Cintas Corporation

Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Mike Hansen, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining us. With me today is Scott Farmer, Cintas Chairman of the Board and Chief Executive Officer, and Todd Schneider, Executive Vice President and Chief Operating Officer. We will discuss our fourth quarter results for fiscal 2020. After our commentary, we will be happy to answer your questions. 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 would 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 FCC. I'll now turn the call over to Scott Farmer.

Thank you, Mike, and good morning, everyone. As you know, this continues to be a challenging time for all of us, and we can't thank enough our employees, who we call partners, for doing all that they can to keep our customers' places of business clean, safe, and ready for the workday. On May 13th, we provided an update on how Cintas' business has been affected by the COVID-19 pandemic and how we were managing the business. COVID-19 continues to be a significant disruption to our economy and to business. Our priorities are unchanged. They include keeping our employees healthy and safe, and remaining committed to serving our customers in any way possible. I believe we're succeeding at both. Our employee partners have been consistent and diligent in their care of our customers, providing essential products and services to healthcare facilities, pharmaceutical companies, grocery store chains, food processing plants, and many others. We've provided healthcare customers with clean scrubs and microfiber towels and moths, We've provided tens of thousands of customers with disinfectant and sanitizer spray services. And we've provided tremendous amounts of personal protective equipment, including face masks, face shields, and other items to our customers to keep their employees safe. Our supply chain has worked feverishly to satisfy this demand. The demand for items like hand sanitizers and N95 respirators has increased tenfold in this pandemic. Our existing suppliers around the world have been key to us meeting this demand, and we thank them for their support. In addition, our scale enabled us to establish additional relationships with dozens of vendors to secure these scarce products. We continue to work to aid existing customers with the products and services that they desperately need, and our ability to access these products that others can't has enabled us to win new customers. We continue to communicate with our customers who remain idled and are considered on hold, and our focus is on being there to help them when they reopen. Before turning the call back to Mike, I want to conclude by stating that I'm thankful for the tremendous dedication of our employee partners. I'm proud of their ability to adapt and persevere in the midst of unprecedented adversity. In addition, I'm as excited as ever about our principal objective of exceeding our customers' expectations to maximize the long-term value of Cintas for our shareholders and working partners. Our value proposition of getting businesses ready for the workday by providing essential, unparalleled image, safety, cleanliness, and compliance arguably has never resonated more than it does today. This pandemic will not soon be forgotten, and its impact on society is likely transformative. We believe a new trend of greater focus on health, readiness, and outsourcing of non-core activities is underway. More healthcare scrubs are being professionally laundered and managed, so fewer are worn in public. Businesses, including universities and retail establishments, are requiring huge quantities of sanitizer and related services. Most businesses are providing larger budgets to align with proper cleaning protocols and supply chains of these key items are moving to the U.S. to reduce dependence on other nations. We believe Cintas is well positioned to benefit from this new normal. Now I'll turn the call back over to Mike.

Thanks, Scott. Our fiscal 24th quarter revenue was $1.62 billion. a decrease of 9.7% compared to last year's fourth quarter. Earnings per diluted share, or EPS, from continuing operations were $1.38, a decrease of 34.8% compared to last year's fourth quarter. Free cash flow for this year's fourth quarter was the highest it had been all year at $316 million. Organic revenue adjusted for acquisitions, foreign currency exchange rate fluctuations and differences in the number of work days declined 8.4% for the fourth quarter of fiscal 20. Organic revenue for the uniform rental and facility services operating segment declined 9.6%. Organic revenue for first aid and safety services operating segment increased 21.9%. Gross margin for the fourth quarter of fiscal 20 of $708 million decreased 14.1%. Gross margin as a percentage of revenue was 43.7% for the fourth quarter of fiscal 20 compared to 45.9% in the fourth quarter of fiscal 19. Selling and administrative expenses as a percentage of revenue were 30.9% in the fourth quarter of fiscal 20 and 28.3% in the fourth quarter of fiscal 19. Operating income for the fourth quarter of fiscal 20 of $207 million decreased 34%. Operating margin was 12.8% in the fourth quarter of fiscal 20 compared to 17.5% in fiscal 19. Our fiscal fourth quarter contained one less workday than the prior year fourth quarter. One less workday in a quarter has an impact of approximately 50 basis points on operating margin due to many large expenses, including rental material cost, depreciation expense, and amortization expense, being determined on a monthly basis instead of a workday basis. Fourth quarter of fiscal 20 operating income was affected by many items caused by COVID-19, including additional reserves on accounts receivable and inventory, severance and asset impairment expenses, and lower incentive compensation expense. Excluding these items, the operating margin was 15.5%. All of these items were recorded in selling and administrative expense. The additional inventory reserves account for slow-moving inventory, mostly in our uniform direct sale business, where customers in some of the most severely impacted industries, such as airlines and hotels, exist. Our effective tax rate on continuing operations for the fourth quarter of fiscal 20 was 20.4%, compared to 21.7 percent last year. The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense. Net income from continuing operations for the fourth quarter of fiscal 20 was $145 million, and reported earnings per diluted share were $1.35. At the onset of the pandemic, we drew on our credit facility in the amount of $200 million. This was for defensive purposes. We have a great cash flow business, and as the quarter progressed, cash generation exceeded our expectations. Cash generated was used not only to repay the $200 million borrowed against the revolver, but also to pay off a $200 million term loan. We ended the quarter carrying no variable debt. Our leverage calculation per our credit facility definition was 1.6 times debt to EBITDA. Our balance sheet is strong. We have an untapped credit facility of $1 billion and no material debt maturities in the next 12 months. Free cash flow for the year exceeded $1 billion and increased 34.1% over the prior fiscal year. We remain steadfast in our commitment to effectively deploying cash to increase shareholder value. We purchased $393 million of Cintas stock in fiscal 20 under our buyback authorizations. including $200 million in early March before the COVID-19 pandemic. The amount remaining under our buyback authorization is $1.1 billion. Looking ahead to fiscal 21, please note that there will be one more workday than in fiscal 20. One more workday will benefit fiscal 21 total revenue growth by 40 basis points. One more workday also benefits operating margin and EPS, Fiscal 21 operating margin will be about 12.5 basis points better in comparison to Fiscal 20 due to one more day of revenue. By quarter in comparison to Fiscal 20, the Fiscal 21 first quarter will contain one more workday, the second quarter will contain the same number of workdays, the third quarter will contain one less workday, and the fourth quarter will contain one more workday. Please keep the quarterly day differences in mind when modeling our fiscal 21 results. Before turning the call over to Todd Schneider to discuss the performance of each of our businesses, I want to comment on fiscal 21 financial guidance. Due to the recent increases in the number of people contracting COVID-19 and the actions governments are taking again in response, uncertainty remains about the pace of the economic recovery. Therefore, we are not providing annual guidance at this time. However, since we are more than halfway through our quarter, we are willing to provide our first quarter financial expectations, and they are as follows. Revenue in the range of $1.675 billion to $1.7 billion. Uniform rental and facility services segment organic revenue decline of 8% to 9%. First aid and safety services segment organic revenue increase approaching 10%. Earnings per diluted share of $2 to $2.20. And that implies a total operating margin in the range of 16.5% to 18% at the revenue midpoint. As Scott was quoted in today's earnings release, despite the uncertainty, we are confident in our ability to manage the short term and maintain focus on our long-term objectives. Todd will now make some comments about the performance of each of our businesses. Todd?

