CTAS - NASDAQ

Good day, everyone, and welcome to the Cintas Second Quarter Fiscal Year 2023 Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Adler, Vice President, Treasurer and Investor Relations. Please go ahead, sir.

Thanks, Russ, and thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer; and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2023 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 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.

Thank you, Paul. Second quarter total revenue grew 13.1% to $2.17 billion. Each of our businesses increased revenue at a double-digit rate. The benefits of our strong revenue growth flowed through to our bottom line. Operating income margin increased 70 basis points to 20.5% and diluted EPS grew 13% to $3.12. I thank our employees whom we call partners for their continued focus on our customers, our shareholders and each other. Uniform Rental and Facility Services operating segment revenue for the second quarter of fiscal '23 was $1.71 billion compared to $1.54 billion last year. The organic revenue growth rate was 11.3%. Revenue growth was driven mostly from increased volume. Our sales force continues to add new customers and penetrate and cross-sell our existing customer base. Businesses prioritize all we provide including image, safety, cleanliness and compliance. Challenge with labor scarcity and rising costs, businesses continue to turn to Cintas to help them get ready for the workday. Additionally, price increases contributed at a higher level than historically. We believe such a mix of revenue drivers, volume and price is healthy and supportive of continued long-term growth. Our First Aid and Safety Services operating segment revenue for the second quarter was $236.0 million compared to $202.2 million last year. The organic revenue growth rate was 15.1%. This rate reflects the continued momentum of our First Aid cabinet business, which continues to grow more than 20%. Whether it is COVID-19 or influenza, the health and safety of employees remains top-of-mind. We provide businesses with access to quick and effective products and services that promote health and well-being in workplace. Personal Protective Equipment or PPE, while still elevated compared to pre-COVID levels, declined slightly on a sequential basis. The revenue mix-shift benefits our financial results because the cabinet service is a more consistent revenue stream and has higher profit margins than PPE. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was $228.9 million compared to $184.9 million last year. The Fire business organic revenue growth rate was 18.0% and the Uniform Direct Sale business organic growth rate was 33.9%. Before turning the call over to Mike to provide details of our second quarter results, I'll provide our updated financial expectations for fiscal year. We are increasing our financial guidance. We are raising our annual revenue expectations from a range of $8.58 billion to $8.67 billion to a range of $8.67 billion to $8.75 billion, a total growth rate of 10.4% to 11.4%. Also, we are raising our annual diluted EPS expectations from a range of $12.30 to $12.65 to a range of $12.50 to $12.80, a growth rate of 10.8% to 13.5%. Mike?

