Earnings Call Transcript - CTAS Q4 2023

Operator, Operator

Good day, everyone, and welcome to the Cintas Corporation announces Fiscal 2023 Fourth Quarter and Full Year Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Jared Mattingley, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Jared Mattingley, Vice President, Treasurer and 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, who will discuss our fiscal '23 fourth quarter results. After our commentary, we will open the call to questions from analysts. The Private Securities and 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. Fourth quarter total revenue grew 10.1% to $2.28 billion. The organic growth rate, which adjusts for the impacts of acquisitions and foreign currency exchange rate fluctuations, was 10.3%. We are pleased with these fourth quarter results, where each of our businesses continues to grow and execute at a high level, especially coming off our highest growth quarter in fiscal '22. Fourth quarter gross margin was $1.09 billion. Gross margin increased 210 basis points from 45.6% to 47.7%, an increase of 15.1% over the prior year. Operating income for the fourth quarter of fiscal '23 of $470.8 million, increased 16.4% over the prior year. Operating margin increased 110 basis points to 20.6% from 19.5% in the prior year. Fourth quarter net income was $346.2 million, an increase of 17.6%. Earnings per diluted share for the fourth quarter were $3.33, an increase of 18.5% over the prior year fourth quarter. These results conclude a fiscal year of significant accomplishments, including the following: Fiscal year '23 revenue was a record $8.82 billion, an increase of 12.2%. Organic growth was also 12.2% for the year. We saw double-digit organic growth for every quarter during fiscal '23. We were once again named to the prestigious Fortune 500 for the sixth consecutive year. It is an honor to be recognized among the most successful and respected companies. Operating income grew 13.6% for the year. When you exclude both fiscal '22, $12.1 million gain on the sale of operating assets and a $30.2 million gain on an equity method investment transaction, operating income grew 16.7%. EPS grew 11.5% for the year, excluding the previously mentioned prior year gains, EPS grew 15.2%. We increased our quarterly per share dividend by 21.1%. We've increased our dividend every year since going public, which is 39 consecutive years. As part of our steadfast commitment to corporate responsibility, we issued our third environmental, social and governance, or ESG report. Each year, we continue to make the report more robust. Cintas was founded on a sustainable business model. Our corporate culture is based on doing what is right and challenging ourselves to improve. We're proud of these results and the efforts of our employees whom we call partners. I'll now turn the call over to Mike, to provide details of our fourth quarter results.

J. Michael Hansen, Executive Vice President and CFO

Thank you, Todd, and good morning. Our fiscal '23 fourth quarter revenue was $2.28 billion compared to $2.07 billion last year. The organic revenue growth rate, adjusted for acquisitions and foreign currency exchange rate fluctuations was 10.3%. Uniform Rental and Facility Services operating segment revenue for the fourth quarter of fiscal '23 was $1.77 billion compared to $1.6 billion last year. The organic revenue growth rate was 9.1%. As we've done in the past, I will share revenue mix of the Uniform Rental and Facility Services operating segment for the fourth quarter. Keep in mind, there can be small fluctuations in mix between quarters. Uniform Rental was 48%, dust was 18%, hygiene was 16%, shop towels were 4%, linen, which includes microfiber wipes, towels and aprons was 10%, and catalog revenue was 4%. These percentages are consistent with last year, which speaks to the robust demand across all of our products and services. Our First Aid and Safety Services operating segment revenue for the fourth quarter was $249.8 million compared to $218.2 million last year. The organic revenue growth rate was 14.1%. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was $261.5 million compared to $226.2 million last year. The fire business revenue was $173.5 million, and the organic revenue growth rate was 17.3%, resulting in a strong finish to the year. The Uniform Direct Sale business revenue was $88 million, and the organic growth rate was 11.5%. This strong performance exceeded our expectations as robust demand continued for these products and services. Gross margin for the fourth quarter of fiscal '23 was $1.09 billion, compared to $946.2 million last year, an increase of 15.1%. Gross margin as a percent of revenue was 47.7% for the fourth quarter of fiscal '23 compared to 45.6% last year, an increase of 210 basis points. Energy expenses comprised of gasoline, natural gas and electricity were a tailwind, decreasing 65 basis points from last year. Strong volume growth from new customers and the penetration of existing customers with more products and services help generate great operating leverage. Gross margin percentage by business was 47.7% for Uniform Rental and Facility Services, 51% for First Aid and Safety Services, 47.9% for Fire Protection Services and 36% for Uniform Direct sale. Fourth quarter SG&A was 27.1%, which was up 100 basis points from last year. We've continued to invest in selling resources and branding initiatives, and our insurance costs were higher. We are self-insured, which means our insurance costs can fluctuate from quarter-to-quarter. Fourth quarter operating income was $470.8 million compared to $404.4 million last year. Operating income as a percent of revenue was 20.6% in the fourth quarter of fiscal '23 compared to 19.5% in last year's fourth quarter. Our effective tax rate for the fourth quarter was 22.4% compared to 22.8% last year. Net income for the fourth quarter was $346.2 million compared to $294.5 million last year. This year's fourth quarter diluted EPS was $3.33 compared to $2.81 last year. I'll now turn the call back over to Todd to provide his thoughts and our financial expectations for fiscal '24.

