Cintas Q1 2023 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
September 26, 2023
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Operator

Good day, everyone, and welcome to the Cintas Corporation announces fiscal 2024 First Quarter Earnings Release Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Jared Mattingley, Vice-President, Treasurer and Investor Relations. Please go ahead, sir.

Jared S. Mattingley
Vice President, Treasurer and Investor Relations at Cintas

Thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer; and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2024 first-quarter results. After our commentary, we will open the call to questions from analysts.

The Private Securities Litigation Reform Act of 1995 provides a Safe-Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission.

I'll now turn the call over to Todd.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you, Jared. We are pleased with our start to fiscal year 2024. First quarter, total revenue grew 8.1% to $2.34 billion. Each of our businesses continue to execute at a high level. The benefits of our strong volume growth in revenue flowed through to our bottom line. Operating income margin increased a 110 basis-points to an all-time high of 21.4%, and diluted EPS grew 9.1% to $3.70.

I thank our employees, whom we call partners for their continued focus on our customers, our shareholders and charter. Uniform Rental and Facility Services operating segment revenue for the first quarter of fiscal '24 was $1.3 billion compared to $1.7 billion last year. The organic revenue growth rate was 7.6%. While price increases moved near historical levels, revenue growth continues to be driven mostly from increased volume. Our sales force continues to add new customers and penetrate and cross-sell our existing customer base. Businesses prioritize all we provide, including image, safety, cleanliness and compliance.

Our First Aid and Safety Services operating segment revenue for the first quarter was $260.7 [Phonetic] million compared to $234.2 million last year. Organic revenue growth rate was 11%. Our value proposition continues to resonate in our First Aid and Safety Services operating segment. Health and safety of employees remains top-of-mind. We provide businesses with access to quick and effective products and services that promote health and well-being in the workplace.

Our Fire Protection Services and Uniform Direct Sale businesses are reported in the all other segment. All other revenue was $254.8 million compared to $234.5 million last year. The Fire business revenue was $174.3 million. And the organic revenue growth rate was 14.2%. The Uniform Direct Sale business revenue was $8.5 [Phonetic] million, which was down 2.7% organically compared to last year.

Now before I turn the call over to Mike to provide details of our first quarter results, I'll provide our updated financial expectations for our fiscal year. We are increasing our financial guidance. We are raising our annual revenue expectations from a range of $9.35 billion to $9.5 billion to a range of $9.4 billion to $9.52 billion. The total growth rate of 6.6 to 8%. Also, we are raising our annual diluted EPS expectations from a range of $13.85 to $14.35 to a range of $14 to $14.45, a growth rate of 7.8 %to 11.2%. Mike?

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

Thanks, Todd, and good morning. Our fiscal 2024 first quarter revenue was $2.34 billion compared to $2.17 billion last year. The organic revenue growth rate adjusted for acquisitions and foreign currency exchange rate fluctuations was 8.1%. Gross margin for the first quarter of fiscal '24 was $1.14 billion compared to $1.03 billion last year, an increase of 11%. Gross margin as a percent of revenue was an all-time high, excuse me, up 48.7% for the first quarter of fiscal '24 compared to 47.5% last year, an increase of 120 basis-points.

Strong volume growth and continued operational efficiencies helped to generate this record gross margin. Energy expenses comprised of gasoline, natural gas and electricity or a tailwind, increasing 50 basis points from last year. Please keep in mind that some of the energy benefit is the result of efficiencies we've created with our proprietary SmartTruck technology. Certainly, we have also seen a benefit from a drop in prices at the pump compared to a year-ago.

Gross margin percentage by business was 48.1% for Uniform Rental and Facility Services, 55.9% for First Aid and Safety Services, 49% for Fire Protection Services, and 38.7% for Uniform Direct Sale. Operating income of $500.6 million compared to $440.1 million last year. Operating income as a percentage of revenue was 21.4% in the first quarter of fiscal '24, compared to 20.3% in last year's first quarter, an increase of 110 basis points. Our effective tax rate for the first quarter was 19.2%, compared to 14.8% last year. The tax rates in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation.

