Cintas Corp Q2 FY2026 Earnings Call

Good day, everyone, and welcome to the Cintas Corporation Announces Fiscal 2026 Second Quarter Results 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.

Thank you, Ross, and thank you for joining us. With me are Todd Schneider, President and Chief Executive Officer; Jim Rozakis, Executive Vice President and Chief Operating Officer; and Scott Gurule, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2026 2nd 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, Jared. We had another successful quarter, reflecting the strengths of our value proposition. Cintas delivered record revenues and strong operating margin performance, while we continue to invest in our business to position the company for the future. Second quarter total revenue grew a strong 9.3% to $2.8 billion. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 8.6%. Each of our 3 route-based businesses had strong revenue growth in the quarter. Our business continues to operate at a high level as our employee partners deliver strong execution across the board and maintain a clear focus on driving value for our customers and shareholders. Gross margin as a percent of revenue was 50.4%, a 60 basis point increase over the prior year. Operating income grew to $655.7 million, an increase of 10.9% over the prior year, diluted EPS of $1.21 grew 11% over the prior year. Our strong revenue growth is creating leverage and our cost savings initiatives and investments we've made are helping to improve our employee partners' productivity and help them deliver better solutions for our customers. Our operating margin for the company was an all-time high. The operating margins for our 2 largest route-based businesses were also all-time highs, reflecting the high level of execution by our employee partners. Turning to guidance. We are raising our fiscal 2026 financial guidance. We expect our revenue to be in the range of $11.15 billion to $11.22 billion, a total growth rate of 7.8% to 8.5%. We expect diluted EPS to be in the range of $4.81 to $4.88, a growth rate of 9.3% to 10.9%. With that, I'll turn it over to Jim to discuss the details of our second quarter results.

Thanks, Todd. This quarter marked another period of solid progress for our business as we continue to advance the rollout of our technology initiatives and build on the strong foundation of organic growth we have established. Our focus on innovation, operational excellence, and customer engagement is delivering measurable results. We are strengthening our relationships with existing customers through expanded offerings and superior service, which has led to all-time highs in retention rates while also successfully attracting new customers, who see the clear benefits of partnering with us. These achievements reflect the commitment and talent of our employee partners, whose efforts are positioning us for sustained success. Turning to our business segments. Organic growth by business was 7.8% for Uniform Rental Facility Services, 14.1% for First Aid and Safety Services, 11.5% for Fire Protection Services and 2% for Uniform Direct Sale. Gross margin percentage by business was 49.8% for Uniform Rental Facility Services, 57.7% for First Aid and Safety Services, 48.2% for Fire Protection Services and 41.9% for the Uniform Direct Sale. Gross margin for Uniform Rental Facility Services segment increased 70 basis points from last year. The 49.8% gross margin is the second highest gross margin ever for this segment. The strong revenue growth in this segment is helping to create leverage. In addition, our supply chain team and process improvement initiatives from our engineering and Six Sigma Black Belt teams continue to help expand our margins while navigating the current economic environment. Gross margin for the First Aid and Safety Services segment was 57.7%, which equals a previous all-time high set last year. As we mentioned previously, the mix of revenue and timing of investments can impact this business from quarter to quarter. We are pleased that our investments to grow this business are generating strong double-digit revenue growth, while being able to expand our gross margin. We are growing in many ways. We're adding new business with over two-thirds being converted from non-programmed customers. We are cross-selling to existing customers. Our retention rates are at all-time highs, and we continue to experience success in our focused verticals of health care, hospitality, education, and state and local governments. Our strong culture of execution, combined with multiple growth levers, has positioned us over the years to exceed multiples of job growth and GDP. All businesses have a need for safety, cleanliness, and compliance. Our value proposition resonates in all economic cycles as evidenced by our growth in sales and profit in 54 out of the last 56 years. With that, I'll turn it over to Scott to discuss our operating income, capital allocation performance, and 2026 guidance assumptions.

