Cintas Corporation

Good day, everyone, and welcome to the Cintas Fourth Quarter Fiscal Year 21 Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Adler, Vice President and Treasurer of Investor Relations. Please go ahead, sir.

Thank you, Nick, and thank you for joining us. With me today is Scott Farmer, Cintas Executive Chairman of the Board of Directors. Todd Schneider, President and Chief Executive Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our fourth 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 SEC. I'll now turn the call over to Mike Hanson.

Thanks, Paul. Our fiscal 2021 fourth quarter revenue was $1.84 billion, compared to $1.62 billion in last year's fourth quarter, an increase of 13.3%. Earnings per diluted share, or EPS, were $2.47, an increase of 83% from last year's fourth quarter. The organic revenue growth rate adjusted for acquisitions, divestitures, foreign currency exchange rate fluctuations, and differences in the number of workdays was 11.5%. for the fourth quarter of fiscal 21. Organic revenue for the uniform rental and facility services operating segment was 13.7%. Organic revenue for the first aid and safety services operating segment declined 6.8%. Gross margin for the fourth quarter of fiscal 21 was $859.1 million compared to $707.8 million in last year's fourth quarter. Gross margin as a percent of revenue increased 310 basis points to 46.8% for the fourth quarter of fiscal 21, compared to 43.7% in the fourth quarter of fiscal 20. Selling and administrative expenses improved as a percent of revenue to 27.4% in the fourth quarter of fiscal 21, compared to 30.9% last year. Operating income for the fourth quarter of fiscal 21 of $356.4 million increased 71.8%. Operating margin increased 660 basis points to 19.4% in the fourth quarter of fiscal 21 compared to 12.8% in the fourth quarter of fiscal 20. Fiscal 20 fourth quarter 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 fiscal 20 fourth quarter operating margin was 15.5%. All of these items were recorded in last year's selling and administrative expenses. Our effective tax rate for the fourth quarter of fiscal 21 was 19.4% compared to 20.4% last year. The tax rate can move from period to period based on discrete events, including the impact of stock compensation. Net income for the fourth quarter of fiscal 21 was $267.7 million, an increase of 85.2%. EPS was $2.47. an increase of 83% from last year's fourth quarter. Our balance sheet and cash flow remain strong. Our leverage calculation for our credit facility definition was 1.5 times debt to EBITDA at May 31st, 2021. On June 1st, 2021, $250 million of debt bearing an interest rate of 4.3% matured and was repaid with cash on hand. We have an untapped credit facility of $1 billion. During the fourth quarter of fiscal 21 and our first quarter of fiscal 22 to date, we purchased $979 million of Cintas common stock under our buyback program. On June 15, 2021, Cintas paid shareholders $79.2 million in quarterly dividends. For the fiscal year ended May 31st, 2021, revenue was $7.12 billion compared to $7.09 billion for fiscal 20. EPS for fiscal 21 were $10.24 compared to $8.11 for last fiscal year. Revenue and adjusted EPS have grown 50 of the past 52 years. Fiscal 21 free cash flow, which is defined as net cash provided by operating activities, less capital expenditures, was $1.22 billion, an increase of 14.7% compared to last year. For our fiscal 22, we expect our revenue to be in the range of $7.53 billion to $7.63 billion, and diluted EPS to be in the range of $10.35, to $10.75. Please note the following regarding our guidance. Our fiscal 22 effective tax rate is expected to be in the range of 19.5% to 20.5% compared to a rate of 13.7% in fiscal 21. The higher effective tax rate negatively impacts fiscal 22 EPS guidance by about 85 cents and EPS growth by about 800 basis points. Guidance does not include any future share buybacks or potential tax reform. We remain in a dynamic environment that can continue to change. Our guidance contemplates a steadily improving economy absent any economic or pandemic-related setbacks. For financial modeling purposes, please note that there are no workday differences when comparing fiscal 22 to 21. Both fiscal years contain 66 days in the first quarter 65 in the second, 64 in the third, and 66 in the fourth quarter. I'll now turn the call to Paul for commentary on the performance of each of our businesses.

Thanks, Mike. 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. The segment also includes the sale of items from our catalogs to our customers on route. Uniform rental and facility services revenue was $1.47 billion compared to $1.27 billion last year. Our uniform rental and facility services segment gross margin increased 410 basis points to 47.7% for the fourth quarter compared to 43.6% in last year's fourth quarter. driven in large part by lower production and service expense as a percent of revenue. While some inflationary pressures increased certain costs, these were more than offset by increased revenue from businesses reopening or increasing capacity as COVID-19 case counts fell and restrictions on businesses were reduced. 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 fourth quarter was $186.9 million compared to $196.3 million last year. First aid fourth quarter revenue was up against a very difficult comparison. In last year's fourth quarter, in response to the onset of the COVID-19 pandemic, personal protective equipment sales surged. Also, the first aid cabinet service business was not impacted until late in last year's fourth quarter when business restrictions became widespread. As a result, the division posted a 21.9% organic revenue growth rate in last year's fourth quarter. The first eight segment gross margin was 43.0% in the fourth quarter of this fiscal year compared to 46.1% last year. The difference in gross margins is due to revenue mix. As we guided last quarter, less personal protective equipment was sold in the fourth quarter than in the third quarter. However, as a percentage of total division revenue, personal protective equipment revenue was still a significant percentage. While profitable, personal protective equipment revenue has lower gross margins than the first aid cabinet servicing business. We expect gross margins to improve sequentially as the cabinet servicing business continues to grow and gets closer to the pre-COVID percent of total division revenue. Our fire protection services and uniform direct sale businesses are reported in the all other category. All other revenue was $181.9 million compared to $152.3 million last year. The fire business organic revenue increased 22.4%. Gross margin improved 70 basis points. Uniform direct sale business organic revenue growth rate was 6.2%, and gross margin increased 280 basis points. I'll now turn the call over to Todd for our final prepared remarks.