Todd Schneider, President and CEO

Thank you, Mike. As we move into fiscal '24, we will celebrate our 40th anniversary of being a publicly traded company. Back then, we were excited about what lay ahead. Today, we are equally excited about the significant opportunities that the future holds. Our value proposition remains strong, and our prospects for continued profitable growth are great. Every business goods producing or services providing has a need for image, safety, cleanliness, and compliance. We work with businesses to help them build a better workday. We provide the products and perform the services better, faster, and more economically freeing businesses to concentrate on their core competency. A year ago, I introduced three priorities: branding, ESG, and technology to help drive our focus, continue to differentiate us in the marketplace, and provide increased competitive advantages. I'm pleased with our progress in each of these key areas. Our branding efforts continue as more and more businesses have learned how we can help them get ready for the workday. We continue to make progress on our ESG goals and our sustainable solutions focus on reducing, reusing, recycling, and repurposing our textiles. These solutions continue to resonate with our customers and prospects as we help them achieve their sustainability initiatives. I want to spend a minute speaking about technology, in particular, our digital transformation journey. We've been very successful thus far in using technology to drive efficiencies in our production facilities, efficiencies out on the routes with our trucks via our proprietary Smart Truck technology, and we are in the early innings of our My Cintas customer portal, which makes it easier for our customers to do business with us. As we look to the future, we're very excited to have great technology partners in SAP and Verizon, which are helping us to provide a better customer experience and improve efficiencies within our business. We are excited to announce today that we have an additional strategic technology partner with Google, leveraging their Google Cloud platform. As a result of these relationships, it positions us at the forefront of technology innovation. We are still in the very early stages of our digital transformation journey, and we are excited about the impact it will have on our customers and our company in total. We are confident technology will be a competitive advantage for us now and well into the future. I will now provide our guidance for fiscal '24. For our fiscal year '24, we expect our revenue to be in the range of $9.35 billion to $9.5 billion, a total growth rate of 6.1% to 7.8%. We expect diluted EPS to be in the range of $13.85 to $14.35, a growth rate of 6.6% to 10.5%. Please note the following: fiscal year '24 interest expense is expected to be approximately $98 million compared to $109.5 million in fiscal year '23, predominantly as a result of lower variable rate debt. This may change as a result of future share buybacks or acquisition activity. Our fiscal '24 effective tax rate is expected to be 21.3% compared to a rate of 20.4% for fiscal '23. The higher effective tax rate negatively impacts fiscal '24 EPS guidance by about $0.16 and diluted EPS growth by about 120 basis points. Guidance does not include any future share buybacks or significant economic disruptions or downturns. And guidance includes the impact of having one more workday in fiscal '24 compared to fiscal '23. We're excited about next year and beyond. The future of Cintas remains bright. I'll turn the call back over to Jared.

Jared Mattingley, Vice President, Treasurer and Investor Relations

That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up as needed. Thank you.

Operator, Operator

Our first question today comes from Andrew Steinerman with JPMorgan Securities.

Andrew Steinerman, Analyst

Hi. I'd like to talk about net realized price as part of the organic revenue growth in the fourth quarter and into the guide. And I think you might need to remind me, I think there's no explicit gas surcharge that Cintas puts on, but obviously, gas prices are down year-over-year. And how does that factor into pricing? And just overall, how has Cintas done in terms of raising price to their B2B customers versus the input costs?

Todd Schneider, President and CEO

Good morning, Andrew, thanks for the question. Yes, good question. From a pricing standpoint, as we have spoken about in past quarters, our pricing has been certainly above historical during fiscal '23, as it needed to be because of the cost inputs. When we think about what that will look like moving forward in our '24 guide, we expect that pricing will return closer to historical and our cost inputs are in a similar spot, as you saw in the CPI report that came out yesterday and the PPI report that came out this morning. We are seeing inflation coming down. I think our team has done a pretty amazing job of managing input costs, both our operational team but our supply chain team, which has really benefited us. So we do not rely upon pricing as the only lever to gain leverage to expand margin. We are committed to extracting out inefficiencies in our business, and you're seeing that. You've seen that in fiscal '23. Our guide for fiscal '24 reflects attractive incremental margins, and we're going to do it successfully, and we're going to expect that inefficiencies in our business to help us expand margins.

J. Michael Hansen, Executive Vice President and CFO

Thank you, Andrew, I might just add two things. One, specifically, we do not have a fuel surcharge. And secondly, you made a comment about our price increases offsetting input costs. The best way to think about that is margins in the fourth quarter were up 110 basis points. Margin for the fiscal '23 year were up 70 basis points, and our guidance implies margin improvement throughout the range of guidance for next year. So, keep that in mind as we think about pricing versus input costs, et cetera, we're still raising margins, improving margins.

