Earnings Call Transcript - CTAS Q3 2021

Paul Adler, Vice President, Treasurer and Investor Relations

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 third 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, CEO

Thank you, Paul. Good morning, everyone. The COVID-19 coronavirus pandemic continues, and it remains a significant disruption to the economy. Our fiscal third quarter, which included the months of December, January, and February was particularly challenging. COVID-19 case counts surged from about 180,000 on December 1 to a peak of little over 300,000 on January 8. Not surprisingly, economic indicators reflected an economic recovery that slowed considerably. In December, the U.S. economy posted job losses again after seven straight months of job gains. The operating environment was also challenged by severe winter weather. The snow and ice storm in February caused extensive energy blackouts in the U.S., especially in the state of Texas. Despite a very difficult operating environment in late December and into January, our sales rep productivity remained strong and our employee partners persevered enabling us to offset the headwinds and get to flat on a sequential basis. On top of that, we were able to help our customers with large supplies of personal protective equipment before the end of the quarter. We provided more personal protective equipment than ever, enabling us to exceed our financial expectations. Also, on an organic basis, our quarterly revenue was flat year-over-year, a strong accomplishment considering the comparison to the prior year quarter that was not impacted by COVID-19. Looking ahead to our fourth quarter, we expect lower COVID-19 case counts to be the foundation for an improved operating environment. We do not anticipate that personal protective equipment sales will be as strong, so fourth quarter revenue in this product line will decline sequentially. However, we believe that our recurring service revenue will increase solidly on a sequential basis after being flat in the third quarter. Mike will provide more information regarding our fourth quarter guidance soon. Regardless of the operating environment, our employee partners worked with urgency to get businesses ready for the workday. Companies want to open their doors every day with confidence that they’re ready for their employees and their customers. We helped businesses achieve that objective by providing a wide range of products and services that enhance our customers' image and help keep their facilities and employees clean, safe, and looking their best. For over 90 years, Cintas has accomplished getting businesses ready for the workday in numerous ways, including providing hygienically clean uniforms to auto manufacturers so that workers can safely build their cars; restroom supplies and services to professional services firms so bathrooms are ready for use by employees and clients; hygienically laundered towels to coffee chains so baristas can serve their coffee lovers; first aid products to restaurants to address the cuts and burns of the kitchen group; and test inspection and repair services of fire extinguishers and alarm systems to facilities' managers to protect employees and customers from danger. The COVID-19 pandemic assured that business readiness is now a new era of preparedness. Getting ready for the workday today also includes taking actions to prevent and reduce the transmission of viruses and bacteria. Our solutions for getting businesses ready for the workday include providing hygienically clean scrubs to dentist offices because hygienists feel vulnerable taking them home to launder. Sanitizing spray services and disinfectant wipes for food manufacturers, for instance, enable them to routinely sterilize surfaces. Hand sanitizer dispensing units to universities help employees, professors, and students keep their hands clean. Masks and gloves to city, county, and state governments protect employees when interacting with the public. And hygienically cleaned isolation gowns to hospitals safeguard caregivers from contaminants. Our value proposition of helping businesses get ready for the workday has arguably never been more relevant. Every business has a need that Cintas can help fulfill, and in this unpredictable environment requiring new and increased demands, businesses appreciate the certainty that comes from Cintas. The Cintas tag line of 'Ready for the Workday' helps describe what we do and who we are. Our employees, whom we call partners, are always ready for the workday whether in the best of times or the most uncertain times. Our partners are honored to be deemed essential. They are ready to listen, ready to offer solutions, ready to solve problems, and ready to be counted on to deliver, and they do. Now, I’ll turn the call back over to Mike for commentary on our financial results.

