信達思 (CTAS) 2021 Q2 法說會逐字稿

Good day, everyone, and welcome to the Cintas' Quarterly Earnings Results 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.

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.

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 health care 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 the U.S. 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're 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.

We'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 has 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'll turn it over to Mike for commentary on the financial results of the quarter.

Mike?

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 pretax gain on sale of $18 million was recorded in 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 1.6x debt to EBITDA.

We have an untapped credit facility of $1 billion.

For financial modeling purposes, please note that there is 1 more workday in our fiscal '21 than in our fiscal '20.

1 more day will benefit fiscal '21 total revenue growth by 40 basis points.

1 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 1 more day of revenue.

In fiscal '20, each quarter contained 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.

Thank you, Mike.

As Scott stated, COVID-19 remains a significant disruption to the economy.

Every business in U.S. 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' 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 to give a better understanding.

Many of those examples highlighted customers in the industries of health care, education and state and local government and products and services, including scrubs, hand sanitizer service and masks.

During the second quarter of the fiscal year, the amount of Uniform Rental and Facility Services new business sold to health care, education and government customers is double the amount in the prior year period.

And the amount of first aid, fire and other new businesses sold to customers in health care, education and government is 6x the amount sold in the same period last year.

And some of this new business is reoccurring and some may not repeat.

Nevertheless, the results are really impressive.

Also, the number of scrub dispensing machines installed in our first 2 quarters doubled last year's number.

And since the virus appeared, our employee partners have 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, health care scrubs, masks and towels in the provision of restroom supplies and other facility products and services.

This 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 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.

Uniform Direct Sales business growth rates are generally low single digits and are subject to volatility, just as when we install a multimillion-dollar account.

Uniform Direct Sales, 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.

Uniform Direct Sales 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're happy to answer your questions.

(Operator Instructions) We'll take our first question from Andrew Steinerman with JPMorgan.

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.

Andrew, this is Scott.

Yes, we can give you a little bit more color on that.

Through the quarter, we continued to see an improving revenue trend for the month of November.

In the Uniform Rental and Facility Services segment, rental organic growth was minus 1%.

First Aid and Safety for the month of November, organic growth was 14%.

And fire continued to improve through the quarter, and it ended November -- with the month of November down 1%.

And it's 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 the first quarter.

And could you make a comment about December?

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

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

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 was about 100 bps, 100 basis points of lower discretionary.

Has any -- 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?

Yes.

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 called out as 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 case -- COVID cases and the environment, we're going to remain pretty tight on those.

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 -- whether supply has gotten a little looser or just easier to get?

Just any comments on the First Aid and Safety expense -- cost side.

Seth, this is Todd.

Regarding the First Aid business, certainly, there are some PPE-type items that are still very challenging to get.

We are -- 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.

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% 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's nothing structural or no change in the business that would lead us to believe otherwise.

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

You mentioned that through 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?

Yes.

Our new business numbers continue to perform very well.

They -- 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 at 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.

Got it.

That's helpful.

And then could you talk a little bit about how much growth you're seeing from the nonprogrammer market versus your existing customers?

And how much health care as a vertical is contributing to growth currently?

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 health care 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 health care 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 health care 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 health care 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 health care.

George, this is 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, the folks, customers and 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 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 in the medical area have been very successful, the isolation gowns, hands sanitizer, sanitizer wipes, disinfectant wipes, scrubs, are all -- are seeing 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.

It's a green service, right?

We're not just throwing it in the trash, we're using it.

It saves them significant money.

The availability of them instead of folks struggling to get isolation gowns and being panicked over 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 that we can meet the specifications that are detailed out for such a product.

So that's been a big win.

And a lot of health care 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, in many cases, wearing those home, washing those at home and whom they come in contact with on the way to home makes people a little uncomfortable.

So all that has been quite good demand.

In those cases, we consider there's no programmers.

We might be doing some business with those health care organizations, but we're expanding that relationship dramatically.

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

This is Mario Cortellacci filling in for Hamzah.

Just touching on the slowing 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 markets.

I'd imagine it's probably similar to what we saw earlier in the year with the high-risk industries being hit a little harder.

But I mean, 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?

Yes.

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 theaters, that type of thing are being hit the hardest because of these restrictions and people's I think, natural fear to go in a congregation, place like a movie theater.