Net income for the first-quarter was $385.1 million compared to $351.7 million last year. This year's first quarter diluted EPS of $3.70 compared to $3.39 last year, an increase of 9.1%. Cash flow remains strong. Net cash provided by operating activities in the first quarter grew 13% over the prior year. On September 15th, we paid shareholders $138.3 million in quarterly dividends, an increase of 17.8% from the amount paid the previous September.

Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal '24 interest expense is expected to be $98 million compared to $109.5 million in fiscal '23, predominantly as a result of lower variable rate debt. Our fiscal '24 effective tax rate is expected to be 21.3%, this compares to a rate of 20.4% in fiscal '23. The higher effective tax rate negatively impact fiscal '24 EPS guidance by about $0.16 and diluted EPS growth by about 120 basis points. Our financial guidance does not include the impact of any future share buybacks. Guidance includes the impact of having one more workday in fiscal '24 compared to fiscal '23. This extra workday comes in our fiscal third quarter. Jared?

Jared S. Mattingley
Vice President, Treasurer and Investor Relations at Cintas

That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you.

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Operator

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

Faiza Alwy
Analyst at Deutsche Bank Aktiengesellschaft

Yes, hi, thank you and good morning. Wanted to see if you could provide a bit more color on the new business environment and if you've noticed any -- any change in terms of the macro environment? Certainly, you guys are talking to your customers every day. So, just a bit more perspective around what you're seeing out there in the marketplace.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Great. Good morning, Faiza. Yeah, our new business pipeline is quite good. We love the state of our sales organization, the focus that they have and the the scope. And so new business is quite good. And that's a big driver of our growth that you're -- that you're seeing. And we see that continuing. As far as macro environment, it is -- we haven't seen any real change in our customers' behavior, I would say since we reported last. So pretty consistent what we have seen over the past few quarters and we are watching it very-very closely and monitoring it as we move forward.

Faiza Alwy
Analyst at Deutsche Bank Aktiengesellschaft

Great. Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

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

Faiza Alwy
Analyst at Deutsche Bank Aktiengesellschaft

Thank you, good morning. I just wanted to see if you could give us a little more color, I think in terms of the pricing strategy and then also the strong volume growth. So, I think you said pricing is back to historical levels. So I'm guessing that's down in that low-single digit comp versus almost every other company talking about still, I guess, pricing higher than above an average. So just maybe the first question is just, how do we think about your pricing strategy here?

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yes. Good morning, Manav. Yeah, it is certainly closer to historical levels and we like that. That's we think appropriate based upon our cost inputs. But we are -- we're very proud of the fact that we're growing our business attractively and we think we can continue this. Based upon new business being robust and our customer retention levels being a very good as well. And we're seeing that in our -- in our customer satisfaction scores as well. And then the status of our customers is the -- they're continuing on in the operating environment as they have in the past. So we like where we're positioned. We'd like the momentum in our business and we like how we're growing it as well. And we think it's -- it bodes well for the future.

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

Manav, I might just add to that. You asked about our pricing strategy and as we've talked in the past, our goal is operating margin improvement, right? And pricing can be a lever within that, but we have other levers. It's not the only way for us to improve margins. And so as we think about the operating margin strategy of increasing, we've got a lot of good things going on and this is a great quarter that shows where pricing is sort of returning back to that historical level, we still increased margins quite nicely even to record levels. And again, it's just pricing is a part of that strategy.

Manav Patnaik
Analyst at Barclays

Yeah, that makes sense. That's quite impressive. And then maybe just on the strong volume growth, could you just help provide some color on how much of that is in a new business, cross-selling, maybe share gains, any color around that?

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yeah, good question, Manav. I mean, it's everything. As I mentioned, our new is quite good and our retention levels, we're very happy with and we're cross-selling. And we're continuing to make good progress there. We're never satisfied. But our value proposition is resonating with our customers and we're trying to make it easier to do business with us through various technologies and I think it's showing up in our results. And we're, again bullish.