Mike Hansen, CFO

Thank you, Scott. Our fiscal 2021 third quarter revenue was $1.78 billion compared to $1.81 billion in last year's third quarter. Earnings per diluted share or EPS were $2.37, an increase of 9.7% from last year's third quarter. The organic revenue growth rate adjusted for acquisitions, divestitures, foreign currency exchange rate fluctuations, and differences in the number of workdays was flat for the third quarter of fiscal '21. Organic revenue for the Uniform Rental and Facility Services operating segment was also flat. Organic revenue for the First Aid and Safety Services operating segment increased 17.7%. Gross margin for the third quarter of fiscal '21 was $809.5 million compared to $824.4 million in last year's third quarter. Gross margin as a percentage of revenue increased 10 basis points to 45.6% for the third quarter of fiscal '21 compared to 45.5% in the third quarter of fiscal '20. This increase was despite one less workday in this year's third quarter compared to last year. Selling and administrative expenses as a percentage of revenue were 27.2% in the third quarter of fiscal '21 and 28.2% last year. Fiscal '21 third quarter results benefited from increased sales rep productivity and lower discretionary spending. Operating income for the third quarter of fiscal '21 of $326.5 million increased 3.8%. Operating margin increased 100 basis points to 18.4% in the third quarter of fiscal '21 compared to 17.4% in the third quarter of fiscal '20. Our effective tax rate on continuing operations for the third quarter of fiscal '21 was 14.4% compared to 18.9% last year. Net income from continuing operations for the third quarter of fiscal '21 was $258.4 million, an increase of 10.2%. And again, EPS was $2.37, an increase of 9.7% from last year's third quarter. Our balance sheet and cash flow remain strong. Our leverage calculation for our credit facility definition was 1.6x debt to EBITDA. We have an untapped credit facility of $1 billion. During the third quarter of fiscal '21, we purchased $82 million of Cintas' common stock under our buyback programs. Earlier this week, on March 15, Cintas paid shareholders $79.5 million in quarterly dividends. For financial modeling purposes, please note that there is one more workday in our fiscal '21 than in our fiscal '20. One more workday will benefit fiscal '21 full revenue growth by 40 basis points. In fiscal '20, the fourth quarter contained 65 workdays. This fiscal year's fourth quarter contains 66. Please keep these differences in mind when modeling results on a year-over-year and sequential basis. For our fourth quarter, we expect our revenue to be in the range of $1.8 billion to $1.83 billion, and diluted EPS to be in the range of $2.20 to $2.40. Our fourth quarter effective tax rate is expected to be in the range of 21% to 22.5%. Please note that our guidance does not include any future share buybacks or additional government restrictions on businesses in the event of increasing COVID-19 cases. We are encouraged by vaccinations, stimulus, and business reopenings, and we expect an improved operating environment in our fourth quarter. We expect recurring revenue to increase solidly on a day adjusted sequential basis in the range of about 1% to 2.5%, after being flat in the third quarter. However, we do not anticipate that personal protective equipment sales will remain at record levels, so fourth quarter revenue in this product line will decline sequentially. Our fiscal fourth quarter marks the lapping of the onset of the COVID-19 pandemic. Our prior year fourth quarter coincided with a period of greatest GDP decline and job losses resulting from unprecedented restrictions on businesses to help combat the surge of COVID-19 cases. While the pandemic continues, our fourth quarter financial results, including revenue growth will benefit in part from an easier comparison. Excluding certain items, last year's fourth quarter operating margin was 15.5%. I’ll now turn the call over to Todd Schneider to discuss the performance of each of our businesses.

Todd Schneider, COO

Thanks, Mike. The Uniform Rental and Facility Services operating segment includes the rental and servicing of uniforms, healthcare scrubs, mats, and towels and the provision of restroom supplies and other facility products and services. The segment also includes the sale of items from our catalogs to our customers on route. Uniform Rental and Facility Services revenue was $1.42 billion compared to $1.45 billion last year. Our Uniform Rental and Facility Services segment gross margin increased 50 basis points to 46.3% for the third quarter compared to 45.8% in last year's third quarter, driven in large part to lower production and service expense as a percent of revenue. 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 third quarter was $198.5 million compared to $170.5 million last year. The First Aid segment gross margin was 43.5% in the third quarter compared to 48.0% in last year's third quarter. The difference in gross margin is due to revenue mix. In the pandemic, the needs of businesses for personal protective equipment, including masks and gloves have skyrocketed. Even though personal protective equipment is a less predictable revenue stream with lower gross margins than the relatively consistent first aid cabinet service, personal protective equipment is a profitable product line, and we continue to work with urgency to fulfill the needs of businesses. Also note that on a sequential basis, First Aid segment gross margins and operating margins have improved through the pandemic. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other category. All Other revenue was $160.7 million compared to $192.1 million last year. The Fire business's organic revenue increased 3.5%, while the Uniform Direct Sale business organic revenue growth rate was minus 39.7%. Revenue from our airline, cruise line, hospitality, and gaming customers are largely realized within this business line. 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 sir. Our first question will come from Tim Mulrooney with William Blair.