Thanks, Jim, and good morning, everyone. As Todd mentioned, we continue to perform at a high level as evidenced by record level revenue and operating margins for the second quarter. Selling and administrative expenses as a percentage of revenue was 27%, which was a 20 basis point increase from last year. Second quarter operating income was $655.7 million, compared to $591.4 million last year. Operating income as a percentage of revenue was 23.4% in the second quarter of fiscal 2026 compared to 23.1% in last year's second quarter, an increase of 30 basis points and an all-time high. Our effective tax rate for the second quarter was 21.2% compared to 20.7% 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 second quarter was $495.3 million compared to $448.5 million last year. This year's second quarter diluted earnings per share was $1.21 compared to $1.09 last year, an increase of 11%. For the second quarter, our free cash flow was $425 million, an increase of 23.8% over the prior year. Our strong cash generation allows us to have a balanced approach to capital allocation in order to create value for our shareholders. In the second quarter, we continued to invest in our businesses through capital expenditures of $106.3 million. Also in the second quarter, we were able to make strategic acquisitions totaling $85.6 million in all three of our route-based businesses. During the second quarter, we paid dividends in the amount of $182.3 million. Also during the second quarter and as of December 17, we were active in the buyback program with repurchases of $622.5 million of Cintas shares. That is the third largest share repurchase we've made in a quarter. During the first six months of fiscal 2026, we have returned $1.24 billion in capital to our shareholders in the form of dividends and share buybacks. Earlier, Todd provided our updated guidance for the remainder of the fiscal year. As you contemplate the guidance, it is important to remember that during the third quarter of fiscal 2025, we recognized a $15 million gain on the sale of an asset. That will not repeat and will be a headwind when comparing the third-quarter results year-over-year. In addition, please note the following in the guidance. Both fiscal 2025 and fiscal 2026 have the same number of workdays for the year and by quarter. Our guidance does not assume any future acquisitions. Our guidance assumes a constant foreign currency exchange rate, fiscal 2026 net interest expense of approximately $104 million, a fiscal 2026 effective tax rate of 20%, which is the same compared to our fiscal 2025, and the guidance does not include the impact of any future share buybacks or significant economic disruptions or downturns. With that, I'll turn it back to Todd for some closing remarks.

Thank you, Scott. Looking ahead to the second half of fiscal 2026, we are right where we want to be, and our focus remains on helping customers meet, and in many cases, exceed their image, safety, cleanliness, compliance needs. We remain committed to leveraging our investments to sustain our positive momentum and deliver exceptional customer service. I want to thank our employee partners for their incredible commitment to our customers and everything they do for Cintas. I'll now turn it back over to Jared.

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.

And our first question comes from Tim Mulrooney from William Blair.

Only 10 minutes on the prepared remarks. That's what I'm thankful for this holiday season. So just one question from me. There continues to be a lot of noise in the labor market data. But I think most would agree that we've seen a softening trend in terms of hiring activity over the last several months, at least on balance. And I'd be curious to hear if you've seen any material change in employment levels across your customer base, if what we are seeing in the broader payroll numbers are playing out in your world or if the reported job losses are more in the white-collar world where you're providing some services, but those folks don't typically wear uniforms. I know you've emphasized your ability to grow in all types of environments. But I'd be interested in your take on more of the underlying dynamics here given the number of businesses that you service week to week.

Well, thank you, Tim. We are certainly reading the same things you are. We're watching job reports as we always do. And as we spoke about in our prepared remarks, as a reminder, we've shown the ability to grow in multiples of GDP and jobs growth for a long time now. And we certainly love it when our customers are adding employees and their businesses are really healthy and that's how we love that. But we don't need it in order to grow our business the way we like to. That being said, to your point, I think you have to dig past the headlines on the jobs report. First off, we've picked our verticals really well, very strategically. And the employment picture for them is, if you look at it, it's positive: health care, education, hospitality, state and local government. Those are good. The services providing sector continues to show growth. And the goods-producing sector isn't performing as well, but the specialty trades within them are doing well, and those are obvious uniform wearers and users of our services. So there are certainly many jobs that are under pressure, hence, what you see in the headlines and the market reports, but they are certainly more generally, white-collar jobs in IT, financial back office that are really not end markets for us, as you pointed out, Tim.

And our next question comes from Manav Patnik from Barclays.

I also just had one broader question, maybe just following up from that one. I know you've obviously shown that you guys can outperform and execute in any kind of environment. But just maybe help us appreciate what your downturn playbook looks like? Like if unemployment does crack, how do you still keep up these kinds of high single-digit growth levels, which levers typically make up more? Is it all of them? Just any color there would be helpful.

