Earnings Call Transcript - CTAS Q1 2021

Operator, Operator

Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference. Today's call is being recorded. At this time, I would like to turn the call over to Paul Adler, Cintas Vice President, Treasurer and Investor Relations. Please go ahead.

Paul Adler, Vice President, Treasurer and Investor Relations

Thanks, April, and good morning and thank you for joining us. With me today is Scott Farmer, Cintas Chairman of the Board and Chief Executive Officer; Todd Schneider, Executive Vice President and Chief Operating Officer; and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our first quarter results for fiscal 2021. After our commentary, we will be happy to answer questions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC. I'll now turn the call over to Scott Farmer.

Scott Farmer, Chairman of the Board and Chief Executive Officer

Thank you, Paul. This continues to be a challenging time for our employees, whom we call partners, but they are doing all they can to keep our customers’ places of business clean, safe, and ready for the workday. Our employee partners have remained diligent in their care for our customers, providing essential products and services. And they remain diligent in their care for each other, and we can't thank them enough for their truly impressive achievements. Before we get into the financial results, I'd like to provide you with some examples of our interactions with our customers in the first quarter of our fiscal year, so you will have a better understanding of our business. A hospital system in Michigan provided isolation gowns to their staff and laundered them in the hospital. These garments are fluid resistant protective clothing worn by doctors and nurses. The hospital had difficulty staffing the laundry and suffered quality issues. The hospital system, a no programmer as we call it, decided to outsource the procurement and laundering to Cintas so they could concentrate on patient care. Another no programmer, a dental alliance with 55 locations in three states, signed with us for scrubs in a rental program for 550 wearers. Due to their satisfaction with the service, they are in discussions with us to add facility services products and first aid supplies. In California, one university system with many campuses signed a multi-year agreement for hand sanitizer service. In addition, our first aid business is providing them with $0.5 million of hard-to-find gloves. To another university system in California, our first aid division is providing over a million facemasks. A restaurant chain that has been a customer since 2007 struggled in the first few months of the pandemic. In talking with the customer, we listened, were empathetic, and adjusted service frequencies and inventories in partnership with them. They were so pleased with the way that we treated them that they renewed our service agreement and added hand sanitizer stand service to every one of the restaurants. A casino customer in Ohio recently reopened after being dormant due to COVID-19 restrictions. In order to conduct business in the new environment, the casino added rental mask services and additional items to increase cleaning protocols including dust mats, microfiber mops, and towels. A city government in Texas was a no programmer until they came to us for a hand sanitizer program for all of their government buildings. They were so happy with the execution that we gained their trust to provide some of their Personal Protective Equipment needs as well. They were impressed with our ability to deliver hundreds of thousands of masks within days. These examples are just a handful of the many and were offered to highlight the following; our opportunity to convert no programmers, the do-it-yourselfers remains robust; scrubs and isolation gowns are indicative of a broad uniform rental opportunity. Our approach is being flexible with customers in the short term, which brings long-term benefits. Our Net Promoter Scores, which we use to measure customer satisfaction, have never been higher. Earning the trust of the customer enables us to penetrate further and cross sell, and our supply chain and service network, our competitive advantages, enable us to increase service to existing customers and add new customers by procuring and providing items in short supply. Our value proposition of getting businesses ready for the workday by providing essential unparalleled image, safety, cleanliness, and compliance has never resonated more than it does today. A new trend of greater focus on health, readiness, and outsourcing of non-core activities is underway. We are well positioned for this new normal. I'll turn the call over to Mike now for commentary on the financial results.

