Categories Earnings Call Transcripts, Other Industries

Cintas Corp (CTAS) Q2 2021 Earnings Call Transcript

CTAS Earnings Call - Final Transcript

Cintas Corp (NASDAQ: CTAS) Q2 2021 earnings call dated Dec. 22, 2020

Corporate Participants:

Paul F. Adler — Vice President, Treasurer and Investor Relations

Scott D. Farmer — Chairman and Chief Executive Officer

Michael Hansen — Executive Vice President and Chief Financial Officer

Todd Schneider — Executive Vice President and Chief Operating Officer

Analysts:

Andrew Steinerman — JP Morgan — Analyst

Seth Weber — RBC Capital — Analyst

George Tong — Goldman Sachs — Analyst

Mario Cortellacci — Jefferies — Analyst

Manav Patnaik — Barclays — Analyst

Andrew Wittmann — Baird — Analyst

Tim Mulrooney — William Blair — Analyst

Gary Bisbee — Bank of America — Analyst

Kevin McVeigh — Credit Suisse — Analyst

Scott Schneeberger — Oppenheimer — Analyst

Toni Kaplan — Morgan Stanley — Analyst

Shlomo Rosenbaum — Stifel — Analyst

Presentation:

Operator

Good day, everyone and welcome to the Cintas Quarterly Earnings Results Conference Call. [Operator Instructions]

At this time, I would like to turn the call over to Mr. Paul Adler, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Paul F. Adler — Vice President, Treasurer and Investor Relations

Thank you, and thank you everyone for joining us. With me today is Scott Farmer, Cintas’ Chairman of the Board and Chief Executive Officer; Todd Schneider, Executive Vice President and Chief Operating Officer; and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our second quarter results for fiscal 2021. After our commentary, we will be happy to answer questions.

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 SEC.

I’ll now turn the call over to Scott Farmer.

Scott D. Farmer — Chairman and Chief Executive Officer

Thank you, Paul and good morning, everyone. The COVID-19 Coronavirus pandemic remains a significant disruption to the economy. In the final month of our fiscal second quarter, November, the COVID-19 virus counts surged from about 100,000 per day at the beginning of the month to about 250,000 per day now. Not surprisingly, economic indicators such as jobs growth, unemployment and retail spending reflect an economic recovery that slowed considerably as the fall months progressed and the virus counts increased.

Despite the macroeconomic headwinds, I’m pleased with our second quarter financial performance, which exceeded expectations. Our employees, whom we call partners have not wavered in their passion for getting businesses ready for the workday. They’re providing essential products and services to help keep our customers and their places of business clean and safe. These include hand sanitizer services, professionally laundered healthcare scrubs and isolation gowns, first-aid products, sanitizing wipes, face masks, gloves and fire protection services as well as many others.

The conversion of no programmers, the do-it-yourselfers if you will, remains robust. Our supply chain and service network enables us to increase service to existing customers and add new customers by procuring and providing items in short supply. And our Net Promoter Score, which we use to measure customer satisfaction has risen dramatically to an all-time high. We find ourselves today, however, at a time of increasing uncertainty, a number of states and municipalities have reinstituted temporary economic restrictions in response to rising COVID-19 cases. Others are considering them.

On the other hand, vaccines are being distributed and US government continues to discuss additional economic stimulus. The uncertainty of the resolutions of these impactful events makes providing near-term guidance very difficult. Therefore, we are not providing financial guidance at this time. However, if we’re able to gain clarity before the end of the quarter, we’ll provide an update in advance of our third quarter earnings release.

That said, there is much that does remain certain. Our employee partners reflect the steadfast Cintas culture. They’re always striving to exceed the expectations of our customers to maximize the long-term value of Cintas for its shareholders, employee partners and other stakeholders. The result is consistently strong financial performance with Cintas growing revenue and EPS 49 of the past 51 years.

I remain certain of our value proposition of getting businesses ready for the workday by providing essential unparalleled image, safety, cleanliness and compliance. It is never resonated more than it does today. I remain certain of our addressable market, namely the millions upon millions of businesses that are not currently Cintas customers, many of whom are not in a program with recurring service, but could benefit from at least one Cintas product or service. And I’m certain that Cintas is well-positioned for years to come.

Now I will turn it over to Mike for commentary on the financial results of the quarter. Mike?

Michael Hansen — Executive Vice President and Chief Financial Officer

Thank you, Scott and good morning. Our fiscal 2021 second quarter revenue was $1.76 billion compared to $1.84 billion in last year’s second quarter. Earnings per diluted share from continuing operations or EPS were $2.62, an increase of 15.4% from last year’s second quarter.

Organic revenue adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations declined 4.4% for the second quarter of fiscal ’21. Organic revenue for the Uniform Rental and Facility Services operating segment declined 3.6%. Organic revenue for the First Aid and Safety Services operating segment increased 14.5%.

Gross margin for the second quarter of fiscal ’21 was $819.9 million compared to $852.4 million in last year’s second quarter. Gross margin as a percentage of revenue increased 50 basis points to 46.7% for the second quarter of fiscal ’21 compared to 46.2% in the second quarter of fiscal ’20.

Selling and administrative expenses as a percentage of revenue were 26.6% in the second quarter of fiscal ’21 and 28.1% last year. Fiscal ’21 second quarter results benefited from lower discretionary spending and increased sales rep productivity.

Operating income for the second quarter of fiscal ’21 of $352.9 million increased 5.5%. Operating margin was 20.1% in the second quarter of fiscal ’21 compared to 18.1% in the second quarter of fiscal ’20. Our effective tax rate on continuing operations for the second quarter of fiscal ’21 was 13.3% compared to 20.1% last year. Tax rate can move from period-to-period based on discrete events including the amount of stock compensation expense.

Net income from continuing operations for the second quarter of fiscal ’21 was $284.9 million, an increase of 15.7%. EPS was $2.62, an increase of 15.4% from last year’s second quarter. In the second quarter of fiscal ’21, certain Uniform Rental and Facility Services operating assets were sold. The pre-tax gain on sale of $18 million was recorded in the selling and administrative expenses and impacted operating margin by 100 basis points. The pretax gain and related tax benefit impacted EPS by $0.25.

