Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Cintas Corp (CTAS, Financial) achieved record fourth-quarter revenue of $2.47 billion, marking an 8.2% increase year-over-year.
- Fourth-quarter gross margin increased by 11.6% to $1.22 billion, with gross margin as a percentage of revenue rising to 49.2%.
- Operating income for the fourth quarter grew by 16.3% to $547.6 million, with an operating margin increase of 160 basis points to 22.2%.
- Fiscal year revenue reached a record $9.6 billion, an 8.9% increase, with organic growth at 8%.
- Cash flow from operating activities exceeded $2 billion for the first time, providing greater flexibility for capital allocation.
Negative Points
- Fiscal '25 will have two fewer workdays compared to fiscal '24, impacting revenue growth rates by approximately 160 basis points in the first and fourth quarters.
- The Fire Protection Services segment will face margin pressure due to the ongoing SAP implementation.
- Uniform Direct Sales experienced a 4.4% decrease in organic revenue growth.
- Net interest expense is expected to increase to approximately $106 million in fiscal '25, up from $95 million in fiscal '24.
- The competitive environment remains highly challenging, with increased competition noted by industry peers.
Q & A Highlights
Q: Hi. Good morning, Todd, Mike, and Jared. Congrats on a strong quarter. I was wondering, I guess the comment on your retention rate. I know that you said it's generally stable. Have you seen any slight uptick in industry churn or downtick in retention, I guess? Or how are you seeing your customers behave in this environment?
A: Good morning, Josh, and thanks for your comments. We really haven't seen a change in our customer behavior or as I mentioned, our retention rates are still very attractive levels. And when you have as broad of a customer base as we do, there are certainly some aspects that are thriving and some that are struggling. It varies based upon industry, it varies based upon geography. But when you speak as a whole, I would say our customer base -- we haven't seen much change in it so far.
Q: Could you just talk about your reasoning behind choosing that 6.4% to 8.0% organic growth for next year? I guess in the context of just doing 7.5% in Q4, what are the scenarios that would lead you to the bottom and the top end of the growth range?
A: Well, Josh, we really like where our guidance is. We like where our business is. And that's where we target our business to grow at those types of levels. Certainly, we read the overall macro data that you all read about what's going on in the economy and so we watch that but we don't expect much change at this point. And as a result, I'd say we expect to be right in that guide. We'd love for the economy to go even faster but nevertheless, we find ways to be successful. Our value proposition is resonating. We service a little over 1 million customers or 16 million businesses in our market and we have all kinds of ways to grow. And I think we've shown that we have the ability to exceed GDP growth and exceed employment growth, so we would certainly love for our customers to be thriving and adding people all over the place. But nevertheless, we're going to find a way to be successful, and we're confident in our guide.
Q: Can you just update us on how you're thinking about incremental margin and how you're thinking about the margin story for 2025? And what are the bigger tailwinds? What are you most excited about? And anything going on in the cost environment as well?
A: I'll start, Heather, and good morning. As we think about margin expansion, our guide reflects margin expansion. With the first item we think about as it comes to that is leverage. Leverage on revenue growth. And we've demonstrated that we have the ability to do that and that will continue to do that. And that's easy to say, hard to do. But the team has done an incredible job in so many areas starting with our global supply chain, which is a competitive advantage in the marketplace. How they go about their jobs. The fact that they have dual source or many sources for 90% or more of the products that we source, so how they go about that. The great work that's been done on material cost, again, starting with sourcing, but also we leverage our SAP system to help us to improve our garments sharing. And we've been working on this for years and it's bearing fruit, not only in our cost structure, but also in turnaround time for our customers. So it helps us to get product to our customers faster when it's in our stock rooms versus having to order new out of our distribution centers, better for our customers, better for our financials and that's paying off for us.
Q: Todd, I thought I would start with the competitive environment. Both of your largest competitors have noted increased competition out there and I know that your product and service offering is a little bit broader. But I thought just given those competitor comments, I would take your temperature and have you comment if you could please, on what you're seeing out there in the competitive environment?
A: I'll tell you is that we operate in a highly competitive market. Always have, always will. I'm sure I've been with the company for 35 years. It's been competitive every day since I've been here. Now that being said, our revenue retention rates, as I mentioned, are attractive. And part of it is because our new business wins tend to come from the no-program market and less from the competition. So as I mentioned earlier, there's 16 million businesses out there. We service about 1 million. So the whitespace out there is incredible and we're focused on converting those folks from -- I'll call it a do it yourself type to a customer of ours. And that value proposition is resonating because we help them focus on taking -- care of their customers or their patients or their guest or whatever and however you want to describe it and we take that for them. And we're able to do it better, faster, smarter, in many cases, cheaper than what they were doing it. So yeah, it's a competitive heck. Yeah, it's always been competitive, and we're focused on growing the market and that's been a good model for us.
Q: Can you talk a bit about the progress you're making with penetrating your high growth focus verticals, including health care, hospitality, education, and government. Where you're seeing particularly good traction?
A: We really like the verticals that we've chosen. And as a reminder, it's not just a sales strategy. It is also how we are organized around those customers, those industries, and verticals. To make sure that we're meeting -- exceeding their needs because there are a little different. And as we do that, the products, the services that we provide, the support that we provide is all -- comes along with that. And so yeah, they're all operating at attractive levels. And I wouldn't call anyone out specifically where I'd say, Oh, my gosh, that one is exceeding. They're all doing quite well. I thought it might be helpful to talk a little bit about a recent healthcare win that we had. We recently sold a large hospital network with scrub dispensing technology for the scrubs in the various departments throughout acute care hospital. But we're also having really good success with surgery centers and those types that are attached to the large acute care hospital networks. And you're probably seeing some of that acute care hospital networks having investments in other areas. So in fact, I'd say three large health care systems came to us for help with their non-acute facilities. When I say non-acute facilities, I'm talking about really surgery centers, clinics, physician offices, those types. And they came to us and said, you're done a great job for our acute care. Can you help us with the non-acute? And what does that do for them? It allows them to have a consistent supply, but also allows them to consolidate vendors. So we're seeing good success in -- certainly in healthcare, but the other verticals are all performing well. And we like the decisions, the investments that we've made in those areas, and we
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