Andrew Steinerman, Analyst

Great. Thank you.

Operator, Operator

Our next question will come from Faiza Alwy with Deutsche Bank Securities.

Faiza Alwy, Analyst

Yes. Hi, good morning. I wanted to talk about the type of economic or macro environment that you're embedding in your guide. I know you said that significant economic disruptions or downturns are not assumed, but give us a sense of what type of economic environment you're assuming?

Todd Schneider, President and CEO

Thank you for the question, Faiza. We are not anticipating a significant economic disruption. Predicting economic indicators can be quite difficult. However, I can share what we are experiencing in our business. We have not observed much change in customer behavior. Our sales productivity is strong, customer retention remains high, and there is still considerable interest in our products and services. New programs are performing well, and most of the new accounts we are acquiring look promising. We appreciate the opportunity to expand our reach, and those customers recognize the value in what we offer. Our vertical strategy is also proving effective. Therefore, we expect business as usual. While we acknowledge that the macro environment may fluctuate, we are not forecasting any economic downturn.

Faiza Alwy, Analyst

Thank you. I would like to follow up on the Google partnership. Can you share your perspective on the future direction of this partnership over the next few years? What benefits do you foresee as you pursue your digital transformation strategy?

Todd Schneider, President and CEO

Certainly. Our partnership with Google enables us to store our critical data more effectively and efficiently. However, we believe it has the potential for much more, especially due to the connections Google has with SAP and our own relationship with SAP, which has been very successful for over a decade. This relationship goes beyond the typical customer-vendor dynamic; it's strategic. Recently, SAP and Google expanded their partnership, allowing our SAP data to integrate with Google Cloud’s data and analytics technology. This will provide us access to advanced AI and machine learning capabilities, and we are excited about the long-term benefits of this collaboration. To give you some examples, connecting these technologies allows us to better identify promising prospects for our sales team, enhancing productivity and morale. Instead of making random calls, we can direct our team to the next best prospect. Additionally, we can present the next best product to customers based on past behaviors. We anticipate that certain customer service functions could improve significantly in the years to come. For instance, we see an opportunity to utilize Google Maps to enhance our Smart Truck technology for more dynamic routing, which will save time and energy, allowing us more time to engage with customers. Furthermore, we want our service team to focus on the right customers at the right time, and we believe this technology can help direct them toward at-risk customers or those requiring additional attention. This approach is a process rather than a one-time event, and we believe it will be highly impactful for our business and our customers in the coming years.

Faiza Alwy, Analyst

Great. Thank you so much. Really appreciate it.

Operator, Operator

Next question comes from Ashish Sabadra with RBC.

Ashish Sabadra, Analyst

Thanks for taking my question. I wanted to turn down into the First Aid and Safety Services. We saw some material acceleration in growth there. I was wondering if you can talk about what's driving that strength. And then as you think about '24, any puts and takes that you would call out? Or how do we think about that momentum going forward? Thanks.

Todd Schneider, President and CEO

Thank you, Ashish. I'll start, and if Mike wants to add anything. The First Aid and Safety business is performing very well, and we are optimistic about its future potential. We're achieving significant leverage from the strong growth, and the mix of business is appealing. During the pandemic peaks, we saw an increase in PPE and safety sales, but now the mix has shifted back to our preferred cabinet sales, which are repeat customers and offer higher margins. We are pleased with this mix, and overall growth is strong. Our value proposition is resonating with customers, who are focused on reinvesting in their workforce. The concept of health and wellness is strongly appealing in the market, and we are taking advantage of that. Additionally, we are addressing inefficiencies within the business, which will help us further enhance our margins. We are confident in our current position, excited about the supportive trends in health and wellness, and believe the future looks promising in this area.

Ashish Sabadra, Analyst

That's very helpful color. I just wanted to drill down further on the vertical sales strategy. Obviously, you mentioned you're seeing some pretty good success on that front. I was wondering if you could drill down further on the key verticals. And then also on your health care initiative, how those are trending, but also any other verticals that you would call out? Thanks.

Todd Schneider, President and CEO

Certainly. Our key verticals where we're focusing our time are health care, education, and government. We've organized around those verticals. We have products and services that are attractive to them. Certain service functions dedicated to them. And as a result, we're really benefiting from it. We very much think that they're smart verticals to invest in. And as a result, they're growing really attractively. Customer retention is good, new business is good. We think that there's a real long opportunity here for us to continue to invest in these into the future. Certainly, the demographics of health care are quite attractive. But education and government are doing well in addition, and we're going to continue to invest in those areas. So it's paying dividends for us.

Ashish Sabadra, Analyst

That’s very helpful color. Thank you very much.

Operator, Operator

Your next question comes from Manav Patnaik with Barclays.

Manav Patnaik, Analyst

Good. Historically, you've mentioned that nearly two-thirds of new sales come from familiar programmers. I wanted to get an update on that and also ask about the competitive landscape. Have there been any recent changes? Your two public competitors are going through significant transitions.

