Earnings Call Transcript - CTAS Q3 2024

Operator, Operator

Good day, everyone, and welcome to the Cintas Corporation Announces Fiscal 2024 Third Quarter Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jared Mattingley, Vice President and Treasurer, Investor Relations. Please go ahead, sir.

Jared Mattingley, Vice President and Treasurer, Investor Relations

Thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2024 third-quarter results. After our commentary, we will open the call to questions from analysts. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Todd.

Todd Schneider, President and CEO

Thank you, Jared. Due to the outstanding dedication and execution of our employees, whom we call partners, we delivered very strong results for our third quarter. Total revenue for the third quarter grew 9.9% to $2.41 billion. The revenue dollars represent record quarterly revenue. We are pleased with the performance of each of our businesses. Our revenue growth remains robust and we have good momentum in the business. New business remains strong. Our sales team continues to operate at a high level. We are seeing broad success across the many verticals, particularly within our focus verticals, as well as our cross-selling efforts and penetration of new products and services within our existing customers. Retention levels are strong and remain at very attractive levels. Our strong revenue growth flowed through to our bottom line. Gross margin for the third quarter increased 220 basis points to a record 49.4%, an increase of 14.9%. Operating income was a record 21.6%, an increase of 16.6%. Diluted EPS grew a robust 22.3% to $3.84. Cash flow remains strong. Net cash provided by operating activities in the third quarter grew 32.8% over the prior year. In the third quarter, we continued to invest in our businesses through capital expenditures of $107 million. During the third quarter, we made acquisition purchases of $111 million. On March 15th, we paid shareholders $137.6 million in quarterly dividends, an increase of 17.1% from the amount paid the previous March. Our strong cash flow gives us flexibility to choose how we deploy our capital and through three quarters, we have deployed over $1.4 billion of capital across our priorities of capital expenditures, acquisitions, dividends, and buybacks. I would like to thank our employees, whom we call partners, for their continued focus on our customers, our shareholders, and each other. Before turning the call over to Mike to provide details of our third-quarter results, I'll provide our updated financial expectations for our fiscal year. We are increasing our financial guidance. We are raising our annual revenue expectations from a range of $9.48 billion to $9.56 billion to a range of $9.57 billion to $9.6 billion, a total growth rate of 8.6% to 8.9%. Also, we are raising our annual diluted EPS expectations from a range of $14.35 to $14.65, to a range of $14.80 to $15, a growth rate of 13.9% to 15.5%.