Thanks, Paul. We are pleased with our fourth quarter financial results. They conclude a fiscal year of significant accomplishments, including the following. We help keep our customers' place of business clean, safe, and ready for the workday by providing essential products and services, We procured hard-to-find and potentially life-saving items, such as face masks and gloves, provided hygienically clean healthcare scrubs and isolation gowns, and developed services, including hand sanitizer dispensing, sanitizing spray services, and disinfecting wipes. Our net promoter scores reached an all-time high because we consistently delivered for our customers by providing needed products and services and being flexible with service agreement terms during the pandemic. We were again named to the prestigious Fortune 500, climbing 31 spots to rank at number 410 on the 2021 list. It's an honor to be recognized among the most successful and respected companies. We allocated capital to improve shareholder return. We paid down debt, reducing interest expense. We increased the annual dividend 10.2% and changed from an annual dividend to a quarterly dividend to return cash to shareholders more timely. We've increased the dividend 37 consecutive years. Also in fiscal 2021 and up until today, we repurchased 2.7 million shares of Cintas stock for a total of $979 million. As part of our steadfast commitment to corporate responsibility, we issued our inaugural Environmental, Social, and Governance, or ESG report. We are committed to protecting the environment enhancing humanity, and supporting the communities where we do business. And in addition to these many accomplishments, and despite the unprecedented challenges of the COVID-19 pandemic, we grew our fiscal year revenue and adjusted EPS. I can't thank our employee partners enough, and I am so proud of their truly impressive achievements. The CINTA story is one of growth. We've grown revenue and adjusted EPS in 50 of the past 52 years, The only exceptions were the great recession years. Our successful long-term financial formula is organic revenue growth in the mid to high single digits, double-digit earnings per share growth, significant cash generation, and prudent deployment of excess cash to further generate strong shareholder returns. Our prospects for continued growth are great, and in result, in part from a strong value proposition and a vast total addressable market. We have a product or service to help nearly every business get ready for the workday. Examples include scrub rental to hospitals and dentists, hygiene supplies and services to professional services firms, floor care services including walk-off mats and mops to retailers, first aid products to hotel and restaurant kitchens for cuts and burns, fire protection services to facilities managers at universities, and personal protective equipment to city maintenance and sanitation departments. The renting of healthcare scrubs and isolation gowns is indicative of a broad uniform rental opportunity. Plus, we are so much more than a uniform company. More than half of our revenue is from facility services, including hygiene, floor care items such as walk-off mats and dust mops, cleaning tools like microfiber mops and towels, first aid cabinet services, personal protective equipment, and fire protection services, including test and inspection of extinguishers and alarms. Our total addressable market is the 15 to 20 million businesses we don't currently service. Every business, goods producing or services provided, has a need for image, safety, cleanliness, or compliance. Every business has a need CENTOS can fulfill. Additionally, the COVID-19 pandemic ushered in a greater focus on health, readiness, and outsourcing of non-core activities. Significant opportunities for new revenues continue to 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. The new services we launched, including hand sanitizer stand dispenser service and sanitizing spray service, have a long runway. CentOS consistently invests in technology to support growth. Our recent implementation of the SAP Enterprise Resource Planning System provides benefits in three main areas. One is operational efficiencies. Our route drivers utilize personal route computers, which are similar to a cell phone, to access data and process transactions real-time. Also, SAP enabled us to have visibility to laundry plant stockroom inventories across our operations, helping improve profitability via the sharing and reuse of revenue-producing assets. And the technology helps us improve working capital via tighter management of supply chain inventory. A second benefit is data analytics and enhanced business reporting. These result from having the order-to-cash cycle all in one system, SAP enables us to analyze, process, and extract information from extremely large data sets, helping us target penetration, cross-selling, and pricing opportunities. And our third competitive advantage is improved customer service. Through SAP, our customers can pay bills and communicate with us 24 hours a day, seven days a week. We expect the ease of doing business will help us improve customer retention. Also, customers can order products and services via SAP resulting in improved turnaround time and faster realization of product and service revenue. I want to say a few more words regarding ESG. From the start of our company in the Great Depression, the Cintas business model was wholly based on sustainable practices, wash and reuse. We have a great corporate responsibility story to tell. We will continue to expand our ESG reporting and are excited about issuing our next report this year. And finally, I'd like to say thank you on behalf of all Cintas employee partners to Scott Farmer for his 18 years of service as Chief Executive Officer. Under Scott's leadership, the company's revenue grew from $2.69 billion in 2003 to $7.12 billion in fiscal 2021. Scott successfully led Cintas through years filled with challenges, changes, and opportunities, including the Great Recession, our largest acquisition, the COVID-19 pandemic, and the integration of SAP technology across the organization. We thank Scott for his service to the company as CEO, and we are grateful that he remains as Executive Chairman.