Todd Schneider, President and CEO

Yes, Manav, I didn't catch the beginning of your question, but I believe I understand what you're asking. I'll do my best to address it, and please let me know if I miss anything. The known programmers are performing well, and they have historically made up a significant share of our sales, which continues to be the case. We offer products and services that appeal to them, and our sales team is adept at communicating effectively with these clients. It’s crucial to realize that when it comes to known programmers, the increased spending is not always entirely new for them. In many instances, we’re capturing funds that they would have allocated elsewhere, not necessarily to direct competitors, but on compliance, image, safety, and cleanliness. Consequently, we can often redirect those funds to our services, which can result in cost savings for them. So, it isn’t a matter of whether there is a limit to this; rather, we believe there’s significant potential for growth. The economic climate could create challenges, but that doesn’t deter our ability to sell to known programmers; in fact, we see a very long growth trajectory there. Regarding competition, we are in a highly competitive industry, but I haven’t noticed any significant shifts in the competitive landscape. I'll leave it at that.

Manav Patnaik, Analyst

Okay. And then just one quick follow-up I had. I think I understand that the Google partnership, the benefits it potentially brings with any sense of timeline? Like when does this start happening, when you get the data on the cloud and then you start seeing some of these benefits?

Todd Schneider, President and CEO

Well, it's certainly going to be a process. We just entered into our relationship with them recently. We've had meetings with them to talk about where we're going to go here. And as I mentioned, it's not an event. It's a process. But we see some low-hanging fruit, I guess is the best way to say it. As we have gone down this path, more ideas are coming out. So we think we can benefit for years to come with this opportunity. And I won't go into too much detail just because we see some competitive advantages there. And as a result, we'll keep those to ourselves. But we think the runway is long and attractive.

Manav Patnaik, Analyst

Okay. Thank you.

Operator, Operator

And our next question comes from Joshua Chan with UBS.

Joshua Chan, Analyst

Hi, good morning, Todd, Mike and Jared, congrats on a strong quarter. My first question, when you are selling First Aid and Fire, basically those adjacent businesses, how much of that growth is selling to existing customers? And how much of it gets you kind of entirely new customers that don't run uniform from you?

Todd Schneider, President and CEO

Yes, Josh, that's a great question. It's a combination. Cross-selling has been very beneficial for us over the years and will continue to be so. However, we are also focused on acquiring new customers. In the Fire and First Aid segments, there is some overlap, but it's not complete. This allows us to engage with customers who may be interacting with us for the first time. We have a dedicated enterprise sales team that reaches out to customers or prospects regardless of what product they are initially interested in. If a customer is new to us and their interest lies in Fire, that’s fantastic, or if it's in First Aid or rental garments, we go where their interest lies and then build upon that relationship. We appreciate that the lack of complete overlap opens up new opportunities for us, and we actively pursue cross-selling.

Joshua Chan, Analyst

Great. That makes sense. Thanks for the color. And I guess for my follow-up, if I look at your incremental margin, it's climbed pretty steadily through 2023. I assume if you got better alignment between price and cost. So how are you thinking about the cadence of incremental margins looking into 2024?

J. Michael Hansen, Executive Vice President and CFO

Josh, our incremental margin for the total company in fiscal '23 was 26.8%, a little bit up from the previous year. There can be ups and downs from quarter-to-quarter in the way that we invest or the costs that we see. We don't necessarily try to predict one quarter at a time. We do believe we can get incremental operating margins in that 20% to 30% range from quarter-to-quarter generally, but it's going to go up and down, again, based on what we are doing within the business, some initiatives that we may or may not roll out. So the bigger focus is on the full year, and our goal is to get those incremental attractive enough that it improves margins over the year. I wouldn't call it linear nor flat. It's going to be based on how we're managing the business.

Joshua Chan, Analyst

That’s great. Thanks for the color and thanks for your time.

Operator, Operator

Your next question comes from Justin Hauk with R.W. Baird.

Justin Hauk, Analyst

Good morning, everyone. I wanted to ask a follow-up on Andrew's question regarding the implied revenue growth of 7% for 2024. Can you break down the factors influencing this? It's coming off a strong 12% growth in 2023, which followed a solid 10%. The 7% seems more in line with your long-term historical organic growth. Can you clarify if the difference is mainly due to pricing? It sounds like your new business, retention, and existing sales are still performing well. I’m trying to understand the underlying factors.

Todd Schneider, President and CEO

Thank you for the question, Justin. I will do my best to answer and see if Mike wants to add to it. Regarding our growth, Q4 growth was approximately 10%, which is quite positive, especially when compared to last year's strong growth of 12.7%, our best performance of the year. When you compare the 10% growth to the upper end of our guidance, which is in the mid to high 7s, you can view it as a return to more historical levels of pricing. We believe this is appropriate due to the easing of inflation, evidenced by the decline in energy costs we have noticed. As I mentioned earlier, we are aiming for growth that is more in line with historical trends, and volume growth remains strong. Pricing will appropriately return to historical levels. Nonetheless, we are still guiding towards incremental margins and an increase in operating margin. While pricing is one way to enhance margins, it is not our only option.