Thank you, Mike. The recent operating environment has certainly been challenging. As Scott mentioned, our focus has been on the safety of our partners and fulfilling the needs of our customers. At the onset of the pandemic, our leadership team attacked the crisis like a major acquisition or investment. Leaders from all areas of the company met daily to gather information, strategize, and execute. Daunting challenges were overcome, and many were viewed as opportunities facilitated by our strong corporate culture, which is rooted in positivity, competitive urgency, and concern for employees, customers, and other key stakeholders. The results have included a safe and healthy workforce, and a rise in net promoter scores from our customers. Our approach was to be highly flexible and take a long-term view of our relationship with our customers. Fortunately, we were deemed an essential service in all markets we operate in. However, many of our customers were closed, and even for those who were open, the impact on the financials of their business was substantial. For those customers who were open or ready to reopen, we were able to provide products and services that were critical to providing confidence to their employees and customers that they were in a safe environment. Products like soap, hand sanitizer, masks, and disinfectant spray services. I'll now turn to the fourth quarter financial performance of our businesses. The uniform rental and facility services operating segment includes the rental and servicing of uniforms, healthcare scrubs, masks, and PALS, and the provision of restroom supplies, hand sanitizers, and other facility products and services. The segment also includes the sale of items from our catalogs to our customers en route. Uniform rental and facility services revenue was $1.27 billion, a decrease of 11%. Excluding the impact of acquisitions, foreign currency exchange rate changes, and the difference in the number of work days, organic revenue declined 9.6%. Our uniform rental and facility services segment gross margin was 43.6% for the fourth quarter compared to 46.0% in last year's fourth quarter. We had one less workday in our fourth quarter, which had a negative impact of about 40 basis points in the current quarter. Lower production and service expenses as a percent of revenue compared to last year's fourth quarter were more than offset by amortization expense on uniforms, dust mats, towels, and other items rented to customers. Amortization expense was 300 basis points higher this fourth quarter compared to last. This non-cash expense is a significant headwind in the short term, but will improve in ensuing quarters because purchases of new items were reduced and more existing items will become fully amortized. As Mike stated, selling and administrative expenses were negatively affected by many items caused by the COVID-19 coronavirus. Excluding the impact of the applicable aforementioned items, uniform rental and facility services operating margin was 16.1% compared to 18.5% in the prior year period, a detrimental margin of 37%. Our first aid and safety services operating segment includes revenue from the sale and servicing of first aid products, personal protective equipment, and training. This segment's revenue for the fourth quarter was $196.3 million. Organic revenue for the segment increased 21.9%. Revenue from servicing of first aid cabinets decreased due to the business closures from stay in place orders. However, our business of providing personal protective equipment surge, overcoming the revenue declines of cabinet servicing. Sales, service, supply chain, finance, and others work quickly to provide current customers with masks, respirators, sanitizer, and other critical items needed. In addition, the division secured new business through our ability to source scarce resources quickly. The result was a 40.8% organic revenue growth rate in May. Businesses are echoing our mantra of there is nothing more important than the health and safety of our employees and customers. The first aid segment gross margin was 46.1% in the fourth quarter compared to 47.7% in last year's fourth quarter. Lower production and service expenses as a percent of revenue compared to last year's fourth quarter were more than offset by cost of goods sold. Cost of goods sold was 840 basis points higher this fourth quarter compared to last and is attributable to the increased proportion of revenue from personal protective equipment. Excluding the impact of the applicable previously mentioned items triggered by the COVID-19 coronavirus, the first aid and safety services operating margin was 18.2% compared to 15.4% in the prior year period, an incremental margin of 32%. Our fire protection services and uniform direct sale businesses are reported in all other categories. Fire protection services include the performance of testing, inspection, and maintenance of fire protection equipment, including extinguishers, alarms, sprinklers, and emergency lights. The uniform direct sale business includes the provision of custom-tailored apparel. All other revenue was $152 million, a decrease of 24.5%. Organic revenue declined 24.5%. The fire business organic revenue declined 12.4% due to the inability to access many businesses because of closures from stay-at-home orders. The uniform direct sale business organic revenue declined 39.5%. Revenue from our airline, cruise line, hospitality, and gaming customers largely falls within this segment. These industries have been amongst the hardest hit by the pandemic. That concludes our prepared remarks. We are happy to answer your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, for any questions, please press star 1 now. We will pause briefly for any questions. And we will take our first question today, and that is from Andrew Steinerman with JPMorgan Securities. Please go ahead with your question.

