Cintas Corporation

everyone and welcome to the Cintas quarterly earnings results conference today's call is being recorded at this time I'd like to turn the call over to Paul Adler Cintas vice president treasurer and investor relations please go ahead thanks April and good morning and thank you for joining us with me today is Scott Farmer Cintas chairman of the board and chief executive officer Todd Schneider executive vice president and chief operating officer and

and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our first quarter results for fiscal 2021. After our commentary, we will be happy to answer 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 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 FCC. I'll now turn the call over to Scott Farmer. Thank you, Paul.

This continues to be a challenging time, but our employees, who we call partners, are doing all they can do to keep our customers' places of business clean, safe, and ready for the workday. Our employee partners have remained diligent in their care of our customers, providing essential products and services, and they have remained diligent in their care of each other, and we can't thank them enough for their truly impressive achievements. Before we get into the financial results, I'd like to provide you with some examples of our interactions with our customers in the first quarter of our fiscal year so you have a better understanding of our business. The hospital system in Michigan provided isolation gowns to their staff and laundered them in the hospital. These garments are fluid resistant protective clothing worn by doctors and nurses. The hospital had difficulty staffing the laundry and suffered quality issues. The hospital system, a no programmer as we call it, decided to outsource the procurement and laundering to Cintas so they could concentrate on patient care. Another no programmer, a dental alliance with 55 locations in three states, signed with us for scrubs in a rental program for 550 wearers. Due to their satisfaction with the service, they are in discussions with us to add facility services products and first aid supplies. In California, one university system with many campuses signed a multi-year agreement for hand sanitizer service. In addition, our first aid business is providing them with a half a million dollars of hard to find gloves. To another university system in California, our first aid division is providing over a million face masks. A restaurant chain that has been a customer since 2007 had been struggling in the first few months of the pandemic. In talking with the customer, we listened and were empathetic and adjusted service frequencies and inventories in partnership with them. They were so pleased with the way that we treated them that they renewed our service agreement and added hand sanitizer stand service to every one of their restaurants. A casino customer in Ohio recently reopened after being dormant due to COVID-19 restrictions. In order to conduct business in the new environment, the casino added rental mask services and additional items to increase cleaning protocols, including dust mats and microfiber mops and towels. And a city government in Texas was a no programmer until they came to us for a hand sanitizer program for all of their government buildings. They were so happy with the execution that we gained their trust to provide some of their personal protective equipment needs as well. They were impressed with our ability to deliver hundreds of thousands of masks within days. These examples are just a handful of the many. and we're offered to highlight the following. Our opportunity to convert no-programmers to do-it-yourselfers remains robust. Scrubs and isolation gowns are indicative of a broad uniform rental opportunity. Our approach of being flexible with customers in the short term reaps long-term benefits. Our net promoter scores, which we use to measure customer satisfaction, have never been higher. Earning the trust of the customer enables further penetration and cross-selling, and our supply chain and service network are competitive advantages, enabling us to increase service to existing customers and add new customers by procuring and providing items in short supply. Our value proposition of getting businesses ready for the workday by providing essential unparalleled image, safety, cleanliness, and compliance has never resonated more than it does today. A new trend of greater focus on health, readiness, and outsourcing of non-core activities is underway. We are well positioned for this new normal. I'll turn the call over to Mike now for commentary on the financial results.

Mike? Thanks, Scott, and good morning. Our fiscal 2021 first quarter revenue was $1.75 billion, a decrease of 3.6% from last year's first quarter. Earnings per diluted share, or EPS, were $2.78, an increase of 19.8% from last year's first quarter. Free cash flow, which is defined as net cash provided by operating activities, less capital expenditures, for this year's first quarter was $281.4 million, an increase of 32.6%. Organic revenue adjusted for acquisitions, foreign currency exchange rate fluctuations, and differences in the number of work days declined 5% for the first quarter of fiscal 2021. Organic revenue for their uniform rental and facility services operating segment declined 5.4%. Organic revenue for the first aid and safety services operating segment increased 17.1%. First margin for the first quarter of fiscal 21 of $826.2 million decreased 2.7%. Gross margin as a percentage of revenue, 47.3% for the first quarter of fiscal 21, compared to 46.9% in the first quarter of fiscal 20. Selling and administrative expenses as a percentage of revenue were 27.3% in the first quarter and 30% in the first quarter of fiscal 20. Fiscal 21 first quarter results benefited from lower expenses as a percentage of revenue in many areas, including discretionary spending. Operating income for the first quarter of fiscal 21 of $349.7 million increased 14.2%. Operating margin was 20% in the first quarter of fiscal 21 compared to 16.9% in the first quarter of fiscal 20. Our fiscal first quarter contained one more workday than the prior year first quarter. One more 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 on a workday basis. Our effective tax rate on continuing operations for the first quarter of fiscal 21 was 7.8% compared to 10.1% 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 of fiscal 21 was $300 million, an increase of 19.6%. Earnings per diluted share were $2.78, an increase of 19.8% from last year's first quarter. In addition to the solid financial performance, we continue to generate strong cash flow. First quarter free cash flow was $281.4 million, an increase of 32.6% compared to last year. Our leverage calculation for 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. For financial modeling purposes, please note that there will be one more workday in our fiscal 21 than in our fiscal 20. One more day will benefit fiscal 21 total revenue growth by 40 basis points. One more workday also benefits operating margin and EPS. Fiscal 21 operating income margin will be about 12.5 basis points better in comparison to fiscal 20 due to one more day of revenue. In fiscal 20, each quarter contained 65 workdays. In fiscal 21, workdays by quarter are 66 in Q1, 65 in Q2, 64 in Q3, and 66 in Q4. Please keep these differences in mind when modeling results on a year-over-year and sequential basis. 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 continuing COVID-19 pandemic, uncertainty remains about the pace of economic recovery. Therefore, we are not providing annual guidance at this time. However, we would like to provide our second quarter financial expectations. We expect revenue to be in the range of $1.725 billion. to $1.75 billion, and EPS to be in the range of $2 to $2.20. Please note the following regarding second quarter financial expectations. Our second quarter contains the same number of workdays as last year's second quarter, but one less than our first quarter. We expect operating margin as a percent of revenue to be in the range of 17.5% to 19%. And we expect our second quarter effective tax rate to be about 22% compared to 20.1% in last year's second quarter. I'll now turn it over to Todd.