Our balance sheet and cash flow remains strong. Our leverage calculation for our credit facility definition was 1.6 times debt-to-EBITDA. We have an untapped credit facility of $1 billion. For financial modeling purposes, please note that there is one more workday in our fiscal ’21 than in our fiscal ’20. One more day will benefit fiscal ’21 total revenue growth by 40 basis points. One more workday also benefits operating margin and EPS.

Fiscal ’21 operating margin will be about 12.5 basis points better in comparison to fiscal ’20 due to one more day of revenue. In fiscal ’20, each quarter contains 65 workdays. In fiscal ’21, workdays by quarter are 66 in Q1, 65 in Q2, 64 in Q3 and 66 in Q4. Please keep these differences in mind when modeling on a year-over-year and sequential basis.

I’ll now turn the call over to Todd Schneider to discuss the performance of each of our businesses.

Todd Schneider — Executive Vice President and Chief Operating Officer

Thank you, Mike. As Scott stated, COVID-19 remains a significant disruption to the economy. Every business in the US and Canada has been impacted. Many of our customers that have remained open are not yet operating at the same level of business as before the pandemic started because of the virus has negative impact on health and the economy. Our employee partners continue to work with urgency to offset these headwinds.

Over the past couple of quarters, we have provided some examples of their interactions with both new and existing customers, so to give a better understanding. Many of those examples highlighted customers in the industries of healthcare, education, and state and local government, and products and services, including scrubs, hand sanitizer service and masks.

For the second quarter of the fiscal year, the amount of Uniform Rental and Facility Services new business sold to healthcare, education, and government customers is double the amount in the prior year period. And the amount of first-aid, fire and other new business sold to customers in healthcare, education and government is 6 times the amount sold in the same period last year. So some of this new business is recurring and some may not repeat. Nevertheless, the results are really impressive.

Also, the number of scrub dispensing machines installed in our first-two quarters doubled last year’s number. And since the virus appeared, our employee partners that provided businesses with over 350,000 hand sanitizer dispensers and over 125 million masks. I’m truly in awe of the accomplishments of our team in this challenging time. And I’m excited about the opportunities for Cintas post pandemic, which seems to be finally appearing on the horizon.

With that, I’ll turn now to the second quarter financial performance of our businesses. Uniform Rental and Facility Services operating segment includes the rental and servicing of uniforms, healthcare scrubs, mats and towels in the provision of restroom supplies and other facility products and services. The segment also includes the sale of items from our catalogs to our customers on route.

Uniform Rental and Facility Services revenue was $1.41 billion compared to $1.47 billion last year. Our Uniform Rental and Facility Services segment gross margin was 47.5% for the second quarter compared to 46.6% in last year’s second quarter. Higher inventory amortization expense of 80 basis points was more than offset by the benefits of lower production and service expense as a percent of revenue.

Our First Aid and Safety Services operating segment includes revenue from the sale and servicing of first-aid products, safety products, personal protective equipment and training. This segment’s revenue for the second quarter was $194.4 million compared to $169.7 million last year. The First Aid segment gross margin was 43.0% in the second quarter compared to 48.4% in last year’s second quarter.

Lower production and service expenses as a percent of revenue compared to last year’s second quarter were more than offset by a higher cost of goods sold from the increased proportion of revenue from personal protective equipment such as masks and gloves.

Our Fire Protection Services and Uniform Direct Sales businesses are reported in the all other category. Our Fire business historically grows each year at a strong pace. The Uniform Direct Sale business growth rates are generally low-single digits and are subject to volatility, such as when we install a multi-million dollar account.

Uniform Direct Sale, however, is a key business for us, and its customers are often significant opportunities to cross-sell and provide products and services from our other business units. All other revenue was $152.1 million compared to $204.1 million last year. The Fire business organic revenue declined 3.3% due to the inability to access some businesses because of closures.

The Uniform Direct Sale business organic revenue declined 51.2%. Revenue from our airline, cruise line, hospitality and gaming customers largely falls within this segment. These industries continue to be among the hardest hit by the pandemic.

That concludes our prepared remarks. We are happy to answer your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We’ll take our first question from Andrew Steinerman with JP Morgan.

Andrew Steinerman — JP Morgan — Analyst

Good morning, everyone. Could you give us a sense about the month of November in terms of organic revenue trends for rental? And if you can make a comment into the month of December, that would be great.

Scott D. Farmer — Chairman and Chief Executive Officer

Andrew, this is Scott. Yeah, we can give you a little bit more color on that. Through the quarter, we continue to see an improving revenue trend for the month of November and the Uniform Rental and Facility Services segment. The rental organic growth was minus 1%, first aid and safety for the month of November organic growth was 14%, and fire continue to improve through the quarter and it ended November with the month of November down 1%.

And its important to note that about mid-November, we did see the impact of some of the state’s restrictions on businesses, I would say it affected the trend. But it hadn’t turned it worse than it had been at that point. So it’s a little unpredictable on where it goes but as you can see through the month of November, we continued on a positive trend. I think second quarter revenue sequentially grew about 2.7% over first quarter.

Andrew Steinerman — JP Morgan — Analyst

And could you make a comment about December?

Scott D. Farmer — Chairman and Chief Executive Officer

I would say, through the first couple of weeks, we were running around where we were in November.

Andrew Steinerman — JP Morgan — Analyst

Great. Okay. Thanks, Scott.

Scott D. Farmer — Chairman and Chief Executive Officer

Yeah.

Operator

We’ll take our next question from Seth Weber with RBC Capital.

Seth Weber — RBC Capital — Analyst

Hey, guys. Good morning. I had a couple of questions on the margins. I think I’m just trying to handicap where we’re at with expenses coming back online. I think, Mike, I think last quarter you talked about there is about 100 bps — 100 basis points of lower discretionary. Has any of the — have any of those costs started to come back here in the second quarter? And how should we think about that kind of through the rest of the year? Thanks.

Michael Hansen — Executive Vice President and Chief Financial Officer

Yeah. We continue to manage those costs pretty tightly given the environment that we’re in. The difference between last year’s travel and meetings, which I call out is a 100 basis points in Q1 was about 40 basis points in Q2. Now Q1, we normally travel more as we start our fiscal year, but it was still about a 40 basis point benefit. And we’ll continue to monitor the situation. Certainly, I know that our operational people are itching to get out and see our locations and our customers, but given the levels of cases — COVID cases and the environment, we’re going to remain pretty tight on those.