Hi. I was hoping you could give a comment about just small and medium-sized businesses in total. Obviously, it's an important part of your client base. Do you feel like the small businesses that haven't opened yet still are in a position to open? And if not, do you feel like when would we know more?

Well, Andrew, this is Scott. It's a, I'd say, uh, you know, we have ongoing conversations with our customers that are on hold. Uh, you know, and I would say that the majority of them intend to, to reopen. Um, a lot of it depends on how long this lasts and that sort of thing. But, um, you know, we, we feel pretty good about it so far. Uh, and, uh, You know, the indications that we get from them are that they do intend to reopen. But it's going to be, it's so cloudy right now looking out into the future. I don't know that any of them could, you know, on a state-by-state basis, maybe they could give us some sort of an indication of their timing. But, you know, in total, it's very difficult for us to be able to do that for you.

Okay. And so far they've felt like the federal support for small businesses during this juncture has been sufficient.

You know, I'm sure there are lots of opinions on that. But, yeah, I think so. I think that we'll find out, you know, if more support is coming based on what we understand is going on in Washington right now. both for businesses as well as for individuals. And I think that supporting the individual would, in effect, also be supporting the businesses because they'd have the money to spend to do so. But we'll find out more here in the coming weeks as that gets resolved in D.C.

Thank you, Scott. I appreciate it. Thank you. And we'll move on to our next question or comment, and that is from Seth Weber with RBC Capital Markets. Please go ahead with your question.

Hi, good morning, everybody. I hope you're doing well. Scott, in your prepared remarks, I heard several times you talk about the healthcare vertical and the opportunity there. Can you just talk about whether you are actually seeing, you know, real-time conversions here from hospitals that are switching to, you know, more outsourced scrub rental and just sort of the conversations that you're having there in that vertical in particular and I know you've sort of targeted a more specific sales effort there and just traction on how that's going. Thanks.

Sure, yeah. We have for the last few years had healthcare as a vertical that we've spent a lot of time and effort trying to cultivate. I think that you've all probably seen news reports of healthcare workers after work going to grocery stores or some other place and being harassed by other customers because the customers were afraid that their clothing was contaminated. And hospitals realize that. Healthcare workers realize that. Traditionally, particularly in the nursing end of healthcare, the nurses have bought their own scrubs and taking them home and wash them themselves. There has been a conversion to professional laundering of those scrubs so that healthcare workers don't take them home, don't wear them out of the hospital and so forth. And that would be something that we could handle for them. We have seen customers who have used our services relative to scrub rental in portions of the hospital, expand that into other areas of the hospital, and I think that that is the beginning of a movement that we will see more and more of as I look to the future.

Seth, this is Todd. Just to expand upon that, as Scott mentioned, you see the videos of folks in grocery stores where people are upset because what is on their garments? And what we're seeing is Employers are worried about what people come in contact with from the point they leave their home to the point they arrive at the hospital. And employees are worried about what they're taking home as well, whom they might come in contact with on the way home and what goes into their home laundry. So this professional cleaning, hygienically cleaned laundry is really important and we've had a number of customers many of which are names you would recognize that are very interested in broadening those programs to help their employees and their businesses.

And I would just add one more thing. That is not just the big hospital chains. It's also doctors' offices, dentists, health care workers in general. And so it's early, early stage, but we like the momentum that we're seeing there. and think that it has an opportunity as we look out in the future for an area of really good growth.

Okay, that's super helpful. Thank you. Mike, if I could just get a follow-up in. Just the delta for the quarter came in a little bit better than I think your kind of mid-quarter, late-quarter update. Was there anything that you would call out that drove just the relatively better end of the quarter? you know, one-time, you know, big one-time sales or anything, or is it just sort of, you know, trends just got a little bit better than you expected towards the end of May?

Yes, Todd talked a little bit about it in his remarks that first aid really finished with a strong May of 40% growth. And as much as anything, it was that kind of performance that led us beyond the guidance that we gave in mid-May.

Okay, super helpful, Beck. Thank you very much, guys.

Thank you, and we'll move on to our next question, and that is from George Tong with Goldman Sachs. Please go ahead with your question.