Mike Hansen, Chief Financial Officer

Thanks, Scott, and good morning. Our fiscal 2021 first quarter revenue was $1.75 billion, a decrease of 3.6% from last year's first quarter. Earnings per diluted share or EPS were $2.78, an increase of 19.8% from last year's first quarter. Free cash flow, which is defined as net cash provided by operating activities less capital expenditures for this year's first quarter, was $281.4 million, an increase of 32.6%. Organic revenue adjusted for acquisitions, foreign currency exchange rate fluctuations, and differences in the number of workdays declined 5% for the first quarter of fiscal 2021. Organic revenue for the uniform rental and facility services operating segment declined 5.4%. Organic revenue for the first aid and safety services’ operating segment increased 17.1%. Gross margin for the first quarter of fiscal 2021 of $826.2 million decreased 2.7%. Gross margin as a percentage of revenue was 47.3% for the first quarter of fiscal 2021 compared to 46.9% in the first quarter of fiscal 2020. Selling and administrative expenses as a percentage of revenue were 27.3% in the first quarter and 30% in the first quarter of fiscal 2020. Fiscal 2021 first quarter results benefited from lower expenses as a percentage of revenue in many areas, including discretionary spending. Operating income for the first quarter of fiscal 2021 was $349.7 million, an increase of 14.2%. Operating margin was 20% in the first quarter of fiscal 2021 compared to 16.9% in the first quarter of fiscal 2020. Our fiscal first quarter contained one more workday than the prior year first quarter. One more workday in a quarter has an impact of approximately 50 basis points on operating margin due to many large expenses, including rental material costs, depreciation expense, and amortization expense being determined on a monthly basis instead of on a workday basis. Our effective tax rate on continuing operations for the first quarter of fiscal 2021 was 7.8% compared to 10.1% last year. The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense. Net income for the first quarter of fiscal 2021 was $300 million, an increase of 19.6%. Earnings per diluted share were $2.78, an increase of 19.8% from last year's first quarter. In addition to the solid financial performance, we continue to generate strong cash flow. First quarter free cash flow was $281.4 million, an increase of 32.6% compared to last year. Our leverage calculation for our credit facility definition was 1.6 times debt to EBITDA. Our balance sheet is strong. We have an untapped credit facility of $1 billion. For financial modeling purposes, please note that there will be one more workday in our fiscal 2021 than in our fiscal 2020. One more day will benefit fiscal 2021 total revenue growth by 40 basis points. One more workday also benefits operating margin and EPS. Fiscal 2021 operating income margin will be about 12.5 basis points better in comparison to fiscal 2020 due to one more day of revenue. In fiscal 2020, each quarter contained 65 workdays. In fiscal 2021, workdays by quarter are 66 in Q1, 65 in Q2, 64 in Q3, and 66 in Q4. Please keep these differences in mind when modeling results on a year-over-year and sequential basis. Before turning the call over to Todd Schneider to discuss the performance of each of our businesses, I want to comment on fiscal 2021 financial guidance. Due to the continuing COVID-19 pandemic, uncertainty remains about the pace of economic recovery. Therefore, we are not providing annual guidance at this time. However, we would like to provide our second quarter financial expectations. We expect revenue to be in the range of $1.725 billion to $1.75 billion and EPS to be in the range of $2 to $2.20. Please note the following regarding second quarter financial expectations. Our second quarter contains the same number of workdays as last year's second quarter, but one less than our first quarter. We expect operating margin as a percent of revenue to be in the range of 17.5% to 19%. And we expect our second quarter effective tax rate to be about 22% compared to 20.1% in last year's second quarter. I'll now turn it over to Todd.

Todd Schneider, Chief Operating Officer

Thank you, Mike. Before I review the business results, I'd like to build off of Scott's comments. While the environment remains challenging and uncertain, we did experience continued improvement in results throughout the quarter. The majority of our existing customers have reopened, and our employee partners are working diligently in partnership with these businesses to get them ready for the workday. Despite reopening, many existing customers are not yet operating at the same level of business before the COVID-19 pandemic began, because of the virus’s impact on health and the economy. In keeping with the Cintas culture, our employee partners are working with urgency to offset these headwinds. Significant opportunities for new revenues exist because of the need of businesses to instill confidence in their employees, customers, students, and patients that they will remain healthy and safe. Additionally, businesses are outsourcing tasks that are not their core competency, so they can successfully navigate these challenging times. The value we provide businesses has never been more evident. In fact, we've been given a seat at the table in discussions with state and local officials, hospital administrations, COVID-19 procurement task forces, and hospitality cleanliness councils. There is greater demand for services and products we already provide, such as health services, and in other areas, demand is so attractive that we are providing new services and products made possible by our supply chain, distribution network, sales force, and cash flow. These include rental healthcare isolation gowns, hand sanitizer stand dispenser service, and sanitizing spray service. With that, I'll turn now to the first quarter financial performance of our business. Uniform Rental and Facility Services operating segment includes the rental and servicing of uniforms, healthcare scrubs, masks, towels, and the provision of restroom supplies and other facility products and services. This segment also includes the sale of items from our catalogs for our customers on route. Uniform Rental and Facility Services revenue was $1.39 billion, a decrease of 4.1%. Excluding the impact of acquisitions, foreign currency exchange rate changes, and the difference in the number of workdays, organic revenue declined 5.4%. Our Uniform Rental and Facility Services segment gross margin was 48.7% for the first quarter compared to 47.2% in last year's first quarter. Prior inventory amortization expense of 80 basis points was more than offset by the benefit of lower production and service expense as a percentage of revenue, the additional workday, and lower energy expenses. Our First Aid and Safety Services operating segment includes revenue from the sale and servicing of first aid products, safety products, personal protective equipment, and training. This segment's revenue for the first quarter was $204.5 million. The organic growth rate for the segment was 17.1%. The first aid segment gross margin was 40.2% in the first quarter compared to 49% in last year's first quarter. Lower production and service expenses as a percentage of revenue compared to last year's first quarter were more than offset by higher costs of goods sold from the increased proportion of revenue from personal protective equipment, such as masks and gloves. Our Fire Protection Services and uniform direct sale businesses are reported in the all other categories. Our fire business historically grows each year at a strong pace. Uniform direct sale business growth rates are generally low-single-digits and are subject to volatility, such as when we install a multimillion dollar account. Uniform direct sale, however, is a key business for us and as customers are offered significant opportunities to cross sell and provide products and services from our other business units. All other revenue was $147.7 million, a decrease of 20%. Organic revenue declined 22.2%. The fire business organic revenue declined 5.3% due to the inability to access some businesses because of closures. The uniform direct sale business organic revenue declined 47.3%. Revenue from our airline, cruise line, hospitality, and gaming customers largely falls within this segment. These industries continue to be among the hardest hit by the pandemic. That concludes our prepared remarks. We are happy to answer your questions.