Thank you, Mike. Before I review the business results, I'd like to build off of Scott's comments. While the environment remains challenging and uncertain, we did experience a continued improvement in results through the quarter. The majority of our existing customers have reopened, and our employee partners work diligently in partnership with these businesses to get them ready for the workday. Despite reopening, many existing customers are not yet operating at the same level of business before the COVID-19 pandemic started because of the virus's impact on health and the economy. In keeping with the Cintas culture, our employee partners are working with urgency to offset these headlights. Significant opportunities for new revenues exist because of the need of businesses to instill confidence in their employees, customers, students, patients, et cetera, that they will remain healthy and safe. Additionally, businesses are outsourcing tasks that are not their core competency so they can successfully navigate these challenging times. The value we provide businesses has never been more evident. we've been given a seat at the table in discussions with state and local officials, hospital administrations, COVID-19 procurement task forces, and hospitality cleanliness councils.

There's greater demand for services and products we already provide, such as .

In other areas, demand is so attractive that we are providing new services and products made possible by our supply chain, distribution network, sales force, and cash flow. These include rental healthcare isolation gowns, hand sanitizer stand and dispenser service, and sanitizing spray service. With that, I'll turn now to the first quarter financial performance of our businesses. The uniform rental and facility services operating segment includes the rental and servicing of uniforms, healthcare scrubs, mats, and towels, and the provision of restroom supplies and other facility products and services. This segment also includes the sale of items from our catalogs to our customers on the route. Uniform rental and facility services revenue was $1.39 billion, a decrease of 4.1%. Excluding the impact of acquisitions, foreign currency exchange rate changes, and the difference in the number of workdays, the organic revenue declined 5.4%. Our uniform rental and facility services segment gross margin was 48.7% for the first quarter compared to 47.2% in last year's first quarter. Higher inventory amortization expense of 80 basis points was more than offset by the benefit of lower production and service expense as a percent of revenue. The additional workday and lower energy expenses. Our first aid and safety services operating segment includes revenue from the sale and servicing of first aid products, safety products, personal protective equipment, and training. This segment's revenue for the first quarter was $204.5 million. The organic growth rate for the segment was 17.1%. The first aid segment gross margin was 40.2% in the first quarter compared to 49.0% in last year's first quarter. Lower production and service expenses as a percent of revenue compared to last year's first quarter were more than offset by higher cost of goods sold from the increased proportion of revenue from personal protective equipment such as masks and gloves. Our fire protection services and uniform direct sale businesses are reported in the all other category. Our fire business historically grows each year at a strong pace. The uniform direct sale business growth rates are generally low single digits and are subject to volatility, such as when we install a multi-million dollar account. Uniform direct sale, however, is a key business for us, and its customers are often significant opportunities to cross-sell and provide products and services from our other business units. All other revenue was $147.7 million, a decrease of 20.0%. Organic revenue declined 22.2%. The fire business organic revenue declined 5.3% due to the inability to access some businesses because of closures. The uniform direct sale business organic revenue declined 47.3%. Revenue from our airline, cruise line, hospitality, and gaming customers largely falls within this segment. These industries continue to be among 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, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 at this time. We'll pause for just a moment. And we'll first hear from Seth Weber of RBC Capital Markets.

Hi. Good morning, everybody. I hope everybody's keeping well. um i had a couple questions on the first aid safety business i i guess um maybe mike can you just talk to how um do you feel like you're still seeing large one-time sales in that category or do you feel like that this is uh you know that the growth rate there has been reset to you know a higher level kind of on a sustainable basis and then you know on a follow-up question can you just talk give us a little bit more color on what you're seeing on the supply chain on the cost side I think Todd called out some higher COGS for some PPE. Is that, do you think, just a temporary issue or will that, is that sort of the new normal just on the cost side? Thank you.