Yes, that's a great question, Manav. We have a diverse range of products and services and serve a wide array of customers. Aiming for mid- to high single-digit organic growth is crucial for us, and we have numerous avenues for growth that provide us with flexibility. New business is key, and while some companies might have fewer employees, they still have essential needs to meet. Often, they lack the manpower to handle these requirements and seek our help to outsource those tasks. Therefore, acquiring new business is vital. We're still in the early stages of cross-selling our various offerings to our existing customers, which is a significant area for growth. This is all highly valuable. M&A activity tends to increase during such times as well. Additionally, we have various strategies, beyond those mentioned, that give us considerable options. Lastly, the introduction of new programs presents a significant opportunity for us.

Manav, this is Jim. Perhaps I can give just a little more color on how much opportunity really lies within our current customers. As Todd mentioned in his prepared remarks, our objective is to first supply our customers with a great experience with us. And that starts at the foundational level. And then we are in the right position to be able to ask them for more opportunities and to steer more of their spend that they already have over to us. And just due to the nature of our service model, we're in their facilities so frequently that we get a really deep understanding of what their needs are and what the opportunities may come from. So I have an example here of a property management company that we service out on the West Coast, and we've been servicing that facility for a number of years for uniform rental for all the folks who work on the property. And during our routine visits, our team uncovered that they were doing bulk orders from an e-commerce solution for all their restroom supplies. When inquiring with the company, they realized that they were tying up cash flow. They were tying up really precious real estate space and storage space that they did not want to tie up, and they were taking a lot of their labor and manpower to go ahead and inventory all of those goods. Our folks went in and introduced the concept of outsourcing that to us and utilizing the Cintas hygiene program. They found out that now their spend is much steadier than it was in the past. It makes it much easier to budget, and they are not tying up that space. And maybe most importantly, their team is not involved in taking their precious time away from what they focus on going ahead and managing hygiene inventories. They let us handle that for them. So just a small example of activities that happen across 1 million plus customers every day.

And our next question comes from Andrew Steinerman from JPMorgan.

I noticed the advantages and disadvantages regarding the customers' employee base, but I wasn't able to determine if ad stops have changed from year to year. I did hear that you are continuing to grow with the same customers, so could you comment on ad stops year-over-year? Additionally, regarding the acquisitions completed in the second quarter, how much will they contribute to revenues in the second half of the year?

Well, I'll take the first half, Andrew. So thank you for the question. As we mentioned and through Jim's example, we talked about all the various products and services we can provide for our customers, and it's broad and growing. So from that standpoint, growth from current customers, I would describe it as very stable, if anything, slightly positive. So we're in a good position. Our current customers see the value proposition that we can offer to them, and that actually helps with retention as well. Scott, if you want to address the second half?

Yes. Thanks, Todd. And Andrew, we've talked in the prepared remarks that the acquisition impact during the second quarter was about 70 basis points. If you think about the rest of the year and our guidance, we obviously assume no new acquisitions. You can assume that there's a normal tail when it comes to the acquisition volume, and generally for the second half of the year, you would assume about half of the second quarter impact, so call it 30 to 35 basis points.

And our next question comes from Josh Chan from UBS.

Congrats on a really strong quarter. I guess my two questions. One, I think both Todd and Jim mentioned that retention rates are at record levels. Usually, you see those in stronger economic times. So maybe could you talk about how you're able to achieve strong retention rates even in these types of climates? And then I guess my second question is on the incremental margins. I think both Q1 and Q2 were within your longer-term range, but maybe towards the lower end. So any way to think about how that kind of transpires in the second half would be great.

Thank you, Josh. I appreciate that. I'll handle the first part regarding retention, while Jim will cover the incrementals. Our retention rates are currently at record highs, and we have maintained this for several quarters. This results from several factors. First, our team's execution is commendable; they are doing an excellent job of ensuring our customers are well taken care of. This is easier said than done, beginning with our supply chain and operations teams, who are performing exceptionally well. This excellence is rooted in our culture, which we believe is our greatest competitive advantage, especially in more uncertain economic conditions. This is significantly benefiting our team. Additionally, we are offering exceptional value to our customers through our products, services, and technology. The investments we've made in technology serve two main purposes: they simplify the work for our employee partners, enabling them to provide value to customers, and they make it easier for customers to do business with us. Considering all these factors, our retention rates are very appealing. Jim?