Operator, Operator

Thank you. And we'll first hear from Seth Weber of RBC Capital Markets.

Seth Weber, Analyst

I have a couple of questions about the first aid safety business. Mike, do you think you're still seeing large one-time sales in that category, or has the growth rate reset to a higher level that can be sustained? Also, could you provide more insight into what you're experiencing with the supply chain on the cost side? I believe Todd mentioned some higher costs of goods sold for certain PPE. Do you see that as a temporary issue, or is this becoming the new normal for costs? Thank you.

Scott Farmer, Chairman of the Board and Chief Executive Officer

Seth, this is Scott. I'll address the first part of your question and then I'll hand it over to Todd for the second part. Regarding first aid and safety, I think the key takeaway is that the significant initial sales of PPE in our first aid business are quite similar to what we observe in our direct sales sector. When we secure a large new client, there's typically a substantial upfront purchase of these products, followed by a decrease in that customer's revenue to a more stable maintenance level. In the first quarter, we experienced a number of substantial upfront sales in the first aid and safety sector, which are now transitioning to that maintenance phase. While there are still opportunities to identify new customers, it appears that the rush we saw in the first quarter due to the pandemic is slowing down, and we are likely moving towards a maintenance phase in the second quarter. This suggests that we may not experience growth in the high-teens for first aid and safety, but we do anticipate continued strong growth in that area.

Todd Schneider, Chief Operating Officer

We kind of end up in a large first order and then there is some maintenance mode there, but we're really focused on taking care of our customers. There is great demand for some of these products out there, gloves, masks, hand sanitizers, etc. So, we're blessed to be in a good position in the inventory and able to take care of them, but we are encouraged still that we're selling a lot of first aid cabinets; that's going well, and we think things will moderate in growth. We're also anxious to see the COGS moderate back to closer to where it was before.

Seth Weber, Analyst

Have you noticed any improvement in the cabinet business, Todd? I remember you mentioned last quarter that you were facing challenges in accessing facilities. Has the cabinet aspect of the business seen any growth as well?

Todd Schneider, Chief Operating Officer

Seth, you sound a bit muffled. Can you start that question over please?

Seth Weber, Analyst

I was just wondering if you've noticed any improvement in the cabinet business. I remember last quarter you mentioned facing challenges with accessing facilities and similar issues. Has the cabinet segment of the business improved as well?

Todd Schneider, Chief Operating Officer

Yeah, our new cabinet sales are going quite well, but we have a lot of customers that are still on the sidelines. They're close. So that's certainly affecting what is being procured through our cabinets, and we're anxious for those businesses to get back up and running. But long-term, while we pivoted helping our customers, we're quite bullish on the direction of the organization.

Operator, Operator

Next we'll hear from George Tong of Goldman Sachs.

George Tong, Analyst

Hi, thanks. Good morning. You talked about healthy growth for scrubs and isolation gowns in the healthcare vertical, both among existing customers and in the no programmer market. At this point, what percentage of revenue is being generated by healthcare customers and how quickly is this vertical growing?

Scott Farmer, Chairman of the Board and Chief Executive Officer

Hi, George. This is Scott. When discussing revenue in the healthcare segment, it's important to consider all the products and services we provide, including fire services, first aid services, some direct sales, and uniform rental and facility services. This now accounts for about 7% of our total revenue. We're optimistic about the opportunities in this segment. Healthcare makes up about 17% of GDP, so we believe there's significant potential for growth. The scrub rental business and isolation gowns can be referred to as the scrub business. Isolation gowns are generally worn over scrubs to protect healthcare workers from bodily fluids. There's no need to categorize them separately. COVID has shown healthcare providers that wearing scrubs home may not be the best approach, and they're seeking to outsource the management of these programs, which positions us well. I believe healthcare has the potential to be the first segment to grow to over 10% of our total revenue, and we remain very optimistic about it.

George Tong, Analyst

And as revenues begin to recover over the near to intermediate term, can you provide some perspective on what you expect for incremental margin flow through, particularly as operating leverage begins to kick in and you start to see utilization and capacity rates recover?

Mike Hansen, Chief Financial Officer

I think, George, regarding incremental margins, we have discussed in the past that we prefer them to be in the 20% to 30% range. We have clearly exceeded this in the first quarter. However, over the long term, this is still the range we aim for because it supports our desired growth strategy. It helps us manage the number of sales personnel, routes, and capacity we require. When we are growing as we want, we prefer to maintain that 20% to 30% range and anticipate it will continue as we move beyond this disruptive and challenging period.

Operator, Operator

Hamzah Mazari of Jefferies.

