Earnings Call Transcript
CINTAS CORP (CTAS)
Earnings Call Transcript - CTAS Q1 2023
Operator, Operator
Good day, everyone, and welcome to Cintas First Quarter Fiscal Year 2023 Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Adler, Vice President and Treasurer, Investor Relations. Please go ahead, sir. Pardon me, interruption, Mr. Adler, we're unable to hear you.
Paul Adler, Vice President and Treasurer, Investor Relations
Thank you. Yes, we were still on mute. So, 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 2023 first 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 Chief Executive Officer
Thank you, Paul. We are pleased with our start to our fiscal year 2023. First quarter total revenue grew 14.2%. Each of our businesses increased revenue at a double-digit rate. The benefits of our strong revenue growth flow through to our bottom line. Excluding a one-time gain recorded in last year's first quarter selling and administrative expenses, operating income margin increased 20 basis points and EPS grew 12.3%. Our sales force continues to add new customers and penetrate and cross-sell our existing customer base. Businesses prioritize all we provide, including image, safety, cleanliness, and compliance. In challenge with labor scarcity and rising costs, businesses continue to turn to Cintas to help them get ready for the workday. I thank our employees, whom we call partners, for their continued focus on our customers, our shareholders, and each other. Turning now to our business units. Uniform Rental and Facility Services operating segment revenue for the first quarter of fiscal ‘23 was $1.70 billion compared to $1.51 billion last year. Organic revenue growth was 12.3%. Revenue growth was driven mostly from increased volume. Additionally, price increases contributed at a higher level than historically. We believe such a mix of revenue drivers volume versus price is healthy and supportive of continued long-term growth. Our First Aid and Safety Services operating segment revenue for the first quarter was $234.2 million compared to $199.1 million last year. Organic revenue growth was 15.8%. This rate reflects the continued momentum of our First Aid cabinet business, which continues to grow more than 20%. Personal protective equipment or PPE, while still elevated compared to pre-COVID levels declined again on a sequential basis. We welcome this mix shift because the cabinet service is a more consistent revenue stream and has higher profit margins in PPE. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was $234.5 million compared to $189.7 million last year. The Fire business organic revenue growth rate was 17.4% and the Uniform Direct Sale business organic growth rate was 44.1%. Before turning the call over to Mike to provide additional details on our first 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 $8.47 billion to $8.58 billion to a range of $8.58 billion to $8.67 billion. Also, we are raising our annual diluted EPS expectations from a range of $11.90 to $12.30 to a range of $12.30 to $12.65.
Mike Hansen, Executive Vice President and Chief Financial Officer
Thanks, Todd, and good morning. Our fiscal 2023 first quarter revenue was $2.17 billion compared to $1.9 billion last year. The organic revenue growth rate adjusted for acquisitions, divestitures, and foreign currency exchange rate fluctuations was 13.9%. Gross margin for the first quarter of fiscal ‘23 was $1.03 billion compared to $902.8 million last year, an increase of 13.9%. Gross margin as a percent of revenue was 47.5% for the first quarter of fiscal ‘23 compared to 47.6% last year. Energy expenses comprised of gasoline, natural gas, and electricity were a headwind increasing 30 basis points from last year. Gross margin percentage by business was 47.5% for Uniform Rental and Facility Services, 49.6% for First Aid and Safety Services, 48.8% for Fire Protection Services, and 37.3% for Uniform Direct Sale. Operating income of $440.1 million compared to $394.1 million last year. Excluding last year's first quarter gain totaling $12.1 million and recorded in selling and administrative expenses, fiscal '23 first quarter operating income increased 15.2% and operating income margin increased 20 basis points to 20.3% from 20.1% last year. Our effective tax rate for the first quarter was 14.8% compared to 11% last year. The tax rate can move from period to period based on discrete events, including the amount of stock compensation expense. Net income for the first quarter was $351.7 million compared to $331.2 million last year. Last year's first quarter diluted EPS contained $0.09 from the previously mentioned gain and related income tax expense. Excluding the gain and the related income tax expense, this year's diluted EPS of $3.39 compared to $3.02 last year, an increase of 12.3%. First quarter operating cash flow increased 13.8%. On June 15, 2022, we paid shareholders $97.7 million in quarterly dividends. Also during the quarter, we purchased $210.8 million of Cintas common stock under our buyback program. We continue to allocate capital in many ways to improve shareholder return. Our strong balance sheet and cash flow enable us to do so consistently. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal '22 included not only the gain on sale of operating assets in the first quarter but also a gain on an equity method investment in the third quarter. Excluding these items, fiscal '22 operating income was $1.55 billion, a margin of 19.7%, and diluted EPS was $11.28. Please see the table in our earnings press release for more information. Fiscal '23 operating income is expected to be in the range of $1.72 billion to $1.76 billion compared to $1.55 billion in fiscal ’22 after excluding the gains. Fiscal ‘23 interest expense is expected to be approximately $110 million compared to $88.8 million in fiscal '22 due in part to higher interest rates. Our fiscal ’23 effective tax rate is expected to be approximately 20%. This compares to a rate of 17.9% in fiscal ’22 after excluding the gains and their related tax impacts. The expected higher effective tax rate will negatively impact fiscal '23 diluted EPS by approximately $0.32 and diluted EPS growth by approximately 290 basis points. Our financial guidance does not include the impact of any future share buybacks, and we remain in a dynamic environment that can continue to change. Our guidance contemplates a stable economy and excludes pandemic-related setbacks or economic downturns.
