信達思 (CTAS) 2022 Q4 法說會逐字稿

Good day, everyone, and welcome to the Cintas Fourth Quarter Full Year 2022 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Paul Adler, Vice President and Treasurer, Investor Relations. Please go ahead, sir.

Thanks, Darren, and thank you, everyone, 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 2022 fourth 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. Our fourth quarter financial results were led by a strong revenue increase of 13.0% to $2.07 billion. Despite strong inflationary headwinds, operating income margin increased 10 basis points to 19.5% and EPS grew 13.8% to $2.81.

Our sales force continues to add new customers and penetrate and cross-sell our existing base. Businesses prioritize all we provide, including image, safety, cleanliness and compliance. Challenged with finding labor to run their business, heightened concerns over sanitization and inflationary labor and purchasing costs, businesses increasingly outsourced to Cintas to help them get Ready for the Workday.

We were able to deliver increased operating margin and EPS despite this period of significant inflation by productively selling new business, penetrating existing customers with more products and services, providing excellent service while driving operational efficiencies and obtaining incremental price increases from our customer base.

Fourth quarter free cash flow increased 15.2% from last year. On June 15, we paid shareholders $98.2 million in quarterly dividends. And during the fourth quarter and through July 13, 2022 we purchased $496.5 million of Cintas' common stock under our buyback program. We continue to allocate capital in many ways to improve shareholder return.

We are pleased with our fourth quarter financial results. They conclude a fiscal year of significant accomplishments, including the following: Fiscal year '22 revenue was a record $7.85 billion, an increase of 10.4%. The organic revenue growth rate was 10.2%. Excluding 2 gains recorded this fiscal year and 1 recorded last fiscal year, operating income margin increased 50 basis points to 19.7%.

We allocated capital to improve shareholder return. Acquisition spend was $164.2 million. In fiscal '22, and up until today, we repurchased 4.3 million shares of Cintas stock for a total of $1.62 billion. Also, we increased the dividend 26.7%. We have increased the dividend every year since going public, which is 38 consecutive years.

We made significant progress on our digital transformation journey. Our customers continue to find added value in managing their program through our online solution. We expect the ease of doing business with us to drive greater customer retention and faster revenue realization.

We are actively using our new rolled out proprietary routing technology, which we call Smart Truck. This technology helps us make smarter routing decisions, enabling us to spend more time with our customers on service and sales. It also allows us to reduce energy usage and expense by driving fewer miles.

We also made great strides in data analytics and enhanced business reporting, helping us target penetration, cross-selling, operational efficiencies and pricing opportunities.

In addition, as part of our steadfast commitment to corporate responsibility, we issued our second Environmental, Social & Governance, or ESG report. It's a more robust report. Cintas was founded on a sustainable business model. Our corporate culture is based on doing what's right and challenging ourselves to improve. With this in mind, we announced our ambition to achieve net zero greenhouse gas emissions by 2050.

And finally, our actions are being recognized. We were again named to the prestigious Fortune 500. It's an honor to be recognized among the most successful and respected companies. We were also recently added to the FTSE4Good Index Series. The index series includes companies demonstrating strong ESG practices. I thank our employees, whom we call partners, for their continued focus on our customers, our shareholders and each other.

Cintas has grown revenue and adjusted EPS in 51 of the past 53 years and our prospects for continued profitable growth are great. They result in part from a strong value proposition and a vast total addressable market. Every business, goods producing or services providing, has a need for image, safety, cleanliness or compliance. Operating a business is increasingly complex. Rather than doing it themselves, business is increasingly outsourced to Cintas. We provide the products and perform the services better, faster and economically frame businesses to concentrate on their core competency.

Since every business has a need for image, safety, cleanliness or compliance, our total addressable market is vast. The prospects for uniform or workwear rental are significant. The unserved workwear rental market is tremendous. Tens of billions of dollars of workwear are sold by retailers each year to workers in every sector of the economy. There are millions of people in health care alone, hospitals, urgent care, doctor's office, dentists' offices and long-term care going to work every day in scrubs purchased from retailers. We focus on targeting these retail customers, converting them to our rental program. The fact that consistently 60% of our new customers are converted from retail to a rental program speaks to the size of the opportunity as well as our continued success.

Plus, we are more than just a uniform rental company. More than half of our revenue is from facility services, including hygiene, floor care items such as dust mats and mops, cleaning tools like microfiber mops and towels, first aid cabinet services and fire protection services, including test and inspection of extinguishers and alarms. Every business that has a door, floor, wall, bathroom and employees is a sales prospect.

Our organic revenue growth rates are indicative of our compelling value proposition and tremendous market [for us]. We grow revenue in multiples of GDP and jobs growth because of ample supply and demand for our products and services.

Our growth in revenue is profitable growth and our operating margins have a long runway for expansion. Growth results in more buying power with our suppliers. It produces operating leverage. Route density increases, reducing energy expenses and providing more time to spend with customers on service and sales.