Hamzah Mazari, Analyst

My first question is maybe for Scott. I know you've touched on some examples of new business in your prepared remarks. But maybe if you could just talk about how the sales cycle today compares to pre-COVID in converting some of these customers? I assume healthcare has accelerated given to some of your comments, maybe even food service. But maybe if you could just talk about how that cycle differs today versus pre-COVID. It seems like it's accelerated. I think you touched on outsourcing potentially accelerating coming out of this period?

Scott Farmer, Chairman of the Board and Chief Executive Officer

Yeah, happy to provide a little color there, and Todd may want to chime in as we go through this. But the pre-COVID, we had decision-makers that had time to review things, try to get multiple competitive looks and things like that when we're out in the marketplace. I think that the urgency of trying to find certain products and services certainly shortened that sales cycle; decisions were made more quickly. It's not to say that they weren't trying to find competitive bids. But in many cases, it was hard for competitors to come up with the products and services they needed to fulfill a customer's order. I'm proud to say that we did a really good job of making sure that we were in front of that and had inventory. So we've been reasonably successful in being able to help these companies out. As we look at sales productivity among our sales force, we have been through the entire COVID period, selling at very impressive productivity rates, and we’d like to see that happen. We think it's a good sign for the foreseeable future for the company. And so you combine that sales productivity with decision-makers that are in the market, trying to make reasonably quick decisions, and we think we can do very well in that regard. Todd, I don’t know if you have anything to add?

Todd Schneider, Chief Operating Officer

Yeah. It's a good question. It really varies dramatically based upon whom you're calling on, the products you're selling. Our sales organization is highly urgent anyway and highly adaptable. And I've been really impressed by how they’ve been able to overcome any obstacles that seem to come in their way. But we have products and services that people really need to instill confidence in their employees, in their guests, in their customers, however you want to describe their students or their patients. When you have those available, it does shorten the sales cycle because there are times where we walk in and they say, 'My goodness, you have that, let's go.' And so, again, there are so many different sales processes going on at any one time. It’s tough to make a sweeping statement. But just generally speaking, yeah, it set it up because of the urgency of making sure people are taken care of. And we are again blessed to be in a good spot with our products and services, and that creates confidence in our people and our customers, which is showing in the productivity.

Hamzah Mazari, Analyst

Great. Could you discuss the outlook for the hygiene business, particularly your value proposition compared to larger competitors that entered the market earlier? I know your product appears more appealing than competitors, especially with hand sanitizers and similar items. Can you provide some insight into the value you bring to this business? It seems to be a newer area for you, although it has gained traction since before COVID.

Todd Schneider, Chief Operating Officer

I'll begin, and Scott can add in if needed. Thank you for your thoughts on our products. We invest significantly in our research and development to ensure we offer appealing and functional products, and we've been in the hygiene industry for many years. We previously mentioned how the events of September 11, 2001 greatly influenced security measures, and we believe that the current pandemic will similarly impact hygiene practices in our world, which has been beneficial for our business. Our customers appreciate our product availability, attractive offerings, and efficient inventory distribution system. We maintain a fair approach to our operations and have a comprehensive range of products and services readily accessible. Customers can rely on us to meet all their needs with a single organization. Our routes mostly service customers weekly, allowing us to assess their inventory and provide consultative services rather than just waiting for them to request more products. This route network and our distribution center system offer us a significant strategic advantage moving forward.

Scott Farmer, Chairman of the Board and Chief Executive Officer

And I'd say it this way just to echo what Todd said. What we do that most of our competitors who have been in this space for some period of time don't do is that we're there every week, so we make sure that they always have inventory and they never run out. Most of the time, a customer who's buying it from a supply house or a traditional competitor has to take it upon themselves to realize that they're running low on inventory, sometimes that happens when they're out of inventory, then they have to go and place the order, and they have to wait for the order to come to them. They're out of supply for maybe a few days and that sort of thing. And they don't have to worry about that when we're taking care of it for them. And restrooms are something that every single business has to deal with. And when we take care of that for them, it's one less detail that they have to worry about in the course of their business day and allows them to focus their time and attention on taking care of their customers. So I think that's the value proposition that we're offering in the hygiene business.

Operator, Operator

Manav Patnaik of Barclays.

Manav Patnaik, Analyst

My first question is, clearly you guys are winning a lot of new mandates there. And in the past, you talked about how non-programmers are really kind of two-thirds of the new sales. Is that tilt still persisting more now, because is it the COVID-driven demand? And I assume other competition has the same kind of list as well, or is there an element that you guys are just winning some of that new share as well, if that’s high at the table?

Mike Hansen, Chief Financial Officer

So Manav, I believe you're inquiring about whether around 60% of our new business is coming from new programmers and how that stands as we navigate this disruptive period, as well as any changes in how our competitors are approaching the market. To start, as Todd mentioned earlier, our new business remains very strong. We're offering not only the same mix of products as six months ago but also a somewhat different mix that involves hygiene messaging, which is resonating well. This can certainly open the door to new types of prospects we may not have engaged with before. Once we establish a connection, positive outcomes can follow. As they experience our service, we can discuss additional needs they might have. We've seen some good success with this approach, particularly in the fourth quarter and even more so in the first quarter.

