Cintas Corporation (CTAS) Earnings Call Transcript & Summary

Okay. Good morning, everybody, and thanks for sticking with us here. I'm pleased to have now with us Cintas and the title of a panel is an ESG journey that builds on the history of growth. And I think it's a very interesting ESG story that I think Cintas is starting to tell well. And so very happy to have with us Todd Schneider, who is the CEO; and Christy Nageleisen as well, who is the Vice President of ESG and Chief Compliance Officer for Cintas. So Todd and Christy, thank you so much for being here.

Thank you. Appreciate your attention.

So Todd, maybe just to start off with, we obviously know Cintas very well. We've considered to be one of our top names for quite some time. But some people are not that familiar with the company. They often overgeneralize it as a uniform company. So maybe just to set the stage, if you could just tell us a bit about Cintas from your perspective.

Great. So we already publicly held a Fortune 500 company that is based in Cincinnati, Ohio. We trade over the NASDAQ Global Select market under the symbol CTAS. We are a component of the S&P 500 Index and also the NASDAQ 100 Index. And we helped more than 1 million businesses of all types and sizes. We help them run a better business. And we do that by providing items that help make their facilities and their employees clean, safe and looking the best. And we do that via products and services that include uniforms, mats, restroom supplies, first aid safety supplies and fire protection items -- and we have a total addressable market of 16 million businesses. So I'd like to talk about it being a, I'll call it, a 16-mile marathon, and we're 1 mile into a 16-mile marathon. So a long way to go, which is very exciting for us. And we certainly were known for uniforms. We lead in many cases, the uniforms. But frankly, we leave with whatever the customer is interested in. And then once we are doing business with that customer, then we talk about all the other products and services that we have to offer.

Got it. And Todd, one of the interesting things I found when I started covering the company, which is the history of the company. You guys have been around for, I think, 90-plus years now. So can you just give us a brief history of how Cintas got started?

Yes. Interestingly, we started in 1929 at the start of the great Depression. -- Doc and 1 million farmer were collecting rigs around Cincinnati and those rigs were being used to clean machinery. And what they realized was those regs were just being -- once they use them, they would dispose of them in the trash. And they saw an opportunity. They saw that they could take those rigs back, they could clean them and then sell them back at a fraction of the cost back to the companies that disposed of them. So essentially, we started as a recycling company, and that's still a large component of what we do. We don't talk about ourselves in that manner, but it's certainly that repurposing of items is exactly what we do. So we've had a sustainable business model going almost back to 100 years now. And then the 1960s, Doc and Amelia's grandson, Dick Farmer took over the reins of the business and he ignited the growth of the business by providing additional products and services and entering new geographies. So very exciting time for us and that kind of brings us to the modern decent task where we are today. And we have shown the ability to be a great, a consistent performer in our financials. And we -- meaning we have grown our revenue and our adjusted earnings per share in 50 of the last 52 years. The only exceptions to that were the great recession of 2008, 2009.

Got it. Maybe just one more for you, Todd, which is, you mentioned recycling, which is a keyword and the theme of the day is circular economy, so that makes sense. But the theme of the conference is doing good is good for business. Is that applicable for Cintas?

Great question, Manav. Thank you very much. And the answer is decidedly, yes. These 2 concepts are not new to exclusive. And we see the innate connection between smart business practices and sustainable activities as [indiscernible] the Cintas of the past, the present and the future. And we have a, we believe, a very unique culture here, and it's based on doing what's right and challenging ourselves to be better. And we don't like choosing between those 2. We don't choose between those 2. We are constantly going to be focused on doing things the right way, doing them, making sure that we're proud of what we do and how we do it, but also challenging ourselves to be better and we call that positive discontent meaning the status quo is not acceptable. We have to challenge ourselves. And we are doing exactly that. And you see it in our -- the reduction that we had in our environmental footprint. . And what's an obvious area to see that is in our energy expense. And when you think about our energy expense as a percent of sales. We are significantly lower than our public competitors, and that benefit that we see there also shows itself in our industry-leading markets as well.

Got it. That's super helpful. Christy, maybe I can bring you in here. Firstly, congratulations, you recently got promoted to this newly created position of Vice President of ESG and Compliance Officer last year. But as it relates to ESG, maybe if you could just help us understand what is your overarching objectives in this role?

Sure. And thank you very much, Manav. I'm excited to lead our enterprise-wide assessment of ESG-related initiatives. Cintas already has a fantastic history, but we do expect to identify additional opportunities that will allow us to reduce our impact on the environment. And for example, we are looking at ideas and initiatives that will allow us to make even greater operational reductions and energy, emissions, water, raw materials and [indiscernible]. We also expect to improve our initiatives around diversity and inclusion, human capital, safety and health and government's objectives among others. I'm very excited about the opportunity, and I look forward to developing a new comprehensive and integrated ESG strategy.

Got it. And just talking about the strategy, yesterday at our conference, there was a lot of talk around reporting and standards and the need for more disclosures. And I think last year, you guys issued, I think, what was your second ESG report. So can you just tell us a little bit about Cintas' ESG journey from that perspective?