Yes, Josh, I'll get to the second question regarding margins. First of all, we ran 27% incremental margin by the second quarter, which we really like. And that's right in our stated range of that 25% to 35%. That range is really important for us. That allows us to continue to invest in the future growth of the business while being able to expand margin along the way. So we really like that; that allows us to make the investments in technology, the necessary investments in capacity, bench strengths, and selling resources. All of those are really critically important to us. So that would be really right in the sweet spot of the range. Now a couple of things to keep in mind with regards to incremental this year and how it plays out for the remainder of the year. First off, we're coming off of a comparison to last fiscal year, which is a really tough comp. Last fiscal year, we ran in the second quarter incrementals of 49.7%, that's an outperformance, not what we normally expect. So we're really pleased with the 27% this quarter given that comparison. In fact, if you look at the whole first half of last year, we ran an incremental of 44.3%. So really, really high in the beginning of last fiscal year, settling back into our range this fiscal year. A couple of other things maybe to keep in mind is really what the guidance implies with regards to incrementals for this fiscal year. If you look at the whole year across the board, incrementals would imply somewhere between the 29 and 30% when you adjust for the $15 million asset sale from last fiscal year, so that's right in the heart of where we want to be, a perfect level of investment continuing to fuel future growth. And if you look at the back half of the year, that would imply incrementals of 30% to 33%. So moving back up towards the high side of that range, so we're really pleased with where we are. We like the outlook of the year, and we think that's a great spot for running the business.

And our next question comes from Jasper Bibb from Truist Securities.

I wanted to get an update on your experience with sourcing costs and tariffs so far this year. I guess, how have things trended relative to your expectations when you initially set guidance for the year?

Thank you for the question. Yes, the tariffs are indeed a changing situation. We are continuing to perform at a high level. As I mentioned before, during challenging times, we may need to increase our efforts, but we are managing well. Although we are affected by higher costs due to tariffs, our supply chain remains a competitive strength. In this environment, that strength becomes even more crucial. It’s important to note that our supply chain is flexible and adaptable, largely because we source materials from around the globe. We have excellent geographic diversity, and over 90% of our products have multiple sourcing options. This versatility is vital given the current sourcing environment. Our guidance takes into account the existing tariff situation, aligning closely with our expectations. We are able to amortize most of our goods, which provides us time to adjust as needed. Overall, things are progressing as anticipated, but we are staying vigilant since both the sourcing and tariff environments are subject to change.

And then really healthy margin in the First Aid business this quarter. Can you provide a bit more detail on what the underlying mix has looked like in that business this year? I know you were a bit heavier on the training side for the end of last year. So curious if that flipped back more recurring revenue.

Yes, we are very enthusiastic about the First Aid business. It has been performing exceptionally well for us, and we are pleased with its progress. The growth we have observed has been significant, and our leadership emphasizes that the health and wellness of our businesses, employees, and customers is paramount. We fully agree, and we anticipate continued solid growth in that sector, projecting a low double-digit growth rate for the foreseeable future. However, changes in the mix of business can influence margins. We are comfortable with our current range, but slight shifts in mix may lead to variations in margins. We are committed to investing for the future to enhance value for our customers. Running a business involves complexities, and our focus is not solely on achieving a specific increase in gross margin. Instead, we aim to maintain an attractive range that allows us to grow our operating margins, keeping in mind that the mix of business significantly affects this. Jim, do you have anything else to add?

No, Todd, I think you hit all the main points of what really drives this business. The only other thing I might just say is the team did a fantastic job in the quarter of execution, and we're really pleased with the results and where they stand.

And our next question comes from Andrew Wittman from RW Baird.

I wanted to give you an opportunity to share your thoughts on the competitive environment. Over the past few years, some competitors have aggressively pursued volume. You've managed to perform very well during this time, but I'm curious about what you're observing in the market and how it's impacting your price realization.

Thank you for the question, Andrew. As you know, we operate in a very competitive environment, and that has always been the case. Throughout my career, it's been this way. We do win some business from competitors, but our primary focus is on acquiring new customers who weren't previously using our services. When we engage with these businesses, they become our customers. Currently, over two-thirds of our new customers come from this segment, and the opportunity here is substantial. We currently serve just over one million customers, while there are still more than 16 million businesses in the U.S. and Canada. This presents an attractive market for us. Our retention rates are at all-time highs, which is an added advantage. The success we achieve is tied to the value we provide, starting with our culture and executed by our employee partners. We are pleased with our team's performance as they compete in the marketplace, specifically targeting the large total addressable market of non-program customers, which excites us.