Paul Adler, Vice President and Treasurer, Investor Relations
That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you.
Operator, Operator
We'll now take our first question from Ashish Sabadra of RBC Capital Markets. Please go ahead.
Ashish Sabadra, Analyst
Thanks for taking my question. I was wondering if you could just comment on the new business trend, specifically around signing up new customers. Have you seen any changes there? And any signs of elongations of sales cycle, particularly for larger customers? Thanks.
Todd Schneider, President and Chief Executive Officer
Good morning, Ashish. This is Todd. Thanks for the question. Yeah, our new business is quite robust. We continue to be very successful in converting non-programmers into our programs in all of our businesses with the exception of fire, which obviously – everyone's a programmer in that business, but we're having really good success there. And we look at the total addressable market and it's still incredibly large and growing. So that's exciting for us. But as far as the sales cycle, I haven't seen anything that would lead me to believe that the sales cycle is elongating. We've got really good momentum in our new business. I'm very encouraged by that. And as we've spoken about in the past, some of our investments that we have made are really paying off big in the form of some of our unique products in our rental line with our Carhartt products, our Chef Works, and we've got a CareFlex line of scrubs that's really successful in our unique restroom lines. And then our First Aid business, just the breadth of products that we're offering is really helping us get in the door and provide great products and services to our customers. They're also seeing our investments and technology that we've made, whether it's our garment tracking that is giving us a real advantage in the marketplace, our garment dispensing that we've seen. And I've spoken about our myCintas portal, which is a unique advantage in the marketplace. It makes it easier to do business with us and that's important for our customers and gives our sales partners confidence in walking in the door. So some really good things heading in that direction.
Ashish Sabadra, Analyst
That's very helpful color and obviously great to see that strong momentum in the top line. Maybe just on the margins, the question around energy looks like, oil prices might be rolling off here or at least the fuel prices may be rolling off, but the natural gas prices are going up. How should we think about those puts and takes on the energy front for the rest of the year? Thanks.
Todd Schneider, President and Chief Executive Officer
So when you think about our energy spend, certainly, it's up over where we were a year over prior. It's down 10 basis points sequentially. Trying to anticipate exactly where that's going to head is challenging. Certainly, but I can tell you this, we are focused on efficiencies that we can drive in our business that will lower our needs for natural gas and lower our needs for gas at the pump. And we're leveraging those and that's helping us. That helps us with our CO2 emissions and it helps us with our efficiencies in our business and our spend. And we're confident we can continue to make strides there. So that's where exactly natural gas prices will go this winter, what's going on in Europe and other areas. It's tough to tell for sure, but we'll manage through it and we see opportunities to improve in our business, and we're leveraging that.
Mike Hansen, Executive Vice President and Chief Financial Officer
Ashish, I might add that right around 60% of our energy spend is gas and diesel and the remainder is electricity and natural gas. So the natural gas is a smaller component of that energy spend. More of it is the price at the pump, which as you suggested, is coming down.
Ashish Sabadra, Analyst
That's very helpful color. Thanks again.
Todd Schneider, President and Chief Executive Officer
Thank you.
Operator, Operator
We will now take our next question from George Tong of Goldman Sachs. Please go ahead.
George Tong, Analyst
Hi. Thanks. Good morning. In the quarter, approximately what percentage of new business growth came from the no programmer market?
Todd Schneider, President and Chief Executive Officer
Good morning, George. This is Todd. The majority of our accounts come from no programmers. So that trend has been consistent over the years and continues. And in a marketplace where it's still difficult for employers to find people to work, offering a value of this and the way we handle it with uniforms is attractive for them. So it's another benefit for customers and they see that as an opportunity to attract their employees and retain their employees, and we have a great offering when it comes to that, that makes it really attractive for people. So I'd say those trends continue as they have in the past.
