Good day, everyone. And welcome to the Cintas Second Quarter Fiscal Year 2022 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Paul Adler, Vice President and Treasurer, Investor Relations. Please go ahead, sir.

Thank you, Vanasan. And 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 2022 second 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.

Thank you, Paul. Our second quarter financial results were led by a strong revenue increase of 9.4%. Our financial results are indicative of our compelling value proposition, vast total addressable markets, and the outstanding execution of our employee partners. I thank our partners for continuing to navigate these challenging times by focusing on our customers. The benefits of our strong top line growth flowed through to our bottom line. Excluding last year's $18 million pretax gain on the sale of certain operating assets in the Uniform Rental and Facility Services segment and the related tax benefits, second quarter operating income margin increased 70 basis points from last year, and EPS grew 16.5%. These results are especially significant given that they were achieved in a period in which U.S. inflation hit a 39-year high. Uniform Rental and Facility Services operating segment revenue was $1.54 billion compared to $1.41 billion last year. Organic revenue growth was 8.5%. The labor market is challenging. However, we are benefiting in the current environment. Businesses are struggling with the scarcity of labor, which has left many understaffed. Also, businesses have a heightened awareness of safety and cleanliness and are concerned with their ability to properly sanitize amid persistent COVID infections. Businesses are increasingly outsourcing to Cintas, so they can focus on their core competencies and be Ready for the Workday. And it is noteworthy that the U.S. still hasn't recovered about 4 million pre-pandemic jobs, and the job openings totaled about 11 million. Return of jobs represents future revenue growth opportunity for Cintas. Our First Aid and Safety Services operating segment revenue for the second quarter was $202.2 million compared to $194.4 million last year. Organic revenue growth was 3.2%. Second quarter revenue was up against a difficult comparison. In last year's second quarter, in response to the COVID-19 pandemic, sales of personal protective equipment (PPE) were very high and the business grew organic revenue by 14.5%. At that time, PPE comprised an outsized percentage of First Aid and Safety Services revenue mix. The amount of PPE has declined year-over-year as expected. However, COVID infections are still prevalent and PPE remains a larger percentage of the revenue mix than it was pre-COVID. Over the same period of time, the recurring first aid cabinet service business revenue has increased. In fact, it is up 20% from last year. We welcome this shift in mix because First Aid cabinet service business is a more consistent revenue stream and has higher profit margins than PPE. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was $184.9 million compared to $152.1 million last year. The Fire business organic revenue growth rate was 16.9%, and the Uniform Direct Sale business organic growth rate was 47.3%. Both businesses benefited in part from an improved economic environment. Regarding our balance sheet and cash flow, our financial position remained strong. Second quarter operating cash flow increased 27% from last year and free cash flow improved 16%. Recently, on December 15, we paid shareholders $98.5 million in quarterly dividends. The amount per share of common stock paid of $0.95 represents a 26.7% increase over the company's previous quarterly dividend. We continue to allocate capital to improve shareholder return. Now before turning the call over to Mike, I want to highlight that we recently issued our 2021 environmental, social, and governance report. Cintas was founded on a sustainable business model. We are committed to protecting the environment, enhancing humanity, and maintaining accountability. The report, our second consecutive, provides expanded information and data, including our reductions in energy usage, water consumption, and Scope 1 and Scope 2 emissions. Our ESG report further illustrates that our corporate culture based on doing what is right and challenging ourselves to improve is a competitive advantage. I'll now turn the call over to Mike.