Hi, thanks. Good morning. Can you provide an update on your Uniform Rentals capacity plans, especially with the evolving pace of business reopenings, and what your capacity plans look might have in terms of an impact on decremental margins over the next several quarters?

Sure, George. The question is, what is our capacity plan? Just make sure I'm answering it the right way.

Yeah, historically or recently, you've indicated that you intend to maintain the majority of your capacity in anticipation of businesses reopening. And now with the pace of business reopenings, obviously in flux with COVID inflections, infections spiking in certain places, what are your latest thoughts on maintaining that capacity or will you plan to trim capacity given what we're seeing?

Well, let me sort of give this a broader view of how we've managed this up to this point. Todd mentioned in his remarks that early on we had daily meetings with our leadership team, and that's HR and IT and my direct reports, the presidents of the divisions, global supply chain, and we covered a number of different things in that in those meetings it started with the safety of our people and how do we get them the right personal protective gear and and how do we make sure that people were arriving at work aren't infected and how do we take temperature where do we get the thermometer all that sort of thing and then from there moving into the customers but part of it also included a review of business and and capacity and Generally speaking, we're happy with where we are from a capacity standpoint, although we continue to review it. We announced that we're shutting down an operation in Minnesota, and that was one that we had been looking at for some time. It was an acquired operation. It was an older facility with older equipment and inefficient layout. And in that market we have capacity to move the volume into other facilities that are more efficient, more modern. And so we announced that we're going to do that. We consistently review the operations and our capacity on a market-to-market basis, and we'll continue to do that looking forward. Todd, you got anything you want to add?

Yeah, George, great question. We're looking at this in the long term. We're excited about where our business is positioned. We think that the demands for our products and services moving forward are going to be healthy and when we look at it, we think of image, safety, cleanliness, are all things that businesses are very, very interested in. So we constantly are evaluating our capacity model. As you know, capacity is really a local subject. It rolls up to a corporate subject. But we look at it locally, and we're constantly evaluating it. But we're thinking long-term, and we like our position, and we're We like where the demand we believe is going to be coming for our products and services.

Got it. Very helpful. And then as a follow-up, can you provide some additional detail on how revenue trends evolved moving through the quarter and if your fiscal 1Q outlook assumes stable July run rates in August or if it assumes an improvement off of July levels?

So, George, we've seen obviously since the May call We've seen some nice improvement in the revenue run rates in which we were in the May timeframe down in the mid to high teens. We've seen that reduced to the mid to high single digits.

And we're expecting still slight improvement, but...

in a lot of improvement as we move forward. So we're seeing a little bit of improvement, but not much from this point.

Got it. Very helpful. Thank you.

Thank you. We'll move on to our next question, and that is from Hamza Mazzari with Jefferies. Please go ahead with your question.

Good morning. Thank you. My question is on how do you – The sustainability of first aid organic growth and also hygiene, if you could touch on what you saw there in terms of growth and whether you think that's sustainable for the balance of the year. Obviously, demand is still there, but do you think the market's well-supplied whereby that organic run rate drops off? Just any thoughts as to how you're thinking about those two specific areas?

Great. Thank you for the question. This is Todd. As Mike and Scott mentioned, trying to forecast out past Q1 is very challenging. The reason being is the spiking cases recently have changed things. It seems like every couple, two, three weeks is more like two or three months in the past. But we do see as cases rise, there's demand for PPE is still strong. As people, as we believe that drops off with hopefully remedies, vaccine eventually, people will be back to work and then they'll be consuming more product out of our first aid cabinets. So it's tough to forecast out past Q1. But nevertheless, we think we're in a really good spot.

Hans, this is Scott. I would add that I think as a general statement, one of the reasons we saw the big spike of these sales in May is because there was really a rush by just about every business out there to find personal protective gear, hand sanitizer, the things that they need to keep their workplace open and clean. And if they could find somebody who had it, they were buying months worth of supply because they were afraid that if they came back out into the market again to buy it, it may not be there. So it was almost to me like what we would see when we would sell a large direct sale customer We get a big first upfront order as everybody gets their clothes, and then it drops off to a more typical run rate after that. I think that we're going to continue to see the demand for the masks and the hand sanitizers and that sort of thing, but there was a big upfront purchase, a race to make sure that you had enough of it, and it'll settle back into an ongoing demand, certainly not at that 40% run rate. Now, relative to the hygiene services, my read on that is that that's a long-term change in the marketplace. I said in the May call that I think that what this pandemic has done to workplace cleanliness and sanitation is similar to what 9-11 did to public building security. You know, we have customers right now that have come to us and said, look, I have 7,000 branches. I need hand sanitizer stations in all of them, and I need somebody to come by on a regular basis and make sure that they're full. As for my employees and my customers, we've seen... large universities, Big Ten, Pac-10 universities come to us and have thousands of these hand sanitizer stations put up in their buildings across their campuses. They want us to do this because not only do we have the sanitizer and the station available, but the service to come by on a regular basis and make sure that they have the supply that they need as opposed to worrying about buying a whole bunch of sort of retail pump bottles, trying to put them in places and having those disappear because people grab them and walk away with them. So I think that our service and our service model in these areas is playing a big role in the marketplace today with our existing customers and our ability to sign new customers And once they start talking to us about things like hand sanitizers and surface sanitizer spray services and things like that, they start talking about their restroom services. And if they have people that need uniforms, we start talking about uniforms and entrance mats and the rest of the things that go along with that. So from a hygiene standpoint, I'm confident that this trend is going to continue.