Scott, this is Scott. I'll take the first part of that. I'll let Todd take the second part of that. On first aid and safety, I think the way is probably the best way for you all to look at it is that a lot of the initial upfront large sales of PPE through the first aid business are similar to what happens in the direct sale business when we sell a big new customer. There's a large upfront sale of these goods, and then that customer's revenue will drop to a maintenance level. And so we are seeing that in the first quarter, we did have a lot of large upfront sales to customers in the first aid and safety business that are now moving into that maintenance level. That doesn't mean that there aren't other customers out there that we can find and identify, but I think that there was a big rush of that in our first quarter as the pandemic hit. And so I would say we're probably closer in the second quarter to moving more into the maintenance mode on those types of things. I would say that probably means that we may not grow in high teams in first aid and safety, but we will continue to see very good growth in first aid and safety.

Seth, this is Todd. I completely agree with Scott. You kind of end up in a large first order, and then there is some maintenance mode there, but we're really focused on taking care of our customers They are in great demand for some of these products out there, gloves, masks, hand sanitizer, et cetera. So we're blessed to be in a good position in the inventory and be able to take care of them. But we are encouraged still that we're selling a lot of first aid cabinets that's going well. And we think things will moderate in growth But we're also anxious to see the COGS to moderate back to closer to where it was before.

Okay. Have you seen a pickup in the cabinet business, Todd? I know last time we talked about it, it was pretty slow.

You couldn't get any sales. Seth, you sound a bit muffled. Can you start that question over, please?

Sure. Sorry. I was just wondering if you've seen a pickup in the cabinet business. I know last quarter you talked about, you know, that you're having challenges getting into facilities and things like that. Has the cabinet side of the business picked up as well?

Yeah. Well, there's a great question, Seth. Our new cabinet sales are going quite well. But we have a heck of a lot of customers that are still on the sidelines. They're closed. So that's certainly affecting what is being procured through our cabinets. And we're anxious for those businesses to get back up and running. But long-term, we've pivoted, helping our customers. And long-term, we're quite bullish on the direction of the organization.

Okay. Thank you very much, guys. I appreciate it. And once again, Star wanted to ask a question.

Next, we'll hear from George Tonga-Bulbin-Sacks.

Hi, thanks. Good morning.

You talked about healthy growth for scrubs and isolation downs in the healthcare vertical, both among existing customers and in the no-programmer market. At this point, what percentage of revenue is being generated by healthcare customers, and how quickly is this vertical growing?

George, this is Scott.

When we talk about revenue in the healthcare segment, keep in mind that we're talking about all of the products and services that we would provide to the healthcare segment. That is both fire service, first aid service, some direct sale business, and obviously some rental, uniform rental and FS business. It represents about 7% of our total revenue now. We're excited about what we see in that segment. Healthcare represents about 17% of GDP and so we think we continue to have a big opportunity in healthcare. The scrub rental business and these isolation And from your perspective, if you just simply refer to those as the scrub business, I think you'd be safe. These isolation gowns are things typically worn over the top of the scrub, dealing with particular patients to protect the nurse or doctor from bodily fluids and things like that. No need to get into a whole separate category on that. But we're excited on what we see there. The COVID has brought a realization to healthcare providers that taking, wearing scrubs to work and then wearing them home may not be the right approach. And they're looking for ways to outsource managing those programs for them. And we really like the position that we're in. I would say that Healthcare has a great opportunity to be the first segment that we service to grow to over 10% of our total revenue. And so we remain very optimistic about this segment.

Got it. That's helpful.

And as revenues begin to recover over the near to intermediate term, can you provide some perspectives on

what you expect for incremental margin flow through, particularly as operating leverage begins to kick in and you start to see utilization and capacity rates recover?

Yeah, I think, George, from an incremental margin perspective, we've talked a lot about in the past, we like incremental operating margins to be in the 20% to 30% range. We've exceeded that in this first quarter. But that's the longer term. That still is the range that we like to see because it really keeps us in a cadence where we are growing in the way that we want to grow and we are managing the number of salespeople that we need and the number of routes that we need, the amount of capacity that we need. And when we are growing the way we want to grow, we like that 20 to 30 percent range and expect that that will continue as we get out of this really disruptive and bumpy period.

Got it. Thank you.

Taza Mazari of Jefferies.

Hey, good morning. Thank you. My first question is maybe for Scott. I know you touched on some examples of net new business sort of in your prepared remarks. But maybe if you could just talk about how the sales cycle today compares to pre-COVID in converting some of these customers. I assume healthcare has accelerated given some of your comments, maybe even food service. But maybe if you could just talk about how that cycle differs today versus pre-COVID, it seems like it's accelerated. I think you touched on outsourcing potentially accelerating coming out of this period.

Yeah, I'm happy to provide a little color there. And Totten, I want to chime in as we go through this. But, you know, the Pre-COVID, we had decision makers that had time to review things, try to get multiple competitive looks and things like that when we're out in the marketplace. I think that the urgency of trying to find certain products and services certainly shortened that sales cycle. Decisions were made more quickly. It's not to say that they weren't trying to find competitive but in many cases it was hard for competitors to come up with the products and services that they needed to fulfill a customer's order. I'm proud to say that we did a really good job of making sure that we were in front of that and had inventory, and so we've been reasonably successful in being able to to help these companies out. As we look at sales productivity amongst our sales force, we have been through the entire COVID period selling at very impressive productivity rates, very high historically. We like to see that happen. We think it's a good sign for the foreseeable future for the company. And so you combine that sales productivity with decision makers that are in the market trying to make reasonably quick decisions, and we think we can do very well in that regard. Todd, do you have anything to add?