Absolutely. As ESG priorities have become more clearly defined this more holistic approach to business has evolved, Cintas has really been watching, listening and learning. And now we are prepared to join the conversation in a more meaningful way. We are defining, we are measuring and we are creating formal strategies centered on ESG principles. And we view our entrance into the ESG reporting -- and the ESG reporting and our development of company-wide ESG strategy as the latest steps in our progression. Many of the ESG concepts that we measure and report on are ingrained in Cintas and have been for decades. The very foundations are rooted in our culture, and as Todd mentioned, rooted in our reduced reused recycled mindset. We, as a company, are very proud of our efforts to reduce our environmental impact, to foster and so in supportive atmosphere for our employee partners and that we demand of ourselves that we conduct our business as a world ethical and model company. But what we've accomplished here is only the beginning, and we are still at the start of our journey. One that will be further rooted in ESG-related initiatives. And we are very excited about tackling those initiatives now and in the future.

Got it. That's helpful. I want to come back to one of those points, Christy. But Todd, maybe just for you, speaking of kind of future target goals you guys recently committed to achieving net zero greenhouse gas ambitions by 2050. Can you just talk about your thought process and how you got there and why?

Yes. We're very excited about our goals. We recognize climate change is a global issue, but we also recognize being a good corporate citizen means being a good steward of the environment and the communities in which you do business. So that's very important to us, and always has been, but it's something that we're more outspoken about now. And net zero is ambitious. And it's specifically ambitious because -- we know that the technologies that are out there, they have to improve for us to accomplish our goals. So we're not standing around and waiting. We are doing our part, and we're pushing the manufacturers of whether it be our trucks or our production equipment to move the ball forward because -- and we happen to be in a position where they'll listen because we're such a large purchaser of the equipment that they're listening. And so it's affecting change. So that's really important to us because without their creativity without the inventions of the future, it's not going to happen. So we are very involved in making sure that, that does happen so that we can hit our goals. And while we're doing that, we also recognize that it creates a competitive advantage for us in the marketplace. And we have 3 major constituents that we talk at nauseam about, which is our employee partners, our customers and our shareholders. And here's what I know is there is a component of each of those 3 that are very passionate about this subject. And what I also know is a year from now, it's going to be even a larger percentage of those people that are passionate about it. So we recognize that it is creating a competitive advantage in the marketplace to attract, retain and develop employee partners, to attract, retain and develop customers and as well as attract and retain shareholders. So we love those competitive advantages.

Got it. And Christy, you mentioned reduce, reuse, recycle, that mentality, obviously is key to achieving some of these targets. Can you just give us a few examples on how that does -- how that approach does help all your business units in achieving some of these goals?

Yes, absolutely. And Todd had mentioned this a little earlier when he was talking about our history and about our history of reusing industrial rigs. This reduced for use recycled approach is really embedded within our business. But today, we are reusing far more than industrial [indiscernible]. Certainly, we're focusing on microfiber, bar and shop towels. We are looking at health care scrubs and isolation gowns. We're essentially reusing uniforms and aprons, carpeted mats and mops and many other items. In addition to that, our laundering expertise and our laundering process here at Cintas provides significant water and energy efficiencies compared to traditional [ at home ] laundry processes. Because of our scale and because of our investments we make in engineering and technology, we are using far less water and energy. So by using Cintas, companies are really adherently driving reduction of greenhouse gas emissions because their employees are not laundering their uniforms at home.

Got it. And so that's a little peak at what I'd asked Todd earlier around doing good is good for business. But perhaps maybe a few more examples on how the doing good part of what you guys do actually helps you our business or the competitive advantage, like Todd mentioned?

So to increase our positive impact on the environment, we've really been focusing on our fleet and our operations. From the fleet perspective, we are piloting electric vehicles and that we're also rolling out technology that's going to improve our route planning. And these 2 efforts together really allow us to drive down a reduction of greenhouse gas emissions as it relates to our fleet. We are also looking at our operations, and we are continuing to explore ways that will lessen our environmental impact, including lessening our overall water withdraw through exploring reuse opportunities. We're also in the process of converting our plants in other locations over to LED lighting systems, which is also going to help drive down that greenhouse gas emission. So all of these efforts together help us achieve a significant competitive advantage. As Todd mentioned earlier, our total energy expense as a percent of revenue is less than our competition, and that's helping us achieve industry-leading profit margins. In addition to the environment, we're also committed and very committed to diversity, equity and inclusion. And our diverse workforce is also a competitive advantage. It allows us to better understand how our products and services are viewed and how they meet our customer needs, and it also allows us to identify what innovations may assist our business. Finally, we remain very and strongly committed to our health and safety of our employees. And as you may know, Cintas has more facilities than any other business, that have been rated Star under OSHA's Voluntary Protection Program, which is OSHA's highest level of safety recognition. This focus on health and safety is also a competitive advantage. It allows us to reduce our employee turnover, our worker's compensation expense and other related costs. And I would encourage anyone that's watching to reach out to cintas.com to read our ESG report, which provides a lot of additional information on these particular initiatives.