Tim Mulrooney, Analyst

Good morning, Scott, Todd, Mike, and Paul. My question, I have one for you this morning on the Uniform Rental segment. Operating margins in this business have ticked up nicely in 2021, and I think some of that was from structural cost savings, and may be some from temporary cost savings. Moving forward, would you expect uniform operating margins to kind of normalize towards that pre-pandemic run rate over time or would you expect the operating margins to kind of settle at a somewhat higher level than the pre-pandemic run rate? Thank you.

Scott Farmer, CEO

Well, Tim, this is Scott. I'd start by saying that there have been a lot of expenses this year that we have been able to control tightly, discretionary spending, travel, things like that, that impact the P&L. How much of that returns, I'm not sure. I mean, we saved a lot, we don't necessarily have to have the large group meetings where everybody is traveling into one town to accomplish that. Some of that will happen, but a lot of that probably won't. But I'd say that in our recurring revenue businesses, as the economy continues to improve, you're going to see us need to add some expenses back onto the P&L. That might be growth routes in the rental division as an example. Jobs that would help us with growth, additional salespeople, sales training, additional headcount in the production operations to be able to process things. So, I wouldn't expect a linear improvement, but I would tell you that we do think that we will continue to see 20% to 30% incremental margins as we add the sales line back onto the P&L, and over time I think that we can maintain margins that will be at least at or above, probably above where we were pre-pandemic, so that's how I would answer that. Does that help you?

Tim Mulrooney, Analyst

That's really helpful, honest and thoughtful answer. I appreciate that. Scott, thanks for taking my question.

Scott Farmer, CEO

Okay. Thanks, Tim.

Operator, Operator

Thank you. Our next question comes from Andrew Steinerman with J.P. Morgan.

Andrew Steinerman, Analyst

Hi, there. A question for Todd. When you think of rentals being flat in the just reported quarter, could you just give us a sense of how much ancillary services is contributing versus are you seeing improvement in Uniform Rentals as well? And a quick comment on how dependent are you in some of the areas like restaurants that are still kind of opening up ahead?

Todd Schneider, COO

Andrew, that's a great question. As mentioned in our prepared remarks, demand for various items related to PPE and other pandemic-related products was very strong in the third quarter. This was driven by the rise in case counts, which you all noticed. It contributed approximately $45 million more than in the second quarter. We don't expect that level to continue into the fourth quarter, but we are optimistic about the business recovery we are observing. You can see this in our sequential improvement and the outlook for fourth quarter compared to third quarter, even without that heightened demand for those specific products and services. Regarding restaurants, that is definitely part of our business. We are encouraged by the increase in consumer activity and spending. We believe that financial relief from stimulus will support this trend, and we really hope that small businesses, who have done an amazing job of coping through difficult times, see an increase in demand as well. So, we are feeling positive about what we see.

Andrew Steinerman, Analyst

Okay. Thank you.

Scott Farmer, CEO

Andrew, if I could just add a point of clarification of the $45 million that Todd referred to, that is in the rental segment as well as the First Aid segment. You saw our First Aid segment had another very good quarter at 17.7%. And so, we're seeing demand in all of these different kinds of things from all of our customers, and we're doing our best to meet those demands. So, that $45 million is not all within the rental segment, it's in all of our businesses.

Andrew Steinerman, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our next question comes from George Tong with Goldman Sachs.

George Tong, Analyst

Hi, thanks. Good morning. If you exclude the $45 million in PPE lift in the Uniform Rentals business, could you perhaps talk about how revenue trends progressed moving through fiscal 3Q?