Thank you, Todd, and good morning. Our fiscal 2022 second quarter revenue was $1.92 billion compared to $1.76 billion last year. The organic revenue growth rate, adjusted for acquisitions, divestitures, and foreign currency exchange rate fluctuations was 9.3%. Gross margin for the second quarter of fiscal '22 was $885.1 million compared to $819.9 million last year. Gross margin as a percent of revenue was 46% for the second quarter of fiscal '22 compared to 46.7% last year. Gross margin percentage by business was 46.8% for Uniform Rental and Facility Services, 43.5% for First Aid and Safety Services, 44.6% for Fire Protection Services, and 39.1% for Uniform Direct Sale. Energy-related expenses were a headwind, increasing 40 basis points from last year. Also, we made investments in labor to support our strong current and anticipated revenue growth. Selling and administrative expenses improved as a percentage of revenue to 26.2% in the second quarter compared to 26.6% last year, operating income of $381.2 million compared to $352.9 million last year. Operating income margin was 19.8% compared to 20.1% reported last year. Excluding last year's second quarter $18 million gain on the sale of certain assets, which were recorded in selling and administrative expenses, this year's second quarter operating income grew 13.8% and operating income margin increased 70 basis points. Our effective tax rate for the second quarter was 18% compared to 13.3% last year. The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense. In addition, last year's second quarter tax rate included a 370 basis point benefit from the sale of certain assets. Net income for the second quarter was $294.7 million compared to $284.9 million last year. Diluted EPS was $2.76 compared to $2.62 last year. Excluding last year's second quarter gain and the related tax benefits, which impacted diluted EPS by $0.25, this year's second quarter diluted EPS of $2.76 compares to $2.37, an increase of 16.5%. We are increasing our fiscal '22 financial guidance. We are raising our annual revenue expectations from a range of $7.58 billion to $7.6 billion to a range of $7.63 billion to $7.70 billion, and diluted EPS from a range of $10.60 to $10.90 to a range of $10.70 to $10.95. Please note the following regarding our guidance: Fiscal '22 effective tax rate is expected to be approximately 19% compared to a rate of 13.7% for fiscal '21. The higher effective tax rate negatively impacts fiscal '22 diluted EPS guidance by about $0.72 and diluted EPS growth by about 700 basis points. Guidance does not include any future share buybacks, and guidance assumes an uneven economic recovery caused by COVID-19. However, guidance does not contemplate significant COVID-19 pandemic-related setbacks such as stay-at-home orders or costs necessary to comply with government COVID-19 mandates. Finally, when modeling our fiscal '22 financial results by quarter, please note that in last fiscal year's third quarter, we were able to help our customers respond to a spike in COVID-19 cases by providing them with a variety of supplies of personal protective equipment, gloves, in particular. We provided more personal protective equipment in that quarter than in any other. Excluding the PPE that we don't expect to repeat, our second half of the year revenue growth guidance is over 9% at the top end of our range.

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.

We'll go ahead and take our first question from Manav Patnaik with Barclays.

Thank you very much. I was just hoping you could address your near-term visibility more in terms of reactions from your customers with the spread of Omicron, and if you're seeing any change in behaviors or are people just kind of chugging along here?

Manav, this is Todd. Thanks for your question. Good morning. At this point, we haven't seen a change in our customer base as a result of Omicron. It's a little early to tell, certainly. But nevertheless, I would say it's business as usual at this point with our customers, and we're looking forward to the back half of the year.

Got it. And then maybe just as a follow-up, tied to the other pressures out there, which is inflation. It sounds like you guys are handling that well. You referred to investments in the labor force. Can you just address what that is and broadly how you feel about managing these inflationary pressures going forward as well?

Yeah, great question. Inflation is certainly real, but I think we're managing it quite well. We do have a world-class supply chain organization that is a real competitive advantage in these cases. Fortunately, we've been addressing wages over the past couple of years, as we've spoken about in the past calls. So we weren't caught flat-footed with regards to wages. Our wage increases are still a little above historical, but we're more investing in the infrastructure to be able to service our customers based on our current growth and anticipated growth, which we are very excited about. Thank you. Thank you.

We'll go ahead and take our next question from Andrew Steinerman with JPMorgan.

Hi. It's Andrew. If I try to back into the second half operating margins in the full year guide, I get to 19.1%, which is up modestly year-over-year. And I just wanted to make sure that you do the math the same way as maybe you'd kind of go through some of those kind of puts and takes on the second half operating margins.

Good morning, Andrew. Our implied operating margin guidance for the second half of the year is a little bit higher than what you stated at 19.1%. We think of it closer to the 19.5%. And look, we still expect some very nice operating margin growth for the year, even in the back half of the year, and even in an environment that is pretty challenging, as I'm sure you're aware in terms of the inflationary pressures. But as Todd mentioned, we're managing that inflation. We like the margin improvement, and our expectation is we're going to see better than the 19.1% that you referred to.

