Earnings Call Transcript - CTAS Q1 2022

Paul Adler, Vice President and Treasurer, Investor Relations

Good day, everyone, and welcome to the Cintas First Quarter FY '21 Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Adler, Vice President and Treasurer, Investor Relations. Please go ahead, sir. Thanks, Shelly. 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 first quarter results for fiscal 2022. After our commentary, we'll open the call to questions for 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 SEC. I'll now turn the call over to Todd.

Todd Schneider, President and Chief Executive Officer

Thank you, Paul. We are pleased with our start to fiscal 2022. First quarter total revenue grew 8.6% and diluted earnings per share, or EPS, grew 11.9%. Every business, whether goods-producing or services-providing, has a need for image, safety, cleanliness, or compliance. Every business has a need Cintas can fulfill to help get them Ready for the Workday. Our financial results are indicative of our strong value proposition and vast total addressable market. Uniform Rental and Facility Services operating segment revenue was $1.51 billion, compared to $1.39 billion last year. Organic revenue growth was 8.2%. We expected solid growth over the prior year period in which the economy was in a weakened state, but we also made solid progress on a sequential basis. In total, revenue grew stronger than anticipated. We continued to make measured investments to support our growth. The labor market remains challenging. The U.S. still hasn't recovered 5.3 million pre-pandemic jobs. This represents an opportunity for us. Most of our customers are open. However, most are not operating at the same capacity and employment levels as pre-COVID. We are seeing inflationary signs, including higher costs of freight, energy, wages, and supplies. We continue to take actions to minimize the impacts. These include reviewing and challenging our processes and procedures, producing efficiencies, and reducing costs and thoughtfully implementing increases to the pricing of certain products and services in response to higher operational costs. Our First Aid and Safety Services operating segment revenue for the first quarter was $199.1 million compared to $204.5 million last year. First quarter revenue was up against a very difficult comparison. In last year's first quarter, in response to the COVID-19 pandemic, personal protective equipment, or PPE, sales were surging, propelling the business to grow organic revenue over 17%. At that time, PPE comprised an outsized percentage of First Aid and Safety Services revenue mix. As discussed on previous earnings calls, the amount of PPE has declined as COVID case counts have fallen from peak levels. However, 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. We welcome this shift in mix because the First Aid Cabinet Service business is historically a higher profit margin business and more consistent. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All other revenue was $189.7 million compared to $147.7 million last year. The Fire business organic revenue growth rate was 17.8%, and the Uniform Direct Sale business growth rate was 68%. Both businesses benefited in part from increased activity in a period of reduced COVID case counts. Regarding our balance sheet and cash flow, our financial position remains strong. Recently, on September 15, we paid shareholders $98.8 million in quarterly dividends. The amount per share of common stock paid of $0.95 represents a 26.7% increase from the company's previous quarterly dividend. We continue to allocate capital to improve shareholder return. I'm proud of the execution of our employees, whom we call partners. They continue to navigate an unsettled environment by focusing on our customers. The COVID-19 pandemic continues, of course, fueled recently by the surge of the Delta variant. We remain well positioned headed into the fall and winter months to provide potentially life-saving items such as face masks and gloves, provide hygienically-clean garments such as health care scrubs and isolation gowns, and conduct services, including hand sanitizer dispensing and sanitizing spray services. Now, before turning the call over to Mike, I want to highlight a recent announcement of our ambition to achieve net-zero greenhouse gas emissions by 2050. Cintas was founded on a sustainable business model. Our corporate culture is based on doing what's right and challenging ourselves to improve. We view our ambition to achieve this objective as a natural extension. Also, as part of our steadfast commitment to corporate responsibility, we will soon issue a more robust environmental, social, and governance report. We are committed to protecting the environment, enhancing humanity, and maintaining accountability. I will now turn the call over to Mike.