Justin Hauk, Analyst

Okay, no, that's helpful. I mean that's kind of what you were implying, but I wanted to clarify that, that was kind of the magnitude of the change. I guess the second question, just on the insurance cost increase, and maybe SG&A as a percentage of revenue in general, how much of an impact was that in the quarter? And then is that kind of a run rate headwind that you'll face next year? And the reason why I ask is, obviously, you're implying margin expansion here, but your SG&A as a percentage of revenue is still pretty low versus kind of pre-COVID levels. And so just trying to understand how much structural SG&A leverage gain you have here versus returning to more of a normalized level?

J. Michael Hansen, Executive Vice President and CFO

Because we are self-insured, those claims can fluctuate throughout the year. There is nothing structural related to that; it's simply a consequence of being self-insured. We ended the year with SG&A at 26.9%, which is a few hundred basis points lower than pre-COVID levels over the last few years, and we've discussed this before. We have worked hard to achieve this level, and we don’t want to revert to historical levels. Our expectation is to continue finding ways to better optimize SG&A, especially G&A, to ensure it contributes to our margin expansion in the future. We will keep looking for opportunities to reduce it and do not expect it to rise back to those higher levels we experienced before COVID.

Justin Hauk, Analyst

Great. Okay, I appreciate it. Thank you.

Operator, Operator

And we'll hear next from George Tong with Goldman Sachs.

George Tong, Analyst

Hi, thanks. Good morning. You mentioned there hasn't been much change in customer behaviors based on what you're seeing. Can you elaborate on how customer budgets, sales cycles in the sales pipeline are evolving with the current environment?

Todd Schneider, President and CEO

Good morning, George. The environment hasn't changed significantly. Customer health varies by geography and business size, whether they are small, medium, or large. Generally, the sales process remains consistent, and the sales pipeline appears strong. We are satisfied with our positioning and investments. We have the right products and services and are focused on our customers, which positions us well for the future. As I mentioned earlier, we're not acting as economic forecasters, but we are closely monitoring our business and hoping for a smooth economic outlook. Regardless, we will continue to find ways to succeed as we have in the past.

George Tong, Analyst

Got it. That's helpful. And then I wanted to drill down further into your healthcare vertical, which you touched on earlier, COVID certainly provided a notable lift to the health care business. Can you talk a little bit about how quickly the health care business is growing, what new business trends there look like, and what mix of revenue currently represents?

Todd Schneider, President and CEO

Certainly, George. The healthcare business has been strong for us for many years. It involves not just having a sales focus, but also organizing around our customers, products, services, and service organization. This means it’s more than just sales; we view it as a complete business. It is contributing positively to our growth rates, and we see a long runway ahead. The demographics are very appealing, and our pipeline for sales growth appears strong, thanks to years of investment that have positioned us well. We expect this trend to continue.

George Tong, Analyst

Got it. And just the mix of revenue?

J. Michael Hansen, Executive Vice President and CFO

I don't have that in front of us, George, right now. In the past, it's been about 7%. And I'd say that it's growing faster than average.

Operator, Operator

Your next question comes from Tim Mulrooney with William Blair.

Tim Mulrooney, Analyst

Yes. Good morning. On the First Aid business, specifically, pre-pandemic operating margins were closer to 15%. They went down several hundred basis points. I know from the sell-through of lower-margin PPE in '21 and '22. But now it looks like you're sitting at 19%. I mean, that's a big jump from pre-pandemic levels. Would you expect, I guess, Mike or Todd, a little bit of a give back at some point? Or do you expect to keep and build on those margin gains that you've made this year?

Todd Schneider, President and CEO

Yes, Tim, we do not expect to give back. We expect to maintain and build on those improvements. We're leveraging certainly the total growth, the benefits of health and wellness being important to people in the marketplace. The mix of business being attractive and we've fundamentally focused on extracting out inefficiencies in the business. And we're not giving those back, so yes, we see the future is bright for that business.

Tim Mulrooney, Analyst

Yes. Okay. It was more than just sales mix. It sounds like you did some structural things.

J. Michael Hansen, Executive Vice President and CFO

Yeah. Tim, we talk a lot about the mix certainly returning, and that's been a big part of it. But as Todd mentioned, our first aid safety partners have a lot of things going on in terms of business improvement opportunities from sourcing better to routing better to sales productivity improving to penetration opportunities. There's a lot going on in that business. We've attributed a lot, you're correct, to the revenue mix, and that has been important in terms of the height of the pandemic to today. But there's also a lot that's going on in the business that is working towards structural improvements in the business that create long-term efficiencies, and you're seeing that. That's why we don't expect to give it back. There's nothing that we are underspending or underinvesting in to get these margins. These are real business improvements that are sustainable. And that's what we love about the business. It has been growing nicely, it's resonating with our prospects and customers. It's pretty exciting to think about that business in our fiscal '24 topping $1 billion for the first time. So we do love the business, and there's a lot of good work going on there.

