. Great question. As Mike said, we win in many ways. We have been selling no programmers since the inception of my career, I can tell you that, and we continue to. And I'll just remind you, there is -- we service a little over a million businesses, but there's 16 million businesses in the US and Canada, so there's plenty of opportunity there. And we like both. We certainly win some from the competitors. We like growing the pie. And then the examples I was giving, it's a mix. But in large part, it is -- they were either doing it in house, meaning they were processing microfibers in house, or they were telling their employees to go buy product. So there's different variations of no programmers, meaning some are just -- were buying products and providing to their people and telling them to wear them. Some of them, they were just telling them to show up to work and look good. But nevertheless, we bring so much better consistent program identification, cleanliness, all these and compliance are big drivers for our customers.

Mike Hansen:

Manav, we -- no change in what we're seeing in M&A. Still we're working the pipeline as best we can. We've made some nice acquisitions this year. From a buyback perspective, you've heard us speak to it being an opportunistic execution. And that's what you saw this quarter. As we think back about our first quarter results, and we thought they were pretty good, the stock reacted a little bit negatively, and we saw that as a nice opportunity and we took advantage of it. So that is a -- it was a good example during the quarter of an opportunistic execution of that buyback program. And the beauty, Manav, as we speak about our capital allocation, we don't always have to choose right in the quarter or maybe let's call it for the year. We've invested in the business as we've talked about. Our CapEx is up, which is important to us as a part of that investment. M&A is up from last year. Dividends are up 17% from last year, and we've been able to execute on the buyback program. So when you hear us talk about the sort of the four levers of capital allocation, we've done them all, I think, nicely this year. And again, the beauty of our cash flow and our balance sheet is we don't really have to choose.

Operator:

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

Todd Schneider:

Thanks for the question, Josh. Yeah, the cleanroom business is, it's an attractive sector for us. I mentioned pharmaceutical and biotechnology companies, and there's -- it seems like there's more and more every year that need that level of cleaning, that level of cleanliness. So, that is -- we think that bodes well for that business in the future. And there has been -- you've seen some momentum onshoring in that area. And we want to make sure that we have the appropriate capacity to serve our current customers and that we're prepared for the future as well. So, we like the trends in that business, and we like the business.

Todd Schneider:

Yeah. Great question. Yeah. So, we recognize that energy prices go up, they go down. But one thing that's going to be consistent is, we're going to be focused on extracting out inefficiencies in our route structure and in our production facilities. So, that will be really important to us. And we think there is certainly ample opportunity there still to go. We've talked about the SmartTruck technology, that's been impactful to us in many ways. But what's also impactful is, as Mike mentioned, our Six Sigma team of professionals, our Engineering professionals, and then layering in with that technology allows us to have a centralized visibility into our operations at a level that we've never had before in the history of the company this technology allows us. So -- and it allows us to maximize our labor, our equipment, ultimately our energy spend. So -- and we're focused on extracting out those inefficiencies, so that we can manage it moving forward. We love when energy goes -- costs go down, but we recognize those markets will move, but we're going to be focused on extracting out those inefficiencies.

Heather Balsky:

Hi. Sorry about that. Thank you for taking my question. And first question with regards to the programmers and non-programmers, as we're further and further out from the COVID period, are you still seeing the shift in demand in terms of more non-programmers looking to outsource, or do you think it's starting to normalize back to pre-COVID trends?

Mike Hansen:

Heather, the no programmers is still -- we get -- more than 60% of our new business comes from no programmers. Your reference to the pandemic might be, we did certainly, in the early days of the pandemic, see an increase in personal protective equipment and things like hand sanitizer. Those have normalized back to what we would call normal and ongoing levels, so that might be the only change that we had, and back to normal.

Todd Schneider:

Heather, it's a good question. We don't really discern the difference between our Six Sigma team, our Engineering team and our Technologies. They all have to work, be orchestrated appropriately to get the efficiencies, so -- and that's exactly what we're doing. So, everybody has to be involved. And that's what produces the great results. As for G&K, yeah, we're -- we now -- we’re I think about six and a half years since we acquired, if my math is correct. So, yeah, I wouldn't say that there's anything left on the bone there.

Andy Wittmann:

Yeah, great. Thanks. Good morning, and thank you for taking my questions. I guess, I just wanted to ask on the outlook a little bit here, Mike. The second half total revenue guidance is in the 7% range at the midpoint against an organic 9% quarter here. So, a degree of deceleration. I guess that was implicit in your previous guidance as well. But just thought maybe give you a chance to elaborate a little bit more on that, talk about what you're seeing in the macro, if that's just you guys being kind of your normal prudent approach, or if there's something that we should be considering?

Andy Wittmann:

Great. That's my only question for today. Have a Merry Christmas, guys.

Operator:

And our next question comes from George Tong from Goldman Sachs. Please go ahead, George.

Todd Schneider:

George, we -- good morning, George. We -- forward-looking, as Mike said, there's always -- we're not trying to prognosticate exactly how our customers will react to the turning of the calendar year, but we're not seeing any change in sales cycles, and we haven't seen a change in our customer base and they're -- how they're reacting to what's going on in the marketplace. So, it's kind of business has been consistent, and it's more what Mike referred to the turn of the calendar year. And we'll see how businesses react coming out of the holidays.

Todd Schneider:

Yeah, George. Cross sell is -- it's an important component of our growth, and the nature of it is we're having good success across all of our areas of our business. We're blessed to be in a position where our customers, fortunately, they really like us. They like our relationships. We have people in their businesses on a really frequent basis, mostly on a weekly basis. So they -- and we have -- so that means we have eyes, ears, and minds in their business and we can help. And it doesn't matter to us what a customer might lead with, whatever they're interested in, but then we will quickly pivot and we can help them in many ways. So -- but just the nature of the size of the rental division is such that because there is -- are so many customers there, there's plenty of opportunity for our First Aid and Fire business to cross onto that just because of the numbers there. But nevertheless, it's working quite well across all of our organization. We share leads, we share thoughts, and we make sure that the customer is well taken care of.

Tim Mulrooney:

Yeah, good morning. I just wanted to ask one question. Pricing now normalized back to the 2% range. That means your organic growth was comprised of approximately seven points of volume. I was just hoping you could dig into that a little bit more as it was a little stronger than I think most of us were expecting. Did you see an uptick in retention? Did you have a strong quarter with that cross sell? Or maybe new account growth and any details would be helpful.

Mike Hansen:

And as we talk, we win in a lot of ways. And the momentum in the rental business is still really good. But we also saw in the quarter some really nice acceleration in First Aid and Safety from 11% in the first quarter to 12.7% organically in the second quarter. And we saw some nice improvement in Fire where we went from a little over 14% in the first quarter to 17.8% in the second quarter. So we just see some really good momentum in all of our businesses. And particularly those two had some really nice performance in the second quarter.

Todd Schneider:

Thank you, Tim. You as well.

Andrew Steinerman:

Hi. Could you just mention if your ad stops directionally and the uniform rental business was up, down, or flat recently?

Andrew Steinerman:

Okay, thank you very much.

Operator:

And our next question comes from Jasper Bibb from Truist Securities. Please go ahead, Jasper.

Todd Schneider:

Yeah, I'll start, Jasper. Good morning. Our -- we're seeing -- just like you're seeing with inflation in total, we're seeing that come down. It's never coming down as fast as we like, but we are seeing it. Cotton is stabilized. We're seeing freight come down and that's important to us. And the labor market is easier. It's still not easy, but it is easier. So I think that probably the right way to think about it would be as the labor market eases, and that will lessen pressure on wage growth as well.

Mike Hansen:

Sure. Jasper, we have seen some nice performance in that business and I spoke to a few of them where from a margin perspective, first of all, the value that we sell with, nothing is more important than the health and safety of your employees is really still resonating well. And so our growth has been really good in that business. We talked a little bit in the opening comments about sort of the recurring revenue streams of AED rentals, our eyewash stations and our WaterBreak. And these have been great businesses for us. The growth has been really good and the margins are great for us. Many times these are add-on products to existing customers. But in all three of them, we install, and then we have a recurring service program that goes on after that. And again, it leads to really nice stickiness and also nice margins. The other thing that I'll point out is we opened a first aid and safety distribution center a couple years ago and that allows us to source more. It allows us to centralize some of our sourcing, and those kind of things lead to a better product cost, and that again drives down the material cost in our first aid and safety business. So the combination of really good sales mix, really good growth in the business, good sourcing, the one I didn't mention was SmartTruck technology that is also having a benefit there. All of those things are contributing. And so this is not a case of six months of sort of unusual items. This is a little bit of a lot of hard work and execution by our first aid and safety partners to really get this margin going.

Operator:

And our next question comes from Faiza Alwy from Deutsche Bank Securities. Please go ahead, Faiza.

Todd Schneider:

Good morning, Faiza. Thanks for the question. We really like the fire business. It's the only business we're in where you legally have to have it. So there is, I'll call it double negative, no program market. Everyone is a programmer. But we are able to cross-sell very well into that market. We're using various technologies that Mike referenced to make sure that we're positioning our partners to be more successful, meaning we use SmartTruck technology in all of our businesses, and that helps us. But we're getting leverage from our growth. And the growth is attractive. And we think it's – there’s certainly -- running a business isn't linear. So there will be ebbs and flows, but we like the long-term outlook for the fire business. That being said, as you mentioned, we are going through an SAP implementation. We certainly -- we haven't even implemented at this point, so we haven't seen any benefits just yet, but we're optimistic about how that can help our business over the coming years.

Faiza Alwy:

Great, thank you. And then if I could just follow up on the macro environment, you made some comments in response to a previous question around just you’re being prudent and there is some uncertainty. Just given sort of how well you are doing [with no programmers] (ph) and the momentum you are seeing in sort of these other businesses, I'm curious if you can give us a framework in terms of how we should think about the impact of macro on your business.

Faiza Alwy:

Understood, thank you so much.

Seth Weber:

Hey, good morning and happy holidays, guys. I wanted to just go back to the clean room discussion for a minute. If there's any way to frame how we should be thinking about that, new facility openings, and are those facilities higher CapEx relative to a traditional facility? Is there any way to combine facilities or I'm just trying to get a better understanding of this opportunity and what the investment might be for Cintas going forward? Thanks.

Seth Weber:

Okay, that's helpful. Is there any way for us to think about how many of these facilities you might be opening over the next couple of years relative -- I mean I saw the press release for the Wisconsin facility, but is this order of magnitude ones and twos or could this be much bigger going forward?

Seth Weber:

Okay, that's helpful, thanks. And then maybe just a quick follow up on the direct, it's nice to see the direct sales business turn positive again in the quarter. Is there any color on whether that's coming more from the service side of your customer base, more of the manufacturing side, and any just detail there or is it just kind of across the board?

Mike Hansen:

Yeah, we typically would say in the low to mid-single-digit growth. So this quarter is sort of in line with that expectation.