George Tong, Analyst
Got it. Can you provide an update on uniform demand trends from the healthcare vertical?
Todd Schneider, President and Chief Executive Officer
The healthcare sector is very appealing for us and is experiencing solid growth. The demographics in the United States and Canada indicate that demand will keep rising. We have distinct offerings in this area, such as garment dispensing and our unique line of scrubs, which contribute to its attractiveness. We also rent other items in the healthcare market, both in acute and non-acute settings, and we are encouraged by the demand we are observing. For instance, around six months ago, we implemented a scrub rental program for a well-known hospital. The nurses using the program expressed concerns about safety regarding the products they were taking home. They chose Cintas because of our unique technology that helps manage inventory, ensuring they have access to necessary products while also controlling costs. Additionally, it enhances safety by ensuring potentially contaminated scrubs do not go home with the employees, as we handle the laundry through our hygienic cleaning process, giving them confidence in our service. Recently, we also sold a microfiber wipe rental program to the same hospital. They utilize these wipes primarily for cleaning patient rooms. Previously, they were purchasing the wipes and having hospital staff clean them on-site, which created challenges in labor access. They opted for Cintas to lower their labor costs while ensuring the wipes are processed correctly through our hygienically clean process. In response to your question about uniform demand in hospitals, it remains robust, and there is a wide range of services we can offer to those hospitals, as illustrated by these examples.
George Tong, Analyst
Very helpful. Thank you.
Todd Schneider, President and Chief Executive Officer
Thank you.
Operator, Operator
I will now take our next question from Andy Wittmann of Baird. Please go ahead.
Andy Wittmann, Analyst
Thank you for taking my questions. Mike, I wanted to discuss what the guidance implies. How much conservatism is included in it? I mentioned a few points in the prepared remarks. Is there any change in the guidance based on the macro outlook? Also, are there any leading indicators that assure us the economy is performing as you believe it is?
Mike Hansen, Executive Vice President and Chief Financial Officer
Let me begin with the guidance. We're now 60 days past our initial guidance, and it suggests strong growth for the remainder of the year. However, as you know, we faced some tougher comparisons because our business performed well last year. Therefore, we anticipate a slight deceleration in growth from current levels, but we still expect healthy growth, finishing the year in the range of 9% to over 10%. We are pleased with the current momentum of the business, and as of now, we are not seeing any changes in the value our customers perceive or in the overall economic conditions. Regarding margins, we expect to see improvement this year, and our guidance reflects this margin enhancement, even considering the challenging economic environment. Our updated guidance is slightly more optimistic than what we provided 60 days ago, which is influenced by the first quarter’s performance and the positive momentum we are experiencing. As for the economic outlook, it’s quite complex. Some analysts suggest we may already be in a recession, while others predict it for early or late 2023. The Federal Reserve has indicated that GDP growth for 2023 is projected to be 1.2%. Given these uncertainties, it's difficult to predict the economic landscape moving forward. However, we know our current business momentum is strong, and our customers and prospects are responding positively to our value proposition. This positive reception, along with other factors, gives us confidence that this momentum can continue alongside healthy margins, which is reflected in our guidance. I hope this clarifies your question.
Andy Wittmann, Analyst
Thank you for that. I wanted to follow up with a question about overall customer retention levels. Given that you're seeing price increases above historical averages, I thought it would be useful to comment on that. You have mentioned sales momentum in various ways, but in terms of sales productivity on a per head basis, is that metric also up year-over-year?
Todd Schneider, President and Chief Executive Officer
Thanks for the question. This is Todd. Regarding retention, it's very good, and we appreciate the momentum. We are organizing effectively to meet and exceed our customers' expectations, and we believe our product and service offerings are appealing to them. I've mentioned some of our unique products and technology that customers appreciate. They also value our flexible and empathetic approach over the past couple of years as they navigated their challenges during the pandemic. We understood their difficulties and adapted to provide what they needed rather than simply insisting on contract terms. This has been beneficial for us. As for productivity in new business, we see positive results. Our sales force is strong, well trained, and positioned effectively. When our sales partners are confident in our products, technology, and services, it translates into enhanced productivity. We are also leveraging technology through our investment with SAP, which yields significant benefits. One example is using analytics to identify the best prospects for our sales partners, allowing them to focus their efforts more effectively. This not only helps our partners but also benefits our company and boosts confidence. Such investments are paying off for us.