Scott Farmer, CEO

Yes. George, regarding Mike's point, the $45 million was distributed across all our divisions and wasn't solely a rental increase. It's essential to remember that our third quarter is typically less predictable than other quarters, and this year was no exception. It includes two holidays, Christmas and New Year, and our customers sometimes take several days off based on when these holidays occur. Additionally, we faced potential weather challenges from snow and ice storms, which did impact us this year. As we entered the third quarter, we were quite apprehensive about the situation. COVID cases were rising, and I noted earlier that the economy lost jobs for the first time in seven months in December. Therefore, December through January and even into February posed significant economic difficulties. However, as we transitioned into February, we began to see our recurring revenues rebound. COVID cases dropped sharply, especially around the second week of January, and the anticipated restrictions on businesses did not fully occur. Consequently, we gained some momentum in February that carried into March, and I believe this is reflected in our fourth-quarter guidance.

George Tong, Analyst

Got it. That's helpful. And just as a follow-up to that, if you look at new business trends and plans for sales force hiring, can you talk a little bit about how the pipeline is building?

Scott Farmer, CEO

We're very pleased with our pipeline. Our sales rep productivity continues to be at very, very high levels. We believe that the value proposition is resonating today in the economy more than ever. So we're excited about our opportunities as we look out into the future. There are roughly 16 million businesses in the United States and Canada, and we do business with a million of them. And we really like our opportunity as we approach hopefully the end of this pandemic, and a more normalized economy of our ability to attract new customers. So, the pipeline is relatively full, and the reps are performing at high levels, even considering the fact that many times they're making sales calls over a virtual Teams or Zoom call and being successful in doing it. So, we're excited about getting past this pandemic and getting into a normal economy. We think we'll be well-positioned to take advantage of that.

Operator, Operator

Thank you. Our next question comes from Hamzah Mazari with Jefferies.

Hamzah Mazari, Analyst

Hey, good morning. My question is a little bit more big picture. Pre-COVID, I guess your long-term growth rate was sort of 6% to 8% depending on the year. In a post-COVID world, and you touched on a little bit of this with some of the ancillary services that may have benefited from the pandemic, which may normalize. But at the same time, you have these newer verticals you've penetrated, there's some structural outsourcing, maybe in healthcare that could be a tailwind. I don't know if that sort of plateaued out or continues, so when you put all the puts and takes together in a post-COVID world, do you expect your growth rate to be better than what it was prior to the pandemic on a normalized basis as you look out over the next couple of years?

Scott Farmer, CEO

Hamzah, that’s tough for us to predict. I'm not sure that I'm going to go out and say that we're going to be doing better than we were from a percentage growth standpoint, post-pandemic than we were pre-pandemic. But as I’ve said, we really like where we're positioned. We've made a lot of investments in the business that we think are beginning to pay off, that allow us to move quicker to be a better supplier to customers. Our customer satisfaction rates that we measure with Net Promoter Scores are at all-time highs, and we have opened up new segments of opportunity for us. We have new products and services that we can offer to more and more businesses. So, I'll just answer that by saying, we think we're very well-positioned, and we're excited about the future.

Todd Schneider, COO

Hamzah, this is Todd. To elaborate on what Scott mentioned, the main uncertainty is how demand for some of the additional services we're offering will develop. What we do know is that future demand will exceed what it was before the pandemic. It's exciting to note that many of our customers were previously unaware of the range of products and services we provide. While it’s important to acknowledge that the pandemic brought no positives, if there is any silver lining, it’s that our customers now have a greater understanding of our value. This is reflected in our NPS scores, as Scott pointed out. We believe that as customers engage with more of our products and services, we enhance the value we deliver to them, which is a very positive trend. Additionally, we have maintained our pricing for nearly two years, as we felt it was not the right time to implement price adjustments while customers faced numerous challenges during the pandemic. This has been greatly appreciated by our customers and positions us well for the future. We consider the lifetime value of a customer to be more significant than a short-term focus, and we hope that provides clarity.

Hamzah Mazari, Analyst

Yes, that's very helpful. And just my follow-up question and I'll turn it over. Just on the Fire business, I know it's a smaller business for you, but it's a good business. Could you maybe talk about how you're thinking about scaling that business up? And the reason I ask is we look at the First Aid business and you did ZEE Medical in 2015, and that business scaled up. Does Fire have the same potential in your mind, and maybe if you could just talk about the competitive dynamic in that business?