Thank you, Todd, and I'd like to take this moment to thank all of my Cintas partners across the company. I'm proud of our many collective accomplishments, including the innovative products and services that we provide our customers, as well as the tremendous dedication of our employee partners without whom we wouldn't be successful. Our company is in a position of financial strength with the strongest and most experienced management team that we've ever had, executing a proven strategy that has allowed our continued success even through the recent pandemic. It's been a true honor and privilege for me to have led this company as CEO for the last 18 years. And I'm as excited about our future as I've ever been, and I look forward to watching this leadership team steer us to continued success in the future.

That concludes our prepared remarks. We are happy to answer your questions.

Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once your name has been announced, you will have the opportunity to ask your question along with one additional follow-up question. Again, please press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal. And our first question comes from Andrew Whitman with RW Baird. Please go ahead.

Great, and thanks for taking my question, Scott. Congratulations on a great run. It's been a pleasure, and we look forward to still having you associated maybe when we come to Cincinnati next time.

You bet. Thank you.

Yeah. So I guess getting on to business here a little bit, maybe this is for Mike. There's been a lot of focus on inflationary factors and what I heard here on your prepared remarks and in your release was that it sounds like you're getting good operating leverage, but I was just hoping you could drill in and talk about some of the key factors you've talked about in the past. Certainly labor is, is one. That's come up a lot broadly across the street. You've talked about some other things like health care travel and others are mentioning merchandise costs. I was just wondering if you could talk about some of those key buckets and talk about the offsets that that you have baked into guidance, because it looks like your margin guidance is flat up slightly. And so I was just kind of hoping you could talk about some of the moving pieces inside of that as to why you feel like you can offset some of these headwinds that might be creeping in.

Sure, I'll begin and certainly Todd can jump in, but as it relates to guidance, you're right, Andrew, the implied margins would be at the low end of the guidance, flattish to at the high end, up around 70 basis points, so a pretty good range. And, you know, you've heard us talk a lot about we've made some really great progress. We made some difficult decisions through this pandemic, and it'd be a shame to go backwards in this. And this guidance is suggesting that we don't intend to. And so how do we think about this inflation? Certainly labor, as you mentioned, Andrew, is a big component of our cost structure. You know, the really good news for us is we've been working on the labor rates for some time. So this isn't something that is catching us by surprise. And over the last several years, we've been increasing the labor rates And so certainly the labor environment is a difficult one from the standpoint of the supply of people. Hiring has been a little bit more difficult. But we don't expect that increasing wages around us is really going to be a significant issue. We've been working on that for years and And don't expect that to really be that difficult for us as we move into the future.

And I would add that that includes last fiscal year. We raised the wage rates of all of our hourly people in our distribution centers, offices, production, all of our service, frontline service personnel. So we don't have a big catch-up as a result of that. I know there are other businesses out there that froze wages in the pandemic. and because it was a year, they might have a catch-up to make, and we don't have that. So, you know, I'm happy to say that. But I don't think that so far we've seen issues where the labor rates are going to cause us significant problems, but we're more concerned about what happens to our customers as a result of this, and so we'll be watching that very closely.

Andrew, this is Todd. It's a great question. We're in a good staffing position. We like where we are there. We like the fact that we've been addressing this subject over the course of a number of years. And as Scott pointed out appropriately, even in the peak of the pandemic last year, we were committed to staying the course and doing the right things and taking care of our hourly partners because we knew that We can see things coming, right? And we're committed to it. So that's important to us. Certainly other input costs are cost of goods. And our supply chain team is working harder than ever, and they're doing a great job in managing through that process to get us the goods that we need to make sure we're servicing our customers, which they're doing a great job at. and to manage our cost structure from that standpoint. But we like the spot we're in, and we anticipate getting, hopefully, some leverage on the additional revenue that we bring in. We've done such a great job and took such a big jump forward from fiscal 20 to fiscal 21 that, as Mike stated, it would be a shame to go backwards, and we're focused on going forward.

And Andrew, maybe I'll add a couple other items. You saw that energy was 30 basis points higher in our fourth quarter than our third quarter, about 40 basis points year over year. We've built that kind of increase into our guidance, and certainly there is room within our guidance for for larger increases than that, but something that we'll keep our eye on. We constantly are working on improving efficiencies, productivity levels, routing, and those things will all have positive impacts. From a material cost standpoint, You know, the good news is many of our rental items are amortized. So when we see increases in costs, they generally tend to take a long time to make it to our P&L, and they have to last for a while so that they bleed in over time. And so, you know, obviously we've got a great global supply chain Todd talked about, and they adapt. And so when we see inflationary pressures, we look for opportunities to adapt to that new environment. And I think over the course of the last year, we've talked a lot about our supply chain. They've done a great job, and we anticipate that they'll continue to do a very good job. Now, having said that, you know, there are a lot of challenges in the supply chain and in hiring that we've talked about. And we're not immune to inflationary pressures. They are all built into our guidance. But the other thing is we haven't increased our pricing for two years, right? But we certainly believe that that is an opportunity for us as we move into this new fiscal year. We have selectively started to do that in some areas. Pricing is local. For us, it's customer by customer decision, and where we believe it makes sense, we will do that. And so that is certainly something that is available to us when we believe that the cost pressure is warranted. Again, all of that is built into our guidance, which assumes not just keeping the great leap forward that we made in fiscal 21, but even continuing to improve upon it.