Growth means more volume in the plants covering fixed cost of building, machinery and equipment. And when we penetrate existing customers with more products and services, the incremental operating margins are even stronger because we realize more revenue per service [stuff]. The future of Cintas remains bright.

I'll now turn the call over to Mike to provide the details of our fourth quarter results and our financial expectations for fiscal '23.

Thanks, Todd, and good morning. Our fiscal 2022 fourth quarter revenue of $2.07 billion compares to $1.84 billion last year. The organic revenue growth rate, adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations was 12.7%.

The Uniform Rental and Facility Services operating segment revenue for the fourth quarter of fiscal '22 was $1.63 billion compared to $1.47 billion last year. Organic revenue growth was 10.5%.

Our First Aid and Safety Services operating segment revenue for the fourth quarter was $218.2 million compared to $186.9 million last year. Organic revenue growth was 15.1%. This strong growth rate reflects the growing momentum of our First Aid Cabinet business, which grew 25% in the fourth quarter. While personal protective equipment remains elevated compared to pre-COVID levels, PPE revenue was about 7% less than the fourth quarter of last year.

Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was $226.2 million compared to $181.9 million last year. The fire business organic growth rate was 18.3%. And the Uniform Direct sales business organic growth rate was 53.5%. Both businesses finished the year strong.

Gross margin for the fourth quarter of fiscal '22 was $946.2 million compared to $859.1 million last year, an increase of 10.1%. Gross margin as a percent of revenue was 45.6% for the fourth quarter of fiscal '22 compared to 46.8% last year. Gross margin percentage by business was 45.7% for the Uniform Rental and Facility Services segment, 46.1% for First Aid and Safety Services, 47.5% for Fire Safety Services and 39.3% for Uniform Direct Sale.

Operating income of $404.4 million compared to $356.4 million last year, an increase of 13.5%. Operating income margin was 19.5% compared to 19.4% reported last year, a 10 basis point increase.

Our effective tax rate for the fourth quarter was 22.8% compared to 19.4% 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 fourth quarter was $294.5 million compared to $267.7 million last year. Diluted EPS was $2.81 compared to $2.47 last year, an increase of 13.8%. Note that the higher effective tax rate in this year's fourth quarter was a 500 basis point headwind to the EPS growth rate and a $0.12 headwind to EPS.

For our fiscal year '23, we expect our revenue to be in the range of $8.47 billion to $8.58 billion, an increase of 7.8% to 9.2% over fiscal '22. We expect diluted EPS to be in the range of $11.90 to $12.30.

Please note the following. Fiscal '22 included a gain on sale of operating assets in the first quarter and a gain on an equity 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 $1.68 billion to $1.73 billion, compared to $1.55 billion in fiscal '22 after excluding the gains.

Fiscal '23 interest expense is expected to be approximately $110 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 approximately 20%. This compares to a rate of 17.9% in fiscal '22 after excluding the gains and their related tax impacts. The expected higher effective tax rate will negatively impact fiscal '23 diluted EPS by approximately $0.32 per share and diluted EPS growth by approximately 290 basis points.

Our financial guidance includes share buybacks through July 13, 2022, but does not include the impact of any future share buybacks. And we remain in a dynamic environment continue -- 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. Darren, I'll turn it over to you.

(Operator Instructions) We will now take our first question from Faiza Alwy from Deutsche Bank.

I guess my first question is just around you mentioned that your guidance contemplates a stable economic environment and does not contemplate any economic downturn. Could you maybe talk to us more about that? I know that historically you've outperformed the economy. But to the extent, as you know, there are a lot of concerns around a potential recession in the United States and globally, could you maybe talk a little bit about how your outlook may change to the extent that we run into an economic downturn?

Certainly, Faiza, thank you for the question. When we think about our guidance for next year, for fiscal '23, we like our momentum. We like where we are through this point in our fiscal year. We like our sales productivity. We like our leverage that we think we're getting. And we are not trying to predict the next recession and certainly not the depth or breadth of that recession.

In many ways, I hope that my customers don't read the newspaper or look at -- or ever listen to the news because, yes, what you hear, there are certainly scattered approaches out there. But what I can tell you is we like what we're seeing in our business. We like the momentum that we're seeing in our business. And if a recession occurs, a downturn occurs, then we will manage it appropriately, which we have always done and will continue to do so. And we're quite confident in our ability to do so and we'll -- we remain poised and we're watching it very closely.

Excellent. Just as a follow-up, could you talk about energy costs. As you know, there's been quite a bit of volatility. As it relates to oil prices, you've historically disclosed sort of how much energy impacted your margins. Maybe could you just talk to us about what the impact was this quarter and what you're anticipating for 2023.

Sure, Faiza. Our fourth quarter energy for the total company was 2.5%, that's up 40 basis points from a year ago. In our rental segment, energy was up 50 basis points, so just a little bit more in that business. Our expectation is on the whole fiscal '23 compared to fiscal '22, we're going to see an increase of, call it, 20 to 30 basis points.

