Cintas Corporation announced their Fiscal 2023 Fourth Quarter and Full Year Results Conference Call, which was led by Vice President, Treasurer and Investor Relations, Jared Mattingley. Todd Schneider, President and Chief Executive Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer, discussed the fourth quarter results. Total revenue grew 10.1%, with organic growth rate of 10.3%. Gross margin increased to 47.7%, while operating income increased 16.4% and operating margin increased 110 basis points to 20.6%.

In the fourth quarter of fiscal year '23, Cintas saw a record $8.82 billion in revenue, an increase of 12.2%, and organic growth of 12.2%. Earnings per diluted share for the quarter were $3.33, an increase of 18.5% year-over-year, and operating income grew 13.6%. The company also increased their quarterly per share dividend by 21.1%, and issued their third ESG report.

The Uniform Rental and Facility Services operating segment had revenue of $1.77 billion in the fourth quarter of fiscal '23, with organic growth of 9.1%. The revenue mix was 48% for Uniform Rental, 18% for dust, 16% for hygiene, 4% for shop towels, 10% for linen, and 4% for catalog revenue. The First Aid and Safety Services operating segment had revenue of $249.8 million with organic growth of 14.1%. The All Other segment had revenue of $261.5 million, with fire business revenue of $173.5 million and organic growth of 17.3%, and Uniform Direct Sale business revenue of $88 million with organic growth of 11.5%. Gross margin for the fourth quarter of fiscal '23 was $1.09 billion, with a percent of revenue of 47.7%, an increase of 210 basis points. Energy expenses were a tailwind, decreasing 65 basis points from last year.

In the fourth quarter of fiscal '23, gross margin percentage 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. Operating income was $470.8 million compared to $404.4 million last year, and net income was $346.2 million compared to $294.5 million last year. For fiscal '24, the company will focus on branding, ESG and technology to provide competitive advantages.

Cintas has been making progress in branding, ESG goals, and sustainable solutions, and is continuing its digital transformation journey with the help of technology partners such as SAP, Verizon, and Google. For fiscal year '24, Cintas expects a revenue growth rate of 6.1-7.8% and a diluted EPS growth rate of 6.6-10.5%.

Cintas has been raising prices to their B2B customers due to cost inputs, and for fiscal year '24, interest expense is expected to be $98 million compared to $109.5 million in fiscal year '23. The effective tax rate for fiscal '24 is expected to be 21.3%, negatively impacting EPS growth by about 120 basis points. The future of Cintas remains bright and the company is not factoring in any share buybacks or economic disruptions into their guidance. There is one more workday in the fiscal third quarter of '24 compared to '23.

The team has done an excellent job of managing input costs, and they do not rely on pricing as the only way to increase margin. The guide for fiscal '24 reflects attractive incremental margins, and the fourth quarter of fiscal '23 saw an increase of 110 basis points in margins. The company is not assuming any significant economic disruptions or downturn for their guide.

Todd Schneider explains that their business is doing well, with good sales productivity, customer retention, and interest in their products and services. They are also benefiting from their vertical sales strategy. He then goes on to explain that their partnership with Google is providing them with better, faster, smarter, and cheaper data storage, as well as other benefits due to the strong relationship between Google, SAP, and their own company.

This partnership between SAP and Google Cloud will give access to advanced AI and machine learning capabilities. This will help the sales organization by providing them with the next best prospect to call on, and the next best product to offer customers. It will also enhance their Smart Truck technology with Google Maps, saving time and energy. Lastly, it will help the service team to make sure they are in front of the right customers at the right time.

The First Aid and Safety Services business is performing well and the growth is helping the company gain leverage. During the peak of the pandemic, PPE and safety sales were higher, but now the mix of business is back to repeat sales and higher margins. The value proposition is resonating with customers who are investing in health and wellness, and the company is also leveraging inefficiencies in the business.

Todd Schneider provides insight into the company's vertical sales strategy, which focuses on health care, education, and government. He explains that the company has organized around these verticals and offers products and services tailored to them. As a result, customer retention and new business is strong and the demographics of health care are attractive. Manav Patnaik then inquires about the competitive environment and changes within the two public competitors.

Todd Schneider explains that the know programmers market is doing well, and they have products and services that are attractive to them. He also states that the competitive landscape has not changed from that standpoint. Finally, he mentions that they have recently entered into a relationship with Google, but it is going to be a process before they start seeing any benefits from it.

Todd Schneider explains that while cross-selling has been beneficial for the company in the past, they are also interested in getting new customers through Fire and First Aid products, which do not completely overlap with their existing offerings. The company has an enterprise sales organization that will call a customer or prospect regardless of their starting point, and they will then expand the relationship from there.