Yeah, Hamza, it's a good question. It really varies dramatically based upon who you're calling on, the products you're selling. Our sales organization is highly urgent anyway and highly adaptable, and I've been really impressed by how they've been able to overcome any obstacles that were, it seems like, in their way. But when you have products and services that people really need to, I'll say, instill confidence and their employees and their guests and their customers, however you want to describe it, their students, their patients, when you have those available, it does shorten the sales cycle because there's sometimes when we walk in and they say, my goodness, you have that? Let's go. And so, again, there's so many different sales processes going on at any one time. It's tough to say, make a swooping statement, but Generally speaking, yeah, it's set it up because of the urgency of making sure people are taken care of. And we are, again, blessed to be in a good spot with those products and services, and that creates confidence in our people and our customers and showing in the productivity.

Great. And then just my follow-up question is just on the hygiene business. Could you maybe talk about, you know, the outlook there, but particularly, you know, what is your value proposition in hygiene versus, you know, some larger competitors that maybe moved into that market first? I know your product looks nicer than Ecolab from the outside, but hand sanitizers and such, but maybe just give us a sense of the value prop you have in that business, because it seems like a newer business for you, even, you know, pre-COVID, obviously it's accelerated today.

Well, Hans, I'll start then, and Scott, feel free to jump in. We appreciate your comment on our products. We invest a heck of a lot into our R&D to make sure that we have really attractive, functional products, but a lot of investment in it. And we've been in the hygiene business for, I'll call it, decades. It's just we spoke in our last call about how September 11th, 2001 had a dynamic impact on security. And we believe that this pandemic is going to have a similar effect on hygiene in our world. And that has been something that's been positive for our business. So our customers love the fact that we have availability. We have attractive products. We have a great inventory distribution system. very fair approach to how we handle things. And we have a great suite of products and services that are right there on the truck. They can deal with one organization that can handle all their needs. We're able to, because the vast majority of our routes service our customers weekly, it allows for us to be able to inspect what they have, where they are from an inventory standpoint, and help provide some consultative services instead of just tell us when you need some more product. So that route infrastructure and obviously distribution center system is a real strategic advantage for us moving forward.

I'd say it this way just to echo what Todd said. What we do that most of our other competitors who have been in this space for some period of time don't do is that we're there every week so we make sure that they always have inventory and they never run out. Most of the time a customer who's buying it from a supply house or a traditional competitor has to take it upon themselves to realize that they're running low on inventory. Sometimes that happens when they're out of inventory, then they have to go and place the order. They have to wait for the order to come to them. They're out of supply for maybe a few days and that sort of thing. And they don't have to worry about that when we're taking care of it for them. And, you know, restrooms are something that every single business has to deal with. And, uh, And when we take care of that for them, it's one less detail that they have to worry about in the course of their business day and allows them to focus their time and attention on taking care of their customers. So I think that's the value proposition that we're offering in the IT business.

Great.

Very clear. Thank you so much. Manav Patnaik of Barclays.

Yeah, good morning, gentlemen. My first question is, you know, clearly there's a lot of new mandates here. In the past, you talked about how non-programmers were kind of two-thirds of the new field. Is that tilt, is that focus shifting more now because of, you know, I guess the COVID-driven demand? And, you know, is it, Are you seeing competition get the same kind of, you know, list as well, or is there an element of you guys just, you know, winning some of that new share as well, if that's how it's associated?

Yeah, so, Manav, I think you're asking, is our – we talked about new business – about 60% of our new business coming from no programmers. And is that the case as we sit here in this disruptive period? And are we seeing any differences in the way that our competitors are coming to market and competing? And I'll start. As Todd mentioned earlier, our new business continues to be very, very robust. And we're selling not just the same mix of product from six months ago, but a little bit of a different mix as it relates to this hygiene messaging, which is resonating so well. And so that certainly can lead to new types of prospects that we may not have talked to in the past. And when we get our foot in the door, good things can happen when they start to see our service, we can continue to talk about other needs that they may have. And so we've seen some nice success in that during this, even during the fourth quarter, but more so in this first quarter.

Frankly, that was part of the question of the sales cycle. The sales cycle is certainly a bit sped up just because we are selling more no programmers. There is no hurdle to get over to sell something. They can buy immediately. And that's been very positive for us. As Mike mentioned, we're selling into a variety of different prospects. And we're also, because of the urgency and the intensity of what is important to these businesses, we're able to get at levels of decision makers that we weren't in the past quicker. So that's... That, again, speaks things up. When decision makers hear our value proposition, it resonates. A pandemic has been absolutely horrible for the country, the world. It's been negative for our customers. But if there is some shining light, it's bringing more focus to the products and services that we have, the value that we provide, and getting us an audience at high levels quickly.