Stephanie Moore:

Hi, good morning. Thank you. I wanted to touch a bit on maybe the cross-sell opportunity over time. I think you've provided -- you continue to execute very well on your investments, particularly on the technology front and called out this enhanced visibility that you have. So maybe you can talk about, given some of these investments, what this might mean for cross-selling, meaning the opportunity to add those additional products and kind of continue to further penetrate each existing customer. So kind of how are you balancing the incremental products that you can offer over time? Thanks.

Stephanie Moore:

Thank you. Appreciate it.

Operator:

And our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead, Scott.

Todd Schneider:

Yeah. Good morning, Scott. We’re -- the items that you mentioned, they're all really important to us. We are -- there's not one that I would call out, but I would think about it this way. We think the future's really bright and we want to invest for the future. We know we need the talent acquisition team to be attracting the very best talent. The management trainee programs are leaders of the future, and we think they are a critical pipeline, and we're going to need those leaders. And then the selling resources are, we see the -- it looks, we think the future's bright with our, how many customers we have, what the size of the market is. I mentioned 1 million customers, about 16 million businesses. So that's all great. And then you kind of wrap it all with technology, because technology will, we want to make it easier to do business with us, and we want to leverage technology to make our partners more successful. Point them in the right direction, give them the right tools in their toolbox to spend their time in the right spots, but also to make it easier for the customer to buy, easier to do business with in totality.

Mike Hansen:

Sure, not a lot of change in the strategy, Scott, and that is we love rental tuck-in opportunities and we've made a number of those this year. And as you can imagine, when we do that in a marketplace, we add immediate capacity utilization improvement, route density, and so those things really help us in the rental business. So we've made some of those. We certainly have made some first aid acquisitions, and we've made fire acquisitions. Again, the dynamic is similar in all three of these. These are really nice tuck-in opportunities that just strengthen our business in the local markets in which we acquire them, and we'll continue to look for those opportunities as best we can.

Operator:

And our next question comes from Shlomo Rosenbaum from Stifel. Please go ahead, Shlomo. Shlomo, is you line muted?

Mike Hansen:

Shlomo, when our quarters end on a holiday and it seems like too many of them do, it does create a little bit of disruption in terms of the ability to collect the mail, the application. We have seen maybe just a touch of slowing in the AR, but we've not seen any, I'll say deterioration from the standpoint of additional write-offs. But we did see a little bit of slowing, and the Thanksgiving holiday can usually contribute to that.

Mike Hansen:

Well we -- certainly the revenue growth is powerful in all of our businesses and when we see some really nice revenue growth, that's important. The other thing that I would say is you know the uniform direct sale business went from a negative 2.7% in terms of revenue growth to 4.7%. And that is important for operating margins too. So we did see some nice improvement there in the direct sale. Nothing I would say that is noteworthy other than, again, some nice acceleration in the revenue.

Leo Carrington:

Thank you, and good morning. If I could ask a follow up on that point around the one-off or the cost that you called out in Q2 around current acquisition, training, technology. Were you calling them out to any of these one-off increases in nature or more to highlight where the spend is? And then in terms of the underlying margins and drop through in Q2 on your organic growth, do you see that as sustainable when you factor in the additional investment this quarter?

Leo Carrington:

Very clear. Thank you.

Toni Kaplan:

Thanks very much. You mentioned the success that you've had with the branded products earlier, particularly with Carhartt and Chef Works. Could you just remind us if these are exclusive relationships and how long the relationships are for and then are there any other areas that could benefit from branded products or equipment that you could offer as well?

Toni Kaplan:

Yep, terrific. And maybe if you could just give us your latest thoughts on potential international expansion, that'd be great. Thanks.

Operator:

And at this time, there are no further questions. I'd like to turn the call back over to Jared Mattingley to close out the call.

Operator:

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

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.

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

Operator:

[Operator Instructions]. And our first question comes from Faiza Alwy from Deutsche Bank.

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.

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?

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.

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.

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?

Joshua Chan:

And I guess for my follow-up, could you talk about what your CapEx expectations are this year and kind of the types of projects that you're investing in?

Operator:

And our next question comes from Heather Balsky from Bank of America.

Todd Schneider:

Heather. Yes, we're certainly watching what's going on with the auto worker strike, but it is not affecting us in any material way whatsoever. We have a very broad-based customer base. And as a result of that, it's not affecting us to any material degree whatsoever. And keeping in mind that we have no one customer that's greater than 1% of our revenue and no even sector that's greater than 10% for 3-digit NAICS codes. So that helps us and insulates us a bit from all that. As far as the macro environment, it really -- it varies based upon the sector, geography, whether they're goods producing or services providing. But the labor market is a little easier, but still not easy. And you see that through the -- what we've -- what we're reading with the job openings, still 9.5 million job openings. And that affects our customer base from a standpoint of them trying to attract and retain people. We would love to see those jobs filled because we think that would be really good for our customers and for the economy in general.

Justin Hauke:

I wanted to ask about the First Aid margins because it kind of sustainably been higher than they have been historically and really more comparable to the Uniform Rental and the Facility Services segment. And I guess the question is, I mean, for years, that was kind of a scale business where you were building it out and it had lower margins. Are you at the point now where like that business has reached a point where it has very comparable margin sustainably to the Uniform Rental business?

Justin Hauke:

Okay. Great. And then I guess the last one is kind of more procedural, I guess. But you did -- it looks like on the cash flow about $56 million spending on acquisitions in the quarter, which is a little bit higher than what you guys typically do. Do you have any comments on kind of where that was, where we should see the revenue flow from it?

Operator:

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

Todd Schneider:

Yes, those are 3 great verticals for us. I mean, they're 3 great segments of the North American economy. And so, yes, we're still seeing outsized growth in those markets. And as we've chatted about in the past, it's more than just a sales effort. We've organized around them. We've got products for them. We've got technologies for them. And that is resonating with that customer base. So we think we've chosen them quite well, and there's plenty of runway in all of them. So we're, again, quite bullish on the future of those segments.

Todd Schneider:

Yes. George, we're -- the nature of the math around our businesses, the Rental business is obviously a large percentage of it. And we're guiding towards margin expansion for the year. And we do not see energy being a tailwind for the balance of the year. So we expect margin expansion based upon certainly leverage on revenue growth, that's going to be helpful. But we're extracting those inefficiencies out of our business. And as Mike mentioned earlier, we're proud of the fact that pricing is returning back to historical levels, but we're still able to grow operating margin -- gross margin and operating margin at very attractive levels and to levels that are all-time highs. So that's part of our plan. And our team is actually treating at a very high level, and we expect that, that will continue.

Todd Schneider:

And Mike, I might add that when we extract those inefficiencies out, that's better for our customers because we're able to spend more time in front of them instead of on the road. It's certainly better for our partners, our employee partners because it makes them that much more productive, and that's good for them and our organization. And it's really good for the environment. So we think -- let's say there's a lot of boxes checked there, and we've worked hard on that technology over the years, and it's showing up. And it's benefiting not just the P&L in a more simplistic fashion, but in many ways.

Samuel Kusswurm:

This is Sam Kusswurm on for Tim. I guess I want to start with another health care question here. But as it relates to your health care clients, you've talked a lot about the opportunity here, especially as more no programmers convert. But I guess I'd like to know for those health care operators who already use a service partner, what do you think your penetration rate is? And how might that compare to some of your other customer verticals?

Samuel Kusswurm:

Got you. Appreciate it. Maybe just another quick one on the margins. I see SG&A as a percentage of sales picked up again in the quarter compared to last year. I guess I'm wondering if there was any variable costs like your insurance expenses? Or if it was mainly some of the selling and branding investments you've talked about previously? Maybe you could just help break that out for us a little more.

Operator:

And our next question comes from Andrew Steinerman from JPMorgan Securities.

Todd Schneider:

Yes. 20% to 30% is our target. We -- Q1 was a very attractive incremental margins. And there's always puts and takes in every quarter as I mentioned. Running a business is not linear. But we will expect that we will be in that 20% to 30% range. I certainly like higher in the range than lower. And we are -- and I think our guide speaks to where attractive margin improvement for the year as well.

Seth Weber:

I wanted to ask just about the small tick down in Uniform Direct Sales organic growth here in the quarter. It's the first, I think, decline that we've seen there in a while. I know the comp was hard. Is there anything else that you'd call out there for that business?

Seth Weber:

Do you think, Todd, do you think that business could be up for the year? Or do you think that's kind of flattish or down?

Michael Hansen:

Seth, I might point out that the last 2 years have -- they have been a significant recapture of what we sort of lost in that pandemic period of time. In our fiscal '22, that business grew organically over 50%; in fiscal '23, it was almost 30%. So there was a lot of recapture going on, but keep in mind that our longer-term goal for that business, Todd expects it to grow, but it's probably more of a low single-digit to mid-single-digit grower in our portfolio.

Todd Schneider:

Yes. Good question, Seth. Certainly, it's a very competitive marketplace and First Aid products, Safety products, there is hundreds of competitors out there. There's many, many ways to procure those products, whether it be van delivered or e-commerce, you name it, we see it there. But as a result of that, it's a very competitive market. And we've talked about the health and safety of employees being the #1 item that businesses are focused on. And when that occurs, there's certainly -- it attracts plenty of people into the marketplace because the value proposition of taking great care of employees is resonating with folks. And so yes, it's a very competitive environment, and I'm sure it will continue to be.

Stephanie Moore:

Actually, maybe continuing on that last question there. Could you talk a little bit about what you're seeing in terms of the competitive landscape and your more core Uniform ancillary product segment? As you continue to win new business, where are you seeing the majority of that new business coming from? Is it nonprogrammers, some of the regional players, larger players? Any color there would be helpful.

Stephanie Moore:

Got it. And just a follow-up, if I may. You noted that retention level continue to be really high. I'm just curious, in this current environment, what do you think is resonating the most with your customers that your sales force kind of goes in? Is it kind of the willingness to work with them on price? Is it the product offering, your scale? I'd love to just get your thoughts on what do you think is resonating the most to drive such a nice retention level.

Operator:

And our next question comes from Scott Schneeberger from Oppenheimer.

Todd Schneider:

Scott, I'll start. Mike, if you would like to chime in there. We're deploying technology, and you can call it automation, you can call it technology, you can call it digital. We're deploying that across all of our businesses and across all areas of our business as well, and we've been focused on that for years. But there certainly is -- we're seeing some real benefits there with our investment with SAP, with our investments -- our partnerships with Google and with Verizon. And it's -- those are -- we see that there's plenty of opportunities still to come there to improve in the efficiencies of our business and to automate certain functions. And we call it -- make it easier for our customers to do business and make it easier for our employee partners to take great care of our customers. The more we can invest there, we think it's an incredibly good use of our balance sheet because it positions us well for not just the short term, but the long term as well.