That's really helpful. Thank you. My one follow-up is just trying to get a sense of the reopening benefits that you're getting or expecting on a sequential basis. How much is left after the May quarter and into June? Is there still businesses that are closed for you or substantially closed where the revenues are so de minimis that they might as well be considered closed? Or on a sequential basis, are you starting to feel like things are fairly normal here June, July time period? Thank you.

Andrew, Mike talked about pricing being a local subject. Reopening is a local subject as well. For the most part, most businesses are back. Certainly, Canada has been a little slower to come back because of vaccination rates and government restrictions. effects, impacts there. But nevertheless, in general, most businesses are back. Now, are they back at the levels that we think they will be in the future? No. And we're committed to helping them with our valuable products and services to help them be prepared as they their employees come back and their customers come back so that they can compete in the marketplace. So hopefully that helps.

I would add, this is Scott, I would add that we think that Canada will be in the position that the U.S. is sometime the end of the summer with reopenings, but they're on a steady pace heading in that direction. The biggest issue that we have is that businesses are open, but there are, what, about 7 million fewer people employed right now than there were pre-pandemic. And so there's a lot of room there, and I think as federal unemployment benefits subside in September, we hope to see that our customers that are open will be able to get themselves back to full staffing, and that will obviously benefit our business.

Thank you. Moving on to our next question, we'll go to Manav Patanik with Barclays Capital. Please go ahead.

Thank you. Good morning, guys. So I was just hoping you would help us with the, you know, kind of cadence of organic growth by segment. You know, there's still obviously a lot of uncertainty potentially out there. So thank you for giving full-year guidance. But I was just hoping if there's anything to call out in terms of modeling, you know, the growth rates of the segments.

Yeah, Manav, this is Todd. So I think you've seen through our guidance, we expect a range of 5.8 to 7.2 from a growth rate. When you think about, obviously, the Realm Division is by far our largest division, so they will be in that range. But we expect that all of our businesses, meaning the other businesses, fire, first aid, and our direct sale business, will all be... high single-digit growth businesses in this fiscal year. So we feel very positive about all of them, and I look forward to growth in each of those businesses.

Yeah, I think we might see a little bit of bumpiness in the first aid business. You saw that their revenue was a little bit lower growth-wise. They had a decline in the fourth quarter. They had such a strong year last year, particularly in the fourth quarter and the first quarter. We may see a little bit of bumpiness through the year, but it's a great business. It's improving. We're seeing the recurring business and the mix start to turn back to where we like it. And so that's just throughout the year maybe a little bit of a different performance than we're used to seeing from a steadiness perspective.

Okay, that makes sense. And then if I can just ask, you know, around capital allocation, I mean, the, you know, the buyback was a pretty big number, the 900 plus million that you talked about. Can you just help us understand, you know, that in the context of, you know, the M&A pipeline and what we should, you know, expect going forward?

Yeah, so amount of our commitment is still number one priority is to invest back into our business. to grow the number of customers we have and grow those customers and invest in our infrastructure. Our second one is to invest in M&A, and we are very focused on M&A, active in that area, and it's a big push for us. And then third, if there is, consistent with what our approach has been in the past, if there is a capital that is in excess of that, then we'll return it back to the shareholders in the form of increase in dividend and repurchase of the stock as appropriate.

This is Paul. I just wanted to add that we're so fortunate to have such a strong balance sheet. The cash flow is so strong. We did that buyback and our leverage is 1.5 times as we mentioned in the script. Fortunate to be in a position where what we do with the dividend and the buybacks doesn't preclude us from M&A or any other activities because of the strength of the balance sheet.

All right. Thank you.

Thank you. And our next question comes from Andrew Steinerman with J.P. Morgan Securities. Please go ahead.

Hi. When you frame fiscal 22 revenue growth, could you just talk about some verticals here? Which verticals do you think will be above the average growth of the guide and which verticals might take longer to rebound or maybe they're just slower growth verticals.

Andrew, this is Todd. As we look at the business, certainly the hospitality business, you read about it in the papers. care about bookings, whether it's airlines or hotels, etc. That is a vertical that we think will be quite positive this year. The healthcare vertical is going to continue to be strong for us. Hospitals are catching up on voluntary type of procedures, which is helping that. And we have a very attractive value proposition in both of those areas as well. Education, government are both, you know, we expect to be quite strong for us. There was a mix of business I think you will see will be different in those areas, less PPE and more focused on more of a traditional type of approach that we've had in the past. But those key verticals are important. are all positioned well. And if you think of them all, they're all positioned quite well. Hospitality probably the best.

Are there any slower growth protocols or really is a rising tide here?

Yeah, I would say none come to mind where I would say, yeah, slower type of growth. It's just kind of a rising tide is the best way to put it.

Great. Thank you.