Mike Hansen, Executive Vice President and Chief Financial Officer

Thanks, Todd, and good morning. Our fiscal 2022 first quarter revenue was $1.9 billion, up from $1.75 billion in the same period last year. The organic revenue growth rate, accounting for acquisitions, divestitures, and currency fluctuations, was 8.6%. Gross margin for the first quarter of fiscal '22 reached $902.8 million, compared to $826.2 million a year ago. As a percentage of revenue, gross margin increased by 30 basis points to 47.6% compared to 47.3% in the first quarter of fiscal '21. The gross margin percentage by business was 48.3% for Uniform Rental and Facility Services, 44.8% for First Aid and Safety Services, 46.1% for Fire Protection Services, and 41.5% for Uniform Direct Sale. Selling and administrative expenses rose by 6.7% to $508.7 million compared to last year's first quarter, reflecting investments in our sales teams along with slight increases in travel and meeting costs, partially offset by the sale of assets in our Uniform Direct Sale business. Operating income increased by 12.7% to $394.1 million. Operating margin grew by 80 basis points to 20.8% in the first quarter of fiscal '22 compared to 20% in the first quarter of fiscal '21. Our effective tax rate for continuing operations in the first quarter of fiscal '22 was 11%, compared to 7.8% in the prior year. This tax rate may fluctuate based on discrete events, including stock compensation expenses. Net income from continuing operations in the first quarter of fiscal '22 was $331.2 million, marking a 10.4% increase. Diluted EPS was $3.11, reflecting an 11.9% rise from last year's first quarter. We are raising our fiscal '22 financial guidance, increasing our annual revenue expectations from a range of $7.53 billion to $7.63 billion to a new range of $7.58 billion to $7.67 billion; and adjusting diluted EPS from a range of $10.35 to $10.75 to a range of $10.60 to $10.90. For our guidance this fiscal year, we expect the effective tax rate to be about 19.5%, up from 13.7% in fiscal '21. This higher effective tax rate will negatively impact fiscal '22 diluted EPS guidance by approximately $0.77 and diluted EPS growth by about 760 basis points. Our guidance does not factor in any future share buybacks or potential tax reform and assumes an uneven economic recovery due to the COVID-19 Delta variant surge, although it does not anticipate significant pandemic-related setbacks like lockdowns. Lastly, when analyzing our fiscal '22 results by quarter, it's important to note that in last fiscal year's second quarter, we sold some operating assets in Uniform Rental and Facility Services, resulting in a pretax gain of $18 million recorded in selling and administrative expenses, which affected second quarter operating margin by 100 basis points and impacted EPS by $0.25. Additionally, in the third quarter of last fiscal year, we helped our customers respond to a spike in COVID-19 cases by supplying significant amounts of personal protective equipment, providing more than in any other quarter.

Paul Adler, Vice President and Treasurer, Investor Relations

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.

Operator, Operator

We'll take our first question from Tim Mulrooney with William Blair.

Tim Mulrooney, Analyst

Can you talk about the primary factors that led you to raise revenue guidance this quarter? Was it primarily related to the better-than-expected result that you generated here in the first quarter? Or is it more related to your outlook for the remaining three quarters of this fiscal year?

Todd Schneider, President and Chief Executive Officer

Hey, Tim. It's Todd. Thanks for the question. Well, certainly, our performance in Q1 exceeded our expectations, but we like the momentum that we see in our business. We like the new business, that’s as a driver of growth for us. And we're providing more products and services to our customers. So, to those who are open and hopefully they will be back to full strength here very shortly. But in general, yes, we like the momentum that we see in our businesses.

Tim Mulrooney, Analyst

Okay, thanks, Todd. I was wondering if you could also maybe talk about growth by vertical a little bit more this quarter. I know hospitality was showing a strong recovery last quarter. Did that vertical stall out a little bit as COVID cases ramped up here in August and September? And are there any other end markets that you could call out here as being somewhat stronger or weaker than you had expected?