Andy Wittmann, Analyst
Great. Thank you.
Todd Schneider, President and Chief Executive Officer
Thank you.
Operator, Operator
We can now take our next question from Tim Mulrooney of William Blair. Please go ahead.
Tim Mulrooney, Analyst
Yes. Good morning. We know energy was a slight headwind to margins in the quarter relative to last year, but gross margins were only down 10 basis points. So I was curious, how some of the other cost buckets are trending? How are labor costs trending? Were those a headwind or a tailwind to margins? And anything else big to point out here like maybe materials and supplies?
Mike Hansen, Executive Vice President and Chief Financial Officer
Certainly, I'll begin. From a gross margin standpoint, you're correct that we are down 10 basis points compared to last year, in a period where total energy expenses have increased by 30 basis points. However, we have improved sequentially by 190 basis points, indicating some positive movement. The rental gross margin of 47.5% is quite strong for us; we've only exceeded that a few times, and it's significantly higher than pre-pandemic levels. We are pleased with our performance in this area and the sequential improvement in gross margins, which is quite positive. Despite strong growth in volume during the past year, we have managed to keep gross margins relatively stable while also investing in our business. This volume growth has created a necessity for additional capacity, especially in our laundry facilities, and we are committed to ensuring we can meet customer demand. Overall, I don't have any unusual concerns to highlight, other than that we are making consistent progress. Additionally, our First Aid and Safety business is performing exceptionally well, reaching an all-time high. We are excited about its growth, which Todd pointed out is over 20%, and the favorable trend in that segment. In summary, we are making good sequential progress while continuing to invest in our growth for the future.
Tim Mulrooney, Analyst
Yeah. Thanks, Mike. I guess my follow-up will just stick on that point. The First Aid and Safety gross margin really stuck out to me in the quarter. I mean, you're almost at 50% gross margin in that business, well above what we normally see there. Are there any extraordinary items to call out there that help drive those strong results that wouldn't necessarily repeat moving forward? Just trying to understand how to think about gross margins in First Aid moving forward as we model out the business for the rest of the year?
Todd Schneider, President and Chief Executive Officer
Sure. Tim, it's Todd. We're pleased with the improvement in the gross margin of the First Aid business. This reflects a shift in the business mix. However, I wouldn’t characterize it as anything extraordinary or a one-time event. That said, there will be fluctuations in the First Aid business gross margin throughout the year, so don’t expect a consistent upward trend. We are making investments and growing the business quite successfully, while also trying to maximize the revenue growth we’re experiencing. As Mike mentioned regarding all our businesses, we need to invest to meet demand, and we're doing just that while striving for intelligence and efficiency. We're very satisfied with the demand levels we’re observing and are working to ensure we can meet them.
Tim Mulrooney, Analyst
Okay. That's really helpful. Thank you, guys and congrats on a nice quarter.
Todd Schneider, President and Chief Executive Officer
Thank you, Tim.
Mike Hansen, Executive Vice President and Chief Financial Officer
Thank you.
Operator, Operator
We can now take our next question from Manav Patnaik of Barclays. Please go ahead.
Manav Patnaik, Analyst
Thank you. Good morning. I can appreciate, obviously, all the trends are very strong today. As you said, no economic weakness you're seeing in your businesses, but maybe you can help us with typically if that does start impacting your customers, like, how quickly do you see it, how quickly do they react? And I guess what do you do in response to that?
Todd Schneider, President and Chief Executive Officer
We are not currently seeing any economic weakness in our customer base. As a reminder, we are four months into our fiscal year. While we are aware of the discussions about a potential recession, we are focusing on positioning ourselves to grow through various economic cycles. Historically, we have experienced growth in 51 out of the last 53 years, with the exception being the great recession. We hope any future recession will not be as severe. In the event of a traditional recession, we expect to maintain strong performance and growth, as we have outpaced GDP and job growth in the past. Our products and services address needs such as cleanliness, safety, image, and compliance, which are in higher demand today than before, even pre-pandemic. We have diversified our offerings, with our customer base now comprising 70% services and 30% goods. This diversification should support us going forward. Moreover, we have invested in a vertical sales approach targeting sectors like government, healthcare, and higher education, which adds to our resilience. Our strong cash flow positions us well to capitalize on opportunities, whether we face a recession now or in the future.
Manav Patnaik, Analyst
Okay. Got it. That's helpful. And then maybe Mike, if you could just remind us of your mix on the debt side between fixed and floating, whether you hedge just as we track these interest rate increases?