Thank you. And our next question comes from Hamza Mazari with Jefferies. Please go ahead.

Hey, good morning. This is actually Ryan Gunning filling in for Hamza. My first question is just around the fire protection business. And if you could just talk about the competitive dynamics there and any opportunity for a larger scale M&A in that business, kind of similar to what you did with Z Medical on the first aid side.

Yeah, Ryan, this is Todd. We like our position in the fire business. We really like the fire business. We understand how to go to market and how to make attractive margins in that business, and we're investing. We're investing in M&A. We're investing in infrastructure to make sure that we're able to service all of our customers. you know we have a national offering in that business some via subcontracting but nevertheless a very attractive national approach and we're positioned well how we you know our culture our infrastructure how we execute puts us in a good spot and and there's a good momentum in that business there was You think about it, it's all legally you have to have those products and those services. But nevertheless, there was some pent-up demand in it from repairs. If you think about someone comes through and looks at your fire equipment and there's some items that need to be repaired, During a pandemic, people weren't so anxious to spend money on those types of subjects, but as we're coming out of it, we're busy. We're busy in that area for many reasons, but one of which is some pent-up demand on repair, which is great business for us.

Got it. Thanks. That's helpful. And then switching over, could you provide any kind of visibility on, like, how much of your sales you consider today as like non-recurring versus recurring and how you kind of define that?

Yeah, great question. So when you think about, you know, let's call it PPE items that were really pandemic-related, they are still at levels elevated from pre-pandemic, but we do not expect them to repeat at the levels that they were in fiscal 21. If you think about our guidance, we think we would be with the PPE that doesn't repeat. If it does repeat, then we would be on the high end above 8% from an internal growth rate. So think about it that way, about how much will not be repeating, that we don't expect to repeat, which kind of demonstrates the mix of businesses. It's got to be much closer to traditional, and there's some real good momentum there to get to the growth rates that we've got it towards.

Got it. Thank you very much.

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

Hi, thanks. Good morning. In the uniform rental segment, can you talk a bit about sales rep productivity trends and how the pipeline is performing, especially moving through the quarter and entering fiscal 2022?

George, I'm glad you asked about that. I have been so impressed by our sales organization, the creativity, the flexibility, the urgency, the intensity about which way they go about their jobs. and how they have adapted to a crazy environment. And we try to work very hard to position them with great products and services so that people very much want to take their calls. And so we like where that's heading. The mix of business is obviously changing, but it's getting back to much more traditional, George. But there is a... There is a strong audience for our sales partners and whom they're calling on, partly because there was some items that you, when people were going through the pandemic, they said, hey, I can't make a decision on uniforms right now, but I need some critical products to help my business run. We provided those critical products and services, and it's positioned us now that it's closer to businesses getting back to normal, where they say, okay, now I'm ready to talk about those types of items. So all that is positive for us. As we went through it, folks didn't realize that we had all the products and services that we do, so that opened some doors, and we're continuing to operate in those doors to help improve our business.

That's very helpful. And then switching gears to healthcare and hygiene, those are very strong categories over the past year. Can you describe what kind of performance you're expecting structurally from those healthcare and hygiene categories, not just in fiscal 2022, but really looking forward? And then diving into PPE, you talked a little bit about normalization there in first aid mix, going back to pre-COVID levels over time, which has high margins. Is Talk a little bit about that evolving mix as well and the implications for growth and profitability.

Yes, George, I'll start. Mike, Scott, Paul want to jump in. We've spoken in the past about hygiene, cleanliness, all those subjects that the pandemic has done for those subjects, what 9-11 did to security. 20 years ago. And so what we're seeing is there's a greater focus on the health of employees, health of patients, health of guests, students, and hygiene is a big part of that. So we see that as something that will be elevated into the future, and we think that's good for society, that's good for our business. and good certainly for all those individuals. So we think that's gonna be something that's elevated hopefully in perpetuity. As far as PPE normalization, there was a breakneck pace to get PPE last year because folks couldn't keep their doors open in certain cases, couldn't work. So there was some real peaks last year That is certainly less we expect this year. The Delta variant, I think, brings a bit of a wild card into that, which we're not going to try to predict. But nevertheless, as we go throughout the year, you will see much more normalization. You'll see more people using our traditional cabinets, first aid products. hands and cabinets, as we say, and PPE will be more moderate. Now, just keep in mind, we've always been in the PPE business. We've always provided these products and services. It's just they were elevated. We will continue to offer them, but as more people get back to work in offices, in machine shops, in government and education, There will be more people that will be consuming, from a first aid standpoint, our traditional types of bandages and tablets, et cetera. So hopefully that gives you a little color.

And George, this is Paul. You mentioned first aid specifically too, so I just want to make sure we provided enough clarity there. That business, as Mike said, alluded to, it's in a transition period where You know, to Todd's point, so much PPE was provided. You know, we seized the opportunity to come through for our customers and provide thermometers and masks and visors, et cetera. So it's an outsized, you know, percent of the revenue. That will transition, as we've been talking about the last couple of quarters. You know, what I want to make sure everybody understands is that first aid business is is getting back to that more reoccurring revenue stream with that cabinet service business, which we are very excited about. And to think about a 9% or a high single-digit type of a growth rate for first aid in fiscal 22, that's coming off a huge growth rate with a lot of PPE, so still a strong performance. And what I want to make sure people don't miss is that in order to drive a high single-digit growth rate in 22 with PPE declining, that cabinet service business is growing very strongly. And what that will do then... is improve the margins going forward for the first aid business in fiscal 22. We probably won't get back, you know, all the way to pre-COVID levels in terms of margins in first aid because just like many of our businesses, you know, it's a lot of small transactions. There's some momentum that has to build, but definitely the margins will continue to improve through the year as we get back to servicing those cameras.