Scott Schneeberger:

Great. Appreciate that. The -- you just referenced SAP, and you mentioned CapEx may be high end of the range this year, working on some implementation in the Fire segment. Could you just speak to -- would that have a tail to next year? How much more -- I mean, are we going to see SAP projects for years to come? Just a sense of what you have on the spend side going forward.

Todd Schneider:

Scott, to expand upon what Mike said, it is a journey. But when you're on that journey, there is benefits -- a long, long tail of benefits as well. And so we will continue to invest appropriately. We have relationships at a very high level in each of those organizations, and it's going to bear fruit for us. And that's part of our plan. It's not easy. It's very challenging to go through these processes. But our team has shown the wherewithal to not only digest the change, but then leverage the opportunities that are in front of them.

Shlomo Rosenbaum:

Todd, maybe you can just peel the onion back a little bit more on that margin on the First Aid side? I know you pointed to some sourcing and stuff like that. But it seems like the business has gone from mid-teens to low 20s in the course of the year. And I was wondering if there -- is there something to do with the route optimization? Is it mix related, pricing? Anything else that operationally made such a significant difference? And after that, I have just a question on the labor environment for you guys yourselves? Are you -- is it easier for you guys to source people for what you need?

Shlomo Rosenbaum:

And then just the labor environment on your own, like for the people that you're sourcing?

Operator:

And our next question comes from Kartik Mehta from Northcoast Research.

Todd Schneider:

Yes, Kartik. First of all, we're a really different company today than we were in 2008, 2009. We have a much more diversified customer base. We're now -- today 70% of our customers are service is providing, 30% are goods producing. We have significant verticals that we didn't have as well, health care, education, government. So we think we're really well positioned for whenever the next recession is. And I remember '08, '09 because I was running the sales organization back then. And our value propositions still resonated with people, and we still sold new business. And we did so at attractive rates. As I mentioned, it's not always are we asking for new money. Sometimes it's just a redirection of those from somewhere else to us, not only in a -- maybe a direct competitor standpoint, but also they're purchasing clothing, they're purchasing items to take care of the facilities. So we think we're well positioned. I might also mention, you didn't ask specifically about it, but we love having a pristine balance sheet. And we think whenever the next recession is that might open up opportunities for us. And just the fact that we've -- our organization is focused on fighting through whatever the economic environment is, taking great care of our customers, taking great care of our employee partners. And we've grown sales in 52 of the last 54 years. And we suspect that whatever the economic environment is, we believe we're going to be successful in it.

Kartik Mehta:

Yes. And just as a follow-up, if you look at the First Aid and Safety business, you're doing really well in it. Is there a way you would look at to say a certain percentage is recurring? Do you consider a certain percentage recurring? I know you don't have long-term contracts in that business. But just from a demand standpoint and what you've seen from a historical standpoint?

Operator:

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

Todd Schneider:

Yes. Great question, Toni. I'm glad you asked because my first job 34 years ago was on the trucks. And we have been cross-selling our products via our -- we call them our service sales representatives. We've been cross-selling them since I started, and I'm sure it was in place well before I started as well. So we see -- the fact that we have 12,000 or so trucks that roll out of our parking lots every single day that are focused on taking great care of our customers, when they roll out of those parking lots, they're spending time in those businesses. And they have eyes. They have ears, they have minds, and they see what's going on in those businesses, and they see opportunities. And it always has been and always will be a key component of our growth trajectory because we see that infrastructure as a real advantage. And we leverage it and make sure that those service providers, either they provide more products and services or they provide a lead to provide more products and services based upon the nature of the product that the customer might be interested in.

Todd Schneider:

Toni, we know that our customer satisfaction scores are really good. And in large part because they really like our people. They like our service providers, our frontline service providers. And we leverage that. And whether it be, as Mike mentioned, a more -- a smaller type customer, we can cross-sell via the service provider. A larger one that's a little bit more complicated. There might be a need for some air cover, for some help there. But nevertheless, that's always been an important component of our strategy and always will be.

Todd Schneider:

Yes, Toni, great question. So we are always on the lookout for those opportunities. We think we have a really strong technology platform that we can build off of. But we know that the answer for what our customers are interested in is with spending time with our customers, and our employee partners are the ones who discern those opportunities. So we're always asking now, how do we make it easier to do business, what -- is there any void? And frankly, that's where most of our investments have come from, that information, been trying to make it easier to do business with us. So we're always in search of trying to be a world-class service provider, but having an incredibly strong technology platform that makes it easier for our customers to do business with us, that makes it easier for our employee partners, our service providers to create a world-class experience for those customers. So yes, we're in search of whether it's -- we buy it or we bolt it on to our current platform or we created ourselves, all of those are of interest to us, and we'll be moving forward.

Jared Mattingley:

Thank you for joining us this morning. We will issue our second quarter of fiscal '24 financial results in December. We look forward to speaking with you again at that time. Thank you.

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.

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.

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.

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?

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.

Operator:

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

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.

Todd Schneider:

Certainly. Our relationship with Google gives us a better, faster, smarter, cheaper way to store our critical data. But we see it as it can do so much more, due in large part because of the relationship that Google has with SAP and the relationship we have with SAP and now Google. As you all know, we have had a very successful relationship with SAP for over a decade now. And we've spoken in the past that it is much more than just a customer vendor relationship. It's a strategic relationship. So you combine that with just a couple of months ago, SAP and Google announced that they have an expanded partnership. And what that's going to do is it's going to allow our SAP data to be connected with the Google Cloud Data and analytics technology, which will give us access to their advanced AI and machine learning capabilities. So we're excited about that. It's going to -- we think we can benefit for many years to come as this type of relationship. But you asked Faiza for a few examples. So I'll give you a few to help give a little color around it. We see having these technologies connected, the opportunity to put in front of our sales organization instead of calling, I'll say, more blindly on who to try to sell our services to, we call it next best prospect for our sales team to have real technologies to push in front of them. Here's where you go spend your time. We think that's significant and can have an impact on our productivity and our retention and morale productivity, all those things. Next best product for the customer. So instead of just trying to figure that out, we can put that in front of our sales team to -- and our service team to make sure that they're talking to our customers about the next best product that would fit based upon other customer behaviors. We think certain customer service functions could be enhanced nicely over the coming years. There is -- we all use Google Maps, and we see an opportunity to leverage Google Maps to even further enhance our Smart Truck technology to make routing even more dynamic, which will save us time, saves us energy, saves us -- allows for more time in front of our customers instead of on the road. And then just one more, I would say is that, our service team, we're blessed to have a lot of customers. We want to make sure that they're spending -- they're in front of the right customers at the right time. And we see the potential to leverage that type of technology to point them in the right direction to make sure that they're focused on any at-risk customers and customers that we need to enhance the effort with them with the people in front of them. So hopefully, that gives you a little color around it. Again, this is not -- we don't see this as an event, we see this as a process and the coming years, we think it can be very impactful for our business and our customers.

Operator:

Next question comes from Ashish Sabadra with RBC.

Todd Schneider:

Thank you, Ashish. I'll start, and if Mike wants to chime in. The First Aid and Safety business is going quite well. We really like that business. We've -- we see significant opportunities in the future there. And we're getting leverage there, really growth -- the strong growth is really helping us get some real leverage but the mix of business is very attractive. We spoke about during the peaks of the pandemic now, there was more PPE sales and safety sales. And the mix is now back to what we really like, it's a cabinet sale that are repeat in nature and higher margin. So we really like the mix, but the growth in total is great. And I would tell you that the value proposition is really resonating our customers are trying to make sure that they're reinvesting in their people. Health and wellness is a concept that is resonating very strongly in the marketplace, and we're leveraging that and benefiting from that. And on top of that, we're also -- we have inefficiencies in that business as well. So we're extracting out those inefficiencies. They're going to help us continue to expand our margins. But we like the position we're in, we like the tailwinds we have with the health and wellness, and we think the future is quite bright in that area.

Todd Schneider:

Certainly. Our key verticals where we're focusing our time is health care, education and government. We've organized around those verticals. We have products and services that are attractive to them. Certain service functions dedicated to them. And as a result, we're really benefiting from it. And we very much think that they're smart verticals to invest in. And as a result, they're growing really attractively. And customer retention is good, new business is good. And we think that there's a real long opportunity here for us to continue to invest in these into the future. Certainly, the demographics of health care are quite attractive. But education and government are doing well in addition, and we're going to continue to invest in those areas. So it's paying dividends for us.

Operator:

Your next question comes from Manav Patnaik with Barclays.

Todd Schneider:

Yes, Manav, you were -- I couldn't hear the first part, but I think I understand your question. I'll try to answer it. And if I don't, then please let me know. The know programmers are -- it's going quite well. And it has historically been a significant portion of what we sell, and it continues to be a significant portion of what we sell. And we have products and services that are attractive to them. We have a sales effort that is, I'd say, skilled at identifying and delivering the message to those folks. And I think it's important to understand that with know programmers, it's not always -- I would say rarely is it just all incremental new spend to them. Many, many cases, we are able to -- they're spending those dollars somewhere in many cases, with other vendors, maybe not a direct competitor, but they're spending money on compliance and image and safety and cleanliness, those types of things. And as a result, we're able to redirect those dollars to us, in many cases, save the money. So don't think of it all as, oh my gosh, is there an end to that because if the economy -- there's any stress in it that they're not going to be able to sell know programmers there, quite the opposite. We're -- we see a very, very long runway there. So that's attractive. As far as the competitive set, I mean, we operate in a very competitive industry, a very competitive environment. I would say I haven't seen any changes to the competitive landscape from that standpoint. So I'll leave it at that.

Todd Schneider:

Well, it's certainly going to be a process. We just entered into our relationship with them recently. We've had meetings with them to talk about where we're going to go here. And as I mentioned, it's not an event. It's a process. But we see some low-hanging fruit, I guess is the best way to say it. But as we have gone down this path, more ideas are coming out. So we think we can benefit for years to come with this opportunity. And I won't go into too much detail just because we see some competitive advantages there. And so as a result, we'll keep those to ourselves. But we think the runway is long and attractive.

Operator:

And our next question comes from Josh Chan with UBS.

Todd Schneider:

Yes. Josh, it's a good question. It's a mix. Cross-sell has been very helpful for us over the last number of years and will continue to be. But we love new customers. And the Fire and First Aid, there is some overlap, but not complete overlap. And so it allows us to get into speaking to customers about that. And the first time they may have done business with us at all. So -- and then we -- separately we have an enterprise sales organization that will call a customer or prospect. And frankly, it doesn't really matter to us what they start with. It's whatever the customer is interested in. If a customer doesn't do any business with us and they want to start -- their interest is in Fire, wonderful, or if it's in First Aid, wonderful, or rental garments, then we go where the interest is and then we expand out that relationship from there. So we love the fact that there isn't complete overlap, and it gets us into new opportunities and then we cross-sell like crazy.