We certainly have seen the energy high in June in the first part of our quarter here. But it's nice to see that the price at the pumps come down just a little bit in the last couple of weeks. And our expectation is that it's not going to stay at this elevated level but certainly higher than our fiscal '22 year.

We will now take our next question from Hamzah Mazari from Jefferies.

My first question is just around labor challenges, labor availability. Could you give us a sense of how much demand could you not meet because labor was an issue? And is that fair? Was there a demand out there that you couldn't meet because of labor challenges? And if so, what would the growth have been if labor wasn't an issue? And do you see labor normalizing at some point? Do you have some visibility into that? Any thoughts there?

Hamzah, it is -- thank you for your question. It is certainly a challenging environment on the labor side. But I'm quite happy where we are staffed and our team has done an incredible job in managing through that process. The demand from our customers, as you can see, is quite robust, and we're meeting that demand. And so it wouldn't be popular here if someone said that, hey, I can't meet the demand so my revenues aren't going to be as good. That's not how we run our business. And we're proud of the fact that we're staffed well. We've got a really great team that is meeting the customers' needs and exceeding them.

And as far as labor in the future, that's a tough one, but you would think that it might be easing a bit, but we're really not seeing it. It's trying to attract and retain and develop really good people is challenging today as I can ever remember in my career. But when things are really hard like that, we think we -- it gives us a chance to shine and I think we're doing just exactly that.

Got it. And just my follow-up question is just around M&A. Clearly, balance sheet is under levered. Clearly, you've bought a lot of stock back and continue to. Are valuations just too high? Or were you looking for a larger deal that sort of didn't pan out? Just sort of any thoughts there. I know one of your competitors is spinning off their business. And I know you don't comment specifically on M&A, but maybe just thoughts on M&A environment, what you're seeing there. Have valuations come in with the market coming in? And with some of the labor challenges, maybe private operators are more in distressed than your business.

Great question. We don't comment specifically on M&A, but what I can tell you is this, that we are actively pursuing deals of all shapes and sizes. And certainly, valuations matter, certainly. But it really takes 2 to dance. And we've got to find -- the right situation has to occur for an owner, an organization or shareholders of an organization to be willing sellers. And that tends to pace it more than anything. As you mentioned correctly, our balance sheet, we love our position and we're ready, willing and able to make deals of all shapes and sizes.

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

Can you provide an update on how customer purchasing behaviors have changed in the current environment? How have [Ad stops] and cross-selling evolved among your customer base?

George, the current customer penetration, the current customer buying patterns have been good. As you can see in our revenue over the course of the year, our revenue has accelerated each quarter, and that's due in part because of really good new business, but our existing customers and the penetration we're seeing at those customers has gone very well. And that certainly has been a part of the contribution of the accelerating growth.

Todd mentioned, we love our momentum as we've -- as you can certainly see through the quarterly growth throughout this year and a pretty good guide. And we just -- we haven't seen a change in their behavior. Our value propositions that Todd talked about in our script and the outsourcing needs and the difficulties that are facing businesses because of the labor challenges that they're facing, it has resonated. Our value has resonated really well with those customers. And so the outsourcing has been good.

So all in all, George, we like the momentum and the performance of those existing customers has been really good.

Very helpful. And then with respect to pricing trends, can you talk a little bit about how that's also changed in the current environment and if your latest pricing increases are fully offsetting input cost inflation or more than offsetting input cost inflation?

George, great question. As I mentioned earlier, it's a very challenging environment. We've said all along that were not immune from inflation. But we really like our plan and our investments. And clearly, pricing is a component of our strategy. It has to be. Input costs are significant because -- specifically labor and material costs. But we think we're doing a great job with that. Our price adjustments are certainly above historical as they need to be to address the costs that are coming through organization. We've done a really nice job of leveraging SG&A to provide us room to invest in other areas where we've had to add people and certainly in labor rates, et cetera. But it's working nicely.

And part of our focus -- a big part of our focus is we are looking at customers from a long-term standpoint and saying, yes, we have to adjust price and it will be above historical. However, we are going to find a way to grow margins and do so in ways other than just pricing. And we're doing that in certainly many key initiatives to help improve and find efficiencies in our business.

So you didn't ask specifically about that, but I think that's what you're getting at. And I'll just provide a little bit more color on that because I think it might be helpful for folks to understand that as we take this long-term approach with customers, we'll adjust price, but we're going to go find efficiencies so that we can still improve our business and improve margins.

I mentioned in our script -- and by the way, most of this of our efficiencies are tied to SAP and our digital transformation. SAP is the backbone of how we run our business and how we find -- how we're able to enjoy the digital transformation that we're experiencing and our customers are experiencing as well. So just bear with me, I'll walk through a few of these for some color.