Very helpful. Thank you.

Thank you. Our next question will come from Tony Kaplan with Morgan Stanley. Please go ahead.

Thank you. I know you talked about the margin guidance earlier in the call and addressed the inflation impacts, but I wanted to see if you could provide maybe some additional detail around which business lines you're expecting to see the most strength from a margin perspective.

Well, Tony, I would say, you know, we expect all of our businesses to perform very, very well. And in order for us to be able to guide in the way that we did from about a flash to up 70 basis points, you know, we're going to need good performance out of all of our businesses. And that translates into very good incremental margins, especially in our rental business. It certainly, as Paul just described, it means that we're going to see some nice improvement in our first aid margins as we see a bit of a mixed shift. We expect continued good performance in our fire business as I think we mentioned 22% organic growth in the fourth quarter. We've got some great momentum and we'll get some nice leverage as we move into the year. And then certainly our direct sale Those margins, I would expect from a percentage standpoint to really increase nicely as we see the revenue start to come back. That will allow us to get a little bit more efficient and certainly be able to leverage our infrastructure in that business. So we're looking for margin increases. good margin performance in all of our businesses all contributing to that guidance range margin improvement and all contributing to real healthy 20 to 30 percent incremental margins.

Tony, obviously we're guiding towards all of our businesses growing incremental margins 20 to 30 percent but when you think about it, obviously the mix is going to change in all those businesses. and each of them sold with the exception of fire, there was some PPE. We'll get back to more traditional type of mix, and that and the leverage on the additional revenue is going to help us.

That's great. In your prepared remarks, you mentioned the 15 to 20 million businesses that you don't currently service. Could you just talk about the recent industry outsourcing trends. Um, has that, have you seen that accelerate or, or flat? And can you, how do you go about reaching out to those businesses? Is that a, an initiative, a big opportunity for you any more so than historically? Just how, how should we think about the opportunity?

Yes. Uh, Tony, the, um, the outsourcing trends continue. Um, uh, that has been positive. In addition, um, The focus on bringing manufacturing back to the United States and Canada we think will be a positive. That's obviously in the early innings, but both of those we think will be positives for our business. As far as reaching out, we have a significant investment in our infrastructure. And part of that infrastructure is in our route base and part of that is in our sales organization. So that is a significant investment. You've probably also seen, I hope you've seen, some of our investment in mass media that we're leveraging. because we think it can pay dividends for that infrastructure. And the number one thing we hear from customers and prospects, frankly, is, hey, I didn't know you did that. That is a product or a service that they didn't realize that we provided. So we're trying to leverage that and get the message out and to give a little air cover to our infrastructure.

Thank you.

Thank you. Our next question comes from Tim Mulrooney with William Blair. Go ahead.

Good morning, guys. I wanted to check in on the healthcare opportunity, which I know has gotten a lot of attention on recent calls. We haven't talked about it a lot yet today. You previously stated that I think the vertical could expand from kind of 7% of sales today towards potentially 10% of sales over the next several years. But I know things are changing rapidly these days. So with another three months under your belt, I'm curious if those expectations have changed at all in either direction.

Tim, this is Todd. I'll start. We don't see momentum slowing down in that area. Again, hospitals are getting back to more normal operation, how they run their business. and our value proposition resonates with them. We've talked often about the various products and services that we provide, scrubs being a big one, isolation gowns, but also cleaning products to help them provide a healthy environment. There's a whole lot more focus on health and welfare now, obviously in the healthcare business because of what they do for a living. There's always been a major focus on providing an environment that allowed for high patient satisfaction that was not only in health, but also in image. So when you think about what they need, it's a great vertical for us and the products and services we provide. And there's a long runway there. We're providing products and services to health institutions that I'd like to think you'd be impressed by the name of the list of people we do business with, so who's who in that business. But nevertheless, we're not nearly as penetrated as where we can be, should be, and will be. So we're very much in the early innings on that vertical still.

Okay, great. Thanks, Todd. And just switching gears, I apologize if you already addressed this, but how did the energy costs impact the results this quarter? I don't know, maybe year over year or sequentially or however you want to present it. But can you also talk about your expectation for energy costs that's built into your guidance, maybe for your fleet, but then also for your production plants? Thank you.

Tim, our total energy costs for the quarter were 2.1% of revenue. That's up 30 basis points from the third quarter, and that's up 40 basis points from a year ago. So we did certainly see some increase within the quarter. Our expectation is that those will remain elevated during fiscal 22, up at those levels, maybe even a little bit higher. So that's what we've got incorporated. Most of that increase being price at the pump, so our gas and our service, our routes. So that's what we've got in the guidance.

Great. Thank you.