Todd Schneider, President and Chief Executive Officer

Great question, Tim. The hospitality sector has seen significant recovery and is performing well, so I wouldn't say it's stalled in any way. However, there is a slight delay in how orders are received and shipped, which affects staffing decisions. Despite this, we remain optimistic about the hospitality market. There is some concern regarding the return of business travel, particularly convention travel, but overall, the hospitality industry is improving. There are some anxieties related to the impact of COVID variants and the timeline for business travel's return. On the other hand, our healthcare segment is thriving. Our offerings in that area resonate well with clients, whether it's cleaning services or personal protective gear like isolation gowns and scrubs. We often compete with disposable products, and due to ESG considerations, the appeal of providing items that are laundered and recycled stands out. Many healthcare institutions appreciate having a product that doesn't just end up in the landfill after use, making our value proposition very compelling.

Operator, Operator

We'll take our next question from Andy Wittmann with R. W. Baird.

Andy Wittmann, Analyst

Great. I don't usually ask about the Direct Sales segment, but I'm going to this quarter. The segment margins in All Other came out very strong. We haven't seen them this strong in a while, obviously, plus 68%. It's a big number, but we all know that the compare was fairly easy. Todd, could you just talk a little bit about what drove the margin leverage? Was there an unusually large order that came back with somebody kind of redressing folks? Or maybe just a little bit of color as to what drove the great profit margins in the All Other reportable segment?

Todd Schneider, President and Chief Executive Officer

Well, Andy, thanks for your question. Our partners in that area of the business appreciate your recognition of their strong performance. You're correct that the comparisons were favorable due to what happened in the hospitality sector last summer. However, our revenue is rebounding nicely, which explains the revenue growth. Additionally, we are optimizing our organizational staffing levels, and Mike mentioned an asset sale in that area. Overall, while we don't expect to see that level of increase consistently in the future, we feel we have strong leverage and are well positioned. Our organization has been right-sized following last summer's events, and we believe we are in a great position to seize market opportunities and enhance our investment leverage.

Mike Hansen, Executive Vice President and Chief Financial Officer

Well, the other half or part of that All Other segment is the Fire business, which also had a great first quarter. And so, we're very pleased with that business and the momentum in that business as well. We saw some nice sequential improvement in the gross margin of the Fire business. And at organic growth of 17.8%, we're thrilled with the performance that we've seen.

Andy Wittmann, Analyst

Yes. Okay. For my follow-up question, I wanted to get more specific about the labor market and how it relates to your business, particularly regarding your ability to hire and compensate employees, as well as the impact on your customers. Can you discuss the staffing levels at your company? You're consistently acquiring new business, but what does the headcount look like for your historical customers? Are they still maintaining their numbers? Can you provide any insights on how much they have declined? We mentioned earlier that there are still 5 million jobs missing; how many of those were previously held by Cintas employees?

Todd Schneider, President and Chief Executive Officer

Yes, Andy, first of all, you can't read a newspaper without hearing about wage pressures in the labor market. We are certainly not unaffected by this, nor are our customers. We are working hard every day to manage staffing at levels we feel confident about in our business. Regarding our customers, it's challenging to provide a specific number since it varies greatly depending on geography and industry. For instance, the restaurant sector is still far from recovering to its pre-COVID state, while warehousing and distribution have returned very well, possibly at or above pre-COVID levels. Overall, we are still below pre-pandemic employment levels, reflecting the 5 million fewer jobs in the U.S. compared to before COVID. We are eager for our customers to return to their previous staffing levels. In terms of labor and its functions, our primary focus is on its impact on our customers; we will find ways to manage it effectively.

Paul Adler, Vice President and Treasurer, Investor Relations

On not only 5.3 million jobs lost, right, versus pre-pandemic, but still 10 million, 11 million job openings that haven't been filled, which is great opportunity for us, as you know.

Todd Schneider, President and Chief Executive Officer

Yes. The latest number I saw from the Bureau of Labor Statistics that they reported out earlier this month was 10.9 million job openings. So, I don't know how many of those would be people that would wear a Cintas uniform and utilize items out of our first aid cabinets, etc. But we'd like to see those all be filled.