Todd Schneider, Chief Operating Officer

The sales cycle has been influenced by the increase in no-code programming, which eliminates barriers to immediate purchases, benefiting us. As Mike pointed out, we are reaching a variety of prospects, and due to the urgency and relevance of our offerings, we are connecting with decision-makers faster than before. This highlights our progress. When these decision-makers understand our value proposition, it resonates with them. While the pandemic has been devastating globally and for our customers, it has also sharpened focus on the value of our products and services, allowing us to engage higher-level audiences more quickly.

Manav Patnaik, Analyst

Okay, that makes sense. And in terms of at least the examples we’ve provided, it sounds like there are a lot of large institutions that are coming to you for the offerings, but maybe just on the flip side. Can you just talk about your kind of small business customers and adding, just kind of in survival mode? Do you anticipate risks further down the road of getting on the lockdown that they can even survive? Just any color there would be appreciated.

Scott Farmer, Chairman of the Board and Chief Executive Officer

That varies by location, industry, and similar factors. Each situation is unique due to different local or state government restrictions. Generally, the small customers that are currently operating are managing quite well. This highlights the resilience of the American entrepreneurial spirit, as they adapt to new regulations like face masks and outdoor dining. However, many are not yet operating at full capacity due to lingering restrictions or customers who may not feel ready to return to their establishments. It's evident that a vaccine will be positively received for the American and global economies, allowing rules to change and businesses to return to a new normal that enables more traditional operations.

Operator, Operator

Andy Wittmann with Baird.

Andy Wittmann, Analyst

I have a question and then a follow-up question. I mean clearly here in the quarter you saw quarter-over-quarter acceleration in the organic trends, talking about the rental segment, I guess, in particular. And I'm just curious if you could give a little bit more detail on your customers and look at the guidance for next quarter. It kind of suggests that revenues will be down 5% or 6% year-over-year and that's not too dissimilar from what you saw here in the quarter. So how has the month-over-month trends progressed in comparison to what the implied revenue outlook is? And just any color that you have in terms of your visibility in this and how you chose to select this range with all the uncertainties, conservative or other factors that are baked into the revenue guidance?

Todd Schneider, Chief Operating Officer

Certainly, this has been an unusual environment. There were 22 million jobs lost almost overnight, and then jobs returned quickly in the very early part of the summer. As summer went on, things moderated a bit, and now there are 11 million jobs that have not yet been recovered, which has impacted our business. We need more businesses to reopen. We are still expecting sequential growth from Q1 to Q2, despite having one less workday in Q2 compared to Q1. We are encouraged by our new business efforts, the products and services we are offering, and the engagement from our customers. However, it takes time for these new business efforts to show results, especially with many businesses still closed and jobs remaining on the sidelines. We are very optimistic about Q2, Q3, and Q4, and we like the trend we're seeing.

Mike Hansen, Chief Financial Officer

I would like to highlight a couple of points. First, Scott mentioned earlier that sales of large personal protective equipment for first aid and safety transitioned into maintenance somewhat, so please keep that in consideration. Additionally, if we compare the first quarter revenue on the same number of workdays as Q2, it amounts to 1.720 billion. We notice that the guidance range, particularly at the upper end, shows promising sequential improvement. Lastly, it’s important to remember that last year's second quarter was also strong for us. To summarize what Todd mentioned, we are optimistic about our performance and the momentum we have, especially in a challenging environment that still has a degree of uncertainty. We believe this guidance range indicates continued positive momentum.

Operator, Operator

Thanks, Mike for that, that's good perspective. I want to also kind of ask on the cost side here. Anytime you've got basically EBITDA up against declining revenue, that's again, a very surprising and very good outcome for the company. We're already starting to see some questions from some of our customers asking if there was anything one-time, either positively or negatively. In other words, costs that maybe were furloughed or otherwise, things like that that were recognized in the quarter that need to creep back in here as the year progresses or other things, if you continue to do some level of restructuring. Certainly, that was a big factor in your fourth quarter. It sounded like you had it mostly contained in the fourth quarter, but maybe there was some carry-over in the first quarter. But, Mike, I was hoping you could just talk a little bit about some of the puts and takes inside the margins and the implications about incremental margins over a hundred percent here on a go forward basis and what's unusual about the quarter, if anything.