Scott Farmer, CEO

Yes. We do think the Fire business has an opportunity to scale up. There are lots and lots of small independent players; there are regional players, there are some PE groups that are doing some regional roll-ups. So, there are opportunities for us to make some acquisitions in that business that would help us ramp up scale and geographic coverage. It is a very good business. One of the things that is important to understand is that different states have different licensing requirements for the level of service technicians we have out there performing different levels of service, be it fire extinguisher repair and replacement versus sprinkler systems and alarm systems. They have different certification levels that they must have. But that said, we like our ability to grow in the geographies we're in. There are a lot of markets we would like to expand into, and there are lots of opportunities for tuck-in acquisitions in the markets we are in right now. So, we really like that business. And I think over time, we can scale that up to be of size. I always tell the division presidents, including Fire and First Aid, that their job is to figure out how to get their division to be at least a $1 billion in revenue, and that's what they should be thinking about. And that helps us put goals in place and decide what type of resources we want to invest in the different businesses and so forth, but we clearly think that both First Aid and Fire divisions can be over $1 billion in revenue for us.

Operator, Operator

Thank you. Our next question comes from Andrew Wittmann with RW. Baird.

Andrew Wittmann, Analyst

Great, and thanks for taking my questions. I had one question and then a follow-up. I guess, on the first question here maybe, Mike, over the years Cintas' growth has been fairly consistent in the characteristics that comprise between things like price and stocks and new accounts, even retention. In normal times, we have a pretty good sense about how that contributes to your year-over-year growth rate. Now that the next few quarters are going to be driven more by a reopening-type growth rate, I was wondering if you could talk about which of those factors you think will contribute more than their historical percentages to the growth and maybe less, just to understand how you're thinking about how this matters and how it will unfold in the next few months or quarters.

Scott Farmer, CEO

Yes, Andrew, the last four quarters have certainly presented a different and unpredictable environment for us. Looking ahead, what we’ve indicated for the fourth quarter, which will also set us up for the first quarter of '22, is the ongoing reopening of businesses and returning those businesses to more normalized operations. We were on a positive trend towards the end of our first quarter this year and into the second quarter, which has since paused. Many customers are still either not open or are operating at limited capacity. As we consider the next couple of quarters, and likely most of fiscal '22, the focus will be on fully reopening the economy and restoring healthy operating conditions for those customers.

Andrew Wittmann, Analyst

That's helpful. Then just for my follow-up, I wanted to just talk about inflation a little bit. There's been obviously a lot talked about and it seems like there's a lot of merit given the amount of stimulus that's going to be hitting the system here. It’s already hitting the system. So, I was hoping, Mike, you could talk a little bit about where inflation could hit you, where you might be seeing it today or expect to see it tomorrow.

Mike Hansen, CFO

Yes. So, from a short-term perspective, we could certainly see changes in gas prices at the pump. We saw sequentially an increase in our energy percentage of about 10 basis points, and that certainly could contribute over the course of the next year. I think labor is certainly in the news, and the conversations about wage rates are likely to have some impact on us as well as our customers. We could see, as you mentioned, certainly in some of the PPE, we have seen quite dramatic changes in prices, in costs to us in terms of gloves and masks and sanitizer over the course of the last year. There's probably a little bit of that continued unpredictability in that kind of product. But, Andrew, the really good news is we've got great efficiency in our business. And so, many times we're able to offset that with current initiatives within the business. But if we can't, we certainly can look to pricing changes into the future. Todd mentioned we have not liked that idea in the last year; we did not think it was the right thing to do. But it's been two years really since we've done it. But if we see inflation peak, that's an opportunity that we will certainly have to consider. And usually in the past, that's allowed us to pass on a good portion of those kinds of costs if we can't offset them within our operations.

Todd Schneider, COO

Andrew, it's Todd. Just to build upon that, everything Mike said is right on target. We're in a good position to withstand those adjustments based on our model and efficiencies. But with all these, whether it's inflation in general, or wage inflation specifically, our biggest concern is always the impact to our customers. We will manage our business; we will do it appropriately. But if it affects our customer base, then that's a much greater concern. And we're hoping that the health of those smaller businesses has been tested, and we're in hopes that they can continue to expand and thrive in the new environment.