One last item on that subject is we – What Scott mentioned, there's such a need for these products because they need to restore these folks, whether it's a bank branch or a hotel, whatever, a university. They need to restore confidence in their employees, their customers, their students, their guests, whatever it is. And these products are critical to restoring confidence And then what it's also doing for us is it is allowing, because it's such an important subject to these folks, it's allowing for us to get an audience at very high levels within organizations, higher than in many cases it's ever been before in organizations. And then we're able to speak to the comprehensiveness of what we can provide.

And it resonates. That's very helpful, Kalar. Just a follow-up question. I'll turn it over. Just on the SAP system, could you maybe talk about what kind of data that gives you now relative to what you didn't have before? I realize it's COVID-19 and demand environment is different, so you may see benefits of cross-selling come in later from the SAP. But just for investors, just to get a sense of what do you have today that gives you sort of a full view of the customer, that you didn't have before that can maybe help you longer term once you come out of COVID or during COVID even?

Hamza, thanks again for the question. This is Todd. SAP is doing a lot of things for us. We now have one view of our customer. Not completely, right, because we have it in our first aid business and our rental business, but a significant portion of our business. It's helping the speed at which we're able to retrieve data, which is helping us to make decisions in more real-time basis than in the past. And it's also helping with some other items that we're doing from a technology standpoint, give the customer a view of their spend with us, helps them be able to manage their business with us. And obviously there's some other benefits that we're seeing from a ability to reuse products, get a good view of our stock rooms, of our supply chain, et cetera. So it's been very beneficial.

Thank you.

Thank you. And we'll move on to our next question. And that is from Manav Petnak with Barclays. Please go ahead with your question.

Thank you. Good morning, gentlemen. My first question is just around the supply chain that you guys have. You talked earlier in the call about your scale allowing you to get additional relationship with vendors and so forth. Just broadly, have there been any other disruptions? Or would you say, net-net, it's been pretty smooth?

Manav, this is Scott. I would say that, first of all, I think this goes back to the morning meetings that we were having. We were getting real-time feedback on what was going on in the field, what our customers were looking for, what they needed, and that sort of thing. And we got a jump on it early by having the entire group together to say, we need to get out and source face masks, hand sanitizers, all of the hygiene products because there's a huge demand coming. And our supply chain folks did a fantastic job of going out and reacting to that. And I said on the last call that I think our supply chain has become a competitive advantage for us. We are in good and getting better stock position on most of these items and we have competitors that are still struggling to source it at all. And so I think that our supply chain has done a great job. So I would say disruption, no, I don't think there's been any disruption. There was some a little bit at the beginning when we first started trying to find some of these things, but they've done a great job in meeting the demand.

Got it. Thank you. And, you know, just a broader question around managing the cost base. I know there's obviously a lot of uncertainty. You talked about the Minnesota facility that you were looking at a while back. I think there's another one in the Milwaukee area, but just wondering how you're thinking about, you know, what sort of cost actions you need to take now, or is it just a way to see only if things get worse, do you, you know, cut more or rationalize more?

Mano, this is Todd. So from a cost standpoint, we know, we believe we've been through the worst of it. We believe we've shown a great ability to manage through that process. And we're continuing to adjust our cost structure in all facets as we move through this pandemic. We believe it's short term. We believe the long term of our business is It looks very, very positive. But we've successfully managed through what we believe is the worst of it, and we're going to manage through this process as we move forward, no matter what is thrown at us.

Got it. Thank you, guys.

Thank you. And we will move on to our next question, and that is from Andrew Whitman with RW Bayard. Please go ahead with your question.

Okay, thanks for taking my question. I guess I wanted to check in a little bit on the competitive environment. You know, every recession is different, but, you know, historically, if volumes wane, sometimes there can be increased price competition. So I was just wondering, Scott or Todd, if you could comment on what you're seeing from the competition, if it's too soon to say, or if there have been any changes in the marketplace, what those changes are, if any, and how you're reacting to them.

Andrew, this is Scott. I'll make some comments, and then if Todd has anything he wants to add, I'll turn it over to him. But overall, I think that it's difficult to say so far what's happening from a pricing standpoint as a result of COVID-19. We'll get anecdotal evidence on a market-by-market basis that things are competitive, that somebody's doing some crazy things, but we always seem to get that. I would tell you that one of the things that we have seen and seen evidence of is that we do have some competitors out there who are struggling to service their customers. I don't know whether that is supply chain issues that they can't get the product. whether it is that they have service issues or something's happened in their service force or what it is, but we have seen some signs of that. I wouldn't call that a major trend, but I think it is one of the things that is unique about this pandemic is that for one reason or another, Some of these businesses are just having a hard time operating as they ordinarily would. Scott, any other feedback?

Yeah, I think the other item is Scott mentioned that our supply chain organization has done an incredible job in helping position us to service our customers properly, and I completely agree with that. But one of the decisions we made very early on in one of the meetings that we referenced earlier is that Even if we're in a position where we are so unique because we have products that others don't, we're going to take a very long-term approach on how we handle that with the customers. We are going to be extremely fair on pricing and approach it as though it's not a one-time sale. It's going to be a long-term customer. And so... That's how we approached it. Generally speaking, the competitive market is, I would say, Andrew, I haven't seen any real change to the landscape besides some one-off items of lack of supply, those types of things, where we've garnered an opportunity that we've leveraged.