I mentioned our My Cintas online portal which it provides us really nice leverage. It provides us improved revenue via sales and retention because customers value the ability to manage their program and pay their bills on their time, not just when our office is available. So that's great. But it also provides us some improved productivity because it allows customers to self-serve instead of our partners having to take care of that as well.

I mentioned in the script as well our Smart Truck technology, which is proprietary routing technology. It allows for more efficient routing and tracking of our vehicles. Where does this help us? It helps us and provides us more time that we can spend with customers instead of driving. That's more productivity. It provides real-time tracking to assist what customer needs. It helps us reduce idle times, which is obviously important to us, lower fuel consumption and obviously lower GHG emissions as a result. And in fact, over the last 3 quarters, within our rental division, our distance between customers has reduced 5%, which is just -- it's just finding an efficiency in our business by leveraging technology and because driving as we've always said, when the wheels are moving, we don't generate any revenue, it's when the wheels stop. So that's important to us.

And then we also have something that we've rolled out through our technology transformation or digital transformation, what we call our operational excellence dashboards, which allows for us the ability to evaluate our production facilities, our plants, to see how they're performing without having to be at each plant physically to evaluate performance. So in the past, you had to be at a plant to see how they were performing, were they on time and were the turn times in our wash alleys, we track everything. And now we have technology that allows us to do that. And so it's all driven because of our SAP platform. Many of this, it ends up showing up in faster turnaround of product, better utilization of in-service inventory, which helps offset purchases. It's been significant for us. And I thought I'd just provide a little color because I thought it might help you as you think about pricing and how we're fighting inflation.

We will now take our next question from Ashish Sabadra from RBC.

I just wanted to focus on the health care, government and education vertical, those 3 key verticals that were a key area of focus. How is the progress on that front?

And then maybe a more broader questions around the economic sensitivity of your end market. Just wanted to follow up on the earlier question, like how much of the revenue is really generated from more sensitive end market versus more recession-resilient end markets? Any color on that front will be helpful.

Ashish, thanks for the question. Our verticals are quite robust. We've invested significantly there. And we look at those as businesses, how we operate the products, the services that we're providing, the tools to our partners. And that provides us advantages in the marketplace and helps us -- positions us to provide better services to our customers which is important to us.

And certainly, the education sectors had -- the last 2 years have been a bit bumpy for them. It seems like they're meaning with closures and what have you. That appears to be behind them hopefully.

The government sector has been very consistent for us. Hospitality, as you read, has been quite robust and continue the demand in that -- in the hospitality sector seems to be quite good.

And when we think about our Fortune 1000 and corporate accounts sectors, our customers seem to be doing quite well and trying to see into the future and see what will occur with -- is a recession imminent? Are we in one? Is it going to be next year? Here what I can tell you is our value proposition, what Mike spoke about of -- the items that we provide are important to people, provides compliance and sanitization, image, health, wellness, those things are very important.

And then when you combine that with the fact that it's -- there's still over 11 million job openings in the country. And as a result, it's tough for our customers to hire and train and keep their people. And they're looking to us to outsource items. And we're in a great position to take that on and we're happy to take that on and help them with those functions.

That's very helpful color. And maybe just a quick one on the -- follow-up on the health care. I know the last disclosure was -- it was, I think, almost 7% of the revenue with the opportunity to be 10% of the revenue in the midterm. I was wondering if it's possible to provide any update on that front, particularly on the health care side?

Yes. The health care has been an absolute great vertical for us. It's a very important one. It's our largest vertical as we look at the opportunity still. It's still under 10%. We see an amazing runway there and big items in the future when you think over the coming years because, again, we're organized appropriately to meet the needs of those customers. We know them really well and we listen to what their needs are and we're addressing them and continuing to invest in technology that will help them to be more successful, to help them run a better business, and we're quite bullish on that vertical.

That's great. Congrats on the strong momentum in the business.

We will now take our next question from Andy Wittmann from Baird.

I was just wondering if as you look back at the fact that you grew margins during COVID, so recently, just a couple of years ago, does that limit any flexibility that you have on your margins or on your P&L if we were to head into the next recession?

Andy, thanks for the question. It depends upon the -- when, how long, how deep that recession is and that's for others to try to forecast. But we see -- fortunately, we have plenty of runway on finding efficiencies in our business, whether the -- and when we think about the value that we're providing our customers. When our customers are healthy, our business is that much better. But we will fight through whatever recession comes our way. We've done that. And we've shown the ability to grow sales and profits in I'd say just about every operating environment out there, 51 of the past 53 years, the exception being the '08,'09. I certainly hope that it's not that deep and nastier recession, whatever comes next. But we'll be prepared to manage through that as you've seen us do over the years.