Tim Mulrooney, Analyst

That is exciting, and I appreciate the extra color there. Mike, that's very clear. If I could just shift gears really quickly. One of your competitors recently commented that they saw customer retention rates come down a little bit recently, but it was kind of more of a normalization, okay, like following a boost over the last several years when things were good. Now that kind of back towards historical rates. I'm curious, and some investors are curious if you guys saw something similar to any material degree. Did you see retention rates kind of jump up a little bit in fiscal '22 and '23? And have you seen that pull back or normalize, so to speak, more recently? Thank you.

Todd Schneider, President and CEO

Great question, Tim. Over the past few years, we've seen a nice improvement in our customer retention levels through the pandemic. We think we handled that really strategically, intelligently, and thought about the long term. We have continued to see those same levels of customer satisfaction and retention. So no, we have not seen a change from that standpoint. We're always working on improving our business and making sure that we are super focused on taking great care of our customers and staying attentive to their needs, is a big part of making us successful. So we've not seen a change, and we're focused on making sure that doesn't happen.

Tim Mulrooney, Analyst

Got it. Thank you.

Operator, Operator

We'll hear next from Kartik Mehta with Northcoast Research.

Kartik Mehta, Analyst

Good morning. I wanted to ask your expectations for ad stops as we go into fiscal '24. It seems as though companies are starting to slow down their hiring. And I'm wondering what type of impact that's included in the guidance or what you're anticipating?

Todd Schneider, President and CEO

Kartik, we have not seen a change to our ad stops metrics, and we are expecting that will continue. Part of it is because of the diversity of our customer base, not just goods producing services providing, and the broadness of our customer base. We're not dependent upon any one particular area, and we expect to grow in multiples of GDP. So we expect that our ad stops metrics will continue on its path.

Kartik Mehta, Analyst

Perfect. And then Mike, you might have said this, so I apologize if you already talked about this. But just the impact from energy costs in FY '24 versus FY '23, what you've included or anticipated.

J. Michael Hansen, Executive Vice President and CFO

Let me share a couple of numbers. The total energy for the company in the fourth quarter was 1.8%, and for the entire year, it was 2.2%. Compared to fiscal '22, we saw a decrease of 10 basis points, which is roughly flat. Looking ahead to '24, we noticed that pump prices spiked in June of last year, and our first quarter numbers from last year were relatively high. We might see a slight boost in Q1, but our expectation is that we will remain approximately flat thereafter.

Kartik Mehta, Analyst

Okay. Thank you very much. I really appreciate it.

Operator, Operator

Next, we'll hear from Seth Weber with Wells Fargo.

Seth Weber, Analyst

Good morning. I wanted to revisit the revenue guidance for a moment. It appears that both the First Aid Safety and Fire businesses are experiencing strong momentum, so I’m trying to grasp how the revenue guidance is structured. Do you believe that all three segments will fall within the 6% to 8% range, or will some perform above and others below that range? It seems there is still significant momentum in the First Aid Safety and Fire businesses.

Todd Schneider, President and CEO

Well, Seth, good morning. We like the momentum in all of our businesses. So will there be some above, some below? Yes. But generally speaking, we see in the mid-to-high single digits would be probably where you can think of it. As I mentioned earlier, we're up against comps that are significant, partly because of pricing being above historical in the past, well above historical, and now being closer to historical.

Seth Weber, Analyst

Okay, Mike, for my follow-up question on CapEx, it seems to be approaching that 4% mark again. Is that how we should be thinking about it for fiscal '24? Also, could you provide any insights on whether that spending will be on brick-and-mortar or other capacity-related areas?

J. Michael Hansen, Executive Vice President and CFO

Sure. Yes, we would expect 3.5% to 4% of revenue. Look, when we've had a really good couple of years of volume growth, we have capacity needs in certain places. Capacity is local in our business, but we have capacity needs. We want to continue to invest for growth. There will be everything from added washers and dryers and specific wash alleys to some of a few bricks and mortar new buildings and other investments in the business that allow us to continue to have the capacity we need to grow. So it is kind of back to that historical 3.5% to 4% range. That would be our expectation.

Seth Weber, Analyst

Got it. I appreciate it, guys. Thank you very much.

Operator, Operator

And we'll move next to Heather Balsky with Bank of America.

Heather Balsky, Analyst

Hi, thank you for taking my question. I know you've got a question earlier about sort of the trend in sales and the difference is related to pricing. I'm curious, focusing specifically on the uniforms business. You've been growing organically 9% to 11% the last few quarters. If presumably we're well past the COVID recovery period. I'm just curious what's enabled you to drive that outperformance versus kind of pre-COVID levels? And if you think that sustainable going forward?

Todd Schneider, President and CEO

Good morning, Heather. Yes, our Uniform Rental business is performing quite well. We think we have invested appropriately in the sales organization. We really like where we're going there. We like the productivity levels. They've continued to go up. There are plenty of inputs to productivity, whether it's products that we launch, services that we launch, retention levels of our people, the leadership of the organization to ensure that we're driving items that make them more successful. So no, it's going well, and our service organization is doing an outstanding job with customer retention, making sure, as I mentioned earlier, our customer satisfaction scores are near all-time highs. As a result of that, our lost business, our customer retention is really attractive. We have our new business up, and our customer retention has improved over pre-COVID levels. Those are big for us and having a really positive impact on the business.