That makes sense. I guess the color to that question is, Is the stress that's out there in the marketplace, do you think, potentially going to shake loose opportunities for acquisitions in this environment as well?

It's tough to say where and when somebody might decide to sell their business, but I You can see a scenario around this in just about any industry where it could cause people to make decisions to sell their business. We obviously are in a position where we could afford to make acquisitions, and that would be something that we would be looking forward to do if the opportunities present themselves.

Thank you.

Thank you, and we'll move on to our next question or comment, and that is from Gary Bisbee with Bank of America, Merrill Lynch. Please go ahead with your question.

Hi. Hi, guys. Good morning. So I wanted to ask a question about the costs. The first quarter outlook, you know, implies sequentially improved revenue but sequentially lower costs. So can you just give us a sense, sort of, how much cost you've taken out or how we should think about how that will annualize through the P&L when you'll actually see all of that. And the last piece of that, should we think that some of the cost takeout you've done is structural or is it more really temporary that we should think most of it comes back at some point in the future when revenue begins to trend back to the historical level? Thank you.

Well, it's a little bit of all of the above there. We have eliminated all discretionary spending. Business travel is down. As a matter of fact, we're not allowing people to travel right now. So those kind of costs are down. Some training meetings where people ordinarily would be flying and traveling to go to training and staying in hotels isn't happening. Those are happening on you know, Zoom meetings and team meetings and things like that. We have made some changes to right-size, you know, the organization from a labor standpoint. You know, those can and will go up as volume comes back. and that sort of thing. We have, you know, we've eliminated, we announced that we're going to close one of our operations that's more of a permanent or at least a longer-term type of thing. But, you know, we do all of the above, and we'll continue to look at the changing nature of this, and we can head in either direction. We can manage the cost as we grow into it, or if it, you know, I think in May there were 44 states that had stay-in-place orders, general business restrictions that shut down businesses in those states. You know, if it goes back to that, well, we know what that world looks like, too. We've been there. You know, we're off mid to high teens in revenue, and we know what we need to do to right size, you know, to go back to that point. I don't think that direction is going to happen, but we're ready to go in either direction to manage the costs the way they need to be managed in order to continue to help the P&L statement and make a good margin.

I know you're not giving guidance beyond this quarter, but would a reasonable way to think about that moving forward, be that you think you could manage the cost structure relatively in line with change in revenue? So in other words, if the Q1 margin actually looks quite strong year over year, given the revenue headwinds, that you could keep that kind of pacing, or are there some step function costs that could come back in at some point when you do see revenue much stronger?

Yeah, Gary, you know, what we saw in the fourth quarter was such a precipitous drop in revenue that it's hard to react, but we did, and you're seeing some of those benefits of the reaction in the first quarter. Now, as we move, Scott talked a little bit about we will adapt to the revenue and the environment as we move forward, but there are going to be some things like discretionary spending and travel, that certainly will come back. We still have a hiring freeze on today. And as we get more clarity on the future, we will start to then think quite a bit more about adding to the capacity for growth like we normally would in a kind of a normal environment. And we'll get back to that kind of thing. But certainly we're seeing some benefits in the first quarter. of the moves and the decisions we made. And we're going to adapt as we move forward into the second quarter and the rest of the year, but it's a little bit unclear still what that environment looks like. And so we'll continue to make decisions rapidly so that we can do our best to adjust to the levels of revenue and the levels of capacity that are necessary.

Thank you. If I could sneak one more in. Historically in Q4, you've given the rentals mix by products. Is that something you have at your fingertips and be willing to share this year?

Sure. Our uniform rental business was 50% of the rental segment. Dust was 18%. Hygiene was 14%. Shop towels, 4%. Linen products, 10%. Catalog, 4%.

Thank you.

Not a lot of change from the last year in any of those categories.

Thank you. And we'll move on to our next question. And that is from Tim Mulrooney with William Blair. Please go ahead with your question.

Good morning, everybody. Scott, you mentioned at the beginning of this call about being there for your customers when they reopen. What percentage of your customer base would you say has reopened at this point? And also, can you help us understand what those conversations look like when the customer reopens? Is it a slower ramp? Is there any sort of contract renegotiation, or do you just pick up where you left off? Thank you.

Well, first of all, we're dealing with a business owner or manager who did not make the decision themselves necessarily to shut their business down. And so the conversation is around what are your plans? When do you hope to reopen? help us understand, you know, what you think will happen in your business and how we can help you, you know, have you furloughed or let go any of your people. You know, we have large customers who have turned to us to help them develop cleaning protocol for their businesses. We can share some of that with you. Prior to the pandemic, you were just using these services. We have some other services that might help you to make sure that your workplace is clean and sanitized with various products and services that we can provide. Would you like us to help you get set up with those type of things? But really, it's to help them get to a point where they reopen. We look at it and say the lifetime value of these customers is really important to us, and we're not here today to talk about the contract and that sort of thing. We're here today to help you get reopened. As your business starts to come back, we can get into all the rest of the details of that sort of thing. And I would tell you, Tim, that we use the Net Promoter Score system to evaluate our you know, customer satisfaction, if you will, with our services. And we have seen a dramatic increase in net promoter scores as we have moved through this pandemic because of the way that we've helped them, because of the advice and the tools and the services that we can have. I would tell you that we're getting letters from, you know, presidents and CEOs of pretty big companies because of what we've done to help them. But it has improved our relationship with, as a general statement, across the board with our customers as we've helped them through this. And I'm proud of the way that our frontline people have been handling this. and we look forward to helping more and more of these customers come back online.