Operator, Operator

We'll take our next question from Manav Patnaik with Barclays Capital.

Manav Patnaik, Analyst

I just had one question for you guys. And I was just hoping, you talked about wage and labor a bit, but can you just talk about the moving pieces on the cost side? We've heard a lot about driver shortages and fuel costs and supply chain. I was just hoping you guys could just give us a quick state of what's happening with you guys?

Todd Schneider, President and Chief Executive Officer

Certainly, energy costs are on the rise, impacting everything from fuel to natural gas for our operations. However, we've made significant efforts to improve efficiencies in our routing and production to counteract these increases, and I believe we're managing this well. We have previously addressed the wage issue by focusing on our frontline partners, so we were prepared for the discussions around wages that have come up lately. It's crucial for us to stay competitive in the market to attract the right partners for our team, and we are making sure to do that effectively. Additionally, we've been careful with our discretionary spending. While some travel has resumed, it's still not at pre-COVID levels. Mike, do you have anything to add?

Mike Hansen, Executive Vice President and Chief Financial Officer

No, I think that addresses the cost aspect, but also keep in mind that we mentioned this briefly in July. We have started to raise prices in the first quarter. It’s a strategic approach focused on individual customers, and initial feedback indicates that our customers are responding positively. This is crucial as we see energy costs rising year-over-year. We are not insulated from inflationary pressures, but as Todd mentioned, we are managing them very carefully. We are exploring opportunities for automation and efficiency, and if necessary, we can increase prices strategically, which we have begun to do in this first quarter after a few years of not doing so.

Manav Patnaik, Analyst

Got it. And actually, maybe if I can squeeze in one more. Just hoping you could give us an update on the M&A pipeline, perhaps in the non-uniform businesses? Like are there opportunities that you guys are actively seeking?

Todd Schneider, President and Chief Executive Officer

Great question, Manav. We're actively pursuing opportunities in all of our businesses. Activity has increased in the second half of the year, likely in anticipation of upcoming tax changes. We appreciate this level of activity. We are in a strong financial position and value our balance sheet. Following our investments in existing facilities to support growth, our second priority for capital allocation is mergers and acquisitions. We are very focused on being acquisitive and are eager to finalize more deals soon.

Operator, Operator

We'll take our next question from Hamzah Mazari with Jefferies.

Hamzah Mazari, Analyst

I wanted to follow up on pricing. You mentioned that you hadn't adjusted prices for a while, perhaps 2 years or 18 months. Now, I understand you're starting to raise prices. What kind of price assumptions are included in your guidance? How are discussions with customers going? I assume they are aware of inflation news everywhere. Since you haven’t increased prices in some time, could you discuss the scale of these changes? Are you playing catch-up on pricing, or how should we view your pricing strategy?

Todd Schneider, President and Chief Executive Officer

I wouldn't consider it a catch-up. We hadn't raised prices in two years. As Mike mentioned, these are strategic decisions. Pricing is influenced by local factors, including the industry, geography, and the current condition of the business. We aim to be fair to our customers while being aware that some organizations are performing significantly better than others. The nature of the conversations can vary based on the specific business, but the prevalence of inflation in the news makes these discussions somewhat easier. However, these conversations are never simple, as they can be challenging for our customers. Our focus remains on the long-term value of these customer relationships, and we address them accordingly.

Hamzah Mazari, Analyst

Got it. My follow-up question is regarding the SAP implementation. I know it was completed some time ago, but then COVID hit, and we found ourselves affected by that, which is still ongoing. Could you provide some examples of how the SAP system is benefiting you now that organic growth is returning? It would be helpful if you could discuss this either qualitatively or quantitatively, whether on the cost side or revenue side.