Manav Patnaik
Analyst at Barclays

Got it. Thanks for that.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

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

Josh Chan
Analyst at UBS Group

Hi. Good morning, Todd, Mike and Jared. Thanks for taking my questions. I guess, could asked about inflation and what you're seeing across your different cost buckets, labor, energy and material and how you expect that to transpire over the coming quarters as well?

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yes, good morning, Josh. Yeah, I'll start. If Mike wants to chime in as well. Yeah, well, so what we're seeing from an input cost standpoint, labor is still higher than historical. But to Mike's point earlier, we're finding ways to improve operating margin in that environment still. And part of is because productivity is quite attractive and we're trying to position our employee partners so that they can be more successful in the marketplace, which is good for them and it's good for for ourselves and obviously with that retention levels of our employee partners being much back -- very close to historical levels. That's good for our customers as well.

Other input costs, you saw where energy was down year over prior. That is really a Q1 subject because if you recall last year, the price at the pump was very high and so a little bit of a tailwind there. But we think that will be pretty muted through the balance of the fiscal year. And then last, material costs. Our global supply chain team is doing one heck of a job in trying to make sure that we're well-positioned to have a very competitive prices and access to all of our product. And we've spoken in the past about how a very small percentage of our products are single-source. So that that positions us well as far as having access to product, but also being given them at very competitive rates.

Josh Chan
Analyst at UBS Group

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

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

Sure. We did see a little bit of an increase in capex in Q1. We are -- as we've talk, we are in the midst of implementing SAP for our Fire Protection business, and that adds a little bit of capex. In the first quarter, we also saw -- over the last couple of years supply chains, our vendors have had some disruption in their ability to deliver, trucks being the best example. And in the first quarter we saw a little bit of a catch up in terms of us receiving more of those trucks. And so we saw a bit of an increase there too in the first-quarter. I expect for the year that we're going to likely be right around 4%. Longer-term, we still believe 3.5% to 4%. But because of SAP and sort of that catch up, might be a little closer to 4% this year.

Josh Chan
Analyst at UBS Group

Great. Thank you, Mike, and thanks both for your time.

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

My pleasure.

Operator

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

Heather Balsky
Analyst at Bank of America

Hi, thank you for taking my question. I was hoping first if you could talk about your exposure to the auto sector and any exposure you may have to, I guess, some of the current disruption? And then two, if you could talk about through the end markets. Are there any areas where just in this macro you're seeing softness and areas where you're seeing strength would be great? Thanks.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Good morning, Heather. Yes, we're certainly watching what's going on with the auto workers' strike. But it is not affecting us in any material way whatsoever. We have a very broad-based customer base. And as a result of that, it's not affecting us to any material degree whatsoever. And keeping in mind that we have no one customer that's greater than 1% of our revenue and even sector that's greater than 10% for three digit NAICS codes. So, that helps us insulate us a bit from all that.

As far as the macro environment, it really it varies based upon the sector, geography, whether the goods producing or services providing. But the labor market is a little easier, but still not easy. And you see that through the, what we've -- what we're reading with the job openings, still 9.5 million job openings. And that affects our customer base from the standpoint of them trying to attract and retain people. We would love to see those jobs filled because we think that would be really good for our customers and for the economy in general.

Heather Balsky
Analyst at Bank of America

I appreciate the color. Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

And our next question comes from Justin Hauke from R.W. Baird. Please go ahead, Justin.

Justin Hauke
Analyst at R.W. Baird

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yeah. Good morning, Justin. Yeah, we really like the First Aid business. I mean, it's that -- it resonates with our customer base. The strong very strong value proposition is helping our revenue growth. The mix has returned closer to historical with First Aid and Safety. And Justin, just like our other businesses, weren't using various technologies to extract the inefficiencies out of our business and there is certainly no exception to that. I mentioned that our global supply chain team has done -- doing a great job and sourcing product and we're benefiting from sourcing there. But yeah, we see -- certainly there is -- running a business is not linear. But that being said, we certainly think that gross margins in excess of 50 are sustainable in that business.