Mike Hansen, Executive Vice President and CFO

Thanks, Todd, and good morning. Our fiscal 2024 third-quarter revenue was $2.41 billion, compared to $2.19 billion last year. The organic revenue growth rate adjusted for acquisitions, foreign currency exchange rate fluctuations, and a difference in the number of workdays was 7.7%. Total growth was positively impacted by 170 basis points due to the extra workday. We remind you, as you update your models for next fiscal year that there will be two less workdays compared to this current fiscal year. Each quarter next year will have 65 workdays, which means, the first and the fourth quarters will each have one less workday than this fiscal year. Organic growth by business was 7.1% for Uniform Rental and Facility Services, 11.5% for First Aid and Safety Services, 13.9% for Fire Protection Services, and Uniform Direct Sale was down 3.9%. Gross margin for the third quarter of fiscal '24 was $1.19 billion, compared to $1.03 billion last year, an increase of 14.9%. Gross margin as a percent of revenue was 49.4% for the third quarter of fiscal '24 compared to 47.2% last year, an increase of 220 basis points. Strong volume growth, technology improvements, and continued operational efficiencies helped generate this strong gross margin. Gross margin percentage by business was 48.8% for Uniform Rental and Facility Services, 56.3% for First Aid and Safety Services, 48.8% for Fire Protection Services, and 41.1% for Uniform Direct Sale. Gross margin for the Uniform Rental and Facility Services segment increased 170 basis points from last year. Energy was a tailwind of 40 basis points. In addition, we continue to leverage our strong revenue growth, our technology investments and extract inefficiencies out of the business through our Six Sigma and engineering teams. Our technology investments have allowed us to improve garment sharing among our plants, which improves material cost. Our SmartTruck technology allows us to improve our route efficiencies and provide route densities to our existing routes, which positively impacts truck purchasing, labor, and energy. Our Six Sigma and engineering teams have helped us create efficiencies in the plant that allow us to maximize the utilization of our plant equipment, labor, and energy. Gross margin for the First Aid and Safety Services segment increased 470 basis points from last year. Strong revenue growth continues to help expand our margins in this segment. Strong revenue performance in some of our high-margin recurring revenue products like AED Rentals, eyewash stations, and WaterBreak continues to provide a healthy revenue mix. Our technology investment in SmartTruck continues to provide route optimization and improved efficiencies. And our First Aid dedicated distribution center allows us to lower product costs. All of these contributed to improved gross margins. Selling and administrative expenses increased 90 basis points from last year. The increase was driven by investments in selling resources, technology and our management trainee program, as well as costs associated with an agreement in principle to settle the purported class action contract dispute brought by plaintiffs City of Laurel. We determined that settling the claim is in the best interest of Cintas. The total monetary payment agreed to in the proposed settlement, including the 60 basis points recognized in this quarter is $45 million. We expect that the settlement costs will not impact our financials in future periods. As Todd mentioned earlier, we generated strong cash flow. For the year, our free cash flow increased 31.6%. This has allowed us to invest back into the business, which has resulted in capital expenditures of 4.3% for the year. Our investments include technology to grow the top line and expand margins, automation to improve efficiencies in our plants and additional processing capacity where needed. We expect capital expenditures to finish around 4.25% of revenue for the year. Operating income of $520.8 million compared to $446.8 million last year. Operating income as a percentage of revenue was 21.6% in the third quarter of fiscal '24 compared to 20.4% in last year's third quarter, an increase of 120 basis points. Our effective tax rate for the third quarter was 19.9% compared to 22.1% last year. The tax rates in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. Net income for the third quarter was $397.6 million compared to $325.8 million last year. This year's third-quarter diluted EPS of $3.84 compared to $3.14 last year, an increase of 22.3%. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal '24 interest expense is expected to be $99 million compared to $109.5 million in fiscal '23, predominantly as a result of less variable rate debt. Our fiscal '24 effective tax rate is expected to be 20.6%. This compares to a rate of 20.4% in fiscal '23. Our guidance does not include the impact of any future share buybacks. As I mentioned earlier, we expect that the proposed settlement will not impact our financials in future periods and accordingly, there is no impact on our guidance. Guidance includes $17.4 million of acquired revenue for the fourth quarter. This revenue includes the impact of the recently announced acquisitions during the third quarter. That concludes our prepared remarks. Now, we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you.

Operator, Operator

We will now take our first question from Manav Patnaik from Barclays Capital. Please go ahead, Manav.

Ronan Kennedy, Analyst

Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my questions. Can I just ask, with regards to the strong margin performance, can you kind of assess or characterize the contributions from, whether it's the SmartTruck, the Six Sigma, the engineering extracting of inefficiencies? But also how we should think about those as drivers in the context of the sustainability of the margins, if you could elaborate on that, please?

Todd Schneider, President and CEO

Thank you for your question, Ronan. When you think about the gross margin, it really starts with our culture, how we run our business, the expectations we have, the intensity with which we run it, and the focus. That being said, there are many inputs to those numbers. Certainly, our investments that we are making are paying off. The investments in SmartTruck, the investments in our Six Sigma team, the investment in our engineering team, the investment in our supply chain organization are all helping us to improve those results. So I can't give you an exact number with, hey, SmartTruck gave us X basis points, what have you. There are many inputs, and we're pleased with the investments that we've made, and we're pleased with the leadership and the culture of the organization, where they're focused on driving those results, providing a better experience for our customers and providing a better experience for our employee-partners.

Ronan Kennedy, Analyst

That's helpful. Thank you. And then with regards to obviously, strong performance on the top line as well, can you just talk about the contributions from new business and penetration versus expectations, how pricing is trending, and also retention, please?

Todd Schneider, President and CEO

Yes, that's a great question. When we consider our growth, there are several factors at play. We're satisfied with our growth trajectory, particularly our internal growth and the acquisitions we’ve made, which are solid businesses. In analyzing our growth components, pricing certainly plays a role, but it's not the primary driver. The bulk of our growth comes from increased volume, which is encouraging because it aligns with our goal to expand our business in that way. Pricing has stabilized and is now more in line with historical levels, which is what we anticipated for the year. We're particularly gaining from our new business initiatives. Our team is performing exceptionally well, and our service organization has impressive retention rates. Additionally, we are effectively cross-selling our diverse range of products and services to ensure our customers and prospects are well-informed. We are seeing advantages across all these areas, and we are pleased with our current position and growth strategy.