Todd Schneider, President and Chief Executive Officer

Yes, Hamzah. There are several ways in which we are benefiting from SAP. First, having a comprehensive view of the customer significantly enhances our ability to cross-sell. When we offer more products and services, customers perceive more value, which aids in retention. This has been crucial for us and will continue to be important going forward. Additionally, we gain advantages from data analytics, cash cycle management, and other areas. One specific opportunity is improving routing efficiencies, which aligns with our goal for net zero emissions by 2050. We believe that with technology, we can make substantial progress in this area. Furthermore, SAP enables us to provide our customers with an online experience that was previously unavailable. We've learned that customers prefer flexible communication options beyond traditional office hours for tasks like bill payments, requests, and orders. Our online platform, My Cintas, facilitates this modern way of doing business by offering more accessibility for our customers. Another operational improvement is our ability to accelerate the process from receiving an order to dispatching it. Enhanced transparency across our supply chain allows us to better anticipate needs and fulfill orders more quickly than in the past. We have effectively utilized this system and expect further advancements moving forward.

Operator, Operator

We'll take our next question from George Tong with Goldman Sachs.

George Tong, Analyst

Revenue growth in the quarter was stronger than you expected on a sequential basis. Can you elaborate on the sources of upside, specifically? And where you see the most promising trends over the next year?

Todd Schneider, President and Chief Executive Officer

I’ll start by mentioning that two significant drivers of our growth have been new business and a robust value proposition that resonates well with many companies. A lot of businesses are still facing staffing challenges, as evidenced by the 10.9 million job openings. When companies can partner with us to outsource specific functions, it becomes very appealing. They realize that we can handle tasks they previously managed themselves, which has been beneficial. Additionally, most of our customers are open to expanding services, and we are actively providing them with more products and services. We are eager for them to return to their pre-employment levels, which we believe will improve further. Overall, new business and expanding within our current customer base are key drivers that we expect will continue to support us throughout the year.

George Tong, Analyst

Got it. That's helpful color. And then I wanted to dive into pricing increases, which you touched on earlier. To what extent do you think that pricing combined with efficiencies can fully offset the input cost increases that you're seeing? And could there be a timing lag as to when those pricing increases will take effect and the real-time nature of the input cost increases that you're seeing now?

Mike Hansen, Executive Vice President and Chief Financial Officer

Yes, George, timing is challenging, as it's difficult to align the exact moment when cost increases occur with changes in the supply chain. However, we are doing our best to manage this situation. As I mentioned earlier, our discussions today have made it clear that there are cost increases, and the price adjustments we make are reasonable and understandable to our customers, based on our experience thus far. One advantage of our cost structure, which Todd highlighted, is our approach to labor. We have been addressing this issue for some time, making us potentially less affected than some competitors. Additionally, many of our material costs are amortized. Consequently, when we face supply chain spikes, whether related to labor or materials like cotton, our amortized costs act as a natural hedge. This slows the impact of these increases, requiring sustained pressure for an extended period before significantly affecting us. In such cases, our pricing strategy allows us to stay slightly ahead of inflationary pressures. Overall, while the timing of expenses and benefits isn't always perfect, we believe we manage it fairly well and benefit from the nature of our business operations.

Operator, Operator

We'll take our next question from Ashish Sabadra with RBC.

Ashish Sabadra, Analyst

Mike, I just wanted to drill down further on the cross-sell opportunities that you mentioned. I was wondering if you could provide any color on where you are in penetrating, let's say, hygiene products, safety as well as first aid and fire services within your existing customer base? And how can you accelerate that cross-sell either through organic or through M&A? Any color on those fronts?