Is the 19.5% referring to the total company? I wanted to comment on the increases on the customer side, particularly the B2B increases, since you've been on a break and are now in the process of raising prices for customers. How has that been received? Are they understanding of the inflationary situation?

I'll take that one, Mike. Thanks for the question, Andrew. Certainly, on the pricing, one of the things that's important to understand is that we don't simply send out a letter increasing prices to all 1 million customers all at the same time. We address the issue throughout the year. So you'll continue to see that. And also, as we said in the past, pricing is a local subject. Some industries are still struggling, some are doing quite well. Some geographies are still not back to pre-COVID while others are nicely ahead of the curve. Now inflation seems to be in every headline and every time you turn on the news. As a result, I'd say the conversations with our customers are generally going well, and our results are a little bit better than historical in that area as well. But as you know, we take a long-term approach and we focus on the lifetime value of our customers, which is reflected in our NPS scores being at all-time highs. Now all that being said, in the face of inflation at a 39-year high, we are growing our operating income and incremental margins at very attractive rates, and we're excited about that.

Right. And then just confirm 19.5% was total company, right?

It was a total company growth of just under 19% compared to last year, indicating a significant margin improvement. Last year's margins were record highs, exceeding pre-pandemic levels by 310 basis points, so we are optimistic about our margin trajectory for the second half of the year.

Well said. Thank you very much.

Okay. We'll go ahead and take our next question from Hamzah Mazari with Jefferies.

Hi. This is Mario Cortellacci filling in for Hamzah. Just my first question around labor. Maybe you can just update us just not on the labor inflation portion, but also on the labor availability in your business and kind of how you're managing through that? And then also, maybe you could tie that through to what your pricing strategy looks like regarding that, especially since you guys really haven't taken any price in the past 2 years, I believe it was?

Yes, Mario. This is Todd. As far as labor availability, we're competing quite well out there. We pay a very competitive wage and offer very attractive benefits. We think we're an employer of choice, and that's reflecting in our staffing levels, which we like. It's certainly more challenging this year than in the past in general, but we're competing quite well, and we like that. As far as how we look at pricing, you'll see it throughout the year. It is something that we examine customer by customer because it's a local subject. We evaluate the long-term value of the customers. We are doing better than historical. The reason being is that customers are highly aware of the inflation and wage pressures as well. Because of that, we think we're in a good spot. I'm very thankful that we've been addressing wage increases over the past few years because it prevented us from being flat-footed coming in and facing real pressure.

Great. And then just for my follow-up. Can you just comment on the Fire business and your strategy for getting into some of the top fire markets that you're not currently in? Do you intend to play in any other adjacencies within the Fire business such as what other larger players have done in that space?

Yes, Mario. As far as the Fire business, we're continuing to build out our footprint. We have found that the model we are providing service levels to customers is showing up nicely in new business wins and retention, and you're seeing it in the growth. As for adjacencies, we're always evaluating those, but we think there's incredible run rate in that business with the type of strategy we have today without even going into an adjacency. However, we're certainly always evaluating this.

Great. Thank you very much. I hope you all have a great holiday.

Thank you. You too.

And we'll go ahead and take our next question from George Tong with Goldman Sachs.

Hi, thanks. Good morning. Your gross margins contracted 80 bps year-over-year in the Uniform Rental segment. Can you elaborate a bit on margin performance there and what your guidance implies for Uniform segment gross margins?