Operator, Operator

Thank you. Our next question comes from Toni Kaplan with Morgan Stanley.

Toni Kaplan, Analyst

Thank you. Just wanted to ask about the SAP benefits that you are seeing now that the integration within Rental has been completed. I know we're sort of in a unique period, but just wanted to see if any of those are coming through now or if we should be expecting them going forward, just anecdotally any benefits from the SAP program. Thanks.

Todd Schneider, COO

Yes, Toni, this is Todd. We are seeing very nice efficiencies from having one platform for the entire organization benefiting our customers in one view of Cintas. It's benefiting our locations and the ability to share inventory in our distribution centers in order to anticipate needs. It's been quite impactful and a lot of positive things that have come out of having that one platform and the efficiencies that come along with it both for the customer and also internally have been very encouraging.

Toni Kaplan, Analyst

Great. I wanted to also ask about capital allocation. If we hit a period now where demand accelerates, do you expect to be investing more back into the business for organic growth opportunities or M&A? And I saw you’re buying back some stock in the quarter. So, does that get back to historical levels, just what are you thinking about allocating capital?

Scott Farmer, CEO

Well, if we start with CapEx, we're still sort of managing through the unpredictability of the economy. So, we're probably a little more conservative right now and will be in the fourth quarter. But over time, I think our CapEx spend as the economy turns around will get back to a more normalized historical type, and that's typically roughly 60% based on growth and 40% on maintenance. So, I think we'll continue to see that type of spend. We do generate a lot of cash. We've got a very strong balance sheet. And so, we would be interested in acquisitions in all of our businesses. Obviously, the dividend is important to our shareholders. We have continued to be in a position where we could increase the dividend to our shareholders every year since we went public, and obviously that is a streak that we'd like to see continue. Finally, we do have roughly a $1 billion left on our authorization, and that is more sort of opportunistic from time to time as we see opportunities to acquire our own stock. We saw a little bit of that in the third quarter when the stock price went down. I wouldn't be surprised to see that sort of thing in the future.

Operator, Operator

Thank you. Our next question comes from Gary Bisbee with Bank of America.

Gary Bisbee, Analyst

Hey, guys, good morning. It's impressive to get back to flat year-over-year same day sales, I guess, a quarter really before lapping the step down from the pandemic. I wanted to ask about mix within that sale. So, can you give us a sense of how meaningful PPE, sanitizers, and other pandemic-driven sales are to the current revenue levels? And how much of the more normal historical mix would still be down in Q3 without that? That's the first question.

Scott Farmer, CEO

Let me start by saying that things like the hand sanitizer and some of the sanitation products and wipes fit into a recurring revenue stream. Once we put a stand out there, we come in and service it on a regular basis, make sure they have enough product in there to make it through to their next delivery and so forth. So that becomes part of the recurring revenue stream. The other products, things like disposable gloves, disposable face masks, and things like that are one-time PPE sales. I refer to it as one-time, but it's more of a direct sale that can fluctuate up and down depending on customer needs. A lot of it depends on geography, it depends on the industry that the customer is in; some distribution-type businesses have increased headcount, increased number of wares, while other businesses have reduced the number of wares. So, it's a little bit all over the board trying to put some parameter on that relative to historical averages. I'd say recurring revenue with the understanding that some of that is now the result of hand sanitizer, and that's where it flat through the quarter. We think that revenue is going to pick up as the economy turns around, as our customers get back to being able to open their businesses more fully, and bring back some of their headcount. I believe that an awful lot of the recurring business is here to stay. I’ve said in the past, and I continue to believe that it's going to be a long time before a typical American walks into a business, walks into a restaurant, a lobby, a movie theater or any place and isn't looking for a hand sanitizer station after grabbing the doorknob going in and out of a public building. We're seeing that in stadiums, we're seeing that in hotels that are open, at elevator stations and that sort of thing. So, I think that's going to be here to stay. If I'm right about that, as they bring back and open up their operations more fully, that will be revenue as they add people back on revenue on top of where they are right now.