Heather Balsky, Analyst

Great. Thank you. That's really helpful. And I feel like I have to ask an AI question here. You guys talked about being early in your digital transformation journey. Are you guys looking at any investments on the AI side in terms of efficiencies and sort of behind-the-scenes type benefit? I'm just curious. Thanks.

Todd Schneider, President and CEO

Yes, we are actively exploring and investing in various opportunities. We believe we are collaborating with the right partners, such as Verizon, SAP, and Google. Our relationship with them goes beyond that of a typical customer-vendor arrangement; it is strategic, and they are assisting us in leveraging market opportunities. While I can't provide specific details, I can assure you that we recognize the potential for investment in this area and are pursuing it wisely, as we believe it will yield significant returns. Furthermore, we anticipate discussing this for many years to come because we believe it has considerable potential.

Heather Balsky, Analyst

That’s really helpful. Thank you.

Operator, Operator

Your next question comes from Scott Schneeberger with Oppenheimer.

Scott Schneeberger, Analyst

Thank you very much. I have a cautionary question. It seems like things are going really well, and recent economic indicators look positive, but I’m curious about your plan if there is no softness in the economy as your guidance suggests. How do you view the efficiency levers you might pull? What assurances can you provide that you'll be in a good position if you aren't able to achieve some of the leverage you've been experiencing on the top line? Thank you.

Todd Schneider, President and CEO

Scott, let me make sure I understand. You're saying if we can't get to leverage or if the economic environment changes?

Scott Schneeberger, Analyst

If the economic environment dips below kind of status quo and deteriorates, just curious what kind of leverage you guys would pull to maintain financial sense?

Todd Schneider, President and CEO

Yes, certainly. That's a great question. We have a highly experienced leadership and management team that has faced various challenges over the years. Regardless of the circumstances, we believe we can succeed in any situation. Your question is difficult to answer due to uncertainties surrounding the depth, duration, and extent of the economic downturn. We anticipate performing well in all economic climates. A severe downturn like the one in 2008 or 2009 might present different scenarios, but we are prepared. We have proven our capability to thrive in diverse economic conditions, achieving growth in sales and profits for 52 out of the last 54 years. I expect we will continue this trend and find ways to succeed, no matter the economic landscape. There are numerous strategies we can employ, and we believe our team is well-equipped to navigate these challenges.

Scott Schneeberger, Analyst

Thank you. I appreciate that. For my follow-up, I have a two-part question related to your housekeeping. I was wondering about your thoughts on capital expenditures as well as other uses of capital as we approach fiscal 2024. Specifically, I'd like to know your views on buybacks, mergers and acquisitions, and any other potential adjustments to the balance sheet that you are considering. The second part of my question is if you could remind us of the impact of one additional workday in fiscal 2024 compared to fiscal 2023.

J. Michael Hansen, Executive Vice President and CFO

Sure. From a capital allocation perspective, we expect that cash flow will continue to be very strong in fiscal '24. Additionally, our balance sheet is solid. As of May 31, we have no variable debt. This positions us well to leverage our strong cash flow and robust balance sheet. We are eager to pursue mergers and acquisitions if the right opportunities arise, and we will actively seek them out at appropriate valuations. We view that opportunity favorably. Share buybacks are also an excellent option; with strong cash flow and a solid balance sheet, we can effectively utilize that cash for buybacks. Our philosophy and strategy regarding capital allocation remain consistent. Our fiscal year guidance incorporates an additional workday, which will contribute approximately a 40 basis point benefit to sales growth. This translates to about a 12 basis point enhancement to the bottom line in operating margin.

Scott Schneeberger, Analyst

Great, thanks. Appreciate all the color.

Operator, Operator

Your next question comes from Shlomo Rosenbaum with Stifel Nicolas.

Shlomo Rosenbaum, Analyst

Hi, thank you for taking my questions. I wanted to just ask a little bit more on the hiring environment at your clients. You said you're not expecting it to change. It's been a very strong hiring environment for the last several years since that initial dip in COVID. Is there a way that you think about it in your mind in terms of the strong hiring environment and just kind of clients adding personnel driving some of that revenue growth, particularly in the Rental Uniforms division? Or do you think it's really a lot more of the company's own efforts in terms of cross-selling, finding new customers, and pricing? Then I have a follow-up.

Todd Schneider, President and CEO

Good question, Shlomo. We love it when our customers are hiring more employees, and it certainly allows you to swim a little bit downstream then. But we've got to find ways to add value to customers even when they're in a more flattish environment. That being said, there are still almost 10 million job openings, so that's very encouraging. We'd love to see those jobs filled. We're going to find a way to be successful whether our customers are hiring at rapid rates or at much lower rates. This is impacted by our ability to cross-sell, bringing more value to the customers in other products and services that they may have with maybe a new business unit or within that business unit just selling more items. So there's a lot of inputs to that and how we categorize it. But we like the spot we're in. We think the products and services and the value proposition that we're providing is resonating with people. We'd certainly love the economy to continue or even improve.