Operator, Operator

And our next question comes from Joshua Chan from UBS. Please go ahead, Joshua.

Joshua Chan, Analyst

Hi. Good morning, Todd and Mike. Thanks for taking my questions. Could you discuss the sustainability of the growth you're experiencing now that pricing has returned to a historical level? Do you believe the current run rate can be maintained based on your interactions with customers and the dynamics of retention rates?

Todd Schneider, President and CEO

Yes, Josh, good morning. We are pleased with our growth progress. An exciting aspect is that we service over a million customers, but there are 16 million businesses in North America, indicating significant potential for us. About 60% of our new accounts are from non-programmers, and this trend is continuing. We are achieving great results by engaging with prospects and demonstrating a more effective approach than their current methods. This does not necessarily mean new spending, as they may already be allocating that budget elsewhere; we are just helping them to use it more efficiently, effectively, and often at a lower cost. The potential for growth remains very appealing due to the number of prospects available and our value proposition resonating with both prospects and customers. We are content with our growth trajectory and aim to maintain this momentum.

Joshua Chan, Analyst

That's great color. Thank you. And for my follow-up, you talked about incremental margins being in the 20% to 30% range historically, and now you're sort of at the higher end of that in recent years. Is this the right level of incremental margins going forward on revenue growth that comes ahead?

Todd Schneider, President and CEO

We understand the goal of achieving 20% to 30% incremental margins, and we aim to be at the higher end of that range to enhance our margins. We're focused on eliminating inefficiencies and leveraging our revenue growth in various ways. However, we also acknowledge that running a business isn't a straightforward process, and there will be fluctuations with some quarters performing better than others. Overall, we are satisfied with that range and definitely prefer to be at the higher end.

Operator, Operator

And our next question comes from Heather Balsky from Bank of America. Please go ahead, Heather.

Heather Balsky, Analyst

Hi. Thank you. I was hoping you could just talk about the M&A you did this quarter and what attracted you to the assets. And then an update on how to think about M&A going forward.

Todd Schneider, President and CEO

I'm happy to start. M&A is an important component for us, and it can't be paced since it happens as opportunities arise. The two acquisitions we announced last quarter are strong businesses with excellent operators. The one in Kentucky helped us gain necessary capacity in that region, allowing us to integrate that volume into seven of our facilities. This creates synergies that enable us to spend more time with our customers instead of driving. In Pennsylvania, while we didn't acquire additional capacity, we absorbed the volume into 16 of our facilities, which also provides synergies and allows for more customer engagement. We have the chance to discuss our wider range of products and services with our new customers. Overall, these were two attractive acquisitions with operators that align well with our strategy.

Mike Hansen, Executive Vice President and CFO

Maybe a couple added points. As Todd said, these are great acquisitions, and we've had a handful of them this fiscal year. Each of the two that Todd talked about is less than $20 million in annual revenue. The $17.4 million that we gave you in our prepared remarks includes the impact of those. But keeping in mind, we've made acquisitions all year long, and so that fourth quarter impact would include all of the acquisitions we've made throughout the last 12 months. Just something to keep in mind as you're thinking about our fourth quarter.

Heather Balsky, Analyst

Thank you. Appreciate it.

Operator, Operator

And our next question comes from Andy Wittmann from RW Baird. Please go ahead, Andy. Hello, Andy. Is your line muted?

Andy Wittmann, Analyst

I'm sorry about that. Mike, I want to expand on the last question you had regarding the contribution from mergers and acquisitions. In your fourth quarter guidance, has there been a change in your fundamental outlook for the company, considering the recent larger acquisitions? Additionally, was the $45 million legal settlement mentioned included in your initial guidance, or are you handling that separately while still increasing your guidance?

Mike Hansen, Executive Vice President and CFO

Yeah, so, Andy, I already forgot your first part of the question. What was your first part?

Andy Wittmann, Analyst

First question is, does your fundamental outlook for the business unchanged?