Todd Schneider, COO

Gary, this is Todd. I think it's important to understand that the majority of the products and services we're discussing, such as face shields, gloves, hand sanitizer, and cleaning chemicals, have been offered for decades. It's not new; it's just enhanced. We believe it may not remain at the current levels, but it will stay elevated in the near future and possibly even longer. This is exciting for us. Our customers now view these items as having much more value, largely because there is a greater focus on hygiene and cleanliness than in the past. Many customers used to clean for appearance, but now they clean for health. This is beneficial for society and strengthens our value proposition to our customers.

Gary Bisbee, Analyst

And if I could just clarify one thing in that response. Scott, you said recurring revenues were flat. Did you mean sequentially versus Q2 or did you mean year-over-year? And if the latter, flat year-over-year, does that imply then that the one-time-ish PPE sales increase year-over-year was similar to the Uniform Direct sales decrease, which would allow that to be flat? I just want to make sure I understood exactly what you're saying.

Scott Farmer, CEO

I meant sequentially from the second quarter.

Gary Bisbee, Analyst

Got it? Okay. All right. I mean, what I'm trying to solve for is, how much the traditional businesses are down. I appreciate everything you're saying about this demand persists and the big uptick in sustainable recurring sanitizer sales, but in the traditional pre-pandemic business mix, is that still down 5%, and it's offset by PPE up 5%, or directionally can you help us understand it? What I'm really trying to solve for is what's at risk of going away over 12 months, 18 months, as the traditional business mix obviously comes roaring back.

Scott Farmer, CEO

Well, Gary, I think the best way to describe it is, as we mentioned, in total for the company, it was up $45 million sequentially. We don't think that will repeat, but we do believe that these elevated levels, relatively elevated levels are here to stay.

Mike Hansen, CFO

Yes, and Gary, to answer what's at risk, it's really premature. Scott talked a little bit about the enhanced value proposition of all of these things. While we may see, we have seen some ups and downs in terms of that product mix in the last three quarters. We don't expect that to go away overnight. This is not going to be a flip of the switch and the pandemic is over. It's hard to say how much of this will continue in the future. Will the frequency of sanitizer spray services stay the same frequency as today? Will the frequency of our ultra-clean services stay the same as today? It's hard to tell. But what we fully expect is that this cleanliness idea and value is going to stick around for a while. So trying to dissect the results by product category and other things, we're not going to get into that because it's too early to tell exactly what that future run rate is going to look like.

Operator, Operator

Thank you. Our next question comes from Kevin McVeigh with Credit Suisse.

Kevin McVeigh, Analyst

Great, thanks. I know you talked to kind of the severe weather holiday impact. Is there any way to think about how much the weather impacted the quarter? And I know it kind of varies across business lines, but just any thoughts as to how that impacted the quarter?

Scott Farmer, CEO

Well, I guess the easiest way to look at it would be that there was a dip from early December into January, and then revenue started to rebound as we got into February. February was better than January. And obviously, if you look at all that, the quarter winds up being flat sequentially to the second quarter. So, you can run that down and then dip back up. I would tell you that we do have some momentum as we go into the fourth quarter. We have a better expectation of economic conditions in our business as we get into and through the fourth quarter.

Kevin McVeigh, Analyst

Got it. And then just is there any way to think about across your client base, what percentage you are engaged right now, or not using your product or service versus where it was last quarter and where that's been historically? I know there's probably seasonality there, but just trying to get a sense of how many clients maybe aren't fully active right now, but you expect to start coming back as the economy starts to reopen.

Scott Farmer, CEO

So, Kevin, I think your question was what percent of our customers are on hold? We had a strong run up in the summer and into the fall, some never came back, some of them went on hold. So, it's a little difficult to give you an exact number on that. But I can tell you that we're anxious for those folks to get back. We think there is an incredible amount of pent-up demand that is in the marketplace, you had that with stimulus checks, and we think consumer spending could spike quite strongly in Q3 and Q4 of the calendar year. We think that'll be really positive. If you put that together with the strong value proposition that we have with our customers, meaning that when they come back, they still have to provide confidence to their employees and their customers, their clients, that they're coming back to a safe environment. We think all that combined is going to make for quite a good situation.

Operator, Operator

Thank you. Our next question comes from Scott Schneeberger with Oppenheimer.