Mike Hansen, Chief Financial Officer

Sure. I'll begin by saying that I won't highlight any specific one-time items. As you consider this timeframe, we began the quarter facing considerable disruption and uncertainty. We implemented a hiring freeze, a wage rate freeze, and maintained strict control over discretionary spending. As the quarter progressed, revenue exceeded our initial guidance, which we were pleased with. We started to reinstate hiring for revenue-generating positions, which will positively affect our progress moving forward. In this first quarter marked by significant disruption, we entered with considerable uncertainty but exited with a bit more momentum than anticipated. I’d like to note a couple of key aspects from the quarter. Energy performance was 30 basis points better than last year, providing some assistance. We previously mentioned discretionary spending; travel expenses decreased by about 100 basis points. We're eager to visit customers and our locations, and we'll begin doing so gradually, leveraging the improved revenue momentum. Additionally, last year, we experienced high medical expenses in the first quarter, but we've returned to our typical range, which resulted in a benefit of about 90 basis points. Overall, this suggests that we have effectively controlled costs and managed the business well during a turbulent period. As we move forward, we plan to continue investing in revenue-generating positions and growth opportunities.

Operator, Operator

Andrew Steinerman.

Andrew Steinerman, Analyst

Hi, it’s Andrew. I wanted to clarify the monthly trends a bit more. I understand we're in uncertain times, and many jobs are still returning to the workplace. I was unsure if, when you mentioned year-over-year organic revenue declines in rental, you meant that the situation in September has continued to improve compared to August. Are the declines now in September year-over-year versus August, or have we seen September's declines remaining similar to those in August? Is the uncertainty more focused on October and November, or have you noticed some stability in September?

Mike Hansen, Chief Financial Officer

Andrew, we saw some really nice momentum. Certainly, Todd talked about the highly disruptive period at the beginning of the quarter. So the job recovery and economic recovery was pretty extreme in the early part of the summer, and the business reopenings moderated as certainly as the summer went on. Our revenue performance improvement continued through the quarter, and we still believe that we're still looking to see sequential improvement. So September, while moderated from let's say June and early July, is still moving in the right direction and trending in the way that we would want it.

Operator, Operator

Next we'll hear from Gary Bisbee at Bank of America.

Gary Bisbee, Analyst

I guess I'd love to go back to the margins a bit more. So you've obviously done a great job cutting costs and deferring some investments. And I heard your earlier answer to a prior question about what helped in this quarter? But can you give us any sense of how to think about the cadence of costs coming back? Do you envision the ability to manage that pretty tightly with sequential improvement in revenue? Or are there some costs at some point that it could come back more quickly? And I guess as part of that, have you identified anything within your cost reduction efforts to date that you think could turn into more permanent or sustainable cost reductions for the business?

Scott Farmer, Chairman of the Board and Chief Executive Officer

First of all, as we look ahead to the second quarter and beyond, we are confident in our ability to manage our costs effectively. We are closely overseeing labor at the highest levels of the organization, ensuring that anyone looking to add positions must go through the proper approval channels. We are starting to reinvest in areas that are critical for the business, including bringing back trucks and service representatives that have been sidelined due to recent disruptions. This is helping drive production and is necessary for manufacturing our goods. We are also reintroducing salespeople who were temporarily inactive. In the second quarter, we resumed our national radio and some television advertising, which you may have noticed over the weekend. These expenses are vital for promoting our business and reaching customers. However, we remain confident in our ability to manage these costs effectively. We continuously evaluate whether certain expenditures are necessary or could have long-term implications. This proactive approach is part of our company culture, and when we identify potential reductions, we act swiftly to eliminate unnecessary costs. So far, we haven't encountered any major issues in the first quarter, but we anticipate changes that will alter our operations moving forward. Currently, we are operating with greater efficiency due to necessity, which can be beneficial for any organization. Overall, I believe we have done an excellent job of improving efficiency, and I expect that trend to continue. There will be some expenses returning in the second quarter that will benefit the business in both the intermediate and long term, all of which fall within our financial guidance.

Todd Schneider, Chief Operating Officer

Gary, this is Todd. As Scott mentioned, growing comes with costs, and it's an investment. We've demonstrated the ability to manage those expenses as they decrease, and we'll do the same as they increase, which is much more enjoyable for our team. Experiences like the ones Scott referred to prompt us to reconsider our perspectives and assess our organization differently. One noteworthy point is our engagement with customers: we need to determine how much in-person interaction is necessary compared to virtual meetings. Business is fast-paced, and we are currently examining this as our customers find value in it. This could lead to quicker processes and might have long-term effects; time will tell. In the near and medium-term, that's our outlook.

Gary Bisbee, Analyst

Great. Thanks. And then just to follow up, you talk a lot about sanitizer sales and the big opportunity there. Is it right that that all flows through the hygiene facilities business within rental? And if that is right, can you give us any sense of how well that's doing and maybe what the underlying rental revenue trend is today or how it's been trending, excluding that hygiene business? Just trying to get a sense if that's doing a lot worse and hygiene is just absolutely killing it today. Any color on that would be great. Thank you.

Todd Schneider, Chief Operating Officer

Sanitizer sales mainly come through our rental services, particularly for our first aid customers as well. We offer sanitizer in various forms, but it primarily flows through the rental sector due to the reach of their organization and our customer base. The sales of sanitizer are performing strongly and are also contributing to additional sales. It helps us access new prospects and connect with decision-makers we hadn't reached before. For instance, we mentioned in the last call a large bank we had minimal business with previously, which now has sanitizer service at all their branches. This is a significant development as they are now discussing first aid, fire safety, and other rental products with us. These urgent needs enable our team to showcase what we offer, demonstrate our value, and open new opportunities for sales, which is very encouraging.