J. Michael Hansen:

Josh, our incremental margin for the total company in fiscal '23 was 26.8%, a little bit up from the previous year. And Josh, it's -- there can be ups and downs from quarter-to-quarter in the way that we invest or in the cost that we see. And so we don't necessarily try to predict one quarter at a time. We do certainly believe we can get incremental operating margins in that 20% to 30% range from quarter-to-quarter generally, but it's going to go up and down, again, based on what we are doing within the business, some initiatives that we may or may not roll out. So the bigger focus for us is on the full year, and our goal is to get those incremental attractive enough that it improves margins over the year. So I wouldn't call it linear at all, I wouldn't call it flat. It's going to be based on how we're managing the business.

Operator:

Your next question comes from Justin Hauk with R.W. Baird.

Todd Schneider:

Thanks for the question, Justin. I'll try to answer and see if Mike wants to expand upon it. So when you think about our growth, Q4 growth was around 10%, which is really nice growth, especially considering a strong comp of last year of 12.7%, which was our strongest growth of the year, that year. So if you compare that 10% to the -- I'll call it the top end of our guide or in the mid-7s to higher 7s, you can think of that as really pricing returning back to closer to historical levels. And as I mentioned earlier, the reason that we see this as appropriate and is we're seeing an easing of inflation. And we saw that -- you can see that in the drop in the cost of energy that we've seen, the benefit we received in Q4. And as I mentioned earlier, also you saw it in the CPI report yesterday and the PPI report today. So -- and as you appropriately said, I mean, we're guiding towards a more historical type of growth volume growth is really good still. Pricing will return closer to historical appropriately so. But all that being said, we will still have -- we're guiding towards incremental margins and operating margin expansion. So pricing is a lever, but it's not our only lever available to us in order to expand margins.

J. Michael Hansen:

Justin, because we are self-insured, those claims can -- they can kind of move up and down throughout the year. There's nothing that we would say is structural related to that. It's just a product of being self-insured. We ended the year at 26.9% in SG&A, that is, gosh, a couple of 100 basis points maybe lower than pre-COVID in the last few years, and you've heard us speak about this. Look, we've worked hard to get it to that level, and we don't want to get back to historical levels. So our expectation is we're going to continue to find ways to better leverage SG&A, particularly G&A to make sure that it contributes to our margin expansion into the future. So we're going to continue to work hard to look for opportunities to bring it down and do not expect it to return to those higher 20 places that we were in pre-COVID.

Operator:

And we'll hear next from George Tong with Goldman Sachs.

Todd Schneider:

Good morning, George. It's a pretty -- the environment hasn't changed significantly. The health of customers is varies based upon geographic, what type of business they're in, small, medium, large, those types of things. But generally speaking, the sales process and has not elongated the sales pipe looks very good. We like the spot we're in. And we have invested appropriately. We're in the right -- we've got the right products and services. We've got the right focus on our customers, and we think that we're well positioned for the future. And we certainly are trying to make sure that we're planning for the long term. And we're -- as I mentioned earlier, not trying to be an economic forecasting business, but we are making sure that we're watching our business very closely and hoping for clear sailing ahead with the economy. That being said, we will find a way to be successful as we have in the past.

Todd Schneider:

Certainly, George. The healthcare business has been strong for us for a number of years. And is large part not just having a sales focus, but organizing around those customers, products, services, our service organization. So it's more than just sales. It is making sure that we look at it as a business. And it's growing -- it's accretive to our growth rates. We see very long runway there. As I mentioned earlier, the demographics are really attractive. But the pipeline of sales growth looks robust. And that's because of years of investment in making sure we're really well positioned, and we see that continuing.

J. Michael Hansen:

I don't have that in front of us, George, right now. In the past, it's been about 7%. And it's -- I'd say that it's growing faster than average.

Operator:

Your next question comes from Tim Mulrooney with William Blair.

Todd Schneider:

Yes, Tim, we do not expect to give back, we expect to maintain and build on those improvements. And we're leveraging certainly the total growth, the benefits of health and wellness being important to people in the marketplace. The mix of business being attractive and we've fundamentally focused on extracting out inefficiencies in the business. So -- and we're not giving those back. So yes, we see the future is bright for that business.

J. Michael Hansen:

Yeah. Tim, we talk a lot about the mix certainly returning, and that's being -- that's a big part of it. But as Todd mentioned, our first aid safety partners have a lot of things going on in terms of business improvement opportunities from sourcing better, to routing better, to sales productivity improving, to penetration opportunities. There's a lot going on in that business. And we've attributed a lot, you're correct, to the revenue mix, and that has been important in terms of the height of the pandemic to today. But there's also a lot that's going on in the business that is working towards structural improvements in the business that create long-term efficiencies and you're seeing that. And that's why we don't expect to give it back. There's nothing that we are underspending or underinvesting in to get these margins. These are real business improvements that are sustainable. And that's what we love about the business. It has been growing nicely, it's resonating with our prospects and customers. And it's pretty exciting to think about that business in our fiscal '24 topping $1 billion for the first time. So we do love the business, and there's a lot of good work going on there.

Todd Schneider:

Great question, Tim. So, over the past few years, we've seen a nice improvement to our customer retention levels through the pandemic. We think that we handle that really strategically, intelligently and thought about the long term. And we saw our customer satisfaction scores go up at that same time. And we've continued to see those same levels of customer satisfaction and retention levels. So no, we have not seen a change from that standpoint. And we're always working on improving our business and making sure that we are super focused on making sure we're taking great care of our customers and staying attentive to their needs, is a big part of what makes us successful. So we've not seen a change, and we're focused on making sure that doesn't happen.

Operator:

We'll hear next from Kartik Mehta with Northcoast Research.

Todd Schneider:

Kartik, we have not seen a change to our ad stops metrics, and we are expecting that, that will continue. We're -- part of it is because of the diversity of our customer base, not just good producing services providing and the broadness of our customer base. We're not dependent upon any one particular area and we expect to grow in multiples of GDP. And all that being said, we expect that and stops metrics will continue on its path.

J. Michael Hansen:

So let me -- I'll give you a couple of numbers. Fourth quarter total energy for the total company was 1.8% for the fourth quarter. For the year, that was 2.2%. So for the year -- this year -- fiscal '23 compared to '22, it was down 10 basis points. So it's roughly flattish. As we think about '24, look, the prices at the pump spiked in June of last year. And so our first quarter numbers of last year were fairly high. And so we may get a little bit of a tailwind in Q1 and then our expectation is we'll turn roughly flattish.

Operator:

Next, we'll hear from Seth Weber with Wells Fargo.

Todd Schneider:

Well, Seth, good morning. We like the momentum in all of our businesses. So will there be some above, some below? Yes. But it's -- but generally speaking, we see in the mid-to-high single digits would be probably where you can think of it. And it's -- and as I mentioned earlier, the -- we're up against comps that are significant, partly because of pricing being above historical in the past, well above historical, now it being closer to historical.

J. Michael Hansen:

Sure. Yes, we would expect 3.5% to 4% of revenue. Look, when we've had a really good couple of years of volume growth, we have capacity needs in certain places. Capacity is local in our business, but we have capacity needs. And we want to continue to invest for growth. And so there will be everything from added washers and dryers and specific wash alleys to some of a few bricks and mortar new buildings and other investments in the business that allow us to continue to have the capacity we need to grow. So it is kind of back to that historical 3.5% to 4% range. That would be our expectation.

Operator:

And we'll move next to Heather Balsky with Bank of America.

Todd Schneider:

Good morning, Heather. So yes, our Uniform Rental business is performing quite well. We've -- we think we have invested appropriately in the sales organization. We really like where we're going there. We like the productivity levels. They've continued to go up. And there's plenty of inputs to productivity and it's whether it's products that we launch, services that we launch, the retention levels of our people, the leadership of the organization to make sure that we're driving items that make them more successful. So no, it's going well, and our service organization is doing an outstanding job with customer retention, making sure, as I mentioned earlier, our customer satisfaction scores are near all-time highs. And as a result of that, our lost business, our customer retention, the appropriate way to say it. Our customer retention is really attractive. So our new is up and our customer retention is improved over pre-COVID levels. So those are big for us and having a really positive impact on the business.

Todd Schneider:

Yes, Heather, we're certainly investigating and investing in opportunities. And we think we're with the right partners. When you think about Verizon, SAP and Google, having those three as the -- our technology -- our strategic technology partners, we think we're with the right folks. And we don't just have a customer vendor relationship with them, we have a strategic relationship with them, and they're helping us -- they are and will help us to leverage those opportunities in the marketplace. So I can't lay out specifics for you, but I'll just tell you this, we're -- we see the opportunity to invest in that area, and we are doing so appropriately because we think it will pay big dividends. That being said, it will be -- we'll be speaking about this for many, many years to come because we think the benefit has a real -- has a lot of legs to it.

Operator:

Your next question comes from Scott Schneeberger with Oppenheimer.

Todd Schneider:

Scott, let me make sure I understand. You're saying if we can't get to leverage or if the economic environment changes?

Todd Schneider:

Yes. Certainly. Good question. I -- we have a very tenured, very experienced leadership team, management team that has been through the cycles. It seems like you name it, we've been through it, and we expect to be successful in all environments. Now -- so your -- the question is a tough one to answer because the economic downturn, how deep is it? How long is it? How broad? And so trying to understand that is challenging. But we expect to be successful in all economic environments. If you're talking about a massive downturn in '08, '09, that might be different. But we're ready. We know how to do this. We have demonstrated our ability to be successful in and all these different types of economic environments. We have grown our sales and profits in 52 -- in the last 54 years. And my expectation is we will absolutely do so and we will find and fight and a way to be successful in whatever economic environment. So plenty of levers available to us. And we think we've got the right team in place to manage that.

J. Michael Hansen:

Sure. From a capital allocation, I'll start with our expectation is that cash flow is going to continue to be very good in fiscal '24. And secondly, our balance sheet is in great shape. We -- as of May 31, we have no variable debt. And so we can do a lot of things with great cash flow and a great balance sheet. We would love to use that on M&A if the opportunities come along, and we'll be as aggressive as we can be in terms of looking for them and making sure that they come at the right value, but we love that opportunity. Buyback is another great opportunity, again, with good cash flow and a great balance sheet, we can put that cash to work, and we certainly could do it in the form of a buyback. So, look, our capital allocation philosophy and strategy hasn't changed. And with -- again, with a healthy balance sheet and a healthy cash flow, we can do some good things with that as we look forward to fiscal '24. Your second question of the one workday for a fiscal year. In this case, it would be about a 40 basis point benefit to growth -- sales growth. And think about it as about a 12 basis point benefit on bottom line on operating margin.

Operator:

Your next question comes from Shlomo Rosenbaum with Stifel Nicolas.