Mike Hansen, Executive Vice President and Chief Financial Officer
Sure. As of the end of August, we have about $500 million in commercial paper or other short-term variable debt. The remainder of our debt consists of fixed or senior notes. We do have some maturities in 2027 with interest rates locked in, which are currently favorable. We appreciate having a portion of short-term debt because it provides us with flexibility. We can pay it down if desired, or we can take advantage of it if needed.
Manav Patnaik, Analyst
All right. Thank you.
Operator, Operator
And we can now take our next question from Andrew Steinerman of JPMorgan. Please go ahead.
Andrew Steinerman, Analyst
Hi. It’s Andrew. I just wanted to get a quick thoughts from you about organic revenue growth for the balance of the year from kind of each First Aid, Fire, Uniform Direct. Those had particularly strong first quarters. I definitely heard your general comments about tougher comps. And like, do you think each of these three should be double-digit organic growers this year?
Todd Schneider, President and Chief Executive Officer
Thank you for the question, Andrew. While we don’t provide individual guidance for each of our businesses, I can share some general thoughts. I haven't calculated the annual figures yet, but I'm considering the performance for the second through fourth quarters. I believe that for the rental, Fire, and First Aid businesses, we can expect high-single-digit growth for the remainder of the year. It's important to note that the First Aid business had some PPE in the third quarter, which will make comparisons more challenging. For our Uniform Direct Sale business, we are facing significantly tougher comparisons, so I would anticipate growth to be high-single digits to flat, or possibly even negative in the fourth quarter due to these challenging comps. This business tends to be more variable.
Andrew Steinerman, Analyst
Please repeat the part about Uniform Direct Sale being high-single digits, and also clarify what you meant by flat regarding the other categories.
Todd Schneider, President and Chief Executive Officer
Yes. When considering the Uniform Direct Sale business, it's a more variable business with expectations of high-single digit growth from Q2 through Q4. In Q4, we may see growth decline to closer to flat or possibly even negative due to the significant comparisons we'll be facing in the latter half of the year.
Andrew Steinerman, Analyst
Makes sense. Thank you so much.
Todd Schneider, President and Chief Executive Officer
Great. Thank you.
Operator, Operator
And we can now take our next question from Faiza Alwy of Deutsche Bank. Please go ahead.
Faiza Alwy, Analyst
Yes. Hi. Thank you. Good morning. I guess, I'm curious, like what has gone better than what you expected, when you first gave the guide a couple of months ago, especially as it relates to revenues. I know you mentioned better pricing and I'm curious if the pricing update has been better than expected or is that better new business? I know you mentioned the healthcare vertical in particular. So just more perspective on like what you think really drove the outperformance, specifically in the rental business?
Todd Schneider, President and Chief Executive Officer
Great. Faiza, thank you for the question. It's Todd. I'll start, and Mike can add in if he wants. There are many factors contributing to our positive growth. New business is performing well, as we discussed, but retention and penetration are also quite strong. We continue to enhance our cross-sell efforts. Additionally, pricing is playing a more significant role than it has in the past, which is warranted due to the rising costs we are experiencing in areas like labor and materials. Overall, we are pleased with the key factors we are seeing. I previously mentioned our diversification into various businesses and verticals; we are encouraged by the momentum in all these areas, indicating widespread progress.
Faiza Alwy, Analyst
Great. Thank you. And then just a follow-up on the labor environment. I don't know if you're seeing some easing in the environment in your business at this point. And I'm curious how you think about that going forward sort of, is that as a labor environment eases, is that a benefit for you? Or is that maybe more of a headwind from a competitive perspective?
Todd Schneider, President and Chief Executive Officer
Good question about labor. I would say it is easing a bit, but relatively speaking, it is still a very challenging environment. However, it may not be as challenging as it was six or eight months ago, but it's still tough. We are always focused on tracking and retaining the best people, which we believe gives us a competitive advantage in the market. So when we look at what this means for us, we are continually pursuing that. Any easing of the labor market would certainly be appreciated as it might make it easier to run at lower capacities. However, our team has consistently found ways to manage and is appropriately staffed to meet our customers' demand. They have done an incredible job navigating through the challenges of the past couple of years to ensure our success. Regardless of the environment, our team will adapt; we have demonstrated that in the past and will continue to do so.
Faiza Alwy, Analyst
Great. Thank you so much.
Todd Schneider, President and Chief Executive Officer
Thank you.
Operator, Operator
We will now take our next question from Heather Balsky of Bank of America. Please go ahead.