Mike Hansen, Executive Vice President and CFO

I apologize. As Todd mentioned, our market continues to be very large, the business momentum remains strong, and adoption is good. The forecast for the fourth quarter aligns with our desired growth profile. Overall, with no significant changes in customer behavior, we expect continued performance similar to what we've experienced, and we are pleased with the business momentum. Regarding your second question about the 60 basis points, that was not included in the initial guidance at the beginning of the year, and it was absorbed in the third quarter.

Operator, Operator

And our next question comes from George Tong from Goldman Sachs. Please go ahead, George.

George Tong, Analyst

Hi, thanks. Good morning. Can you provide an update on the external selling environment, including how client budgets and sales cycles are performing?

Todd Schneider, President and CEO

I'm glad to start. Good morning, George. We haven't really seen much change in the sales cycle; interest in our products and services remains strong. We're continuously investing in new offerings and making adjustments to ensure they are appealing to our prospects and customers. The momentum is good. Outsourcing continues to be effective, and the no program market remains very large. We have become quite skilled at presenting our solutions to help prospects improve their operations. We assist them with all the products and services we offer. As I mentioned, it's often not about generating new funds; typically, they are already spending money, just reallocating it to us for better, faster, smarter, and more cost-effective solutions.

George Tong, Analyst

Got it. That's helpful. And then separately, can you talk a little bit about your focus verticals, including healthcare, how much additional runway is there for these focus verticals to serve as a tailwind to organic revenue growth?

Todd Schneider, President and CEO

Our internal growth strategy is effectively helping us organize around the customer and deliver the products and services they need. This approach has benefited us significantly over the years. We are very optimistic about all the verticals we operate in, including healthcare, hospitality, education, and state and local government. Each of these areas presents an attractive opportunity, and we are well-structured to meet their needs. Our value proposition is connecting well with them.

Operator, Operator

And our next question comes from Tim Mulrooney from William Blair. Please go ahead, Tim.

Luke McFadden, Analyst

Hi, good morning. This is Luke McFadden on for Tim Mulrooney. Thanks for taking our questions today. So I wanted to ask, too, just on first date, I'll start with the first one and then move on to the second one after. But First Aid and Safety has been growing at a double digit rate for quite a few quarters in a row now. I know there's a penetration story here with your established base of uniform customers, but I'm also curious if new product introductions are an important driver of this growth. How much of your growth in that segment is from new product introductions?

Todd Schneider, President and CEO

Good morning, Luke. We are very enthusiastic about the First Aid business. Innovation is a key aspect of our culture, so we are constantly focused on enhancing our processes, products, and services. While I can't specify the exact contribution of a product rollout to our growth, I can say that the value proposition in the First Aid sector, as well as in all our businesses, is really resonating. The mix of business we have is strong, and our investments in our distribution center are enabling us to be more effective in sourcing and providing products. A robust supply chain allows us to deliver products to customers in a timely manner, positioning us for success. We aim to ensure all customers, whether from uniform, fire, or direct sales, are aware of our First Aid business, and we actively strive to facilitate that awareness through various channels. We are indeed benefiting from this cross-selling approach.

Luke McFadden, Analyst

Understood, really helpful, and maybe just sticking on first aid and safety here. As you think about that segment of your business, does it feel like you've essentially built out the full suite of products and services there, or at some point should we expect that potentially you're more about other product introductions as you continue to build out the portfolio? Because the room here for more is essentially what I'm curious to know.

Todd Schneider, President and CEO

Yeah, Luke, again, I'll go back to our culture. Our culture is such that we are constantly innovating and pushing ourselves to provide the best products and services. And so you'll see more of that to come. We're constantly innovating to put our partners in the best position, our employee partners in the best position to provide the most value for our customers.

Mike Hansen, Executive Vice President and CFO

And maybe one added comment Luke, when we think about this business, you may have heard us speak to umbrellas of image, safety, cleanliness, and compliance and when we think about this business, safety is a fairly large umbrella and when our first aid and safety people are speaking with customers and thinking about that innovation that Todd talked about, we're thinking quite broadly about how do we keep our customers, how do we help our customers keep their employees safe. And that can mean opportunities into the future. And that's the way we look at it from a broad perspective.

Operator, Operator

And our next question comes from Andrew Steinerman from JP Morgan Securities. Please go ahead, Andrew.

Andrew Steinerman, Analyst

Hi. In the quarter, when you look at your rentals and facility services segment, how much of the growth is actually coming from uniforms versus ancillary services directionally? Like, is there good growth in both? And also if you can make a comment about ad stops within uniforms.

