Cintas Corp ($CTAS) Q3 2025 Earnings Call

Good day, everyone, and welcome to the Cintas Corporation announces fiscal 2025 third quarter results conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jared Manningly, Vice President, Treasurer, and Investor Relations. Please go ahead, sir.

Thank you, Russ. Thank you for joining us. With me are Todd Schneider, President and Chief Executive Officer, and Mike Kansen, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2025 third quarter results. After our commentary, we will open the call to questions from analysts. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Todd.

Thanks, Todd, and good morning. Our fiscal 2025 third quarter revenue was $2.61 billion compared to $2.41 billion last year. The organic revenue growth rate adjusted for acquisitions and foreign currency exchange rate fluctuations was 7.9%. As Todd alluded to, foreign exchange rates negatively impacted third quarter revenue growth by 40 basis points. Organic growth by business was 7% for uniform rental and facility services, 15% for first aid and safety services, 10.6% for fire protection services, and uniform direct sale was down 2.3%. Gross margin for the third quarter of fiscal '25 was $1.32 billion compared to $1.19 billion last year, an increase of 11.1%. Gross margin as a percent of revenue was an all-time high at 50.6% for the third quarter compared to 49.4% last year, an increase of 120 basis points. Robust volume growth, operating leverage, and continued operational efficiencies help generate this strong gross margin. Gross margin percentage by business was 50% for uniform rental and facility services, 57% for first aid and safety services, 49.9% for fire protection services, and 41.2% for uniform direct sale. Gross margin for the uniform rental and facility services segment increased 120 basis points from last year. Our progress year-over-year reflects our focus on operational excellence initiatives combined with leverage from strong revenue growth. We continue to realize benefits from our technology investments and extracting inefficiencies from the business. Gross margin for the first aid and safety services segment increased 70 basis points from last year with strong revenue growth continuing to create leverage. Our sales mix remains favorable with more profitable first aid products and increases in our recurring revenue products like AED rentals, eyewash stations, and water brick. Our technology investment in SmartTruck provides route optimization and improved efficiencies, and we continue to see sourcing benefits from our first aid dedicated distribution center that have allowed us to lower product costs. All of these contribute to improved margins. Selling and administrative expenses as a percentage of revenue was 27.2%. As Todd shared, there was a $15 million gain on the sale of property during the third quarter of fiscal '25. Without that gain, selling and administrative expenses would have been 27.8%. Last year, there was a $15 million agreement in principle to settle a purported class action contract dispute. Without that $15 million settlement, selling and administrative expenses last year would have been 27.1% instead of the reported 27.7%. Third quarter operating income was $609.9 million compared to $520.8 million last year. Operating income as a percentage of revenue was 23.4% in the third quarter of fiscal '25 compared to 21.6% in last year's third quarter, an increase of 180 basis points. Adjusted for the gain on the property sale, operating margin in the third quarter of fiscal '25 was 22.8%, the second highest in Cintas' history. Our effective tax rate for the third quarter was 21% compared to 19.9% last year. The tax rate in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. Net income for the third quarter was $463.5 million compared to $397.6 million last year. This year's third quarter diluted EPS of $1.13 compared to $0.96 last year, an increase of 17.7%. When adjusted for the $15 million property sale, EPS was $1.10. As Todd mentioned earlier, we continue to generate strong cash flow. Over the first 9 months of the year, our free cash flow increased 14.5% over the prior year. This has allowed us to invest back in the business, which has resulted in the third quarter capital expenditures of $99.9 million. We expect capital expenditures for the year to finish close to our target of 4% of revenue. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal '25 revenue guidance accounts for the impact of negative foreign currency exchange rate fluctuations. While the first half of the year was negatively impacted by only 10 basis points or $5 million, the second half of the year is expected to be negatively impacted by approximately 40 basis points or $16 million. Fiscal '25 net interest expense is expected to be approximately $100 million compared to $95 million in fiscal '24. Our fiscal '25 effective tax rate is expected to be 20.2%. Please note that this implies a fourth quarter effective tax rate of 23% compared to an effective tax rate in last year's fourth quarter of 21.4%. As a reminder, there are two fewer work days in fiscal 25 compared to fiscal 24, which has a negative impact on total revenue growth of about 80 basis points for the year. Also, as a reminder, the upcoming fourth quarter will have one less work day than last year's fourth quarter. This will negatively impact the fourth quarter total revenue growth by about 160 basis points. Guidance does not include any future share buybacks or significant economic disruptions or downturns. I'll now turn the call back over to Todd for some closing remarks.

Thanks, Todd. 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. If you would like to ask a question, please press star one on your telephone keypad now. Please be prepared to ask your question when prompted. You also be allowed to ask one follow-up question. Once again, if you would like to ask a question, please press star one on your phone now. And our first question comes from George Tong from Goldman Sachs. Please go ahead, George.

Hi, thanks. Good morning. Can you talk a little bit about how customer purchasing behaviors and sales cycles are changing given the currently evolving macro environment?

Got it. That's helpful. And just as a quick follow-up, you mentioned last quarter that you were experiencing some pricing normalization as inflation normalizes. Can you talk a little bit about how pricing trends are performing this quarter compared to past quarters?