Thanks, Todd, and good morning. Our fiscal 2023 second quarter revenue was $2.17 billion compared to $1.92 billion last year. The organic revenue growth rate adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations was 12.8%. Gross margin for the second quarter of fiscal '23 was $1 billion compared to $885.1 million last year, an increase of 15.5%. Gross margin as a percent of revenue was 47% for the second quarter of fiscal '23 compared to 46% last year. Energy expenses comprised of gasoline, natural gas and electricity were a headwind, increasing 10 basis points from last year. Strong volume growth from new customers and the penetration of existing customers with more products and services helped generate great operating leverage. Gross margin percentage by business was 47% for Uniform Rental and Facility Services. 50.5% for First Aid and Safety Services. 47.4% for Fire Protection Services, and 37.2% for Uniform Direct Sale. Operating income of $444.9 million compared to $381.2 million last year. Fiscal '23 second quarter operating income increased 16.7% and operating income margin increased 70 basis points to 20.5% from 19.8% last year. Our effective tax rate for the second quarter was 22.1% compared to 18% last year. The tax rate can move from period-to-period based on discrete events, including the amount of stock compensation expense. Net income for the second quarter was $324.3 million compared to $294.7 million last year, an increase of 10.1%. This year's diluted EPS of $3.12 compared to $2.76 last year, an increase of 13%. We had to overcome higher inflation, interest expense and tax rate, therefore we are especially pleased with these financial results. Cash flow remains strong on September 15th, 2022. We declared dividends and pay them on December 15th, 2022 in the amount of $117.4 million in quarterly dividends. To provide our annual -- Todd provided our annual financial guidance related to the guidance. Please note the following. Fiscal '22 included a gain on sale of operating assets in the first quarter and a gain on an equity method investment in the third quarter. Excluding these items, fiscal '22 operating income was $1.55 billion, a margin of 19.7% and diluted EPS was $11.28. Please see the table in our earnings press release for more information. Fiscal '23 operating income is expected to be in the range of $1.75 billion to $1.79 billion compared to $1.55 billion in fiscal '22 after excluding the gains. Fiscal '23 interest expense is expected to be $113 million compared to $88.8 million in fiscal '22 due in part to higher interest rates. Our fiscal '23 effective tax rate is expected to be 20.7%. This compares to a rate of 17.9% in fiscal '22 after excluding the gains and their related tax impacts. Please keep the following in mind when modeling third quarter versus fourth quarter financial results. The number of work days in the third and fourth quarter of fiscal '23 are unchanged from fiscal '22. There are 64 days in the third quarter and 66 days in the fourth. Less work days results in less revenue to cover certain fixed and amortizing costs. In last year's third quarter, First Aid and Safety sold about $15 million in COVID test kits. We don't expect that revenue to repeat this year. Uniform Direct Sale organic revenue growth rates have been very strong year-to-date, however we expect these rates to be pressured in the second half of the fiscal year as the business faces increasingly challenging comparisons. Payroll taxes reset in our fiscal third quarter, increasing our SG&A costs on a sequential basis. Our financial guidance does not include the impact of any future share buybacks and we remain in a dynamic environment that can continue to change. Our guidance contemplates a stable economy and excludes pandemic related setbacks or economic downturns. I'll turn it back over to Paul.

That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you.

[Operator Instructions] And our first question comes from Faiza Alwy from Deutsche Bank Securities. Please go ahead, Faiza.

You've had really good results. So congratulations on that. I'm curious how would you characterize your outperformance. Has it been more because of new business? Has pricing come in sort of better than you expected? And maybe as part of that, if you could talk about your SAP program, like how much of a benefit do you think that has had over the during the course of this year?

Good morning, Faiza. Thank you for your question. Yes, we, our beat on the revenue side are driven significantly by new business, it's continues to be a very attractive for us. But we are selling more items into our customer base. So it's pretty broad. I mentioned in the prepared comments that pricing is above what our historical experience has been. As you can imagine, due to the experience with inflation that we're seeing across our organization. But it is -- but the primary drivers volume growth and we're benefiting from that. We're investing for that and things are -- we like the trend there. As far as on the margin side, we are committed that we are not going to be solely focused on growing margins because of pricing. In fact, we are dedicated to finding efficiencies in our business, some of that is through revenue leverage just general revenue leverage that we get, but we are focused on finding efficiencies and you mentioned SAP certainly that technology is helping us significantly. We've had -- we've talked about our -- the digitization. Our digital transformation of our business that has been very, very important to us and we're seeing benefits whether it's in our routing efficiencies, productivity of our sales partners, be getting better reuse of our products, in-service inventory because of SAP. Those are all benefits that we're seeing and the marketplace is noticing it and it's helping us with a competitive advantage in the marketplace.

Great. And then as we look ahead some companies have started talking about, started sounding a little bit more cautious, as you know, a lot of economists are forecasting a potential recession. Talk about how do you, how does, you talked previously about how your business might get impacted, but talk about like what's the sales pitch during a recession. I think that would be helpful for us to hear.