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 lull.

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, had 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 8 or 9 months' worth of experience in dealing with it and the fact that we have vaccines beginning to roll out right now, there's 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 questions.

No, that was helpful.

And then going back to health care for a second.

Just, I guess, could you give us a sense of what the competitive landscape looks like there?

So I think recently, one of your competitors came out with a new scrub line.

You had mentioned the isolation gowns as 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 systems to your advantage?

Yes.

Todd, do you want to take this one, and I'll chime in.

Sure.

Okay.

Great.

Yes, Mario, I would say, in the health care market, depends upon what area within the health care area, acute, nonacute; even, frankly, into what department you're speaking of.

But generally speaking, iso gowns, scrubs, et cetera, those are direct purchase market.

In the case of iso gown disposable, the most common way people procure those products, linen companies certainly are in that space, those who provide services to those types of customers.

But if I -- generally I'd describe it to be it's a direct purchase or disposable market with any reusables would be traditionally with a linen type companies would be the most 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 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 folks struggle to get an 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, and they're 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 there.

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 better technology around the fabrics, et cetera.

And it makes it completely accessible, meaning there's a 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 health care 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 great momentum, and we're very encouraged.

Todd, I -- let me add just -- this is Scott.

Let me add one thing relative to competition.

And Todd mentioned that it is traditionally a direct sale item, 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 an 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 health care market.

And we think we have a multiyear 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 health care as well.

We'll take our next question from Manav Patnaik with Barclays.

Scott, if I could just ask you, just again, from a competitive standpoint, just on broader commentary, I guess, outside of health care, like have you seen any changing dynamics if people are getting quite aggressive?

Or there's some more consolidation going on?

Just curious, any color there?

Yes.

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 lowball prices and competition trying to take big 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.

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 increased trying to get those products, we have 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.

But we haven't increased our prices to our customers in about 1.5 years, 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.

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-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 up long term in how customers look at us.

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 times where there's kind of heightened demand.

Have you seen maybe some of your smaller competitors just be financially constrained?

And does that present even more opportunities now?

Well, yes, we -- 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 to those customers.

From time to time, we do see an issue with a competitor, and we'll react accordingly in -- 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 acquisitions.

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.

We'll take our next question from Andrew Wittmann with Baird.

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 managed through this and seeing your margin percentage go up despite the revenues declining.

And so Mike, I guess the question as we look ahead from really just high levels I'm looking for here, as we're almost about to annualize the COVID comps, if you will, how should we be thinking about the margins?

I mean you guys have articulated the [driving home] discretionary, 100 basis points last quarter, 40 this quarter of benefit.

But are there other buckets out there that could [the] margin headwinds as you hit the year and annualize the COVID things?

I don't know, things like incentive compensation, I don't know, 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 in as we hit the year mark on COVID?

Yes.

It's been a challenging year.

And the -- 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, we -- 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, we're -- 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's managed 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.

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

Just one for 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?

Tim, this is Todd.

Thanks for the question.

Employee, what we call partner, retention is never easy.

But I would say that our performance since the start of the pandemic has been impressive.

The 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're doing on a daily basis to help businesses function in this environment and function successfully.

So there's a an esprit de corps 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 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.

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

First of all, I just wanted to clarify one thing.

Todd, you said health care education, government customers, I believe you said new business has doubled year-over-year, but then you said something else is up 6x.

What were those 2 numbers?

I want to make sure I got that right.

Gary, happy to clarify.

So both -- I was speaking of both -- excuse me, 2 different sectors.

One for rental, our rental and facility services business, those sectors, the health care, education and government, new business is up double in that area.

And in the case of First Aid, fire and other, our new business, again, for health care, education and government is up 6x.

Now as I mentioned in the opening remarks, not all of that will be repeating, some will not.

But nevertheless, we're really, really encouraged by how well we're doing in those areas of our business.

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?

Yes.

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 for 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 more normalized type of economy.

Okay.

And then just if I could, one financial question on cash flow.

It's obviously been quite strong.

How do you think about 2 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 whatnot.

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?

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 a little more cautious and that's 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, 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 into 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.

We'll take our next question from Kevin McVeigh with Crédit Suisse.

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 customer is 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.