Operator, Operator

Next question from Tim Mulrooney of William Blair.

Tim Mulrooney, Analyst

Two quick ones on the balance sheet here, guys. First of all, you've got a lot of cash piling up on the balance sheet here. Is this just prudent to have extra liquidity given the macro uncertainty? And can you share what your capital allocation priorities are for this year?

Scott Farmer, Chairman of the Board and Chief Executive Officer

Yeah, first of all, there's a lot of uncertainty still out there. We like having some cash on the balance sheet in case anything comes up that is unforeseen and our balance sheet is strong anyway. But it certainly helps us have a more optimistic view of the future when we have that on the balance sheet. I think that normally in a normal environment with our ability to generate cash, we're looking for acquisitions, we're looking for what we can do to invest back into the business, dividends, share buybacks, and such to help improve our shareholders’ overall return. I would say as things become a little clearer, as we get out into the future, we'll get back to our normal process. We’ve got a pretty good track record of how we manage those things for our shareholders, and I would expect that we'll be back to that hopefully soon. Hopefully, we'll get a vaccine that works at some point and get back to a more normal environment.

Tim Mulrooney, Analyst

Does that include CapEx getting back to a normal run rate? It was like $30 million in the quarter, that's I think less than half of what you did last year. Would you expect that to get back just as I’m thinking about my models?

Scott Farmer, Chairman of the Board and Chief Executive Officer

I don't anticipate seeing a significant increase in CapEx in the second quarter. Typically, around 60% of CapEx is allocated for growth while 40% goes towards maintenance. We have some capacity in our markets to add more trucks and improve our production facilities, but I don't believe that the growth-related CapEx will be necessary in the upcoming quarter. Looking beyond that, the outlook is still somewhat unclear. However, I am optimistic that by the end of the year, we will be able to return to a more normal level of CapEx spending, which would indicate a healthier growth environment for us.

Operator, Operator

Scott Schneeberger of Oppenheimer.

Scott Schneeberger, Analyst

Just curious about kind of the pain points in markets that you have been doing as well. I think airlines, cruise maybe oil and gas. Could you give us an idea just percent of revenue is being impacted that would not be in the fiscal second quarter guidance as anticipated to see improvement? And then I know there are different things in those end markets, so it’s not that easy to do. But just to give us a feel of how much of the revenues are impacted that you don't see coming back in near-term? Thanks.

Scott Farmer, Chairman of the Board and Chief Executive Officer

Scott, most of those highly impacted segments are in our direct sale business; that would be the travel and hospitality related customer base, that would be hotels, airlines, cruise ships, and even gaming is in there. Those revenues are off significantly in the direct sale business. We think it’s going to continue that way for the foreseeable future. I think that those are probably a longer lead time to see those to see if those come back as their customer base gets more and more comfortable with getting on an airplane, going to an airport, or flying to a city, taking a taxi to a hotel, and so forth. So I think that we're going to see those areas struggle for a while. That is all in our guidance and it’s also in our results for the first quarter. I would say that the second quarter probably for those related industry segments will perform similarly to the way they did in the first quarter. There may be a few in there that do a little better than others. But I'd say it's probably at this point, through the second quarter more of the same in those segments.

Scott Schneeberger, Analyst

And maybe just as a follow-up broadly, I don’t think you guys touched upon the ERP and what you're seeing now that that’s mostly implemented. So just a quick update on that please. Thanks.

Todd Schneider, Chief Operating Officer

Well, our ERP is, we rolled it out across our first aid and our rental division over the past few years. We're seeing some real nice advantages there, whether it affects our ability to get product to customers faster has been a nice impact. Our transparency into the data, and the ability to look at the customer across business units has been advantageous, especially as we go-to-market in some of the key segments that have been significant. We're very happy to be done with the integration; these are never easy processes. But we're also seeing some real nice advantages there. I'd say one of the bigger ones is the ability to get the speed of product to customers because of various items internally that allow us to get the product to them. Our customers really value that, especially in an environment like this where you can deliver when you say you will or faster in an environment where a lot of companies are struggling to do that and that's a big advantage for us.

Operator, Operator

Toni Kaplan of Morgan Stanley has our next question.

Toni Kaplan, Analyst

Just regarding the upcoming election, what are your thoughts on potential impacts on your business depending on the outcome? I was thinking of it as maybe under a Trump win? Seems like bringing back some manufacturing jobs into the U.S. could be good, but maybe higher tariffs could be a potential offset. Is that the right way to think about it? And how are you thinking about the puts and takes of a Biden win?