Just for my follow-up, I thought I would just ask a little bit on the M&A side. Obviously, last fiscal year was one of your bigger years that you had since for a while, a pretty big quarter here in terms of capital deployment towards M&A. Maybe, Todd, you could just talk about kind of the funnel here. Do you feel like thinking about the amount of capital deployment last year is again doable this year with the progress that you made this year so far?

Andrew, that's a great question. We're very pleased with our capital allocation strategy. In the last quarter, we invested over $100 million in capital expenditures and $85 million in mergers and acquisitions. We were active in all three of our route-based businesses. Additionally, we paid out $182 million in dividends and conducted over $600 million in stock buybacks. We feel confident in this capital allocation approach and believe we've acted responsibly. M&A is definitely a key part of our strategy. We had a strong quarter and an excellent year last year, but as you know, M&A can be unpredictable due to factors like family-owned businesses considering their future. We appreciate M&A in various forms, including tuck-ins and new market expansions. When we engage in M&A, we especially value the people managing the business and our customers. We aim to achieve synergies with tuck-ins and enhance our capacity and cross-selling opportunities with larger acquisitions. Our pipeline remains active; Jim, our corporate development team, and I are all involved in it. We have established relationships that go back years, and we're prepared to make M&A an essential part of our future strategy.

And our next question comes from George Tong from Goldman Sachs.

You touched on some of this, but can you provide a high-level overview of what you're seeing with sales cycles and broader customer purchasing behaviors? And if you've noticed any meaningful changes from prior quarters?

George, nothing specific to call out. We've certainly operated in easier environments. As this economic environment, it's a little less certain than we like. But despite that uncertainty, the value proposition continues to resonate. Outsourcing can save money, improving steady cash flow, and the same time that can be spent on running the business. That was referenced in Jim's example that we talked about earlier. I've already referred to retention rates being at very attractive levels. And our growth from our current customers was steady and if anything, improved slightly. So we think we're in a good spot, and we like where we're pointing.

Got it. That's helpful. And then just a follow-up. You took up your full year guide for revenue. Can you talk about how much of the increase reflects upside in the quarter versus what you were internally expecting compared to maybe a stronger outlook for the remainder of the year?

Yes. Our guidance for the year is strong and aligns with our expectations. We're anticipating growth of 7.8% to 8.5%, with a midpoint of 8.2%. This is exactly where we want to be. It's important to note that the comparisons for growth will be more challenging in the second half, as last year's second half growth exceeded the first half by about 90 basis points. While we have seen solid performance, we will face tougher comparisons for growth in the second half than in the first half. Nevertheless, we are satisfied with our current position and guidance. We believe we can achieve some leverage on this guidance moving forward, which will positively impact the bottom line and contribute to our earnings per share guidance as well.

And our next question comes from Jason Haas from Wells Fargo.

I wanted to follow up to get more details on the timing of the tariff costs. It seems like they may have started to affect the P&L, but there is more impact expected. Is that a correct understanding? Also, how is the industry responding, and how are you managing it? Have you begun to increase prices compared to your competitors, aside from just raising your own prices? How should we think about this?

Well, there are a few points to address. Firstly, regarding tariffs, we have options to manage their impact. It's not as straightforward as simply stating that tariffs will significantly affect us; we just haven't felt that fully yet. Our company culture drives us to find ways to improve continuously. We're actively seeking additional suppliers and working at higher capacities to reduce costs. While we acknowledge the potential impact of tariffs, we are putting in considerable effort to minimize that effect. In terms of pricing, we prioritize a long-term strategy. Currently, our pricing is at historical levels, but we value the long-term relationship with our customers. Our focus is on growing our business through volume increases rather than just adjusting prices. We're committed to eliminating inefficiencies within our operations, which will enable us to increase our margins alongside revenue growth. We do not simply transfer costs to our customers, as we operate in a competitive market where customers have options. Therefore, we're diligently working to mitigate the cost implications of tariffs and other expenses, ensuring we are well-positioned to grow our margins successfully.