Todd Schneider:

Good question, Shlomo. We love it when our customers are hiring more employees and it certainly allows you to swim a little bit downstream then. But we've got to find ways to add value to customers even when they're in the more flattish type environment. That being said, there is still almost 10 million job openings. So that's very encouraging. We'd love to see those jobs filled. But we are -- we're going to find a way to be successful whether our customers are hiring at rapid rates or at much lower rates, we're going to find a way to be successful. And that is impacted by our ability to -- we would call it cross-sell, bring more value to the customers in other products and services that they may have with maybe a new business unit, but maybe within that business unit just selling more items. So there's a lot of inputs to that and how we categorize it. But we're -- we like the spot that we're in. And we think the products and services and the value proposition that we're providing is resonating with people. And would certainly love the economic to continue or even improve.

J. Michael Hansen:

Sure, Shlomo. Look, the First Aid margin was at 18.8% in Q4, still a really healthy place to be. And nothing noteworthy other than growth is -- organic growth still is very good, gross margin is still very good, and we continue to invest for the future. So nothing noteworthy there. From the all other perspective, the Fire operating margin in Q4 was slightly over 20 and so that's a great place for us in that business. The direct sale business was 3.5%. So quite a bit lower. And that business can move up and down and have a little bit more volatility than the other businesses just because of the nature of it. We still love the business. It grew nicely, but mix can have an outsized effect on that operating margin and it sort of did in the fourth quarter. As we move forward, from a First Aid perspective, we still expect the really positive margins that we've seen as we've discussed a few minutes ago. And we still expect Fire to continue to perform very, very well like it has in fiscal '23.

Operator:

Your next question comes from Toni Kaplan from Morgan Stanley.

Todd Schneider:

Thank you, Toni. We -- the answer is yes. All the above is what we're doing. We see a long runway in the First Aid business. We're -- the vast majority of what we sell are people that are do-it-yourself. There's -- as you think about, there's 16 million businesses in North America, there is a significant opportunity to sell our First Aid cabinet services, but our other services as well, whether they be AEDs, wash stations, those types of items that really have value to customers. And that health, safety, compliance tailwind, we don't see that changing. People are investing in their organizations, and we see that as a tailwind for many years to come and the market is really, really big. So that's where we're -- we love the growth that we're seeing in that business, and we're continuing to invest appropriately to make sure that it continues.

J. Michael Hansen:

Toni, that's a really difficult thing to try to say one point of inflation equals x points of margin. That's pretty difficult to do. But I'd maybe say this. When you think about our cost structure, we've got a really nice mix of cost types, if you will. So we certainly have things like labor that are impacted by inflationary pressures. And we work very, very hard on that over the course of the last five years, I would say. And we're in a good spot. But then we also have this large part of our cost structure that is amortizing. And it allows us to effectively see any inflationary impacts coming if they are coming and plan for them accordingly. And so we may plan for that in terms of our pricing approach, we may plan for that in terms of other initiatives. But the point is, because we're amortizing those costs, it takes a while for inflation to get to us, and during that period of time, we can plan and we can anticipate better. While we're on that bucket, I would say our global supply chain really does a nice job of not being single sourced. And so when there are some inflationary pressures in various parts of the world or in our supply chain, because we're not single source, we have the ability to move volume a little bit in flex, we have choices. And that's important for us. And it has been important for us over the course of the last two years in the high inflationary environment. And then the third bucket that I would throw out is sort of that infrastructure. We've got a large infrastructure, 400-plus locations around the country. And when we are growing really nicely, we're leveraging it very, very well, and we've done that over the course of the last few years. And so Toni, we're not a product company that is dramatically affected by today's inflation. And you hear us talk about pricing is just one lever that we have to get margin improvement. And that's because of, number one, we've got this sort of diverse cost structure. And number two, we've got a lot of initiatives and things that we're working on. And it gives us choices. And that's the -- that's really the key for us in terms of fighting inflation. So hopefully, that answers the question. It's not an easy metric for us because of the cost structure that we have and the initiatives that we have, and it also depends on where the inflation comes from.

Operator:

And this concludes our question-and-answer session. I'd like to turn the call back to Mr. Mattingley for any additional or closing remarks.

Operator:

This concludes today's conference call. Thank you for attending.

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.

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

Operator:

[Operator Instructions]. And our first question comes from Manav Patnaik from Barclays. Please go ahead, Manav.

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.

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 that 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.

Andrew Steinerman:

Hi. Without 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?

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?

Operator:

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

Todd M. Schneider:

Faiza, I'll start, and then Mike can certainly chime in. As far as our results are quite good, we usually do grow in multiples of GDP. And -- but we like where we are and where we're heading. Regarding SAP, we're very much in the early innings of SAP. That is the umbrella of our technology investment or the digitization of our business. And we went through all the implementation, which we're still -- there's always work to be done there. But nevertheless, we're seeing benefits from our technology investments. Our customers are seeing benefits from our technology investments. And we certainly love when we derive efficiencies from technology, but we get even more excited when our customers see benefits, giving us a competitive advantage in the marketplace. So we've talked in the past about the certain advantages that we get with technology investments. My Cintas portal is one of the more obvious ones that the customers see an advantage. They get to be able to manage their account. They make request the majority of our requests are done outside of normal business hours. So our customers don't always just want to be able to deal with our service provider in person or call our office during normal business hours. So they like to be able to do the flexibility to do business on their time and to get things off their list and move it on to ours. And that portal allows that flexibility for them and it's showing up in customer satisfaction and customer loyalty. So yes, very much on the early innings of our technology deployment, I can certainly speak more to that, if you like.

Faiza Alwy:

Great, that's really helpful. Maybe on the -- I mean, I would love to hear more about the technology so I'll leave it up to you in terms of how much more you'd like to share. But maybe specifically on the healthcare vertical, could you talk about what the growth trends have been like there, what they were like this particular quarter and sort of how they've been trending?

Operator:

And our next question comes from George Tong from Goldman Sachs. Please go ahead George.

Todd M. Schneider:

Yes, thanks for the question George. I would say that the selling environment is very similar. It has not really changed much. Sales cycles, they're not elongating the -- what's going on with our customers, they're still fighting to bring people on to make sure that they're providing the right levels of service. And in these types of environments, we help provide value to them. We provide a benefit to them running their business. And in many cases, we're able to help customers save money from what they were doing. So I spoke earlier about when you walk into a customer and they're not a programmer, well they still have products that -- probably that they have procured on their own kind of a do-it-yourself and they're struggling to keep up with that. And in many cases, because of our scale and our ability to source products and the fact that we are already there, servicing them in many cases, we can provide great value for them and actually help lower their costs. So -- and we've seen that throughout the years, and that's a real benefit as we go through trying to provide value for our customers. So, generally speaking, George, I would say the selling environment is pretty similar -- not a whole lot of change over the past six months or so.

J. Michael Hansen:

George, I don't know if I can specifically separate the guidance raise. But clearly, we had a nice third quarter and the performance was strong from the organic growth to the gross margins to the operating margin. So a pretty solid quarter all the way through. And our guide for Q4 would suggest we expect more of the same. So the guide would suggest we expect another nice quarter. Hard to separate though for us exactly what the difference is because our internal expectations are a little bit different than our external, I'll say, consensus and guide.

Hans Hoffman:

Hi, this is Hans Hoffman on for Stephanie. Thanks for taking my question. Just wanted to ask on margins, specifically the First Aid and Safety gross margin. Obviously, really strong and almost 52%. Is that just a function of kind of lower margin PPE sales rolling off and higher-margin cabinets business kind of becoming a larger part of the mix or is there anything else kind of to call out on the performance there and how should we be thinking about margins in that business on a go-forward basis?

Hans Hoffman:

Got it, thanks. And then just for my follow-up, I wanted to ask on the -- all other segment. Clearly, really strong growth there in the quarter. And I know last quarter, you guys kind of talked about tougher comps, specifically in the Uniform Direct business in the second half of this year. I was just kind of curious what kind of drove the strong performance this quarter, as I think a lot of us kind of expected that to kind of show up in Q3?

Operator:

Our next question comes from Andrew Wittmann from R.W. Baird. Please go ahead Andrew.

J. Michael Hansen:

Sure. So I'll start with material cost, Andrew. Let me start with we source or direct the sourcing of more than 90% of our volume and more than 90% of our items have more than one source. And that's really important to keep in mind so that when our vendors may have inflationary pressures on them, the thing to remember is we have choices. And so sometimes that means we do have to take increases, but many times, it means we have -- we can flex and we can negotiate and we can -- again, we have choices. And so we don't always have to accept every vendor price increase that comes our way when we direct to sourcing ourselves and when we have multiple sources, that's really important. The other thing is, obviously, the amortization of this bucket of expenses allows us to see ahead, to anticipate what's coming. So as you can imagine, when a vendor does come to us and has a price increase, that -- it takes a while to, first of all, build the inventory and then it goes to our distribution centers. And then for after a turn, it comes into our rental locations, and that's where the amortization starts. And in month one, we have 1/18th of that inflation for garments, for example, 1/48th of that for entrance mats. And so you can kind of get a feel for it. It takes a long time for those inflationary pressures to come to us. That means we can do lots of planning. We can think about initiatives that we have going on, and we can accelerate some of those. We can think about process improvement and we can implement those, but we can also give in at least one annual price increase and maybe multiple price increases before that full inflation hits us. So we can really get ahead of that kind of cost. So we have choices, and we can really see ahead of that. And that gives us a really nice opportunity to plan the business without a lot of disruption. The other thing I'll say, Andrew, is we've got a lot of infrastructure. We've got a lot of facilities and trucks and things, rents. And those aren't quite as disrupted by inflation or at least immediately. And so again, we can get with our great growth, we can get some really nice leverage on that part of our cost structure. And then when you think about labor that you touched on, Andrew, we certainly want to make sure that we are maintaining the absolute best partner engagement that we can, and that means we like to be at market or slightly above market rates, that's important for us in terms of the labor rates. But we've talked about -- we've had a couple of things happen over the course of the last five or six years. One is, we had a lot of gene case synergies being realized over the course of the last six years, and that allowed us to be a little bit more aggressive on raising rates. So we were never caught flat footed in terms of when the labor challenges hit. That was -- that's been important to us, and it's been -- it has allowed us to kind of keep disruption down. But the other thing is, we've talked a lot about initiatives like Smart Truck. We talked a lot about the technology impacts in our facilities that allow us to be more efficient. So that means as we are growing, we don't need to add as many resources within the plants or on the routes, and that allows us to leverage that labor environment even in this period of time where we've got raising labor rates.

Andrew Wittmann:

Great, that's helpful. I guess just for my follow-up, I wanted to ask about, I guess, the balance sheet, Mike. I mean by -- in the next quarter or two, you'll be at about one times leverage, which is on the lower end of where you've historically run the company. And with the company doing effectively $2.2 billion of EBITDA and growing, there's a cash flow being very strong, you're going to have not only the ability to leverage the balance sheet plus the cash coming in, that's a lot of capital to deploy. How do you deploy that capital in a world where we haven't seen that amount of capital being -- having been deployed really since you guys did G&K, like you said six years ago, how do you keep the balance sheet geared appropriately and what are the opportunities that are out there for you?