Great. First off, we continue to watch our customer base very closely. We're looking at all of our data to see if there's some trends that we might see if customers are consuming less and what have you. So we're watching that. Now as far as in a recession every recession that I've been -- I've experienced while at Cintas over the last 33 years, we've always sold an attractive amount of new business. And the reason being is, we hope businesses and in an environment, that we help them, position them for success as far as, if they're in the business and they have less people, then somebody still has to take care of certain functions. So we're able to sell value there. If they are in an environment where they're looking to save money, there's in many cases we're able to save them money. It's not that they are. We're always asking for increased spend. It's just redirect the spend to us. And in many cases, we're able to help customers with that instead of spending it with some other vendor or with an outsourced item that they bring it to us. And we can bring efficiencies to them. So we fully expect that we -- our new business will be attractive in any type of economic environment. Certainly, we prefer when the economy is growing robustly, but we'll find ways to be successful in whatever the environment.

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

Hi, this is John, filling in for Ashish. Congratulations on the strong results. Maybe just following-up on Faiza's question, could you talk more about kind of retention, as well as just what the current customer conversations are going like today? Thanks.

Yes, thank you, John. I'll speak to it if, Mike, if you'd like to contribute on this subject. But, first off, our retention levels are quite attractive. We very much like where they are. We're focused on making sure that our customer is - it's why we wake up in the morning, is to take care of them, and that focus that culture is pervasive and we're making sure that our partners are positioned to be able to make sure they can take care of them and exceed their expectations. So all that is attractive for us and keep in mind we have a really broad customer base. So we serve over million customers that we see on a very consistent basis. Some are doing some are challenged in the current economic environment, whether they struggle to find people or they're struggling with the wage inflation or inflation in general and then we have other customers that are thriving in this type of environment and frankly we have everything in between. And but generally speaking, what we see are, it's still -- we still like what we see with our customer base. And I think that broad customer base is a real benefit for us.

That's great color. Thank you. Maybe quickly to follow-up. Could you just talk about capital allocation and if there's any change there, just what you're seeing today in M&A given some of the more challenging headwinds with inflationary pressures?

Sure, John. This is Mike and we haven't changed our philosophy in terms of capital allocation. We want to continue to invest in the business. And certainly, as we've seen the accelerated growth over the last three quarters, we are investing in the business, but we love M&A and we continue to have all of the discussions to try to keep that pipeline active, but it always takes to come to a decision and we are working those conversations hard and our expectation is that we will be able to continue in the M&A path, but that's we certainly love that option. And certainly, we -- I misspoke a minute ago on dividends. We paid a dividend in September - on September 15th, we paid another one on December 15th, and we certainly have increased the dividend every year we've gone public. We like that option as well and then the buyback continues to be an opportunistic alternative for us when we have excess cash, so no philosophy changes. We're still working all of those in the same way that we have.

Our next question comes from George Tong from Goldman Sachs. Please go ahead, George.

You mentioned you're continuing to sell more items to your existing customers. Can you describe how overall customer spending behaviors have evolved with the overall economy and if sales cycles have changed at all?

Thank you, George, for the question, and good morning. Again, we have a very broad customer base. And we have a very broad product offering and we're blessed to have both and as a result we're organized in a manner where we're trying to make sure that our customers know everything that we have to offer, they don't always. We've spoken in the past about how going through the pandemic was really, really challenging. One of the positive outputs of that was the fact that our customer base saw the broadness of our offering and in many cases didn't realize we had products and services that we have. So we're focused on that. We're trying to provide more value. When we do that, it is, it helps us because we're -- when we stop our truck and the invoice is larger that's good leverage for us. So we'll provide more value to the customer and we're getting leverage in that manner. So all that's positive. So as far as the sales process being elongated. We're not saying that at this point. And as I mentioned earlier, we are certainly seeing a mix out there. Some customers are struggling and some are doing quite well and everything in-between. But generally speaking the customer base continues to head in a positive manner.

Got it. That's helpful. The upside in revenue this quarter was driven I think significantly by new business. Approximately how much of the new business growth in the quarter came from the no programmer market or Uniform Rentals?

Yes, good question, George. So no programmers continues to be a really great opportunity for us. The majority of our new accounts that we sell are in the no programmers section. And so we've been focused on that. We train our partners on that. And those that set of prospects sees value in what we provide. And as a result, the TAM is massive and so that's very exciting for us and we see very nice growth opportunities into the future.