Todd Schneider, President and Chief Executive Officer

Thank you for your comments and question, Ashish. Our sales and service team is effectively positioned to offer a range of products and services. They have tools that help identify opportunities, and while they aren't flawless, they do help direct our efforts to provide value to our customers. We're aware that the more products and services we offer, the stronger our customer relationships become. Just like in any relationship, having only one product tends to make it more vulnerable compared to offering two or more. This remains a key focus for us. Nearly every customer requires our fire service due to legal obligations, and we see good overlap with uniform customers who need direct sales for uniform rentals. Additionally, there are uniform rental customers who also require first aid and safety products, training, CPR, and other items we offer. Our primary challenge has been that many customers were not aware of the full range of our offerings. While it's a good problem to have, it still needs addressing. We're working to change customer perceptions through our sales and service efforts and our mass media investments, such as our recent advertisement during the Ryder Cup, where we aimed to raise awareness of all the products and services we provide. We may not be a complete one-stop shop, but we can certainly guide our customers significantly in that direction. Mike, do you have anything to add?

Mike Hansen, Executive Vice President and Chief Financial Officer

Well, the only thing I would add is the really good news is we're in the early innings of penetration. And so when you think about the rental customers and the opportunity to continue to penetrate with even rental items, such as our restroom products and our things that we've talked about recently in the last year, like isolation gowns and hand sanitizers, we're in the very early innings. And when you couple that with the first aid and safety, and fire opportunities again, less than 20% penetration. And so we've got a lot of work to do, and the exciting thing is much opportunity remains.

Ashish Sabadra, Analyst

That's very helpful color. That's great. And maybe just a quick clarifying question. I was just wondering at a very high level, can you provide what are the key categories of spend and the percentage of expenses from labor versus fuel versus amortization of equipment? Any color would be helpful.

Mike Hansen, Executive Vice President and Chief Financial Officer

Sure. Let me start with energy. Energy, which includes fuel for our trucks and the operation of our laundry services, accounted for 2.1% this quarter. This is a 40 basis point increase compared to last year and remains flat compared to the fourth quarter. While there has been a slight increase, it still represents a relatively minor portion of our overall cost structure. When considering our cost structure, it's helpful to think of it in three categories: the costs of materials, the costs of running the laundries, and the service costs. Although these categories are not identical, they can be roughly considered as one-third each. Each category has unique characteristics. For materials, many are amortized over certain time frames, allowing us to smooth out those costs. We also have direct sale items, like restroom products, that we expense right away. A significant portion consists of rental items that we amortize. In terms of laundries, we consider the depreciation of the buildings, the equipment in our wash areas, and the associated labor costs. In the service category, we have our drivers, trucks, the amortization of the trucks, and fuel costs. Overall, labor constitutes a substantial part of our cost structure, while the materials and products we sell also contribute significantly. We manage each of these categories tightly and continually seek opportunities for improvement.

Operator, Operator

We'll take our next question from Toni Kaplan with Morgan Stanley.

Jeffrey Goldstein, Analyst

This is actually Jeff on for Toni. I know this question was asked earlier related to revenue guidance, but I wanted to ask it slightly differently as it relates to EPS. The EPS guide is up by about 2% for the full year, but it seems like a lot of that is maybe flowing through the buybacks and a better-than-expected tax rate. So is that fair? And is that to say from an operating standpoint, maybe you're a little bit more optimistic on the revenue side, but maybe some cost headwinds keep you a little conservative here? Just some more color on that would be helpful.

Mike Hansen, Executive Vice President and Chief Financial Officer

Sure, Jeff. I don't believe that's an accurate depiction of our guidance. Our guidance of $10.60 to $10.90 reflects a 3.5% to 6.4% increase in annual EPS. You mentioned a lower tax rate, but according to our current guidance, our tax rate will rise by 5.8% compared to 2021, which is quite significant. Considering the 760 basis points I mentioned earlier, that adjusts EPS growth from about 11% to 14%. While the buybacks we executed in the fourth quarter and first quarter did provide some benefit, we still expect pretax earnings growth to be in the double digits. Overall, it's looking like a solid year. Looking ahead, we discussed in July that our guidance implies operating improvement ranging from 0 basis points at the low end to 70 at the high end, and today’s guidance remains consistent with that. This follows a impressive 310 basis point improvement in operating margin in the previous fiscal year. Therefore, focusing solely on taxes doesn’t accurately capture what’s happening. The EPS guidance is strong, reflecting healthy margin improvement and pretax increases of around double digits, with a higher tax rate impacting EPS. I hope this provides more clarity on our EPS guidance.