Seth Weber — RBC Capital — Analyst

Okay. Can you just talk about, have you seen any relief on the cost side on the First Aid and Safety category? I know there have been some cost pressures there. Have that — has that kind of loosened up here a little bit with more as weather supplies has gotten a little looser or just easier to get? And I’m saying, — just any comments on the First Aid and Safety expense, cost side?

Todd Schneider — Executive Vice President and Chief Operating Officer

Seth, this is Todd. Regarding the First Aid business, certainly, there are some PPE type items that are still very challenging to get. We’ve been blessed to be in a good inventory position to help our customers out with those items. But PPE is in short supply. It’s had some impact on cost to us in those cases, but again, we’ve looked at it with a long lens and we’ve invested appropriately and our customers really appreciate the fact that we’ve been able to provide products and services, such as PPE and other items to help them get through this challenging time.

Scott D. Farmer — Chairman and Chief Executive Officer

We do like, Seth, the sequential improvement of gross margin of just about 40% in Q1 to 43% in Q2. And so we’re — we did see some nice performance in our first aid cabinets in the quarter and as we talked about at the — in September that mix of PPE obviously came down a bit with the growth moving from — in that segment from over 20% in Q4 to 17% to 14.5% here in Q2.

So we’re starting to see some of those PPEs turn into the maintenance mode that we’ve talked about in the last couple of quarters and that mix change, as well as the improving first aid cabinet has helped that gross margin and we’ll — when we get to a more normalized environment, we certainly believe that those first aid gross margins are going to trend back towards where we had been pre-COVID. There is nothing structural or no change in the business that would lead us to believe otherwise.

Operator

We’ll take our next question from George Tong with Goldman Sachs.

George Tong — Goldman Sachs — Analyst

Hi. Thanks. Good morning. You mentioned that in the first several weeks of December, Uniform Rental trends are running around where you were back in November. Can you discuss changes you’ve seen if any around new business and retention trends over the past several weeks?

Scott D. Farmer — Chairman and Chief Executive Officer

Yeah. Our new business numbers continue to perform very well. We still believe that the value proposition that we have is important in this current environment and so we’re continuing to attract new customers. We have seen — we haven’t seen a change in lost business rates at this point. We have seen because of government restrictions some customers going back on a fold, meaning they’re temporarily closing the business until the restrictions are lifted.

And that would be the change that we’ve seen since about mid-November in the economy. Those restrictions are — various states and cities it’s California, it’s Illinois, it’s New York, other states, Washington, Oregon, even up in Toronto. So these are the places that we see those type of restrictions that are impacting our customers, but from a lost business standpoint, we haven’t seen a real change in lost business rates.

George Tong — Goldman Sachs — Analyst

Got it. That’s helpful. And then can you talk a little bit about how much growth you’re seeing from the non-programmer market versus your existing customers and how much healthcare as a vertical is contributing to growth directly?

Scott D. Farmer — Chairman and Chief Executive Officer

Sure. The no programmer market for us, we’ve tracked it for many years. It’s between 60% and 65% of our new business customers. It remains in that range today, and as I said in my opening remarks, there are millions of businesses out there that do not have a program that we can offer them. And so we like our position and our ability to convert them. Even within the healthcare space, there are, if you define a no programmer as somebody who doesn’t have a rental program, most of the scrubs that you see in hospitals are direct sale type scrubs. Some of them bought by individual healthcare workers, some by the hospital for departments and things like that, but converting them to a rental program, we would call a conversion of a no programmer.

The other area that we’re seeing in healthcare that’s doing really well are isolation gowns. Those are traditionally direct sale, disposable, gowns. And we have a rentable alternative that actually saves the hospitals and healthcare providers money to convert from a direct sale program to a rental program. So we’re seeing a lot of success in that as well. And that would be what we would consider a no programmer conversion within healthcare.

Todd Schneider — Executive Vice President and Chief Operating Officer

George, it’s Todd. Just to build off a couple of items that Scott mentioned. Our no programmer as a business, as a percent of our total remains quite consistent. What is changing is, it is allowing us to get audiences to folks, customers prospects that we haven’t had in the past in many cases because of the access we have to critical products and services that they need to provide to their business and within their business to either or their customers or to their employees, both, so that they can have confidence to come to work and for people to come into their business.

Scott spoke about some of the — in the medical area have been very successful. The isolation gowns, hand sanitizer, sanitizer wipes, disinfectant wipes, scrubs are all — are it’s in great demand. Scott mentioned that the isolation gowns were — that was virtually almost the entire market was a direct purchase market, purchase disposable market, probably the best way to describe it. And what we’ve done with isolation gowns has been very attractive to our prospects and our customers, what, it’s a green service, right. We’re not just throwing in the trash. We’re reusing it. It save them significant money. The availability of them instead of folks struggling to get isolation gowns and being panicked that we’re trying to take care of their patients. What we — the garments that we’re providing are more comfortable than what they’ve been wearing in the past.

And then lastly, we brought some technology to that business, so that we can track exactly how many times those garments have been processed. So if they — we can meet the specifications that are detailed out for such a product. So that’s kind of big win and a lot of healthcare customers are very, very interested in that and we mentioned in our previous earnings release that the demand for scrubs has been up very nicely. People are uncomfortable, many cases wearing those home, washing those at home and whom they come in contact with on the way home makes people little uncomfortable. So all that has been quite good demand. In those cases, we consider those no programmers we might be doing some business with those healthcare organizations, but we’re expanding that relationship dramatically.

Operator

We’ll take our next question from Hamzah Mazari with Jefferies.

Mario Cortellacci — Jefferies — Analyst

Hi. This is Mario Cortellacci filling in for Hamzah. Appreciate the time. Just on touching on the flowing in November and the continuation into December, could you maybe just give us a level deeper in terms of what you’re seeing on your end market? I’d imagine it’s probably similar to what we saw earlier in the year — excuse me, with the high-risk industries being hit a little harder, but is that more or less what you’re seeing or could you give us some of the puts and takes on some of your end market exposure?