Okay, that makes sense. And, you know, in terms of at least the examples we've provided, it sounds like, you know, there's a lot of large institutions that are, you know, coming to you guys for the But maybe just on the flip side, can you just talk about your kind of small business customers and are they just kind of in survival mode? Do you anticipate, you know, risk further down the road if they're under lockdown, if they can even survive? Just in any color there would be appreciated.

Yeah, obviously that depends on, you know, geography. industry segment and that sort of thing. It's different in each one because of various local governments or state governments that have put restrictions in place. I'd say generally speaking the small customers that are open right now are weathering this as a general statement pretty darn well. I think it says a lot about the American entrepreneurial spirit to see them able to do the things that they're doing with, you know, the new rules in place, be they face masks and outdoor dining and such. But, you know, some of them, you know, many of them are not at full capacity yet because of various restrictions that have been put on them. or customers that may not be ready to come back out to frequent their businesses. So, you know, clearly I think for the American economy, for the global economy, a vaccine is going to be very well received so that the rules can change and businesses can get back to operating in a sort of a new normal, but a normal that allows them to operate in a more traditional fashion.

Thank you all. Andy Whitman with Baird. Okay, thanks.

Yeah, I have a question and a follow-up question. I mean, clearly here in the quarter, you saw quarter over quarter growth. acceleration in the organic trends and talking about the rental segment, I guess, in particular. And I'm just curious if you could give a little bit more detail here because when we look at the guidance for next quarter, it kind of suggests that revenues will be down 5% or 6% year-over-year, and that's not too dissimilar from what you saw here in the quarter. So how has the month-over-month trends progressed in comparison to what the implied revenue outlook is? and just any color that you have in terms of your visibility in this and how you chose to select this range with all the uncertainty. Is it conservative or are there other factors that are baked into the revenue guidance?

Andy, this is Todd. Good question. Certainly, this has been an unusual environment. There was 22 million jobs that were lost, it seemed like overnight almost, And then jobs returned pretty quickly in the very early portion of the summer. And then as you've seen as the summer wore on, things moderated a bit in jobs returning. And there's still 11 million jobs that have not been recovered. So that has certainly impacted our business. We need more businesses to come back. We are still guiding towards sequential growth from Q1 to Q2. We do have one less workday in Q2 versus Q1. And we're encouraged by our new business efforts, the products and services that we're selling, the engagement of our customers of what we're providing. But it takes a while for all those new business efforts to recover over all the businesses that are still closed and all the jobs that are still on the sidelines. But we're very much looking forward to Q2, Q3, Q4, and we like the trend lines that we're seeing.

Okay. Maybe I'll offer a couple questions. Maybe I'll offer a couple points. One is Scott talked a little earlier about the first aid and safety large personal protective equipment sales that kind of turn into maintenance a little bit. So keep that in mind. Another point I'll make is if you think about the first quarter revenue on the same work days as Q2, you're talking about a billion 720. And so we do see some, that guidance range, especially at the top of it, does look to nice sequential improvement. And keep in mind, the last point I'll make is last year's second quarter was a pretty good quarter for us as well. And so when you put it all together, echoing what Todd said, we remain excited about the performance and the momentum that we have, particularly in a bit of a challenging environment, and one that still contains a fair amount of, I'll say, lack of clarity, let's say. And so we think this guidance range really points to continued nice momentum improvements.

Thanks, Mike, for that. That's good perspective.

I wanted to also kind of ask on the cost side here, you know, anytime you've got, you know, basically EBITDA up against declining revenue, that's a very surprising and obviously very good outcome for the company. We're already starting to see some questions from some of our customers asking if there was anything one time, either positively or negatively, in other words, costs that maybe were furloughed or otherwise, things like that that were recognized in the quarter that need to creep back in here as the year progresses. Or other things, if you continue to do some level of restructuring, certainly that was a big factor in your fourth quarter. It sounded like you had it mostly contained in the fourth quarter, but maybe there was some carryover in the first quarter. But Mike, I was hoping you could just talk a little bit about some of the puts and takes inside the margins and the implications about incremental margins over 100% here. on a go-forward basis, and what's unusual about the quarter, if anything?

Sure, I'll start that. I wouldn't call out any specific one-time items, but as you think about this period of time that we're in, we entered the quarter with a fair amount of disruption and lack of clarity, and we entered it with a hiring freeze, a wage rate freeze, and pretty tight control on discretionary spending. And as the quarter went on, you know, revenue obviously came a bit higher than our guidance range, and we've been pleased with that. And so we started to bring – we started to hire back revenue-producing positions and And that certainly will have an impact as we move forward, but in the first quarter, in this period of just extreme disruption, we entered it with a lot of uncertainty and we exited it with still some uncertainty, but better momentum than we certainly expected. I'll point to a couple things, though, within the quarter. Energy was 30 basis points better than a year ago, so we certainly got a little bit of a help there. We talked a little bit about discretionary spending. If you think about travel, that was down about 100 basis points. We are itching to get out to visit customers and our locations, and we'll start to do that slowly. but some of that will get leveraged with better revenue momentum as well. And then the third thing I'll say is last year, you might recall, we had a pretty high medical expense in the first quarter. We kind of settled back into our normal range, and that was a benefit of about 90 basis points. All in all, though, Andy, you know, it points to our ability to really control the costs and manage the business pretty well in a highly disruptive period of time. And it also shows that as we move out of this, we will continue to invest in revenue-producing positions and the growth routes, et cetera.