Jeffrey Goldstein, Analyst

No, understood. That was helpful. And then I want to ask about First Aid margins, which were pretty strong in the quarter. Are you able to quantify at all how much PPE is still constraining margins there, just given it's greater than normal mix? And then I guess based on that, how should we think about near-term upside as that rolls off? Like is that really going to kick up in the next few quarters as that roll off? Just kind of overall, if you could talk about the path back to pre-COVID margins in that line of business.

Mike Hansen, Executive Vice President and Chief Financial Officer

Certainly. PPE has played a significant role in that business, and I appreciate you highlighting it. It has been crucial for our customers over the past year, and we invested substantially in inventory to meet their needs, even though it affected our gross margin somewhat. However, we've noticed some positive sequential improvement. Our current margin of 44.8% is still below the pre-pandemic rate of around 48%. We believe we can return to those levels. The PPE we have from the past year tends to decline more rapidly than our First Aid offerings, as we have many job vacancies and fewer workers than before the pandemic. As these vacancies are filled and more people return to work, we will see an increase in our first aid cabinets, which will drive momentum. One positive trend we have observed is that both existing and new customers are recognizing the importance of keeping their employees safe and healthy. Our First Aid business enables us to deliver that value, and we've seen strong growth in this segment. While we have good momentum, we are not quite there yet. We anticipate continued sequential improvement, and while any individual quarter may present some challenges, we remain optimistic about overall improvement in gross margins for that business throughout the year.

Operator, Operator

We'll take our next question from Gary Bisbee with Bank of America Securities.

Gary Bisbee, Analyst

If I could go back to labor for a minute, I think a lot of your comments have been about cost and working on wages. But are you fully staffed both from a service and a sales perspective? And if you had seen any elevated turnover relative to history or had any increased difficulty hiring to support the rebound in growth you're seeing?

Todd Schneider, President and Chief Executive Officer

Gary, a very good question. I guess the way I'd describe it is, we're having to run at higher RPMs to get the output that we want. So, it's harder. There's no doubt about it. Attracting, retaining, and developing the talent is core to what we do as a company, and we're working that much harder now to get to the levels that we want to be at. So, are we staffed at the levels we want to be at? Yes. Yes, we like our staffing position. Turnover is still very manageable. And I think it speaks to many, many things. Certainly, the total compensation that we provide, the attractive benefits, but it really speaks to the culture and the investment that we put in to people, because for so many partners that have grown up in the company and have and have advanced in the company, and that's part of our culture. So we've always had to be really good at painting a picture for people about this is where you start, but we will invest and develop you. And we're having to work harder at it, but it's still resonating with folks. And so that's where we are now.

Gary Bisbee, Analyst

Okay. Great. You mentioned the property, plants, and equipment and some of the pandemic-driven sales in first aid and safety. However, there were also some sales from uniforms related to the facilities business. Is there a significant portion of revenue there that might decline in the future? I'm trying to understand how this could affect the growth rate in the core uniforms business over the next few quarters. Is it elevated, or is it not a major concern in the overall scope of that business?

Todd Schneider, President and Chief Executive Officer

Yes, what Mike mentioned was a significant part of our First Aid and Safety business. While there was some revenue from our rental business related to PPE, it was much smaller compared to what comes from our First Aid business. Regarding demand, we believe we're in a good position if there is a need for those products and services. We are managing our inventory and there is still demand. As a country, and in North America and globally, we hope that this demand will decrease over the rest of our fiscal year. Our guidance reflects that. We are focusing on strengthening our core business, and if our customers require those products and services, we are ready to assist them.