Scott Schneeberger, Analyst

Thanks very much. Good morning. Somewhat following up on that last question from Kevin. Specifically in your airline cruise line hospitality, the travel segment, can you put any quantification on how much those are down, and more importantly, maybe just a feel for if you've seen any improvement on those metrics since the trough? Or if we're still there? And then I will take away from the answer that that is one of the categories that you think in the back half of this calendar year could significantly open up.

Scott Farmer, CEO

To begin with, most of the revenue from those customers is in our direct sale business, and that business is down about 40% over the prior year. And as you analyze that, it's a little different depending on which segment you're talking about. For example, a lot of cruise ships are still at port, so the cruise line business has really been affected. There is some travel happening now, particularly in terms of vacation travel. So the hotels are doing a little bit better; the airlines are starting to pick up their revenue streams within their businesses. We have seen a little improvement from our revenue to those customers. Still down 40% is a pretty significant number, and I think that those businesses will have some form of recovery as the vaccines continue to roll out and people begin to feel safer traveling. I haven't been to the vacation spots in Florida, but I understand that the spring break crowd is maybe not as big as normal, but they're down there right now. So, I think that there was, as Todd said, a pent-up demand for people to be able to go and do things again, vacation again, go get on an airplane and visit family in a different state across the country. That sort of thing. I think the big trigger for all that and when that all happens is how soon a good portion of the U.S. population has a vaccine. How long will it take to get back to pre-COVID? That I don't know; it might take a couple of years, but I definitely could see some improvement in the second half of the year if the pace of vaccines continues at the rate that it is right now.

Scott Schneeberger, Analyst

Thanks for that, Scott. My follow-up is, you mentioned earlier it's been two years since any change in pricing as a customer appreciation type strategy. I'm curious, as we move into the next fiscal year, might we see that start to happen? Would it be only in specific areas that are seemingly overdue and necessary to cover inflation, or is that a strategy you'll continue to maintain? What would it take to start to get a little bit assertive with pricing?

Scott Farmer, CEO

Scott, thanks for that question. First of all, it's important that you understand that it's not so much that we do it as a favor to the customer, but from our perspective, we want our customers to survive this pandemic, and we were doing all kinds of things to help them out in that regard. Depending on the customer-by-customer basis, a small business might need to add hand sanitizers, masks, gloves and things from us, but they can't afford all of that. So, we help them with adjustments on their invoices. Maybe their entrance mats went from a weekly service to a biweekly or monthly service at a lower rate to help them afford what was happening. To us, it's about the relationship that we have with the customer. We believe we've enhanced their image of us and their opinion of what type of provider we are during these times. It was similar in the great recession. We had the experience of doing things then as well. The lifetime value of customers is significant as we come out of this; they like us, they're willing to trust us, they're more open to listening to what we have to offer them when we develop new products and services, and that all comes into play when we calculate the lifetime value of that customer. From a price standpoint, yes, we're coming up on two years since we last increased our prices on our recurring revenue, and that's particularly in the Rental division where that's probably a stronger statement. We have seen competitors' pricing environment in our business. When they're trying to take our business, they offer ridiculously low prices, but the way they treat their customers leads to them raising prices to help protect their bottom line as opposed to helping the customer. We've seen that in various places in the competitive environment in the last couple of years. We will look at it in the future on a customer-by-customer basis, what type of products and services they need. If we are seeing price increases across the board in our supply chain, we'll have to figure out how to pass some of those costs on to our customers. But the fact that we haven't raised prices in the last couple of years puts us in a good position when we sit down to talk to them about price adjustments. Generally speaking, I think those conversations are going to go well. Will that happen in the near future? I can't tell you yet. A lot of it depends on how economic conditions continue to recover. I would assume that with the potential for energy prices to increase and for inflation to increase, we're eventually going to have to adjust our prices.

Operator, Operator

Thank you. This concludes today's Q&A. I would now like to turn the call back over to Paul Adler for closing remarks.

Paul Adler, Vice President, Treasurer and Investor Relations

Thank you, Katie, and thank you everyone for joining us this morning. We will issue our fourth quarter of fiscal '21 financial results in July. We look forward to speaking with you again at that time. Good day.

Operator, Operator

Thank you. This concludes today's teleconference. You may now disconnect.