Scott D. Farmer — Chairman and Chief Executive Officer

Yeah. Sure. It boils down to certain industry segments or geographies and the segments that you can imagine the travel, hotels, cruise lines, even in certain areas, restaurants, movie theatres that type of thing are being hit the hardest because of these restrictions and people I think natural fear to go and congregate in a place like a movie theatre. The geographies depend on what type of — or if there are any restrictions in place and what we have seen so far is, as we got through the end of November, an increase in the number of states and municipalities that have put restrictions in place, we don’t know whether that trend is going to continue through the holidays and just as an example, Governor Newsom in California put the restrictions in place. They’re pretty tight, but he says that they will extend to January 4.

The question that we have there is will he extend that further, which has been his tendency or will it actually be January 4 when he starts to loosen those restrictions. So those states are the — and municipalities are the areas where we’ve seen the change since about mid-November and my perspective is that we are in a temporary low, we don’t think it’s going to be anywhere near what it was in our fourth quarter last year.

Quite honestly, at that point, nobody including governors and people running businesses at any idea how bad it was going to be how deep it was going to go and so forth but now that we’ve got eight months or nine months worth of experience in dealing with it and the fact that we have vaccines beginning to roll out right now. There is light at the end of the tunnel, this is a temporary period of time that we’re going to go through and so that I hope provides a little color to you. I’m happy to get more specific in any area if you have any question.

Mario Cortellacci — Jefferies — Analyst

No, that was helpful. And then going back to healthcare for a second. Just I guess could you give us a sense of what the competitive landscape looked like there? So I think reasonably one of your competitors came out with a new scrub line, you had mentioned the isolation gowns is being one of your differentiated product, which is, I’m assuming, helping you win business. Just wondering how those conversations are going with customers regarding competition. And then also could you touch on how you’re positioning your scrub dispensing system to your advantage?

Scott D. Farmer — Chairman and Chief Executive Officer

Yeah. Todd, you want to take this one and I’ll chime in.

Todd Schneider — Executive Vice President and Chief Operating Officer

Sure. Okay. Great. Yeah. Mario, I would say in the healthcare market, depends upon what area within the healthcare area acute and non-acute, even frankly into what department you’re speaking of. But generally speaking, iso gowns, scrubs, etc., those are direct purchase market. In the case of iso gowns disposable, the most common way people procure those products. Lending companies certainly are in that space, those who provide services to those types of customers. But if I generally describe it would be a — it’s a direct purchase or disposable market with any reusables would be traditionally with a [Indecipherable] companies would be the most — a common experience.

As far as the scrub dispensing, it’s been going extremely well for our business and our customers. The demand is there because it’s a — well, I think most people can kind of see the experience where you go into a grocery store and you see people wearing scrubs, right and those belong to the hospital normally. And what happens is because both struggled to get access to scrub, they tend to hoard them. And as they hoard them, then they have to buy more scrubs and when they do that, are in that tough situation, they tend to buy the cheapest scrub they can because they end up disappearing. And we completely change the value proposition and we provide a scrub that people want to wear, not just have to wear. It’s comfortable, attractive and we’re continuing to invest in that area and come out with a better technology around the fabrics, etc. And it makes it completely accessible, meaning there is complete accountability.

So when you want a scrub, you can get it. You have complete access and then it’s laundered for you. So, they don’t have to take it home. So it has been really attractive for our healthcare customers. And as I mentioned in the opening remarks, we’ve installed twice the amount of scrubs that we did last year at the same time so far through Q2. So a great momentum, and we’re very encouraged.

Scott D. Farmer — Chairman and Chief Executive Officer

Let me add, just — this is Scott. Let me add one thing relative to the competition and Todd mentioned that it is traditionally a direct sale items, scrubs and isolation gowns and that sort of thing. And so I think the thing that’s helpful to you all to understand is that it is really difficult and I don’t know that it’s even a concept that a traditional direct sale competitor would even consider would be to try and develop a laundry service to do that.

So we’re providing a unique opportunity for a customer to convert to a rental program where the traditional competition can’t, they don’t have the ability to do that. And that is a big significant competitive advantage for us versus the traditional supplier, that and we believe that because of the technology we brought, the scrub machines, the dispensing units that keep inventory tracking and our ability to control how often a isolation gown is processed before we pull it out of service.

These are the kind of things that for traditional competition, they can’t do. Relative to other rental companies that would be linen companies and uniform rental companies, we’ve been in this for a long time. We have trained salespeople and service providers that specialize in the healthcare market, and we think we have a multi-year head start on what you would probably consider to be our traditional rental competitor and we like that position a lot and I think that’s why you’re seeing the amount of success for us as we’ve gone through this process and through the pandemic that we are seeing. So I just thought I’d offer that as some color relative to healthcare as well.

Operator

We will take our next question from Manav Patnaik with Barclays.

Manav Patnaik — Barclays — Analyst

Thank you. Good morning. Scott, if I could just ask you just begin from a competitive standpoint, just some broader commentary I guess outside of healthcare like have you seen any changing dynamics that people are getting tight, aggressive or is it some more consolidation going on? Just curious, any color there?

Scott D. Farmer — Chairman and Chief Executive Officer

Yeah. Let’s — we’ll talk competitive — maybe competitive behavior and pricing. We have seen some aggressive pricing in the marketplace. I think that as competition sees their business existing customer base have issues and decline in revenue, they typically get aggressive with pricing. I don’t think this is anything that we haven’t seen in the past relative to low ball prices and competition trying to take business from us. And that’s a market by market type of an environment and it could be in any particular market.

The small players or one of the big national players in that market that decide they need to do something to try to win some accounts. But relative to overall pricing though, while we have had to adjust prices on fluctuating items like gloves and face masks and hand sanitizer and the PPE kind of things as our cost increase trying to get those products, we’ve had to adjust prices upward on those items.

For our recurring revenue across all of our businesses, really, we have not increased prices during the pandemic, and in fact for as a general statement, particularly in the rental division, well, we haven’t increased our price through our customers in about a year and a half, and that’s a strategic decision on our part. We don’t think that during a global pandemic, it’s the right time to be raising prices and I think that’s one element of why we’ve seen our Net Promoter Scores, how we measure customer satisfaction be impacted to the positive. And so that’s our position on pricing at this point.