Certainly, George. This is Todd. Gross margin in general is up 40 basis points due to energy alone, so that's obviously a headwind. I think gas stand-alone is up 60% year-over-year. But as far as the balance of that, the 70 basis points, we're making investments in the additional employee partners that we need to service the very nice growth that we're seeing along with the growth that we see coming. The revenue now, George, is a little different from last year. It's much closer to our traditional revenue mix. Let me give you an example to help understand that better. With PPE, there was obviously significant demand last year, and we're happy to help our customers with it. But in many cases, those were simply drop shipments to those customers. When you drop ship large quantities, it doesn't take a whole lot of work. In contrast, servicing uniforms, facility services, first aid, and safety cabinets requires more work. However, we welcome this shift as it provides more value to customers than simply a drop ship. It's stickier business and yields better margins. We like it, and we have been staffing for and guiding toward it. Though inflation is at a 39-year high, as I mentioned, energy costs are up 40 basis points, and our investment in growth is intended for both today and the future. Excluding the one-time gain from last year, our operating margins were up 70 basis points and our incremental margins are quite strong. We are doing exactly what we had hoped and planned for, which would be the way I would describe it.

Got it. That's helpful. Your healthcare and hygiene businesses have seen a boost in demand with COVID. Can you talk about trends and the broader opportunity you're seeing in health care and hygiene?

Certainly. Health care and hygiene are connected. Health care is a vertical, while hygiene applies across all businesses. For healthcare, we're continually seeing strong demand. We appreciate what we're providing with scrubs and items to help customers clean patient rooms and other rooms, in addition to isolation gowns. All of that is consistent, and we continue to be very bullish about the healthcare vertical. As for hygiene, and I'm grouping hygiene with sanitization and cleanliness, we believe there's been a sea change that may benefit us long-term because of the focus on hygiene, health, and safety. We believe this will reflect positively in our Uniform Rental and Facility Services segment as well as our First Aid business. People are very focused on the health, safety, and wellness of their employees, customers, guests, and patients, and as a result, this is good for us.

Got it. Very helpful. Thank you.

Thank you.

And we'll go ahead and take our next question from Ashish Sabadra with RBC.

Thanks for taking the question. I just wanted to follow up on the comments that you made on healthcare, but just focus on the larger opportunities across the three verticals: healthcare, government, and education vertical. I was wondering if you could comment on the pipelines for those larger opportunities. Thanks.

Yeah. Ashish, the pipeline looks quite strong for all those verticals. We feel good. Our sales organization is operating at a very high level, and we really like our new business wins in that area. Our retention is very attractive. So, looking at all that, our new business wins and retention are strong, and we are excited for our customers to get back to full strength, which we think bodes well for our future.

That's very helpful color. And maybe just talking about technology; in the last call, you had mentioned the benefits of SAP implementation and more to come. I was wondering if you could talk about what you're doing on the technology front, on the automation front, and provide some preview of what we could see over the next year? How should that help offset some of the inflationary pressure? Thanks.

Yeah. Great question. Investing in technology is one of our top priorities because we see the opportunity to improve operational efficiencies and also provide items that customers notice and make it easier to do business with us. A good example is by leveraging SAP and partnering with a communications company. We have launched what we call Smart Truck technology, which collects and analyzes data to create a much more efficient routing structure. This allows us to spend more time with customers instead of driving between stops. When the wheels are moving, that's just expense; we only make money when the wheels stop. This is an opportunity to leverage technology to improve operational efficiency. We have also launched a portal for our customers allowing them to conduct transactions online, which is a competitive advantage. In contrast to years ago, customers no longer always want to do business during normal hours; they're interested in doing business on their time. Over half of their requests come outside normal business hours, emphasizing the importance of modernizing our service approach.

That's very helpful color. Thank you and happy holidays.

Thank you.

We'll go ahead and take our next question from Andy Wittmann with Baird.

Thanks for taking my question. I guess I just wanted to get a little subjective comments on the new guidance this quarter versus what you gave last quarter. Mike, it looks like the biggest change in the EPS side is just a little bit lower tax rate. On the revenue side, the quarter beat consensus. You don't guide quarterly, but it feels like the fundamental outlook for revenue and core operating margin hasn't materially changed. Is that the right way to look at it, or did you see a change in business fundamentals that you're factoring into the updated guidance?

Andy, I think that's a fair assessment from not a lot of change in what we had been talking about last quarter, which is continuing strong growth in the second half of the year. Excluding that big PPE number in the third and a little bit in the fourth quarter, our growth would be in excess of 9%. The margins we have been talking about for much of the year remain. We certainly expect margin growth. If we hit a 19.5% margin, that's roughly a 60 basis point improvement in the back half, alongside a 50 basis point improvement in the first half. So, the movement is a little bit of taxes and maybe a little margin improvement. Generally speaking, your assessment is fair: nice growth and healthy margin improvement on record margins from a year ago.