Great. Thank you very much. April, do we have any other questions?

Andrew Steinerman?

Hi, it's Andrew. I just wanted to get a little more clarification about monthly trends. I definitely understand we're in uncertain times and there's so many jobs to return to the workplace yet. I just wasn't sure if when you were talking about year-over-year organic revenue declines in rental, if you saw September, meaning what we've already experienced, continue to narrow from August, so are declines narrowing in September year-over-year versus August, or have we already seen September declines hover with August? Is the uncertainty in October and November, or have you already seen some hovering in September?

We, Andrew, we saw some really nice momentum and certainly Todd talked about the highly disruptive period at the beginning of the quarter. And so the job recovery, the economic recovery was pretty extreme in the early part of the summer. And the business reopenings moderated certainly as the summer went on. But our revenue performance improvement continued through the quarter. And we still believe that, you know, we're still looking to see, sequential improvement and so September while moderated from let's say June and early July is still moving in the right direction and trending in the way that we would want it.

Okay, thank you. Next we'll hear from Gary Bisbee of Bank of America.

Hey guys, good morning. I guess I'd love to go back to the margins a bit more. you know, you obviously have done a great job cutting costs and deferring some investment. And I heard you earlier answer the earlier question about sort of what helped it this quarter. But can you give us any sense of how to think about the cadence of costs coming back? Do you envision, you know, an ability to manage that pretty tightly with sequential improvement in revenue or, you know, are there some costs at some point that could come back more quickly? And I guess as part of that, have you – identified anything within your cost reduction efforts to date that you think could turn into more permanent or sustainable cost reductions for the business?

Gary, this is Scott. First of all, as we look out into the second quarter and beyond, we are confident in our ability to control our costs. and we are still really managing labor at the very top of the organization so that people who are adding or want to add positions have to make sure that they're going through the proper channels to get approval to do that. that we need to do to invest in the business are going to come back online. That may be trucks that have been and therefore service reps that have been idled because of this disruption because of the growth that we've seen through the first quarter. Some of that is coming back online as a result of that. That's driving some production. labor to produce the goods. We're bringing some salespeople back online that were temporarily on the sidelines. In the second quarter, we're back to advertising, both national radio advertising and some TV advertising that you may have seen this past weekend. So these are the kind of costs that we think are necessary to continue to grow the business and to get our brand out there in front of customers and prospects. But we're very confident in our ability to manage these costs. Are there things that we look at to say maybe we don't need those or as much of that or that might have a long-term impact? We're always looking for those kind of things, and that is part of the culture that we have as a company, and when we find them, we pretty much jump on them and make sure that we can drive those costs out of the organization. I think that there's nothing major at this point that we saw in the first quarter, but there operate and do business moving forward. We're much more efficient right now out of necessity than we have been, and I think that that's always good for any organization to put themselves in a position where they look around and realize what else can we do to get efficient. So I think we've done a really good job, and my expectation is that we'll continue to do so. That said, there are going to be some things that are coming back online in the second quarter that I think for the long-term, intermediate and long-term benefit of the business and our ability to grow are necessary expenses.

All of which are within the guidance.

Yes.

Gary, this is Todd. Steph talked about growing is expensive, but it's an investment. And I think we've shown the ability to manage those expenses on the way down, meaning as the economy kind of went off a cliff. And we will manage them on the way up as well. And hopefully that V continues. And I got to tell you, it's a whole lot more fun to manage on the way up than it is on the way down. And our people feel that way. And when you go through these types of cataclysmic events, As Scott mentioned, it makes you look through a different lens. You evaluate your organization different. And one of the interesting items is how we engage with our customers. Do they want us there? Should we be there in person as much? Whether it's a Teams call or a Zoom call or FaceTime, whatever it is. you know, business moves fast, and we're evaluating that. Our customers are evaluating that, but it does allow things to speed up, and will that have a long-term impact? It could. We shall see. I think certainly in the short and intermediate future, that's what we see.

Great, thanks. And then just to follow up, you know, you talk a lot about the sanitizer sales and the big opportunity there. Is it right that that all flows through the hygiene or facilities business within rentals. And if that is right, can you give us any sense sort of how well that's doing and maybe what the underlying rentals, you know, revenue trend is today or how it's been trending excluding that hygiene business? Just trying to get a sense if that's doing a lot worse and hygiene is just absolutely killing it today. Any color on that would be great. Thank you.

Yeah, great, Gary. So the sanitizer sales predominantly flows through rental, certainly our first aid customers as well. We sell sanitizer, whether it's in various forms. So you'll see it in both, but predominantly in the rental organization just because of the scope of their organization and their customer base, etc., And sanitizer sale is going quite well. But you know what? It is leading to other sales as well. It gets us in the door and allows us to, as we mentioned earlier, it's getting us in front of prospects we've never been in front of before. It's getting us in front of decision makers we weren't able to get to in the past. I think on our last call, we spoke about a really large bank that we had hardly done any business with before. And now they have sanitizer service at all their branches, which is significant. But now they're talking to us about first aid, and they're talking to us about fire and other rental products. So those types of urgent needs allow for our people to get in and help explain to people what we do, how we do it, the value we provide, and it opens some eyes and we're able to sell more.