Todd Schneider — Executive Vice President and Chief Operating Officer

Scott, if I may. Manav, just a couple of items on that regarding our approach with our customers. Scott mentioned pricing hasn’t — recurring revenue pricing hasn’t gone up in 18 months or plus. And our approach to our customers was to be, we call it caring, consistent, and flexible. Meaning, we know it’s a very challenging time for our customer base and our prospect base, so we wanted to take the appropriate approach. Scott mentioned that it’s showing up in our customer satisfaction scores, which we track via Net Promoter Scores. And we look at it as what’s the lifetime value of those customers and we want to have those customers for a lifetime and not take a short-term approach. And I think again, that’s showing up in our Net Promoter Scores and I think it’s going to show for a long-term in how customers look at us.

Manav Patnaik — Barclays — Analyst

Got it. That’s helpful. And also, I think you’ve given examples on how basically your scale plays totally to your advantage in these time shares those kind of heightened demand. Have you seen — maybe some of your smaller competitors just going to be financially constrained. And is that present even more opportunities now?

Scott D. Farmer — Chairman and Chief Executive Officer

Well, yeah, I always like to say we’re an equal opportunity competitor and if any of our competition in a particular market is having a hard time with either getting supplies, getting the product that they need having trouble with servicing their customers, we’re more than happy to step in and provide those products and services through those customers. From time to time, we do see an issue with the competitor and we will react accordingly on a customer by customer, prospect by prospect basis if you will relative to that. I don’t know that it’s because of the — it’s still a little uncertain in where this is all going to go and how quickly it’s going to end, different opinions on that, but I do think that it could provide a future opportunity for acquisition. I think that there would probably be a desire on the part of a potential seller to try to get their revenue back to where it was pre-COVID to have something larger to sell but with that we’ll deal with those kind of situations as they come up, but that is obviously an opportunity for us as well.

Operator

We will take our next question from Andrew Wittmann with Baird.

Andrew Wittmann — Baird — Analyst

Great. Thanks for taking my questions guys. I think this one is probably for Mike and just kind of looking back here on calendar 2020, it’s obviously been a remarkable year, challenging year for so many people. I mean the thing that most investors will look back and think about Cintas and how you manage through this and seeing your margin percentage go up despite the revenue is declining.

And so, Mike, I guess the question is, we look ahead to really just high levels I’m looking for here, as we’re almost about to analyze that the COVID comps, if you will, how should we be thinking about the margins? I mean you guys have articulated the travel [Indecipherable] discretionary 100 basis points last quarter 40 this quarter of benefit. But other buckets out there that could be margin headwinds as you hit the year and analyze the COVID, things — I don’t know, things like incentive compensation, fuel prices, other things that might have to come back in on the production side of things, what else should we be thinking about from a high level as investors that could come back and as we hit the year mark on COVID?

Michael Hansen — Executive Vice President and Chief Financial Officer

Yeah. It’s been a challenging year and it has required a lot of different managing of the different cost structures and it certainly has been a challenge, but as we move forward, look, there are certainly some things that we have learned about some of our costs like travel and can we do some things more efficiently and I think there will be permanent savings on some of those things. There will be some of that comes back, but I don’t think we’re going to see 100 basis points of movement in something like that.

And so as we look forward Andrew, I would say this, where we want to grow over the course of the long-term. We will continue to staff revenue producing positions to prepare ourselves to grow and that may mean a little bit more bench in our service departments and in our sales departments and that will probably create a little bit of additional spending.

But having said that Scott manage the business very, very well in this period of time and I would expect that that is going to continue. We will continue to be very, very cognizant of our margins and our costs and recognizing that our goal is to continue to see very healthy incremental margins. So Andrew, I don’t — there’s not really anything that I would point to other than a little bit of that travel coming back and a little bit more of the staffing of revenue producing positions that are needed for growth.

Andrew Wittmann — Baird — Analyst

Okay. Great. That’s my only question for today. Have a good holiday season guys.

Michael Hansen — Executive Vice President and Chief Financial Officer

Thank you.

Scott D. Farmer — Chairman and Chief Executive Officer

You too.

Operator

We will take our next question from Tim Mulrooney with William Blair.

Tim Mulrooney — William Blair — Analyst

Yeah. Good morning. Just one from me as well on employee retention, which I know is a key initiative for the firm and something you all track pretty closely. I’m curious how that’s trended through the pandemic with furloughs and disruptions to your routes, from temporary shutdowns. If employee turnover has been something that’s been harder to manage over the last several quarters, or if it’s actually been easier because the labor market isn’t as tight as it’s been relative to the last several years? Thank you.

Todd Schneider — Executive Vice President and Chief Operating Officer

Tim, this is Todd. Thanks for the question. Employee, what we call partner retention is never easy, but I will say that our performance since the start of the pandemic has been impressive results are continuing to improve. We have — our partner base is an impressive group of folks who are relentless, creative and very proud of what they are doing on a daily basis to help businesses function in this environment and function successfully. So there’s a [Indecipherable] in the organization that they’re very proud of what they do and we’ve got a great group of leaders and frontline partners all throughout that we’re very happy with.

And so, yes, it’s going quite well and that we’re really encouraged about that as we move through. When you go through really hard things, right and this — going through this pandemic has been extremely challenging, not just for ourselves but for, I’d say, well, you can say the world, right, it’s been very challenging. But it makes you better, makes you stronger and we have found out a lot about our partners and how resilient they are and it’s been a real pleasure.

Tim Mulrooney — William Blair — Analyst

That’s great. Great color, Todd. Thank you.

Todd Schneider — Executive Vice President and Chief Operating Officer

Thank you, Tim.

Operator

We will take our next question from Gary Bisbee with BofA Securities.

Gary Bisbee — Bank of America — Analyst

Hey. Good morning. First of all, I just wanted to clarify one thing. Todd, you said healthcare, education, government and customers. I believe you said new businesses doubled year-over-year, but then you said something else is up 6 times. What were those numbers?