Yeah. Okay. Thanks for going into that, Mike. I guess my follow-up question pertains to the margins, which you discussed earlier. You mentioned pricing was a bit above average. Are there any other driving factors for margin performance besides pricing and operating leverage from the business? Are there other investments or actions you are taking to help this margin performance, or is it somewhat of a natural outcome of price/cost as well as fixed cost leverage?

Yeah. Andy, this is Todd. Good question. I think it's the normal operation of the business. We're always investing in various items that help our operational efficiencies. I mentioned the Smart Truck technology that we’re excited about, but it's generally the leverage we're getting in the face of a very challenging environment. As Mike said, our margins were record margins at a 310 basis point improvement, and we're excited about that. We're continuing to take steps forward this year.

Andy, I might categorize the positives into a couple different buckets. First, our growth is at strong levels, driving great leverage within the business which translates to productivity improvements; from laundry facilities to sales rep productivity, productivity is strong and continues to improve through process improvement and automation. We're managing our cost structure very tightly, having made some difficult changes last year. While we’re seeing travel resume, we try to maintain that tighter structure. Lastly, pricing is helping a bit this year, further driving margin improvement. We are achieving solid performance even in the face of increasing energy and other inflationary factors.

Yeah. Great. Thanks for the comprehensive answer, guys. Happy holidays.

You too, Andy.

And we'll go ahead and take our next question from Tim Mulrooney with William Blair.

This is filling in for Tim. Thanks for taking questions here. I wanted to discuss margins briefly again. In the Uniform Rental segment, the operating margin is lower year-over-year, but it remains very strong compared to historical standards. Should we view this segment's margin structure from a long-term perspective, suggesting it may stay down year-over-year due to increased cost inflation, yet still capable of sustaining '21 margins in a more normalized environment?

A couple of points. We've discussed the gain on the sale of assets from a year ago, which was recorded in SG&A within rental. If you exclude that gain, last year's second quarter was 21.1% compared to our 22% this year, a 90 basis point improvement. We have maintained rental margins above 20% for the past six quarters. Given the challenging environment, I anticipate seeing periodic ups and downs, but we view our rental segment's performance favorably.

Excellent. Maybe switching gears back to the PPE. Earlier in the year, I think you expected a PPE headwind of about 1% in fiscal 2022. It seems like that expectation has changed. What is your updated perspective on what the PPE headwind will be for fiscal 2022?

Looking at our guidance for the back half of the year, I believe the high-end revenue growth is 7.4% over last year. Considering our earlier comments about growth at 9%, that's about 160 basis points in the back half; you can think about roughly 80 basis points for the full year. We're not far from earlier expectations but certainly more back-end loaded.

Got you. Thanks for the color. Thank you.

And we'll go ahead and take our next question from Toni Kaplan with Morgan Stanley.

Thank you. I wanted to ask an ESG-related question. Given the size of your fleet, a shift to electric vehicles seems meaningful. In your ESG report, you indicated that by January, you expect to deploy 12 electric vehicles. Has this program been initiated? Can you discuss the potential of rolling this out to the entire fleet?

Yes, Toni, this is Todd. Thank you for the question. We are excited about electrifying the fleet. We are on schedule with our plans for testing. We have a diverse fleet, including various types of trucks such as rental trucks, first aid trucks, and fire trucks. We're working with some large manufacturers to ensure we can meet the needs of our customers, our employee partners, and shareholders. We believe getting ahead of this curve is important, and we're committed to overcoming challenges related to the size of our fleet and accessing supply.

That's helpful. I've been receiving questions about your capacity for large-scale M&A. There’s skepticism around that. Do you think that’s valid? Given the fragmented market, is there still potential for you to execute a large deal? Some deals seem to be taking longer to get approved right now.