Thank you. And our next question comes from Gary Bussey with Bank of America Security. Please go ahead.

Hi, guys. Good morning. I guess on revenue, at first, one clarification, one question. I just wanted to clarify. So high single digit for first aid, I heard that, and then I heard some discussion of the tough comps, and I think the term bumpiness. Is high single digit the right number for the year, but maybe declines in the near term as you get through the toughest period of comps is not out of the question? Is that a fair statement on that business? And the question... then on revenue. On the rentals business, right, the long-term growth rate's been sort of in line with this guidance. You've got easy comps. You've had sequential improvement throughout last year. The fourth quarter had quite strong growth. You know, and I guess I wonder why you wouldn't be positioned to grow faster than the historical long-term trend, given those factors in this year. Did the hygiene business within rentals have an outsized benefit from PP&E that rolls off, and is that a drag, or are there other factors beyond just your normal conservatism that might be weighing on that business? Thank you.

So, Gary, as far as the first aid, yeah, think about it as five single digits for the year. As Mike stated, Q4 last year, Q1, excuse me, Q4 of 20 was a huge growth rate for the first aid business, as was Q1, so the comp from right now, we're really big. So as the year goes on, the PPE comp will lessen, and as a result, our growth rates will be better in that business. So the bumpiness that Mike spoke about is simply the PPE comps, in the early portions of this fiscal year versus last. As far as the rental, yeah, as we mentioned in the past, there's PPE in our results from last year in rental as well. And again, just going back to our total guidance, if the PPE would repeat that we do not believe it will, this year, then you'd be into the, the number would start with an eight as far as internal growth. So how far into the eights, I really don't know, but nevertheless, we'd be picking up a heck of a lot of basis points and growth if that PPE repeated. So it's a headwind. We're proud that we provided the product to our customers. Our customers really valued it. It opened doors. Excuse the pun, but it kept their doors open in many cases. And our net promoter scores reflect it. So they were very appreciative that we were able to provide those products and services. If they need them again, we'll provide them. We just don't think that they'll be at the levels that they were in the past.

Thank you. And then the quick follow-up. In the past, Mike, I think you've provided the breakdown of the rentals business revenue in the fourth quarter by the various sub-segments. I wonder if you'd be willing to do that again this year.

Yeah, Gary, it's Paul. Yeah, Gary, we have that information for you. And I would preface it by saying, first of all, what we provided typically is a Q4 sample Q4 fiscal 21 versus fiscal 20. Obviously, you know, there's a lot of noise in these figures, excuse me, in that, you know, it's an unprecedented time. Fiscal 20's fourth quarter was the onset of the pandemic. So a lot of job losses, a lot of pandemic-driven demand, as Todd just said, for certain items of PPE. So I wanted to throw that out there first. But last year's fourth quarter, So fiscal 20, Q4, uniform rental was 50% of the segment mix. Dust, which is the walk-off mats, mops, that was 18% of the mix. Hygiene products, those are the soaps, the air fresheners, sanitizing dispensers, et cetera, that's 14%. Last year, shop towels were four, linens, 10, and the catalog business, which is more like the small direct sale components of the rental business products off of the route from the drivers. That was 4%. So then this year's mix, uniform rental, 48%. Dust, 17%. Hygiene, 17%. Shop towels, 4%. Linens, 9%. And catalog, 5%. So again, obviously... coded impacted results not necessarily you know reflective of future performance but with the this this breakout you can obviously see how strongly hygiene performed typically like in the q4 fiscal 20 that was mostly restroom type items soaps and air fresheners the paper but in this q4 21 that hygiene percentage grew greater driven by the sanitizer dispensers, the sands, the sanitizing sprays, et cetera. And then that catalog nudged up a little bit from 4% to 5%, and that's where a lot of the PPE in the uniform rental and facility services business that we've talked about is recorded, the masks, gloves, those types of items.

Thank you.

Thank you. And our next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.

Thanks very much. For my first one, I just wanted to follow up on the M&A comments earlier. It sounded like you have a very active pipeline that you're pursuing. I'm just curious if you could elaborate a little bit on what areas you may be pursuing and size of targets and how ripe things are. and then maybe what you're seeing with regard to multiples, good or bad, in the environment. Thanks.

Scott, I'll say each of our businesses were acquisitive, but tuck-ins, certainly some geographic expansion as well. So we're highly active, and there's folks that are at least answering phones. and taking calls, and we'll see where that goes. Certainly, you'll wonder about changes to tax, potential changes to taxes. Will that free things up? That'll be interesting to see what happens with that. As far as the size and multiples and such of things, there's everything from you know, the very small to medium-sized types. I won't comment on else, but they're all active. And, you know, part of it is because multiples, if you look at it historically in the marketplace, they're pretty high. But we're quite active in that area because we look at it from a very long-term approach, and we know when... when we make those types of acquisitions that it positions us to grow those as well. Because of our broad offering of products and services that we bring to the table, that in many cases the folks that we're speaking to don't have that broadness, it allows for us to take a long-term approach and grow those businesses whether it's just in that area of the business or cross-selling it across each of our enterprise.