Heather Balsky, Analyst
Hi. Good morning and thank you for taking my question. Regarding new customer growth, you mentioned healthcare earlier in the Q&A. What other areas are you seeing momentum in? Are there additional sectors where you're experiencing growth or targeting sectors that you haven't focused on before? I would appreciate any insights you could share on that. Thank you.
Todd Schneider, President and Chief Executive Officer
Thank you for the question, Heather. Our experiences highlight a broad range of successes. For instance, in the government sector, we sold a uniform program to a major city about a year ago. This included departments like sanitation, transportation, and recreation. They had been using a local provider prior to our involvement and chose us for our superior garment offerings, which their employees preferred. Our garment tracking technology helped them minimize costs by reducing garment losses. Additionally, our My Cintas web portal streamlines their business interactions with us, saving them administrative time. Recently, we expanded our relationship by providing First Aid cabinet services to those departments and more municipal buildings. Previously, they were ordering first aid products online and managing their own inventory. The sales lead for this came from our uniform service provider, who identified their need for assistance. They selected us for better product management, enhanced compliance, cost savings, and to alleviate their administrative burden. This example illustrates how we are growing our business by meeting the demands of organizations, even in public sectors like city government, reflecting strong retention and cross-selling opportunities that contribute to new business growth. I hope this additional detail is helpful.
Heather Balsky, Analyst
Yeah. Thank you for that. And then just a question on pricing. Can you just walk us through where you are in the process of taking, I guess, this outsized pricing you've been taking? When did it start? Kind of when do you start to anniversary it? Just trying to think through the flow through as we progress over the next few quarters.
Todd Schneider, President and Chief Executive Officer
Well, pricing is a local issue that varies from customer to customer. Some businesses are performing better than others. When inflation increased significantly, we had to ensure that our price adjustments were higher than historical levels. So, when inflation surpassed historical averages, we adjusted our pricing accordingly. Looking ahead, the impact of our pricing will depend on future inflation trends. I can't predict exactly what will happen regarding that or a potential recession, but we are closely monitoring all relevant factors and will manage the situation appropriately.
Mike Hansen, Executive Vice President and Chief Financial Officer
Heather, I'd like to add two points. First, regarding our pricing structure, we typically have higher prices compared to our competitors. This means we do not generally compete on price. We believe our products and services are superior, which justifies the higher price points. I don't anticipate this will change. As Todd mentioned, we are continually exploring ways to enhance that value in the future. However, I don’t expect our pricing to fluctuate due to inflation. We believe we can maintain premium pricing because our products, like Carhartt and others, are of higher quality, and our service is better. Secondly, as Todd noted, our pricing varies by customer and location; it's not a matter of needing to immediately offset inflation. We aim to do right by our customers while adding the right value. Given our cost structure, we don't have to quickly adjust for inflation. For instance, in our rental business, we can amortize the products. This means if costs rise, we have visibility before it affects our profit and loss statement, as costs must first pass through manufacturing, reach our locations, and then amortize over time. This allows us to implement several price increases before impacts are felt on our P&L. Our ability to predict and manage both costs and pricing is evident in our consistent margin growth year-over-year, even during challenging market conditions. I wanted to share this insight to emphasize our careful approach to pricing and cost management, which has enabled us to improve our margins over the last four quarters despite inflationary pressures.
Seth Weber, Analyst
Yeah. No, it makes total sense, Mike. I appreciate it guys. That's super helpful and that's really all I had today. Thank you.
Operator, Operator
We'll now take our next question from Shlomo Rosenbaum of Stifel. Please go ahead.
Shlomo Rosenbaum, Analyst
Hi. Good morning. Thank you for taking my questions. It's pretty noticeable that the cost of goods sold is up only like $10 million sequentially. But when I look at the SG&A, it's up like $46 million. And usually when you have some kind of inflationary prices, I would have thought it'd hit the COGS more. Maybe you could explain to us what the changes were in SG&A and was there some kind of significant investments in production or anything like that? And maybe if you can bring it down to kind of the unit level?
Mike Hansen, Executive Vice President and Chief Financial Officer
I will address the SG&A aspect. Yes, we did see a sequential increase. However, if we look back to fiscal 2015, our first quarter SG&A has typically been the highest of the year. Setting aside the impact of the pandemic, this pattern has been consistent over the years. The primary reason behind this is factors like higher payroll taxes that occur when our equity compensation vests, which usually happens in the first quarter. We also tend to have more stock options that lead to increased payroll taxes and various meetings and activities that take place at the beginning of the year. Nevertheless, if we exclude the gain we've previously mentioned, our SG&A is down 40 basis points year-over-year. We're pleased with the movement in that area. In fact, looking back to the pre-pandemic first quarter of 2020, we're down nearly 300 basis points. Compared to 2019’s SG&A, we're down 260 basis points. My point is that experiencing a higher SG&A in the first quarter is not unusual for us due to how our business operates and the timing involved. Year-over-year, we continue to perform well in this area, with a reduction of 40 basis points.