And our next question comes from Andy Wittmann from R.W. Baird. Please go ahead, Andy.

I guess I wanted to ask on the First Aid segment, Mike. The margins in particular I think really stood out. You made the comment that you're getting some favorable mix shift as the PPE is rolling out. Last quarter's margins were also very good. I think better than most people expected. So it feels like there's something pretty sustainable in the margin rates. Would you agree with that assessment or is there something in there that we should be aware of as we come to 2Q fiscal '24 as a tough comp or something, maybe just some detail as to what's really driving these margins that are really frankly kind of a step function better than what you put up in the past?

Yes, Andy, you're right, the margins are better than historical. The mix shift has been great. We have a -- there's a number of areas where we're able to gain leverage. Certainly the new business is a very nice lever for us. The change in -- I'll call it society and the focus on health and wellness is a real tailwind for us. And so as a result of that cabinet revenue growth is very attractive for us that affects the mix, but we are also finding, I mentioned we've got -- we're finding efficiencies in throughout our business. And First Aid is included in that. And so whether it's routing technology. We've been on SAP and First Aid for a little bit longer, but we're finding efficiencies and we have a very strong supply chain that is finding opportunities to source better and improve our overall operating margins. And Mike, anything you'd like to contribute there?

The only thing I might add is to specifically, Andy, nothing to call out that there is one-time or short-term in nature. It's just that the business is performing very, very well.

Great. I guess kind of similar question, different segments on the Uniform Rental and Facility Services segment. Obviously, you're getting good gross margin leverage, which says a lot about all the things you've already talked about. You mentioned making investments in the business. It appears that the SG&A line and the Uniform Rental segment in particular has been seeing investments there. And I was just wondering maybe you could provide some detail as to what kinds of investments you're making or if it's maybe just still kind of return from COVID and getting some travel and T&E back in there. Maybe just a little detail about SG&A in the rental segment.

Yes, Andy, good question. We're excited about the gross margin improvement that we're seeing in that business. Despite a 20 basis points headline that we're that we're up against in energy still. So, you're right, the SG&A is up. It's there is we're making investments in the business and appropriately so. Also some G&A medical costs, workers' comp and what have you are higher this quarter and there's always some puts and takes as it relates to that, but we are guiding towards for the whole year in that business, incrementals in the 20% to 30% range and we are, as I mentioned, that margin expansion is going to come in a number of ways, but revenue growth leverage, productivity, which is a broad word, right. There are so many areas where we get productivity improvements and pricing. But, yes, so we're focused on improving the margins there and we'll manage through the G&A investment, the SG&A investment as we move forward.

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

Two questions. One on labor. We've heard from others -- other industries and companies that labor availability today still remains somewhat a governor growth. I mean has that been the case for you guys? Are you holding back in certain markets due to constraints around qualified labor and just generally how would you characterize the labor availability situation today versus say last quarter?

Thanks for the question, Tim, good morning. As far as labor is concerned, the -- I'll call the labor market in totality, easier, but not easy. It is still certainly challenging there. We care passionately about how that looks for our customers and how it impacts our customers. I mentioned some are struggling to staff still and as a result, that affects their business, which impacts us. So but from his standpoint of Cintas and how we're staffed that is not affecting our growth rate, it would be more about how our customers are impacted. I can tell you it wouldn't go well here. If someone said I can't grow as fast as you think I should because I can't staff. We figure that out and we think the environment that we provide for our partners where they have great opportunities and a great wage and benefits and great security and great development is a real advantage for us in the marketplace. So as far as Cintas staffing that is not slowing us up. Certainly, our customers could be impacted by that to some degree.

That's good. That's good color, Todd. I mean, it's good to know, I mean there are some companies we've talked to that are literally dialing back on sales and marketing costs just because they can't find a labor to support the growth. So that's good to know you guys aren't in a situation. One more from me on wage rate inflation. I'm curious what that's running at approximately right now for your folks actually out on the routes and how does that compare to your historical averages? Thank you.