Todd Schneider — Executive Vice President and Chief Operating Officer

Yeah. That’s right. We are happy to clarify. So both — I was thinking of both — excuse me, two different sectors. One for rental, our rental and facility services business, those sectors, the healthcare, education and government, new businesses have doubled that area. And in the case of our first aid, fire and other, our new business again for healthcare, education and government is up 6 times. Now as I mentioned in the opening remarks, not all of that will be our repeating, some will not but nevertheless, we’re really, really encouraged by how well we’re doing in those areas of our business.

Gary Bisbee — Bank of America — Analyst

And can you give us some color on the rest of the end markets you serve? I mean obviously those you’ve been calling out and it makes sense that you’re doing really well, but is the rest of the book down on a new business or how do we think about sort of total Cintas at this point, including the good and the bad?

Todd Schneider — Executive Vice President and Chief Operating Officer

Yeah. So in total, our new business is very good. We’re very encouraged by that. The trend lines are great. The productivity is at an all-time high. It’s replacing a lot of revenue, customers that are closed and for those, it’s also replacing a lot of revenue for customers who are maybe open, but certainly not at the same levels as what we’d expected in a new more normalized type economy.

Gary Bisbee — Bank of America — Analyst

Okay. And then, just if I could, one financial question on cash flow, it’s obviously been quite strong. How do you think about two factors, one, capex coming back to more normal levels, is that just a matter of revenue getting back and you’re bringing the spend back or anything else we should think timing? And then the other one on inventory. Inventory days is up a lot, I guess in part sales down, but also building inventory for all these newer items, PP&E and what not, how do you think about inventory levels in a more normalized revenue environment at some point in the future? Are they likely to be higher than they’ve been and is that something that will continue to build and have an impact on cash flow? Thank you.

Scott D. Farmer — Chairman and Chief Executive Officer

Well, let’s start with capex. I think that we’re going to probably see capex remain below historical levels until we get through the COVID crisis and the economy recovers, but I’d still say that even today, we’re probably spending capex at a 60% growth, 40% maintenance level. So — but I just think it’s going to be lower until we get through this everybody is little more cautious and that sort of thing.

Relative to inventory, it’s important that I think we make the statement that we are doing the best job that we can to manage the supply chain and the supply of these hard to get items with the demand that we’re seeing from our customer base and that’s the primary reason you’re seeing an increase in this inventory. I don’t believe that we’re going to see a sudden drop-off in the need for these products.

I think it will be a slow, steady decline and we’ll have some view on that as the economy recovers and as COVID vaccines continue to roll out. Many of these are going to be around at a higher level than pre-COVID for a long, time. And so we’re — we haven’t seen any issues with slow moving inventory at this point or anything like that, but I will tell you that the fact that we have been able to bring these products in the inventory, the way that we have has been a huge competitive advantage for us in the marketplace where, because we might have masks or gloves or hand sanitizer, prospects who ordinarily have not been doing business with us, listen to and react to our ability to provide them with these COVID related products.

And then also listen to what else we can do for them. And so it might be a call where a company is interested in hand sanitizer and we wind up after our sales rep is out talking to them, where they’re putting 10 people in Uniform and restroom supplies in the restroom and entrance mats and mops and cleaning chemicals and so forth, in addition to the hand sanitizer. So it’s been a big competitive advantage for us as we’ve gone through this process and I think one of the reasons why our NPS customer satisfaction scores are up, as well as we’re seeing very robust new business results.

So I think the balance sheet that we have has allowed us to be able to make that investment. Our supply chain has done a great job in sourcing it and I think that it’s reflected in our ability to sell new accounts and satisfy our customers.

Operator

We will take our next question from Kevin McVeigh with Credit Suisse.

Kevin McVeigh — Credit Suisse — Analyst

Great. Thanks so much. Hey, I wonder, if you could give us a sense of across the client base, how many are — in percentage numbers, maybe how many are inactive today and is there a way to think about where the average customers in terms of percentage of prior peak just to get a sense of just the potential to scale as things start to reaccelerate from a COVID perspective or recovery rather?

Scott D. Farmer — Chairman and Chief Executive Officer

That’s difficult for us to say because, in many ways, it’s a moving target. We have had customers that were open and then because of a regulation or a restriction had to shut down temporarily, open back up, some of the customers that are open, are open only at 50% capacity or at a lower level than they were, but we haven’t gotten into those figures because it moves around so much that if I tell you something today, it would be different next week, and so we — depending on who might apply new restrictions and so forth. So we haven’t gotten into that level of detail and I hesitate to do that only because I think it might be a little misleading, only because it moves around so much.

Kevin McVeigh — Credit Suisse — Analyst

Okay. Thank you. And then just — and then kind of post-COVID world, you think about how much of the demand is structural? Is there any way to think about that against the core business in terms of, it seems like obviously healthcare is going to be a more significant contributors business but just any incremental step-up and how much of that is kind of structural versus maybe starts to kind of normalize?

Scott D. Farmer — Chairman and Chief Executive Officer

We’ve learned a lot as we’ve gone through this process and I think that one of the really positive aspects of this whole thing is that we have done a much better job of communicating to existing customers and even prospects, all of the things that we can do for them. And therefore, are selling more to existing customers and a new prospect that might come on board. They may only start with a particular service but because they’re aware of the other things that we have to offer. When they see that need, they know who to call. That has been a structural change for us.

And I believe that the things that we have to offer, these customers or things that they’re going to be using in the long-term within their businesses to help keep their businesses, their employees and their customers safe, have a clean environment for them to work in, be compliant with the regulations and in the fire business, insurance company requirements and so forth. So we’re excited about the position that we’re in right now. And as I look to the future, I’m really excited about where all this can go.

Todd Schneider — Executive Vice President and Chief Operating Officer

Kevin, this is Todd. As an example of that…

Kevin McVeigh — Credit Suisse — Analyst

Hey, Todd.

Todd Schneider — Executive Vice President and Chief Operating Officer

We mentioned that in a previous call that there is a large national banking that we were doing zero business with and now, we’re providing hand sanitizer to every single branch that they have and we are — in addition to that we are talking to them about other facilities products that they are in need of. And we’re also talking to them about our Fire Service, which as you can imagine, they need all of that, it’s just a matter of where we’re getting it from and centralizing spend, in many cases, saving money.