So it's really encouraging. Next we'll hear from Tim Mulroney of William Blair.

Good morning. Two quick ones on the balance sheet here, guys. First of all, you've got a lot of cash piling up on the balance sheet here. Is this just a prudent step to have extra liquidity given the macro uncertainty? Can you share what your capital allocation priorities are for this year?

First of all, there is a lot of uncertainty still out there. We like having some cash on the balance sheet in case anything comes up that is unforeseen and our balance sheet is strong anyway, but it certainly helps us have a more optimistic view of the future when we have that on the balance sheet. I think that normally in a normal environment with our ability to generate cash, we're looking for acquisitions. what we can do relative to investing back in the business, dividends, share buybacks and such to help improve our shareholders' overall return. And I would say that as things become a little more clear as we get out into the future, we'll get back to our normal process. And I think we've got a pretty good track record of how we manage those things for our shareholders. And I would expect that we'll be back to that hopefully soon. Hopefully we'll get a vaccine that'll work at some point and get back into a normal environment.

Okay, thanks, Scott. Does that include CapEx getting back to a normal run rate? It was like $30 million in the quarter. That's, I think, less than half of what you did last year. Would you expect that to get back, just as I'm thinking about my models?

Yeah, I'd say this. I don't know that you're going to see a lot of increase in CapEx in the second quarter. Most of the time, CapEx is about 60% of that is for growth and 40% is for maintenance. We do have some capacity in markets with the ability to put some more trucks on the road and within our production facilities So I don't know that the growth CapEx is going to be necessary in the second quarter. We get out much beyond that. It's still a little cloudy out there for us to predict, but I can see that hopefully by the end of the year we're back to a more normal CapEx spend, and that means that hopefully we'll be seeing a more normalized growth environment for us.

Understood. Thank you.

Good luck next quarter. Thank you, Timothy. Scott Schneiderberger of Off The Timer.

Thanks very much. Good morning. Yeah, I'm just curious about kind of the pain point and markets that you're enduring as well. I think airlines, cruise, maybe oil and gas. Could you give us an idea just what percent of revenue is being impacted that would not be in the fiscal second quarter guidance as anticipated to see improvement? And I know there are different things in those end markets, so it's not that easy to do, but just to give us a feel of how much of the revenues are impacted that you don't see coming back in the near term. Thanks.

Well, Scott, the... Most of that, those highly impacted segments are in our direct sale business. That would be the travel and hospitality related customer base. That would be hotels and airlines and cruise ships and even gaming is in there. Those revenues are off significantly in the direct sale business. We think it's going to continue that way for the foreseeable future. I think that those are probably a longer lead time for those to see those come back as their customer base gets more and more comfortable with getting on an airplane going to an airport, flying to a city, taking a taxi to a hotel, and so forth. So I think that we're going to see those areas struggle for a while. That is all in our guidance, and it's also in our results for the first quarter. I would say that the second quarter probably for those related industry segments will perform similarly to the way they did in the first quarter. There may be a few in there that do a little better than others, but I'd say it's probably at this point through the second quarter more of the same in those segments.

Thanks, I appreciate that. And just as a follow-up to Broadway, I didn't think you guys had touched upon ERP and what you're seeing now that that's nicely implemented. So just a quick update on that, please. Thanks.

Well, our ERP is – we've run it out across our first aid and our rental division over the past few years. And we're seeing – Some real nice advantages there, whether it affects our ability to get product to customer faster has been a nice impact. Our transparency into the data, the ability to look at the customer across business units has been advantageous, especially as we go to market in some of these key segments has been significant. We're very happy to be done with the integration. Those are never a fun process, but we're also seeing some real nice advantages there. I'd say one of the bigger ones is the ability to get speed of product to customers. because of various items internally that allows us to get the product to that. So customers really value that, especially in an environment like this where you can deliver when you say you will or faster in an environment where a lot of companies are struggling to do that.

And that's a big advantage for us. Tony Kaplan of Morgan Stanley has our next question.

Thank you. Um, just regarding the upcoming election, what are your thoughts on the potential impacts on your business? Depending on the outcome, I was thinking of it as, you know, maybe under a Trump win seems like bringing back some manufacturing jobs into the U S could be good, but maybe higher tariffs could be a potential offset. Is that the right way to think about it? And how are you thinking about the puts and takes of a Biden win?

Well, yeah, I mean, there's a big difference between the two candidates and their intentions. I would say that the U.S. economy, not just us, but the U.S. economy will be affected depending on which candidate wins and assuming they both implement the things that they say the positions that they have taken at this point. Biden administration, more business regulation could slow down businesses' ability to continue to grow. Higher taxes would obviously hit profits and earnings per share. And then obviously the impact of the overall stock market. And as you said, President Trump wants to continue to try to bring manufacturing jobs back and maintain or improve the current tax situation. Anyway, we will be impacted as much because of how our customers are impacted by whoever wins. as anything else. So, you know, I think that as a general statement, because our customer and prospect base is such a broad spectrum of American industry that as American industry goes, you know, we will go with it. I will say this, I am confident because we have managed through, you know, different versions of what different administrations have brought in into the U.S. economy that we can manage through this, that we will manage through it as we have in the past. I think we've got a really good track record of proving that we can do that. And so we're optimistic either way about the long-term future of the company. I think that there may be some short-term differences that could come to bear depending on who wins.