Justin Hauke
Analyst at R.W. Baird

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

Well, I'll start and Mike can chime in. Justin, as you know, we love leveraging our balance sheet for M&A and we think it's a great use of cash, and we're very happy with the fact that we were able to deploy some of the cash to leverage that opportunity and we are acquisitive in all three of our operating segments that are route-based and we made acquisitions in all three, so in Q1. So we're pleased with that and we think that'll -- is a great opportunity for us to bring those customers into the fold, those partners -- those employee partners into the fold and provide more value and cross-sell t those customers that are now part of Cintas.

Justin Hauke
Analyst at R.W. Baird

Okay. Thank you very much.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

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

George Tong
Analyst at The Goldman Sachs Group

Hi, thanks, good morning. In the past you've talked about strong demand from the healthcare, education and government verticals in driving Uniform Rentals growth. Can you discuss the latest trends you're seeing in these end markets and what's fueling the growth?

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

George Tong
Analyst at The Goldman Sachs Group

Got it. And then with respect to margins, your gross margins expanded 60 bps year-over-year in your Uniform segment, most of that appears to be driven by lower energy costs. Can you discuss puts and takes around Uniform gross margins in the quarter and opportunities for additional margin expansion over the remainder of this year that comes above and beyond tailwinds you're seeing from lower energy costs?

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

George, I might just reiterate what I mentioned in the prepared remarks that that keeping in mind that the energy benefit that we are getting is partly because we are working really hard at things like our SmartTruck. Initiative. So in other words, as we continue to grow really nicely with volumes, we don't need to add as many routes and trucks as we have in the past and that creates then better fuel efficiency, if you will, throughout our network. And so that's a -- it is a proactive initiative to get energy down. And one of those proactive ways is through that SmartTruck technology.

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

George Tong
Analyst at The Goldman Sachs Group

Very helpful. Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

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

Sam
Analyst at William Blair

Hey, this is Sam [Phonetic] coming on for Tim. Thanks for taking my questions here. I guess, I want to start with another healthcare question here. But as it relates to your healthcare clients, you've talked a lot about the opportunity here, especially as more no programmers convert. But, I guess I'd like to know for those healthcare operators who already use a service partner, what do you think your penetration rate is and how might that compare to some of your other customer verticals?

Todd M. Schneider
President and Chief Executive Officer at Cintas

Sam, that's a good question. I don't have that in front of me. But we know this, we're in the early innings with healthcare. And we're coming up with more products and services that they find attractive and that's part of our culture. We will enter into a business, but then we we get out from behind our desk and we go spend time with our customers. And when we find that we find the answers to what they are most interested in by speaking to them and our customers and our employee partners and we're hearing from them in various areas where we can help them and we're taking action there. So again, a very long runway in that vertical. And that's again part of our culture and will be part of how we go to market moving forward.

Sam
Analyst at William Blair

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

Nothing, nothing unusual in the quarter. We did see the -- we talked in the fourth quarter about some claims getting higher but not structural. We saw those come back down to something more normal. But as it relates to the quarter, just some puts and takes, nothing of any significance. Our goal is to continue to leverage, particularly the G&A piece of that and we're going to continue to work at that.

Sam
Analyst at William Blair

Awesome. Appreciate it. Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

And our next question comes from Andrew Andrew Steinerman from J.P. Morgan Securities, please go ahead, Andrew.

Andrew Steinerman
Analyst at J.P. Morgan Securities

All right. I wanted to talk to you about incremental margins, which were super strong in the quarter and last quarter on a year-over-year basis. I surely know Cintas historically has targeted 20% to 30% as range for incremental margins. But kind of given where we are right now, it definitely feels like that kind of low-end of the range to 20% might not be as appropriate. And so my question is, you know, has your medium-term range for incremental margins been creeping up?

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

Andrew Steinerman
Analyst at J.P. Morgan Securities

Okay, thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

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

Seth Weber
Analyst at Wells Fargo & Company

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yeah, good morning, Seth. Certainly what we have seen outstanding performance from that business over the past really two years and -- but it is, as we've spoken about in the past, the Uniform Direct Sale business tends to be a little bit lumpier based upon rollout some large programs, whether it's hospitality or a Fortune 1000 type customer. So, nothing more than that. We still are bullish on the future of that business and for the year and moving forward.