Operator:

And our next question comes from Tim Mulrooney from William Blair. Please go ahead Tim.

Todd M. Schneider:

Well, certainly Sam, we watch the energy prices very closely. Fuel, as in diesel and gasoline, hasn't changed that much year over prior. Natural gas, we're watching, and we expect that, that will be a benefit in the near future and the electricity it doesn't change a whole lot. So I wouldn't say that you can count on significant tailwind there. We are certainly not when you think about energy as a percent of sales, I think we came in at 2.15% energy as a percent of sales. So we like when they're coming down, and we manage it as they're going up, but I wouldn't expect a real change there.

Samuel Kusswurm:

Got you. I appreciate the color there. I guess for a follow-up, you've spoken before about Smart Truck and I think you just mentioned the question previously for the riding software. Now it's been over a year since kind of for filling it out. I guess I'd be curious if you could help quantify a benefit to your margins and if you still think there is a sizable benefit remaining there from further durations or adoption?

Operator:

And our next question comes from Seth Weber from Wells Fargo. Please go ahead Seth.

J. Michael Hansen:

Well, I'll say free cash flow, I think your point is a good one from the perspective of -- it's a little bit transitory, but in the way of, look, we're coming off of a fiscal 2021 year where there wasn't a lot of growth and then really getting some nice acceleration into fiscal 2022 and 2023. And so there is a little bit of -- as we have used capacity through the pandemic, we've gotten back into a time period where we need some capacity here and there. And we've been really good at managing the capacity in many different ways, whether it is, for example, better efficiency in our existing wash alleys to adding a washer to adding a dryer to maybe then adding a new facility. But we've gotten to the point where it's time to add capacity again, and that's healthy. But I would call that there is a little bit of a mismatch there that we're catching up a bit from that. Having said that, look, we still expect free cash flow to be very, very strong. And whenever we're growing nicely, we're going to use some working capital. That's just the nature of our business. And that's a good thing. But you're right, there's a little bit of a catch-up in our capital expenditures, and we'll start to I'll say, those will get more in sync as we go into the next year and following years, assuming there's no other economic disruption.

J. Michael Hansen:

Yes, it's going to be close -- we certainly don't expect it to be down at that 2% level. It's going to be closer to that 4% level as we think about moving forward.

Heather Balsky:

Hi, thank you. You talked a fair amount during the call about your success with new customers and that a lot of them are what you call non-programmers. And I think a key theme that's been discussed on multiple calls is the shift to outsourcing and an acceleration kind of in that trend. I'm just curious, as you kind of look to what happened in the third quarter and as you're looking out, kind of your thoughts on how that trend continues, do you see it normalizing, or do you think there's further momentum into the next few years? Thanks.

Heather Balsky:

Great, thank you. And I guess as my follow-up, you discussed earlier that you are looking for M&A opportunities, although you don't know kind of when those might occur. I'm curious, can you talk about your priorities with regards to M&A, are there white space areas you want to fill in, is it geographic opportunities, just what are your priorities? Thanks.

Operator:

And our next question comes from Toni Kaplan from Morgan Stanley. Please go ahead Toni.

Todd M. Schneider:

Yes, Toni, [Technical Difficulty] today. The labor market in general is easier than it was six months ago. It's certainly not easy still. And so we're focused on staffing at the level to make sure that we provide really good customer service. And so that's where we are. We will adjust accordingly if the economic cycle changes. And we're watching it really closely, as you can imagine, to make sure that we're providing the right service, the right value to our customers. But we certainly have a watchful eye out to understand if demand starts to change based upon what's going on in the broader economy.

Todd M. Schneider:

Yes, Toni. So our pricing, it varies based upon -- pricing is a local subject. So we handle it differently in different businesses and different geographies. So that being said, yes, our pricing is above what it has been historically. That being said, the volume growth is the majority of our growth. And the reason being is the inflationary environment is such that we have to pass on a larger price increase than we do historically. Fortunately, the customers are -- they understand that. They understand the environment, and we've been very successful in providing the right levels of service so that they are open to those adjustments. We're not here to give guidance beyond Q4 but certainly, if the work of the Fed is such that it brings inflation down, then we'll manage our business accordingly to match that.

Operator:

And our next question comes from Shlomo Rosenbaum from Stifel. Please go ahead Shlomo.

Todd M. Schneider:

Yeah, thank you Shlomo for the question. We have a really diverse customer base. And so no, we are not more geared towards the medium-sized -- small, medium, large customers, geographic, different verticals. We have a really diverse customer base. And when you think about our business now, it is more geared towards the service economy than it is just goods producing. And so you name it, we've got it. We've got some small customers that are struggling. We've got some that are thriving. And that is really more dependent upon their business, there maybe -- their particular environment. And the same goes for the medium and the larger customers. It's a real mix and we work with them. So we have a customer who is particularly struggling, then we pivot and try to adjust accordingly. If their demand is such that it's coming down, then we pivot and handle it accordingly. But again, we also have other products and services that they might be procuring elsewhere where we might help them and provide cost savings to them. So, it varies based upon the customer but we are focused on providing that value and we will continue to focus on that.

J. Michael Hansen:

Yeah, well there is always pushback from customers, always have and always will be. The current environment with inflation levels make it an opportunity for us to do so better than historical, larger than historical. But I wouldn’t tell you that the environment has changed dramatically. But certainly inflation is starting to, it appears to come down and so we are managing our business accordingly and we will manage our customers accordingly as well.

Scott Schneeberger:

Thanks, good morning everyone. I guess, on -- the focus on margin question, could you provide a little bit of attribution, a 110 basis points just operating income improvement year-over-year is really impressive, could you kind of provide what was that via the topline as opposed to where were you getting efficiencies on the cost lines, and maybe elaboration to the extent you are able of what was Smart Truck, what was just automation in the facilities, what was SAP, really, that's where the question is focused on the cost lines, where are you getting the most benefit presently? Thanks.

Todd M. Schneider:

Scott, I'd just like to add, certainly what Mike was talking about, it starts with great growth. That is so critical to us. But part of our culture here is we're focused on extracting inefficiencies out of our business. And we've -- and I spoke earlier that there's a lot of inputs to revenue growth, and there's a lot of inputs to margin improvement. And Mike went through a list, which was pretty darn comprehensive. But generally speaking, the -- I'll just say that we're focused on and we're not going to just grow through pricing, and we're going to find a way in these types of environments to extract the inefficiencies so that we can grow margins, which in these type of inflationary environments are certainly is very challenging, but the team is doing a heck of a job, and we're quite proud of it.

Todd M. Schneider:

Yes. Certainly, Scott. It is -- you're talking about changing behavior within customers. So it tends to be a higher percentage of new customers that are coming on board that are participating at a high level. And the reason being is, it's new behavior, period. So then changing the customer -- the current customer behavior takes longer. And because they're used to a certain way of how we're doing business and some are leaning into it faster than others. But we're -- we see a very long runway here of benefits that we're going to get. And where does it show up? It shows up in so many places, but certainly trying to be easier to do business with is a focus here, and it makes it easier to do business with us. So I think you'll see that benefit for years to come.

Operator:

And at this time, there are no further questions. I'd like to turn the call back over to Paul Adler for closing remarks.

Operator:

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

Paul Adler:

Thanks, Russ, 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 second 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.

Mike Hansen:

Thanks, Todd, and good morning. Our fiscal 2023 second quarter revenue was $2.17 billion compared to $1.92 billion last year. The organic revenue growth rate adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations was 12.8%. Gross margin for the second quarter of fiscal '23 was $1 billion compared to $885.1 million last year, an increase of 15.5%. Gross margin as a percent of revenue was 47% for the second quarter of fiscal '23 compared to 46% last year. Energy expenses comprised of gasoline, natural gas and electricity were a headwind, increasing 10 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% for Uniform Rental and Facility Services. 50.5% for First Aid and Safety Services. 47.4% for Fire Protection Services, and 37.2% for Uniform Direct Sale. Operating income of $444.9 million compared to $381.2 million last year. Fiscal '23 second quarter operating income increased 16.7% and operating income margin increased 70 basis points to 20.5% from 19.8% last year. Our effective tax rate for the second quarter was 22.1% compared to 18% last year. The tax rate can move from period-to-period based on discrete events, including the amount of stock compensation expense. Net income for the second quarter was $324.3 million compared to $294.7 million last year, an increase of 10.1%. This year's diluted EPS of $3.12 compared to $2.76 last year, an increase of 13%. We had to overcome higher inflation, interest expense and tax rate, therefore we are especially pleased with these financial results. Cash flow remains strong on September 15th, 2022. We declared dividends and pay them on December 15th, 2022 in the amount of $117.4 million in quarterly dividends. To provide our annual -- Todd provided our annual financial guidance related to the guidance. Please note the following. Fiscal '22 included a gain on sale of operating assets in the first quarter and a gain on an equity method investment in the third quarter. Excluding these items, fiscal '22 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 '23 operating income is expected to be in the range of $1.75 billion to $1.79 billion compared to $1.55 billion in fiscal '22 after excluding the gains. Fiscal '23 interest expense is expected to be $113 million compared to $88.8 million in fiscal '22 due in part to higher interest rates. Our fiscal '23 effective tax rate is expected to be 20.7%. This compares to a rate of 17.9% in fiscal '22 after excluding the gains and their related tax impacts. Please keep the following in mind when modeling third quarter versus fourth quarter financial results. The number of work days in the third and fourth quarter of fiscal '23 are unchanged from fiscal '22. There are 64 days in the third quarter and 66 days in the fourth. Less work days results in less revenue to cover certain fixed and amortizing costs. In last year's third quarter, First Aid and Safety sold about $15 million in COVID test kits. We don't expect that revenue to repeat this year. Uniform Direct Sale organic revenue growth rates have been very strong year-to-date, however we expect these rates to be pressured in the second half of the fiscal year as the business faces increasingly challenging comparisons. Payroll taxes reset in our fiscal third quarter, increasing our SG&A costs on a sequential basis. 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 pandemic related setbacks or economic downturns. I'll turn it back over to Paul.

Operator:

[Operator Instructions] And our first question comes from Faiza Alwy from Deutsche Bank Securities. Please go ahead, Faiza.

Todd Schneider:

Good morning, Faiza. Thank you for your question. Yes, we, our beat on the revenue side are driven significantly by new business, it's continues to be a very attractive for us. But we are selling more items into our customer base. So it's pretty broad. I mentioned in the prepared comments that pricing is above what our historical experience has been. As you can imagine, due to the experience with inflation that we're seeing across our organization. But it is -- but the primary drivers volume growth and we're benefiting from that. We're investing for that and things are -- we like the trend there. As far as on the margin side, we are committed that we are not going to be solely focused on growing margins because of pricing. In fact, we are dedicated to finding efficiencies in our business, some of that is through revenue leverage just general revenue leverage that we get, but we are focused on finding efficiencies and you mentioned SAP certainly that technology is helping us significantly. We've had -- we've talked about our -- the digitization. Our digital transformation of our business that has been very, very important to us and we're seeing benefits whether it's in our routing efficiencies, productivity of our sales partners, be getting better reuse of our products, in-service inventory because of SAP. Those are all benefits that we're seeing and the marketplace is noticing it and it's helping us with a competitive advantage in the marketplace.