Hey, Tim, this is Todd. We have such a diverse customer base, both by industry and geographically. So that conversation with the customer really depends upon what's going on in their business, where they are geographically. Some of them, they're opening back up, and they had no revenue. before they opened back up. Some had virtually all their revenue. And that conversation, as you can imagine, varies dramatically depending upon what they were experiencing in their business. But generally speaking, most were impacted, even those who remained open. And we worked with them. We worked with the customers, and they said, hey, we can only afford so much. We said, well, let's adjust your spend with us down in this area, but we can help you with these areas that are so critical to restoring confidence in your employees and your customers that they're operating in a safe environment. And that helped them, and it helped us to – is helping us to bring more value to our customers.

That's all great color. Thank you. Thank you, Scott. A strong increase in net promoter scores is an encouraging sign. Thank you, and good luck next quarter.

Thanks, Tim. Thank you.

Thank you. And we'll move on to our next question, and that is from Toni Kaplan with Morgan Stanley. Please go ahead with your question.

Thanks very much. In the past, you've talked about how about 60% of your growth comes from converting no programmers. I'm just curious, in this environment, are you seeing a change in that mix? Are you seeing higher growth from existing customers? Are you seeing maybe new customers signing up for the hygiene products? Just trying to think about how that growth dynamic has been changing in this COVID period.

Tony, this is Scott. We're a couple of few months into this, so it might be difficult for us to give you any hard data on that. But clearly, for certain products, both existing customers who haven't used it from us in the past and prospects, need it and so we are we're working very hard on both sides of that to to provide that to businesses I think that there are businesses that may not have typically been users of our services that are looking to us now and saying there's an opportunity there's a company out there that can provide this stuff to us and provided on a regular basis where we don't have to worry about it anymore. We should call them and talk to them. So I think there's some opportunity in the no-programmer market for us to broaden our opportunity to continue to grow.

And, Todd, maybe talk a little bit about sales rep productivity that we're seeing right now.

Yeah, thank you, Mike. Tony, our sales rep productivity, I am so impressed by their creativity and by their tenacity, productivity is doing really, really well. It's in part because of our culture, because of our partners, and because we have products and services that people want and need to, again, help restore confidence in their employees and their customers, clients, etc. As you can imagine, our sales partners aren't exactly physically in front of folks nearly as much as they were, but they're busy. They're busy at all time levels and doing it via calls, Teams calls, Zoom, phone calls, you name it. We're very encouraged by that.

That's great. I was hoping you could give an update on the final amount that you've spent on SAP this year and what you expect to spend next year, and just an update on any benefits that you're seeing so far from the implementation.

The spend this year, Tony, has generally been in that recurring, the implementation costs and the training and consulting costs, and we've talked over the last few years about about $12 million annually of that for the last several years, and that amount will drop off as we've completed that rental rollout. From the perspective of the benefits, Todd talked a little bit about the information that's available, and sometimes that's hard to quantify, especially in the short term. We're seeing the sales productivity be good, We're seeing some good information on the one view of the customer, the online portal information. And so those are going to drive some benefits, but it's going to take a little bit of time to see that, and it's pretty difficult at this point to quantify what that might be.

That's great. And the 12 goes to zero next year?

Yes. I mean, it does drop off. Tony, in the midst of this changing environment dealing with the pandemic, it's going to be a little bit hard to say that's going to be X basis points for the year, but that $12 million does drop off as that implementation has been completed.

Great. Thank you.

Thank you. And we'll take our next question. And that is from Shaloma Rosenbaum with Stiefel Nicholas. Please go ahead with your question.

Hi, thank you very much for taking my questions. Hey, Mike, is there any way you could help investors quantify the opportunity for the scrubs rentals in Cintas? Like what's the opportunity just in general into healthcare with that? And you know, how much of your sales are any way into healthcare? And is there like a way to think about the pull through? In other words, we're hearing a lot of it. This is a great opportunity and conceptually we can understand that we're trying to figure out like when you put pen to paper, what could this mean for you guys?

Well, Shlomo, Scott talked about the healthcare opportunity a little bit earlier and we love the, we love the opportunity. We even, we, we loved it before the pandemic, but, but as we sit here today, We like it even more. It's about 7% of our total revenue, and we think that's got a real opportunity to grow. You know, it's hard to put pen to paper and give you a specific number, especially when we are in the midst of this pandemic environment. But we love the opportunity, and when we get things like scrub rental products into hospitals, We are there almost every day, and that invites more and more opportunities, whether it's in microfiber or first aid or other types of CENTOS opportunities. We love being there with our customer and talking to them about the challenges that they face, and so it generally can lead to more enterprise-type sales at those big hospitals and And as we move forward, Scott talked a little bit about we're seeing this cleanliness idea move to the smaller healthcare facilities as well, and that creates opportunity in the scrubs, in the microfiber, and other places. So we really do like the opportunity as we move forward, but it's pretty difficult to put a specific number on it right now.