Yes. Wage rates. I don't have an exact number to give you, but we start with the answer and work backwards. And the answer is, we've got to have great people, we've got to have really well-trained and prepared people who can help us be successful and take care of our customers. So is above historical. Yes, it is above historical but nevertheless we're focused on putting the very, very best team out on the field, so that we can take great care of our customers and prepare us for the future of this organization.

And our next question comes from Manav Patnaik from Barclays. Please go ahead, Manav.

Thank you. I guess just to follow-up a little bit. There's a lot of press out there around C-Suite anxiety, right. And I just wanted to know, historically, I guess, how long before that starts flowing all the way down to kind of your direct customers on the street and how quickly can you react because your current guidance obviously is through me. And so things might be fine till then I was just curious if there is a timing element that we should be considering to.

Yes, Manav, thanks for the question. Yes, we always have anxiety, right. It's part of making sure you're sharp and but nevertheless it is, we do worry about do our, as an economy, do we talk ourselves into pulling back and is that happen to our customer base and does that happen as a ripple effect and but we're not seeing it. We're again, our customer base. It's so broad. Some are doing great. Some are not. But in general we like the direction of our customer base and we in many ways we hope they don't read the press and they stay focused on taking care of their business and investing for the future. And but we'll see what that holds and how the Fed handles things and how that might impact the general economy.

Manav, I might add, you go back 2.5 years to the pandemic to the beginning of the pandemic. I think we show that we can be pretty nimble when it comes to our cost structure and adapting to changes in the environment.

Yes, that's fair. And Mike maybe if I could just ask a follow-up just on CapEx and free-cash flow expectations for the year. Any changes or help there?

Well, look, we -- what you've seen maybe in the first half of this year is when we grow and we've seen three quarters now straight of double-digit organic growth. So a nice actually four quarters, so a nice acceleration in the performance. And when we grow and the volumes are healthy, we certainly invest in the business and that investment can come through in the way of working capital. And so you see a little bit more working capital usage in our cash flow statement. And that's not necessarily unusual for us when we see an acceleration in the growth rate. But we like our cash flow. It will continue to be strong and this year should not be an exception to that. And that cash flow. I talked a few minutes ago about capital allocation and the cash flow that we've got going on this year will not force us to make choices. We can still do all of the capital allocation that we typically think about. So we like where we are.

Our next question comes from Andrew Steinerman from JPMorgan Securities. Please go ahead, Andrew.

Hi, Todd, Mike and Paul. I wanted to ask a little bit about merchandise amortization, kind of given the strength of Cintas' new business, which usually has uniforms going into service. You know, how did merchandise amortization affect gross margins? I mean rental gross margins in the second quarter? You know, obviously, I know rental gross margins were up despite any effect of merchandise amortization. And do you expect rental gross margins to be up in the second half of the year, year-over-year?

Andrew we -- as it relates to the amortization, certainly you've seen the growth that I've talked about a few times and that translates into more garments and other products being injected into our in-service inventory. And we love that. We love when that happens. And so we're seeing growth in the amortization. But we're able to leverage that pretty nicely so far. And you know our business well. We amortize many of those rental products. And so we have good foresight or visibility into what's coming. And that means we can plan, we can source, we can increase prices when necessary. So the visibility gives us a nice advantage in terms of how we think about other ways of operating the business. And as it relates to the second half of the year, look, we don't typically provide guidance on gross margin specifically. But certainly the guidance that we've provided contemplates improvement in our operating margins in the second half of the year and the growth that we have on the top line and all of the other initiatives and things we've got going on. They are performing well and enabling us to do that, to do that margin improvement even in a difficult period of time.

And our next question comes from Heather Balsky from Bank of America. Please go ahead, Heather.