Todd Schneider, President and CEO

Good morning, Andrew. We don't disclose specific numbers, but to answer your question directionally, we are experiencing growth across all areas. There is strong demand for our uniform business and our facility services, as well as for all our business products and services. Nothing stands out in any particular area. Regarding ad stops, we haven't noticed any change in customer behavior. Overall, it's business as usual. There are many factors that contribute to that number, but I would still characterize it as business as usual.

Andrew Steinerman, Analyst

Thank you.

Todd Schneider, President and CEO

Yes, sir.

Operator, Operator

And our next question comes from Jasper Bibb from Truist Securities. Please go ahead, Jasper.

Jasper Bibb, Analyst

Hey, good morning, guys. I wanted to follow up on the earlier discussion on first aid. The gross margin there was really impressive at 56% this quarter, but you also had SG&A at 25% from the prior year. So, could you provide just maybe a bit of color on the investments you're making in that business? And when do you think the first aid segment should start to deliver a bit more margin leverage over that G&A base?

Todd Schneider, President and CEO

Yeah, Jasper, good morning. As I mentioned, we really like the business and it's performing really well and we're investing appropriately. The amount of prospects out there are massive. And to Mike's point earlier, the value proposition is resonating. We talk about the mantra in that business is what's more important to a business than the health and safety of their employees and their customers. So that is resonating. We're in a great position to invest to provide those products and services. So we're doing just that. And so we're investing in selling resources, we're investing in marketing resources, because we really like where we are, and it makes sense to invest. And I think you're seeing it show up in the operating margin and the gross margin.

Mike Hansen, Executive Vice President and CFO

Each quarter this year has seen growth of 22% or higher, which is a significant improvement compared to last year. As Todd mentioned, we aim to keep investing in the long-term growth of all our businesses. These investments are particularly evident in the gross margin for first aid and safety. We are pleased with the margins, which have increased significantly over the past few years, and we will continue to invest as it makes sense to do so.

Jasper Bibb, Analyst

Thanks, that makes sense. And then just was hoping to get an update on what you're seeing for expense growth on labor and fleet related costs in the quarter?

Todd Schneider, President and CEO

Labor is a significant factor for us. We aim to offer attractive and competitive wages. In our previous discussions, we mentioned that we have not been caught off guard by the wage inflation we have observed in North America over the last few years. We believe we are in a strong position regarding this issue. An exciting development is that our Six Sigma and engineering teams are working on automating specific processes, which helps us bring transformative technology into various areas of our business, such as SmartTruck and plant efficiencies. This automation assists us in managing our labor costs effectively while ensuring we remain competitive and can attract top talent. We have been investing in these initiatives for years, and they are starting to yield positive results.

Operator, Operator

And our next question comes from Ashish Sabadra from RBC. Please go ahead, Ashish.

Ashish Sabadra, Analyst

Thanks for taking my question. I just wanted to focus on the Google partnership. I was wondering if you can provide an update on that front. I believe you've already migrated your SAP onto the GCP. And how should we think about those benefits that you may have seen in the quarter, but also benefits as we go forward? Thanks.

Todd Schneider, President and CEO

Good question, Ashish. I would say that we have a strong relationship with Google. You're right that we transitioned to the Google Cloud platform, and I think we're still in the early stages of that process. We definitely aim to enhance our collaboration and empower our employees to deliver greater value and achieve success. We believe there are tools at our disposal that will help us provide more value to our customers and enable our team to excel, which contributes to their success. Although we are in the early stages, we are optimistic about the potential of this partnership.

Ashish Sabadra, Analyst

That's a very helpful color. And if I can ask a quick accounting clarifying question. So in the balance sheet, the uniform and other rental items and service that's moderated sequentially quarter to quarter, I was just wondering if you can provide any color on what's driving that, is that better efficiency or any color on that front? Thanks.

Mike Hansen, Executive Vice President and CFO

Yes. Todd talked a little bit about how we are working on all pieces of the business, but certainly one of those is inventory, and he touched on a little bit of garment sharing. So you can think about when we improve garment sharing, for example, we don't need to inject as many new garments into that in-service inventory. So the more sharing means better utilization of our existing in-service inventory, and it means we don't have to add as much into the in-service inventory from new purchases. That's one of the areas. Certainly, though, there are others like improved sourcing as well. Volume growth, as Todd said, remains really strong, and so what we're seeing is some nice offsetting of the volume growth with some of these initiatives.