Andy, I might just add, we certainly adjusted at the beginning of the pandemic our cost structure and we're able to pull costs out. But as you can imagine, for the last, I'll call it, 5 quarters, our growth has been -- our revenue growth has been really solid and accelerating. And so along the way, there have been investments that have been necessary and investments that we've wanted to make. And that means we've added growth routes back that we took out in the early days of the pandemic. We've added capacity in our production facilities to handle this great volume growth that we've had. And so we've got this investment going on right now. And as Todd said, look, if the environment changes and we need to pivot, you've seen us pivot pretty effectively certainly in the last few years. And we'll do that again if the economic situation requires us to do so.

That's helpful color. Mike, I just -- I usually ask about the All Other segment, but there was a big number on the direct sale. I think you said plus 53% year-over-year. Obviously, comps were relatively easy. But was that just a program that was contained in the quarter? Or do you -- is there something changed in the outlook that could either flow into 1Q or more sustainably change in how that business is going to market or how customers are reacting?

Great. Thank you, Andy, and the partners in that area. Thank you for asking about it as well. The -- as you know, that can be a little bit more spiky, the direct sale business, but the comps were easier. But nevertheless, we like the momentum we have in that business. We've diversified our customer base. We're selling to a broader area. We've got nice position in that market. And yes, we like where we are.

Now certainly, comps will get tougher next year. So even more so in the back half of the year, not just for that business but all of our businesses. But we really like the momentum and the position in the marketplace in that business.

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

Todd, thank you earlier for all those kind of productive examples you talked about. And despite the high inflation environment, you guys are one of the few companies that are showing margin expansion. And so I was hoping maybe you or Mike could remind us of the big cost buckets and how you are being able to manage through this inflationary environment to show this margin expansion and how perhaps sustainable it could be.

Sure, Manav. Certainly, when you think about the cost structure, and I'll speak mostly to our rental business, certainly, labor is an important bucket for us. And as you've heard Todd explain over the last 4 quarters or so, we've worked really hard over the last several years to improve the -- or increase the rates at higher than, I'll say, historical averages. And that left us not flat-footed in this challenging environment and it's allowed us to continue to raise but not in an alarming rate that maybe some of our other competitors have had to do. And we'll continue to manage that very, very appropriately.

The other bucket that I'll mention is our material cost. Certainly, material cost is a big component. And as you know, we are able to amortize the rental items, so the items that we are reusing in the business in a recurring nature, garments, dust mats, mops, et cetera, shop towels. And so we're able to amortize those. And so we don't get inflation impact immediately. This amortization allows us to understand what's coming and it allows us to anticipate. And that allows our global supply chain to flex when we need to, to change volumes around. And that's very important for us to be able to see ahead.

And the other thing it allows us to do, it allows us to potentially get a couple of price increases in before that, I'll say, higher cost even hits our P&L. So for example, when we have -- if we have cost increases in our materials and we amortize those over 18 months, that's first high -- that first months of higher costs, we have 1/18 of it. The second month, we get 2/18 of it. So we -- it doesn't fully hit our P&L for 18 months. we can adapt, make decisions, including pricing decisions before that fully hits us. So we have this -- we've got this nice, I'll call it, hedge in that part of the cost structure, and that certainly is an important part of our cost structure.

And the other thing I'll say is, certainly, we've got some infrastructure. And we can leverage that infrastructure pretty well with revenue growth like we've got today and the momentum. And so we've been able to manage all of those buckets in different ways, but quite appropriately. And then when you couple all those -- the way we manage those different buckets with the initiatives that Todd spoke of to get efficiencies, labor efficiencies, productivity improvements, technology improvements, those things can really help us as we face inflation.

And as Todd laid out, we've got a pretty good game plan against it. As you've seen, we've -- in this year just ended, in a pretty difficult inflationary environment, we were able to raise our operating margins 50 basis points.

Thank you, Mike. Yes, I think that's very helpful, we get a lot of discussion. Just as a follow-up, the $164 million that you spent on the deals, can you just give us a flavor of kind of where, how many the size of those deals and perhaps what that small tuck-in pipeline looks like?

Sure. We're always working in that pipeline and we've made some very nice deals in our rental segment this year. We also certainly made some very nice deals in our First Aid and Fire businesses as well. And then we had the equity investment that we effectively bought out, and that is more of a global supply chain impacting acquisition. But we like all of them and they have certainly provided some nice synergies in a tuck-in nature for the year. And we'll continue to work on those as we move forward. We think the pipeline is good.

We will now take our next question from Andrew Steinerman from JPMorgan.

I had two questions. The first one is in the '23 revenue guide that you gave percentages in dollars, could you just also give that in terms of the percentages in organic constant currency numbers as well because I assume FX makes a difference in M&A might have some needle moving.

And the second question, I just want to hear more about your First Aid business, like particularly the cabinets business. Like what percentage of first aid is in cabinets now versus pre COVID? How fast is your cabinet business growing? And then you also introduced a new product, COVID testing -- COVID test kits. How is that going?