So that’s just one example of what is occurring hundreds of times every single day out there with our sales and service organization, as Scott mentioned, really positions us well because there is people in the past, who really wouldn’t take our calls and now they will because of our inventory position and our infrastructure and that helps position us for long-term in a really healthy manner.

Kevin McVeigh — Credit Suisse — Analyst

Makes a ton of sense. I’ve noticed a lot of dispensers being kind of installed and things like that that just historically weren’t there and that bodes well for the future, so, thank you.

Todd Schneider — Executive Vice President and Chief Operating Officer

Yeah. Thank you.

Operator

We will take our next question from Scott Schneeberger with Oppenheimer.

Scott Schneeberger — Oppenheimer — Analyst

Thanks so much. Good morning. In the other segment, I’m just curious, how is your visibility there? You’re obviously experiencing some new wins and seem some struggles, but if you could break it down between fire and direct sale, there’s a sense of the visibility you have, and this is the essence of the question is, you done a nice job managing margin there, is the — how does the visibility correspond with your ability to manage your opex? Thanks.

Scott D. Farmer — Chairman and Chief Executive Officer

Well, the Fire Service business is recovering similar to the Rental and Facility Services segment there. I mentioned earlier that their November organic growth rate was off 1% from pre-COVID levels, but — so we have a pretty good view of what’s happening in that business. And I think that will — similar to what happens with the rest of the economy and what happens with the Rental Division, we’ll see that recover in a similar fashion.

Relative to the direct sale business, a good portion of that business goes into hospitality and travel-related areas, that’s a little murkier and I think that those are hotels, airlines, cruise ships, casinos, food service, and that sort of segment. So those are going to be, I think the longer tail from a recovery standpoint, but I think that there will be a day coming where they’re going to get a pretty good bump.

I think there is a — in my personal opinion, a huge amount of pent-up demand for people to be able to go back on vacation to stay in a hotel that feels safe when they get on an airplane, and that sort of thing. And there is a point at which when the vaccines have been rolled out to perhaps reach herd immunity, you can see airlines throwing some special rates at travelers to welcome them back, hotels and resorts doing the same kind of thing.

I think you’d see that Las Vegas doing everything that they can to get their customers to come back and who knows that — maybe that’s early next summer depending on their rate of vaccinations and things like that, but if it’s going to work in those businesses, it’s also going to work in other businesses. People are going to be able to go back out to their restaurants and their movie theatres locally and maybe go to the concert venue and do the social things that bars and do the social things that they’re missing right now.

And I think that, that is coming. When it happens, we need a little bit more time to understand the rate of rollout for the vaccines and that’s why I continue to say that we are in a temporary role in this and that as we get a little further out and get a little more clarity, we’re going to see I think some economic activity pick up and we’re maybe a couple of quarters away from that may be on an improving quarter-by-quarter basis as those vaccines rollout.

Scott Schneeberger — Oppenheimer — Analyst

Thanks. I appreciate that color. And just as a follow-up, I’m curious on your appetite for M&A and what you’re seeing out there is you’re clearly in a position of power as you’ve kind of discussed over the course of the call. And then maybe $0.02 on the move to the quarterly dividend and just that [Indecipherable] on the whole return of capital strategy of [Indecipherable]? Thanks.

Scott D. Farmer — Chairman and Chief Executive Officer

Yeah. So relative to the dividend that we were sort of the last person standing relative to giving our annual dividends. We thought and I’ve talked about it at a board level for a long time and made a decision to make the change. I think it’s — we have shareholders that we’ve heard from in the past about cash flow and that sort of thing. So we’ve reacted to that. We think it is a good change for us, we think it’s a good change for the shareholders as well. And remind me the first part of the question was?

Michael Hansen — Executive Vice President and Chief Financial Officer

M&A, Scott.

Scott D. Farmer — Chairman and Chief Executive Officer

M&A. Okay. Thank you, Mike. I’m sorry. You probably dropped off, but M&A, yeah. We are cautious right now because of where we are in the recovery. But we are in a position where we could do M&A acquisitions in any of our businesses. We would evaluate them pretty heavily right now, just to make sure we understand, how well that particular business is doing. But we would be acquisitive, if we could find the right deal the right business at the right price.

I think that, as I said earlier, I think there’s a — there is an element of concern on the sellers part, if their revenue is below where it was pre-COVID, that they’re going to get out of the business, what they need to get out of the business, should they sell it. And so there may be a little bit of a lull there. But I think as the economy continues to pick up, we’ll probably see, M&A activity pick up. And, if that’s the case, we sure would like to be a player there.

Operator

We will take our next question from Toni Kaplan with Morgan Stanley.

Toni Kaplan — Morgan Stanley — Analyst

Thank you. I was hoping you could provide some clarification on operating assets that were sold during the quarter. Trying to understand what those were and was that a cost saving measure, given the uncertainty? And does this reduce future capacity at all? And just how does it impact the run rate margin structure, if at all? Thanks.

Scott D. Farmer — Chairman and Chief Executive Officer

Yeah. Sure. It was really just a couple of key focuses, we had some operations in some pretty remote geographies that those particular geographies didn’t lend themselves to have an opportunity for a lot of growth. And so we had a lot of resources dedicated to running those operations. And they just weren’t important geographies for us. We also had some services that we had been experimenting with, if you will, that we came to the conclusion that we had better opportunities to grow other segments of the business. So these are the areas that we sold. It wasn’t really material. Total revenue run rate was about $50 million, annually. So I don’t think that it’s going to have a — any short-term, mid-term, long-term impact on our run rate.

Toni Kaplan — Morgan Stanley — Analyst

That’s helpful. And this was asked in a different way already, but just want to make sure I understand, the comments that you’ve made today sound like things are doing fine, improving in many cases, but there have been some new lockdowns and potential for more. So that’s your reservation for not providing the 3Q guidance. Just — is that fair and what do you see directionally, I guess, as the range of revenue growth scenarios, is it better than 4Q on the downside, but better than this quarter on the upside, like just trying to understand how you’re viewing the range and obviously, there’s a lot of uncertainty. So not trying to nail you down on it, just what’s the upside and downside? Thanks.