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 could 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.

Good.

Okay.

And then just in the kind of post-COVID world, as 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, health care is going to be a more significant contributor to the business.

But just any incremental step-up and how much of that is kind of structural versus maybe starts to kind of normalize?

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 are 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; in the fire business, insurance company requirements and so forth.

So we're excited about the position that we that we're in right now.

And as I look to the future, I'm really excited about where all this can go.

Kevin, this is Todd.

As an example of that, we mentioned that -- in a previous call that there's a large national bank chain that we were doing zero business with, and now we're providing hand sanitizer to every single branch that they have.

And we're -- in addition to that, we're talking to them about other facilities products that they are in need of.

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 they'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.

And Scott mentioned, it really positions us well because there's people in the past who really didn't -- wouldn't take our calls.

And now they will because of our inventory position and our infrastructure, and that helps position us for the long term in a really healthy manner.

It 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.

We'll take our next question from Scott Schneeberger with Oppenheimer.

On -- in the Other segment, I'm just curious, how is your visibility there?

You're obviously experiencing some new wins and seeing some struggles.

But if you could break it down between fire and Direct Sales, give us a sense of the visibility you have.

And this is -- the essence of the question is, you've done a nice job managing margin there.

Is the -- how does the visibility correspond with your ability to manage your OpEx?

Well, the fire service business is recovering similar to the Rental and Facility Services segment.

Their -- 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 and 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, to feel safe when they get on an airplane and that sort of thing.

And there's a point at which when the vaccines have been rolled out to perhaps reach herd immunity.

You can see airlines throw in some special rates at travelers to welcome them back, hotels and resorts doing the same kind of thing.

I think you can see 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 the 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 theaters 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're in a temporary lull 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, maybe on an improving quarter-by-quarter basis as those vaccines roll out.

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 as you're clearly in a position of power as you've kind of discussed over the course of the call.

And then maybe two cents on the move to the quarterly dividend and just thoughts on the whole return of capital and strategy of this thing?

Yes.

So relative to the dividend, that -- we were sort of the last person standing relative to giving out annual dividends.

We thought and have 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 was 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?

M&A, Scott.

M&A, M&A.

Okay.

Thank you, Mike.

I'm sorry, you'd probably dropped off.

But M&A, yes, we're 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'd 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 is an element of concern on the seller's 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.

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

I was hoping you could provide some clarification on the 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 that impact the run rate margin structure, if at all?

Yes.

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 $15 million annually.

So I don't think that it's going to have any short-term, mid-term, long-term impact on our run rate.

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?

Yes.

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 that there is so much uncertainty right now as we look out over the next several weeks, couple of months, few months, maybe.

And it's everything from the rising counts of the virus, we have governments putting more restrictions in place.

And as of today, I don't know whether more 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, well, what if this happens and what if that happens?

And those would be things like what if a governor or a group of governors decided, well, the vaccine is 3 months away, let's leave these restrictions in place for the next 3 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 up California's economy back up January the 4th?

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 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 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 -- 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 in 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 in that position.

But that's my view of it.

And so I'll end with that.

We'll take our next question from Shlomo Rosenbaum with Stifel.

I just have a few.

It's been great color over here.

And I had a few housekeeping items that I thought we could just kind of run through, maybe it would be helpful.

Just on some of the -- can you give more detail on kind of the onetime sales moving to subscription sales?

Are you -- 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 is kind of a little bit more of a permanent lift that's over there?

And then I have a couple more after that.

Yes, 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, a school system, it could be health care, it could be up and down the street business, they tend to make a large buy and then they go into maintenance mode from there.

And some of those large buys were in our Q1.

There were some in Q2.

Some of those that bought in Q1 are now in maintenance mode, and we're in 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've invested for our customers and these inventory levels to help them with that.

So hopefully, that gives you a little bit more color.

Okay.

And then, Mike, this is for you.

I know you're really good with numbers, but I'm still trying to figure out how you got an $18 million gain pretax on 108 million shares to be $0.25 of EPS.

Did that trigger some other kind of tax benefit or something with that gain of sale?

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 pretax gain was about a $0.12 benefit and the tax benefit was about a $0.13 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%.

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.

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.

This concludes today's call.

Thank you for your participation.

You may now disconnect.