Hi. Thank you for taking my question. So your guidance for the rest of the year, I guess, for the back half implies growth probably on the sales side and the 8% to 9% range, which is moderating from what you did in the first half. I'm curious if you could just walk us through kind of where you're assuming there might be some deceleration. Is that just as you come off lapping the COVID recovery and maybe where there might be opportunity for upside just based on the strength you've seen year-to-date?

Heather, thanks for the question. Yes, so a slight, but still very attractive growth. We like where that is. We're preparing for that. And but we are certainly up against some tougher comps in the back half, specifically with First Aid and Uniform Direct sale. So we'll be lapping those and but we like the growth levels and we find them quite attractive. And that's what we are preparing for.

Thank you. And do you think, you know, are there areas that you're seeing in your business. You know, you've done well year-to-date. You've raised your guidance sort of I know First Aid and Safety is very strong right now. Other sort of areas in your business, whether it's certain customers like your opportunity in health care or other business lines where you're really seeing outperformance and kind of growth beyond your typical run rate.

Yes, good question. So again, our customer base is very broad, but I'll tell you this that our verticals where we're investing are, you know, health care, hospitality, education, government are performing quite well and they're growing at an accretive rate to our growth. And we think we choose them wisely and invested in them appropriately. And that customer base is doing well. Within that customer base, again, you get a mix, but nevertheless in general we like that area and it's growing very attractively for us.

Our next question comes from Kartik Mehta from Northcoast Research. Please go ahead, Kartik.

Thank you. I mean I know you've talked about the economy a few times. I'm wondering, as you look at some of the benchmarks for your business and maybe your customers businesses. Anything that stands out either that is positive that maybe you were anticipating would decline or anything that's negative that you are anticipating would be the other way.

Kartik, it's a good question. I continue to talk about how broad our customer base is. So you name it, we see it. But the scarcity of employee -- of workers is an issue. Unemployment is still at a very, very low level. There's still, I think, 10 million job openings in the U.S. economy. So as a result of that, you know, people are, I think, careful about how they're handling their employees and being judicious about that.

And then just last question. Just from an energy standpoint, obviously fuel prices are coming down. It seems as natural gas prices are coming down as well. Is the headwind you're anticipating from energy prices maybe what you anticipated at the beginning of the year when you gave guidance to now? Has that changed at all?

Yes. So we still see energy as a headwind. And when you go to the pump right now, it is certainly a little bit lower than it was a quarter ago. But about 40% of our spend on energy is in natural gas for our production facilities and electric. And that is not heading in the right direction. Natural gas prices are up and electric prices are up. And so but certainly the attention more gets to everybody fills up at the pump for the most part, but not as much focus on natural gas or electric. But we're seeing it and it's I'm sure it's affecting households as well.

And our next question comes from Seth Weber from Wells Fargo Securities. Please go ahead, Seth.

Hi, guys, good morning and happy holidays. I wanted to ask another margin question. Mike or Todd, I mean, the guidance for this year, the back half, it seems like you're the guidance kind of implies a higher than normal incremental margin. And I think, Todd, you mentioned the Uniform business could be 20% to 30% incrementals this year. Is this -- are we moving into a scenario where incrementals could be higher than your normal call it 20% to 25% range and maybe are you more comfortable talking in like a 25% to 30% range for the business going forward. Thanks.

Well, we haven't, Seth, we haven't really changed the narrative on that in terms of the 20% to 30%. But you know as -- there are different ebbs and flows within the business. And sometimes there are periods where we are investing maybe a little bit more than in other quarters et cetera. And, you know, Todd's focused on the full year results and the longer term results. And so there can be ups and downs, certainly, based on our guidance, we are contemplating margin improvement in the back half of the year. And I don't know that it's anything that we're ready to say is a new norm. It's just simply we look at the year and say we've got some really good incremental margins in that 20% to 30% range that will cause the full year margins to go up. But I wouldn't look at it as a new normal type of a thing. It's just simply there are ebbs and flows within the business and timing of investments, et cetera.