Yes, Toni. M&A is our second priority in capital use after investing in our business. We're excited about M&A opportunities of all shapes and sizes. We have a vast market since many people are in uniforms, representing new business wins. About two-thirds of our new accounts are from customers who previously had no program. We believe our other markets have the same potential since they cover facility services, health, safety, sanitation, and hygiene, ensuring broad addresses and strong opportunities.

Very helpful. Happy holidays. Thank you.

Thank you.

And we'll go ahead and take our next question from Scott Schneeberger with Oppenheimer.

Thanks very much. Good morning. I'm curious, this is a question about your average customer in First Aid. Pre-pandemic, what would their cabinet look like? How much has it changed in terms of items or contents compared to now? What can you share on the pricing and margin profile of that cabinet?

This is Todd. As far as our cabinet, we regularly introduce new products for our First Aid cabinets, and that is an important part of that business. We provide various services, including AEDs, training, and compliance, as well as eyewash stations, which OSHA mandates for servicing. We are noticing a renewed focus on health and safety, which is exciting for us. The cabinet itself, aside from new products that we offer, resembles a more traditional setup. However, as health and safety considerations gain emphasis, that will benefit our First Aid business. As noted, the First Aid cabinet business is up 20% year-over-year in our second quarter, which reflects positive momentum. We might not yet be back to the pre-pandemic mix but appreciate the positive movement. The gross margin in this business has improved, and the material costs also align positively. However, this quarter, some of that improvement was allocated to labor investments aimed at building service capacity for current and anticipated growth in the second half of the year.

Great. Thanks for all that color. For my follow-up regarding the same topic, you're operating below pre-pandemic peak First Aid and Safety margins. Do you think within the next year or two, you can get back to those higher levels? Why or why not?

Yes, Scott, this is Todd. We’re focused on that. We believe that as the revenue mix improves, it will positively impact our margins. The increasing focus on health and wellness in the marketplace will also support this by driving demand in that area. As our revenue mix rebalances, we expect to see positive trends toward returning to more traditional margin levels in that business.

Great. I appreciate it. Happy holidays.

Thank you, Scott. You too.

And we'll take our next question from Shlomo Rosenbaum with Stifel.

Hi. Good morning. Thank you for taking my questions. Todd, I wanted to ask about the competitive environment. Aramark has been executing a turnaround for the past couple of years. Has this made a noticeable difference in your market? Have you seen any shifts in competitiveness, or do you find the market so fragmented that any change won't necessarily impact you?

Shlomo, thanks for your question. It's a good question. The operating environment is always competitive; however, there’s nothing particularly noteworthy regarding changes. Our revenue retention rates remain strong, as do new business wins. Most of our growth comes from new programs rather than competition. We believe there is significant upside because our market offers tremendous value to customers. Customers are often surprised with what we can offer compared to what they expect. The ongoing labor shortages mean that our service is increasingly attractive, allowing us to provide valuable support to businesses looking to serve millions more wearers. We're excited about our future growth prospects.

Great. For Mike, regarding the other segments, there seems to be volatility in margins quarter-over-quarter. Please explain the impacts on operating margins across the last couple of quarters.

Shlomo, comparing Q2 to Q1, keep in mind we referred to a gain on asset sales in the first quarter. That quarter had an anomaly with a $12.1 million gain. In Q2, the Fire business remained strong, growing organically 16.9%. We are investing due to growth, reflecting performance quality. Additionally, the Uniform Direct Sale business can be volatile, exhibiting fluctuations based on timing with current customers. Overall, momentum in all these businesses is solid, and we like the performance therein.

Do you see the extra day impacting your performance more in the fire business compared to 4Q '21? The Uniform Direct Sale business seems inherently bumpier.

The additional day has more influence on the Fire business rather than the Uniform Direct Sale, which tends to be dictated by customer program timing. Therefore, that’s where we see the most volatility.

Great. Thank you.

All right. It appears there are no more questions at this time. Mr. Adler, I'd like to turn the conference back to you for any additional or closing remarks.

Okay. Well, thank you for joining us this morning, everyone. We will issue our third quarter fiscal '22 financial results in March. We look forward to speaking with you again at that time. Have a good day.

This concludes today's call. Thank you all for your participation. You may now disconnect.