Seth Weber
Analyst at Wells Fargo & Company

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

I would suspect -- well, we expect our businesses to grow. So, I would suspect that we would see that up, but just the comps are, Seth, with the level of what we dealt with hospitality in that vertical and 41,000 [Phonetic] the level of where employees came back. So strongly I would suspect that you'll see anywhere near the level of growth that we've seen in the last couple of years, but we expect it to grow.

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

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

Seth Weber
Analyst at Wells Fargo & Company

Right. Okay, understood. Thank you. And then maybe just on the the First Aid and Safety business, given the margin strength that you're seeing there, can you talk about -- are you seeing any incremental competition in that space? Are you seeing any, you know, bigger players trying to get into that space, or just smaller regional players getting more active? Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

Seth Weber
Analyst at Wells Fargo & Company

Okay guys. Thank you very much.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

And our next question comes from Stephanie Moore from Jefferies. Please go ahead, Stephanie.

Stephanie Moore
Analyst at Jefferies Financial Group

Hi, good morning. Thank you. Actually, maybe continuing on that last question there, could you talk a little bit about what you're seeing in terms of the competitive landscape and your more core Uniform ancillary products segment. As we continue to win new business, where are you seeing the majority of that new business coming from, is it non programmer, some of the regional players, larger players? Any color there would be helpful. Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yes, good morning, Stephanie. So, I've been in the Uniform Rental and Facility Services business in my career, 34 years, it's been highly competitive, my entire career and I'm sure it will continue to be that way. But we haven't seen a change in the landscape. It's always really competitive. So that being said, we -- our sales organization is highly skilled and what we know is there is a massive opportunity with the no programmer market and for years our organization has been focused on expanding the pie and they are continuing to do exactly that. And when we talk about expanding the pie, they are -- those those employees at a no programmer, I mean, they're wearing garments, right? It's -- but they are -- they may be buying it themselves, they may be buying it through our catalog. It might be a centralized program for the company. But they're purchasing them. And then we provide more value to them with the products and services that we offer, whether they're unique products, like Carhartt or Chef Works, or [Indecipherable] great branded programs. But the no programmer market is really attractive for us and we find that our -- that market sees really good value in what we're offering. So we're focused on expanding that pie and that will continue.

Stephanie Moore
Analyst at Jefferies Financial Group

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yeah, great question, Stephanie. That's a very complicated answer because there are so many inputs to it. But it starts with being highly focused on taking incredibly good care of our customers and attracting and retaining the very best people. But then giving them product services, tools so that they can not only have we intent to take great care of our customers, but do we just exactly that. So, and that gets into grade products that I mentioned earlier. The service focus that we're, or the tools that we're making it to make it easier to do business with us. But it gets down to our people and positioning them to take a really-really good care of our customers and then executing on that, and they are executing at a really high-level. And we talk often about when markets -- when things are challenging, when it's hard to attract people, when it's hard to procure products, when it's hard to operate in the marketplace, it gives us a chance to shine and our culture is shining through and our people are doing one heck of a job and taking care of our customers.

Stephanie Moore
Analyst at Jefferies Financial Group

Great. Thank you so much.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

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

Scott Schneeberger
Analyst at Oppenheimer

Thanks, good morning. Guys, you've certainly -- it sounds like you really want to speak to do SmartTruck because that's been going very well. I was hoping you could add also on automation to facilities and where I'm going here is just kind of an update and where I'm going here is, it sounds like you've been getting nice efficiencies and you still see more room to run. Is there any quantification you can put on that? I know you're looking for margins up this year overall business, but maybe just help us get an idea of what's at play there and how much you can do? Thanks.

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

There are so many details that go into all of the things that Todd just talked about that it's really hard to put a number on it. Our goal is, as you've heard us say is continue to improve margins. We have a number of different levers to do so. Our goal is incrementals in that 20% to 30% range, recognizing we're at the bottom of that range today. But it's hard to -- it's hard to put a specific number on what's left because we're always -- we're always working on what more can we do and there are so many details and so many different projects we're working on. So our guide certainly does imply for continued margin improvement over last year and that's the way we think about it.