Shlomo Rosenbaum, Analyst
Thank you. Can you discuss how the increased revenue has impacted margins for two of the units, while it appears to be different for the other unit? Is there a specific factor regarding what was sold in that unit? Additionally, could you share your expectations for cash flow throughout the year? With such strong revenue, should we anticipate a working capital drag that would affect the growth of revenue compared to earnings?
Mike Hansen, Executive Vice President and Chief Financial Officer
Shlomo, I'll discuss the All Other segment first. I'm not certain if you're referring to the year-over-year gain that we've mentioned multiple times, which is included in All Other. It’s important to exclude that gain of 14.7% for the quarter; for us, this represents a strong performance. However, as Todd noted earlier, the Uniform Direct Sale component can fluctuate and be inconsistent from quarter to quarter, and we’ve experienced some of that this quarter. Once we adjust for last year's gain, where we had an exceptional operating margin in All Other, we find ourselves in a solid position at 14.7%. This is largely due to the variability in the Uniform Direct Sale business. Regarding our cash flow, we are pleased with our performance; our operating cash flow has increased by 13.7% year-over-year, and free cash flow is up by 7%. While there can be fluctuations from quarter to quarter, overall, our cash flow is quite strong and I anticipate continued solid conversion from net income to operating cash flow. As we grow, which has been quite positive, we do experience some pressure on working capital due to an increase in accounts receivable and an uptick in uniforms and other items in service, which has certainly occurred. Nevertheless, we are still generating strong cash flow, and I expect this trend to persist for the remainder of the year. We're likely to see a slight increase in capital expenditures during this fiscal year because we've emerged from a pandemic period when we didn’t need to expand capacity and have experienced significant growth lately. This growth necessitates investment, which will result in a modest rise in CapEx, but it will remain within our guidance of 3% to 3.5% of revenue.
Shlomo Rosenbaum, Analyst
Great. Thank you.
Operator, Operator
And we can now take our next question from Scott Schneeberger of Oppenheimer. Please go ahead.
Scott Schneeberger, Analyst
Thanks very much. Good morning, guys. I mean, kind of go back to the recession question and the essence of the question is going to be visibility. It's been asked a few times on the call, but your guidance, your quarter is obviously quite strong. The guidance is certainly ambitious. And I view you guys as generally pretty conservative. So things must look really good to you right now and through the end of the fiscal year. So no one has kind of asked this, but I want to delve in a little bit deeper. When do you see when you're working with your customer or something like going back to past recessions? What are the first signs you see? How do they manifest? And what type of visibility do you have into OOK that's going to affect our numbers, weeks, months, quarters later. If you could just tell us kind of going back to pass through session, how that takes shape? Thanks.
Todd Schneider, President and Chief Executive Officer
Thanks for the question. When we consider whether we're in a recession, we're closely monitoring the situation as we head into early or late '23, but we can't predict how severe it might be. Regarding our customer base, if their demand is affected, they will look for ways to reduce costs. This might involve reassessing their financials to see where they can make cuts, and typically, our services are not at the top of that list since our spending per customer is relatively low. However, it’s possible they may reduce their requirements for certain services or lower the quantities of products they need if their demand decreases. We will be paying attention to whether our customers scale back due to the impact on their business. That’s one of the key areas we monitor. Mike, do you have any additional thoughts?
Mike Hansen, Executive Vice President and Chief Financial Officer
Yes, that's accurate. We might observe some indicators of this nature, and a few of our customers could potentially close down depending on the type of economic downturn. However, it's important to note that we have successfully navigated numerous recessions over the past 50 years and have continually secured new business during those times. Even if we start noticing that customers are becoming more cautious with their spending, it’s essential to understand that we are not generally asking them to invest additional funds. Instead, we encourage them to redirect their existing budgets towards our services, which will assist them in minimizing their workload. In essence, we enable their teams to achieve more efficiency by alleviating some of their tasks without requiring extra spending. We will remain vigilant regarding various economic factors, but we are confident that we will acquire a significant amount of new business. We are committed to aiding our customers in streamlining their operations. This is why we are enthusiastic about our current momentum and believe that our value proposition is still being received positively. We have repeatedly communicated this and do not anticipate any changes, which is reflected in our guidance, and we are optimistic about our future direction.