Sure, Andrew. I'll tackle the first part and turn the first aid question over to Todd. So as it relates to our revenue guidance, 7.8% on the low end, 9.2% on the on the high end. In the fourth quarter, we had 30 basis points of organic benefit and FX impact. I would expect that we'll see that continue for, let's call it, the first half of the year. And depending on then the acquisitions that we make in fiscal '23, we may see that continue. But those -- any future acquisitions are not baked into those numbers.

So call it, the first half of the year, we'll continue with something in the way of 20 to 30 basis points of M&A and FX. And that's probably going to decrease then without any new M&A activity in the back half of the year. Does that answer your question, Andrew?

Yes.

Okay. And then Todd, I'll turn it over to you for the first aid.

Great. Thanks for the question, Andrew. Yes, our -- certainly, as a percent, our first aid cabinets dropped during COVID. But it's coming back and coming back quite nicely. In fact, it grew 25%. Our First Aid cabinet business did in Q4. And that's very, very encouraging. And it's showing up in our margins as well.

So we will continue to be opportunistic and helping customers with the breadth of our offering. I certainly don't know exactly what COVID will bring this fall. But we're focused on growing our First Aid business and helping all of our customers in that area. If that means they need COVID test kits, we'll help them. If they need masks, we'll help them. You name it. But our focus is on trying to make sure that we're growing that profitable, consistent First Aid cabinet business and we're very encouraged by the trends.

We will take our next question from Seth Weber from Wells Fargo.

Maybe for Mike, can you just talk about -- I mean, the free cash flow is really strong here. Can you just talk about how you're thinking about CapEx going forward and just talk, maybe give us a sense for kind of where you're at from a capacity utilization perspective and whether you have enough capacity or CapEx needs to go higher from here?

Sure. Yes, Seth. We're -- our first -- our free cash flow has been good. Our expectation is that, that's not going to change in this upcoming fiscal '23 year. Our CapEx, look, we expect it to be in the 3% to 3.5% of revenue type of a range. If you look over the last 10 years, that's maybe a little bit down from where we've been. But we're going to keep investing in the business.

As it relates to our capacity, we have had some really good growth this year and there are spots where we've had to add capacity. But generally speaking, I don't expect that we'll have significant and, I'll say, lumped together type of capacity investments, they'll happen over time as we continue to grow. So our expectation is our good and healthy free cash flow will continue in fiscal '23.

Seth, as I spoke about earlier, one of the items that we're focused on is making sure that we leverage our infrastructure to its fullest, whether that be our fleet but also our production facilities. And as I mentioned, our operating excellence technology platform is helping us to make sure we're finding all the efficiencies in our business. And in certain cases, that's allowing us to forgo CapEx as a result because we're able to find efficiencies in running our business in our production facilities as well. And we'll continue to do that as the very best we can.

Okay. And then maybe just on the fire business, can you just give us a little bit of color what's driving the strength there? Double-digit revenue stream seems -- it's been double digits for a while now. And is that just you're taking share from smaller operators? Is that where some of the inorganic growth is coming from? Just any color on how that business is being sustained at this kind of double-digit level.

Sure, Seth. The -- we really like the fire business. We -- we have a very good team that's operating and selling into our customer base. The uniqueness about the fire customers is there really is no program market, right? Everybody is served. They're served in some manner. But we've invested in that business to make sure that we are positioned with the best people, the best technology, that we are continuing to invest in there and the best training. And we're going to really -- we like our spot there from the levels of service that we're providing our customers and it's getting noticed. And that's a business that you want to feel good about who's working in your facility and who's taking care of you and we think that we're well positioned. So good momentum in that business and we're focused on continuing that momentum.

We'll take our next question from Heather Balsky from Bank of America.

I wanted to piggyback on some of the questions regarding just business risk in a tougher macro environment if we do see one. Can you just talk at a high level how your business has changed, say, over last decade, since last economic recession or non-COVID in terms of cyclicality? Do you think from an end customer perspective in the verticals you operate or from a product perspective where you think you're better positioned today than you may have been a decade ago?

Sure, Heather. We -- I'll say a couple of things. We've got, first of all, great momentum in the business and we love the value that we're providing our customers and the outsourcing that is needed in this challenging time is really resonating and working well for us. So that's really important for us. In any turn in the economy, we like our momentum, that's important.

I would say if you think about the last 10 years, our growth has been in multiples above GDP. And why is that -- and multiples above employment growth. And why is that? It's because we're able to sell, number one, to many, what we call in the industry, no programmers. So those that don't have a current recurring program. And that's important because in any kind of environment, we go to prospects and existing customers. And when we sell the value, usually, it's for things that they're already spending money on. And so we're not necessarily asking them to spend new money. We're asking them to spend money with us while we take work content away from them.

So for example, we don't want you to do things -- we don't want our customers to do it all themselves, that takes time, capacity, labor, et cetera, we want to help them do it. And so as we take that work content away from them, again, in any type of environment, that's helpful. But certainly in one where businesses are feeling the pressure of an economy, that can really resonate and help.