Todd Schneider:

Great. First off, we continue to watch our customer base very closely. We're looking at all of our data to see if there's some trends that we might see if customers are consuming less and what have you. So we're watching that. Now as far as in a recession every recession that I've been -- I've experienced while at Cintas over the last 33 years, we've always sold an attractive amount of new business. And the reason being is, we hope businesses and in an environment, that we help them, position them for success as far as, if they're in the business and they have less people, then somebody still has to take care of certain functions. So we're able to sell value there. If they are in an environment where they're looking to save money, there's in many cases we're able to save them money. It's not that they are. We're always asking for increased spend. It's just redirect the spend to us. And in many cases, we're able to help customers with that instead of spending it with some other vendor or with an outsourced item that they bring it to us. And we can bring efficiencies to them. So we fully expect that we -- our new business will be attractive in any type of economic environment. Certainly, we prefer when the economy is growing robustly, but we'll find ways to be successful in whatever the environment.

John Mazzoni:

Hi, this is John, filling in for Ashish. Congratulations on the strong results. Maybe just following-up on Faiza's question, could you talk more about kind of retention, as well as just what the current customer conversations are going like today? Thanks.

John Mazzoni:

That's great color. Thank you. Maybe quickly to follow-up. Could you just talk about capital allocation and if there's any change there, just what you're seeing today in M&A given some of the more challenging headwinds with inflationary pressures?

Operator:

Our next question comes from George Tong from Goldman Sachs. Please go ahead, George.

Todd Schneider:

Thank you, George, for the question, and good morning. Again, we have a very broad customer base. And we have a very broad product offering and we're blessed to have both and as a result we're organized in a manner where we're trying to make sure that our customers know everything that we have to offer, they don't always. We've spoken in the past about how going through the pandemic was really, really challenging. One of the positive outputs of that was the fact that our customer base saw the broadness of our offering and in many cases didn't realize we had products and services that we have. So we're focused on that. We're trying to provide more value. When we do that, it is, it helps us because we're -- when we stop our truck and the invoice is larger that's good leverage for us. So we'll provide more value to the customer and we're getting leverage in that manner. So all that's positive. So as far as the sales process being elongated. We're not saying that at this point. And as I mentioned earlier, we are certainly seeing a mix out there. Some customers are struggling and some are doing quite well and everything in-between. But generally speaking the customer base continues to head in a positive manner.

Todd Schneider:

Yes, good question, George. So no programmers continues to be a really great opportunity for us. The majority of our new accounts that we sell are in the no programmers section. And so we've been focused on that. We train our partners on that. And those that set of prospects sees value in what we provide. And as a result, the TAM is massive and so that's very exciting for us and we see very nice growth opportunities into the future.

Andy Wittmann:

I guess I wanted to ask on the First Aid segment, Mike. The margins in particular I think really stood out. You made the comment that you're getting some favorable mix shift as the PPE is rolling out. Last quarter's margins were also very good. I think better than most people expected. So it feels like there's something pretty sustainable in the margin rates. Would you agree with that assessment or is there something in there that we should be aware of as we come to 2Q fiscal '24 as a tough comp or something, maybe just some detail as to what's really driving these margins that are really frankly kind of a step function better than what you put up in the past?

Mike Hansen:

The only thing I might add is to specifically, Andy, nothing to call out that there is one-time or short-term in nature. It's just that the business is performing very, very well.

Todd Schneider:

Yes, Andy, good question. We're excited about the gross margin improvement that we're seeing in that business. Despite a 20 basis points headline that we're that we're up against in energy still. So, you're right, the SG&A is up. It's there is we're making investments in the business and appropriately so. Also some G&A medical costs, workers' comp and what have you are higher this quarter and there's always some puts and takes as it relates to that, but we are guiding towards for the whole year in that business, incrementals in the 20% to 30% range and we are, as I mentioned, that margin expansion is going to come in a number of ways, but revenue growth leverage, productivity, which is a broad word, right. There are so many areas where we get productivity improvements and pricing. But, yes, so we're focused on improving the margins there and we'll manage through the G&A investment, the SG&A investment as we move forward.

Tim Mulrooney:

Two questions. One on labor. We've heard from others -- other industries and companies that labor availability today still remains somewhat a governor growth. I mean has that been the case for you guys? Are you holding back in certain markets due to constraints around qualified labor and just generally how would you characterize the labor availability situation today versus say last quarter?

Tim Mulrooney:

That's good. That's good color, Todd. I mean, it's good to know, I mean there are some companies we've talked to that are literally dialing back on sales and marketing costs just because they can't find a labor to support the growth. So that's good to know you guys aren't in a situation. One more from me on wage rate inflation. I'm curious what that's running at approximately right now for your folks actually out on the routes and how does that compare to your historical averages? Thank you.

Operator:

And our next question comes from Manav Patnaik from Barclays. Please go ahead, Manav.

Todd Schneider:

Yes, Manav, thanks for the question. Yes, we always have anxiety, right. It's part of making sure you're sharp and but nevertheless it is, we do worry about do our, as an economy, do we talk ourselves into pulling back and is that happen to our customer base and does that happen as a ripple effect and but we're not seeing it. We're again, our customer base. It's so broad. Some are doing great. Some are not. But in general we like the direction of our customer base and we in many ways we hope they don't read the press and they stay focused on taking care of their business and investing for the future. And but we'll see what that holds and how the Fed handles things and how that might impact the general economy.

Manav Patnaik:

Yes, that's fair. And Mike maybe if I could just ask a follow-up just on CapEx and free-cash flow expectations for the year. Any changes or help there?

Operator:

Our next question comes from Andrew Steinerman from JPMorgan Securities. Please go ahead, Andrew.

Todd Schneider:

Andrew we -- as it relates to the amortization, certainly you've seen the growth that I've talked about a few times and that translates into more garments and other products being injected into our in-service inventory. And we love that. We love when that happens. And so we're seeing growth in the amortization. But we're able to leverage that pretty nicely so far. And you know our business well. We amortize many of those rental products. And so we have good foresight or visibility into what's coming. And that means we can plan, we can source, we can increase prices when necessary. So the visibility gives us a nice advantage in terms of how we think about other ways of operating the business. And as it relates to the second half of the year, look, we don't typically provide guidance on gross margin specifically. But certainly the guidance that we've provided contemplates improvement in our operating margins in the second half of the year and the growth that we have on the top line and all of the other initiatives and things we've got going on. They are performing well and enabling us to do that, to do that margin improvement even in a difficult period of time.

Heather Balsky:

Hi. Thank you for taking my question. So your guidance for the rest of the year, I guess, for the back half implies growth probably on the sales side and the 8% to 9% range, which is moderating from what you did in the first half. I'm curious if you could just walk us through kind of where you're assuming there might be some deceleration. Is that just as you come off lapping the COVID recovery and maybe where there might be opportunity for upside just based on the strength you've seen year-to-date?

Heather Balsky:

Thank you. And do you think, you know, are there areas that you're seeing in your business. You know, you've done well year-to-date. You've raised your guidance sort of I know First Aid and Safety is very strong right now. Other sort of areas in your business, whether it's certain customers like your opportunity in health care or other business lines where you're really seeing outperformance and kind of growth beyond your typical run rate.

Operator:

Our next question comes from Kartik Mehta from Northcoast Research. Please go ahead, Kartik.

Todd Schneider:

Kartik, it's a good question. I continue to talk about how broad our customer base is. So you name it, we see it. But the scarcity of employee -- of workers is an issue. Unemployment is still at a very, very low level. There's still, I think, 10 million job openings in the U.S. economy. So as a result of that, you know, people are, I think, careful about how they're handling their employees and being judicious about that.

Todd Schneider:

Yes. So we still see energy as a headwind. And when you go to the pump right now, it is certainly a little bit lower than it was a quarter ago. But about 40% of our spend on energy is in natural gas for our production facilities and electric. And that is not heading in the right direction. Natural gas prices are up and electric prices are up. And so but certainly the attention more gets to everybody fills up at the pump for the most part, but not as much focus on natural gas or electric. But we're seeing it and it's I'm sure it's affecting households as well.

Seth Weber:

Hi, guys, good morning and happy holidays. I wanted to ask another margin question. Mike or Todd, I mean, the guidance for this year, the back half, it seems like you're the guidance kind of implies a higher than normal incremental margin. And I think, Todd, you mentioned the Uniform business could be 20% to 30% incrementals this year. Is this -- are we moving into a scenario where incrementals could be higher than your normal call it 20% to 25% range and maybe are you more comfortable talking in like a 25% to 30% range for the business going forward. Thanks.

Seth Weber:

Okay. That's helpful. Thanks. And then just on the Fire business, the organic growth in the Fire business continues to be in this sort of mid to high teens range. Is that a sustainable number or do you feel like for Fire and just sort of maybe any color on really what's driving that unusually strong organic growth. Thanks.

Operator:

Our next question comes from Shlomo Rosenbaum from Stifel Nicolaus. Please go ahead, Shlomo.

Todd Schneider:

Shlomo, great question. It really depends upon -- our view of the what the staffing levels of our customers will be. It really depends upon where our relationship is some they'll share with us. Hey, calendar '23, here's what we're thinking. Others, they don't depending upon our relationship levels or their planning level. And so in that case, it's a little bit more reactive. So, you name it, we have that type of experience where it's very transparent and we have a good. We can see around the corner with our expectations there. And then some are just very reactive and we have to see what's going on with their customers. So but generally speaking with add stops, I would say, we see our experiences continues and the patterns that we have in the past. And I mentioned earlier that, I don't know, certainly Q1 speaking of the economy Q1, Q2 was GDP shrunk. Q3 was slightly positive. We'll see what Q4. holds in store for GDP. It's tough to tell, if we're in a technical recession or if we're not and what calendar '23 holds in store for us. But the employment situation in the U.S. is still tough to get people and as I mentioned there's 10 million job openings. We'll see if that continues to decline. But we're trying to make sure that we're positioned to grow and but as Mike mentioned, if the economy affects our customer base in a very negative manner, we'll be prepared to pivot and manage our cost structure appropriately and we're planning on being successful in whatever the economic environment brings to us.

Todd Schneider:

Shlomo, as I mentioned, in our prepared remarks, pricing is -- has always been a component of our growth. Same is the - what we went through with some serious economic turbulence with COVID-19 and what have you. So that being said, we're planning on growing our business most attractively through volume growth and getting leverage there and planning on growing margins via leverage on that revenue growth and finding efficiencies in our business. That being said, it's a very competitive environment. And as we talk to our customers, they certainly challenge us. And they want us to find efficiencies in our business and not just pass along cost to them and that's what we're focused on.