Very helpful. Thank you.

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

Hey, morning, guys. Was hoping you could update us on what you're seeing on the COGS side related to tariffs on Mexico and China, and I guess is there any way to frame the exposure purchasing from those countries and what you might be able to do to offset any potential increased costs with your sourcing efforts?

Thanks for that. And then, maybe stepping back on the M&A question, are you thinking about the opportunity to consolidate I guess more mid-size private platforms that could be available in rental uniform or your other industry verticals? And I guess separately, how you characterize the pipeline of those smaller tuck-in size deals for that?

I should take your question, Kev. And our next question comes from Manav Patnaik from Barclays. Please go ahead, Manav.

Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my question. Could I please reconfirm the primary drivers of these impressive margins, especially at the GM level? And then also the sustainability of those drivers and how that will evolve going forward in consideration as to whether the 25% incremental range is still the right way to think about it.

Thank you, appreciate it. And then going I guess to a more granular level with that question. How should we think about the current operating and incrementals for the respective segments? Uniforms and First Aid, drivers and sustainability there. And I guess also for fire protection. I understand there is going to be some potential impacts of SAP conversion next year, but it just anything to be mindful of margin wise by segment specifically.

Thank you. Appreciate it.

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

Hey, good morning. This is Will McFadden on for Tim Mulrooney. Thanks for taking our questions today. Maybe starting off, one area just on the macro picture. Fully recognize you're not providing guidance for 2026 at this time. But just curious kind of at a high level, how should we think about the setup heading into next fiscal year given organic growth in the business remains pretty healthy, but obviously there's a decent amount of uncertainty out there right now.

Understood. Thanks. That's really helpful. And then maybe switching gears a bit here, you've spoken recently about government as being a focus vertical. Just curious how you're thinking about that opportunity in light of the administration's intentions to reduce spending broadly across the federal government agencies. Thanks.

Great, thanks so much.

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

Hey, Mike. Two questions. One small one, one math one. So, what was energy and fuel cost as a percentage of revenues in the just reported third quarter? And my second question is could you tell us what's implied, what's embedded in your full year organic revenue growth guidance when you look on a sequential basis at the fourth quarter that we're in now versus the third quarter? And you can imagine I'm talking about organic, constant currency, sequential, same-day basis.

Let me start, Andrew, with energy and the energy for the quarter was for the total company was 1.7% of revenue. That's the same as last year's third quarter. Rental was 2%, same as last year 2%. From an organic guide, you know, Andrew, we just talked about a 40 basis point impact on total revenue in the third quarter because of FX. We expect that to be fairly similar in the fourth quarter. In addition to that, in the quarter we had, you know, call it 70 basis points of M&A impact. Actually, it was 90 basis points of M&A impact with a 40 basis point headwind to get to that 50 basis point differential. Something not too different than that in the fourth quarter is where I would be guiding you.

Right. So, maybe let me just ask it one other way. When you look at the sequential revenue for the fourth quarter that we're in versus the third quarter we just reported, are you assuming a normal seasonal pattern?

Well, we would assume a normal seasonal pattern in the performance of the business and the underlying performance of the business, yes.

Okay.

The FX is a little different in that we have seen a change in the FX.

Good. Okay, thank you. And our next question comes from Justin Hawk from RW Baird. Please go ahead, Justin.

Yeah, great. Thank you. I guess I just wanted to follow up on that question that was just asked because it would look like the fourth quarter organic, constant currency and Workday adjusted implied number with having that same FX headwind and the M&A contribution would be closer to like 6% versus the high sevens that you've done in the last two quarters. So, I guess I'm curious why there would be kind of a deceleration there. And then the second one, and this is also just purely a number question, but the $15 million gain on sale, which segment was that in on the SG&A line? Thank you.

Okay. All right, thank you for clarifying that. I guess we'll check the math on the workdays, but it sounds like it should be similar to what you've been doing.

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

Hi, good morning. This is David Picho for Ashish. Thanks for taking our question. If you could just dive a little bit deeper into the uniform direct sales. It looks like sequentially it performed better, but still a little down. So, any color there? And then as a follow-up, just circling back to the capital allocation, can you just give some overview of the valuations and the multiples you're seeing out in the market and absent of any large M&A, would you shift towards a buyback? Thank you.

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

Thanks very much. I just wanted to touch base on, I think it's pronounced Hippich, the acquisition you made a quarter ago. Any learnings or just a progress report there and any evolution or opportunity to offer new Cintas products, not only stemming from perhaps that, but from other acquisitions or ideas or initiatives you've come with recently. Thanks.

Great, thanks. Appreciate that. And for the follow-up, just free cash flow has been very strong this year. Looks like in working capital, you've been making a lot of improvement. Just curious, what has occurred structurally, perhaps thinking ahead to the out years? Are you going to be able to achieve a new level and how should we think about free cash flow as a percent of revenue, perhaps? And are you moving in a very positive direction and maybe some discussion of how that's occurred. Thanks.