So we like the way that our value is working. And in the past, we've really been able to grow when there hasn't been much economic growth or employment growth. And our expectation is we'll continue to be able to do that, 60% of our new business that comes from those new programmers.

The other thing is, look, we've got a different kind of sales force today than we did at 10, 12 years ago. And that sales force is really dialed in on finding those new programmers, finding the business and also penetrating more. And our penetration has worked very well. But that sales team is also focused on different verticals that we were walking by in the last recession. And those verticals like health care can be a little bit less impacted by recessions and that's good for us. So we like the diversity in our customer base that we've created over the course of the last 10 years. We think moving forward, that diversity is going to help us as we move forward.

In addition to that, look, we're going to continue to look for M&A opportunities. And we're going to look for -- continue to look for efficiency opportunities and those will help protect us in the next downturn. We can't predict when it may happen. If it's happening, we can't predict how long, how deep, how broad it's going to be, but we like where we are today with momentum and a value proposition that is resonating better than ever. And as you've seen, Heather, over the course of the last few years, if we need to pivot, we've shown that we can pivot and pivot appropriately to match the environment.

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

Mike, sorry if I missed this, but in the fourth quarter, you usually give the mix between rental subsegments, the shop towels, hygiene, et cetera. Can you give us an updated breakdown there?

Toni, it's Paul. I do have that information, and this is just the Uniform Rental and Facility Services segment measured on Q4's activity. Uniform rental, which is the workwear that we rent, Carhartt, the health care scrubs are in there, that was 48% of the mix. Dust, which is the mats, the mops, similar cleaning tools, 18%. Hygiene is 17%. Shop towels, 4. Linens which are typically [aprons] towels, things that don't run through a flat iron machine, that's 9% of the mix. And then catalog revenue was about 4%. And those percentages are very similar to last year which I think speaks to the continued strong demand that we have for all the products and services within that segment.

Terrific. And just sort of on the similar lines, if you think about upselling within uniform rental, what are the real sort of new products that people are demanding? What are -- obviously, in terms of cross-sell, we've seen a lot of success from the sanitizers and the COVID test kits and things like that. But when you look really specifically within rental, what are sort of the new upselling opportunities that you're seeing the most success in?

Toni, within rental, we're seeing quite strong demand for all of our products and services. And we really don't care where it starts as far as what we sell into a customer first because we have such a broad offering that will -- whatever they're interested in, we'll help provide and then we'll continue to provide additional offerings to them.

And -- but when you think about it, right, it's a tough environment to hire and retain people. Providing a benefit of workwear and laundering of workwear, that's a nice benefit for people and helps to attract and retain people. When you think about -- if you're interested in our restroom items, when it's hard to -- when you're busy and you're trying to run a business, trying to deal with those items is something you'd rather -- you'd love to outsource. And as I mentioned earlier, we're able to do it better, faster, cheaper, all that than what they can do for themselves. And in many of those cases, we're not even asking for additional spend. It's just a reallocated spend to us.

So whether that's -- we have such a broad customer base, it depends, but I'm speaking more generically, you've got restrooms, you've got people, you need products and services to help prepare your facility for either your customers, your guests or your employees, patients maybe. And so all of that is being -- is in very nice demand. And certainly, the focus on health, wellness, cleanliness, safety is more so today than it was a few years ago which we think is that is positive for our business.

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

Todd, I'm going to start with a question for you. Given the breadth of your business, with like 1 million clients, you have kind of a unique insight into mainstream America, Main Street America. What is the sentiment amongst your clients? And in terms of their running their businesses and what they're thinking, what are you hearing from the salespeople? Are they relating back to the same kind of fear that we're seeing in the headlines of the newspapers and what the stock market seems to be indicating? Or is it really not that way? Is there kind of a disparity between the headlines and what you're actually seeing on the street from your view?

Shlomo, great question. And you're right, we have such a broad and diverse customer base. We're up and around Main Street U.S.A. every single day and we're watching it really closely. And it seems as though demand is quite strong. Their demand within their business, demand for our products and services. As I mentioned earlier, I hope -- I think we'd all be better off if nobody read the news or listened to the news because it seems like we're trying to talk ourselves into it.

But that being said, we're watching it really, really closely because as Mike mentioned, we'll pivot, we'll pivot appropriately. But to date, it appears as though Main Street USA is doing just fine and we're encouraged by that.

Great. And then, Mike, maybe you could just talk a little bit about the dispersion of costs across the business units. The margin expansion was really pronounced in the first aid and safety and other and then kind of the rental uniforms saw the margin come down. Is that -- do they have just much more significant energy and labor aspect to it? Or maybe you can kind of explain that to us.

Sure. The -- certainly, the rental business is more affected by energy than the other businesses, no question about it. We had really nice quarters in our First Aid business, as you point out. And what you're seeing there is that cabinet growth that we talked about earlier in the call being 25% plus and that getting back to mix that we love. And so we've -- our first aid team has really done a nice job of getting that -- working on that mix and getting it back to the, I'll say, pre-pandemic type of mix, closer to that kind of mix. So really good mix shift and momentum in that business.