Great. That's very helpful. As a follow-up, can you update us on the timing of the SAP Fire implementation costs? Are you still expecting a greater headwind to margins in the second half of the year as that system gets turned on and you start recognizing the amortization?

Thank you for your question, Jason. The ERP implementations require a significant amount of time, and we are currently facing some additional costs, with more anticipated in the future. We are committed to this implementation as we believe it will bring substantial benefits to our employees and customers. Our investment in this area reflects our growth ambitions, and we are actively pursuing acquisitions. Regarding the fire business, we are also engaging in mergers and acquisitions; while the timing of these is unpredictable, they can contribute to geographic expansion and integrate well with our operations. However, M&A can impact our margin profile temporarily until we establish proper operating protocols. In fact, M&A contributed 340 basis points to total growth for fire in Q2, which is a factor in our current margin pressures, alongside some challenges from SAP. Nevertheless, we are investing in this business because we see a very promising future ahead, and we are optimistic about the years to come.

Jason, this is Scott. I just might add, as Todd mentioned, the ERP implementations take some time. We've got some experience with that in our rental business as well as First Aid and Safety, and we are expecting the Fire rollout to carry on into next fiscal year. I would just look at the impact for fiscal year '27 to be around that 100 basis points for the fire protection business.

And our next question comes from Faiza Alwy from Deutsche Bank.

I wanted to ask about your technology initiatives. It's clear that you are leading the way in adopting the latest technologies. Could you provide an update on any recent initiatives? Additionally, could you share the returns on those investments, whether related to AI or other areas you wish to highlight?

Yes, we have been investing in technology for many years and will likely continue to do so indefinitely, as it is essential to how businesses operate today. We have previously mentioned that we are experiencing benefits in areas such as material costs, production costs, and delivery expenses. The Smart Truck has been beneficial from a technology perspective, and having garment utilization on a single system enables us to share garments and reduce costs. All of this is significant. We also see clear opportunities with AI, though we are in the early stages like many other companies. This investment is part of our overall technology initiatives, and we are optimistic about the future impact, making sure we organize and invest wisely to take advantage of these opportunities.

And our next question comes from Stephanie Moore from Jefferies.

I think two areas of your strategy were very clear this morning and obviously have been clear for some time now. First is, obviously, the record retention levels that you continue to see, as well as you called out your investments in key verticals and just the strength that you're seeing there despite the uncertain macro. So kind of given these two factors, maybe talk about how your view on pricing can change because it would seem like retention is very strong. You're also in the verticals where you're seeing a lot of impact, but also continuing to build out your value with these customers. So i.e., I would assume being much stickier. So maybe just talk about how this can inform your pricing strategy going forward.

Stephanie, our pricing strategy remains consistent. We are maintaining historical levels and, as I noted earlier, we consider these matters with a long-term perspective. This long-term approach to pricing has positively impacted our retention rates. While we aim to improve our margins, we will not rely solely on pricing adjustments. We must address inefficiencies because we operate in a highly competitive landscape. We face numerous competitors, including traditional ones as well as online e-commerce and big box retail. Therefore, it is essential to provide great value, which is also true for our key verticals. Each vertical faces intense competition, and we are committed to delivering value and eliminating inefficiencies. We do not operate, and have never operated, in a market where we can simply raise prices due to the highly competitive nature of our environment.

And our next question comes from Scott Schneeberger from Oppenheimer.

It was asked earlier a question on sales cycles, and you guys covered the spectrum with the answer pretty well. I'm curious just to ask that a little different way. What you're seeing behaviorally from large customers as opposed to small customers. Are you seeing any softness or strength in one or the other? Just any indications on those size categories.

Yes, that's a great question, Scott. We closely monitor our customer base, which spans a wide range of products and services. Our customers vary significantly, whether by geography or industry. There isn't anything specific to highlight. Some customers are doing well, while others are facing challenges. However, I can't point to anything specific about the customer base right now. If we wanted to go into more detailed metrics, we could, but I don’t think that's necessary at this moment. Overall, our customer base has remained quite stable, and in fact, there has been a slight improvement.

I noticed a significant buyback during the quarter, and it appears from our conversation that you're considering growth through acquisitions. It looks like we can expect more large buybacks moving forward based on recent activity. Your leverage is currently below 1x, having increased slightly due to some short-term borrowing. How likely are you to increase that leverage further, and how aggressive might your buyback strategy be? What are your plans regarding leverage?