Sure, Scott. Free cash flow has been strong for us and last year was quite a strong year and we've grown about 15% over last year. We have generally from a net income conversion to free cash flow, we've generally been in a 90 to 100% type of a range and that's where we are this year and that's where our expectation would be as we go into the next several years. We have, you know, there are times for example where we may spend a little bit more on inventory as we did in the third quarter. You saw inventory go up just a little bit to maybe get out ahead of the tariffs. Todd talked about how we're dealing with tariffs and maybe make a little bit more of an investment in the near term to make sure that we've got the inventory we want at the cost that we want. And so there can be various quarters ups and downs but generally speaking we like our ops cash flow to be in that 110 to 120 range and we like our free cash flow to be in that 90 to 100% range. I would expect that going forward too.

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

Hi, thank you. I just have a few questions out there. Todd, are you seeing any change at all competitively? One of your major competitors has seen a lot of change at the top of their organization. I was just wondering is that something that you kind of notice on the ground or is that not really noticed on the ground over the last year, year and a half?

Great. Thank you. Just one follow-up for Mike. Can you just give us a heads-up on what the days look like for the quarters in fiscal year '26 for our modeling? Like, is the year the same? Are there any nuances between the quarters?

They are all the same as current, as fiscal '25. So, the quarters, the days per quarter in fiscal '26 are the same as in fiscal '25.

All right, 65, 65 in every quarter. Thank you.

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

Hello, this is Harold on the line for Stephanie Moore. So, I guess just real quick on the tech investment side, you know, you talk about SAP, SmartDrive, MyCintas portal. I know you still have some and then you're still rolling out. So, if you could just provide us a sense of where you are at least like which any you're in along that journey. And I guess if you're doing any other incremental tech investments in the business that you really see materialize, that'd be helpful. Thank you.

Thank you for the call. I guess this on your verticals in the healthcare, hospitality, food services. Anything to call out there? Are you seeing any new business wins in any particular vertical this quarter or any in the pipeline that you would like to call out? And then I guess also on the new business wins side, sounds like you've seen some new business wins on the larger side, so when you look at your new business wins, are they more so coming from national accounts now versus small businesses? Anything around that that would be helpful. Thank you.

Thank you for all the color. Really appreciate it.

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

Thanks so much. I was hoping you could give us an update on cross-selling, how many products on average each customer is purchasing, how that's trended, and just maybe where are you seeing the most cross-selling or add-ons? Like is there a specific type of product or within a certain vertical? Just anything on cross-selling would be helpful.

Great. And then just as a follow-up on outsourcing, we talked about it a couple of times how there could be an opportunity if customers want to, you know, reduce their budgets that you can provide some help to them there. Just wanted to get a sense of historically when you've seen sort of periods of budget tightening or uncertainty, like do you tend to see that outsourcing accelerate? Like just I obviously that could be offset by other things, but you know, have you seen that historically and just maybe an update on outsourcing and how that's been trending over the last, you know, call it few months.

Perfect. Thanks.

And our next question comes from Jason Haas from Wells Fargo. Please go ahead, Jason.

Hey, good morning and thanks for taking my questions. One of the follow-up to respond to an earlier question on pricing to see if you could put a finer point on it. I think you had said that we're right in the historical range, which my understanding the historical range was 0 to 2%. And I thought at least as of last quarter the pricing was running more like 2%. So, I wasn't sure if that implied that there's been further moderation in pricing from last quarter and now we should think about closer to the midpoint of that range. So, if you could just help clarify that, it'd be helpful.

All right. Okay, that's helpful. Thanks for clarifying. And then just on the incremental margins on the thought that 25 to 35% is the right range. I think we're going to be definitely above that this year, it seems. So, can you help me just understand what would drive the incremental margins back down to that 25 to 35% range? I'm not sure exactly what the gain on sale, the $15 million gain on sale. So, like I assume that's not a recurring, I don't know if that's vehicle sales or what, but I assume that's not a recurring benefit. And then I know that there's the SAP implementation for fire, but is there anything else to think about that sort of brings those incremental margins back down lower going forward? Thank you.

Jason, I might add, you know, when there are times also when we're computing that incremental margin where last year's margin has an impact. So, for example, especially if you remove the $15 million settlement from a year ago, our second half of fiscal '24 was we made a nice jump in operating margin. And so, when you do that, that also has an impact on that incremental calculation. So, it's dependent on where we were last year, what our levels and cadence of investments are this year as well. But the really good news is as Todd's been saying, our initiatives, these initiatives that we talk about all the time, they are not one time, but they are just changing the way we do business and that gives us confidence that we can still work in that range for years to come.

It's great. Thank you.

And our next question comes from Leo Carrington from Citigroup. Please go ahead, Leo.

Good morning. Thank you. On the topic of M&A away from UniFirst itself, are there any other large M&A targets in North America? And if not in uniform rentals, where does this leave you? Are there route-based service targets of interest? Maybe outside of North America or you just solely focused on the tuck-ins otherwise. Thank you.

And at this time, there are no further questions. I'd like to turn the call back over to Jared for some closing remarks.

Thank you for joining us this morning. We will issue our fourth quarter of fiscal '25 financial results in July. We look forward to speaking with you again at that time. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. The host has ended this call. Goodbye.