Our Fire and Uniform Direct sale businesses, margins are certainly benefiting from the great top line improvement. We're getting great leverage. They're not -- that All Other is not affected by the energy in the same way that rental is. And we're able to see some superb productivity out of that group, too. So we really like that momentum.

On the rental side, we like where the business is. And we've been investing in that business for the growth that we've seen in terms of an acceleration throughout the year. And look, operating a business isn't always a linear -- perfect linear function. And that means there are times when there's a little bit more investment in some quarters, not as much in others.

And look, overall, we love the trajectory of the rental business. We have certainly added some of those growth routes that I mentioned earlier, some capacity in the production facilities. But we like where the momentum is going in all of those businesses. But it's not a linear -- it's not a perfectly linear type of a thing to operate a business.

Sure. Just to clarify, in the focus in that -- the rental side, I guess the obvious answer would be, oh, you're seeing inflationary costs and that's what's kind of hitting that number. But I want to just kind of [turn] out what you're saying over here that is there a heavier weighting of investment in the last quarter, some of the things -- exactly what you're saying, you may not be linear, and it's not really the inflation that might be hitting you guys, but the fact that you're deciding to continue to invest in this period.

Well, I mean, look, the way that we typically invest is over time and as we need it and it's generally incremental. And in this particular case, in the rental business, we've been investing all year. And sometimes, we're running up against a pretty high comp in last year's fourth quarter.

And look, it's -- I wouldn't say it's an overinvestment or that we underinvested in the past. It's just simply that we are investing in the way that we appropriately need to. And some of that is a little bit more labor over the course of this year, where we're lapping a year fiscal '21 that was significantly impacted by the pandemic. And as we've gotten into fiscal '22, as we've accelerated our growth, we need capacity to -- in order to grow.

I think Hamzah may have asked a question earlier about are we able to find the labor that we need in order to continue to grow and Todd answered yes. And that investment is necessary. But it's important for us, especially in the long-term view that we have and that Todd talked about earlier.

We will now take a question from Scott Schneeberger from Oppenheimer.

It looks like we're getting near the end here. So I just have one, but there's a few parts to it, mostly modeling. So Mike, probably for you.

Kind of a summary question. On operating margin, the guidance implies after a very good year of expansion in '22 more expansion at the midpoint in '23. What are the 1 or 2 things that you really worry about that could push you to the low end of the range? And then what are the couple of items that could push you above? And then the latter part of this question is cadence of operating margin in fiscal '23, how comfortable are you? And where are you thinking about for the first half of the year? And then kind of you talked about higher interest expense. What do you think the cadence is of that? And maybe some color on the tax rate.

Sure. I'll do my best. Yes, the guide that we provided provides for operating income growth of 8.6% at the low, 12% at the high when we're comparing to that adjusted '22 operating income.

What can take us to the low? I don't -- we don't mean to be overconfident, but I would say that the things that concern us most are certainly the macro and what happens that's outside of our control. Right now, we really like the way the prospects and the customers view our value. They are -- our sales productivity numbers are really high. And I think it's more about the macro for us. And certainly, we're not trying to time or predict a recession and our numbers don't necessarily incorporate a recession, but there's a little bit of economic movement that certainly can happen that may move us towards the low end of that range. If we don't see any economic slowdown, we certainly -- given the revenue momentum, we certainly could exceed the high end. So I would say, more than anything, it's about the macro and how does that impact us.

From an interest perspective, look, the Fed is not finished. And we do have some, albeit a fairly small amount, but we do have some variable interest -- variable debt and the Fed is not finished. So we may see a little bit of an impact as we go through the year. On the other hand, we generate a lot of cash. I talked about our free cash flow a little bit earlier. And if we feel like we -- if we have available cash, we'll certainly pay down some variable debt.

So I would say the 1/10 that we gave in the guide is a reasonable number and I wouldn't expect that to move too much unless we did something with the use of our cash potentially in M&A. Otherwise, I think that 1/10 is a fairly solid type of a number.

From a tax rate perspective, look, it's hard to predict what's going to happen in the stock market. It's hard to predict based on the stock market movement how much we may see in the way of exercises of our stock options, et cetera. Those are -- those things can have an impact on our tax rate. And -- so it's hard to predict where we're going to be. But that 20% that were in the guide, I think that's a reasonable place for us. And what would take to move that down, it would take a more significant amount of stock options being exercised than we're expecting. Or it certainly could be other discrete events that happened that we're not expecting. But I think the 20% is a fairly good guide, again based on what we're seeing today.

Thank you. We have no further time, so I'll hand the call back to the speakers for any additional or closing remarks.

Well, thank you for joining us this morning. We will issue our first quarter fiscal '23 financial results in September. We look forward to speaking with you again at that time. Thank you.

Thank you. That concludes today's conference call. You may now disconnect.