Mike Hansen, Executive Vice President and Chief Financial Officer

Gary, I might just add, as you're thinking about the next several quarters, we discussed last third quarter that we did not expect to repeat the $45 million in our fourth quarter. So, as you consider the growth from quarter to quarter, keep that impact from the third quarter in mind. Now, regarding this PPE, the safety and cleanliness themes we've promoted for years are really resonating, and we believe those areas will be larger moving forward than they were before COVID, which is certainly exciting for us.

Operator, Operator

We'll take our next question from Scott Schneeberger with Oppenheimer.

Scott Schneeberger, Analyst

I want to hone in a little bit on the offsetting efficiencies of the environment in the automation. Just anecdotally, if you could speak to a few things you're doing. I know in Hamzah's question, you talked about SAP and automation of payments and customer-facing. Just curious if you could elaborate maybe a little bit on what you're doing in this environment, maybe at facilities or otherwise and some of the longer-term goals of other automation?

Todd Schneider, President and Chief Executive Officer

Good morning, Scott. There are a couple of obvious ones for us. I mentioned routing. That is obviously a significant one that we think is going to pay dividends for us. Scott Farmer always spoke about, we don't generate any revenue when the wheels are turning on our trucks, right? We generate revenue when the wheels stop. And we see an opportunity to improve that efficiency and that we're investing in technology there to do so, and we're excited about the impact that will have not only on our cost structure, but also on our emissions as we move forward. In the production facilities, we are managing very tightly our wash alley and making sure that we have much better efficiencies there, meaning we're tracking very closely the number of loads that go through our facilities versus the quantity that went through pre-COVID on the same playing field, meaning same amount of volume that's going through. And we put some technology in place to help us with that instead of just doing it through elbow grease. And as a result, we're seeing some real benefits there. And again, that will help us in our cost structure, but also in our emissions. And so we're focused on making sure that we're managing that very tightly, and we're seeing some benefits there.

Mike Hansen, Executive Vice President and Chief Financial Officer

No, one other point I want to mention is the automation of stock rooms in our laundry facilities, which enhances visibility and fosters sharing. When we improve the efficiency of our stockrooms, it allows us to reuse garments that are already part of our cost structure. This leads to revenue generation from garments that have either been fully amortized or are already accounted for in our expenses, providing us with nice incremental margins. SAP has given us the visibility needed to better utilize these garments in our stockroom. This is another example of how we are benefiting from these improvements.

Scott Schneeberger, Analyst

Excellent. Sounds good, everyone. I appreciate that. As a follow-up, I wanted to discuss your activity in mergers and acquisitions, which was mentioned, especially towards the end of last year, possibly due to tax considerations. You've conducted over $1 billion in stock buybacks in both the fourth quarter and the first quarter consecutively, which is significant compared to previous years. I’m curious about your thought process regarding this. It seems like you are getting closer to some M&A opportunities, but not much capital is being allocated for repurchases. Should we expect this trend to continue?

Todd Schneider, President and Chief Executive Officer

Scott, as I mentioned, we are active in the market, and we are noticing an increase in participation likely due to tax reform, which we believe will lead to more deals. Our balance sheet is in a strong position, and we are prepared to utilize it effectively for the long-term benefit of our organization. Our top priority for capital allocation has always been, and will continue to be, investing in our existing business to enhance sales and profits. This includes adding products and services, expanding facilities, and improving training and staffing. Following that, our second priority is mergers and acquisitions, which we are committed to and will allocate resources to accordingly. After these priorities, we will return available capital to shareholders through stock buybacks and dividends. We have a solid track record of managing these priorities wisely for long-term value.

Paul Adler, Vice President and Treasurer, Investor Relations

That concludes today's question-and-answer session. Speakers, at this time, I will turn the conference back over to you for any additional or closing remarks. Thank you for joining us this morning. We will issue our second quarter of fiscal '22 financial results in the latter half of December. We look forward to speaking with you again at that time. Thank you.

Operator, Operator

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