Cintas Corporation (NASDAQ:CTAS) Q2 2024 Earnings Call Transcript December 21, 2023
Cintas Corporation beats earnings expectations. Reported EPS is $3.61, expectations were $3.49. CTAS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the Cintas Corporation Announces Fiscal 2024 Second Quarter Earnings Release Conference Call. Today’s call is being recorded. At this time, I would like to turn the meeting over to Mr. Jared Mattingley, Vice President, Treasurer and Investor Relations. Please go ahead, sir.
Jared Mattingley: Thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer, and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2024 second 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 discussions on these points contained in our most recent filings with the Securities and Exchange Commission. I will now turn the call over to Todd.
Todd Schneider: Thank you, Jared. We are pleased with our second quarter results and are excited about the future. Second quarter total revenue grew 9.3% to $2.38 billion. Each of our businesses continue to execute at a high level. Our momentum in the business is good and volume remains robust. We can grow in a number of different ways. Contribution to our growth from new business remained strong and comes from companies that either outsource their program today or they are managing it themselves. We continue to have great success cross-selling to existing customers. Retention levels are strong and remain at very attractive levels, and our value proposition of image, safety, cleanliness, and compliance continues to resonate across businesses of all sizes and in all verticals.
We continue to be pleased with the results from our focus on prospects within the verticals of healthcare, hospitality, education, and state and local government. We recently announced the opening of two cleanroom facilities, one in North Carolina and the other in Wisconsin. These facilities will provide additional capacity in these regions in order to expand our efforts in this area of attractive growth from pharmaceutical and biotechnology companies. The benefits of our strong volume growth and revenue flowed through to our bottom line. Gross margin for the second quarter grew 11.6% and operating income grew 12.3%. Diluted EPS grew 15.7% to $3.61. Cash flow remained strong. Net cash provided by operating activities in the second quarter grew 17.8% over the prior year.
Our strong cash flow gives us flexibility to choose how we deploy our capital. In the second quarter, we continued to invest in our businesses. We also acquired several smaller businesses. On December 15th, we paid shareholders $137.5 million in quarterly dividends, an increase of 17.1% from the amount paid the previous December. During the second quarter, we also purchased $320.3 million of Cintas common stock under our buyback program. I would like to thank our employees, whom we call partners, for their continued focus on our customers, our shareholders, and each other. Now, before turning the call over to Mike to provide details of our second quarter results, I’ll provide our updated financial expectations for our fiscal year. We are increasing our financial guidance.
We are raising our annual revenue expectations from a range of $9.40 billion to $9.52 billion to a range of $9.48 billion to $9.56 billion, a total growth rate of 7.5% to 8.4%. Also, we are raising our annual diluted EPS expectations from a range of $14.00 to $14.45 to a range of $14.35 to $14.65, a growth rate of 10.5% to 12.8%. Mike?
Mike Hansen: Thanks, Todd, and good morning. Our fiscal 2024 second quarter revenue was $2.38 billion compared to $2.1 billion last year. The organic revenue growth rate, adjusted for acquisitions and foreign currency exchange rate fluctuations, was 9%. Organic growth by business was 7.9% for Uniform Rental and Facility Services, 12.7% for First Aid and Safety Services, 17.8% for Fire Protection Services, and 4.7% for Uniform Direct Sale. Gross margin for the second quarter of fiscal 2024 was $1.14 billion compared to $1.02 billion last year, an increase of 11.6%. Gross margin as a percent of revenue was 48% for the second quarter of fiscal ‘24 compared to 47% last year, an increase of 100 basis points. Strong volume growth and continued operational efficiencies helped generate this strong gross margin.
Gross margin percentage by business was 47.4% for Uniform Rental and Facility Services, 54.5% for First Aid and Safety Services, 48.6% for Fire Protection Services, and 40.9% for Uniform Direct Sale. Gross margin for the Uniform Rental and Facility Services segment increased 40 basis points from last year. We continue to leverage our strong revenue growth and extract inefficiencies out of the business in order to expand margins. Our year-over-year improvements are no accident. Our Six Sigma and Engineering teams have helped us create efficiencies in the plant that allow us to maximize the utilization of our equipment, labor, and energy. Our SmartTruck technology allows us to improve our route efficiencies and provide density to our existing routes.
While energy expenses comprised of gasoline, natural gas, and electricity were a tailwind of 40 basis points from last year, please keep in mind that some of the energy benefit is the result of efficiencies just mentioned. As an example, our rental revenue grew organically at 7.9%, but we only added 1% to our route structure since last year. Gross margin for the First Aid and Safety Services segment increased 400 basis points from last year. Our revenue growth is strong and value — our value proposition continues to resonate in this segment. Health and safety of employees remains top of mind. Our mix of revenues continues to be healthy, including growing high margin recurring revenue products like AED rentals, eyewash stations, and WaterBreak.
We continue to use technology like SmartTruck to optimize our routes and improve efficiencies. And our first aid dedicated distribution center allows us to lower product costs. All of these contributes to our improved margins. Selling and administrative expenses grew $64.4 million or 11.1% over last year. Strong revenue growth creates leverage, which allows us to invest in the business. We continue to invest in our people, adding selling resources, investing in our management trainee program to develop future leaders, and expanding our talent acquisition efforts. Operating income of $499.7 million compared to $444.9 million last year. Operating income as a percent of revenue was 21% in the second quarter of fiscal 2024 compared to 20.5% in last year’s second quarter, an increase of 50 basis points.
Our effective tax rate for the second quarter was 20.9% compared to 22.1% last year. The tax rates in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. Net income for the second quarter was $374.6 million compared to $324.3 million last year. This year’s second quarter diluted EPS of $3.61 compared to $3.12 last year, an increase of 15.7%. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal ‘24 interest expense is expected to be $100 million compared to $109.5 million in fiscal ‘23, predominantly as a result of less variable rate debt. Our fiscal ‘24 effective tax rate is expected to be 21.3%. This compares to a rate of 20.4% in 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. Our financial guidance does not include the impact of any future share buybacks and guidance includes the impact of having one more workday in fiscal ‘23 compared to fiscal — I’m sorry, fiscal ‘24 compared to fiscal ‘23. This extra workday comes in our fiscal third quarter. I’ll turn it back to Jared.
Jared Mattingley: Thanks, Mike. 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.
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