Great. And just as a follow-up, just looking at the balance sheet, we've had a decent-sized inventory build the last two quarters. Just wanted to understand what's causing the increase. Is that preparation for an eventual recovery? And do you expect that to continue? How should we be thinking about that going forward?

Tony, this is Todd.

our balance sheet as an advantage, we see our ability to distribute as an advantage, and our customers need us to invest in those products in the short term so that we can help them with those. So in many cases, it has been a real competitive advantage, us investing in that inventory where we have products that our competition does not, and our customers really appreciate the investment on their behalf. and we're leveraging that.

Yeah, and this is Scott. Much of that buildup is in some of the items that are in high demand right now, be it hand sanitizer, and you've got to look at that in a lot of different ways. It's the actual fluid itself, the container that it comes in, the dispensing units that we need, the stands and so forth, And so there's a buildup of that inventory, but these are things that we are doing to take advantage of the opportunities that are in the marketplace right now. And we're very confident that because we've been able to do this and do it in such short order that we are winning business daily. because we have inventory. We talked about one of the examples I gave early on was that we got a very large account because we were able to deliver masks in a matter of days that other companies were telling that prospect it would take months to get those. We had another example of a large customer, multi-location customer that decided to give a third of their and sanitizer stand to business to us, a third to one of our competitors, and a third to a third competitor. We implemented that program with thousands of stands in a week. One of the competitors came back and said, we can't deliver it within your timeframe, so they gave us that third. We did that the next week, thousands of stands, and in the third competitor can only do about half of what they said they could do, so they're giving us half of that third of the business. And it's because we have the inventory available today to service those accounts. And so we look at that and what we've been able to do with our global supply chain and our ability to get those products out into the marketplace quickly as a significant competitive advantage, and we're taking advantage of it right now.

That's super helpful.

Thank you very much. Shlomo Rosenbaum of Peaceful Nicholas.

Hi, thank you very much for taking my questions. Hey, usually in labor-intensive businesses, hiring is really indicative of what companies think is coming down the pike in demand. And I know you guys had a hiring freeze not that long ago, looking at your open positions now between 1,600 and 1,700 open positions. Could you just discuss Is that like a normal amount of physicians you'd have open if there were not a pandemic? Is this a higher amount because there's a catch up? Is it a lower amount? How should I think of this in terms of indicating what you guys are thinking about?

This is Todd. I can't answer your specific, I don't track requisitions by what we have out there by month, but I can tell you that it's certainly an increase from what it was 90 days ago. We try to match up our demand for our services with the supply of our of our products, our services, our infrastructure, our people, and we're matching it up appropriately. So we look forward to Q2, 3, and 4, and we see demand continue to increase. We're certainly conscious of all the external factors, whether they be what's going on with the pandemic, what's going on with COVID, The election all those items, but we're investing for the future and and we're bringing back this book many many of which are revenue creating revenue generating partners That will that will help us continue our positive trend Okay, and then

Maybe you could give a little bit more color on how you're thinking of the business units. I believe last quarter you guys gave a little bit more detail on that in terms of the next quarter. I don't know if you're willing to talk at that granular level this quarter as well.

Well, so Shalom, you were a little hard to hear. I think your question was regarding how each of our businesses is performing as we enter the second quarter and how do we feel about that performance. And Shlomo, I would say that first of all, the guidance encompasses all of what I'm going to mention. But Todd talked a little bit about the momentum of the rental business, and we continue to see a nice trend line, even though it's moderated a bit from that heavy disruptive period early in this first quarter. but we still continue to add really good new business, and we're continuing to sell these hygiene products that Taz talked a bit about. In our first aid and safety, we've had two quarters of high teens growth, and Scott talked a little bit about. These big sales of personal protective equipment are hard to predict, And so they happen, but then they generally will go into maintenance mode. And so our expectation is we'll see a little bit more maintenance mode in the first aid and safety business in Q2. But still very, very good results. We are very excited about that business. The fire business, which was down organically about 12% in the fourth quarter, was down organically just over 5% in this first quarter, and that business continues to perform well and continue to move on an improving trend line. And then lastly, Scott talked a little bit about our direct sale business, which was down 47% in the first quarter, and you probably see that as another quarter of pretty difficult time given that customer base. So that's the way we view the second quarter keeping in mind that it is at the midpoint and higher end of that guidance it calls for sequential improvement and nice sequential improvement at that. So again we like the momentum of the business and the execution of it as well.

Did that answer your question, Shlomo? Yeah, thank you very much.

And it appears there are no further questions at this time. I'll turn the call back over to our presenters for any additional or closing comments.

All right, well, thank you for joining us this morning and for your interest in CENTOS. We will issue our second quarter of Fiscal 21 financial results in December, and we look forward to speaking with you again at that time.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.