Good question. We view buybacks as an excellent use of cash to provide shareholder return. That being said, we have been very transparent on this. We view it as an opportunistic approach. So I wouldn't just simply model in that we are going to lever up and be highly aggressive on buybacks. We'll be opportunistic and handle that as we have in the past. And if you look at our history, even our 5-, 10-, 20-year history, we've been pretty consistent on that. Our capital allocation approach and I wouldn't expect to change to our approach there. We'll continue to look at that opportunistically and return that back to our shareholders as appropriate.

And our next question comes from Shlomo Rosenbaum from Stifel.

I would like to know more about the growth verticals compared to the rest of the business. Can you provide details on the aggregate growth of these verticals versus the overall business and how they compare to each other? What percentage of the business do they currently represent? Additionally, I would appreciate a deeper look into one specific vertical, particularly regarding the scrubs business. How significant is this segment in terms of utilizing your balance sheet to deploy dispensers and invest in effective solutions?

Jim, why don't you take the first half, and then I'll talk about the dispensers.

We continue to see significant success across all four of our verticals: health care, hospitality, state and local government, and education. Currently, health care is the largest and most developed sector, representing about 8% of our total revenue and experiencing growth. All four verticals are growing slightly faster than the overall company average, and we are seeing demand across all business lines. Health care is currently about 8% of our total revenue, and together, the four verticals account for around 11%. We are optimistic about the growth trajectory and the total available market in each of these sectors, and we are strategically focusing our resources on them.

Yes. And I'll take the second half, Shlomo. As a reminder, we don't just sell into these verticals. We organize around them, whether it be customer service or the routing of that, which would take a little bit away from density, but we think it's so important to be experts in that business so that we can provide that much more value. So that helps us get better at finding the next products and services that those customers want and help us provide a better customer experience. That being said, you mentioned dispensers. We have deployed dispensers at many customers. The value that we bring is significant there because it changes the game for them and allows them to look at the product differently. Instead of looking at the product as a commodity, and let's go with the cheapest one we can, they can provide a better value product because they have control over that inventory. So that's all important. We're blessed to have a great balance sheet. We have a balance sheet that allows us to invest for those customers and ultimately get a return for our company, provide a better value and value proposition for the customer, better products, better service, better technology, and that gives us a strategic advantage.

And our next question comes from Toni Kaplan from Morgan Stanley.

I was hoping you could discuss your long-term business outlook. You're already seeing high single-digit growth, which is great. Where do you anticipate the next boost in growth will come from? Will it be from key verticals, new regions, or new products? Considering your presence in the key verticals, how do you view the long-term sustainability of growth at this level? Also, where do you see the major growth drivers?

Toni, we are pleased with our current growth levels. Organically, we are achieving mid- to high single-digit revenue growth, and our recent acquisitions have provided additional advantages. We are satisfied with our position, and our various segments are expanding at a rate that exceeds our overall business growth. This is something we anticipate. We are constantly exploring new products and services to introduce, which contributes to our overall strategy. In terms of new markets, we have solid coverage in our Rental and First Aid sectors, while we are gradually expanding our presence in the fire business. The positive aspect is that we do not need to shift our business models to enter new regions, but we must continue investing in our operations, enhancing our capacity, developing new products and services, and embracing new technologies to sustain our growth. We appreciate the current growth levels because they allow us to organize, plan, hire, and allocate capital effectively. Sustaining this growth enables us to achieve leverage and expand margins accordingly.

Tony, this is Scott. I might just add that we obviously had an outstanding quarter in the second quarter, strong growth performance from all three of our route-based businesses. We had a favorable comp in Q2 to last Q2. As we have talked about earlier, when we think about the second half of the year, I think Todd mentioned this. We do have some more challenging comps. You can see that in our guide for the second half of the year. But whether it's the first half of the year or our guide for the second half, we're right in the stated range of that mid- to high single-digit growth. As Todd mentioned, the growth algorithm we have, we have a lot of confidence that we can sustain that level of growth moving forward.

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

Thank you, Ross, and thank you for joining us this morning. We will issue our third quarter of fiscal 2026 financial results in March. We look forward to speaking with you again at that time. Thank you.

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