Great, thanks. Appreciate that. My follow-up is a bit of a two-parter, but it ties together pretty well. In Todd's section in the press release, there's mention of investment and continued investment in technology and competitive advantage. Just hoping you could elaborate on that. And then the back part of the question is, CapEx was down a lot in the past fiscal year, almost half of what it was in the fiscal year 19 and down a good bit from fiscal 20. Just curious where that goes this year and maybe any tie together with the tech question. Thanks.

I'll start with the tech question and then Mike can handle the CapEx if he prefers. Scott, we're investing heavily there because we see a need to, whether it's productivity or from a competitive advantage, all areas of our business. We talked about leveraging SAP, leveraging the platforms that come along with that, that have customer benefits and operational benefits for us, and then obviously the data that goes along with that. But that being said, we see some opportunities in automation that we've been investing in over the years, and we see opportunities to get efficiencies out of our fleet that we're investing in that we think can pay big dividends in that area. And so we're focused on doing such and making it easier to do business with Cintas. And we think as you do that... That provides leverage for us, so leverage in the marketplace. So, Mike, I'll let you handle the CapEx question.

Sure. From a CapEx perspective, clearly the amounts were down in this past year because capacity needs just weren't the same as they had been in the previous years. We certainly kept up the CapEx for maintenance activities. But as we, you know, there's a bit of a lag between when we need new capacity and when this revenue has started to come back, and we've seen some momentum, but there will be a little bit of a lag in the CapEx. Having said that, I expect we'll get back to historical levels by the end of the fiscal year. That puts us probably in the $250 million range. for fiscal 22. But certainly when we invest, we will certainly, when we need to invest, whether it's capacity, technology, or otherwise, we will certainly do that.

Yeah, the great news is, you know, regarding our investment in the ERP system, SAP, that we've talked about a lot. I mean, a lot of that spending and that, you know, some of the major expenses behind us. And It took us a while to roll it out and get the entire network into SAP. We had the G&K acquisition that added more locations and kind of slowed down the time to complete it. Then we had the pandemic. And so the exciting thing is the additional investment will continue to be made throughout the business, of course, still in technology. But a lot of it's already paid for, and now it's perfecting the system, taking – you know, the toy, so to speak, out of the box and not just using it for the X's and O's of running the business, but, you know, using it to be that competitive advantage to give us the data analytics and the other advantages that we haven't had previously.

Thanks so much.

Thank you. And our final question today comes from Kevin McPhee with Credit Suisse. Please go ahead.

Hey, guys. This is actually Brian. I'm for Kevin. Thanks for squeezing us in here. Thanks for the commentary kind of around the color sort of on the reopening. And, you know, you don't expect not all customers are quite back yet. So just drilling in that a little bit. How should we think about, you know, sort of what percentage of clients are still inactive versus maybe, you know, kind of how that compares to you know, out of businesses or, you know, attrition that we would see. Just to kind of frame that in and, you know, any sort of commentary around how that shakes out geographically, either geographically or by vertical here in the U.S.

So, Brian, I don't have a specific number for you, but just generally speaking, I'd say most businesses are back to some degree, not certainly back to, you know, full bore. We mentioned Canada specifically as an outlier, which we expect, let's just say, by August, September to be back much closer to normal. But one of the big issues is there's 7 million people less working today than there were a year ago or so. And of those 7 million people, I don't know how many of them are CENTOS wearers or will be, but there's a percentage of them. We want those to certainly see those folks get back to work. Whether they're wearing uniforms or utilizing our first aid products and services, all that impacts us. For the most part, businesses are back. they're certainly not anywhere near where we think they will be over time.

Got it. Okay. And then the last one here for us, you guys talked about continuing to expand on ESG reporting. And certainly what we've noticed is the ESG scores tend to focus on the internal operations, but we'd be curious if you could just touch on maybe how you guys help your customers achieve their ESG goals. Thanks.

Yeah, Brian, great question. You know, again, our heritage, what we do, and frankly, speaking of the rental business, what our industry does, the impact that it has on saving customers' water, energy, what we do to treat water instead of it going down into the sewer, because those products, whether they're garments or towels or what have you, all that, they're going to be either purchased and thrown in the garbage or purchased and cleaned at home. And in both cases, we are helping substantially those folks, helping the environment and helping to save landfill space, helping to save water, energy, and the cleanliness of water as well. And I don't think we've told the story well enough in the past because At our heritage, we are a wash and reuse business. Again, without our industry, there would be millions of more gallons and units of energy and et cetera that would be utilized because they're going to be either thrown in the landfill or laundered somehow, and we know that we are infinitely more efficient at laundering those products than they would be at home or in another type of setting.

I might add also that when you think about our first aid and safety and fire businesses, the purpose of those businesses are to keep our customers' employees safe and healthy. And so it's a little bit of a different ESG angle than what Todd was talking about, but But from an employee perspective, our goals are to help our customers really achieve the safety and the health of their employees. So we're looking out for them from that S perspective of the ESG as well.

All right. And thank you. And this concludes today's question and answer session. Mr. Adler, at this time, I'll turn the conference back to you for any additional or closing remarks.

All right. Thanks, Nick. And thank you all for joining us this morning. We will issue our first quarter of fiscal 22 financial results in September, but we look forward to speaking with you again at that time. Have a good day.

And this concludes today's call. Thank you all for your participation. You may now