Scott Farmer, Chairman of the Board and Chief Executive Officer

Well, yeah. I mean, there's a big difference between the two candidates and their intentions. I would say that the U.S. economy, not just us but the U.S. economy, will be affected depending on which candidate wins and assuming they both implement the things that they say, the positions that they have taken at this point. The Biden administration may have more business regulation that could slow down businesses' ability to continue to grow. Higher taxes would obviously hit profits and earnings per share and then obviously the impact on the overall stock market. As you said, President Trump wants to continue to try to bring manufacturing jobs back and maintain or improve the current tax situation. We will be impacted as much because of how our customers are impacted by whoever wins as anything else. Generally speaking, our customer and prospect base is such a broad spectrum of American industry that as American industry goes, we will go with it. I will say this, I am confident because we have managed through different versions of what different administrations have brought to the U.S. economy that we can manage through this as we have in the past. We have a really good track record of improvement that we can do that. So we're optimistic either way about the long-term future of the company; I think that there may be some short-term differences that could come to bear depending on who wins.

Toni Kaplan, Analyst

And just as a follow up. Just looking at the balance sheet, there’s a decent-size inventory build the last two quarters. Just wanted to understand what's causing the increase, is that preparation for an eventual recovery and do you expect that to continue? How should we be thinking about that going forward?

Todd Schneider, Chief Operating Officer

Toni, this is Todd. We see our balance sheet as an advantage. We see our ability to distribute as an advantage. Our customers need us to invest in those products in the short term, so we can help them with those. In many cases, it has been a real competitive advantage for us to invest in that inventory where we have products that our competition does not. Our customers really appreciate the investment on their behalf, and we're leveraging that.

Scott Farmer, Chairman of the Board and Chief Executive Officer

This is Scott. Much of that buildup is related to items that are currently in high demand. Hand sanitizer needs to be considered from multiple angles, including the fluid itself, the containers, the dispensing units, the stands, and so on. We have accumulated inventory in these areas. However, we are leveraging this to capitalize on the opportunities in the marketplace right now. We are confident that our ability to respond quickly is helping us secure business daily due to our available inventory. For example, we won a large account because we could deliver masks in days, while other companies estimated it would take months. Additionally, a major multi-location customer split their hand sanitizer stand business among us and two competitors. We executed that program within a week using thousands of stands. One competitor then realized they could not meet the customer's timeline, so they assigned us their share. We quickly repeated this with thousands more stands. The third competitor could only fulfill half of their commitment, leading them to pass that partial business to us as well. Our available inventory enables us to support these accounts effectively. Our global supply chain has allowed us to deliver products to the market swiftly, which provides us with a significant competitive edge, and we are taking full advantage of it right now.

Operator, Operator

Shlomo Rosenbaum of Stifel Nicholas.

Shlomo Rosenbaum, Analyst

Hi. Thank you for taking my questions. In labor-intensive businesses, hiring typically reflects companies' expectations about future demand. I know you recently had a hiring freeze, and currently, you have between 1,600 and 1,700 open positions. Could you discuss whether this is a normal number of openings? If there were no pandemic, would this be higher due to catching up, or lower? How should I interpret this in relation to your outlook?

Todd Schneider, Chief Operating Officer

Shlomo, this is Todd. I can't provide specific details about requisitions by month, but I can say that there has been an increase compared to 90 days ago. We are aligning our service demand with the supply of our products and services, along with our infrastructure and workforce. We are optimistic about Q2, Q3, and Q4, as we expect demand to keep rising. We are aware of external factors like the pandemic and the election, but we are investing for the future. We are re-engaging with many revenue-generating partners who will help us maintain our positive trend.

Mike Hansen, Chief Financial Officer

So, Shlomo, I believe your question was about how each of our businesses is performing as we enter the second quarter and our thoughts on that performance. Todd mentioned the momentum of the rental business, and we are seeing a positive trend, although it has moderated somewhat from the intense disruptions early in the first quarter. We continue to acquire strong new business and are still selling the hygiene products Todd discussed. In our first aid and safety segment, we’ve experienced two quarters of high-teens growth. Scott pointed out that sales of personal protective equipment are difficult to predict; they occur but typically move into maintenance mode afterward. We expect to see a bit more maintenance mode in the first aid and safety business in Q2, but the results remain very strong, and we are optimistic about that segment. The fire business declined organically by about 12% in the fourth quarter and just over 5% in the first quarter, but it continues to perform well and is improving. Lastly, Scott mentioned that our direct sales business was down 47% in the first quarter; this represents another challenging period for that customer base. For the second quarter, we set expectations at the mid-point and higher end of our guidance, indicating a call for sequential improvement, which we are pleased with. We appreciate the positive momentum of the business and our execution. Did that answer your question, Shlomo?

Operator, Operator

And it appears there are no further questions at this time. I'll turn the call back over to our presenters for any additional or closing comments.

Paul Adler, Vice President, Treasurer and Investor Relations

All right. Well, thank you for joining us this morning and for your interest in Cintas. We will issue our second quarter of fiscal 2021 financial results in December and look forward to speaking with you again at that time. Have a good day.

Operator, Operator

That does conclude today's conference. Thank you all for your participation. You may now disconnect.