Scott Schneeberger
Analyst at Oppenheimer

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

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

From a Fire perspective, the -- we are in the midst of the early innings of the implementation and so we'll see -- we'll see some pressure in the Fire margins a little bit this year and a little bit next year. Though the synergies and the benefits don't come overnight, it's not a flip of the switch. And so we -- just like we did with the Rental business in the First Aid business before that, we need to get onto the platform and it takes a little bit of time to get really good at using the platform and then we really start to see the benefits accelerate, just like we have in First Aid and Rental now. That's a -- Fire is a smaller part of our business, but we certainly expect that those benefits will come.

As it relates to SAP. SAP is not -- it's a journey, right? And we are -- even though we are on SAP and will be for most of our business after the Fire Protection business gets on, there are constant things to learn from SAP. There are new initiatives in working with SAP and Google and Verizon that create new and different things. And so we look at this, I think Todd has talked about it as one of his largest initiatives in terms of technology and it's a journey. It's not a it's not a flip of the switch we turn on new systems here and there. So we're in the midst of that. We will continue to invest in all of that and our expectation is it's going to continue to bring benefits into the future.

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

Scott Schneeberger
Analyst at Oppenheimer

Great. Thanks guys.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yes, sir.

Operator

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

Shlomo Rosenbaum
Analyst at Stifel Nicolaus

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

Good question. Shlomo. Yeah, I mean, again, we love the First Aid business, but there's so many inputs to margin expansion and we're leveraging them all. It starts with really good revenue growth and we're seeing that. And that's in a big way because the value proposition is resonating the products and services that we offer in the marketplace, trying to attract and retain people is still challenging. And people are trying to -- customers are trying to take really good care of their people and we're benefiting from that, and we're helping them accomplish exactly that. We're helping them run their business better. So that's helpful.

The mix, as you know, has -- back during the pandemic it was certainly so much more focused on safety products, a lot of clubs and a lot of sanitizer and those types of items, and that has abated a bit and the mix is back focused on First Aid and those types of products, more recurring revenue type. And yeah, we are absolutely leveraging technology to make it easier to do business, but also to position our partners -- our employee partners to provide more value to our customers and SmartTruck as a component of that. We did have a little bit of energy tailwind, 40 basis-points. But as Mike stated earlier, not all that's because of the price at the pump. That is also because we are extracting the inefficiencies out. And we always talk around here about how -- we don't make money when the wheels are moving. We make money when the wheel stop. That's better for our customers, that's better for our employee partners, and all that is contributing.

And then lastly, as I mentioned, our supply chain team has done a great job. They are leveraging the opportunities there. The larger we get in that business, the more leverage they have and they are executing at a high level, and -- so many inputs that are contributing to it. And what's really encouraging is we see those having an opportunity to continue in the future, so certainly no event is more of a process.

Shlomo Rosenbaum
Analyst at Stifel Nicolaus

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yeah. Pardon me. So from a labor standpoint. Yeah, as I mentioned earlier, it is easier, but not easy, and we are looking for great people. We want to hire not only people that are employed somewhere else, but happily employed, which is very challenging. But we think we have a great employee value proposition as well, and so we're highly focused on that. So, but yes, easier than it was a year ago. But, Shlomo, throughout my career it's always been challenging. It's a little bit more challenging than it has been historically, but not what it once was a year ago or so.

Shlomo Rosenbaum
Analyst at Stifel Nicolaus

Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

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

Kartik Mehta
Analyst at Northcoast Research

Hey, good morning. I know there's a lot of questions and maybe thoughts on what happens to new sales and I'm wondering, if you go back to kind of 2008, 2009 and hopefully have that recession again. But if you look at new sales back then, how did Cintas to perform for new sales? And any lessons from that you would take as we move forward?