J. Michael Hansen explains that the incremental margin for the company in fiscal '23 was 26.8%, with the goal of getting margins in the 20% to 30% range from quarter-to-quarter. However, the focus is on the full year and the margin can go up and down depending on what initiatives are rolled out. Justin Hauk then asks about the implied revenue growth of 7% in 2024, which is coming off of a 12% growth in 2023. Todd Schneider explains that the delta is due to pricing and that new business, retention, and existing sales are still strong.

In Q4, the company's growth was around 10%, which was lower than the 12.7% growth of the previous year. This was due to the easing of inflation and the drop in the cost of energy. Despite this, the company is still guiding towards incremental margins and operating margin expansion, which will not only be achieved through pricing but also through other levers. In addition, the company will face a headwind in terms of increased insurance costs and SG&A as a percentage of revenue. However, this is still lower than pre-COVID levels and there is structural SG&A leverage gain to be had.

Michael Hansen and Todd Schneider both discussed the company's self-insurance status and how they ended the year at 26.9% in SG&A. They mentioned that they have worked hard to get to that level and do not want to get back to the higher levels that they were at pre-COVID. They also discussed customer behaviors and budgets, sales cycles, and sales pipelines, noting that the environment has not changed significantly and that the sales process has not elongated. They believe they are well-positioned for the future and are planning for the long term.

The healthcare business has been strong for the company for a few years and is growing faster than average, currently representing 7% of revenue. The First Aid business saw pre-pandemic operating margins of 15%, but due to lower-margin PP&E in 2021 and 2022, the margins have gone up to 19%.

Todd Schneider and J. Michael Hansen of Mike or Todd discussed the improvements they have made to their business, such as sourcing, routing, sales productivity, and penetration opportunities. They attribute much of the success to the revenue mix, but also to the structural improvements they have made. They do not expect to give back any of the gains they have made, as they are real business improvements that are sustainable. As a result, they anticipate their business to exceed $1 billion in fiscal '24.

Todd Schneider states that they have not seen a change in their customer satisfaction and retention levels, and they are focused on making sure they continue to take great care of customers and stay attentive to their needs. He also says they have not seen a change in their ad stops metrics and are expecting that to continue.

Todd Schneider of First Aid Safety and Fire discusses the company's revenue guidance, which is expected to be in the 6% to 8% range. He states that while all three segments are expected to contribute to the range, there may be some segments that are above or below the range.

J. Michael Hansen explains that the company is expecting CapEx to be in the 3.5-4% of revenue range, which is historically typical. This spending will go towards capacity needs such as washers and dryers, as well as new buildings and other investments. Todd Schneider then adds that the company has been able to sustainably grow their uniforms business organically 9-11% in the last few quarters, even past the COVID recovery period.

The Uniform Rental business is doing well, with high customer satisfaction scores and improved customer retention rates. The company is investing in digital transformation and AI to increase efficiencies, partnering with Verizon, SAP, and Google to leverage opportunities in the marketplace.

Todd Schneider, from a tenured and experienced leadership team, assures that they are prepared to be successful in any economic environment. He acknowledges that the severity of a downturn in the economy would determine the specific measures they would take, but they are confident in their ability to remain successful nonetheless.

J. Michael Hansen discussed the company's capital allocation strategy for fiscal '24, which includes exploring M&A opportunities, as well as the possibility of a buyback. He also noted that the company has a healthy balance sheet and cash flow, which will allow them to put their capital to good use. Lastly, he mentioned that one extra workday would have a quantitative impact in fiscal '24 compared to '23.

Todd Schneider of Cintas Corporation discussed the strong hiring environment at the company's clients, noting that there are still 10 million job openings. He emphasized that Cintas must find ways to add value to customers even in a flattish environment, such as cross-selling and bringing more value to customers in other products and services.

J. Michael Hansen of First Aid and Safety talked about the margin of First Aid in the fourth quarter of fiscal '23, which was 18.8%. He also discussed the Fire operating margin, which was slightly over 20%, and the direct sale business, which was 3.5%. Hansen also talked about the expected positive margins of First Aid going forward and Fire continuing to perform well.

Todd Schneider discusses the potential for growth in the First Aid business, which is mainly driven by DIY customers. He notes that there is a large market for their products and services, such as AEDs and wash stations, and that the health and safety compliance tailwind is unlikely to change. J. Michael Hansen then explains that it is difficult to determine the exact impact of inflation on margin, but notes that it could have an effect.

The company has a diverse cost structure that helps protect it from inflation, including labor costs, amortizing costs, and infrastructure costs. The global supply chain is not single-sourced, allowing the company to move volume and make choices when inflationary pressures arise. The company has initiatives and pricing levers to fight inflation.

Jared Mattingley concluded the conference call by thanking the attendees and informing them that the first quarter fiscal '24 financial results will be released in September. He also mentioned that it is difficult to measure the cost structure and initiatives due to inflation. Toni Kaplan thanked him for his response.

This summary was generated with AI and may contain some inaccuracies.