Operator, Operator

And our next question comes from Stephanie Moore from Jefferies. Please go ahead, Stephanie.

Stephanie Moore, Analyst

Hi, good morning. Thank you. I wanted to continue the discussion on the pretty impressive margin front for the quarter. I appreciate the color in terms of kind of discussing the route optimization, the merchandise management, Six Sigma, the likes. But maybe if you could provide a little bit of color of your major initiatives, which ones you think are kind of still in the early innings, or we could kind of continue to see some more improvement or accelerated improvement? And then maybe taking it a step further, what is next for you guys, in terms of other areas of opportunity that haven't been as major focused yet? Thank you.

Todd Schneider, President and CEO

Good morning, Stephanie. In our strategic initiatives, we're concentrating on how to enhance our overall business, particularly regarding material costs, energy, and labor. As Mike mentioned earlier, our energy expenses have decreased by 40 basis points, which is not solely due to price changes. These are the initiatives we've discussed, focusing on our main costs: materials and labor. We are dedicated to improving efficiencies in these areas. While we appreciate the growth in volume, we aim to maintain our margins because this growth is substantial, and we have strategic initiatives to eliminate inefficiencies in our operations. I won't single out any particular initiative as being in the early stages; we have significant opportunities ahead in this regard. A part of our culture is that we continuously strive to innovate and improve. You can expect to see this sustained effort. Regarding acceleration, it is ongoing; we are always working on it. Therefore, our focus remains on those incremental margins, which is crucial for ensuring we achieve our targets.

Mike Hansen, Executive Vice President and CFO

Yeah, the only thing I might add is we're certainly in the very early innings of technology and we believe there's a nice runway there. Todd talked about just the recent migration to the Google Cloud and that creates a foundation for us to do some interesting things moving forward.

Operator, Operator

And our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead, Scott.

Daniel, Analyst

Hey, good morning, it's Daniel on for Scott. Thanks for taking our question. Could you please speak to the outlook for uniform direct sales and fire protection as well as some perspective on the margins for all others going forward please? Thank you.

Todd Schneider, President and CEO

I will begin with the outlook, and Mike can address the margins. The uniform direct sale business is crucial for us, featuring significant strategic accounts in national and hospitality sectors. These customers contribute significantly to our revenue, not just through direct garment sales but also in other areas. This business can be somewhat inconsistent due to the nature of rollouts and purchases, but we are confident in our position and the value we offer. Therefore, we see a very positive outlook in this area. Regarding the fire business, it has performed excellently for us, with substantial revenue growth and improved margins over recent years. Additionally, it is the only sector where compliance necessitates our products and services. Thus, we are optimistic about its future prospects due to the opportunities we foresee. Mike, feel free to provide your insights on the margins.

Mike Hansen, Executive Vice President and CFO

Certainly. As Todd mentioned, the fire business has experienced a significant increase in margins over the past few years, thanks to various initiatives that have been successful, similar to our other businesses. It's worth noting that we have seen a year-over-year rise in SG&A in the fire division, and we are beginning the SAP implementation for this business. This may create some pressure on fire margins and overall margins as we approach fiscal ‘25 due to this investment. However, as demonstrated in our rental and first aid and safety sectors, once we become proficient with the new system, it can open up valuable opportunities. Although there's been notable improvement, we might face some SG&A pressures next year and the year after as a result of the implementation, but we expect long-term margin improvements. Regarding uniform direct sale margins, as Todd indicated, that business will fluctuate and may be somewhat inconsistent on a quarterly basis, which will affect margins as well. Overall, nothing specific stands out beyond its variability compared to our other three businesses.

Operator, Operator

And our next question comes from Shlomo Rosenbaum from Stifel Nicolaus. Please go ahead, Shlomo.

Shlomo Rosenbaum, Analyst

Hi, thank you for taking my questions. Todd, could you elaborate on the macro environment concerning employment? Specifically, can you discuss the areas where more automation is being sought to offset employment costs due to rising minimum wage in places like California? How much exposure do you have to these sectors? I have a follow-up after that.