Okay. That's helpful. Thanks. And then just on the Fire business, the organic growth in the Fire business continues to be in this sort of mid to high teens range. Is that a sustainable number or do you feel like for Fire and just sort of maybe any color on really what's driving that unusually strong organic growth. Thanks.

Yes, Seth, I'll take that one. We love the Fire business. It's a very attractive business for us, it's the only business we're in where every business legally has to comply with the local laws around it. So the TAM is absolutely massive. And our sales team is doing really well and we're selling into additional customers. We're selling more into our existing customers. We've got a great offering. We really like our position in the marketplace. And the team is doing a heck of a job. So, yes, we would like to continue to grow that business at double-digit rates. Can it achieve the levels that where we are today, that would be outstanding. But certainly double-digits is our focus for that business.

Our next question comes from Shlomo Rosenbaum from Stifel Nicolaus. Please go ahead, Shlomo.

Thank you very much. I want to get a little follow-up on some of the questions on client hiring, which obviously could impact Cintas volumes. Do you feel like you really sell at a level in the organization that you get kind of an advance look at the hiring plans? Or is it really kind of you monitor it as it happens? So like in current you need to react because clients will just kind of add or subtract people kind of in the moment, but you don't -- it's not that you're getting a heads up on that. I'm just trying to understand like your view. Obviously, it's a very broad client base, but just in more generalities. And then there have been any changes, you used to talk about kind of an add stops metric. And I'm wondering if there's anything materially different in what that would look like now.

Shlomo, great question. It really depends upon -- our view of the what the staffing levels of our customers will be. It really depends upon where our relationship is some they'll share with us. Hey, calendar '23, here's what we're thinking. Others, they don't depending upon our relationship levels or their planning level. And so in that case, it's a little bit more reactive. So, you name it, we have that type of experience where it's very transparent and we have a good. We can see around the corner with our expectations there. And then some are just very reactive and we have to see what's going on with their customers. So but generally speaking with add stops, I would say, we see our experiences continues and the patterns that we have in the past. And I mentioned earlier that, I don't know, certainly Q1 speaking of the economy Q1, Q2 was GDP shrunk. Q3 was slightly positive. We'll see what Q4. holds in store for GDP. It's tough to tell, if we're in a technical recession or if we're not and what calendar '23 holds in store for us. But the employment situation in the U.S. is still tough to get people and as I mentioned there's 10 million job openings. We'll see if that continues to decline. But we're trying to make sure that we're positioned to grow and but as Mike mentioned, if the economy affects our customer base in a very negative manner, we'll be prepared to pivot and manage our cost structure appropriately and we're planning on being successful in whatever the economic environment brings to us.

Thank you. Just one follow-up on just on the pricing. Is it kind of normal now for the clients to expect these pricing increases or is it are you getting any material push-back on them as this time is going on?

Shlomo, as I mentioned, in our prepared remarks, pricing is -- has always been a component of our growth. Same is the - what we went through with some serious economic turbulence with COVID-19 and what have you. So that being said, we're planning on growing our business most attractively through volume growth and getting leverage there and planning on growing margins via leverage on that revenue growth and finding efficiencies in our business. That being said, it's a very competitive environment. And as we talk to our customers, they certainly challenge us. And they want us to find efficiencies in our business and not just pass along cost to them and that's what we're focused on.

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

Thanks very much. Good morning. Happy Holidays, everyone. First question in Uniform Rental. I'm just curious about the winning business you guys have obviously highlighted penetration of existing customers, strong volume growth, new customers. Could you speak to what is no programmer versus what is competitively won? Is there a lot of that activity right now of competitively won? And then if you could just kind of differentiate what you're seeing with large customers versus may be small and midsize in the context of that question. Thanks.