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yes, Kartik. Well, first of all, we're really different company today than we were in 2008, 2009. We have a much more diversified customer base. We're now today -- 70% of our customers are services providing, 30% are goods producing. We have significant verticals that we didn't have as well healthcare, education, government. So, we think we're really well-positioned for whenever the next recession is. And I remember '08, '09, because I was running the sales organization back then and our value proposition is still resonating with people. And we still sold new business and we did so at attractive rates. As I mentioned, it's not always are we asking for new money. Sometimes it's just a redirection of those from somewhere else to us, not only in a, maybe a direct competitor standpoint, but also they're purchasing clothing, they're purchasing items to take care of the facilities. So we think we're well-positioned.

I might also mention, you didn't ask specifically about it, but we love having a pristine balance sheet. And we think whenever the next recession is, that might open up opportunities for us. And just the fact that we've -- our organization is focused on fighting through whatever the economic environment is, taking great care of our customers, taking great care of our employee partners, and we've grown sales towards 52 [Phonetic] in the last 54 years, and we suspect that whatever the economic environment is, we believe we're going to be successful at.

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

Kartik, I might add. Todd, might be a little modest. He was running that organization, it was a difficult environment, and he and the sales team exceeded their internal goals and really continued to show that value even in tough times as Todd mentioned in. And as we also talked about, our customer base is quite a bit broader than it was back then, and our sales team is a little bit different. But the really good news is even back then in the deepest, longest, broadest recession we'd seen in a 100 years, we still sold a lot of new business and it's a nice reflection of the value proposition that we have.

Kartik Mehta
Analyst at Northcoast Research

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

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yes, correct. It's a good question. I don't have that in front of me. But I know it has returned much closer to historical or even higher as far as what we see from a repeat recurring type revenue. And we want to provide value to the customers whatever product services they want. It's just the nature of it what we provide, whether it'd be First Aid supplies, access to AEDs, access to eye wash stations, access to clean water for our water break offering. Those are all items that are really important to our customers, more so today than they were pre pandemic and we think that trend will continue.

Kartik Mehta
Analyst at Northcoast Research

Thank you very much. I really appreciate it.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Yes, thank you.

Operator

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

Toni Kaplan
Analyst at Morgan Stanley

Thank you so much. So one of your competitors has been talking about using a strategy where they're incentivizing their drivers to cross-sell products. Can you talk about why you don't use that strategy? You know, what's the disadvantages are that you have found when doing that?

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

J. Michael Hansen
Executive Vice President and Chief Financial Officer at Cintas

And, Toni, we've talked a lot about this over the over the last, more than 10 years. We've got customers of all different sizes verticals, etc., and so while we do certainly expect those service sales reps to continue to penetrate and sell, we recognize that some businesses are just more complex than others, are larger than others. And so sometimes there is a there's a strategy to enhance that opportunity and it might be through, for example, in healthcare we have dedicated people that really do reach out to the decision makers. So it's not just the service sales rep, but it's also other people that have relationship responsibilities that are looking for those new and different penetration opportunities. It's not as simple just to simply say we're going to go in and have a service sales rep or an SSR go into each customer and sell it. All customers are so different. And so we need a strategy that can attack all types of customers and we do.

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

Toni Kaplan
Analyst at Morgan Stanley

That is super helpful. Wanted to also ask, I think the last few calls you've been talking more about technology and investments and things of this sort. Are there any, I guess, technology capabilities that you think you still need without you either are getting through hiring technology people or maybe even doing M&A and maybe you've done it, maybe you still have yet to do. But are there any technology capabilities that you need that basically would be helped through M&A or hiring internally new technology people?

Todd M. Schneider
President and Chief Executive Officer at Cintas

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

Toni Kaplan
Analyst at Morgan Stanley

Thank you.

Todd M. Schneider
President and Chief Executive Officer at Cintas

Thank you.

Operator

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

Jared S. Mattingley
Vice President, Treasurer and Investor Relations at Cintas

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

Operator

[Operator Closing Remarks]

Corporate Executives
  • Jared S. Mattingley
    Vice President, Treasurer and Investor Relations
  • Todd M. Schneider
    President and Chief Executive Officer
  • J. Michael Hansen
    Executive Vice President and Chief Financial Officer
Analysts

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