Shlomo Rosenbaum, Analyst

Okay, great. And then just on a follow-up. Maybe you could talk a little bit about the margin just on a sequential basis of looking at the First Aid and Safety. And then kind of the other division, you had a sequential decline despite revenue going up in the Rental Uniforms; do you have any continuing to go up? Or was there something particular on the insurance side that hit the other divisions? Or is there some particular investments that are going on right now? Just if you can give a little bit of a sequential color on what's going on with the operating margins?

J. Michael Hansen, Executive Vice President and CFO

Sure, Shlomo. The First Aid margin was at 18.8% in Q4, which remains a strong figure. Aside from our growth, organic growth continues to be solid, and our gross margin remains strong as well as our commitment to future investments. The Fire operating margin in Q4 was slightly over 20%, which is impressive for that segment. However, the direct sales business saw a margin of 3.5%, which is considerably lower. This segment can experience more fluctuations than others due to its nature. We still value this business, as it grew nicely, but the mix can significantly impact the operating margin, which happened in the fourth quarter. Looking ahead, we continue to anticipate the positive margins in the First Aid division that we've mentioned earlier, and we expect Fire to keep performing exceptionally well, just as it did in fiscal '23.

Shlomo Rosenbaum, Analyst

Thank you.

Operator, Operator

Your next question comes from Toni Kaplan from Morgan Stanley.

Toni Kaplan, Analyst

Thanks for squeezing me in. I wanted to follow up on First Aid growth. You talked about the Cabinet business contributing it again, which is great. I was hoping you could talk about, is that sort of an industry penetration is growing? Or is it the product set relatively new? I know you're investing in it during COVID. Have you been incentivizing your sales force to sell more cabinets? And are you taking share? Just wanted to get a sense of how long the sort of 20% growth in cabinets can continue and if there are any other factors you'd call out as well. Thanks.

Todd Schneider, President and CEO

Thank you, Toni. The answer is yes. We are actively pursuing all the mentioned strategies. We see significant potential in the First Aid business, primarily catering to do-it-yourself customers. With 16 million businesses in North America, there is a substantial opportunity to expand our First Aid cabinet services, as well as our other offerings like AEDs and wash stations, which provide real value to customers. The trends in health, safety, and compliance are expected to remain favorable, as organizations continue to invest in these areas. We believe this will be a supportive factor for many years ahead. The market is quite expansive, and we are making the necessary investments to ensure our growth continues.

Toni Kaplan, Analyst

Terrific. And this should be a short one, but hoping you could talk about maybe the sensitivity of the business from inflation. So presumably, your costs come down as inflation comes down, so how should we be thinking about maybe like the impact to margin for each point inflation comes down or however you want to frame the sensitivity there? Thanks.

J. Michael Hansen, Executive Vice President and CFO

Toni, that's a really difficult thing to try to say one point of inflation equals x points of margin. That's pretty difficult to do. But I'd maybe say this: when you think about our cost structure, we've got a really nice mix of cost types. We certainly have things like labor that are impacted by inflationary pressures, and we work very, very hard on that over the course of the last five years, I'd say. We're in a good spot. Then we also have a large part of our cost structure that is amortizing. It allows us to effectively see any inflationary impacts coming if they are coming and plan for them accordingly. We may plan for that in terms of our pricing approach or other initiatives. The point is, because we're amortizing those costs, it takes a while for inflation to get to us, and during that period of time, we can plan and anticipate better. While we're on that bucket, I would say our global supply chain really does a nice job of not being single-sourced. So when there are some inflationary pressures in various parts of the world or our supply chain, we have the ability to move volume a little bit in flex. We have choices, and that's important for us. That's been important for us in the high inflationary environment over the last two years. We also have a large infrastructure, 400-plus locations around the country. When we are growing nicely, we're leveraging it very, very well, and we've done that over the last few years. We're not dramatically affected by today's inflation. You hear us talk about pricing is just one lever that we have to get margin improvement. That's because of, one, we've got this diverse cost structure. Two, we've got a lot of initiatives, and it gives us choices. That's the key for us in terms of fighting inflation. Hopefully, that answers the question. It's not an easy metric for us because of our cost structure and the initiatives we have, and also depends on where inflation comes from.

Toni Kaplan, Analyst

Super. Thanks a lot.

Operator, Operator

And this concludes our question-and-answer session. I'd like to turn the call back to Mr. Mattingley for any additional or closing remarks.

Jared Mattingley, Vice President, Treasurer and Investor Relations

Thank you for joining us this morning. We will issue our first quarter fiscal '24 financial results in September. We look forward to speaking with you again at that time. Thanks.

Operator, Operator

This concludes today's conference call. Thank you for attending.