Yes, Scott. I'll start, Mike, if you want to contribute on this subject there. As far as the market, the competitive market. We sell a lot of no programmers. Certainly we do take business from our competitors, but that's, we find that there are so many businesses out there that say, wow, I didn't realize that you would serve a business of my size or I didn't realize you had those types of products and services and they see great value in what we do and so we're very focused on that. As far as the customer base, the larger customers, some of them are struggling, smaller ones are certainly some of them are struggling, but I would say, generally speaking, the smaller ones are probably a little under a little bit more pressure just because it's tough to attract retain staff, pay people and at the levels that you have to be competitive in the marketplace. So that's kind of a generalization that may not be completely fair and I could give you plenty of examples of smaller businesses that are thriving. But that's kind of a generalization I thought I might share with you.

Great. Thanks. And then as a follow-up, specifically, Uniform Direct sales, I think it was about 33%, 34% organic growth in the quarter. Very strong. I heard you mentioned on an earlier question that would be a segment facing some tougher comps in the back half of the fiscal year. If you just speak to kind of what the business activity has been there, what's driving the strong growth right now? What type of customers? Has it been particularly lumpy or is it been just a solid, broad based versus maybe just one or two big customer wins? Just a little bit more elaboration on that business line. Thanks.

Sure. Good question. Very broad based. It's not one customer or a couple customers. It's very broad based. And when you think about that, that area, certainly hospitality is a big component of it, but there's other customers that are national and scope type customers. But hospitality specifically I'll speak to, yes, they're struggling to staff, but there's a lot of demand out there in the hospitality sector. And as a result they need help. And you know and when you think of that, when they're struggling to staff and they have to provide products and services, we've become a very attractive opportunity for them to sole source and to provide products that they can get quickly and that are very attractive and allow them to provide the proper guest experience that they want to provide for their patrons.

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

Thanks very much. I wanted to ask a follow-up on pricing. I know you've been sort of putting through a higher level of price than normal recently, and now it sounds like, you know, obviously you've mentioned a couple of times that volume is going to be a bigger driver to growth. But I guess my question is pricing going to be more of a normal increase versus prior years or, you know, based on, you know, like the challenging macro, although you said you're not seeing it yet, like is it going to be lower than normal or roughly around sort of a normal year for pricing in calendar '23?

Yes, Toni, good question. As we think about pricing in the future, it certainly is above historical today. It's tough to predict what inflation holds in the future. But presuming that comes down, I'd say you'd see us closer to historical from a price adjustments. But it really depends upon what happens with the Fed, what happens with the economy, what happens with wage pressures are so many inputs. And that one's tough to predict. So but we're watching it very closely.

Great. And then when you think about the margin expansion implied and you mentioned sort of higher margin expansion in the back half of the year, is that like I guess how much of it is a result of like energy costs coming down from prior levels or maybe inflation having reached its peak and coming down like I guess how much of it is that versus scale or initiatives, if you could give any sort of breakdown or examples of where the margin expansion will come from? Thanks.

Toni, I would say, it comes from a lot of different places and it's hard to put a number on any particular one of them. But, you know, a couple examples. Energy, we've kind of looked at that, as Todd mentioned earlier, still is a little bit of a headwind going forward. So we're not necessarily expecting we'll get a bunch of energy benefit in the second half of the year, but our revenue growth has been really strong and the performance the momentum has been good and that certainly will continue to help in the second half of the year when we grow at real nice levels like we've guided towards and like we've had in the first half of the year, that always helps our ability to drive better margins. But we've talked over the last year or so about important initiatives that we have. Those remain and continue to do well and those are things like our routing improvements through our smart truck initiative. And we have more of those, whether it is sourcing initiatives that Todd touched on in First Aid or others. But those initiatives become very important to us, too. And then there are just some timing of things, maybe some investment in the first half of the year that was really helping propel our growth and continue our momentum. That may not be at the same type of level in the second half of the year. So it's a lot of those different pieces that kind of fall together. And it's, you know, it's hard to put numbers on every single one of those.

And at this time there are no further questions. I would like to turn the call back to Paul for closing remarks.

All right. Well thank you for joining us this morning. We will issue our third quarter of fiscal '23 financial results in late March and we look forward to speaking with you again at that time. Take care.