Scott Schneeberger, Analyst
Excellent. Thanks guys. That sounds good. I think a good follow-on there. You've alluded to M&A, but we haven't really discussed it on this call. How is the environment right now? Are you seeing more opportunities or is that pretty steady? Any commentary on multiples? Is that something that's what more attractive, less attractive? Thanks.
Todd Schneider, President and Chief Executive Officer
Yeah, Scott. This is Todd. Our deal flow is good. We appreciate our balance sheet and our position in the marketplace. That being said, M&A opportunities can be challenging due to various factors that might motivate someone to sell their business. However, I can assure you that we're well positioned. We value our balance sheet, our team, and our capability to navigate any M&A situation. We believe this will present opportunities for us in the future, and we're prepared for it. It is still difficult to predict the pace of these deals, but the deal flow appears strong, and I don’t see anything significantly different from a valuation perspective in the marketplace. Therefore, we are open to any and all M&A opportunities and will continue to pursue them.
Scott Schneeberger, Analyst
Thanks, Todd. Excellent. I'll turn it over.
Todd Schneider, President and Chief Executive Officer
Thank you.
Operator, Operator
We can now take our final question from Toni Kaplan of Morgan Stanley. Please go ahead.
Toni Kaplan, Analyst
Thanks. I wanted to ask a longer term margin question. If I look back about two years ago, your EBITDA margin really meaningfully stepped up to mid-20s. But at the beginning, I think you're benefiting from travel, reduced travel during the pandemic and healthcare costs. You've really been able to keep it at that level. And I know you talked about adjusting your cost structure at the beginning of the pandemic, but basically what type of expenses have you been able to adjust so that you can stay at this mid-20s EBITDA level? Just how sustainable is it? It seems like it is, but wanted to just get some additional color there.
Todd Schneider, President and Chief Executive Officer
Yeah, Tony. It's Todd, you're absolutely correct. And when we look forward, we see incremental margins. We've talked about 20% to 30% and we see that in our future. And we are leveraging certainly the top line very nicely. We manage our variable costs. I think quite well, the team is very, very good at that. But we're also getting efficiencies from some of our digital transformation that we've talked about in the past. You see that certainly energy is a big subject today, but we've talked about our Smart Truck proprietary routing technology that's helping us reduce idle time and drive time, which obviously helps with energy spend, but it helps with CO2 emissions as well. And one of the things, we talk about around here is that we don't make money when the wheels are moving on our trucks. So getting those efficiencies is very important. We're extracting other efficiencies via our investment with SAP, with our inventory control programs that are allowing us to get better reuse of our products in our stockrooms, which also helps improve turnaround time for our customers. We think it's very, very important which gives us an advantage in the marketplace. I mentioned in our last call, we have an operational excellence dashboard that provides us better transparency into the efficiency levels at each of our production facilities. So that is significant, right? So we're able to understand the efficiency levels of our facilities not by having to be there in person every day, but by understanding the metrics of our operational excellence dashboard in real time. So I guess it's a blessing that we have those opportunities to improve. It's frustrating that we have opportunities to improve, but we're focused on improving those and extracting those efficiencies. So that will allow us to continue to provide good incremental margins separate from the items that I mentioned before with some of the other technologies that we deployed with making it a better win for customers and how they're doing business with us. So yeah, as we look forward, we're going to continue to see those efficiencies and provide what we think are attractive incremental margins.
Toni Kaplan, Analyst
Great. And on a more sort of current basis, any changes to contract structure, changes in contract lengths, any increasing the minimum thresholds for clients, anything to call out there?
Todd Schneider, President and Chief Executive Officer
It's nothing unusual; we adopt a long-term mindset with our customers, and they do the same with us. We ensure we are well-positioned to meet and exceed their needs, delivering products and services that hold real value for them. This approach fosters long-term relationships with our customers, which some may refer to as contracts, but I prefer to think of them as lasting partnerships.
Toni Kaplan, Analyst
Thanks a lot.
Todd Schneider, President and Chief Executive Officer
Thank you.
Paul Adler, Vice President and Treasurer, Investor Relations
Well, thank you for joining us this morning. We will issue our second quarter of fiscal ‘23 financial results in late December. We look forward to speaking with you again at that time. Have a good day.
Operator, Operator
This concludes today's call. Thank you for your participation. You may now disconnect.