All right, thank you. I appreciate that. And then maybe just one for Scott. I know you talked enthusiastically about the opportunity you had with your supply chain and that it's a real differentiator and your ability to access very high levels of the organizations. Now, you've had a very long, successful career in this industry. How would you rank this opportunity now versus what you've seen in different points in time in your career in terms of being able to have access and then potentially be able to capitalize on that in terms of driving your business forward in terms of additional sales because of that access at a higher level of the organization?

Well, Shlomo, you're right. I've been around for a while, sometimes longer than I can believe. I started in 1981 right out of college, so I've seen a lot happen in this business and in this industry. I have always looked at this business with the thought that we have great opportunities ahead of us, and so it's tough for me to say that this is better than others, but There are people that when I first started going to the trade association meetings didn't think the entire industry of the rental industry could do, you know, the kind of revenue that our company alone is doing now. And so, you know, we've been able to grow through all of this. I look out into the future and I say I'm very excited about the opportunities that lie ahead for us. relative to our current position, the things that we have to offer businesses across so many different segments that they really, really need right now. I think we're in a very good position, and obviously all of us, need to resolve this pandemic. And, you know, I read some great news this morning that one of the reports I saw, I think it was in the Wall Street Journal, said Pfizer thinks that they might have approval sometime in October for a rollout of a vaccine in January. And whether it's January or February or whenever it is, if you think about it, this is July, end of July. And so we're closing in on on this race for a vaccine. And hopefully when that happens, we'll get back to a new normal where all the businesses can open back up. And I think when that happens, we can really maximize our opportunities.

Thank you very much.

We'll take our next question, and that is from Scott Schneeberger with Oppenheimer. Please go ahead with your question.

Thanks very much. Good morning. I was hoping to focus on the travel and hospitality and markets, airlines, cruise, hotel, gaming, which look like they may have a bit of a tale of some trouble. Just curious, your conversations, I know you're not providing guidance beyond the current quarter. How should we think, based on conversations you've had with those customers, the good and the bad of consideration here? looking out over the coming fiscal year of just anecdotally what you think are some puts and takes we should keep in mind. Thanks.

Scott, this is Todd. Certainly those folks, those customers in the hospitality business, the travel industry, let's say, have been, they're facing some serious headwinds. But our conversations with them is that they're looking at it long term and They're certainly worried about business travel coming back leisure travel. They think we'll bounce back faster But we're we're working with them at very high levels and in in the case of a few Specifically we worked on teams to help them with their cleaning protocols to help them establish how to provide a safe environment for their guests and And it really all gets back to confidence. The guests have to feel confident that they can travel and be safe. And we are an important portion of that. Now certainly they're not buying certain products such as garments from us at the rates that we would like and frankly that they would like. But we do have other products and services that they need to help restore confidence And that is an important investment that they have to make prior to even their revenues coming back to a large degree. So they see that much value in it that they're investing in it in the near term and hoping that the guest traffic comes back. And as you know, that is really a subject that depends upon where they are geographically, what type of properties, etc., But we're all in hopes that, as Scott mentioned, that we get to remedies and certainly a vaccine very quickly. That way the ultimate confidence can be restored.

That is all primarily direct sale business for us as well, so at least on the uniform side. So the vast majority of that is reflected in our direct sale business. results. And, you know, they obviously have been hit probably the hardest of all of the segments out there. And, you know, maybe that means that it's going to take them longer to recover. But, you know, at some point looking out into the future, I think we all agree that we're going to travel somewhere. We're going to stay someplace when we get there. And as Todd says, their ability to show us as customers of theirs that we're safe, that we are on a clean airplane and staying in a clean hotel and eating at a clean restaurant, the sooner all that happens and they can gain our confidence, the more likely it is that we're all going to begin to take advantage of what they have to offer. But those industries are going to be around. They're not going to go away. This is This may change it in some ways, but they will be out there. They will recover.

Great. Thanks, Scott and Todd. And then just a quick follow-up on a different subject. Scott, you were touching earlier on the cash availability and consideration of M&A in this environment. Just want a bigger picture of thoughts on capital allocation for the company because you do have flexibility. Are you going to sit for a while and watch and wait and see what happens and be conservative? Or might we see you becoming offensive with M&A you've addressed, but also other uses of cash, maybe return of capital and thoughts there? Thanks.

Well, yeah. I think that our priorities have been, and I think looking forward will continue to be, that we would like to make acquisitions. We would like to make investments that would help us continue to grow the business. Mergers and acquisitions would be a great way for us to do that. You know, we also have, you know, a long track record of increasing our dividend. And, you know, those decisions will be made at a future point about what next year's or what our next dividend would be. But that is an important priority for us. And obviously, as you have seen in the past, even into the spring, stock buybacks have played a role when opportunities present themselves. I would say that sort of attitude approach, you know, is likely to continue as we look out in the future, when and, you know, how much and things like that depend on what opportunities present themselves. But our priorities really haven't changed. If we had an opportunity to make an acquisition, you know, now we would certainly want to look at that and take advantage of that opportunity.

Thanks.

Thank you. At this time, there are no further questions, so I'll turn the conference back over to Mike Hansen for any closing remarks.

Well, thank you for joining us this morning, and we look forward to talking with you again after our first quarter, and that will likely be in mid to late September. So thank you, and have a great rest of your day.

Thank you, ladies and gentlemen. This concludes today's conference. All participants may now disconnect.