Got it. And Todd, clearly, a lot of these things have to have the buy-in of the entire company, which means the cultures we write. And that's something that I've observed that Cintas over the years, you guys have a very strong employee, corporate culture, however you want to phrase it. Maybe just a little bit of a history, firstly on how that was set about over the years?

Yes, we have a book that Dick Farmer wrote years ago and called the The Spirit is the Difference. And it talks about our culture and the spirit is the culture, and that is what makes us different. And then it's an handbook for describing how we run our business. It identifies the 3 major components: the management systems, the corporate character and the principal objective, which is our compass, to making sure that we're focused on the most important items. And it helps us to prioritize the long-term company value, which is a very, very important that, that long-term focus stays intact. It also helps to make sure that we keep our people involved in central to all decisions. We do not believe that any -- we have a problem in the company that the solution is in my office or any office, the boardroom, -- the solution is out with our frontline partners. And it's with those people who are providing the service to our customers, or preparing the goods for delivering to our service to our customers. And that is a core principle of how we run our business. And lastly, as Christy mentioned, operating in an ethical, moral and compliant manner is -- it's your ticket into the game. It doesn't make you special in Cintas, but you cannot be in the game if you don't run your business in a operation -- in a moral, ethical and compliant manner. So those items, the long-term value keeping our people central and making decisions in operating in an appropriate manner are -- they are the 3 concepts that are the foundation of ESG at Cintas.

Got it. That makes sense. And Christy maybe if you want to follow up on that and just talk about how that foundation, that Cintas culture impacts your ESG journey as you've laid it out thus far?

Sure. At Cintas, as Todd mentioned, we are guided by a dynamic management system. That is built on policies and procedures that promote reliability and operational consistency. Our management system and our corporate culture are based upon both collaboration and common respect. And that guides us through what we should and should not do. Respecting and valuing one another in the world and the world is key. This leads to fantastic employment employee engagement, a world-class safety program and a widely respected management philosophy. And this supports our ongoing innovations, which have and will continue to help minimize the environmental impact of our business. We do many things in a world-class way here at Cintas, and we cannot be complacent. We must continue to push and stretch ourselves to be better and to make stronger impacts in an outstanding and honorable way.

Got it. So Todd, clearly, all that we've talked about, I think the culture, the resiliency, doing good is good for business. I think that kind of at a high level explain how you guys have demonstrated such success over the years. Maybe just to talk about it from a more near-term perspective, and we've gone through one of the biggest challenges, I guess, the global economy is faced with the COVID dynamic, but you guys still did really well. Can you just maybe a few anecdotes or your thoughts on how this doing good is good for business, helped you guys weather through the storm?

Yes, Manav, the last 2 years have been really challenging globally. Certainly, our customers have plenty of challenges. We did as well. But it gave an opportunity for our culture to shine, and it's what makes us special. And what we've come to realize is that some of the key ESG components were always inherent in how we ran our business. We just didn't speak about it in that manner. And we also realized that our culture is our most significant competitive advantage. And it's more or as important as even the products and services that we provide to our customers. So it affects everything we do. It affects the type of people we hire the way we communicate, the expectations we have of ourselves and each other. And it's a -- as I mentioned, our most significant competitive advantage in the marketplace. And we like to talk about certain corporate character traits that are very, very important to us. And I hope you see it in the marketplace, things like being honest having great integrity. I mentioned full compliance with the laws and regulations, doing what's right, not what's expedient. That's a phrase that we have had in this company since I started 33 years ago, doing what's right, not what's expedient. And it's not -- that is not intuitive to I think, to all businesses. We don't -- we're not going to choose there. We've got a competitive urgency is being urgently dealing with items and not just kicking the can and saying, okay, we'll get to that later. And then lastly, positive discontent, which, as I mentioned, is a positive approach to we've got to get better. The status quo is not acceptable. And in the world we live in today, if you're not moving forward, you're going to get passed up. And you've got to be moving forward at a nice pace. And that's part of our role here is to make sure that we're moving forward, moving forward at a very nice pace and setting the standard for what is expected of all of us.

Got it. That makes sense. Todd, let me just end with one final one, and it's just tied to -- clearly, it sounds like you guys have already been an ESG story, just you haven't been telling it, you're starting to tell it. We're going to see more of the reports. Christy is going to do a lot of good things out there. But -- and so maybe things haven't changed. But the question is, does your capital allocation thoughts, priorities, decisions changed because now you have ESG in your mind in a different way than you did in the last couple of years?

It will certainly impact very much the future. It's impacting the near term as well. But it's -- in order to accomplish our goals and ambitions with ESG and other components of our business, -- that all has to be tied together. And we're not good at choosing here. We like to accomplish everything that we set out. And so capital allocation is certainly going to be a component of our strategy, how we deploy it to get the best bang for the buck and not just for our customers, but our partners and our shareholders, all the stakeholders that we have that are very, very important to us.

Got it. All right. That's super helpful. Todd, Christy, thank you so much for being here. Looking forward to having you back next year and getting even more updates on this journey that you guys are embarking on here.

Manav, thank you for the invitation. On behalf of Christy, myself, it was a pleasure, and we look forward to continued discussions.

Great. Thank you, everyone, for joining.

Thank you.