Todd Schneider, President and CEO

Good morning, Shlomo. From a macro perspective, as I mentioned, we haven’t observed significant changes in customer behavior. There are always some ups and downs. As you pointed out, employers are feeling pressure to find ways to automate processes due to wage inflation, which has been ongoing for many years. Additionally, there are infrastructure bills and on-shoring initiatives that may impact us, but I can't specify exact benefits or challenges at this time. Overall, we feel positive about our current position and find the macro environment to be reasonably stable, which we believe is favorable for our success.

Shlomo Rosenbaum, Analyst

Okay, thank you. Just for a follow-up, you have a competitor there that was spun out, say, six months ago. And I was just wondering, has there been any change in the environment with them competitively in terms, either positively or negatively? I mean, have you seen any changes in the way that they bid? Are you taking more business from them? Maybe you could just comment in general.

Todd Schneider, President and CEO

I would say it's pretty much business as usual. They're a strong competitor, and I have a lot of respect for them. The competitive environment has always been intense since I joined the company, and I expect it will remain so. However, our focus is on positioning our employee partners for success in delivering the best value to our customers, and that hasn’t changed.

Operator, Operator

And our next question comes from Kartik Mehta from Northcoast Research. Please go ahead, Kartik.

Kartik Mehta, Analyst

Yeah, thank you. Hey, good morning. Todd, you have been able to execute extremely well this year, beat guidance. And as you look at the business, is that the result of maybe metrics like non-programmers being a little bit better than you thought? Is it sales being better than you thought? Maybe you're just more cautious about the economy than actually happened. If you look at why you have been able to do better, what would you point to?

Todd Schneider, President and CEO

It starts with our culture and the expectations we have for our employees and the pace at which they work. That said, our value proposition is resonating well across our various businesses. The first aid business is performing strongly, and our outsourcing services are also seeing positive reception. This may be due to the current challenges in hiring, making outsourcing a more attractive option. We are satisfied with our position, having surpassed our internal expectations. However, many factors contribute to this success, as we are focused on enhancing our products, services, and technologies to ensure our team's success and improve customer satisfaction. We are pleased with our standing and are committed to continued investment for the future.

Kartik Mehta, Analyst

And just one follow-up, you obviously discussed M&A a lot. I'm wondering, and I know some of these acquisitions can take years to come to fruition. But as you look at the market today, are you seeing any change in the pricing environment, maybe what expectations are from sellers, or has it remained about the same?

Todd Schneider, President and CEO

Yeah, Kartik, good question. I wouldn’t speak to any change there. It's more about certain events that might prompt them to move, whether it’s an owner’s age or succession among other life events. To your point, in certain cases, these situations take decades to unfold. You can’t really predict them, but when they are ready, we’re ready. We are very interested in mergers and acquisitions of all kinds, whether big, small, or medium, and everything in between.

Operator, Operator

And our next question comes from Toni Kaplan from Morgan Stanley. Please go ahead, Toni.

Toni Kaplan, Analyst

Thanks so much. I wanted to ask a question on the focus verticals. Are you able to share sort of the growth between focus verticals versus non-focus ones? And how do you assess whether to add a new vertical into that sort of focus designation? Is there a different go-to-market strategy for focus verticals as well? Thanks.

Todd Schneider, President and CEO

Good morning, Toni. I expect our focus verticals to grow at a faster rate than our overall business. With a structured approach centered around our customer base, that’s certainly the expectation. We believe we have selected strong verticals that hold significant appeal. While I can't quantify the exact impact on our total growth, I am confident in our choices. We continuously assess whether to add new verticals and determine the best strategies. Ultimately, our priority is to position our employee partners for success and maximize value for our customers. We are actively evaluating this and feel positive about our current investments.

Toni Kaplan, Analyst

Terrific. I wanted to also ask about your marketing budget and whether you've increased that year-over-year. I recently heard some Cintas commercials on Bloomberg Radio for example, just wondering if that's coincidence or if there's been a greater push towards more marketing? Thanks.

Todd Schneider, President and CEO

Thank you, Toni. I'm pleased to hear that. The algorithm is functioning effectively and reaching our target audience. I wouldn't say there has been a significant change; we are simply ensuring that our investment is optimally placed. We are leveraging analytics and technology to maximize the return on investment. It's more about making adjustments rather than a major change in investment. Thank you.

Jared Mattingley, Vice President and Treasurer, Investor Relations

Thank you for joining us this morning. We will issue our fourth quarter of fiscal ‘24 financial results in July. We look forward to speaking with you again at that time. Thank you.

Operator, Operator

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