Scott Schneeberger:

Thanks very much. Good morning. Happy Holidays, everyone. First question in Uniform Rental. I'm just curious about the winning business you guys have obviously highlighted penetration of existing customers, strong volume growth, new customers. Could you speak to what is no programmer versus what is competitively won? Is there a lot of that activity right now of competitively won? And then if you could just kind of differentiate what you're seeing with large customers versus may be small and midsize in the context of that question. Thanks.

Scott Schneeberger:

Great. Thanks. And then as a follow-up, specifically, Uniform Direct sales, I think it was about 33%, 34% organic growth in the quarter. Very strong. I heard you mentioned on an earlier question that would be a segment facing some tougher comps in the back half of the fiscal year. If you just speak to kind of what the business activity has been there, what's driving the strong growth right now? What type of customers? Has it been particularly lumpy or is it been just a solid, broad based versus maybe just one or two big customer wins? Just a little bit more elaboration on that business line. Thanks.

Operator:

And our next question comes from Toni Kaplan from Morgan Stanley. Please go ahead, Toni.

Todd Schneider:

Yes, Toni, good question. As we think about pricing in the future, it certainly is above historical today. It's tough to predict what inflation holds in the future. But presuming that comes down, I'd say you'd see us closer to historical from a price adjustments. But it really depends upon what happens with the Fed, what happens with the economy, what happens with wage pressures are so many inputs. And that one's tough to predict. So but we're watching it very closely.

Mike Hansen:

Toni, I would say, it comes from a lot of different places and it's hard to put a number on any particular one of them. But, you know, a couple examples. Energy, we've kind of looked at that, as Todd mentioned earlier, still is a little bit of a headwind going forward. So we're not necessarily expecting we'll get a bunch of energy benefit in the second half of the year, but our revenue growth has been really strong and the performance the momentum has been good and that certainly will continue to help in the second half of the year when we grow at real nice levels like we've guided towards and like we've had in the first half of the year, that always helps our ability to drive better margins. But we've talked over the last year or so about important initiatives that we have. Those remain and continue to do well and those are things like our routing improvements through our smart truck initiative. And we have more of those, whether it is sourcing initiatives that Todd touched on in First Aid or others. But those initiatives become very important to us, too. And then there are just some timing of things, maybe some investment in the first half of the year that was really helping propel our growth and continue our momentum. That may not be at the same type of level in the second half of the year. So it's a lot of those different pieces that kind of fall together. And it's, you know, it's hard to put numbers on every single one of those.

Paul Adler:

All right. Well thank you for joining us this morning. We will issue our third quarter of fiscal '23 financial results in late March and we look forward to speaking with you again at that time. Take care.

Paul Adler:

Thank you. Yes, we were still on mute. So, 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 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.

Mike Hansen:

Thanks, Todd, and good morning. Our fiscal 2023 first quarter revenue was $2.17 billion compared to $1.9 billion last year. The organic revenue growth rate adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations was 13.9%. Gross margin for the first quarter of fiscal ‘23 was $1.03 billion compared to $902.8 million last year, an increase of 13.9%. Gross margin as a percent of revenue was 47.5% for the first quarter of fiscal ‘23 compared to 47.6% last year. Energy expenses comprised of gasoline, natural gas and electricity were a headwind increasing 30 basis points from last year. Gross margin percentage by business was 47.5% for Uniform Rental and Facility Services, 49.6% for First Aid and Safety Services, 48.8% for Fire Protection Services, and 37.3% for Uniform Direct Sale. Operating income of $440.1 million compared to $394.1 million last year. Excluding last year's first quarter gain totaling $12.1 million and recorded in selling and administrative expenses, fiscal '23 first quarter operating income increased 15.2% and operating income margin increased 20 basis points to 20.3% from 20.1% last year. Our effective tax rate for the first quarter was 14.8% compared to 11% last year. The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense. Net income for the first quarter was $351.7 million compared to $331.2 million last year. Last year's first quarter diluted EPS contained $0.09 from the previously mentioned gain and related income tax expense. Excluding the gain and the related income tax expense, this year's diluted EPS of $3.39 compared to $3.02 last year, an increase of 12.3%. First quarter operating cash flow increased 13.8%. On June 15, 2022, we paid shareholders $97.7 million in quarterly dividends. Also during the quarter, we purchased $210.8 million of Cintas common stock under our buyback program. We continue to allocate capital in many ways to improve shareholder return. Our strong balance sheet and cash flow enable us to do so consistently. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal '22 included not only the gain on sale of operating assets in the first quarter, but also a gain on an equity method investment in the third quarter. Excluding these items, fiscal '22 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 '23 operating income is expected to be in the range of $1.72 billion to $1.76 billion compared to $1.55 billion in fiscal ’22 after excluding the gains. Fiscal ‘23 interest expense is expected to be approximately $110 million compared to $88.8 million in fiscal '22 due in part to higher interest rates. Our fiscal ’23 effective tax rate is expected to be approximately 20%. This compares to a rate of 17.9% in fiscal ’22 after excluding the gains and their related tax impacts. The expected higher effective tax rate will negatively impact fiscal '23 diluted EPS by approximately $0.32 and diluted EPS growth by approximately 290 basis points. 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 pandemic related setbacks or economic downturns. I'll turn it back over to Paul.

Operator:

[Operator Instructions] We'll now take our first question from Ashish Sabadra of RBC Capital Markets. Please go ahead.

Todd Schneider:

Good morning, Ashish. This is Todd. Thanks for the question. Yeah, our new business is quite robust. We continue to be very successful in converting over no programmers into our programs in all of our businesses with the exception of fire, which obviously – they were all -- everyone's a programmer in that business, but we're having really good success there. And we look at the total addressable market and it's still incredibly large and growing. So that's exciting for us. But as far as the sales cycle, I haven't seen anything that would lead me to believe that the sales cycle is elongating. We've got really good momentum in our new business. I'm very encouraged by that. And as we've spoken about in the past, some of our investments that we have made are really paying off big in the form of some of our unique products in our rental line with our Carhartt products, our Chef Works and we've got a CareFlex line of scrubs through land out that's really successful in our unique restroom lines. And then our First Aid business, just the breadth of products that we're offering is really helping us get in the door and provide great products and services to our customers. They're also seeing our investments and technology that we've made, whether it's our garment tracking that is giving us a real advantage in the marketplace, our garment dispensing that we've seen. And I've spoken about our myCintas portal, which is unique and advantage in the marketplace. It makes it easier to do business with us and that's important for our customers and gives our sales partners confidence in walking in the door. So some really good things in -- heading in that direction.

Todd Schneider:

Yeah. So when you think about our energy spend, certainly, it's up over where we were a year over prior. It's down 10 basis points sequentially. Trying to anticipate exactly where that's going to head is challenging. Certainly, but I can tell you this, we are focused on efficiencies that we can drive in our business that will lower our needs for natural gas and lower our needs for gas at the pump. and we're leveraging those and that's helping us. That helps us with our CO2 emissions and it helps us with our efficiencies in our business and our spend. And we're confident we can continue to make strides there. So that's where exactly natural gas prices will go this winter, what's going on in Europe and other areas. It's tough to tell for sure, but we'll manage through it and we see opportunities to improve in our business and we're leveraging that.

Ashish Sabadra:

That's very helpful color. Thanks again.

Operator:

We will now take our next question from George Tong of Goldman Sachs. Please go ahead.

Todd Schneider:

Good morning, George. This is Todd. The majority of our accounts are -- come from no programmers. So that is -- that trend has been consistent over the years and continues. And in a marketplace where it's still difficult for employers to find people to work, offering a value of this and the way we handle it with uniforms is attractive for them. So it's another benefit for customers and they see that as an opportunity to attract their employees and retain their employees and we have one heck of an offering when it comes to that, that makes it really attractive for people. So I'd say those trends continue as they have in the past.

Todd Schneider:

Yeah, certainly. So the healthcare vertical is a very attractive vertical for us. It's growing nicely. Demographics are such in the United States and Canada that demand will continue. And we're seeing -- we have some unique offerings in that area with garment dispensing and our unique scrub line that makes it attractive. There's certainly other items that are -- that we rent into the healthcare market, whether it be an acute or non-acute. But we really like what we're seeing there from that demand. And I'll give you one example of a hospital that about six months ago, we sold a scrub rental program into that account. And it was a nice -- very nice sized customer that you would recognize a name. In that case, the nurses that we were providing the program to, they were wandering the products at home and the nurses voiced a concern about safety. Meaning, hey, what am I taking home? Am I wandering it? Am I wandering it correctly? And in that case, they chose Cintas because of a few things. One is, our technology that we've deployed that's unique that allows us to manage inventory for them, which provides the requisite access to the product, which is really, really important. And also helps control their costs based upon how we manage that inventory. But also improves the safety aspect of it, so separate from being an employee benefit, because those what I'll call potentially contaminated goods or scrubs. They don't go home. We laundry them appropriately via our hygienic process, hygienically cleaning process, which allows them to have the confidence that their process correctly and when that it's improved safety. And just as an anecdote, I mentioned that was about six months ago, just recently, we sold a microfiber wipe rental program to that same hospital. And so they use microfiber wipes in many ways, but the most obvious one is when they're cleaning guest rooms or patient rooms, we should say. In this case, that particular hospital they were purchasing those wipes and then they're having the, I'll call them hospital employees or EBS type folks that were cleaning those on their on-premise laundry. And in that case, they chose Cintas because it was able to -- we were able to reduce their labor costs. They're having trouble getting access to labor. And then again, we're processing those in a manner where they can have great confidence that they're processed correctly with a hygienically clean process. So you asked your original question, George, was about uniform demand in hospitals, which is quite good. But it also, there's so much that we can provide to those hospitals. And I just want to give one example to just give a little color around that.

Todd Schneider:

Thank you.

Andy Wittmann:

Great. Thanks for taking my questions. I guess, Mike, I just wanted to talk a little bit about what is implied in the guidance here. Maybe couple of different ways to think about that. But how much conservativism is baked into the guidance? And I made a couple of comments in the prepared remarks. Is there any change maybe sequentially to the guidance the way you're factoring in the macro outlook? And maybe any leading indicators that you can give us -- that gives us confidence that the economy is performing at the rate that you think it is?

Andy Wittmann:

It does. Thank you for that. I guess, I wanted to -- then follow-up with a question on, I guess, overall customer retention levels. Considering that you're getting above historical averages in price increases, I thought maybe it would be helpful to comment on that. And you guys have talked about the sales momentum in a couple of different ways, but if you look at sales productivity on a per head basis, is that metric up on a year-over-year basis as well?

Andy Wittmann:

Great. Thank you.

Operator:

We can now take our next question from Tim Mulrooney of William Blair. Please go ahead.