Scott D. Farmer — Chairman and Chief Executive Officer

Yeah. Let me try to explain it this way. We’re in a — I think that it’s the timing of our quarter, and therefore this call that are causing part of the problem. There’s so much uncertainty right now, as we look out over the next several weeks, a couple of months, few months, maybe. And it’s everything from the rising counts of the virus, we have government’s putting more restrictions in place. And as of today, I don’t know whether more government — governors and mayors are going to do that, whether they’re not going to do that, how long those restrictions are going to stay in place based on the ones that have put these things in place so far.

We have a typical period between Christmas and New Year’s where traditionally we have a group of customers close down their facilities for the holidays anyway. We don’t know this year, whether that means they’re going to extend that or not. And so that causes a little bit of cloudiness. We’ve got an election in Georgia coming up in a few weeks, that will determine what happens in the Senate. And so there’s a lot of uncertainty. When we sat down and talked about it, we said, well, let’s put a range together. But when we started to put a range together, we started saying, what if this happens and what if that happens? And those would be things like, what if? What if a governor or a group of governors decided?

Well, the vaccine is three months away, let’s leave these restrictions in place for the next three months. What does that do to our ability to predict what our low end of the range might be? What if that doesn’t happen? What if Governor Newsom actually does open California’s economy backup January 4. So it became such a wide range that we decided it didn’t make sense for you. Our impression of — and I don’t want to, I hope you take this the right way. But our impression is that what one of the things that you like about our company is that we’re pretty predictable.

And when we give guidance, you can pretty much determine, in your models, what that means relative to what you think is going to happen. In this particular case, we don’t think that what we would provide for you would allow you to do that, that you might wind up with some big swings with depending on your positive or negative approach, depending on what you think is going to happen in the economy. And therefore, we decided it didn’t make sense for us in this period of time to do that. I do not believe this is my personal opinion, that it will be anything near like what happened in the fourth quarter for us, that was brand new.

And I think there were 38 states that put shelter-in-place, orders in place in a short period of time. We haven’t seen that. I don’t think, I don’t expect that that’s going to happen at this point. It moving forward, might it maybe my personal opinion is that won’t happen. Therefore, I don’t see that as the eventual downside of what’s going to happen. The upside could be that the number of cases begin to subside, that the mayors and governors begin to open. Their economies back up in anticipation of vaccinated progress, and so forth. But I do know this, with the vaccines rolling out that I can’t predict the rate yet, I need a better understanding of what that is going to be.

But with those vaccines rolling out, fewer and fewer governments are going to put restrictive orders in place. And eventually those economies and those states and municipalities are going to begin to recover at a pretty good rate. Is that in our fourth quarter? I’d love to see that. Is it next summer, highly likely that by next summer, some point next summer, we’re going to be at that position. But that that’s my — that’s my view of it, and so I’ll end with that.

Operator

We will take our next question from Shlomo Rosenbaum with Stifel.

Scott D. Farmer — Chairman and Chief Executive Officer

Shlomo, you may be on mute.

Shlomo Rosenbaum — Stifel — Analyst

Sorry, I’m on mute. Thank you. Thank you for calling that out. I just have a few. It’s been great, yes, great color over here. Thank you. And I had a few housekeeping items that I thought we could just kind of run through maybe will be helpful. Just on some of the — can you give more detail on kind of the one-time sales moving to subscription sales, or is there some way you can just get into a little bit more about how that impact might have happened in the quarter? And kind of the success that you’re having over there? Is this something that, it’s kind of a little bit more of a permanent lift that’s over there. And then a couple more after that.

Todd Schneider — Executive Vice President and Chief Operating Officer

Shlomo, this is Todd. We mentioned in our most recent quarterly release that, customers when they buy large orders of PPE, whether it’s a government school system, could be health care could be — up and down the street business, but they tend to make a large pie. And then they go into maintenance mode from there. And some of these large fines were in our Q1. There were some in Q2, some or some of those that bought in Q1 are now in maintenance mode and weren’t Q2. So it’s a real mix and trying to predict for those folks, how long they’re going to need those products and services, the access to them is it’s a dynamic marketplace. So, again, that’s why we’re very good, why we, we’ve invested for our customers in these inventory levels to help them with that. So hopefully that gives you a little bit more color.

Shlomo Rosenbaum — Stifel — Analyst

Okay. And then, Hey, Mike, this is for you, I knew you were really good with numbers, but I’m still trying to figure out how you got an $18 million get gain pre-tax on 108 million shares to be $0.025 of VPS that trigger some other kind of, tax benefit or something with that gain of sale.

Todd Schneider — Executive Vice President and Chief Operating Officer

It’s a great question, Shlomo. It did, yes, the assets had a high tax basis and created while a book gain, a tax loss and so you can kind of think of it as the $18 million pre-tax gain was about a $0.12 benefit. And the tax benefit was about a $0.013 benefit. And maybe said a little bit differently, the 13.3% tax rate was benefited by about 270 basis points. I’m sorry — 370 basis points from these transactions. And the remainder of that tax rate, call it 17%. Without that benefit, did have some benefit from equity compensation, as we’ve talked about in the past. As you think about that tax rate moving forward, I would suggest in the third quarter, you think about a range of 20% to 21%.

Operator

Thank you. That concludes today’s question-and-answer session. Mr. Adler, at this time, I will turn the conference back to you for any additional or closing remarks.

Paul F. Adler — Vice President, Treasurer and Investor Relations

Well, thank you, everyone for joining us. We will issue our third quarter of fiscal ’21 financial results in late March. We look forward to speaking with you again at that time. Good day.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

United Parcel Service (UPS) seems on track to regain lost strength

Cargo giant United Parcel Service, Inc. (NYSE: UPS) ended fiscal 2023 on a weak note, reporting lower revenues and profit for the fourth quarter. The company experienced a slowdown post-pandemic

IPO Alert: What to look for when Boundless Bio goes public

Boundless Bio is preparing to debut on the Nasdaq stock market this week, and become the latest addition to the list of biotech firms that have launched IPOs this year.

Nike (NKE) bets on innovation and partnerships to return to high growth

Sneaker giant Nike, Inc. (NYSE: NKE) has been going through a rough patch for some time, with sales coming under pressure from weak demand and rising competition. Post-pandemic, the company

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top